Critical Benchmarks (References and Administrators’ Liability) Bill [HL]

Lord Agnew of Oulton Excerpts

Order of Commitment discharged
Wednesday 27th October 2021 Lords Chamber

Moved by

[Lord Agnew of Oulton]

That the order of commitment be discharged.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, I understand that no amendments have been set down to this Bill and that no noble Lord has indicated a wish to move an amendment or to speak in Committee. Unless, therefore, any noble Lord objects, I beg to move that the Order of Commitment be discharged.

Motion agreed.

Critical Benchmarks (References and Administrators’ Liability) Bill [HL]

Lord Agnew of Oulton Excerpts

2nd reading
Wednesday 13th October 2021 Lords Chamber

Moved by

[Lord Agnew of Oulton]

That the Bill be now read a second time.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, through this Bill, the Government are supporting the transition away from Libor by providing further legal certainty for contracts that rely on Libor past the end of this year.

This Bill builds on the Financial Services Act 2021, which provided the Financial Conduct Authority with powers to effectively oversee the cessation of a critical benchmark in a manner that protects consumers and minimises disruption to financial markets. In particular, it draws on the work and engagement of my noble friends Lady Noakes and Lord Blackwell, who proposed amendments to that Act which are similar to the provisions in this Bill. I thank them for their constructive engagement on this issue.

I will first take a few minutes to put the Bill in context and to explain the connection to the Act passed by Parliament earlier this year. A benchmark is an index in a wide range of markets to help set prices, measure performance or establish what is payable in financial contracts. Libor is one such benchmark. It seeks to measure the cost that banks pay to borrow from each other in different currencies and over various time periods. It is calculated using data submitted by a panel of large banks to Libor’s administrator, the IBA.

Libor is used in a huge volume and variety of contracts, including in derivatives markets, mortgages, consumer loans, structured products, money market instruments and fixed income products. For example, a simple loan contract may say that the interest payable is Libor plus 2%. In this example, Libor represents the cost to the lender of getting access to the money to lend it out, and the 2% represents the additional risk to the lender associated with making the loan.

Libor was designated as a critical benchmark. This reflects the fact that it is systemically important. Libor is referenced in approximately $300 trillion of financial contracts globally but, from the end of this year, the FCA has said it is clear that Libor will no longer represent the interbank lending market it seeks to.

There is significant history to this. As many will remember, in 2012 it emerged that the Libor benchmark was being manipulated for financial gain. Following the subsequent Wheatley review, Libor came under the jurisdiction of the FCA in 2013. Significant improvements to the regulation and governance of Libor have been made since the Libor scandal. However, in 2014 the G20’s Financial Stability Board declared that the continued use of these kind of rates, including Libor, represented a potentially serious source of systemic risk. The FSB said that financial markets should voluntarily transition towards the use of more robust and sustainable alternatives.

This is because Libor has become increasingly reliant on expert judgments rather than real transaction data, due to the structural decline in the frequency of banks borrowing from each other through the unsecured wholesale lending market. The market that the benchmark seeks to measure increasingly no longer exists. This underscores the fundamental need to transition away from Libor.

Since the FSB’s recommendation, the Government, the FCA and the Bank of England have worked together to support a market-led transition away from use of the Libor benchmark. Primarily, they have pushed contract holders to voluntarily move to robust alternatives before the end of this year, in accordance with guidance from the FCA and the Bank of England. The vast majority of contracts are expected to make this transition away from Libor without any government intervention. We expect 97% of all sterling Libor-referencing derivatives to have transitioned by the end of the year.

However, despite this extensive work and progress, there remains a category of contracts that face significant contractual barriers to moving away from Libor by the end of this year. The measures in the Financial Services Act 2021 sought to provide a safety net for these “tough legacy” contracts. Through the Act, the Government granted the FCA powers to “designate” a critical benchmark if it determines that the benchmark no longer accurately represents what it seeks to measure. The Act also provided the FCA with powers to require the administrator of such a designated benchmark to continue to publish it and to change how the benchmark is calculated.

In the case of Libor, the FCA has announced that it will use these powers to compel the continued publication of Libor using a revised methodology, referred to as “synthetic Libor”. The FCA has done this so that these tough legacy contracts can continue to function. They will have a Libor rate to refer to in its synthetic form, providing for the benchmark to cease in an orderly manner. It is important to emphasise that this synthetic rate is a temporary safety net for those legacy contracts that have not been able to move away from Libor in time for year end. It is not intended to replace Libor in the long term.

The Bill is vital to support the use of the synthetic rate. Clause 1 provides explicitly that Libor-referencing contracts can rely on synthetic Libor. This is covered in the new Articles 23FA and 23FB. Specifically, where the FCA imposes a change in how the benchmark is determined, such as a synthetic methodology, the Bill is clear that references to the benchmark in contracts also include the benchmark in its synthetic form. In the case of Libor wind-down, this means that where a contract says “Libor”, that should be read as referring to synthetic Libor. The effect of that is to provide legal certainty for those contracts that now reference synthetic Libor.

The Bill also provides a narrow and targeted immunity for the administrator of the critical benchmark for action it is required to take by the FCA. This includes where it is required to change how a critical benchmark is determined, such as a change in the benchmark’s methodology. This will protect the administrator from unmerited and vexatious legal claims. The Government have done this in the narrowest way possible. This does not protect the administrator in any area where they act with discretion. It protects the administrator only to the extent that it is acting purely on a direction from the FCA. It also does not in any way change the ability to challenge the FCA; its decisions on setting a synthetic methodology are subject to challenge on the usual public law grounds.

The Bill reaffirms the Government’s commitment to protecting and promoting the UK’s financial services sector. As the global home of Libor, having a clear legal framework and process in place for the Libor wind-down will further underpin our position as a global financial hub. However, I understand that some are concerned that the synthetic methodology may result in a rate higher than the current Libor rate. That is not an issue for the Bill, which does not seek to instruct the FCA on how this synthetic rate should be constructed. That role has already been delegated to the FCA under the Financial Services Act 2021.

It is appropriate that the FCA takes these technical decisions. Indeed, our regulatory system often sees independent bodies empowered to produce calculations which reflect and influence economic reality, such as the Bank of England setting interest rates. It is vital that the FCA is able to create the methodology free of political interference.

I understand concerns about the possible retail impacts of Libor transition and would like to try to address these. First, I remind noble Lords that Libor is primarily the preserve of sophisticated financial operators, not retail investors. The vast majority of Libor contracts are derivatives. These are sophisticated financial products and 95% of these will transition away from Libor voluntarily.

Secondly, synthetic Libor is a last resort. The regulators have been working with the market to encourage operators to move to alternative rates for several years. The vast majority of contracts will not need to use this synthetic rate at all. Thirdly, the FCA’s approach is entirely in line with the global consensus among industry and regulators internationally.

However, I am sympathetic to concerns raised by some noble Lords about the impact this could have on some mortgage holders. I remind noble Lords that the Financial Services Act 2021 allows the FCA to impose a synthetic methodology only if it considers it desirable to do so to protect consumers or to protect and enhance the integrity of the UK’s financial system. The FCA’s proposals have been approved by its statutory consumer panel.

The FCA’s synthetic rate seeks to provide a reasonable and fair approximation of what Libor would have been had it continued to be based on panel bank contributions, while removing a major factor in the volatility of the rate. This is to the benefit of mortgage holders and other retail borrowers, who will no longer be exposed to perceived changes in bank creditworthiness or liquidity conditions in wholesale funding markets.

Today’s Libor rate is at historic lows, but it can fluctuate significantly. Three-month sterling Libor has varied from 0.28% in September 2017 to 0.92% at the end of December 2019 and is now 0.09%. The FCA’s synthetic methodology will protect contract holders from these large swings. We do not know precisely what the difference between synthetic Libor on 4 January 2022 and panel bank Libor on 31 December 2021 will be. We can reasonably expect that it will remain at a historic low when the synthetic methodology is imposed and that contracts referring to this rate will be protected from large swings in the Libor rate.

Finally, only a relatively small number of mortgages use Libor in the UK—around 200,000 out of some 11 million. It is much more usual for a mortgage to reference the Bank of England base rate. The FCA estimates that only around half of these 200,000 mortgages are residential; the rest are buy-to-let mortgages. The FCA expects that the majority of these mortgages will transition away from Libor before the end of the year and so never use the synthetic rate.

Customers holding Libor-referencing mortgages should speak to their lender to switch to an alternative rate. The FCA does not expect firms’ transition efforts to result in worse customer outcomes than would be achieved through synthetic Libor, given the clear market consensus on fair replacement rates that has been established in the market for some time. The FCA would pay close attention to any evidence or feedback suggesting the contrary and take the necessary action to intervene.

The approach the FCA has taken produces a fair approximation of the Libor rate and is the best thing for any consumers or businesses which will need to rely on this rate. The alternative is having no rate at all or being put on an unsuitable fallback rate, which may well be designed for a different situation, such as a short-term problem with publishing Libor.

The Bill supports the wind-down process. It ensures that contracts remain unaffected by the Libor transition if they are not able to move to alternative rates in time. The Government have carefully considered responses to their consultation and the complex range of contracts which reference critical benchmarks. The FCA has confirmed the process to wind down Libor by the end of this year. The Government will continue to engage with Parliament with a view to securing passage ahead of the end of the year.

I hope that, having provided the House with the background to the Bill, an explanation of its provisions and an update on the broader work being undertaken by regulators on the Libor transition, we can debate the provisions in the Bill in a constructive manner and push forward this vital legislation. I beg to move.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

My Lords, I thank noble Lords for their detailed and collaborative contributions on this very technical Bill. I would particularly like to welcome and thank my noble friend Lord Altrincham for his excellent and personal maiden speech. I know that his experience in financial matters will be of great benefit to us all.

The Bill reinforces the provisions in the Financial Services Act 2021 that provide the FCA with powers to oversee the wind-down of a critical benchmark in a manner which protects consumers and minimises disruption in financial markets. In doing so, it provides key support to the Libor transition and market confidence.

I will try to address a number of the questions raised by noble Lords this evening, but I will write on the more technical ones on which I may not be able to come up with the answers immediately.

I start with the noble Lord, Lord Sharkey, and his concern about the late running of this, so to speak. I accept his point that work could possibly have been done before the Financial Services Act 2021 received Royal Assent. The FCA feels strongly that it needs to follow an orderly and sequenced process to consult first on the framework for decisions and then on the decisions themselves, but I accept that the timing will be tight.

