Government Departments: Non-Executive Directors

Lord Sikka Excerpts

Wednesday 8th September 2021 Lords Chamber

[Lord True (Con)]

My Lords, the Government obviously respect the recommendations in any report from the Committee on Standards in Public Life, and we will consider and respond to those recommendations in due course. I believe that talent is not confined to people of a single political opinion. Therefore, I do not follow the noble Lord in the implication that anybody who has ever supported the Conservative Party should be disqualified from one of these roles.

[Lord Sikka (Lab)]

My Lords, the Government have adopted a model of non-executive directorships which has been used at BHS, Carillion, crashed banks and other scandal-ridden entities. The non-executive directors there were friends of executive directors; they lacked independence and were ineffective. If the Government are to persist with non-executives, can the Minister give an undertaking that they will be directly elected by employees and users of the services of the relevant departments?

[Lord True (Con)]

No, my Lords, I cannot give such an undertaking.

Covid-19 (Public Services Committee Report)

Lord Sikka Excerpts

Thursday 22nd July 2021 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I thank the noble Baroness, Lady Armstrong of Hill Top, for this debate and the Public Services Committee for its immensely insightful report. Future generations will wonder how their Government permitted nearly twice the number of their citizens to die during the Covid pandemic than all the civilians who died during the Second World War. Yes, we need to transform public services, but that cannot be done without transforming politics, and economic and social policies. We need a visible politics of care and compassion. The fact that the Prime Minister was comfortable with 83,000 Covid fatalities in the age group 18 or over is really a sad low point in British values. Front-line workers, including hospital staff, care home workers, transport staff and retirees feature disproportionately on the Covid death list.

As Sir Michael Marmot’s recent report demonstrates, the main reason is that, due to low incomes, people have poor access to good food, housing, healthcare and personal space. The pandemic has shown us that poverty and inequalities cause death, but the Government have done little to check that; indeed, they continue with their wage freezes, without any impact assessment on the lives of people or the capacity of the country to manage pandemics. In 1976, the workers’ share of the gross domestic product was 65.1%, and just before the pandemic it dropped to 49.4%—a decline unmatched in any other industrialised country. The average wage was stagnant in the decade preceding the pandemic. This economic legacy has weakened the people’s resilience to pandemics. Many people tested positive for Covid but could not find a safe place to isolate, as they lived in cramped accommodation, all because they are poor.

To manage pandemics, countries need institutional memories and capacities; we lack both. The NHS lacked investment before the pandemic. To manage the crisis, the Government hired expensive and often ineffective private sector consultants for their test and trace programme, which has not augmented the long-term capacity of the NHS. Consultants quickly enter and exit an organisation and leave little trace of their activities. This makes it harder to build a pool of experience and draw lessons.

The Government need to look at their own obsession with privatisation, a key factor in the deaths in care homes. Since 2010, central government grants to local authorities have been cut by 38% in real terms; this accelerated the privatisation of social care. In care homes owned by private equity, nearly 11% of revenues vanish in servicing contrived debt. Private equity also expects a return of 12% to 14% on its investment, which meant that 20% to 25% of the revenues of private equity disappeared in returns, leaving very little for care home residents. Care home workers and residents suffered. Of the 1.49 million workers in care homes, only 50% are full time—nearly 24% are on zero-hour contracts. Almost 42% of the domiciliary care workforce is on zero-hour contracts, and staff turnover is nearly 30%.

In March 2020, the real-term median hourly pay of staff was just £8.50 an hour. In these circumstances, it is difficult, if not impossible, for carers to get to know patients and provide personalised care. Low-paid staff cannot afford to isolate or take time off to recover. It is hard to recall any government concerns about the negative outcomes from privatisation of social care. We cannot build capacity to tackle future pandemics by just creating poverty.

The Government’s economic policies are also creating new dangers and diseases—just look at the water industry, where almost every water company has been fined for anti-social practices. Southern Water is the latest example. The company illegally dumped tonnes of raw sewage into rivers and seas, increasing the likelihood of diseases. Its directors calculated that it was better to pay fines than to treat the sewage, so they dumped it. The puny £90 million fine is no deterrent: Southern’s chief executive has just received a bonus of £551,000 for boosting profits. I cannot recall seeing any health impact that accompanied the Government’s two-thirds cut in the Environment Agency’s budget or deregulation, which expects water companies to self-report their illegal practices.

I hope the Government will reflect on how their political, economic and social policies have inflicted death on thousands and sadness upon millions of innocent people, but I am not too optimistic.

Finance Bill

Lord Sikka Excerpts

2nd reading & Committee negatived & 3rd reading
Tuesday 8th June 2021 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I draw attention to my entry in the register of interests. I am an unpaid adviser to Tax Justice Network. Tax justice is the theme of my remarks today.

