Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2024

Baroness Vere of Norbiton Excerpts

Wednesday 14th February 2024 Lords Chamber

Moved by

[Baroness Vere of Norbiton]

That the draft Order laid before the House on 18 December 2023 be approved.

Considered in Grand Committee on 13 February.

Motion agreed.

Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2024

Baroness Vere of Norbiton Excerpts

Tuesday 13th February 2024 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2024.

Relevant document: 12th Report from the Secondary Legislation Scrutiny Committee. Special attention drawn to the instrument

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, these regulations have been laid to amend the definition of high-risk third countries in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which I will refer to as the money laundering regulations.

The Government recognise the threat that economic crime poses to the UK and are committed to combating money laundering and terrorist financing. Illicit finance causes significant social and economic costs through its links to serious and organised crime. It also undermines the integrity and stability of our financial sector and can reduce opportunities for economic growth and legitimate business in the UK. The Government are bearing down on kleptocrats, criminals and terrorists who abuse the UK’s financial and services sectors. The Economic Crime and Corporate Transparency Act built on the earlier Economic Crime (Transparency and Enforcement) Act to ensure that the UK has robust, effective defences against illicit finance.

The money laundering regulations are at the centre of the UK’s legislative framework for tackling money laundering and terrorist financing. They set out various measures that businesses must take to protect the UK from illicit financial flows, such as conducting enhanced due diligence—EDD—in certain cases. EDD is required to manage and mitigate the risks arising from certain high-risk transactions or business relationships. Businesses must consider a wide range of multiple different factors when deciding whether there is a high risk of money laundering or terrorist financing in a particular situation. They include risk factors associated with the customer, product, service, transaction and delivery channel, as well as any geographical risk factors.

The MLRs set out that firms should consider the risk posed by customers or transactions relating to any countries which have been identified by credible sources, such as the IMF or the World Bank, as lacking effective systems; countries with significant levels of corruption or other criminal activity; or countries subject to sanctions, embargoes or similar measures. As well as these examples, EDD is required in any other case which by its nature can present a higher risk of money laundering or terrorist financing.

The measures being brought forward today relate to another of the specific situations in which regulated businesses must apply EDD, being in relation to any business relationship or transaction with persons established in a high-risk third country—that is, a country identified as such by the Financial Action Task Force, or FATF.

The Economic Crime and Corporate Transparency Act changed how high-risk third countries may be defined under the money laundering regulations, and this statutory instrument simply implements this change. It removes the separate list of countries from Schedule 3ZA and replaces it with an ambulatory reference to those countries listed by FATF, which is the global standard setter for anti-money laundering and counterterrorist financing. This means that countries listed by FATF will automatically be in scope of obligations under the regulations.

By taking this approach, we will ensure that the UK remains at the forefront of global standards on anti-money laundering and counterterrorist financing. This protects the UK financial system from illicit finance linked to the jurisdictions being listed. Where countries have made significant progress to improve their defences, it is equally important that we recognise that and promptly remove them from the scope of high-risk countries in the UK.

Ahead of this update, the UK and the FATF lists were already aligned. Indeed, since the creation of the UK list in 2021, the Government have always updated it to reflect changes to the FATF lists, and that remains our policy. This SI does not, therefore, add or remove any countries from scope, nor change the obligations on regulated businesses. It delivers on government policy in a streamlined way and ensures automatic alignment with the FATF lists without the need for frequent but fairly routine secondary legislation. It also ensures that firms will be notified in a timely manner of updates to the lists and their obligations, staying up to date as the risks change.

This statutory instrument has been reported as an instrument of interest by the Secondary Legislation Scrutiny Committee, which noted that it reduces parliamentary oversight of the process of adding or removing countries, although I note that of course it is government policy and would have continued to be government policy to introduce an SI every time the list changes. Therefore, in a sense this is automating the process. However, the Government are committed to keeping Parliament informed and will submit letters to the Libraries of both Houses at the conclusion of each FATF plenary meeting, when countries made have been added to or, indeed, removed from the FATF’s lists.

I also assure noble Lords that if at any time the Government saw fit to deviate from the FATF lists, they retain the authority and autonomy to do so. In such cases, a statutory instrument would be brought before Parliament for consideration.

I conclude by noting that the measures in respect of high-risk third countries are an important mechanism to mitigate the risks posed by illicit financial flows from overseas. We will continue to use this and, of course, many other tools available to us to respond to wider and emerging threats from other jurisdictions, including by applying financial sanctions as necessary. These amendments will enable the money laundering regulations to continue to work as effectively as possible to protect the integrity of the UK financial system. I beg to move.

[Lord Sharkey (LD)]

My Lords, we support this very sensible SI and recognise the importance of the work FATF does in the fields of money laundering and terrorist financing. We recognise the importance of its lists of high-risk countries and the importance of the UK aligning itself with these lists, especially as they change from time to time.

Up until today, as the Minister said, we have kept ourselves aligned by using SIs to modify Schedule 3ZA to the MLRs. We have done this eight times; the last occasion was 8 January, a month ago. As the last of these SIs passed through the Commons, the Minister noted:

“I am aware that many noble Lords have expressed frustration at parliamentary time being taken up in the other place by such relatively routine matters to keep our high-risk third countries list aligned to the task force’s”.—[Official Report, Commons, First Delegated Legislation Committee, 8/1/24; col. 4.]


I do not know who those noble Lords were either. The Minister proposed a better way: the removal of the list in Schedule 3ZA and its replacement with, as our Minister said, an ambulatory reference to the FATF list itself.

This SI, which was debated last week in the Commons, does exactly that. It is true that it will undoubtedly save some parliamentary time, but it will remain important to ensure that all interested parties are aware of FATF list changes.

HMT issued updated guidance on high-risk third countries on 22 January. In passing, I should note that I could not find Russia on either list. Is that not a little odd? Coming back to the guidance issued by the Treasury, it would seem perfectly reasonable and not burdensome if HMT were to issue similar updated guidance after each of the three FATF plenary sessions that are held each year. Since Parliament will now lose an automatic mechanism for discussing changes to FATF lists, as the Minister said, I am very grateful for her confirmation of the commitments given to the SLSC to continue the practice of depositing in the Libraries of both Houses a summary of FATF meetings at which list changes are made and publishing an advisory note on the government website.

[Lord Livermore (Lab)]

My Lords, we support this SI. It is a common-sense approach to ensuring timely updates to the UK list of high-risk countries, and it retains the flexibility needed to ensure that other countries can be added via affirmative SI if that is deemed appropriate. I note that the Minister mentioned that letters will be placed in the Libraries of both Houses, but what mechanisms will exist under this new regime if noble Lords wish to raise questions or concerns about high-risk countries, should they have them?

I note that we debated the latest update to the list only a few weeks ago and that this SI does not make any further updates to the list of countries. I therefore have no additional questions.

[Baroness Vere of Norbiton (Con)]

My Lords, I am very grateful to both noble Lords for their support for this SI, which I believe is entirely sensible. One of the things that I was unable to bring out in the opening statement as to why I think it is so sensible is that one of the key things about us being aligned to FATF, and the timing of a country being listed by FATF and immediately going on to the list here, is that we can act globally and in a co-ordinated manner so that the international community can ensure that it acts together to magnify the preventive effects.

The noble Lord, Lord Sharkey, mentioned Russia. It is true that Russia is not currently on a FATF list as, of course, a cycle of mutual evaluations needs to be gone through. However, Russia is obviously subject to extensive sanctions by the UK. I think there is sometimes a little confusion about the money laundering regime and the sanctions regime. In the money laundering regime, you are regulated under the money laundering regulations. Therefore, as a regulated person you must do certain things. However, everybody needs to be aware of sanctions, sanctioned individuals and sanctioned organisations. Obviously, for Russia, that is quite significant.

That brings me on to notification. As committed to, we will place a letter in both Houses with a summary of the plenary and whether any countries have gone on or off any list. Perhaps we will provide a reminder to noble Lords as to who is currently on the two lists.

The noble Lord, Lord Livermore, asked how he could raise questions. I suggest that, in the first instance, I would write to the Minister. Obviously, one could use Parliamentary Questions, but a letter would be better and probably elicit a fuller response. If not, there is always the opportunity to request a meeting with the Minister. It is a very important issue and I do not think that there would be any reason at all for us not to agree to do that.

That is about keeping Parliament informed, but then, of course, the regulated organisations need to be kept informed as well. If, as a regulated organisation, you do not have a process for checking who is on or not on a FATF list, I am afraid you are not a particularly well-run regulated organisation. All sorts of different organisations are regulated, but they will have to have controls and processes in place. We would put a notice up, as we always do, in a specific place. Two things would then happen: the regulated organisation itself would see the update—I know that many thousands of them do—but the supervisors, who are the overarching body of the different types of regulated organisations, would also send out reminders to those organisations about any changes. So there are two lines of attack, but, frankly, it should be beholden on the organisation as a regulated body to keep itself in the loop.

With that, I commend the regulations to the Committee.