The noble Lord, Lord Sharkey, also asked why this year is taken as the cut-off. This date was selected back in 2017 after engagement with panel banks, so it has been in the works for quite a long time and there has been time for the industry to plan for it. We have had very close engagement with the US and the timings are aligned. It has now said that the new use of US dollar Libor rate will stop at the end of this year, following supervisory guidance from the US and UK and other international authorities.

The noble Lord, Lord Sharkey, also asked about the mechanisms for the synthetic rate to be smoothed. The FCA has confirmed that that is the approach. The synthetic methodology is based on a broad global consensus and it would cause significant market disruption to change course at this point. It is not clear that that would deliver better outcomes for markets or consumers. As discussed at the briefing yesterday, the smoothing has been put in place taking the five-year median rate, but I can write with more detail if the noble Lord would like, as I accept that this is an important issue.

The noble Lord, Lord Sharkey, said he was worried about congestion at the end of the year. We have been clear that the active transition is the main mechanism; we have seen a large transition away from Libor over the last few months. I take my noble friend Lord Blackwell’s point that the latest data shows that some 55,000 contracts are still outstanding, but they are moving quickly. The FCA has taken on board market feedback on distinguishing between contracts that can be amended before the year end and those that cannot. Every step it is taking is to minimise disruption, in line with the objectives.

My noble friend Lady Noakes asked about the cost of funds fallbacks. This legislation provides certainty on how references to the Article 23A benchmark should be interpreted in contracts and other arrangements in which the FCA has exercised powers under the benchmarks regulation to require a change in the benchmark methodology. Where a contract or arrangement has a fallback that is triggered by the temporary or permanent unavailability of Libor, Article 23FA provides that the benchmark continues to be available and consequently that it does not cease to exist, be published or otherwise be made available. This means that the cost of funds fallbacks, which are generally triggered by the unavailability of the benchmark, will not be triggered.

My noble friends Lord Blackwell and Lady Noakes asked what happens after the proposed 10-year period. The legislative framework put in place in the Financial Services Act 2021 allows the FCA to support the orderly wind-down of the benchmark. Specifically, it allows the FCA to impose a synthetic methodology to provide for the continuity of a Libor setting for the benefit of tough legacy contracts for up to 10 years. The Government will continue to work closely with the FCA and the Bank of England to support an orderly wind-down of Libor and will continue to monitor the risks in this area, given its systemically important role in the UK economy.

My noble friend Lord Blackwell asked about the shorter term, after a year. The benchmark regulation provides that the FCA can review the decision to compel continued publication of a synthetic benchmark after a year. The FCA has been clear about the expected direction of travel with regard to the sterling synthetic Libor rate and does not intend that it will cease automatically after a year.

The noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer, are concerned about FCA accountability and, linking to that, parliamentary oversight. The FCA must operate within the framework of statutory duties and powers agreed by Parliament. The FCA is also fully accountable to Parliament for how it discharges its statutory functions. This direct accountability to Parliament reflects the FCA’s statutory independence and the fact that it is solely responsible for everyday operational decisions, without government approval or direction, and so is primarily accountable for them. The legal framework ensures direct accountability of the FCA to Parliament, including through a requirement for it to produce annual reports and accounts which are laid before Parliament by the Treasury.

The FCA is subject to full audit by the NAO, which has the associated ability to launch value-for-money studies on the FCA. The FCA is subject to scrutiny from Select Committees. The Treasury is the FCA’s sponsor in government; it is responsible for the statutory framework of financial services regulation and for the continued effective operation of the FCA as part of that framework. The mechanisms for the FCA can be directly accountable to the Treasury. This includes direct controls over appointments to the FCA board and powers under the Financial Services Act 2012 to commission reviews.

The noble Lord, Lord Sharkey, and my noble friend Lady Noakes asked about safe harbour. The responses to the Treasury consultation earlier this year identified the risks that parties may look to contest the continued publication of synthetic Libor by its administrator, or to seek damages against the administrator. This risk might be heightened if other avenues of litigation are closed off to parties by the Bill.

Where the administrator of an Article 23A benchmark is subject to legal challenge for complying with statutory requirements imposed by the FCA under the benchmarks regulation, it could impose a significant unreasonable and unmerited burden on the administrator of an Article 23A benchmark. If faced with too much legal risk, the administrator may seek to resign from administering the benchmark, which in turn risks causing disruption. Such action could serve to erode parties’ confidence in using the benchmark, undermining the operation of the FCA’s powers to oversee an orderly wind-down of it.

My noble friend Lady Noakes also asked about alternative benchmarks. The focus of this legislation is on providing legal certainty regarding the operation of the FCA’s powers to wind down this critical benchmark. Where contractual parties have acted in line with regulatory guidance to transition the contract to an alternative rate, the Government do not see that there is a need for further legislative clarity. The Government continue to encourage parties to contracts that reference Libor to transition those contracts to alternative benchmarks wherever possible, in accordance with regulatory guidance.

Several noble Lords, including my noble friend Lord Blackwell, asked about legal certainty. It is the Government’s view that it is appropriate to provide legal certainty as to how references to Libor should be interpreted in contracts or other arrangements, once the switch to the synthetic rate occurs. This legislation comprehensively addresses the risk of contractual claims relating to the exercise of the FCA’s powers to wind down a benchmark, as identified in response to the Treasury’s consultation on this matter.

It is important to stress how narrow the contractual continuity provision is. It does not protect the parties to the contract from all legal challenge. This would result in parties to those contracts not being able to challenge any element of that contract, and would be too broad. It simply specifies that where a contract references Libor, that should be read as referring to synthetic Libor. The effect of that is that legal claims cannot be brought on the basis that synthetic Libor is not included in the contract.

As the home jurisdiction of Libor’s administrator, the UK has a unique role to play in minimising financial stability risks and disruption to financial systems arising from the wind-down, both in the UK and globally. This plays to the comments made by several noble Lords in relation to London’s reputation as a financial centre and the unfortunate events that surrounded the problems with Libor 12 or more years ago.

In the UK framework, the FCA will be able to provide for the continuation of Libor settings under a synthetic methodology. Subject to the legislative framework in other jurisdictions, any change of methodology imposed by the FCA would flow through to global users of Libor contracts continuing to reference the rate. By taking this approach, the UK has provided a global solution rather than an approach that would have been effective only in the UK.

My noble friend Lord Blackwell asked about the methodology. Noble Lords will appreciate that setting this methodology is a responsibility that Parliament has granted to the operationally independent FCA, within the parameters established by the recent Financial Services Act. However, the FCA has an overriding responsibility to act in the best interests of consumers in this country. It is also important to note that the FCA’s approach is in line with the global consensus.

As we all acknowledge, and as I said in my opening remarks, Libor is mostly used by sophisticated financial operators, not retail investors. We estimate that there are only around 200,000 mortgages left on Libor, with that number estimated to fall to somewhere between 50,000 and 100,000 in the next few months. The synthetic Libor rate is a last resort and regulators have been encouraging markets to move to alternative rates for some time.

I remind noble Lords that the Financial Services Act 2021 allows the FCA to impose a synthetic methodology only if it considers it desirable to do so to protect consumers or protect and enhance the integrity of the UK’s financial system. Furthermore, the synthetic rate seeks to provide a reasonable and fair approximation of Libor while removing a major factor in its volatility: the variable credit spread, which has often spiked in times of economic stress. Reducing volatility will benefit consumers who pay interest with reference to Libor.

I will write to the noble Lord, Lord Eatwell, on his specific points; I am afraid that I do not have that information to hand at the moment.

This Bill is vital to the protection of consumers and the integrity of UK markets. I would be happy to arrange another detailed technical session in a similar form to the two we have had so far, because I am aware of how technical this Bill is. I hope that we have noble Lords’ support.

[Lord Tunnicliffe (Lab)]

My Lords, may I raise a bureaucratic point before the Minister sits down? He intends to put letters in the public domain through the medium of the Library. It would be convenient if he could simultaneously copy them to everybody who has participated in the debate and registered interested parties like me.

[Lord Agnew of Oulton (Con)]

I would be happy to do that. I am pleased to see the noble Lord, Lord Tunnicliffe, back here without Covid; we were worried that he might have had it. I will certainly do that.

Bill read a second time and committed to a Grand Committee.

Health and Social Care Levy Bill

Lord Agnew of Oulton Excerpts

2nd reading & Order of Commitment discharged & 3rd reading
Monday 11th October 2021 Lords Chamber

Moved by

[Lord Agnew of Oulton]

That the Bill be now read a second time.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, it is a pleasure to open this Second Reading debate on the Health and Social Care Levy Bill. This is a short but very important Bill that aims to legislate the plan announced by the Prime Minister on 15 September. The plan will tackle the NHS backlog, put the adult social care system on a sustainable long-term footing and end the situation in which those who need help in their old age risk losing everything to pay for it.

The Government’s plan will make a substantial difference to the lives of millions of people across this country. It will be funded with a record £36 billion investment in the NHS and social care systems. Noble Lords will be aware that such an ambitious plan requires funding. In order to pay for a significant increase in spending in a responsible and fair way, the Bill before the House today introduces a new 1.25% health and social care levy. The levy will apply UK-wide to taxpayers liable to class 1 employee and employer, class 1A, class 1B and class 4 self-employed NICs. However, it will not apply where taxpayers pay class 2 or class 3 NICs. It will be introduced from April 2022 and, from April 2023, the levy will also apply to those working over the state pension age.

Noble Lords may be aware that it takes time for HMRC to prepare its systems for such a major shift. That is why, as set out in Clause 5 of the Bill, in 2022-23, the levy will be delivered through a temporary increase in NIC rates of 1.25% for one year only. I would like to make it clear that all net revenues generated by the temporary increase in NIC rates will be ring-fenced and paid to NHS England, NHS Scotland, NHS Wales and the equivalent in Northern Ireland. From April 2023, the temporary rise in NIC rates will be replaced by a formal legal surcharge of 1.25%. Clause 2 of the Bill sets out that this revenue will be ring-fenced for health and social care only.

It is the intention that existing NIC reliefs and allowances will also apply to the levy. That will mean that 40% of all businesses will not be affected due to the employment allowance. When it comes to individuals, those earning more will pay more. The top 14% of taxpayers will pay around half the revenue raised. Conversely, at least 6.2 million people earning less than the NIC primary threshold will not pay the levy at all.

Let me once more remind Noble Lords today why this levy is so crucial. As the Prime Minister and the Chancellor have said, this levy will enable the Government to properly fund the NHS, so that it can recover from the pandemic. Senior NHS leaders have made clear that without additional financial support we will not properly be able to address the significant backlog in the health service. To get everyone the care they need will take time and will require additional revenue.