A key requirement for building a just and sustainable society is for people to have good purchasing power with which to buy goods and services and to stimulate the economy. This simple truth is neglected not just in this Finance Bill but in many previous Bills. The Bill depresses people’s purchasing power. The current tax-free personal allowance of £12,570 has been frozen until 2026, as have income tax thresholds. The net effect is that one in 10 adults will pay a higher rate of income tax, with the poorest ending up paying a higher proportion of their income in tax. This measure alone removes some £19 billion of spending power from households. It will condemn many to a great deal of insecurity and difficulty.

Regressive taxation has been normalised in each year’s Finance Bill. The TaxPayers’ Alliance estimates that the poorest 10% of UK households now pay 47.6% of their income in direct and indirect taxes. This compares with 33.5% by the richest 10% of households. Because of wage and benefit freezes, zero hours contracts and job insecurity, this gap is now much bigger than in 2010. The Government need to examine why their policies continue to hurt the poorest in our society. They increased VAT to 20%; this is a regressive tax which hits the poorest hardest. There is no proposal for reform in the Finance Bill.

Council tax is regressive. This year, it has increased in the range 3% to 5%. Virtually the same council tax is paid on a property worth £3 million as on one worth £350,000, without any regard for any ability to pay. The poorest tenth of our population pays 80% of their income in council tax, while the next 50% pay 4% to 5% and the richest 40% only pay 2% to 3%.

There is no reform of national insurance contributions —another regressive tax. Employees generally pay 12% of their monthly incomes between £797 and £4,189 in contributions. Above that, the rate is an additional 2%. Inevitably, the rich pay a lower proportion of their total income in national insurance, compared to the poor.

Unlike the noble Lords, Lord Leigh of Hurley and Lord Bilimoria, I cannot support the capital gains tax regime. Why on earth do the rich need a special tax regime? Capital gains are taxed at marginal rates of between 10% and 28%, whereas earned income is taxed at marginal rates of between 20% and 45%. Both increase somebody’s welfare and purchasing power. I can see no rationale whatever for taxing capital gains at a lower rate than earned income.

The Government’s policies on capital gains are also a bonanza for the tax avoidance industry. Armies of accountants and lawyers are busy converting income to capital gains so that their clients end up paying lower taxes. By taxing capital gains in the same way as earned income, the Government could raise around £14 billion a year. This could help the less well off by making the £20 a week universal credit permanent; the Government could also easily double it by this one simple reform.

There is tax relief of around £40 billion a year on contributions to pension schemes. Just 10% of high earners receive 50% of tax relief. There are 1.3 million individuals who pay into pension schemes but receive no tax relief and zero government support. This is because their income is less than the tax-free personal allowance. Again, the poor are being punished, for putting a little away for their retirement income.

I hope the Minister will explain why the Government insist on hurting the poorest with regressive tax policies. Just in case he is tempted to defend government policies by claiming that, in recent years, they have increased tax-free personal allowances, I remind the House that this has not changed the burden of tax on the poorest. Increasing the personal allowance has done nothing for 18.4 million individuals whose annual income is less than the personal allowance. We need a rethink if we want a just society.

The report, New Powers for HMRC: Fair and Proportionate? is very impressive, but I cannot help wondering whether the committee has not been hoodwinked by the Government and the tax avoidance industry. On page 3, the report states:

“On the proposals for tackling promoters of mass-marketed tax avoidance schemes, we welcome the Government’s intention to take further tough action against the known ‘hard core’ of promoters, but urge it to redouble its efforts in this respect, and to take further measures to combat the continued proliferation of new schemes.”


Where exactly is the evidence for tough action? There is an enormous difference between the law on the books and the law in practice. The Government have been soft on the tax avoidance industry. Big accounting firms have long raided the public purse through complex tax avoidance schemes. Occasionally HMRC goes to court, but the Government do not take any action against the firms.

Let me give some examples. The UK Supreme Court heard the case of HMRC v Pendragon plc and others. The case related to a VAT avoidance scheme marketed by KPMG, which would have enabled car retailing companies to recover VAT input tax paid while avoiding the payment of output tax. The court declared the scheme to be unlawful and the judge said:

“In my opinion the KPMG scheme was an abuse of law.”


That is a very strong conclusion. To this day, no action has been taken by any regulator or accountancy trade association against KPMG.

The court judgment in Development Securities plc and others v HMRC threw out a complex PwC scheme designed to shift apparent management control of some UK entities to Jersey to gain tax advantages by claiming that the entities were not liable to the UK taxes. The scheme was declared to be unlawful by the courts, but no action was taken against PwC.

An Ernst & Young scheme involved loans between companies in the same group, and the ultimate aim was to enable a company making the interest payment to claim tax relief on the expense while enabling the company receiving the interest to avoid tax. That scheme was sold to Greene King. After a prolonged legal battle, the scheme was declared to be unlawful. No action was taken against Ernst & Young.

