The Parliamentary Under-Secretary of State, Department of Health (Earl Howe): My Lords, from 2013-14, the NHS Commissioning Board will allocate resources to clinical commissioning groups and the Department of Health will make a ring-fenced public health grant to local authorities. The Secretary of State has asked the independent Advisory Committee on Resource Allocation to develop formulae for both CCGs and local authorities. We published ACRA's interim recommendations for local authorities on 14 June and its recommendations on CCG funding will be published in due course.
Baroness Quin: Is the Minister aware of the deep concern in the north-east and other parts of the north of England that if the Government, as has been rumoured, move away from using deprivation and health inequalities as an important criterion, and simply use an age criterion, areas of the north where life expectancy is lower will lose out, compared to more affluent areas in the south? This and other government-trailed proposals, such as regional public sector pay or regionalised benefits, as well as the daily reality of more job losses and more house repossessions in the north than in the south, are adding to concerns that there will be a dramatic worsening of the north-south divide. Will the Minister and his colleagues commit themselves to narrowing that divide, rather than widening it further?
Earl Howe: My Lords, yes. I am aware that this has been said, and it is based on a misapprehension, perhaps as a result of misunderstanding what my right honourable friend the Secretary of State said a few weeks ago. He was not suggesting that deprivation should not be a part of the future funding formula, but simply that age should continue to be the primary factor, as it currently is and should be, in the context of our intention to reduce inequalities of access to health services.
Lord Walton of Detchant: Is the Minister aware that a number of major surveys carried out by all-party groups into conditions such as muscular dystrophy and other neuromuscular diseases, Parkinson's disease
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Earl Howe: My Lords, to a certain extent, we must say here that we are where we are. There is a lot of justice in what the noble Lord has said. We know that services in certain parts of the country are underfunded, compared to the level of clinical need and disability, and commensurately that some services are overfunded in other parts of the country. However, we cannot move suddenly to a position where we redress the balance. That would destabilise services. We certainly believe in equal access where there is commensurate need for the services, particularly those to which the noble Lord referred.
Lord Brookman: We are still the United Kingdom and the Question of the noble Baroness, Lady Quin, is very valid. I am originally from the valleys of south Wales. Life is pretty tough there. I hope that the National Health Service will provide equal service to the people in the valleys of south Wales as it does in the more prosperous areas of the country. Will the Minister confirm that that will be the case?
Earl Howe: My Lords, it is of course for the devolved Administration in Wales to decide on their own allocation of the health budget for Wales. That is not within my gift, as the noble Lord will understand. However, certainly within England we would expect the funding allocations to support the principle of securing equivalent access to NHS services, relative to the prospective burden of disease and disability. Because we have an independent NHS Commissioning Board, people can be assured that this will put beyond doubt that allocations are driven as far as possible by each population's need for healthcare services and not by extraneous factors.
Baroness Greengross: My Lords, later this afternoon the All-Party Group on Dementia, which I am privileged to chair, will launch a report on the rates of diagnosis, the challenge of dementia and how it can be met. We know that more than half of all people with the disease have not been diagnosed. Diagnosis offers access to a memory clinic that can reduce the impact of the disease or postpone its worst effects. Is the Minister aware that the variations across the country are horrific and that people do not know where to go? Will the Government do something to ensure that everybody has access to the care and support that they need in an area that they can reach?
Earl Howe: My Lords, we come back to the issue of age in this context. I say again that we believe, as did the previous Government, that age is the primary driver of an individual's need for health services. The very young and the elderly, whose populations are not
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Earl Howe: My Lords, the funding formula is made up of a number of components, including capitation, deprivation, age, the number of young people not staying in education and the number of people over 60 claiming pension credit. I have a long list in front of me. However, ACRA, the independent body that I mentioned, is composed of a group of independent-minded people who are keen to take into account every relevant factor that bears on this question. If my noble friend wishes, I will write to her with a more detailed list of the factors that historically have been in the formula.