In addition, our social care plan aims to create a dramatically expanded safety net for people in their later life. This means that, instead of individuals having to bear the financial risk of catastrophic care costs themselves, we as a country are deciding to share more of that risk collectively. This is a permanent, new role for the Government and a structural increase in the size of the British state. We therefore need a permanent, new way to pay for it. Noble Lords will be aware that the only alternative would be to borrow indefinitely. That would clearly be the wrong course of action when our national debt is already the highest it has ever been in peacetime. Borrowing ever more today just means higher taxes in the future.

We need to fund our vision for the future of health and social care in this country over the longer term. As the Prime Minister said, with proper funding, we can tackle not just the NHS backlog and expand the social care safety net but afford the nurses’ pay rise, invest in the best equipment, prepare for the next pandemic, provide the largest investment ever to upskill social care workers and build the modern, more efficient health service that the public across the UK deserve.

To conclude, this levy will enable the Government to tackle the backlog in the NHS. It will provide a new, permanent way to pay for the Government’s reforms to social care, and it will allow the Government to fund our vision for the future of health and social care in this country over the longer term. I beg to move.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

My Lords, this has been an interesting debate. The quality of speakers has been very high, and I am aware that most of them know far more about these issues than I do—so it is with a certain humility that I attempt to reply. Also, as someone who does not appear that often, even I have noticed that I do not necessarily have the mood of the House with me on this Bill. However, I will spend longer in summing up than I spent in opening, to try to address some of the concerns and at least put the Government’s point of view on the many challenges that have been raised.

I will start with my noble friend Lord Forsyth, the noble Lords, Lord Eatwell and Lord Shipley, and the noble Baronesses, Lady Tyler and Lady Kramer, on the fundamental issue of the use of national insurance as the linchpin for this tax raising. We need a broad-based tax, such as income tax, VAT or national insurance, to raise the sums needed for such a significant investment. There is a precedent here. In 2003, the Labour Government increased the same NIC rates by 1%, specifically to increase funding for the NHS. There is an existing NIC ring-fence for the NHS. The NIC system already directs a ring-fenced proportion of receipts to the NHS. This ring-fence was established in 1948 and expanded by the Labour Government in 2003. I cannot provide the noble Lord, Lord Eatwell, with a cast-iron guarantee that the hypothecation will remain in perpetuity, but we see the principles here and, as my noble friend Lord Hannan said earlier, rarely do these taxes, once created, go away—so I hope to give some reassurance on that.

This also ensures that businesses contribute to the NHS. That is fair and reasonable, because they need a workforce that benefits from the NHS. Lastly, NICs apply on a UK-wide basis.

The noble Lords, Lord Macpherson and Lord Sikka, asked why we have not included rental income in the widening of the net. We have included dividends while excluding modest amounts of dividend, up to £2,000 a year. With regard to income from property, tax is currently levied at the same rates as income tax on earned income. Divergence in these rates would add complexity and create opportunities for avoidance. Those who earn their income from property have made a contribution to public finances. The property allowance has been frozen, as have the personal allowance higher rate and additional rate thresholds.

The Government are making sure that landlords continue to make a contribution. For example, we have restricted tax reliefs available to landlords. Over the past four years we have restricted relief for finance costs: it can now be claimed only at the basic rate, not at 40% or 45%. That has raised more than £1 billion. The higher rate of stamp duty for additional residential dwellings means that landlords now pay between 3% and 15% extra tax on those properties.

The noble Baroness, Lady Tyler, raised the issue of people over the state pension age, and noble Lords asked about the whole issue of intergenerational fairness. If we were to raise the sums required just for those over 40, the levy would need to be 60% higher, at around 2%. This would be a much larger burden on working people. Furthermore, around half of all the funding raised by the levy will go towards health and social care services that benefit working-age people, such as general NHS funding and vaccines. Working-age people will also benefit from limits on what they would need to pay if they themselves needed care in later life, and they will gain the peace of mind that comes from protecting their family members from substantial costs.

The noble Lords, Lord Eatwell and Lord Sikka, my noble friend Lord Forsyth and the noble Baroness, Lady Tyler, asked about the impact on the lowest paid. In relation to individuals, NICs are a progressive way to raise money: the highest-earning 14% will pay about half the revenues raised, while 6.2 million people who earn less than the NIC threshold of £9,500 will be kept out of the levy. I accept the points raised by two noble Lords about the cliff-edge nature of NIC contributions for higher earners, but the brutal reality is that, in the round, that top 14% will be paying around half of the total. That goes to the crux of this whole debate: we have tried very hard to ensure that this is a broad-based tax—as broad as possible.

Lower-income households will be large net beneficiaries from the package, with the poorest households gaining the most as a proportion of income. As was noted by one noble Lord, the highest 20% of households by income will contribute 40 times as much as the poorest 20%. One can make arguments about how much the bottom and top earn; nevertheless this is a highly redistributive approach to a difficult tax and an issue that all parties have dodged for 20 years. It is a genuinely progressive policy, and the distributional analysis published by the Treasury makes that clear.

Going beyond that, since 2010, Conservative Governments have consistently kept lower-paid people out of tax and kept the cost of living down. The income tax personal allowance threshold has increased by over 90%, meaning that a typical basic rate taxpayer now pays £1,200 a year less than they would have done otherwise. We also increased the NIC primary threshold by over £800, in April of last year, with a typical employee saving just over £100. In April of this year, we increased the national living wage to £8.91—an annual pay rise of £350 for someone working full time on the national living wage. Taken together, our changes to national insurance mean that someone working full-time on the minimum wage is currently £5,400 better off than in 2010.

The noble Lords, Lord Eatwell and Lord Macpherson, asked about the impact on employers. Some 70% of the money raised from businesses will come from the largest 1% of employers, and some 640,000 employers are excluded through the assistance at the bottom end. Again, as a Conservative Minister myself, I do not like raising taxes for anybody, but we have tried to broaden this tax as much as possible. Around 40% of businesses will not be affected by the levy. The noble Lord, Lord Macpherson, and my noble friend Lord Hannan, are not happy about a tax on jobs. The OBR will consider the economic effects of the levy in the light of its updated economic and fiscal forecasts, which will be published in the next couple of weeks alongside the Budget.

The noble Lord, Lord Eatwell, asked about the tax bill on the UK. We have had to take these difficult decisions because, as I said in my opening comments, this is a permanent increase in taxation for a permanent challenge that we face in a country with aging demographics. Our tax system remains competitive, with our tax take as a share of GDP lower than major international competitors, and broadly in the middle of the G7.

My noble friend Lord Forsyth asked about anti-avoidance rules, which is a very important question. I suspect, pragmatically, that there will be some fiddling around at the edges in the March/April threshold, but this whole piece of legislation will be subject to the full anti-avoidance rules that apply to NICs. Indeed, the recent work on IR35 would probably have been the biggest area of weakness had we not engaged in those reforms. The noble Lord might be interested to hear that even government departments are being threatened with fines by HMRC for non-compliance with IR35, so HMRC is out there already.

The noble Lord, Lord Eatwell, and the noble Baronesses, Lady Brinton and Lady Kramer, asked about hypothecation. I touched on this earlier. In 2022-23, all revenue from the health and social care levy will be directed to NHS England and equivalent bodies in Scotland, Wales and Northern Ireland through the existing NHS allocation. From 2023-24 onwards, levy revenue will be ring-fenced in law for health and social care. HMRC will pay the proceeds to those responsible for health and social care in all four parts of the UK, including NHS Scotland, NHS Wales and the equivalent in Northern Ireland.

The noble Baroness, Lady Fraser, asked about devolution and our way of handling that. This is absolutely a UK-wide problem. We have taken the decision to act on a UK-wide basis for the benefit of citizens across the UK. Scotland, Wales and Northern Ireland will receive Barnett consequentials on the additional health and social care funding in the usual way, with exact totals to be confirmed in the SR. Early indications are that, pro rata, the populations of the devolved authorities will receive more money from this approach.

The noble Baroness, Lady Brinton, asked about the funding specifically for social care. The Government are committed to spending £5.4 billion across three years on adult social care from this levy. This funding will end unpredictable care costs and include over £0.5 billion to support the adult social care workforce, in recognition of their efforts over this terrible pandemic. It includes funding to enable all local authorities to move towards paying providers a fair rate for care, which should drive up the quality of adult social care services, improve workforce conditions and increase investments.

Several noble Lords asked about funding for local authorities. We are committed to ensuring that local authorities have access to sustainable funding for core budgets at the spending review. We will ensure that every council has the resources they need to deliver these reforms.

The noble Lord, Lord Griffiths, spoke movingly and clearly understands this sector very well. I would like to reassure him that substantial support has been provided to the social care sector through the pandemic—for example, billions of items of free PPE prioritised to care workers, residents and unpaid carers for vaccination. We have made available £2.4 billion in specific funding for adult social care. This is made up of £1.75 billion for infection prevention and control, £522 million for testing, and £120 million to support workforce capacity. This funding is additional to the £6.1 billion for local authorities to deal with the impact of the pandemic on their services, including adult social care.

I turn to some specific questions on social care spending. First, on the size of the cap, the new £86,000 cap will end unpredictable care costs so that more people can preserve their savings and assets. Andrew Dilnot’s report was published 10 years ago and reflected the circumstances in 2011. Clearly, levels of wealth and asset prices have increased since then. We think that we have set the cap broadly at the right balance of achieving personal responsibility for planning for old age but putting in place a safety net where exceptional costs or periods of care are needed.

On domiciliary care, I think my noble friend—

[Lord Hunt of Kings Heath (Lab)]

Would the noble Lord give the House an estimate of how much a person would really have to spend before they reach the £86,000 cap? Does he agree that it will be at least double?

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

My Lords, more detail will be set out in the Budget and spending review in the next two or three weeks to address the noble Lord’s question.

The noble Lord, Lord Hunt, my noble friend Lord Bethell and the right reverend Prelate asked about help for carers specifically.

[Lord Forsyth of Drumlean (Con)]

I apologise. My noble friend was about to answer the question on domiciliary care.

[Lord Agnew of Oulton (Con)]

Yes, sorry. I lost my thread. There will be no changes to existing procedures.

Noble Lords asked about support for unpaid carers. Of course, they play a vital role in the care system. I suspect that there is hardly anyone here in the Chamber who has not been involved in the care of their parents at the end of their lives on an unpaid basis. I certainly had to—but luckily I am one of seven siblings and we all live in the same county. None the less, it is a considerable burden.