Deloitte promoted a scheme to enable companies to generate deductible tax losses through complex financial transactions. The scheme was sold to Ladbrokes, but it gambled incorrectly and the court said that the scheme was unlawful. No action of any kind whatever was taken against Deloitte.

Big accounting firms have been peddling unlawful tax avoidance schemes and are not investigated, fined or disciplined but are given government contracts and seats on HMRC’s boards. The advisory panel on the general anti-abuse rule, GARR, is also dominated by the same people. Amazingly, none of the GARR panel’s rulings relate to any of its clients.

In sum, I question the claim that tough action against accounting firms for selling tax avoidance schemes has been taken. I invite the Minister to explain why big accounting firms peddling unlawful tax avoidance schemes have not so far been investigated, fined disciplined or prosecuted.

Transparency of Lobbying, Non-Party Campaigning and Trade Union Administration Act 2014

Lord Sikka Excerpts

Thursday 22nd April 2021 Lords Chamber

[Lord True (Con)]

My Lords, I agree that transparency is important; that has been a standard across the House. Ministers’ and Permanent Secretaries’ appointments are published. Obviously, there is ongoing review of this work, not only by the Government but by a number of parliamentary committees. I am sure what my noble friend said will be noted.

[Lord Sikka (Lab) [V]]

My Lords, while it is right to constrain the power of lobbyists and former Ministers renting themselves out, the real cancer at the heart of our politics is corporate money and power, which fund political parties and legislators to gain unfair advantage in public policy-making. Is the Minister concerned? If so, what legislation will he propose?

[Lord True (Con)]

The noble Lord is the antithesis to capitalism. The remarkable success of private companies in procuring vaccines for the safety of our people is something for which I am profoundly grateful.

Financial Services Bill

Lord Sikka Excerpts

Report stage
Wednesday 14th April 2021 Lords Chamber

The objective of the amendment seems sensible, and I am well aware that to go to the Court of Protection is cumbersome, time-consuming and expensive. However, I rather doubt that this Bill is the right place for this measure. I do not see that the FCA can be given any responsibility or power in this connection. I do agree that £5,000 in any year is a sensible amount, below which it should not be obligatory to apply to the court. If my noble friend the Minister considers that the Bill is not the right place for this, could he tell the House what the Government will be able to do to find a solution to this difficult problem?

[Lord Sikka (Lab) [V]]

My Lords, it is a great pleasure to participate in this Bill. I strongly support Amendment 27. In view of the passionate speeches by the right reverend Prelate the Bishop of St Albans and the noble Lord, Lord Foster, my contribution will be relatively short, as they have said almost everything that I wanted to say.

In this technological age, it cannot be very difficult for any provider of bank accounts, credit cards, debit cards, store cards and other electronic payment systems to offer customers an opportunity to block payments to certain providers of services. As has already been said, the blockers actually increase consumer choice. The blockers would be of enormous help, as has been said, to those addicted to gambling or other ruinous addictions—of course, gambling is not the only one. It would certainly help their families too, because it would safeguard the family budget, which then cannot simply disappear by the swipe of a card or the click of a computer key.

I would urge that such blockers should be a necessary condition of the authorisation to trade in financial services in the UK. Other regulators, such as the Gambling Commission, should also insist that anybody who is licensed provides such facilities. The blockers obviously would not prevent people from indulging in gambling and other ruinous addictions. Nevertheless, they would really help vulnerable people in our society and I completely support this amendment.

[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure to take part in this group of amendments and I declare my interests as set out in the register. I will speak to a trio of amendments and I will endeavour to do it in a trice.

First, I very much support the intention behind Amendment 16. I ask my noble friend the Minister, over and above what is set out in the amendment, what reports the Government have received of bailiffs entering properties during the Covid period, both in breach of their guidance and the Covid regulations, and what action all relevant authorities will be taking in this respect.

Secondly, on Amendment 26, I very much support my noble friend Lord Leigh of Hurley, who set out the arguments perfectly and succinctly. Would my noble friend the Minister agree that there is clearly a loophole, and what will the Government do effectively to close said loophole?

Thirdly, and perhaps most importantly, I give full-throated support to Amendment 37C, so perfectly introduced by my noble friend Lord Young of Cookham. It seems one of those amendments where, for want of a small legislative change, a huge material difference could be made to so many people’s lives. It is a funds-releasing, anxiety-relieving amendment. I ask my noble friend the Minister: if not this amendment, will the Government bring forward one of their own at Third Reading? If not this Bill, what Bill?