Motion agreed.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2024

Baroness Vere of Norbiton Excerpts

Tuesday 13th February 2024 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2024.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, this draft statutory instrument makes an update to financial services legislation to make operating a pensions dashboard service a Financial Conduct Authority—FCA—regulated activity. As noble Lords will be aware, the Government have long held the ambition of delivering pensions dashboard services to the public. It is vital that individuals can easily access and view data about their pension savings in one place and at their convenience.

Executed well, pensions dashboards can deliver significant benefits to consumers, providing better access to information about their pensions held in different schemes and putting information about private and state pensions in a single place. This will bring a step change in how people can engage with their pension savings and will finally allow them to have a fuller picture of them. Equipped with this information, individuals will be better able to plan for their retirement, find lost pension pots, seek financial advice and guidance at the right time and, ultimately, feel more in control of their pensions.

As noble Lords will be aware, the Government are supporting the development of the digital architecture needed to make pensions dashboards a reality, as well as facilitating the development of a government-backed pensions dashboard by the Money and Pensions Service. The Government are also supporting the development of private sector pensions dashboards. Different individuals will have different needs, and this will ensure that a range of platforms exist to meet them. However, the Government have been clear that this can take place only with a suitable and robust regulatory framework in place, recognising that consumers using pensions dashboards could be vulnerable to potential harms. It is vital that consumers are adequately protected.

During the passage of the Pension Schemes Act 2021, the Government were clear that the operation of pensions dashboard services should be brought within FCA regulation. This order amends the regulatory perimeter of the FCA to make operating a pensions dashboard service that connects to the Money and Pensions Service dashboard’s digital architecture a regulated activity. Once in force, this will have the effect that anyone choosing to operate a pensions dashboard service will need to be authorised and regulated by the FCA. Firms that are authorised by the FCA and granted permission to undertake the new regulated activity will have to follow the rules and guidance set by the FCA, which has the relevant remit and objectives to establish an appropriate consumer protection framework for pensions dashboards.

As noble Lords will be aware, the FCA consulted on the rules for pensions dashboards. The consultation, which closed towards the end of last year, set out a proposed approach to ensure that the new market for pensions dashboards does not introduce or amplify the potential for consumer harms. We will continue to work with the FCA in the coming months as the regulatory framework is finalised.

This statutory instrument delivers a key part of the framework that we are establishing to make pensions dashboards available to consumers. It is imperative that pensions dashboards operate within a strong regulatory framework, providing appropriate consumer protection so that the consumer benefits of dashboards can be realised. I beg to move.

[Lord Sharkey (LD)]

My Lords, we support this pensions dashboard SI, just as we supported the pensions dashboards project during the passage through the House of what became the Pension Schemes Act 2021. We continue to believe that the dashboards should deliver more information to the consumer in a comprehensive and easily understood way, and that this will make it easier to make better choices.

We understand that providing these dashboards, both for MaPS and for commercial suppliers, is a very complex undertaking. We were not terribly surprised by the delays the project has suffered but we would like some reassurance about progress from the Minister. The new connection date is set for 31 October 2026, but some services may be available before then. Could the Minister tell us when we may now expect the MaPS dashboard to be available to consumers, when we may expect commercial variants to be available and what services short of a full dashboard may be available sooner?

It would also be very helpful if the Minister could tell us when she expects the FCA rules that she mentioned, which were previously consulted on, to be published. It is hard to see commercial enterprises being able to finalise their own dashboards without sight of and understanding of the new FCA rules.

During the debates in the House on what is now the Pension Schemes Act 2021, many of us thought that the MaPS version of the dashboard should be allowed at least a year of operation before commercial versions were allowed to enter the market. Can the Minister tell us whether there is likely to be a period when the MaPS version runs alone?

We also debated the issue of allowing consumers to make transactions via commercial dashboards. Can the Minister say what the current position is? Will transactions be allowed?

The mechanics of the SI before us seem entirely straightforward and are clearly vital to consumer protection. We have no issues with either its purpose or its mechanism. We do have a couple of very minor and tangential questions. First, we are curious about the date of the SI coming into force. Why is it 11 March? Does that date have any particular significance?

The second question relates to the final sentence of paragraph 7.4 of the Explanatory Memorandum, which reads:

“Operating a dashboard may include taking regulatory responsibility for any third parties involved in connecting to MaPS digital architecture on their behalf”.


I would be very grateful if the Minister could unpack that a little. Perhaps she could give an example of such an arrangement. What circumstances would trigger the assumption of responsibility?

[Lord Livermore (Lab)]

My Lords, this SI makes good on a commitment given during the passage of what became the Financial Services Act 2021 to ensure that entities running a pensions dashboard will have to be authorised and regulated by the FCA. This is an important safeguard for pension holders and we welcome the SI, even if it has taken longer than expected to arrive and is not quite the final piece of the pensions dashboard puzzle.

In an age of scams, uncertainty about AI and increasing consumer concern about online safety, perhaps I might ask the Minister about technical safeguards that providers are expected to put in place. I understand that dashboards themselves will not store data, so there is no risk of mass collection. But if an app is not secure and someone is using a device infected with malware, for example, could bad actors still be able to view and therefore exploit data such as account names, numbers and balances? It would be helpful to know what specifications private providers will have to meet—or, indeed, whether the Government or the FCA will be setting any technology specifications at all.

Paragraph 7.1 of the Explanatory Memorandum to this SI states that the regulated entity will be responsible for the actions of third parties connecting to the Money and Pensions Service digital architecture on their behalf. In recent years, there has been a number of examples of websites or apps using plug-ins to process logins which it then turned out had been infiltrated and customer data breached. Are the Government satisfied that the FCA and dashboard providers will be on top of these issues and that they will go to the Information Commissioner if needed?

Although more guidance is being issued about pensions dashboards, it is still not clear when the Government expect the first products to be operational. Does the Minister have a specific target date in mind?

Finally, when this SI was debated in the Commons, the shadow Economic Secretary asked the Minister whether he could confirm whether pensions dashboards would be using the Government’s OneLogin service. The Economic Secretary said he would write on the matter but, as far as I am aware, has not yet done so. Does the noble Baroness have an answer to that point in her brief and, if not, whether she will commit to copying the Economic Secretary’s reply, when it comes, to the participants in this debate today?

[Baroness Vere of Norbiton (Con)]

My Lords, I am very grateful to both noble Lords for their contributions to this short debate on a topic of great interest to all of us pensioners. I, for one, am looking forward to being able to see whether I have any lost pensions that suddenly pop up on my dashboard and it turns out that I am a multimillionaire. I am not holding my breath.

However, I think all noble Lords recognise that it is an incredibly complex undertaking, and it is right that we take the time to ensure that it is done to the level that consumers will expect—particularly given the amount of data available out there relating to pensions. It must be safe and secure; pensions dashboards will allow users to search their pensions and view their data, and they will be connecting to potentially thousands of schemes offered by technologically advanced organisations in some circumstances, and in others, frankly, organisations that are not quite so advanced. It is those laggards that we need to make sure are up to scratch.

Essentially, we expect the digital architecture to facilitate the search of more than 71 million pensions records held by thousands of pension schemes and providers. Each of those—or many of them—will have different IT systems and ways of calculating values. Pulling all of that together is the complex thing behind this, but, as the noble Lord, Lord Livermore, rightly pointed out, we also have the issue of identity verification to consider, and various other critical elements of the ecosystem. Around that sit things such as standards and guidance to pension schemes, in order for them to be able to connect.

The timelines at the moment are that the DWP’s amending regulations came into force in August 2023. That set out a new connection deadline for schemes of October 2026. At the moment the DWP is engaging extensively with industry and has been since last year. It will issue guidance on a connection timetable in spring 2024.

The reason for the delay is that it is a slightly more complex technical issue and solution than initially anticipated. This became apparent once we were able to speak to industry stakeholders to find out how they store their data and present it to their pension holders. But I am convinced there will be a point when we get to the dashboard available point—DAP—at which stage the dashboard will be made publicly available. However, before the DAP can be reached, the Secretary of State for the Department for Work and Pensions will have to issue a notice. He or she will do so only after having regard to whether there is sufficient coverage on the dashboards, that the service is working effectively and that the overall user journey on the dashboard is positive. This will be informed by extensive user testing to ensure the success of the pensions dashboards services from the outset.

I think that it was the noble Lord, Lord Livermore—forgive me, I cannot remember—who asked whether MaPS would be first and then others would follow. In fact, it was the noble Lord, Lord Sharkey. It is too early to say now. Certainly, MaPS will be first, but we are not yet clear whether there will be other private sector providers ready to go at that time. There will not be a rush to try to get private sector providers there because, of course, the FCA is still working on its rules, and we will allow private sector providers only once the FCA has published its final rules. The applicants would need time to prepare accordingly, the dashboard architecture would need to be complete and the private operators would then have to have applied to the FCA, which would have gone away, checked the business model and looked at its usability—all of those things—before it would also be allowed to sit alongside MaPS. So it is too early to say whether a private sector provider would be launched at the same time.