The Care Act encourages local authorities to support unpaid carers and to provide preventive care to stop people’s early care needs escalating. A new cap on care costs will offer greater certainty to unpaid carers and support informed decision-making and planning for the overall costs of care.

The Government will take steps to ensure that the 5.4 million unpaid carers have the support, advice and respite they need, fulfilling the goals of the Care Act. We will work with the sector, including unpaid carers, to co-develop more detail in our plans and will publish further detail in the White Paper for reform later this year—and on the matter of the White Paper, I say to noble Lords that it is not long now. It is only a couple of months; it has been promised before the end of the year, and I am perhaps a little more optimistic than some Members of the House.

[Baroness Kramer (LD)]

Before the Minister leaves this area of exploration, does he have an answer to my question on whether the Government will pick up the costs of the additional national insurance to be paid by those to whom local government outsources services? I believe it is a yes or no answer.

[Lord Agnew of Oulton (Con)]

I cannot give the noble Baroness a clear answer on that now. More detail will be available in the Budget and the spending review. If it does not transpire in those documents in the next couple of weeks, the noble Baroness can write to me and I will investigate further.

On the adult social care workforce, our investment is at least £500 million across the three years to deliver new qualifications, progression pathways and mental health support. This workforce package is unprecedented investment: it is something like a fivefold increase in public spending on skills and training for this sector.

The noble Lord, Lord Griffiths, asked about vaccines for NHS staff. He is correct that at the moment there is no requirement for NHS staff to be vaccinated. However, we have a consultation under way to try to find the best way through on that sensitive issue.

I have probably answered the noble Baroness, Lady Kramer, as much as I can on the compensating of NICs. Just to confirm, I say that the Government will compensate public sector bodies such as the NHS for the increased cost of employer NICs. If they did not, they would simply reduce the amount available. The Chancellor will set out more details in his spending review.

My noble friend Lord Bethell asked about NHSX funding. We remain absolutely committed to all aspects of technological improvement. Again, I am more optimistic over the long term because I believe we will find new ways of treating this sector more efficiently, and NHSX will play a part in that.

My noble friend Lord Naseby made a point about the structure of GPs’ surgeries. We will have to see some dramatic changes in that area. In my view, we cannot sustain surgeries in which five-sixths of the doctors are working only part-time, but again I think this will throw up opportunities. The two sectors will have to work much more closely together—

[Baroness Thornton (Lab)]

The Minister is straying into territory that I think is probably unwise. The noble Lord, Lord Naseby, made various assertions, but there is no proof that part-time doctors and GPs are less efficient or that this is a less efficient way of working. We know that this absolutely is not the case in lots of other places, and there is no proof that it is in this case. The Minister might be wise not to go there.

[Lord Agnew of Oulton (Con)]

I respectfully disagree with the noble Baroness on that. Your Lordships are having a much more detailed debate on health reform very shortly, so I am sure that will be teased out in those discussions.

The noble Lord, Lord Lipsey, asked about the White Paper. As I said, we certainly hope to see that out in the next few weeks.

The noble Lord, Lord Desai, asked about the taxation of carried interest and private equity firms, but I suspect he was being slightly disingenuous as he knows we are not extending this to capital gains tax, only to dividends. No doubt there is a separate debate to be had on that, but at the moment it is a capital gain.

The essence of this debate is the fairness of the way the tax is being structured—

[Lord Eatwell (Lab)]

It is fortunate that the Minister just brought up once again the issue of fairness and the discussion of it in the House. At the beginning of his speech, he referred to the proportion of the total raised from—I think he said—the top 14% of payers. This is a completely bogus statistic and has nothing to do with fairness. Let me give him an example. Let us suppose that someone earns £1 million and there is a 10% levy. They pay £100,000 on the levy and have £900,000 left. Then let us suppose that someone earns £10,000 a year—they would still be caught by this levy, by the way—and, to keep the numbers easy, that they still pay 10%. Their income has gone down from £10,000 to £9,000 and, as Marcus Rashford has said, they are choosing whether to eat or to stay warm. To understand fairness is to understand the impact on individuals of the measures taken. Using these absolutely bogus numbers, which are not at all representative of fairness, simply distorts and degrades the debate.

[Lord Agnew of Oulton (Con)]

I take on board the noble Lord’s points, but the reality is that the highest-paid in this country are paying the largest contribution to this tax and indeed PAYE itself. I accept entirely what he says about the impact being disproportionately greater on poorer people, but that is why we have designed the structure to protect as many people as possible. As I mentioned in my opening comments, some 6 million people will not be subject to this at all, and we have kept 40% of smaller businesses out of it. Those on higher earnings will pay a lot more, and that is an important principle, but I absolutely accept the point he made.

I am grateful for the opportunity to explain the Bill and address the issues that have arisen today, and I now commend the Bill to the House.

Bill read a second time. Committee negatived. Standing Order 44 having been dispensed with, the Bill was read a third time and passed.

Net-zero Emissions Target

Lord Agnew of Oulton Excerpts

Monday 11th October 2021 Lords Chamber

[Baroness Ritchie of Downpatrick]

To ask Her Majesty’s Government what fiscal measures they are taking in pursuit of their net zero emissions target.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, the Prime Minister’s 10-point plan demonstrates our commitment to net zero. It sets out £12 billion of new government investment in green industries. We have set up the UK Infrastructure Bank, backed by £12 billion of capital, to help unlock more than £40 billion of overall investment in infrastructure. Carbon pricing will play a key role in helping the UK achieve net zero, at the same time as raising funds to be invested in the Government’s spending priorities.

[Baroness Ritchie of Downpatrick (Non-Afl)]

My Lords, our entire fiscal system is out of kilter with decarbonising the economy and achieving net zero. For example, look at the gas and oil sector: since signing the Paris agreement, the Government have given £4 billion to oil and gas companies. Can the Minister therefore commit, on the eve of COP, that this practice will be confined to the scrapheap of history and that those companies will receive no more funding through subsidies and tax breaks? If so, can this be included in the spending review?

[Lord Agnew of Oulton (Con)]

My Lords, it is important to point out that we need to transition to a net-zero economy in an orderly way and that we cannot immediately switch on a full net-zero energy system. We are one of the fastest reducers of coal use in the world: our coal consumption has fallen by over 80% in the last 10 years, and we remain completely committed to accelerating.

[The Lord Bishop of Oxford]

My Lords, in order to avoid a disruptive transformation from our current carbon-intensive society, we need the Government to include fiscal measures to protect the poorest and most vulnerable households. Can the Minister confirm that the full Government road map to net zero will include a carbon fee and dividend element to cushion the blow for low-income households, as already successfully trialled in several Canadian provinces, Alaska and elsewhere?

[Lord Agnew of Oulton (Con)]

My Lords, we already do a great deal to support those on lower incomes. We have a number of schemes to support those who are under pressure financially and at risk of higher energy prices. We will, of course, keep all those measures under review.

[Baroness McIntosh of Pickering (Con)]

Will my noble friend ensure that the Government commit water companies to reach their net-zero targets by ending the automatic right to connect for massive new housing developments where water companies simply cannot accommodate the huge amounts of waste water required in antiquated Victorian pipes?

[Lord Agnew of Oulton (Con)]

My Lords, there are currently no restrictions to water companies raising funds to make investments in reaching net zero, and water companies are able to submit plans for such investment to Ofwat as part of the price control. The Government are currently consulting on the strategic direction for the water sector. This consultation outlines the expectation that Ofwat will contribute towards protecting and enhancing the environment and will appropriately challenge water companies’ plans to deliver the change needed in the water sector to meet net zero.

[Lord Browne of Ladyton (Lab)]

My Lords, I am sure the Minister will agree that the Government need to take a joined-up approach to decarbonising the economy. Surely it is inefficient and wasteful to public funds to stimulate decarbonisation with some funds, while stimulating the creation of greenhouse gas emissions with others. When will we see subsidies for fossil fuels wound down?

[Lord Agnew of Oulton (Con)]

My Lords, as I mentioned in an earlier answer, we need to do this transition in an orderly way. We need to ensure that our net-zero energy generation is sustainable. We are moving very quickly. We have seen, for example, the cost of offshore wind drop dramatically over the last five years, from over £100 per kilowatt hour to around £45, but we need to keep moving that along before we remove any more support to the traditional sources of energy.

[Baroness Kramer (LD)]

My Lords, according to the CBI, the obstacle that most frequently holds back business from taking action towards net zero is uncertainty, especially about the Government’s fiscal policy on the environment. Can the Minister assure the House that the Budget on 27 October will provide a clear net-zero fiscal strategy and road map, with a consistent environmental tax policy outlined, including principles and goals that business can rely on for the long term?

[Lord Agnew of Oulton (Con)]

My Lords, I cannot speak to the detail of the Budget in a few weeks’ time, but we have a strong message, which we have been consistent with over the last few years. We have made clear, for example, the recently announced emissions trading scheme, which provides a clear road map for heavy users of carbon. We are about to introduce the plastic packaging tax, which again is clear, for industry to get behind. We will continue to send those messages, but I think they are pretty clear. Indeed, we are seeing dramatic change by business. For example, coming up to COP 26, three huge companies have made very strong commitments: GSK, Hitachi and Microsoft have all committed to get to net zero in the next few years.

[Lord Eatwell (Lab)]

My Lords, in the development of environmental fiscal policy, do the Government accept the fundamental principle that the polluter pays?

[Lord Agnew of Oulton (Con)]

My Lords, ultimately, that has to be the direction of travel for us, but we cannot get there overnight. To implement that sort of stringent regime now would dramatically increase costs, which would then come back to consumers in other ways.

[Lord Mann (Non-Afl)]

I have yet to meet a pensioner who has turned down free electricity. If the Government want to take the red wall with them on their environmental policies, why are they not bringing in again fiscal incentives for solar panels, giving some free electricity to households across the country?

[Lord Agnew of Oulton (Con)]

My Lords, the market is playing its role. As the cost of solar panels declines, it becomes increasingly attractive for householders to implement those sorts of strategies. The cost of solar energy has declined dramatically over the last few years, and I think we will find that, very soon, it will be attractive for many households to take the route the noble Lord suggests.

[Baroness Randerson (LD)]

Does the Minister agree that it would be very environmentally damaging to reduce taxes on aviation, which would in turn encourage more people to fly? Can he assure us that this will not feature in the Treasury’s forthcoming fiscal plans to be announced in the spending review?