--- Later in debate ---

[Viscount Trenchard (Con)]

My Lords, my noble friend Lady Neville-Rolfe is a tireless advocate of impact assessments. I support her proposal to require the Treasury to provide an annual impact assessment of the regulators’ activities. Some of our existing financial services regulation, such as AIFMD, Solvency II and parts of MiFID II, has already had a devastating effect on small business, innovation and the competitiveness of our financial markets. My noble friend’s Amendment 24 will mitigate further damage that might otherwise be done by the application of disproportionate or unduly burdensome rules.

The FCA’s first operational objective is consumer protection, so I do not understand the purpose of the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer, in Amendment 25, which I think would make my noble friend’s amendment read rather strangely. It is a pity that the Minister is not willing to raise the importance of competitiveness of the markets as an objective of the FCA, but, in any event, I hope he will agree that the consumers’ interests are not assisted by measures that damage competitiveness, innovation and small businesses.

Amendment 37, in the names of the noble Baroness, Lady Bennett of Manor Castle, and the noble Lord, Lord Sikka, also refers to impact assessments in its heading. But it is too wide in its coverage. It is not reasonable to make the regulators responsible for matters such as poverty, regional inequality and economic development. Market distortions such as those which would be created by the adoption of this amendment would have an adverse effect on prosperity and economic development across the country, creating more poverty and reducing the scope for the alleviation of regional inequality such as the Government are championing through their levelling-up campaign.

[Lord Sikka (Lab) [V]]

My Lords, I congratulate the noble Baroness, Lady Bennett, on her amendment and her speech. I would like to speak to Amendment 37. The amendment requires the FCA and the PRA to embrace social responsibility by considering the impact and costs/benefits of the financial services industry. Currently, that receives little attention. There are such obligations on companies—in other words, they have to embrace social responsibility—so why not on regulators?

The noble Baroness has drawn attention to the finance curse upon the UK, which has inflicted at least £4,500 billion-worth of damage to the UK economy. It would be helpful to hear from the Minister about the limits of this negative impact on the UK and whether there are any limits to the growth of the finance industry, which can drive out other industries. After all, other industries also have to compete for resources.

For far too long, the social effects of the finance industry have been dismissed as externalities, and little weight is attached to them in any annual report of the FCA or the PRA. Under the Financial Services and Markets Act 2000—FSMA—the FCA is required to

“promote effective competition in the interests of consumers in the markets for regulated financial services and services provided by a recognised investment exchange”

in carrying out certain regulated activities.

The FCA website states that one of its duties is to

“make markets work well—for individuals, for business, large and small, and for the economy as a whole.”

What analysis supports the claim that the FCA actually does this? It is hard to see how any of its statutory objectives can be met or demonstrated to have been met in the absence of any cost-benefit analysis, especially relating to the disappearance of bank branches or the very restricted access to financial services by the masses. This point was raised earlier by the noble Lord, Lord Naseby; I reuse it as an example to illustrate the failures of the FCA.

The absence of bank branches has a direct impact on poverty, regional inequality, economic development, production, distribution and the consumption of goods and services. The FCA acknowledges that 27.7 million adults at the moment are experiencing vulnerability to poor health, low financial resilience or recent negative life events. This is an increase of 15% since February 2020, when 24 million people were considered vulnerable. Yet no formal assessment is offered by the FCA as to why this is, what the role of the finance industry is and how these negative impacts can be alleviated.

I return to the issue of bank branches. Bank branch networks are a vital part of the financial infrastructure, but they have been shrinking at an accelerating rate, with many town centres and districts having no bank branches at all. Some banking services began to be provided by post offices—or bank branches moved into them—but they are closing too. Cash machines are also vanishing and increasingly require a fee, especially those located in the poorest areas. I have seen cash machines charging up to £4.99 for a withdrawal in a relatively poor area of London.

Branch closures result in exclusion from access to financial services. Many citizens, especially the elderly and those in low-income groups, do not have access to fast broadband connections or a computer. Computers in local libraries and homes are not necessarily secure and online fraud is a major risk. Strong signals for smartphones are not available throughout the country and there are too many blackspots. People without computers and smartphones cannot easily access any financial service. This cannot easily be reconciled with the government policy of reducing exclusion from financial services, and the FCA has not really said much about it.

The closure of bank branches means that the banking market is not working well, as many individuals and businesses are unable to access timely and effective financial services. Maybe the FCA interprets the “competition objective” given to it in very narrow economic terms and neglects the social dimension of making markets “work well”. It has done little to address the consequences of branch closures.

The closure of bank branches has severe consequences for financial services, local economies and the erosion of local competition. Bank branch closures impose costs on people, such as going to the next town for your banking: that is, the money spent on transport, the time taken up, extra pollution emanating from travel to the next town, road congestion and searching for the nearest suitable financial services facility—and, of course, there are cyber risks as well.