Self-employment: A1 Forms

Baroness Vere of Norbiton Excerpts

Monday 12th February 2024 Lords Chamber

[The Earl of Clancarty]

To ask His Majesty’s Government what steps they are taking to improve the provision of A1 forms, in particular for self-employed workers in the music industry touring in the European Economic Area.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, HMRC is rolling out significant improvements to the application process by allocating extra resources to help answer phone calls and deal with correspondence across all national insurance services. That includes the training and deployment of more people to process A1 applications. HMRC has also introduced new digital A1 certificate application forms and will roll out automation technology to help process customers’ applications faster.

[The Earl of Clancarty (CB)]

My Lords, as the Minister will be aware, concern is such that both LIVE and the Independent Society of Musicians have written to the Treasury about this issue. I appreciate that there is a recovery strategy but, as the April deadline approaches, there has been no noticeable improvement. Many musicians and crew are receiving their forms after a tour has ended, meaning that money is withheld, potentially permanently. Ultimately, the Treasury will be the loser. Will the Minister agree to meet Peers and interested parties to talk about this? I hope she agrees that that might be helpful.

[Baroness Vere of Norbiton (Con)]

I am grateful to the noble Earl for raising this issue. I reassure him that my inquiries in the Treasury have caused one or two minor waves in ensuring that this gets the priority that it needs. There has been an improvement, although I accept that it is not good enough—as HMRC also acknowledges—and that more needs to be done. I will take away his request for a meeting. Although I am of course happy to meet him, the subject is not directly within my portfolio, so it might be better if the relevant Minister met him.

[Lord Storey (LD)]

My Lords, the news that the Treasury will speed up the process for these forms is welcome for touring musicians, but there are other limitations stifling a thriving live music sector that the Government could take action on. For example, can the Minister confirm whether the Government will commit to the permanent retention of the 50% orchestra tax relief rate?

[Baroness Vere of Norbiton (Con)]

The orchestra tax higher rate has been extended to the end of the 2024-25 tax year and then a taper will be put in place. It is worth noting that the orchestra tax relief has been worth £62 million since 2016. Obviously, the Treasury keeps taxes under review. I note the noble Lord’s comments.

[Lord Berkeley of Knighton (CB)]

My Lords, as the singer Rachel Nicholls has documented, the problems over visas for musicians and singers are now compounded by the fact that foreign opera houses and festivals are beginning to boycott British artists. Has the Treasury made any assessment of how these post-Brexit arrangements are affecting the economy, and if not, please can it do so?

[Baroness Vere of Norbiton (Con)]

I know that obviously the DCMS and colleagues across government are working very closely with the EU and indeed with individual member states to support musicians, and 23 out of 27 member states have clarified their arrangements or introduced easements to allow visa or work-permit-free routes for short-term touring. France, Germany and the Netherlands have all stepped up early on in the process, and Spain recently changed its requirements after intervention from His Majesty’s Government. Obviously, we will continue to address challenges where we see them.

[Lord Aberdare (CB)]

My Lords, 20% of orchestras’ earned income comes from touring, mostly to countries in the European Economic Area. The Government’s plan to remove orchestra tax relief completely from performances in the EEA will have a hugely damaging effect on the viability of such touring, making it hard and, for some orchestras, even impossible to continue to tour in Europe. Will the Minister and her colleagues look again at this proposal and, if it cannot be scrapped, what support might the Government offer to orchestras to help offset the income they will lose and to enable them to continue to tour in Europe?

[Baroness Vere of Norbiton (Con)]

It is not entirely right that costs incurred in the EEA should be offset against UK tax; that would seem slightly odd. However, I reassure the noble Lord that of course some of the costs will be tax deductible: for example, if a group were to hire a conductor from the US and use that conductor for performances in the UK. Obviously, we have to make choices in this area. We are content with where we are headed in terms of removing EEA activity from the orchestra tax.

[Lord Livermore (Lab)]

My Lords, the A1 form is required for each travelling worker, for each trip and for each EEA country they intend to visit. Industry bodies tell us that this represents a significant burden for their members, particularly for those who are self-employed or work for small organisations. Given that HMRC processes are increasingly digitised, do the Government believe that there is scope for simplifying the application process, such as moving from paper to digital certificates, or allowing people to use previously completed applications as a template for their next submission?

[Baroness Vere of Norbiton (Con)]

As I explained in my opening remarks, the forms are now digital.

[Lord Livermore (Lab)]

The certificates.

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

The certificates are a slightly different issue because of course that will depend on the overseas countries accepting a digital form, which I suspect may be slightly more challenging. Where that is possible we will look at it, but we are now focused on ensuring that the processes are sped up. It is important that we get the automation in but it cannot be done end to end, as in some cases one needs caseworkers’ judgment to issue the A1 certificate.

[Lord Kamall (Con)]

My Lords, the noble Earl, Lord Clancarty, raised the issue of the April deadline and making sure that the applications are available—the A1 form as well as the certification. What advice can my noble friend the Minister give to those who do not receive their forms in time, or maybe receive their form electronically but do not have the necessary certification? What leeway will be given to those individuals?

[Baroness Vere of Norbiton (Con)]

The A1 certificates are issued all the time. As the noble Lord, Lord Livermore, pointed out, in many cases a worker needs a certificate for every time they go to a certain country, because of course the circumstances may change. However, in other cases, forms can be valid for up to two years. Therefore there is not an April deadline per se. The April 2024 date is when HMRC expects to be processing back to its normal target arrangements.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest as my son is a rock musician. Does the Minister agree that the provision of music, particularly rock music, is something in which Britain has a comparative advantage? Does she also agree that, for all its benefits in other areas, Brexit has unambiguously increased the barriers to trade in this area?

[Baroness Vere of Norbiton (Con)]

I absolutely agree with the noble Lord that the UK has one of the finest music industries in the world, which of course includes rock music but also classical music and opera. It is the second-largest recorded music market in the world and contributes £6.7 billion to the UK economy. Brexit has meant that there have been changes to certain arrangements. However, the A1 form process has remained relatively stable for many years.

[Lord Grocott (Lab)]

My Lords, as Brexit has been mentioned, I point out that many Members of the House still here will, like me, well remember the early days of the Beatles. They will remember that the Beatles managed perfectly well in Hamburg for many months, if not years, without any great difficulty. That was before the EU was even thought of. Can the Minister consider ways in which we can learn from this by contacting Paul and Ringo to see how they managed that?

[Baroness Vere of Norbiton (Con)]

The Beatles split up the year I was born so I do not have as long a memory as the noble Lord. However, the Government are very focused on developing our emerging artists and ensuring that they can get to new international markets, whether that be in the EU or beyond. The music export growth scheme has been tripled and will now spend £3.2 million over the next two years to support these emerging artists. When it comes to music, we are talking about not just the EU but the entire world.

[Lord Forsyth of Drumlean (Con)]

My Lords, does my noble friend the Minister agree that this is not a problem of Brexit but a problem of EU members not being co-operative?

[Noble Lords]

No!

[Baroness Vere of Norbiton (Con)]

My Lords, I had not expected this to get into a Brexit ding-dong per se. The UK was more ambitious than the EU when it came to negotiating the trade and co-operation agreement but some of our proposals were rejected. I note that the TCA is reviewed every five years and, while I would not want to comment on the scope of that review, there may be opportunities in the future.

Buy Now, Pay Later: Regulation

Baroness Vere of Norbiton Excerpts

Wednesday 7th February 2024 Lords Chamber

[Lord Davies of Brixton]

To ask His Majesty’s Government, further to the publication of draft legislation on ‘Buy Now Pay Later’ arrangements in early 2023, when they intend to fulfil their 2021 commitment to regulate such arrangements.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, the Government’s consultation on proposed draft legislation to bring buy now, pay later into regulation closed in April 2023. In it, the Government reiterated their position that regulation must be proportionate so that borrowers are appropriately protected without unduly inhibiting access to these useful, interest-free products.

[Lord Davies of Brixton (Lab)]

My Lords, I have to say that I find the Answer from the Minister deeply disappointing. It is three years since the Woolard Review concluded that more needed to be done to ensure a healthy, sustainable market in unsecured credit, including, in particular, buy now, pay later. Since that time, the use of buy now, pay later has more than trebled, with the citizens advice bureau warning that consumers are left without vital consumer protection and reporting from its own experience a huge rise in the number of people needing services to deal with the problems created by this form of credit. Is that not just evidence that this is no longer a serious Government prepared to undertake tasks to protect ordinary rank and file people?

[Baroness Vere of Norbiton (Con)]

I disagree with the noble Lord. Obviously, we have received a large amount of stakeholder feedback to the consultation on the draft regulations. We are considering that feedback and it is very varied. In many cases, when provided affordably and used responsibly, interest-free credit can be incredibly helpful to people trying to balance certain payments from month to month. The average outstanding balance of buy now, pay later is £236. These are relatively small amounts of money that can be shifted from month to month, and it is proving incredibly useful to a number of people.

[The Earl of Effingham (Con)]

My Lords, buy now, pay later works for people who can manage their finances, but unfortunately, there are many who struggle with that management. What are the Government doing to make financial education a pillar of the school curriculum?