[Lord Agnew of Oulton (Con)]

My Lords, as I said earlier, I cannot speak for the spending review or the Budget. However, we will not be seeking to inadvertently encourage excess use of aviation travel. But again, it is a very vital part of our economy and, until other forms of transport take its place, we need to support it.

[Lord Whitty (Lab)]

My Lords, it is, frankly, widely believed in both business and environmental circles that the Treasury is at best lukewarm about using fiscal measures to support the climate change strategy. If that is not the case, why has the Treasury not used the supposed freedom post Brexit to remove VAT from building refurbishment, thus continuing to incentivise high-carbon demolition and disincentivise refurbishment and retrofit?

[Lord Agnew of Oulton (Con)]

My Lords, I respectfully disagree with the noble Lord’s view of the Treasury’s position. I mentioned the emissions trading scheme that was announced earlier this year. We have published the Industrial Decarbonisation Strategy, which sets out the vision for a low-carbon industrial sector by 2050. In March this year we were the first G7 country to agree a landmark North Sea transition to support the oil and gas industry’s transition to clean energy. Through this deal, the sector has committed to cut emissions by 50% by 2030. The Treasury is closely involved in all these initiatives.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I follow on from the question put by the noble Lord, Lord Eatwell, about the polluter pays principle. I am sure the Minister is aware of the International Monetary Fund’s report earlier this month recommending that polluters—fossil fuel companies—should pay for deaths and poor health from air pollution and heatwaves, and for the impact of global heating. This is the International Monetary Fund. Will the Government be following this advice and publishing a road map for when they will get to the point of really making polluters pay?

[Lord Agnew of Oulton (Con)]

My Lords, I repeat that we are moving very fast to decarbonising; we are one of the fastest in the G20, and indeed in the G7. If we push the envelope too hard, we will just see a boomerang of costs going back to consumers. We very much support the aspiration for polluters to pay but it must be done on a sustainable basis.

[Baroness Chakrabarti (Lab)]

My Lords, on the one hand we have soaring utility prices, and on the other hand we have imminent climate catastrophe. The Minister repeatedly says he wants to move in an orderly fashion. Does that not point towards greater intervention and greater public ownership of vital utilities?

[Lord Agnew of Oulton (Con)]

I am sure the noble Baroness will know that the current squeeze on gas prices has nothing to do with the quantity of gas available; it is a geopolitical move by Russia to put pressure on Europe, and we are caught up in it. Public ownership of our own utilities would make no difference.

[The Lord Speaker (Lord McFall of Alcluith)]

My Lords, all supplementary questions have been asked.

Capital Requirements Regulation (Amendment) Regulations 2021

Lord Agnew of Oulton Excerpts

Tuesday 14th September 2021 Grand Committee

Moved by

[Lord Agnew of Oulton]

That the Grand Committee do consider the Capital Requirements Regulation (Amendment) Regulations 2021.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, among other things, these regulations support the implementation of the Basel III standards in the UK. I will begin by reminding the Committee of the background to this issue.

I am sure that noble Lords agree that strong prudential regulation is vital if we are to ensure that firms have enough capital and liquidity to operate effectively through periods of economic stress. However, the 2008 financial crisis highlighted major deficiencies in international financial regulation. Following the crisis, the international community came together to remedy this situation by developing updated standards known as the Basel III accords.

The UK, as a member of the G20, is committed to the implementation of the Basel III standards, given their positive benefits to financial stability. Now that the UK has left the EU, we must implement many of these standards domestically for the first time. This includes rules on subjects equivalent to those contained in the EU’s second capital requirements regulation, known as CRR2. Many of these rules do not yet apply in the UK due to the EU’s implementation date falling after the end of the transition period.

The Financial Services Act 2021 enables the Prudential Regulation Authority to make rules updating the existing provision in the UK’s capital requirements regulation for Basel III standards—the CRR—where the Treasury has or will revoke the relevant provision of the CRR. The devolution of responsibility to the PRA for updating these rules reflects its expertise in prudential matters. This is combined with a more flexible and tailored approach that comes with having these regimes set out in regulator rules rather than in statute.

On some of the detail of the instrument, to enable the PRA to update the prudential regime to account for these new Basel III standards, this instrument exercises the powers contained in Section 3 of the Financial Services Act to revoke elements of the CRR and make consequential amendments. These revocations must be within the limits imposed by Section 3(2), which limits the provision to only revoking those parts of the CRR which need to be updated to reflect the new Basel standards, and anything that is connected to, or consequential to, those standards.

When it makes CRR rules, the PRA is subject to an accountability framework, under which it must consider the impact of its rules on a number of areas; the relative standing of the UK compared to other jurisdictions; lending to the real economy; and the Basel standards themselves. For rules made after 1 January 2022, the PRA will also need to have regard to the net-zero carbon target. Additionally, the PRA must consult the Treasury on the potential impacts of any rule changes on equivalence.

This instrument contains additional EU exit-related amendments to the CRR. These are required to ensure that the prudential regime continues to function as intended now that the UK has left the EU. This instrument makes an amendment to Article 497 of the CRR. This allows for the Treasury to extend a transitional provision for certain foreign central counterparties to retain temporary qualifying status. Qualifying status allows UK firms to use these CCPs without being subject to higher capital requirements. Were these CCPs to lose this status, they would become substantially more expensive, thereby reducing the likelihood of their use by banks. This amendment will allow for the transitional period to be extended by regulation one year at a time.

--- Later in debate ---

I recognise that this is a very big question and the Minister might want to write me an essay and not answer today, but is this situation, in which future rules will have no formal parliamentary scrutiny, satisfactory? Should parliamentarians not be more involved in an issue of this importance? If they should have more involvement, how?

[Lord Agnew of Oulton (Con)]

My Lords, I thank the noble Lord again for his very thorough analysis of an immensely complicated subject. I will try to address his two substantive questions. The first was on the scrutiny of PRA rules and regulations by Parliament. I assure the noble Lord that Parliament ultimately sets the regulators’ objectives, and it is right that Parliament has the appropriate opportunity to scrutinise the work of the regulators and their effectiveness in delivering the objectives that Parliament has set them. The letter the noble Lord referred to was clear that we set out a reasonably long consultation period earlier this year and had substantive responses from the key players in the sector, and we have responded to those.

The regulator committed to sending these consultations and draft rules to Parliament during the passage of the Financial Services Act earlier this year. Consultation began in February so there has been a decent period to review and report on them. The PRA published its final rules in July—again, well in advance of this SI. The FSMA requires regulators to undertake these consultations and to consider and to respond to representations from Parliament as well as other stakeholders. Mechanisms for accountability, scrutiny and engagement are considered further through the further regulatory framework review. We should not rush to prejudge the outcome of the FRF review. The Government will bring forward proposals through a second consultation later this year.

On the noble Lord’s question about climate change, the Financial Services Act 2021 was amended to include a “have regard to” the net zero carbon target but its application was delayed until 1 January 2022. This means that the PRA does not need to have regard to climate change considerations in making the rules as a consequence of this specific SI. This delay will ensure that there is no unnecessary and impractical delay in implementing the Basel 3 reforms for 1 January next year, otherwise we would be in the unfortunate position where the regulators would have to reopen or restart their consultations which were first published, as I said, in February this year.

I assure the Committee that the PRA will still need to make rules to implement substantive reforms contained in Basel 3.1. I expect the regulators to use the powers again in future to update their rules: for example, to take account of new international standards or developments in the market. The PRA will need to have regard to the net carbon target in setting those rules.

I hope noble Lords will agree that these amendments strike the right balance between taking action on climate change quickly and taking swift action to reform our prudential regimes that aims to prevent a future crisis. I suggest that we write to the noble Lord to update him on the timetable for his specific concern on the net-zero targets.

[Lord Tunnicliffe (Lab)]

Before the noble Lord sits down, I recognise that what I have said is perhaps complex so I would be grateful if he would also write to me on whether he has any further reflections on how Parliament might be involved. The formal position, as I understand it, is that the PRA can now make regulations without seeking any formal authority from Parliament; indeed, that is almost the essence of it. I sense some degree of sympathy that somehow Parliament ought to be involved, so if he and the Treasury have further thoughts on that, it would be valuable if they could share them with me.

[Lord Agnew of Oulton (Con)]

Of course we will write to the noble Lord to provide a bit more clarity on that. Again, it is that difficult balancing act with incredibly complex regulations—as the noble Lord has so ably demonstrated as he has fought his way through layers of hyperlinks—and I recognise that.

The Prudential Regulation Authority has consulted on these rules. As I mentioned, in July it published the near-final version of the proposed rules, along with an accompanying policy statement. This set out how the regulator has taken into account the public policy factors in the Financial Services Act.

I hope that the noble Lord has found today’s debate informative. I will write to him on the specific items we have discussed. I hope he will join me in supporting this instrument and I beg to move.

Motion agreed.

Money Laundering and Terrorist Financing (Amendment) (No. 2) (High-Risk Countries) Regulations 2021

Lord Agnew of Oulton Excerpts

Tuesday 14th September 2021 Grand Committee

Moved by

[Lord Agnew of Oulton]

That the Grand Committee do consider the Money Laundering and Terrorist Financing (Amendment) (No. 2) (High-Risk Countries) Regulations 2021.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, the Government are committed to combatting money laundering and terrorist financing and recognise the threat that economic crime poses to our country. Illicit finance causes significant social and economic costs through its links to serious and organised crime, it is a threat to our national security, and it risks damaging our international reputation as a fair, open, rules-based economy. Illicit finance undermines the integrity and stability of our financial sector and can reduce opportunities for legitimate business in the UK. That is why the Government are focused on making the UK a hostile environment for illicit finance. As part of this work, we have taken significant action to tackle money laundering and terrorist financing, and to strengthen the whole-system response to economic crime.

Underpinning these efforts are the money laundering regulations, a key part of our legislative framework which set out a number of measures that certain businesses must take to combat money laundering and terrorist financing. These requirements include the need for businesses to identify and verify the people and organisations with whom they have a business relationship or for whom they facilitate transactions.

In addition, the regulations require that financial institutions and other regulated businesses conduct additional checks, or “enhanced due diligence”, on business relationships and transactions involving “high-risk third countries”. These are countries that have been identified as having strategic deficiencies in their anti-money laundering and counterterrorism financing regimes and which pose a significant threat to the UK’s financial system. The statutory instrument under discussion today updates the list of countries specified as high risk in the money laundering regulations.