Some people may well trek to another town with a bank branch, but affordable and efficient transport from many locations, especially in rural areas, is not necessarily available. Trekking to another town is not an easy task for the elderly, the infirm, women with small children, or local entrepreneurs just keeping their head above water. A trader cannot afford to close business for a day, or half a day, to visit a bank branch in another town. In any case, the additional travel generates extra pollution and damages the environment. When people visit another town for their banking services, they end up doing their shopping there, which means that the local economy in the place where they live is also damaged.

Without local bank branches, local shopkeepers, traders and the self-employed cannot easily bank cash takings and cheques. This then increases the risks that they face. Without a local branch, banks cannot easily build an intelligent picture of local businesses, risks and opportunities, and thus cannot provide required financial support for local economies. One study has estimated that bank branch closures dampen SME lending by 63% on average in postcodes that lose a bank branch. This figure grows to 104% for postcodes that lose their last bank branch in town.

The closure of local bank branches increases commercial decline, as I indicated earlier, because people end up shopping in the town where they go for their banking. This accelerates economic decline and has effects on the local housing market, as well as on the provision already made for schools, healthcare and other facilities.

In the absence of local banking facilities, many people, especially the low-paid, may become victims of the payday lenders who charge exorbitant interest rates.

The amendment tabled asks the regulators to discharge their duties because, currently, it is one-way traffic: traffic from the state, taxpayers and people to the banks, and very little in return. On behalf of citizens and taxpayers, the state has bailed out banks; provided quantitative easing to lubricate their liquidity; acts as a lender of the last resort; provides almost free raw material—that is, cash with very low interest rates; protects bank deposits of up to £85,000; and bolsters the bank customer base, and thus the ability of banks to sell services to newer customers, because the state insists that social security payments are made through banks. What exactly is it that the banks offer the public in return? It is hard to see what we are getting in return. We are not getting competition in financial services; we are not getting bank branches that are open and accessible to the masses. There appears to be no quid pro quo from the finance industry. All that people are getting is shrinking access to financial services.

The FCA, as a regulator, has a duty to see that the markets work well for everybody. It has not done so. How can it deliver that duty when people simply do not have access to financial services or have very restricted access?

It is quite likely that, in meeting the objectives of the proposed amendment, the regulators might actually talk to normal people and ask how they are affected by changes in the financial services industry. If this amendment was to be enacted one day, I hope that it would make the regulators more people-friendly.

Global Minimum Corporate Tax Rate

Lord Sikka Excerpts

Wednesday 14th April 2021 Lords Chamber

[Lord Agnew of Oulton (Con)]

My Lords, the Treasury is assessing the statements recently made by the US Government on that tax rate, so we are not in a position to opine on those yet. We agree on the patchwork point: we introduced the digital services tax as an interim to plug at least some of the gaps and problems that exist, but we will certainly review that if we can reach an international consensus.

[Lord Sikka (Lab) [V]]

My Lords, I draw attention to my entry in the Members’ register. A strong, global, minimum tax on multinationals would recover much-needed billions for this country and others. Does the Minister agree it is essential for such a tax to provide a fair balance of taxing rights to all countries, based on allocation factors reflecting the real activities in each country, with a high minimum such as the 21% proposed by the US Administration?

[Lord Agnew of Oulton (Con)]

As I answered to an earlier question, we are not yet in a position to announce whether we support that specific rate. Our policy has always been to put the emphasis on pillar one, which is the allocation of profits in the countries in which they are generated. To go back to my earlier point, if a company is going to use the infrastructure of a country in terms of its affluent, well-educated population, and take profits from it, it must contribute to it, too.

Budget Statement

Lord Sikka Excerpts

Friday 12th March 2021 Lords Chamber

[Lord Sikka (Lab) [V]]

My Lords, I congratulate all new noble Lords and welcome them to the House. The Equality Trust states that, before Covid, the poorest 10% of households paid on average 42% of their income in direct and indirect taxes, compared to 34.3% paid by the richest 10% of households. This gap has increased since 2010. Rather than tax justice, the Budget will force the less well-off to pay higher amounts in income tax, national insurance contributions, VAT and council tax, which will inevitably deplete the purchasing power of the masses and damage economic recovery.

Regressive taxation cannot build a just and fair society, but the Government do not seem to grasp that. Just two reforms—taxing capital gains at the same marginal rates as earned income and restricting tax relief on pension contributions to the basic rate of income tax—could generate an additional £25 billion per year for redistribution and levelling up and change the balance of taxation. Hopefully, the Minister can explain why the Government continue to neglect tax justice for the less well-off members of our society.

Financial Services Bill

Lord Sikka Excerpts

Committee stage & Lords Hansard
Wednesday 3rd March 2021 Grand Committee

[Lord Holmes of Richmond (Con) [V]]

My Lords, it is a pleasure to speak on day four of proceedings in Committee on the Financial Services Bill. In doing so, I declare my interests as set out in the register.

