Child Trust Funds Bill

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Mr. Osborne: In alliance with my Liberal Democrat colleague I am attempting to be tougher on crime and tougher on the causes of crime. I support amendment No. 156, which increases the maximum penalty from £300 to £3,000 for persons who fraudulently seek to open a child trust fund and exploit the scheme. As he said, it seems strange that although they stand to gain £500 from trying to fraudulently open a fund, the penalty is only £300. That makes no sense, because it provides a clear financial incentive to have a go. My amendment would add the possibility of a period of imprisonment. I am not seeking yet to reopen debtors prisons throughout the country but, as the Minister says, the Inland Revenue would not be in a position to lock up people in the bowels of the Treasury. However, the principle, if not the practice, of what I want to achieve is correct.

Surely the Crown Prosecution Service should at least have the option of applying for a custodial sentence, and judges and magistrates should have the option of imposing one. I say that because it is possible to imagine not merely one-off frauds or negligent claims, but large-scale fraud. We are hoping that that will not be the case. I think that the Government are right to say that the product will be a low risk in terms of fraud, but it is possible to imagine a scam in which someone opens hundreds of CTF accounts and, in those circumstances, it would be strange if there were

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no prison sentence. Perhaps the Minister will say that, in the process, people are bound to break other laws that will give the courts powers that the Bill does not. I should be interested to hear that from the hon. Lady.

Amendment No. 187 would increase from £300 to £3,000 the penalty on a financial provider that fails to make a claim for the initial, supplementary additional contribution. It is only fair to give the courts or the Inland Revenue, in this case, some discretion. It is possible that, through blatantly poor management, a financial provider will not do its job properly and, as a result, people lose out because their fund is not accumulating income. The Inland Revenue should therefore have a wider scope of financial penalties available to it.

Amendment No. 189 would do the same for other regulations in respect of account providers. Amendment No. 188 would remove from the clause subsection (5), which states:

''No penalty . . . may be imposed on a person in respect of a failure after the failure has been remedied.''

That seems unnecessarily lenient. Let us suppose that someone goes to a provider, opens a CTF account, expects the provider to apply to the Inland Revenue to put initial funds into the account so that some income can start being earned, but the provider fails to take such action. What will happen a year later when the person is sent an annual statement, notices that he does not have a child trust fund and complains?

As I understand it from subsection (5), provided that the financial provider steps in immediately and says that the problem will be rectified, so no worry should be expressed about it, no penalties would be available to the Inland Revenue. All I am suggesting is that the Inland Revenue should at least have available to it some flexibility. Even if it is clear that the provider has corrected the mistake, it should be punished for making the mistake in the first place, and that should act as an incentive for it not to make future mistakes. In those circumstances, the Inland Revenue should have at its disposal the power to impose a fine.

Ruth Kelly: Much as, I am sure, the Inland Revenue would love to have the power to lock people up for fraudulently claiming child trust funds, our aim is to develop a proportionate regime. At investor level, it is conceivable that there could be attempts to counterfeit vouchers and to open fraudulent or even multiple CTF accounts. However, the system that we have designed means that we will identify the vouchers when they are presented and, most importantly, before any Government endowments are paid into the account.

We have tried in the clause to mirror as closely as possible the penalty provisions that already exist in the system. The sum of £300 regularly appears in income tax and tax credit penalty provisions. Levying a fixed penalty of £300 will provide certainty, and we will avoid having to administer an abatable penalty, which can be reduced to take account of factors such as gravity, co-operation and disclosure, if a sum is sought that the Inland Revenue can levy without having to take account of such complexity. Of course, we would attempt to recover any Government endowments, if they had been paid, and the tax relief that was paid into

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the child trust fund. I believe that the penalty provision in the Bill is sufficient to deter non-compliance and is commensurate with the risk in all but the most serious cases.

The hon. Member for Tatton outlined some examples of what might be considered to be a serious case, such as a multiple fraud. In all such cases the Inland Revenue would seek to prosecute and not to levy penalties. That is an option. There is no reason why a serious term could not be imposed for serious fraud.

11 am

There is no reason, on the face of the Bill, to put down such a penalty of imprisonment. The penalties for child trust fund providers are very much based on existing penalty provisions for ISAs and other similar schemes. The reason that the penalty has been set at £3,000, rather than £300, is not because providers are more able to pay, rather that there is more money at risk. If the provider, as it were, deals with a particular account in a certain way, it is much more likely that other accounts will also be affected.

The child trust fund has been modelled, to a considerable extent, on ISAs. The Inland Revenue's experience of administering ISAs and other schemes shows that the penalty levels are sufficient to ensure compliance with the operational rules. I certainly believe that the penalties, as set out in the Bill, are sufficient to ensure compliance and that they are proportionate. I would ask the hon. Gentleman to withdraw his amendment.

Mr. Laws: I shall not press this to a vote. I am reasonably reassured by the Financial Secretary's comments, particularly the clarification that the Government and the Inland Revenue would seek to prosecute in very serious circumstances. I am not sure that the Financial Secretary's statement that the fine is intended to be proportionate to the amount at risk necessarily holds. I believe that those penalties also relate to withdrawal from child trust fund accounts that have been ongoing and in existence for a period of time, where potentially somebody could withdraw a much larger amount. However, in view of the assurances from the Financial Secretary, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 20 ordered to stand part of the Bill.