[Baroness Vere of Norbiton (Con)]

I agree with my noble friend that this is at the heart of it. Any credit facility, be it interest-free or not, has to be understood by those who use it. To that end, the national curriculum has included financial education since 2024. In primary schools, children learn about the uses of money. In secondary school, they go on to learn about budgeting and managing risk, which is of course incredibly important in the credit markets. They learn about financial products and services and raising and spending public money. We have put those elements in place.

[Baroness Kramer (LD)]

My Lords, a number of the firms that provide buy now, pay later—which are of course unregulated schemes currently—are seeking authorisation from the FCA also to offer regulated credit schemes. As we saw with the mini-bond scandal, this mixing of regulated and unregulated lulled ordinary people into misunderstanding the absence of supervision for unregulated products and led them into serious financial distress. Will the Minister advise the FCA not to authorise any schemes for buy now, pay later firms until buy now, pay later is itself properly regulated?

[Baroness Vere of Norbiton (Con)]

While it is fair to say that buy now, pay later itself is not regulated, many elements of getting out to consumers are regulated. The broader consumer protection legislation which exists provides such protections. For example, the FCA has rules and guidance on advertising and financial promotion. Only today, the FCA financial promotions gateway is in force. Buy now, pay later firms must also go through that gateway with all their marketing materials to ensure that they are not misleading, and that is to the benefit of consumers.

[Baroness Bennett of Manor Castle (GP)]

My Lords, a study last year by the Centre for Financial Capability found that a quarter of buy now, pay later users had been hit by late payment fees. That figure rose to 34% for users aged 18 to 34. Those young people are also facing the problems of the weight of student debt: about half of them go to university and, increasingly, they are carrying debt as well for further education. Is this not just one more way of laying a huge weight of debt on our young people?

[Baroness Vere of Norbiton (Con)]

I do not believe so, because, as I said, it is not a huge amount of debt. The average balance for younger people aged 25 to 34 is just £185. One experience that I think many users have of buy now, pay later is that they may, once, have a late fee—I know that my children certainly have—and then they learn, and they do not do it again. Those fees are not particularly expensive, but Experian, for example, would say that 99% of agreements were settled on time in January and February. We cannot shut off access to a form of interest-free credit which has saved consumers more than £100 million. It is really important that we get the balance right.

[Lord Livermore (Lab)]

My Lords, in February 2021, the Government promised to act swifty to regulate buy now, pay later. Three years later, legislation is nowhere in sight. While the Government have delayed, leaving millions of consumers unprotected, Labour has set out plans for regulating the sector. That includes a requirement for clearer information, while ensuring the same protections for consumers as they get when using a credit card. To move things along, will the Government now adopt Labour’s plan, which has received broad support from all major buy now, pay later providers?

[Baroness Vere of Norbiton (Con)]

I have to be honest with the noble Lord in saying that I have not read Labour’s plan, but he talked about clarity of information. It is worth pointing out that it is not just the FCA that looks at advertising and financial promotion. We have the Consumer Protection from Unfair Trading Regulations 2008; we have the Consumer Rights Act, and then we have the UK advertising code. In terms of information, it is clear that consumers have a number of recourses, but I return to what I said at the outset: the consultation closed in April 2023; the Government have reiterated our position that regulation must be proportionate. I am quite surprised that the Labour Party thinks that it has a solution that has been backed by all buy now, pay later firms, because it is a very complex area and we need to achieve a balance.

[Lord Sikka (Lab)]

My Lords, buy now, pay later services may offer interest-free periods, but, as has already been said, they charge high interest rates and fees for late payments, which really push up the price of the product. Without regulation, this industry is likely to go the same way as pawnbrokers, who charge interest of up to 160%. Will the Government impose a ceiling for the fees and interest rates that this industry can charge?

[Baroness Vere of Norbiton (Con)]

I am not sure whether the noble Lord has looked at what the late payment fees are for buy now, pay later firms. They are incredibly small, because the business model is very different in that it does not necessarily rely only on such charges; they are paid by the retailers as well. As I said, all sorts of existing and broad consumer protections underpin fair contracts—that would be the Consumer Rights Act. The FCA has already taken action against six buy now, pay later firms, where it felt that the contract terms were either unfair or unclear. The system is working; it is a very complicated area; the Government are looking at the responses to the consultation, and we will publish a response in due course.

[Lord Deben (Con)]

My Lords, does my noble friend accept that, if we do not do this carefully, we will be removing opportunities from a large number of people for whom this is important? Is not the rush to regulate a very dangerous concept in this case?

[Baroness Vere of Norbiton (Con)]

I agree with my noble friend.

[Noble Lords]

Oh!

[Baroness Vere of Norbiton (Con)]

I do not always. There seems to be a “computer says no” attitude to newfangled things. I absolutely reject that. While noble Lords may or may not use buy now, pay later, I know many young people who do, and they do so very successfully. I would not want to overregulate a product or get it wrong, thereby causing that product to be removed from the market.

[Lord Watts (Lab)]

The Minister says that there needs to be regulation, that the Government have gone out for consultation and that they are now considering it. To ask the same question I ask of Ministers all the time: where is the timeline for that? When will the Government act rather than talk?

[Baroness Vere of Norbiton (Con)]

We will act by publishing the results of the consultation and our response to it in due course.

[Noble Lords]

Oh!

High Street Banks and Banking Hubs

Baroness Vere of Norbiton Excerpts

Thursday 25th January 2024 Lords Chamber

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, I very much appreciate the opportunity to return to the topic of access to cash and to face-to-face banking facilities. I really do appreciate the strength of feeling across the Chamber on this topic and am very grateful to the noble Baroness, Lady Tyler, for securing today’s short debate.

The Government recognise that banks and building societies occupy a privileged place in society and are essential to enabling people to manage their money on a day-to-day basis. But it is undeniably the case that the nature of banking is shifting. First, there was a move to telephone banking; it took many of us quite a long time to get used to it, but you can now do pretty much anything that you could do face to face on telephone banking. There has subsequently been an ever-increasing number of customers opting for the convenience of online and mobile access. Some noble Lords have explained that they are of a vintage such that they feel that that is not for them. I accept that, but my mother, for example, is of the same vintage, and has embraced it very readily, so there are different people who will take a different view of that. Of course, telephone banking remains available.

If one looks at the hard facts here, in May 2022 only one-third of adults had been to any branch at all to undertake banking activities face to face in the previous 12 months.

[Lord Hacking (Lab)]

That is because they are all closed.

[Baroness Vere of Norbiton (Con)]

That is a significant drop from 2017, just six years ago, when almost two-thirds of UK adults did. Is the noble Lord suggesting that these individuals therefore did not transact at all, or were they able to do it by other means, and have got used to the other means of banking and find them more convenient? Causation and correlation may not quite apply in this.

It is also true that nine in 10 adults bank online or use a mobile app. We cannot reverse the changes in the market and in consumer behaviour; nor can we determine firms’ commercial strategies in response to the changes, which are being led by consumers. Maintaining flexibility to respond to changes in the market is key to what makes the UK’s financial services sector one of the most competitive, innovative and productive in the world.

Decisions on opening and closing branches are taken by the management team of each bank on a commercial basis. The Government do not intervene in these; nor do they stipulate locations for the bank branch network as a whole or for individual banks. The noble Lord, Lord Livermore, mentioned that certain banking initiatives have subsequently closed; it is worth asking oneself why. Was it that actually they were not used?

The Government recognise that access to in-person banking services, particularly cash, remains important to many people across the country. As such, the Government believe that all customers, wherever they live, should have appropriate access to banking and cash services, and that the impact of branch closures should be mitigated where possible. On access to cash in particular, it is worth noting that over 97% of the urban population are within one mile of a free cash access point, and over 98% of the rural population are within three miles of a free cash access point.

The Government have taken action to preserve access to cash, and we legislated through the Financial Services and Markets Act 2023 to protect access to cash for individuals and businesses. This places a responsibility on the FCA to ensure reasonable provision of cash access services. Importantly, in relation to personal current accounts, the FCA is required to seek to ensure reasonable provision of free cash access services. The FCA is currently consulting on its proposed regulatory regime. Under the proposals, banks and building societies designated by the Treasury will be required to assess and fill gaps, or potential gaps, in cash access provision that significantly impact consumers and businesses. Following the consultation, the FCA expects to finalise its rules in the second half of this year.

More broadly, the Government recognise the importance of in-person banking for some people. While decisions on individual branch closures are a commercial issue for firms, which the Government do not intervene in, this Government absolutely support industry-led initiatives to protect access to in-person banking services, such as shared banking hubs, agreements with the Post Office—which I feel are very important—and community outreach programmes, where they work, such as in community centres and libraries.

I highlight the services offered by the Post Office. People can use their local post office under the Post Office banking framework agreement to access everyday banking services, thanks to this commercial agreement. This means that 99% of personal banking customers and 95% of business banking customers can do their banking at the 11,500 Post Office branches right across the country. The noble Lord, Lord Livermore, has a grand plan for some sort of nationalised shared banking hub network. The towns that he is thinking about may not have a branch, but they have a post office, or perhaps there are towns that he would like to write to me about that have neither a branch nor a post office because clearly that is something we could look at. I think the Post Office’s intervention and close working with the industry are very helpful.