I want to speak to Amendment 51, standing in my name. The purpose of this new clause can be simply stated: what is the purpose of the KYC—“know your customer”—requirements? It is one of the top TLAs—three-letter acronyms—in financial services, but is it fit for purpose? Does it achieve what we would want? Does it feel modern in outlook? Does it feel inclusive? It not only goes to the heart of a number of other amendments in this group; it really is a key underpin, and the adoption of this amendment would transform our KYC system and approach in this country. We have to ask those questions: what do want KYC for; what does it need to contain; when do we need it, and in what form?

Amendment 51 seeks, on passage of the Bill, a review of KYC requirements that considers a number of elements in order to seek to transform our approach to KYC. My first point concerns the question of inclusion, and I draw this broadly. Whom do we want to come within, in what form and through what means? For example, asking for paper documentation seems not only outmoded but somewhat exclusionary. Where is the level of efficiency in the current provisions? We have the ability to have “atomic settlement”. The current KYC feels a million miles away from a settlement in a millionth of a second. My final point addresses exactly that question of outdatedness. We have one of the greatest financial services sectors in the world. The big bang in the 1980s revolutionised the City of London, but it goes much beyond that when we consider our role in fintech, not just in London but across the UK, and the Kalifa review on that very subject, published only last week. We are leading-edge in so many ways when it comes to our financial services. KYC in no sense reflects, represents or leads that technological position.

If this amendment were to be seriously considered, if not adopted, we could look at different means of ensuring KYC. We could look at attributes and elements that would assist and give real-time assurance, giving elements to those who need them—things which operate absolutely in real time and are to be relied on, rather than bits of paper, bits of supposed identification, which hark not from a 20th-century but a 15th-century approach to identification. That brings me, finally, to the whole question of digital-distributed ID, which I will speak on later in Committee. That goes to the heart of so much of solving the KYC puzzle. If we could deliver an effective and efficient distributed ID system for individuals and corporate entities, we would transform the position regarding KYC.

I look forward to hearing the comments of my noble friend the Minister on Amendment 51.

[Lord Sikka (Lab) [V]]

My Lords, I speak to Amendment 51A, which invites the Government to reduce the number of anti-money laundering supervisors so that we can have consistent application of standards and effective regulators.

Dirty money is a huge danger to every country on this planet. The full extent of dirty money sloshing around in the UK is not known, although some authorities estimate that around £100 billion a year may be laundered through our banking and financial system. Transparency International’s report, Hiding in Plain Sight, examined 52 cases of global corruption and noted that despite a plethora of form-filling and regulators, some 766 UK-registered business entities were involved in laundering stolen money.

The threat of money laundering to national security is well documented in the Intelligence and Security Committee’s July 2020 report, Russia, which stated that

“the arrival of Russian money resulted in a growth industry of enablers—individuals and organisations who manage and lobby for the Russian elite in the UK. Lawyers, accountants, estate agents and PR professionals have played a role, wittingly or unwittingly, in the extension of Russian influence, which is often linked to promoting the nefarious interests of the Russian state.”

Large sums of dirty money cannot be moved or concealed without the active involvement of accountants, lawyers, and financial experts. These enablers must be tackled, and without effective regulation that is not possible.

However, the UK’s fragmented regulatory system for dealing with money laundering is highly deficient. There are 25 anti-money-laundering supervisors. These include the Financial Conduct Authority, HMRC, the Gambling Commission and 22 other bodies, mainly trade associations connected with accountancy, audit, bookkeeping and legal and notarial services. The list of 22 includes bodies such as the Association of Accounting Technicians, the Association of International Accountants, the Institute of Certified Bookkeepers, the Institute of Chartered Accountants in England and Wales, the Law Society and sundry other trade associations. Having twenty-five supervisors results in duplication, waste, inefficiency, poor co-ordination, inconsistency and obfuscation.

In September 2016, the Committee on Standards in Public Life, in its report, Striking the Balance: Upholding the Seven Principles of Public Life in Regulation, stated that the seven principles of public life apply to all regulatory bodies, and the Government agreed. These include independence and public accountability, but for some reason the Government do not apply these principles to anti-money laundering supervisors. Accountancy and law trade associations have no independence from their members. In any regulatory system, there is a concern that regulators would be captured by those who are to be regulated, but that is the starting point in AML supervision by trade associations.

In October 2011, the Government announced that they would make quangos more democratically accountable, but they have failed on that front too. Of the 25 AML supervisors, 22 are not subject to the freedom of information law, even though they are an explicit arm of the state. Perhaps the Minister will be able to explain this anomaly. Their exclusion from FOI means that the public have no opportunity to scrutinise their practices.