I will explain the background to this instrument. At present, the UK’s list of high-risk third countries, specified in the money laundering regulations, mirrors those identified by the Financial Action Task Force, the global standard-setter for anti-money laundering and counterterrorist financing. The Financial Action Task Force updates its public lists of jurisdictions with strategic deficiencies following the conclusion of each Financial Action Task Force plenary to reflect changing risks and circumstances in these jurisdictions and in the global economy.

This instrument will therefore amend the money laundering regulations to update the UK’s list of high-risk third countries to mirror the Financial Action Task Force’s public lists. This will ensure that the UK’s list is responsive to the latest threats emanating from high-risk countries with inadequate counterillicit finance systems, and that the UK remains at the forefront of global standards on money laundering and terrorist financing. This update will therefore help to protect our national security and the UK’s reputation, and will protect businesses and the financial system from money launderers and terrorist financiers.

In summary, the instrument will update the UK’s high-risk third countries list. Businesses that fall under the scope of the money laundering regulations and which deal with these countries will be required to take extra scrutiny measures. This amendment will enable the money laundering regulations to continue to work as effectively as possible to protect the UK financial system and it will allow the UK to continue playing its full part in the fight against economic crime. I hope that noble Lords will join me in supporting this legislation. I beg to move.

[Lord Tunnicliffe (Lab)]

My Lords, I welcome the Minister to what is for me the first Treasury SI to be held physically since the pandemic began. There is also a sense of nostalgia that predates the Minister: namely, this SI is being conducted by only the Minister, myself and the Government Whip. It is a matter of “never mind the width, feel the quality”.

I am grateful to the Minister for introducing the latest iteration of these regulations. As he outlined, they enact the latest changes to the Financial Action Task Force’s list of high-risk countries for illicit finance, which come three times a year. The last time we debated this topic, towards the end of April, we also covered the logistics involved in defining key terms and ensuring that the UK can mirror the FATF’s list, now that we are outside the EU. Thankfully, the relevant corrections to domestic law have been made, which means that we do not need to revisit that topic in any detail. However, we find ourselves giving retrospective approval to a made affirmative instrument, when the Government’s stated ambition in April was to use the regular process.

Of course, we understand that the work of the FATF may not directly align with the sitting dates of our Parliament. We also accept that delays in bringing forward these regulations introduce a necessary and undesirable risk. While these occasions allow noble Lords to raise a series of related issues with Ministers, it seems unlikely that the Government or Parliament would wish not to enact these regulations when they appear every few months. With that in mind, and given the huge volume of secondary legislation that we now deal with, could the Minister and his department examine whether and how the process giving effect to changes in the FATF list might be streamlined or otherwise improved?

Speaking of peripheral issues, could the Minister also provide a brief update on the Government’s broader efforts in this area? In April, the noble Lord spoke of 52 joint actions being undertaken by the Government and private sector to tackle economic crime. He also referenced 17 extra staff being recruited to the UK Financial Intelligence Unit. How are those exercises progressing? I would be happy for him to write with the details, if necessary.

[Lord Agnew of Oulton (Con)]

My Lords, I thank the noble Lord for his participation in the debate today and for his normal, thorough consideration of the instrument under question.

I shall go to his query about the progress on the 52 actions that we have committed to in this area: 20 of those 52 have now been completed, and we are at a key point in the economic crime plan timeline. The Government recently published the Statement of Progress, which details progress made against the plan; it sets out the UK’s future priorities and outlines seven new priority actions that build on the original actions in the plan. It increases our level of ambition to combatting economic crime, supporting our growth and prosperity and enhancing our global reputation as a clean financial centre and a safe place to do business.

As the noble Lord requested, I shall write to him with further details on the work; there is a great deal going on, covering a number of departments—for example, reforms to Companies House to prevent the misuse of companies, which was set out in September last year. We are looking to introduce reforms to limited partnerships and how they operate, and a register of overseas beneficial owners. Likewise, the Home Office is shortly to consult on a number of economic crime-focused legislative changes to ensure that we have the right powers to share information and seize assets. However, as requested by the noble Lord, I shall put that into a letter so he has a full update.

On the pressure on bringing instruments forward, which will be reasonably frequent, I absolutely accept the noble Lord’s challenge. It is always a difficult balancing act to subject government to proper scrutiny in the parliamentary process but also not to clutter up the timetable. We will take back his comments and see whether there is a better way of doing it.

I hope that noble Lords have found the debate informative, albeit short, and that they will join me in supporting this instrument.

Motion agreed.

Cash Network

Lord Agnew of Oulton Excerpts

Tuesday 7th September 2021 Lords Chamber

[Lord Holmes of Richmond]

To ask Her Majesty’s Government what plans they have to amend competition law to enable collective action to ensure an efficient, effective, accessible, and sustainable cash network across the United Kingdom.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, the Government have not set out plans to amend competition law. However, we are committed to legislating to protect access to cash. The Government are consulting on legislative proposals to protect access to cash withdrawal and deposit facilities. Together with this, the Bank of England has brought together industry to design a new model for wholesale cash distribution. The Government will explore how they can best enable and support an efficient, sustainable and resilient model.

[Lord Holmes of Richmond (Con)]

My Lords, does my noble friend agree that, although the future of payments is digital, the case for cash remains material—material for millions, for individual financial inclusion and national financial resilience for the foreseeable?

[Lord Agnew of Oulton (Con)]

I agree with my noble friend that cash remains a very important measure of exchange in this country. It is now the second most important—it is less important than it was—but we are committed to supporting it.

[Baroness Bryan of Partick (Lab)]

My Lords, in answer to a Question on 19 July this year, the noble Baroness, Lady Penn, stated that

“industry is best placed to develop the most efficient and sustainable solutions for access to cash”.—[Official Report, 19/7/21; col. 3.]

If that is the case, can the Minister explain why 8,000 ATMs—13% of the total—have disappeared in the past 18 months, making access to cash even more difficult?

[Lord Agnew of Oulton (Con)]

To reassure the noble Baroness, there are still some 40,000 ATMs in the country at the last count, and we remain committed to supporting their continuation. Link, the payment services provider for cash machines, has restated that a number of times. The other side of the coin is that the percentage of transactions using cash has declined dramatically; it was 56% of all transactions in 2010, and is now down to 17%. The usage is declining, which is why some of these facilities are going.

[Baroness Wheatcroft (CB)]

My Lords, post offices are highly valued by the communities they serve. Will the Government consider committing to the Post Office’s future by developing it as “The People’s Bank”, providing cash withdrawal facilities in the communities that need them?

[Lord Agnew of Oulton (Con)]

My Lords, the Post Office plays a vital role in supporting payments across the system. There are some 11,000 post offices, and some 95% of business customers and 99% of personal banking customers are able to deposit cheques, check their balances and withdraw and deposit cash. The banking framework allows banking via post offices.

[Lord Tunnicliffe (Lab)]

My Lords, the Minister’s answers seem to me to fail to sense the problem for minorities and people who are poor. My real concern about access to cash is how poor people will manage. For poor people, frequently cash is the only way they can budget—they are not up to systems and that sort of thing. There are not many of them, but society must be responsible for them. I have read the document on this that the Treasury has pushed out; it seems pretty reasonable when you read it, but the key issue is the charging. The system is losing free-to-use cash machines. To us, the charges look trivial, but when you are taking small amounts of cash out, proportionately they are eye-watering. Will the Government insist that the free-to-use network is maintained and possibly enhanced?

[Lord Agnew of Oulton (Con)]

My Lords, to reiterate my earlier point, there are some 40,000 cash machines that are free at the point of use; they are sustained through an interconnection charge between the banks. As for what the Government are doing, in the Financial Services Act of this year we legislated to allow cashback without purchases. That became law in June this year, and it is something where everyone’s interests are aligned: the retailer gets the opportunity to increase footfall into their shops and to reduce the cost of having to bank cash, which is expensive. We are optimistic that this will provide a wide range of additional outlets for cash.

[Lord Hunt of Wirral (Con)]

I declare my interest as an independent non-executive director of Link. What are the Government’s plans to ensure that an effective hub network of physical access to financial services is maintained right across the country in the future? Amid the increasing tension that exists between banks, post offices, the banks’ attempts at hub pilots and local shop services such as cashback, what are the Government doing to co-ordinate the picture to ensure we have free access to cash?

[Lord Agnew of Oulton (Con)]

My Lords, the Government welcome industry efforts to develop solutions to provide continued access to financial services. The community access to cash pilots are an industry-led initiative, taking place in eight locations in the UK at the moment. These are trialling and testing sustainable solutions for ensuring that communities can conveniently withdraw and deposit cash. The Government’s proposals for cash will enable firms to use a range of solutions, including existing facilities, to provide access to cash for the purpose of meeting geographic requirements, provided they are judged to be delivering reasonable access by the responsible regulator.

[Lord Rooker (Lab)]

My Lords, I accept that change will come but it is vital we protect those who rely on cash. It is people on tight budgets, but it goes beyond that: it is also people who are cared for in their own home, with carers who do the shopping. I declare an interest: I was shielding for months last year. Three people were doing the shopping, with cash provided sometimes before the shopping and at other times after. What was I supposed to do? Cash was absolutely vital for those transactions. You cannot give a cheque or give your plastic cards out, so the idea that it affects only a few people, and that change is on the way in digital, is nonsense—we are going to be a cash society for a long time to come.

[Lord Agnew of Oulton (Con)]

I agree with the noble Lord that we are going to remain a cash society for a considerable time, but I reassure him that, as of the first quarter of this year, over 99% of the population was within two kilometres of free cash withdrawal.

[Lord Young of Cookham (Con)]

My Lords, in July I asked whether unbanked pensioners could be issued with debit cards, topped up with their monthly pensions, which they could use in shops—a facility already available to universal credit claimants. I was told that this service was widely available, but when I asked the DWP it told me that only 350 pensioners have these cards. As more and more retailers refuse to accept cash, should not more unbanked pensioners be issued with these cards?

[Lord Agnew of Oulton (Con)]

As my noble friend is aware, the DWP payment policy is to pay benefits and pensions into a standard bank, building society or credit union. The DWP encourages customers to provide standard bank account details, to give them greater choice in where and how they collect their money. Customers who receive their payment into an account of their choice are financially included and can benefit from a wide range of financial services, such as direct debits. A standard account allows customers to access cash payments via post offices, as I mentioned in a reply to an earlier question. The DWP payment exception service is a small-scale scheme where vouchers are uploaded to a card or sent electronically by SMS or email. It is available to that small minority of claimants who cannot open or use a standard bank account. It is not a prepaid card and cannot be used to purchase goods and services.