Of course, banking hubs can go more broadly than the services offered by the Post Office. Banking hubs are a very exciting development. They are quite a new development. They help businesses and people withdraw cash, make deposits, pay in cheques and check their balances, but they may also have a community banker who can help people with more complicated matters that require specialist knowledge or privacy or when somebody wants to have a face-to-face meeting with a banker. These hubs are deployed in response to a bank announcing a branch closure or a community making a cash access assessment request. Where LINK has assessed a community’s cash access needs and concluded that a banking hub is the most appropriate option, that is done as quickly as possible.

I note the comments by the noble Baroness, Lady Tyler, which were echoed by many others noble Lords, including the right reverend Prelate the Bishop of Norwich. I reassure her that to ensure that there is no gap in the provision of services, the industry has committed that when a hub is recommended, a branch will not be closed until a hub is open. I think that will be welcome news to the House today.

Cash Access UK, the provider of banking hubs, has opened more than 30 banking hubs so far and I expect this to rise to about 50 by Easter. I agree that the speed of the rollout has potentially been too slow, but this is a relatively new intervention and the processes are now in place. I echo the comments of the noble Lord, Lord Rogan, in welcoming the work of Cash Access UK. We support it and are in regular contact with it. I am pleased to report that it tells us that it expects the pace of delivery of banking hubs to continue to improve over this year.

The noble Baroness, Lady Tyler, asked for a target for the total number of banking hubs, and a timeline. Indeed, the noble Lord, Lord Livermore, gave us a target of 350—I have no idea where that came from. It depends on local need and the shape and scope of the banking facilities available over time. Imagine that a new bank were to come along and suddenly open a branch on a high street that already contained a banking hub. If we had a target that there had to be banking hub there, what would we do? Would we close it? It does not make sense. We need the flexibility to work with the network and the system. Provided that we get those banking hubs in place as quickly as possible, I think that is by far the better way to deal with the issue that we face.

There is guidance which provides certainty around the provision of the relevant services. The FCA, the independent regulator, provides clear and unambiguous guidance to banks and building societies to ensure that they carefully consider the impact of planned closures on their customers. It is not just about access to cash; they must consider the impact of the lack of services or the change of channel of services on all their customers. The FCA is taking an assertive approach to encourage firms to follow its guidance. When banks and building societies are closing branches, the regulator expects them to put in place appropriate alternatives where this is reasonable. Where firms fall short of expectations, the FCA can and will ask for closures to be paused or for other options to be put in place.

The FCA consumer duty is also now in effect. It sets higher and clearer standards for customer protection across financial services and requires firms to put their customers’ needs first. The consumer duty also requires that firms deliver “good outcomes” for customers. That means that banks owe their customers a higher and clearer standard of care, and must ensure that customers receive support so that they do not face barriers in accessing their accounts.

I note the comments about charities. On the point made by the noble Baroness, Lady Kramer, about transferring an account from one holder to another for an APPG, those are the sorts of things that I am really concerned about when it comes to branch closures. All noble Lords will be aware that getting a signature on a piece of paper can sometimes be very tiresome, and I encourage all banks to try to sort that out. However, UK Finance is also talking to charities to make sure that they are in contact with banks, because there are a number of things that they can access.

I am out of time. I was going to talk about not only connectivity but digital inclusion, which is important because banks themselves are taking big steps to encourage their customers to become more digitally savvy. Indeed, they are helping those who may not necessarily have the wherewithal to afford the sorts of internet services that one might need. I will write with further information.

I will also write to the right reverend Prelate, and copy in all noble Lords, about credit unions—they are quite interesting—and whether there is a gap in the market for hyperlocal banks that serve a community. I have just come back from the US; that is what they have there, and it is a very interesting model.

Climate Risk Models

Baroness Vere of Norbiton Excerpts

Thursday 25th January 2024 Lords Chamber

[Baroness Drake]

To ask His Majesty’s Government what assessment, if any, they have made of the accuracy of climate risk models used by (1) the Bank of England, (2) financial services firms, and (3) pension schemes.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

The independent Bank of England’s climate biennial exploratory scenario builds on globally recognised scenarios from the Network for Greening the Financial System and represents an important milestone in assessing UK exposures to climate risk. However, we recognise that climate risk modelling is an evolving practice, and we support the Bank’s ongoing work to develop its modelling and supervision.

[Baroness Drake (Lab)]

My Lords, the Bank of England’s job is the prudential risk management of the financial system, and it influences the conduct of firms and pension schemes, hence the concern when we learned that its scenarios concluded that it does not much matter whether temperatures rise by 1.5, 2 or 4 degrees: the effect on profits will still be relatively small. How will the Government ensure that the regulator properly oversees the risk to financial stability from more extreme weather and rapid changes in the use of energy?

[Baroness Vere of Norbiton (Con)]

The outcome of the CBES exercise shows that, if banks and insurers do not respond effectively, climate risk could cause a persistent and material drag on profitability: bank credit losses amounted to £110 billion over the late-action CBES scenario. But the Bank of England has always been clear that it was the first time it had done an exercise based on these scenarios, which came from 2021, as I am sure the noble Baroness knows. The NGFS has now refreshed its scenarios, publishing its latest group in November 2023; those will be used by the Bank of England and, indeed, by many other people in the financial system going forward.

[Earl Russell (LD)]

My Lords, the best way to avoid financial collapse is to avoid climate tipping points. We welcome the progress to date on developing financial climate risk models, but this science is still in its infancy. We also welcome the Bank of England’s report of 13 March, updating its assessment of climate risks. The report notes the need to improve climate stress testing and scenario analysis. How will the Government support the development of these urgent tasks?

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

As the noble Lord is aware, our financial regulators are of course independent of government. However, the Government are clear in their annual letters to the various regulators that climate risk is a key part of all the elements they must consider when considering financial stability in the UK and, indeed, globally.

[Baroness Altmann (Con)]

My Lords, the climate models currently used by the Bank of England and pension schemes have been shown by the Institute and Faculty of Actuaries, the Pensions Regulator, and even the coalition of central banks that developed them, to be deeply flawed, yet the Bank of England remains publicly committed to them. What are Ministers doing urgently to learn from academic and climate science, and to make recommendations to the Bank under Section 30B of the Bank of England Act to help it improve the financial modelling of climate risk? Also, what is my noble friend’s department doing to ensure that pension schemes invest more in our solar farms and wind farms, particularly, for example, via investment trust portfolios?

[Baroness Vere of Norbiton (Con)]

Goodness—that is a very wide-ranging question from my noble friend. I do not think it quite right to say that the Bank of England is committed to the scenarios it used back in 2021. For example, as my noble friend will have seen, two more scenarios were published fairly recently. The Government are not, for example, going to mandate a particular model or scenario for the pensions industry or indeed any part of it, because there are different scenarios out there. They are not forecasts but scenarios, and different groups will feel that different scenarios will come into play. Most pension schemes now have to follow the TCFD requirements, which came into force substantially in October 2022. That will really focus the pension schemes on their climate risks but also the climate opportunities.

[Lord Davies of Brixton (Lab)]

My Lords, I need to mention my entry in the register of interests. Following the question from the noble Baroness, Lady Altmann, I urge the Minister to study the report from the Institute and Faculty of Actuaries, whose central conclusion was that commonly used climate models in financial services are underestimating risk. In particular, it says that the choice of assumptions is not widely understood and they pay insufficient attention to the possibility of overoptimistic scenarios for the future of climate change.

[Baroness Vere of Norbiton (Con)]

Of course, my officials and those who work for the independent regulators will look at all evidence, and one often finds that it is very conflicting. The challenges of the models used have been clearly established. There is a higher number of independent transmission channels than previously thought and a lack of historical data; and, of course, one has to anticipate a firm’s reaction to climate change over the longer term. All those things are being considered. This is an evolving science, as I think all noble Lords will agree. However, I go back to the NGFS, of which the Bank of England was a founding member: it consists of 134 central bankers and supervisors from around the world, who are all working together to improve the available scenarios.

[Lord Lilley (Con)]

My Lords, is my noble friend the Minister aware that the economic chapter of the IPCC report on climate change begins:

“For most economic sectors, the impact of climate change will be small relative to the impacts of other drivers … Changes in population, age, income, technology, relative prices, lifestyle, regulation, governance, and many other aspects of socioeconomic development will have an impact on the supply and demand of economic goods and services that is large relative to the impact of climate change”?


Why is the Bank of England fussing with this, rather than concentrating on the real problem of avoiding financial crises such as occurred in 2008?

[Baroness Vere of Norbiton (Con)]

No, I do not quite agree with my noble friend, because the Bank of England has a responsibility to look at all risks. He pointed out many risks that are not climate related. However, underlying all of this is that all those risks—and, indeed, climate risk—are interdependent. One cannot single out one at the expense of others; one has to consider them all in the round. That is why we make it clear when we correspond with the Bank of England and the independent regulators that climate risk is just one of the many risks to our financial system that need to be considered.