The Government’s faith in regulation by trade associations is routinely punctured by the Government’s own reports. In October 2017, a joint report by the Treasury and the Home Office, entitled National Risk Assessment of Money Laundering and Terrorist Financing 2017, summed up key risks around the accountancy sector:

“complicit accountancy professionals facilitating money laundering; collusion with other parts of the regulated sector; coerced professionals targeted by criminals; creation of structures and vehicles that enable money laundering; provision of false accounts; failure to identify suspicion and submit SARs; and mixed standards of regulatory compliance with relatively low barriers to entry for some parts of the sector.”

The report went on:

“Accountancy services have also been exploited to provide a veneer of legitimacy to falsified accounts or documents used to conceal the source of funds. For example, law enforcement agencies have observed accountants reviewing and signing off accounts for businesses engaged in criminality, thereby facilitating the laundering of the proceeds. In many cases accounts have been falsified by criminals and unwittingly signed off by accountants, while in others accountants have been assessed to be complicit”.


That is the state of money laundering and the world of accounting.

However, rather than consolidating the number of regulators and thereby securing consistent application of standards and law, in January 2018 the Government created a new body called the Office for Professional Body Anti-Money Laundering Supervision, better known by the acronym OPBAS. At considerable cost, it became a “supervisor of the supervisors” and oversees the 22 trade associations. The formation of OPBAS is an acknowledgement that all was not well with the regulatory role of trade associations.

A year later, on 12 March 2019, the OPBAS director of specialist supervision said:

“the accountancy sector and many smaller professional bodies focus more on representing their members rather than robustly supervising standards. Partly because they don’t believe – or don’t want to believe – that there is any money laundering in their sector. Partly because they believe that their memberships will walk if they come under scrutiny.”

The OPBAS Director went on:

“We found that some did not fully understand their role as an anti-money laundering supervisor. 23% had no form of supervision. 18% had not even identified who they needed to supervise. Over 90% hadn’t fully developed a risk based approach and had not collected all the data they needed to form a view about their riskiest members and their services. Supervision was often under resourced – and in some cases, there were no resources.


We found that for many supervision wasn’t important. It was only an add-on. This means it often wasn’t on the agenda and for around half, there was insufficient senior management focus. For 20%, it wasn’t overseen by the governing bodies. In some of the professional bodies, where supervision had been outsourced to another provider, there was minimal oversight of the work being done.”


The director also said:

“We also found that in all but 2 professional bodies, processes for handling whistleblowing were inadequate. We found that 56% of professional body supervisors had no whistleblowing policy in place at the time of our assessments.”


There you have it—a powerful indictment of the folly of relying upon trade associations for regulatory purposes. They do not want to be robust regulators because of the concern that “their memberships will walk”.

--- Later in debate ---

[The Deputy Chairman of Committees (Lord Caine) (Con)]

My Lords, I have received a request to speak after the Minister from the noble Lord, Lord Sikka, and the noble Baroness, Lady Bowles of Berkhamsted. I call the noble Lord, Lord Sikka.

[Lord Sikka (Lab) [V]]

The group of amendments which we just discussed focused primarily on economic crime. Matters such as tax avoidance and tax evasion have also been mentioned, which are often the domain of the accounting law firms, banks and others. The noble Baroness, Lady Noakes, is absolutely right in that accountancy trade associations, such as the Institute of Chartered Accountants, also carry out a variety of other regulatory functions; but the question is how well such functions are actually carried out. There have been a number of court cases brought, by HMRC, where the judges have held that the tax avoidance schemes were unlawful. I hope the Minister can help us by telling us whether, after those court judgments, even one big accountancy firm has been investigated, fined or disciplined by the Institute of Chartered Accountants or any other accountancy trade association. Even one example from the past 10, 20, 30, 40, 50 or 100 years will do.

[Baroness Penn (Con)]

My Lords, I would be happy to write to the noble Lord on his question. The debate focused on the role of these organisations in respect of their anti-money laundering supervisory functions. As I said to the noble Lord in my response, a review of the AML regulations will be published no later than 26 June 2022, with a call for evidence this summer. If he feels the need to input to that review, that would be very welcome.

Financial Services Bill

Lord Sikka Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Thursday 28th January 2021 Lords Chamber

[Lord Sikka (Lab) [V]]

My Lords, I congratulate the noble Lord, Lord Hammond, on his excellent speech. I welcome him to the House and look forward to his wise words on many issues.

The Bill has many deficiencies. I have sufficient time to speak on only two matters. In the post-Brexit world, the UK needs to compete to attract business. A key requirement is to ensure that the UK is a clean place with robust regulators. However, the Bill does not do that. It should have been preceded by an independent public inquiry into the finance industry and its regulation.

Regulatory failures continue to make headlines. For example, Dame Elizabeth Gloster’s report on the collapse of London Capital and Finance found that the FCA’s supervision was “wholly deficient” and that its staff

“had not been trained sufficiently to analyse a firm’s financial information to detect indicators of fraud or other serious irregularity.”