[Baroness Hoey (Non-Afl)]

My Lords, the Minister knows that the ending of the Post Office card account, with the Government refusing to renew the contract, is going to really hit those very poorest pensioners who depend on that cash—that is practically all they have to take out each week. Week after week they are now getting letters telling them they must get a bank account or some other kind of digital banking. Why will the Government not accept that the Post Office card account should be retained to help those very poorest pensioners who rely on it, without the bureaucracy of a bank?

[Lord Agnew of Oulton (Con)]

My Lords, it is not difficult to open a bank account. What we need to do is keep encouraging these elderly people who do not have an account yet to open one.

[Lord Kirkhope of Harrogate (Con)]

I congratulate my noble friend on the work he is doing in this regard, but surely we should keep from retailers the costs from the banks themselves for handling cash, which seem to be an impediment. Does my noble friend agree that there is still some reluctance, following the Covid crisis, about handling cash? Is anything being done to reassure the public that it is safe to handle cash?

[Lord Agnew of Oulton (Con)]

My Lords, I think what has happened is that people have discovered the ease of not using cash for a number of transactions. Indeed, retailers would not be turning down cash if their customers were objecting to it.

[The Senior Deputy Speaker (Lord Gardiner of Kimble)]

My Lords, the time allowed for this Question has elapsed.

Overseas Development Assistance

Lord Agnew of Oulton Excerpts

Wednesday 14th July 2021 Lords Chamber

[Lord Fowler]

To ask Her Majesty’s Government, further to the Written Statement by the Chancellor of the Exchequer on 12 July (HCWS172) setting out the fiscal circumstances under which they will return to spending 0.7 per cent of Gross National Income on Overseas Development Assistance, as stipulated in the Official Development Assistance Target Act 2015, whether they intend to bring forward primary legislation in this area; and if not, why not.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, the Government remain committed to the International Development (Official Development Assistance Target) Act 2015 and to spending 0.7% of gross national income on official development assistance. The decisions taken are in line with the spirit and framework of the Act, which envisages situations in which departure from the 0.7% may be necessary. Yesterday’s vote provided the House of Commons with a further opportunity to consider the return to 0.7%. In the light of that and our continued commitment to the 2015 Act, there is no need to bring forward additional legislation.

[Lord Fowler (CB)]

I am afraid that that reply does not convince me. Surely the vote yesterday means that an Act of Parliament passed by both Houses has been overturned by a last-minute Motion passed by just one House, in spite of clear government commitments in November that they would bring forward proper legislation. I will make one short point: I hope the Minister recognises that the vote yesterday does not represent the view of this Parliament.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

My Lords, I can reassure my noble friend that the 2015 Act had provision for suspension of the 0.7% depending on major events such as the one we have just experienced with Covid. I politely remind him that we have seen the largest drop in our economy with regard to our GDP in 300 years, and the Act made provision for adjustments to the rate in light of such events.

[Lord McConnell of Glenscorrodale (Lab)]

My Lords, I drew attention to my entries in the Lords’ register. When the Government confirmed the withdrawal of military support in Afghanistan they stressed, rightly, the critical importance of advocacy of the rule of law, democracy and our support for development in that country as an alternative way forward. Yet, as just one example of these cuts, a project for rural women in Afghanistan has been cut in the third year of its four-year programme, resulting in thousands of women who will no longer receive literacy training or vocational educational training, or be able to complete their courses. Do not the Government think the Taliban will be cheering this decision, delighted that we took it yesterday in the House of Commons? Do they really think that we promote the rule of law and democracy by breaking our own laws in the way that has just been announced by the Chancellor and Prime Minister?

[Lord Agnew of Oulton (Con)]

My Lords, I respectfully disagree with the noble Lord. We have not broken our own laws. As I pointed out in my supplementary answer to my noble friend, this is a suspension of the current percentage which is allowed under the original Act. We have committed through the debate yesterday that we will revert to the original Act’s commitment when the economy allows us to do so.

[Lord Purvis of Tweed (LD)]

My Lords, as the sponsor of the legislation through this House, I calmly say to the Minister that, when he refers to the spirit of the legislation, that spirit was based on a two decades-long consensus that we should not only meet our obligation to the world’s poorest but sustain it. We have enshrined it in a law that the Government are now moving away from, using executive authority. If the Government wish to bring forward changes, they should bring forward legislative changes and not simply Motions. My question to the Minister is very simple and he will have the answer because it is in his briefing pack, I am sure. If the new fiscal tests are linked to the pandemic, it follows that they would have been met when we did not have a pandemic. Under which calendar year in the past have those physical tests been met?

[Lord Agnew of Oulton (Con)]

Just to restate the point, Section 2 of the 2015 Act envisages circumstances in which the 0.7% target is not met due to

“economic circumstances and, in particular, any substantial change in gross national income”

and

“fiscal circumstances and, in particular, the likely impact of meeting the target on taxation, public spending and public borrowing”.

We last met those requirements in 2018-19.

[Lord Judge (CB)]

Please can the answer to this question not be that the law has not been broken? We had that last week and it was not an answer to my question. Is it consistent with the sovereignty of Parliament that an obligation or duty imposed on the Government by primary legislation can be expunged or suspended by Ministerial Statement?

[Lord Agnew of Oulton (Con)]

My Lords, at the risk of being tedious, we have not in any way expunged the Act. We have suspended it in line with the section that I cited in the previous answer.

[Lord Bates (Con)]

My Lords, for many years Her Majesty’s Government have taken great pride in regularly publishing reports on the impact of overseas aid in terms of the millions of lives saved, children educated and jobs created. Will my noble friend say whether any similar impact assessment of the likely effect of this reduction in our aid budget has been carried out by the Treasury or the FCDO using the same established methodology? If so, can it be shared to inform future debates and votes, and if not, why not?

[Lord Agnew of Oulton (Con)]

My Lords, as my noble friend will know, we are undergoing a rationalisation by moving DfID into the FCDO. The Foreign Secretary has agreed that he will focus all of government’s investment and expertise on issues where the UK can make the most difference and achieve the maximum strategic coherence. The FCDO is working through what this means for individual programmes, in line with the priorities identified. We will of course report in detail when those arrangements are concluded.

[The Lord Bishop of Worcester [V]]

My Lords, the Chancellor’s Statement published on Monday finally outlined the meaning of the much-repeated but undefined government line that 0.7% aid spending would be restored when the fiscal situation allows. Will the Minister accept that to many working in the field of international development, these criteria point to a permanent rather than a temporary cut in overseas development, which in any case was due to change and has changed because it is a percentage of gross national income? Does the Minister recognise that this decision represents a terrible sentence, probably of death, for thousands of children and risks doing untold reputational damage to Britain’s leadership in international development?

[Lord Agnew of Oulton (Con)]

I respectfully disagree with the right reverend Prelate on that assertion. We will absolutely be prioritising the budget for the programmes of the most urgency and impact, so I do not accept that. I also point out to him that we have made considerable investments during the Covid crisis by helping other countries through our large investment in COVAX and, indeed, the Prime Minister’s commitment at the G7 to make a large number of vaccines available outside this ceiling of 0.5%.

[Lord Collins of Highbury (Lab)]

My Lords, this decision goes against a long-standing consensus across Parliament. It is against the Conservative Party’s manifesto and against the law and, most importantly, it is against the national interest. As a direct result of these cuts, more people will be forced to flee their homes and more people will turn to extremism in a less secure and stable world. To pick up the point the noble Lord, Lord Bates, made, we have been told in this House that officials carried out an equalities impact assessment which looked at our bilateral country spending. Can the Minister give us a guarantee this afternoon that this will be made public, and quickly?

[Lord Agnew of Oulton (Con)]

My Lords, it is important to remind the House that we have done this in the largest crisis to affect our country since the war and the largest recession in 300 years, with borrowing of £300 billion—14% of GDP—to deal with the crisis. It means that there has had to be some give in the system. We are committed to re-establishing it as soon as the economy allows it, and I am sure that the information the noble Lord asked for will be available soon.

[Baroness Northover (LD)]

As the Minister who took the Bill through the House, I can tell the noble Lord that this is totally contrary to the spirit, let alone the letter, of the law. Has the Treasury made an impact assessment of its new policy on the validity of the integrated review and the UK’s ability to deliver a successful COP 26?

[Lord Agnew of Oulton (Con)]

My Lords, I respectfully disagree with the noble Baroness that it is in breach of the Act. The Act provides for accountability to Parliament in the form of a Statement in the event that the Government do not meet the 0.7% target, to include the fiscal reasons on which the Government rely at that time. This week we have set out clearly and transparently how the Government will approach that task.

[Baroness Sugg (Con)]

My Lords, I struggle to understand how this new policy can be described as temporary. In response to the question asked by the noble Lord, Lord Purvis, my noble friend the Minister referred to one part of a financial year in the past 20 years, and that was only one. The Written Ministerial Statement refers to “a sustainable basis”. Given the implication of this new policy, it is important to be exact, so can my noble friend define exactly what is meant by “sustainable”?

[Lord Agnew of Oulton (Con)]

My Lords, that will be for when we have re-established a fiscal position that allows us to meet our commitments without having to borrow money on a day-to-day basis. That is the position we are in now, and I respectfully remind noble Lords that it will be the next generation who will pick up the tab for this huge amount of borrowing, and something has to give. That is what has happened in this situation.

[Lord Berkeley of Knighton (CB) [V]]

My Lords, given what the Minister has just said, I wonder how he would respond to the devastating observation by John Major yesterday that we seem prepared to build an expensive national yacht—which I would describe as a floating embassy—that we neither need nor want, while cutting back support for thousands of malnourished and starving people around the world who we could and should be further helping to feed.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

I disagree with the noble Lord. The vessel to which he refers will be to promote Britain and trade and lead to wealth creation. The cost—some £200 million, I understand, has been mooted—should be amortised over the life of that vessel. The running costs will be covered by the companies using it. It will bring wealth to this country, and wealth creation is a high priority for us at the moment.

[Lord Parekh (Lab) [V]]

My Lords, 0.7% of gross national income is a moral obligation, it is an international institutional obligation because of our membership of the United Nations, and it is also a statutory obligation, so supersession of this obligation requires enormously compelling circumstances. I cannot see why it has to give way to others, especially when the amount involved is no more than £4 billion out of a total of more than £600 billion that we are going to have to raise. The Government say that this constraint in expedient and temporary. What measures are we taking to make sure that what is temporary does not become permanent? The Government say that they will return to 0.7% when the fiscal situation is established on a sustainable basis. That is a very vague term. How do we decide what is a sustainable basis? It takes a long time to work it out and, more importantly, it is a term which can be understood in several different ways. How can we be sure that the Government will return to 0.7% and what reassurance can be given to people who are deeply worried about the step that the Government are about to take?