[Lord Livermore (Lab)]

My Lords, the Government have made a series of important commitments relating to forest risk commodities. Those commitments, including in the Financial Services and Markets Act to carry out a review of the adequacy of financial regulation in tackling illegal deforestation, rely on the laying of regulations under the Environment Act. Can the noble Baroness tell us when those regulations will be laid and, once they are, how long the review will take?

[Baroness Vere of Norbiton (Con)]

I am well aware of the Government’s work on forest risk commodities, which is under way, as it falls within my portfolio. I cannot give the noble Lord any further timings at this moment, but suffice it to say that we are working on it.

[Baroness Sheehan (LD)]

My Lords, I think I heard the Minister say that the next round of the climate biennial exploratory scenarios needs to accommodate disruptive climate events in the 2020s and take account of the revised scientific consensus about the speed—that is the key word—with which adverse climatic events are being observed and new emerging evidence since the 2021 report. Will the Government ask the PRA to do this as a matter of urgency, with a real emphasis on urgency?

[Baroness Vere of Norbiton (Con)]

No, the Government will not ask the PRA—or indeed anybody else—to do that as a matter of urgency. It is up to those independent regulators to decide the next stage at which CBES may be rerun. However, an important learning experience came out of CBES, which was that many of the capabilities needed to be embedded in the system. It is pointless running a scenario if the underlying information and the risk scenarios and outcomes coming from firms have not been updated to reflect the new scenarios. The independent regulators are very seized of the issue. Obviously, CBES will be run in due course if the Bank of England decides that the results of its previous running have been embedded in the system.

[Lord Brooke of Alverthorpe (Lab)]

My Lords, the noble Lord, Lord Lilley, said that the Bank of England has to take into account a variety of issues. Can the Minister say what work it is doing on AI? Is it in a better position than we are to see what is happening and the consequences?

[Baroness Vere of Norbiton (Con)]

The noble Lord raises a very important issue. However, it is slightly beyond the remit of the Question.

[Lord Kamall (Con)]

My Lords, it is important to recognise what models do: they look at the real world in practice, try to explain it in theory, and then try to predict the future using past and, perhaps, future data. All models are flawed to a certain extent. Given the focus on other things apart from inflation, such as climate risk models, in my noble friend’s experience or opinion, does she think this distracts the Bank of England from one of its essential tasks, which is to focus on getting inflation below 2%?

[Baroness Vere of Norbiton (Con)]

The Bank of England has two major roles, as my noble friend will be aware: it is responsible for monetary policy but also for financial stability. Climate risk very much falls into the latter. However, he is absolutely right about models: there is probably not a single model in the world that is 100% accurate—they can never be. However, it is not about forecasts but about scenarios. It is about taking a range of possible outcomes and thinking about how firms would react to different scenarios. It is right that the Bank of England consider this; however, I know that it is very focused on getting inflation down.

Local Government Finance Act 1988 (Prescription of Non-Domestic Rating Multipliers) (England) Regulations 2023

Baroness Vere of Norbiton Excerpts

Tuesday 23rd January 2024 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Local Government Finance Act 1988 (Prescription of Non-Domestic Rating Multipliers) (England) Regulations 2023.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, although these draft regulations may appear at first sight obscure and technical, they are essential to the smooth functioning of the business rates system for the financial year 2024-25 and beyond.

The regulations serve two main purposes. The first is to preserve the threshold for those businesses that pay rates by reference to the lower small business multiplier at a rateable value of below £51,000. This has been government policy since 2017 but, due to the passing of the Non-Domestic Rating Act 2023 in October, it must be reaffirmed here.

The second is to ensure that this threshold of £51,000 not only applies to occupied properties, as it has done previously, but extends to charities, unoccupied properties and those on the central list that are not subject to full relief. Moving these properties from the higher standard multiplier to the lower small business multiplier will place the entire business rates system on an even footing. It will also constitute a modest tax cut for those properties that will move to the small business multiplier for the first time, to the tune of around £5 million per year.

The Committee may find it helpful if I set out a quick reminder of how the business rates multiplier works. A multiplier is, in effect, a tax rate used to calculate business rates. There are two kinds of multipliers. The standard multiplier applies to businesses with a rateable value of £51,000 or above. The small business multiplier applies to businesses with a rateable value of less than £51,000. The relevant multiplier is multiplied by the yearly rental value of a property, known as the rateable value, to calculate its business rates bill before any reliefs are applied.

These regulations have been precipitated by the Non-Domestic Rating Act 2023, which implemented the reforms announced at the conclusion of the 2020 business rates review. As I am sure many noble Lords are aware, this important legislation introduced more frequent revaluations, bringing the revaluation cycle down from every five years to every three years to make the system fairer and more responsive. The Act also introduced a new improvement relief to incentivise businesses to invest in their properties; legislated for improved transparency in how business rates valuations are calculated; and introduced a number of administrative reforms to the business rates multiplier to streamline and improve the system.

This last point is most relevant here, as those reforms provide the Government with a power to set and alter in secondary legislation the thresholds for which properties are eligible for each multiplier. As these new reforms will come into force from the 2024-25 financial year, the Government must bring forward these regulations in order to maintain the threshold for which properties pay the multiplier at its existing level of £51,000 rateable value. If these regulations are not passed, the small business multiplier will instead apply only to businesses in receipt of small business rates relief. This would constitute a tax hike for hundreds of thousands of businesses whose properties have a rateable value of between £15,000 and £51,000.

The second purpose of these regulations is to bring unoccupied properties, charities and properties on the central list in line with occupied properties, by bringing properties with a rateable value of below £51,000 into the scope of the small business multiplier. The proposal to bring unoccupied properties and charities within the small business multiplier was initially made in the technical consultation following the business rates review. The Government committed to this change in the summary of responses to that document in March 2023. To maintain consistency across the business rates system, it was subsequently decided to bring properties on the central list—the centrally managed list of properties that span multiple local authority areas, such as utilities pipelines—within the scope of the small business multiplier.

The content of this instrument is therefore very simple. The instrument continues and extends existing government policy, applying the small business multiplier to properties with a rateable value of below £51,000 that are not subject to full relief. Properties valued at £51,000 and above that are not subject to full relief will pay business rates by reference to the standard multiplier.

For the majority of ratepayers, then, this statutory instrument merely preserves the status quo. Ratepayers are used to a £51,000 rateable value threshold for the small business multiplier, and this instrument maintains that threshold under the legislative reforms made by the Non-Domestic Rating Act 2023. The instrument promotes stability and predictability in the business rates system. For unoccupied properties, charities and properties on the central list with a rateable value of below £51,000, this instrument will provide a small tax cut, as these properties are brought into the scope of the small business multiplier. The regulations will make the multiplier more consistent and place all properties on a fair and level playing field. I beg to move.

[Lord Jones (Lab)]

My Lords, I thank the Minister for her helpful and brisk exposition, and I will not delay for mischief or malice these regulations that come to the Committee. It is the settled view of the usual channels that it should be so—and rightly so. I rise briefly in the traditional manner to ask the Minister questions, simply and briefly, to hold the Executive to account. So often the Grand Committee considers regulations of great importance to citizens but debate is so brief.

Paragraph 2.2 of the Explanatory Memorandum is welcome. Can the Minister tell us the Government’s estimate of the numbers of small businesses in England and Wales? Does the department have any idea of how many there may be?

Paragraph 12.1 of the Explanatory Memorandum baldly states that this is a “tax cut”. Surely the Minister who comes to this Committee with a tax cut should be congratulated. For the Minister arriving with a tax cut, it raises confidence when next she gives her expert and brisk introductory remarks.

On paragraph 14 of the Explanatory Memorandum, who will carry out monitoring and review? Shall it be civil servants, independent consultants or simply the Minister’s section in her department?

Under the heading “Consultation outcome”, paragraph 10 mentions small businesses. Has the Federation of Small Businesses—or the chambers of trade, for example —been involved in this consultation? Details might be available from the Minister or her officials.

Lastly, local government tells of its great problems concerning finance. Does the Minister know that local government throughout the nation hopes that, in the imminent Budget, the Chancellor will offer more money to hard-pressed local authorities in a time of austerity?

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

Once again, I am grateful to noble Lords for sharing their thoughts in this short debate.

As ever, the noble Lord, Lord Jones, rightly held the Executive to account. I always appreciate his questions. He asked how many small businesses there are. There are hundreds of thousands of them. I can tell the noble Lord that 90% of properties come under the small business multiplier, so only 10% pay at the standard rate; of course, that covers hundreds of thousands of properties, some of which may be used by a single business. We must recognise that the small business multiplier is really important because it covers most properties. As the noble Lord, Lord Shipley, pointed out, it was frozen at the Autumn Statement because we recognise and share his concerns about the impact of business rates on our high streets, which we want to keep as vibrant as possible.

The noble Lord, Lord Shipley, is right that this is a tax cut. Sadly, it is quite limited, but, nevertheless, we will take tax cuts wherever we can find them. As I mentioned in my opening remarks, it amounts to around £5 million and goes to charities. Charities get other reliefs as well, which is why the impact is probably smaller than one might otherwise think.