The report concluded that the FCA failed to fulfil its statutory objectives. The FCA has also been criticised in a report on the collapse of the Connaught Income Fund, and the long-running saga of frauds at the Royal Bank of Scotland and HBOS are further evidence of the FCA’s failures.

Anyone tackling corrupt practices in the finance industry faces obstacles. In February 2017, the Thames Valley police and crime commissioner, Anthony Stansfeld, prosecuted six financiers, including a senior ex-HBOS banker. They were jailed for a total of 47 and a half years. After being shamed, the FCA in June 2019 fined Lloyds Bank £45.5 million. Thames Valley Police force spent £7 million on the prosecutions, but it has not really been compensated by the Government and thus the force has been disabled from mounting any further investigations.

The Conservative police and crime commissioner for Thames Valley has also sought to tackle other cases of financial frauds but has met political and regulatory opposition. On 8 February 2019, he told the London Evening Standard:

“I am convinced the cover-up goes right up to Cabinet level. And to the top of the City.”


That is a strong condemnation of the current regulatory arrangements. The recurring problem is that the regulators are too close to the industry and like to bat for the industry rather than protect people from malpractices. The Bill does not cleanse the finance industry or enhance protections for the people.

My second point relates to the Basel III framework which is implemented by the Bill and affects the calculation of minimum capital requirements and leverage ratios for banks. However, many of the problems highlighted by the 2007-08 crash remain unaddressed. The Government want banks to have more equity, but they have incentivised debt and high leverage, as the interest payments attract tax relief and enable banks to report higher returns to shareholders. Why have the Government not addressed this contradiction at the heart of the calculations of capital for banks?

Financial statements of regulated financial enterprises are based on international financial reporting standards—IFRSs, as they are commonly known. Their use was heavily criticised in the 2013 report by the Parliamentary Commission on Banking Standards. The IFRSs give management too much discretion and management has used that to massage financial statements, as was shown by Carillion, for example. The IFRSs have no clear concept of capital maintenance and therefore calculations of capital based upon accounting numbers are fundamentally flawed. On bank balance sheets, various transactions in historical costs, amortised costs, net realisable values, present values, fair values, market values and even internally generated numbers are all added up. The calculation does not yield any meaningful number for capital maintenance. Banks are currently neither maintaining money, nor real or physical capital, so why do the Government consider them to be a useful guide for regulators?

Neither the FCA nor the Prudential Regulation Authority sets accounting rules for financial enterprises, but they rely on whatever the Financial Reporting Council comes up with. They are storing trouble for the future. The bank financial statements are targeted at short-term shareholders, essentially speculators and capital markets. They do not tell the regulators anything about market interdependencies or systemic risks, all of which were the causes of the 2007-08 crash.

The UK regulators rely on external auditors, even though big accounting firms are unable to deliver honest and robust audits. All banks which crashed in the 2007-08 crash received unqualified audit reports. The Financial Reporting Council routinely laments that 25% to 50% of the audits conducted by the big four accounting firms are deficient. Yet, bizarrely, regulators rely upon auditors. Auditors owe a duty of care to the company but not to any regulator. Regulators do not have a statutory right of access to the auditors’ files or staff. That was one of the reasons why the Bank of England was unable to fully investigate audit failures at Barings, delivered by Deloitte and Coopers & Lybrand, a firm which is now part of PricewaterhouseCoopers. Yet no lessons have been learned. One must also ask whether the reliance on ex-post audits is wise in a world of instantaneous movement of money. Is it not time that the regulators took direct responsibility for auditing the financial statements of banks?

[Baroness Penn (Con)]

My Lords, perhaps this is an opportune moment to remind Back-Benchers of the advisory time limit of six minutes for speeches.

Economic Update

Lord Sikka Excerpts

Tuesday 12th January 2021 Lords Chamber

[Lord Agnew of Oulton (Con) [V]]

I am not entirely sure what the noble Lord is referring to—perhaps to supply chain issues in the first few days of Brexit. If that is his question, I can assure him that all is being done to iron out these initial problems. Overall, the system has worked remarkably well when one considers the enormous change in operating procedures that businesses have had to bring about on an essentially cliff-edge basis.

[Lord Sikka (Lab) [V]]

My Lords, the Government have imposed pay freezes on public sector workers, and many others have received little or no financial support and are struggling to survive. However, they face the full and escalating costs of gas, electricity, water, broadband and even the funerals of their loved ones. What consideration have the Government given to freezing prices of these services to enable hard-pressed families to make ends meet?

[Lord Agnew of Oulton (Con) [V]]

I am not aware of a huge jump in inflation, as suggested by the noble Lord. Indeed, inflation remains extremely low. The pay freeze in the public sector was carefully targeted to ensure that those on the lowest earnings still received some protection.