[Lord Agnew of Oulton (Con)]

I disagree with the noble Lord that this is a small sum of money when it would be 1p on income tax and is something like four times the amount committed to hiring 50,000 more nurses and four times the amount committed to hiring 20,000 more police officers. We have set out, as agreed in the Commons yesterday, the criteria for re-establishing it and committed to re-establishing it when they are met.

[Baroness Nicholson of Winterbourne (Con)]

Does the Minister agree that, given that the amount of funding is a little smaller than earlier, despite the fact that it is extremely generous in global terms, this is the moment to look more carefully at the way in which these funds are spent? Might it be possible, for example, to introduce open tendering rather than automatic disbursements of funds before there is any open competition, as is happening at the moment and has been happening for a long time? Might he also be willing to consider some successful monitoring? There are many ways of monitoring, but at the moment the funding does not seem to be subject to such things and certainly it is not published. Will the Minister consider those two items crucial when he delivers the outcomes of this slightly lower sum of money being spent?

[Lord Agnew of Oulton (Con)]

I strongly agree with my noble friend. We need to be much more stringent in our assessment of how the money is spent. We saw from the St Helena Airport incident, for instance, that money can be wasted. I am sure that with less money available there will be much more scrutiny. That tends to be a natural reaction in organisations. I will take back my noble friend’s useful suggestions to the Treasury.

Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021

Lord Agnew of Oulton Excerpts

Wednesday 14th July 2021 Lords Chamber

Moved by

[Lord Agnew of Oulton]

That the draft Order laid before the House on 14 June be approved.

Considered in Grand Committee on 8 July.

Motion agreed.

Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021

Lord Agnew of Oulton Excerpts

Thursday 8th July 2021 Grand Committee

Moved by

[Lord Agnew of Oulton]

That the Grand Committee do consider the Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, since the financial crisis, the Government have implemented significant reforms to address the problems of the past and make the financial sector safer and more stable. A key element of these reforms was establishing the Financial Policy Committee, which is responsible for identifying, monitoring and addressing risks to the financial system as a whole. The FPC addresses macro-prudential risks through its powers to issue recommendations and, importantly, directions to the Prudential Regulation Authority and the Financial Conduct Authority.

Successive Governments have legislated to provide the FPC with the powers of direction that it needs to address risks to financial stability. Through these existing powers, the FPC can ensure that firms are not allowed to take on excessive levels of leverage, effectively tackle systemic risks in the UK housing market, and vary firms’ capital requirements against exposures to specific sectors over time. This instrument amends the existing powers of direction granted to the FPC by Parliament to ensure that they continue to operate effectively given changes that have been made to the wider prudential regime since they were first introduced.

The Financial Services Act 2021 represents a major milestone in shaping a regulatory framework for UK financial services outside the EU. It enhances the competitiveness of the sector and ensures that it continues to deliver for UK consumers and businesses. The Act extended the powers for the PRA to make rules which apply to holding companies for the purposes of prudential regulation. Accordingly, the Act granted the FPC the ability to make directions or recommendations that relate to holding companies, ensuring a coherent regime under which holding companies become responsible for meeting prudential requirements. Consistent with these changes, this instrument amends the FPC’s existing powers of direction, where necessary, so that they can also be applied in relation to holding companies.

In addition, the Government have stated their intention to move the detail of the leverage ratio framework exclusively into rules made by the PRA using powers introduced by the Financial Services Act 2021. The leverage ratio is intended to be a broadly risk-insensitive measure of a bank or investment firm’s level of leverage. This instrument therefore amends the FPC’s powers of direction over the leverage ratio so that the method for measuring a bank’s exposures when calculating the leverage ratio is defined by reference to rules made by the PRA. This method will be subject to any specifications made by the FPC when it issues a direction in relation to leverage. For example, the FPC currently recommends that the PRA excludes central bank reserves from banks’ exposures for leverage purposes to ensure that macroprudential policy does not impede the smooth transition of monetary policy. Under this instrument, the FPC would instead be able to direct the PRA to make such an exclusion.

This House may wish to be aware that the FPC and the PRA recently published a consultation on proposed changes to the UK leverage framework. This followed the FPC’s comprehensive review of the framework in light of revised international standards, and its ongoing commitment to review its policy approach. The UK remains committed to the implementation of the Basel 3 standards, of which the leverage ratio is a key part, alongside other major jurisdictions.

It is important to emphasise that the FPC’s proposed leverage ratio framework delivers a level of resilience at least as great as that required by international standards, providing a vital backstop to secure the resilience of the banking system. The framework will continue to require that the vast majority of the UK leverage ratio be met with the highest quality of capital. However, I should make it clear that the changes introduced by this instrument are to ensure that the FPC can continue to make effective use of the existing powers of direction over the leverage ratio that have already been granted to it by Parliament. It is for the FPC, which is independent of government, to decide which of its levers, including its powers of recommendation and direction, would be most effective and appropriate to implement measures such as the proposed changes to the leverage ratio framework.

The Treasury has worked closely with the Bank of England to prepare this instrument. In accordance with our statutory obligations, officials have consulted the FPC, which agreed with the approach being taken. We have engaged with the financial services industry on the contents of the instrument.

This instrument is necessary to ensure that the FPC’s existing macroprudential tools continue to operate effectively given changes that have been made to the wider prudential regime since they were first introduced. I beg to move.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

My Lords, I thank the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Bowles, for their thoughtful contributions. It is the Government’s view that this instrument is necessary to ensure that the FPC’s existing macroprudential tools continue to operate effectively, given changes that have been made to the wider prudential regime since they were first introduced. On the question from the noble Lord and the noble Baroness about the leverage ratio, it is for the FPC, which is independent of government, to decide which of its levers, including the powers of recommendation and direction, would be most effective and appropriate to implement measures such as the leverage ratio. It is important to point out that the ratio itself increased from 3% to 3.25% in 2016 and banks are today reporting core capital ratios almost three times higher than before the 2008 global financial crisis.

To expand on the comments of the Economic Secretary, since 2016 the Financial Policy Committee has used its powers of recommendation to implement a leverage ratio, which excludes central bank reserves, and the FPC’s current consultation proposes to maintain that policy. The changes in this SI will instead allow it to direct the PRA to implement such changes to the framework, appropriately reflecting that the PRA will become responsible for defining the total exposure measure on an ongoing basis. On the noble Lord’s question about how the Government foresee capital requirements changing now that we are outside the EU, the UK remains committed to maintaining the highest international standards, including the Basel standards. This has not changed now that we have left the EU. However, I should note that the capital requirements in relation to the implementation of Basel 3 and 3.1 standards and the prudential regime for investment firms are set by the regulators and therefore independent of government.

The Government believe that delegating responsibilities to expert and independent regulators remains appropriate. The regulators have the expertise to set rules in the complex and technical area of financial regulation. They do so in an agile way which corresponds to the changing context. The PRA will decide exactly how these Basel 3 standards will be implemented, subject to any recommendations or directions made by the FPC based on the specificities of the UK market, in line with statutory objectives and accountability frame- works set out in the recently passed Financial Services Act. The PRA’s recent consultation on Basel 3 implementation set out several areas where it proposed to tailor the implementation of the outstanding Basel 3 standards to better reflect the UK context.

The noble Lord requested a timeline for ongoing prudential regulation. Last year, the Treasury and regulators published their intention to implement the outstanding Basel 3 reforms and the investment firms prudential regime for 1 January 2022. To enable this, Her Majesty’s Treasury intends, in the near term, to lay an affirmative SI which revokes the relevant aspects of the onshore to capital requirements regulation, therefore allowing the PRA to make rules that fill the space of those revocations and, in so doing, implement the outstanding Basel 3 standards. The Treasury will also, later in the year, lay an affirmative SI which makes consequential amendments needed as a result of the aforementioned revocations.

I want to highlight the Regulatory Initiatives Grid, the third edition of which was published in May of this year and includes the proposed timeline for other prudential reforms, such as the implementation of Basel 3.1. The grid adds to the extensive co-ordination mechanisms already in place between HMT and regulators, giving firms a clear picture of upcoming regulatory initiatives, including consultations, so they are better placed to plan for them. In relation to consultation exercises and draft rules to emerge since the passing of the Financial Services Act 2021, I can confirm that the PRA sent its consultation and its draft rules on Basel 3 implementation, shortly after their publication, to the Treasury Select Committee, the Lords Economic Affairs Committee and the Lords EU Services Sub-Committee. The PRA intends to follow a similar process when it publishes its subsequent policy statement and near-final rules.

The FCA has also engaged with parliamentary colleagues on its two consultations and policy statement on the investment firms prudential regime. Indeed, the first IFPR consultation was discussed by Parliament during the passage of the Financial Services Act and the FCA has notified the Treasury Select Committee of all the IFPR publications to date. I am confident the FCA will follow a similar process for future consultations, policy statements and final rules. As set out in their letters to parliamentarians during the passage of the Financial Services Act, both regulators are happy to hear views and discuss ongoing work in more detail with MPs, Peers and parliamentary committees wherever this is helpful.

Finally, the noble Lord also asked for an update on the ongoing future regulatory framework review. The FRF review aims to build on the strengths of the UK’s existing framework as set out in FSMA to ensure that it is fit for the future. The review considers whether changes are required to the regulator’s statutory objectives and principles, how we ensure that accountability and scrutiny arrangements with the Treasury, Parliament and stakeholders are appropriate, given the regulator’s new responsibilities, and how we return responsibility for designing and implementing the specific requirements that apply to firms in certain areas of retained EU law to the regulators within a framework set by government and Parliament. An initial consultation exploring these key issues and a proposed approach was published in October 2020 and closed in February 2021. The Government are considering the 120 responses received ahead of a second consultation in the autumn.

On the question asked by the noble Baroness, Lady Bowles, about the plans for the UK framework to take a different approach to Basel, the design of the leverage ratio framework is a matter for the FPC and the PRA, which are independent of government. The UK’s proposed leverage ratio delivers a level of resilience at least as great as that required by international standards. Interested parties are able to respond to the ongoing consultation that I referred to, which is being carried out by the FPC.

I hope that the Committee has found today sitting informative and that it will join me in supporting this order, which I commend to the Committee.

Motion agreed.