Monitoring and reviewing business rates is a really important area. The Valuation Office Agency is responsible for valuing non-domestic property for business rates purposes. As I mentioned, we have decided to reduce the revaluation period from five years to three years to make it a bit more flexible and agile. The agency is required by law to compile and maintain accurate rating lists for non-domestic properties in England; it must do this impartially and independently of central government. It follows international valuation standards and the RICS mandatory guidance on the appropriate method of valuation. Of course, the VOA remains happy to talk to ratepayers to ensure that it gets the number for the rateable value right.

It is also important to recognise that the VOA is undergoing a period of transformation. There are some opportunities to digitise business rates. There is also a positive opportunity to link business rates to the HMRC system, to make it much easier and so that there is better targeting and understanding of how the business rates system works with the tax data from businesses themselves. This reform programme is called the digitalisation of business rates, and it will be a major step forward in modernising the entire system.

The noble Lord, Lord Shipley, went on to ask what small businesses think of this and whether we have heard from them. I am pleased to be able to tell him that there was the 2023 business rates review consultation and the technical consultation. We heard from the Federation of Small Businesses and many other representative groups in those consultations; they provided us with valuable feedback on how we can make the business rates system more productive.

The noble Lord, Lord Jones, mentioned the issue of some in local government feeling the pinch at the moment. The provisional local government finance settlement for 2024-25 has made an additional increase of 6.5% in councils’ core spending power. A consultation with the sector closed on 15 January and we are considering the responses. The final settlement will be confirmed in early February. The Department for Levelling Up, Housing and Communities always stands ready to speak to any council that has concerns about its ability to manage its finances or faces pressures that it has not planned for. We are aware that a small number of local authorities have recently suffered financial distress because of issues specific to them. As I say, we are keen to work with local authorities to ensure that they continue to deliver services for the public.

The noble Lord, Lord Shipley, said that business rates are too high, although he gave credit to the Government, noting that we held the small business multiplier for 2024-25 in the Autumn Statement. That is a positive thing. There is an enormous number of reliefs available for different types of businesses— I was briefed on this—and it is worth making sure that businesses are aware of them. Noble Lords will be aware of the reliefs that we have been able to extend for hospitality, to ensure that our high streets remain vibrant places to go to and socialise. Indeed, there are plenty of others, such as the improvement relief. I think it is possibly quite complicated, but necessarily so, because it targets money to where we need it most.

The noble Lord, Lord Livermore, asked about unoccupied properties. Local authorities are responsible for administering business rates at a local level, and they would determine the occupation of the property. However, if there is any more information or guidance around that that I can provide him with, I will certainly write to him with an update on business rate evasion and avoidance.

Motion agreed.

[The Deputy Chairman of Committees (Viscount Stansgate) (Lab)]

It may be for the convenience of the Grand Committee that we adjourn now, as there is about to be a vote in the Chamber, and reconvene 10 minutes from the moment the Division Bells begin.

Financial Services Act 2021 (Overseas Funds Regime and Recognition of Parts of Schemes) (Amendment and Modification) Regulations 2024

Baroness Vere of Norbiton Excerpts

Tuesday 23rd January 2024 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Financial Services Act 2021 (Overseas Funds Regime and Recognition of Parts of Schemes) (Amendment and Modification) Regulations 2024.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, these draft regulations make a number of technical changes to support the effective implementation of the overseas funds regime, prior to the first funds marketing under it, and ensure the correct treatment of recognised overseas funds.

The overseas funds regime is a new route that will allow overseas funds to be recognised for the purpose of marketing to UK retail investors, where the Government have determined that their regulatory regime is equivalent to that of the UK. Prior to the introduction of the overseas funds regime, there were two recognition routes for overseas funds allowing them to market to UK retail investors. If they were passporting to the UK prior to the UK’s exit from the European Union, funds may now have temporary recognition, which is due to expire at the end of 2025. The second route enables funds to be individually recognised by the Financial Conduct Authority, but this can be costly and time-consuming for both the fund and the regulator.

At present, there are more than 8,000 funds recognised via the former route and 48 funds recognised via the latter route. This is more than double the number of UK-authorised funds. The cross-border nature of asset management means that the overseas funds regime will be critical to ensuring a competitive funds sector for UK investors with an appropriate range of choice.

At present, no funds have been recognised under this regime. However, the Government are currently undertaking the first equivalence assessment for the states in the European Economic Area in respect of retail funds, specifically undertakings for the collective investment in transferable securities—to note, money market funds are excluded from this assessment. Ahead of any equivalence decision or any funds becoming recognised under the overseas funds regime, it is important that the statute book adequately reflects its introduction.

This instrument makes two groups of technical changes. First, it makes amendments to ensure that, where appropriate, funds recognised under the overseas funds regime are treated in the same way as overseas funds which have been individually recognised for the purpose of marketing to retail investors. Secondly, it makes modifications to ensure that recognised sub-funds are appropriately captured. This is because it is common for funds to be structured as an umbrella, with multiple sub-funds beneath it, each with their own investment strategies.

More specifically, this instrument makes changes in the following areas. First, in relation to different pieces of rehabilitation of offenders legislation, it makes consequential amendments to the definition of “relevant collective investment scheme” to include reference to the overseas funds regime. This means that funds recognised under the overseas funds regime are accounted for in the same way as existing individually recognised funds in these pieces of legislation, such as in relation to the disclosure of spent convictions by associates of these funds. The instrument also makes modifications to these pieces of legislation to ensure that recognised sub-funds are appropriately captured.

Secondly, it modifies the Local Authorities (Capital Finance and Accounting) (Wales) Regulations 2003 to ensure that recognised sub-funds are treated appropriately for accounting purposes.

Thirdly, it amends the financial promotions order to allow certain communications made by operators of funds recognised under the overseas funds regime to be exempted from the general restriction on financial promotions. These are limited to cases where the fund in question is communicating with existing investors. This legislation is also modified to appropriately account for recognised sub-funds.

Finally, retained EU law on disclosure for packaged retail and insurance-based investment products is amended such that funds recognised under the overseas funds regime must provide the same retail disclosure documents as other recognised funds.

These changes are technical in nature and, as set out in the Explanatory Memorandum for the statutory instrument, are extremely unlikely to have any impact on business or public services. However, they are necessary to ensure that funds recognised under the overseas funds regime are treated appropriately and that the regime is able to function effectively. I beg to move.

[Lord Sharkey (LD)]

My Lords, we are grateful for the Minister’s clear and concise explanation of what this SI does and why it is necessary. I note the thorough and helpful consultation report, published as long ago as 2020. We are happy to support this instrument and have only a few questions.

The first question is to do with timing. The new OFR will come into operation only when the appropriate equivalence determinations have been made by HMT. The introduction of this new regime has been foreseen for at least two years. During that time, I am sure HMT has been working diligently to decide on the appropriate equivalence determinations. When might we expect these determinations to be published?

My second question arises from the 2020 consultation report. It makes clear the decision not to extend FOS and FSCS protection to the newly authorised funds. This is despite the recommendation of the Financial Services Consumer Panel. Can the Minister explain why these basic consumer protections were omitted?

My third question arises from the decision to reject these protections. In paragraph 2.44, the consultation report notes that:

“In general, respondents to the consultation considered that if the scope of FOS and FSCS remain unchanged, funds should inform investors through disclosures in the fund prospectus”.


The Government agreed that some form of disclosure was necessary, and in paragraph 2.46 said:

“The government will consider the appropriate framework for disclosing the absence of FSCS and FOS in the future. The FCA will also explore whether it is necessary and appropriate to require enhanced risk warnings or explicit acknowledgement from investors about the lack of availability of FOS and FSCS coverage”.


That was over two years ago. How is HMT getting on with the framework thinking? How is the FCA getting on with its exploration? Can the Minister tell us what HMT has concluded about the appropriate framework for disclosing the absence of FOS and FSCS cover and what the FSA has concluded about enhanced risk warnings? If at this late stage there is as yet no conclusion from HMT or the FCA, will she commit to write to us, setting out the conclusions when they are finally arrived at?

[Lord Livermore (Lab)]

My Lords, I am grateful to the Minister for introducing this statutory instrument. We support these regulations, as they will provide smoother market access for overseas funds that have been determined to be equivalent to the UK’s in relation to consumer protection. This SI is part of a wider set of measures to bring the overseas funds regime, or OFR, online. The regime will apply to funds from jurisdictions that the Treasury has deemed “equivalent”, so the OFR will become operational only once those decisions by the Treasury have been made.

When this SI was debated in the Commons, my honourable friend the shadow Economics Secretary asked the Minister when the Secretary expected to take the equivalence decisions that would enable overseas funds to utilise the streamlined approach envisaged under the new overseas funds regime. In his answer, the Minister was able only to say, “very soon, I hope”. Given this, is the Minister able to go any further in providing greater clarity on the timing of these equivalence decisions? Is she able to provide any indication of how many equivalence decisions the Treasury expects to make in the first instance?