Clauses 21 to 26 ordered to stand part of the Bill.

Clause 27

Commencement

Mr. Laws: I beg to move amendment No. 145, in

clause 27, page 15, line 12, after 'section', insert

'section [report on savings effect of child trust funds],'.

The Chairman: With this it will be convenient to discuss the following: Amendment No. 147, in

clause 27, page 15, line 17, at end add—

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'(4) No order may be made under subsection (3) until the report specified in section [report on savings effect of child trust funds] has been laid before Parliament.'.

New clause 5—Report on savings effect of child trust funds—

'The Treasury shall lay before each House of Parliament a report setting out the Treasury's estimate of the net increase in saving which will result from the provisions of this Act.'.

New clause 13—Annual report on effect of child trust funds on wealth distribution—

'The Treasury shall lay before each House of Parliament every year a report setting out the Treasury's assessment of the effects of the provisions of this Act on wealth distribution in society.'.

Mr. Laws: Amendments Nos. 145, 147 and new clause 5 should be taken together, because amendments Nos. 145 and 147 are essentially enabling mechanisms for new clause 5. New clause 5 invites the Treasury to lay before each House of Parliament a report setting out the Treasury's estimate of the net increase in saving that will result from the provisions of the Act. There was a significant exchange between the Minister, her officials and the Treasury Sub-Committee on this matter. I have given the Treasury Sub-Committee enough publicity during the course of the Committee hearings, so I will not go over the questioning once again, including that by the hon. Member for Bury St. Edmunds (Mr. Ruffley).

We detected an unwillingness—although no more than that—on the part of the Financial Secretary and her officials to indicate whether they thought that the Child Trust Funds Bill would work in practice. I recall that the Financial Secretary talked about evidence-based policy making. However, policy making in respect of the Child Trust Funds Bill does not appear to be evidence-based at all, but rather based largely on speculation. Surely, if the child trust fund account is to be of any success at all, we must have not necessarily a target for additional saving—the Minister said that she does not want to get tied to that, which I understand, given the relative failure of many other Government targets—but an impression of how much the Government believe the measure will affect the total stock of savings in the United Kingdom. We have no estimate of that at all. If this is evidence-based policy making, the Government will have done work on how much additional saving will result from the Bill. Otherwise, why would we need it at all? If we simply wanted to give a stock of financial assets to a young person at the age of 18, then, as the Institute for Fiscal Studies has pointed out, this convoluted mechanism would not be needed—we could send them a cheque at that age. We could improve financial education through the education system, which might be more effective than allowing parents to manage the accounts, presumably, as we have heard, with little involvement on the part of the child.

Before the Bill is enacted, the Government owe us an explanation of how much effect the fund will have on savings, and of the basis for such an estimate. I hope that the Minister will touch on the implications not only for child trust fund holders' savings, but for the national balance between savings and investment.

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It will occur to many Committee members that the Government do not have any of their—or our—money to place in the child trust fund accounts and boost individual savings. Due to the huge public borrowing racked up by the Treasury, the Government will have to go to the international financial markets to fund the scheme and, presumably, issue gilt-edged stock. The Minister will borrow money, presumably for five or 10 years, to place in the trust fund accounts on behalf of the trust fund holders. I have not checked the yield on gilts today; perhaps it is 5 per cent., or something of that order. Then she will invite child trust fund holders to invest the money. Some may invest in deposit accounts, but unfortunately they will be borrowing at 5 per cent. and depositing at perhaps 3 or 4 per cent. Others may be persuaded by the Financial Secretary's enthusiasm for equity investments, from which they will hope for yields of 6, 7 or 8 per cent.

The Government are inviting society to take a huge punt—to borrow money from the international financial markets at 5 per cent. and invest it in equities, in the hope that they will go up. If that works, it will be fantastic, although the money borrowed would have to be repaid in future years. The savings would not be net savings, but short-term savings on long-term debt. We would be borrowing money in the long term and investing in equities in the short term, hoping to make money. However, if the equity market were to fall, as it has in many countries including Japan in recent years, we would increase our debt as a society, borrowing at about 5 per cent. and investing in equities that go down. The Minister may be inviting us to take a massive punt on which we may lose money.

We have invited the Minister to say how much additional individual saving will be initiated by the Child Trust Funds Bill; we also ask her to consider the implications for savings in the United Kingdom as a whole, and to remind us that to put the money into the child trust fund accounts as savings, we will have to go out and increase our borrowing. There will be no increase in the net savings of society as a whole merely as a consequence of putting money into child trust fund accounts. It would have an effect only if there was a second-order benefit, and other people decided to redistribute their income between consumption and savings. That means that, for many years to come, we will pay back the interest income on money that is supposedly used to boost savings. If the Minister gets her punt wrong, and the equity market performs unimpressively over the next 10 or 20 years, society will be poorer as a result of the Government's decision to borrow money in a financial market and encourage us to invest it in the equity market.

Those are two fundamental issues about the purpose of the policy, and I hope that the Financial Secretary will accept new clause 5 and agree that we need evidence-based policy making before the Bill is enacted.

 

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Prepared 20 January 2004