[Baroness Vere of Norbiton (Con)]

I am grateful to all three noble Lords for their contributions to this brief debate. On the matter of timing, both of the laying of the SI and where things will go in the future, the laying of the SI is being done now because there is parliamentary time. The assessment of equivalence is still under way, and therefore there is no urgency about this. As the noble Lord, Lord Sharkey, pointed out, the consultation took place a little while ago. The only real rationale is that the technical changes need to be made by the time that the funds are recognised under the overseas funds regime. Obviously, there is a lead-in time required for an assessment to be undertaken of any countries, or indeed territories.

The noble Lord, Lord Sharkey, pointed out that there is an ongoing assessment of the EEA. I can go no further than the Economic Secretary did in the other place. It is right that the ongoing assessment does its work effectively. As noble Lords will know, it started in autumn 2022, but we cannot possibly commit to timelines at this stage, as it is key that the work is done well. However, the overseas funds regime remains a government priority and we are working at pace to finalise this assessment. The temporary arrangements are in place until 2025, so there is a little time available.

The noble Lord, Lord Sharkey, mentioned the consultation. A significant amount of consultation went on prior to the primary legislation that was put in place. He asked some specific questions about consumer protections and the absence of FOS cover. I will write to him with further information on that.

The noble Lord, Lord Jones, spoke about the “big bang”. I joined the City slightly after that. It introduced an element of simplicity—that is clear—but, sadly, the City is now a different place and complexity has crept back in. This includes sub-funds, which are basically funds that sit under an umbrella fund, each of which may have different investment objectives. This is just to make sure that, if somebody has invested in a sub-fund, it can be reflected properly in their accounts in Wales and that the laws on the disclosure of spent convictions apply.

I cannot go further on timings but I am grateful to all noble Lords. As I said, I will write with further details on a couple of other things, in particular the measures around consumer protections that were mentioned by the noble Lord, Lord Sharkey.

Motion agreed.

Pension Investments

Baroness Vere of Norbiton Excerpts

Tuesday 23rd January 2024 Lords Chamber

[Baroness Altmann]

To ask His Majesty’s Government whether they plan to encourage UK pension investors to increase support for (1) long-term UK growth, and (2) UK financial markets.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, the Government are delivering a series of measures to reform pension fund investment, strengthen the UK’s competitive position as a leading financial centre and support long-term UK growth, building on the Chancellor’s Mansion House package of reforms. These measures include an industry-led compact whereby 11 of our largest defined contribution schemes have committed to the objective of allocating at least 5% of their default funds to unlisted equities by 2030.

[Baroness Altmann (Con)]

I thank my noble friend for her Answer. However, the Mansion House reforms focus only on unlisted companies and do not require the investing of a penny in the UK itself. Will my noble friend agree to meet with me and like-minded peers, who are concerned that there are ready-made portfolios in UK-listed investment companies, trusts and REITs that are already investing in wind farms, solar farms, sustainable energy projects and other infrastructure that could be used for pension investments to support UK growth and revive confidence in UK markets? Does she agree that the current problems with charges disclosure have driven pension funds to invest in overseas infrastructure rather than our own and we urgently need to address that, either through a statutory instrument or my Private Member’s Bill?

[Baroness Vere of Norbiton (Con)]

I should be delighted to meet with my noble friend to discuss these matters further. The UK has a world-leading investment trust sector representing over £250 billion of assets and is highly aligned with the Government’s priority to promote long-term productive investment. She will know that at the Autumn Statement, the Government published draft legislation to replace the packaged retail and insurance-based investment products, or PRIIPs, regulations. We also announced that we will bring forward the repeal of the relevant provisions of the Markets in Financial Instruments Directive. This will enable the FCA to put in place more proportionate cost disclosures.

[Baroness Kramer (LD)]

My Lords, I am keen to see increased domestic investment in the UK economy, but is it appropriate to put pension money from small pots—people who cannot afford to lose part of that pot —into liquid, high-risk start-up investments, as the Mansion House compact seems to contemplate?

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

There are two things about that question. First, having a very large number of pension pots under £1,000—I believe that there are now 4 million—is not a good way to manage pensions. We need to make sure that we can consolidate those into much larger schemes that can diversify their investments much better. However, the UK has a very poor record on pensions investing in unlisted securities, running at about 0.5% of pension pots. In Australia, the figure is 4.9% and in Canada, although it is not directly comparable, it is over 15%. Just because something is unlisted and illiquid does not mean that it cannot offer good returns over the long term.

[Lord Drayson (Lab)]

My Lords, I direct the House to my entry in the register of interests. Investment funds have flowed out of listed UK equities for the past 30 consecutive months. When is this going to stop?

[Baroness Vere of Norbiton (Con)]

The Chancellor and indeed the Government have put forward a number of reforms to ensure that we make the UK the best place not only to raise capital but to invest pensions in future. As I am sure the noble Lord has seen, we have been delivering on the recommendations of the noble Lord, Lord Hill, for overhauling the UK’s prospectus regime, we have been looking at the recommendations of Rachel Kent’s investment research review and we have been developing a new type of trading venue that will act as a bridge between private and public markets. We can be innovative, but this is a process of evolution not revolution.

[Baroness Hayman (CB)]

My Lords, I declare my interests as in the register. In their green financial strategy, the Government recognised that clarifying the fiduciary duties of pensions investors, which could help to increase support for long-term and sustainable investment in the UK, was needed. When will the Financial Markets Law Committee, which is reviewing the clarity of the law relating to fiduciary duty, be publishing its report?

[Baroness Vere of Norbiton (Con)]

I am grateful to the noble Baroness for raising this issue, about which I had a meeting last week with a number of fund managers. Some felt that the fiduciary duty needs to be changed, while others were content with it. The Government remain committed to considering how the fiduciary duty can be clarified. The financial markets group that she referenced is independent of government and includes various law firms and pension schemes. We look forward to the publication of its final report, but, as I say, it is independent of government and it will publish its report when it is ready.

[Lord Leigh of Hurley (Con)]

Does my noble friend not agree that this issue needs not just a meeting with the noble Baroness, Lady Altmann, but wider discussion in this House? It is incredibly important to facilitate investment in UK plc. The issue is not unlisted investment; it is investing in the UK market, and it is not just about defined contributions. What progress has been made in respect of direct benefit in encouraging local government pension schemes to invest in UK plc?

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

I would be more than happy to take lots of debates on this issue because it is incredibly important, and the Government are making great strides in this area. For example, on local government pension schemes, hundreds of billions of pounds has been invested for employees’ longer-term pensions. They are invested in pots that are too small; they need to be bigger, so we have set a deadline of March 2025, when we want to see local government pension schemes consolidate into fewer asset pools of greater than £50 billion. We expect that, by 2040, those pension schemes will be invested in pools of around £200 billion. With that sort of money, it is really easy to diversify.

[Lord Livermore (Lab)]

My Lords, when the Labour Party sought to amend the Financial Services and Markets Bill to encourage pension funds to invest in high-growth businesses, the Government opposed our amendment, so the Chancellor’s recent announcement that he is now following our lead was most welcome. However, the Mansion House compact does not, as many noble Lords have said, ensure that the unlocked capital is invested in UK equities, rather than finding its way overseas. What steps will the Government take to incentivise pension funds to put their wealth into the British economy by backing UK assets?

[Baroness Vere of Norbiton (Con)]

I am not aware of the detail of the amendment to that Bill tabled by the Labour Party, but we are taking a very measured approach to market intervention. It is clear to me that we need to do this and, as I said previously, it is evolution not revolution. However, there are many ways in which the Government are focusing on UK high-growth companies in particular. I point the noble Lord to LIFTS, or long-term investment for technology and science—investment vehicles tailored to direct contribution schemes. The Government will coinvest in or support those schemes up to £250 million. The bids have already been submitted, and we expect those funds to be operational and investing in UK growth companies by mid-2024.

[Lord Howell of Guildford (Con)]

Does my noble friend agree that, whatever the pension funds invest in—and we certainly need them to get back to the 40% they once put into Britain, rather than today’s 4%—and wherever they put their money, they are not going to be attracted by very long-term, politically high-risk projects which turn out not to be an investment at all? Is that not a reason why we should encourage giving priority, in our nuclear recovery, to smaller, quick-build machines, rather than sinking all our money into very long-term large structures which may not work even when they are built?

[Baroness Vere of Norbiton (Con)]

My noble friend makes the very important point that investment is always about diversification. We need a wide range of projects and vehicles to encourage the UK economy, and some of those may indeed be of the sort he refers to.

[Lord Watson of Wyre Forest (Lab)]

My Lords, does the Minister believe that consolidating pension funds will lead to an increase or a reduction in the fees paid by pension savers?

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

I would expect the cost to be lower because, on the value for money framework, for example, which the FCA will consult on shortly, we are proposing direct contribution schemes. If they are not making the sort of overall returns that savers could reasonably expect, they will be encouraged to wind down or consolidate. Of course, in those overall returns, one always does put cost. It is true that the cost for each saver is lower for larger schemes.