Lord Foster of Bishop Auckland: My Lords, because the Minister has said that he will work very hard for more equality around the regions, we believe it-but that is not true of the Government as a whole. We are terribly worried, for example, that in the first round of local government negotiations the county of Durham lost £171 million, whereas the county of Surrey gained £60 million. If what we hear is true, the same kind of negotiation will go on in the next round. Will the Minister have words with his colleagues to say that people expect the same kind of equality in local government as he is trying to achieve in health?
Earl Howe: My Lords, I can go further than that. As the noble Lord knows, public health at a local level will become the responsibility of local authorities. Public health grants in 2013-14 will not fall below the 2012-13 estimates, other than in exceptional circumstances where responsibilities shift or where there has been a gross error in the calculation. ACRA proposes a public health formula driven mainly by a measure of mortality, which is strongly correlated with deprivation, and we are actively seeking views on these proposals.
To ask Her Majesty's Government whether they propose any action to assist first-time property buyers following the publication of the English Housing Survey Headline Report 2010-11 on 9 February, showing that the level of owner-occupation in England has fallen to its lowest level since 1988.
The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham): This Government are committed to supporting people's aspirations to own their own home and are sensitive to the particular challenges facing first-time buyers. That is why we are supporting initiatives that we have started such as the FirstBuy scheme, shared ownership schemes, the NewBuy guarantee scheme and the reinvigorated right to buy.
Lord Gavron: I thank the Minister for her Answer. Is she aware that around 40 per cent of people living in London and parts of the south-east between the ages of 20 and 39, whose salaries are just above the limit for social housing, are still priced out of the open market because they cannot afford to buy or to rent at existing prices? These include nurses, teachers, firefighters, police officers and others who are essential to our well-being and who need to live in the city near to their jobs. Apart from the various schemes mentioned, for which I thank the noble Baroness, is she aware of any proposed changes in the planning system that might encourage the private sector to produce some sort of solution to this problem?
Baroness Hanham: My Lords, the national planning policy framework, which my department introduced recently, opens up many doors to planning and housing initiatives. That will release land for house building to support both affordable housing and houses for purchase, which should begin to solve the problem raised by the noble Lord. Another issue is that some people can afford the mortgage but cannot afford the deposit. Those are two areas, and I am sure that we will hear more about both.
Baroness Maddock: My Lords, is the Minister aware that first-time buyers in the north-east of England are returning to the market, and that there are more than there were in 2009? Have the schemes that she outlined in her earlier replies assisted first-time buyers in the north-east, and are there any other initiatives specifically designed to help first-time buyers?
Baroness Hanham: My Lords, I thank my noble friend for her question. With regard to the north-east, I can give her only the figures for FirstBuy, because the NewBuy scheme, which is the latest scheme, cannot identify figures yet as it has not been going for long enough. There were 129 purchase completions by first-time buyers in the north-east recently. Of course, the north-east is really important. As we heard earlier, there are different schemes and different worries. There are also other schemes that help with mortgages. A number of authorities and banks are helping to support mortgages, and the NewBuy scheme will come into that as well. Not only in the north-east but across the country we are beginning to see a solution to what has been a very difficult problem.
Baroness Royall of Blaisdon: My Lords, what is the noble Baroness's response to the construction industry figures that were released this morning, which demonstrate that the industry is desperately in need of a boost?
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Baroness Hanham: My Lords, the construction industry is dependent on land that is available to buy. As I am sure noble Lords know, the Government are releasing their own land as fast as they can. There is a very big programme of land release, most of which is to be designated for housing, both private and public sector, along with the infrastructure to support it. Many schemes across the country have already been identified for these initiatives, and the construction industry itself is all ready to go. We know that builders are ready to take up the land that is available, so I am sure there will be a boost to housing in the near future.
Lord Vinson: My Lords, I believe that there is great common cause across the House that everything should be done to stimulate the building industry. It is one of the great motors of the economy and is a perfect contracyclical investment because housing, once built, is there, so the money is not wasted. Will the Government assure us that they are using every opportunity to help to fill the huge gap in the demand for housing by stimulating in every possible way the housing market and the construction industry, thereby creating many lower-paid jobs for people who would not otherwise be employed? It is a great key to our prosperity.
Baroness Hanham: My Lords, I thank my noble friend, who I know takes a great interest in these matters. I answered him to some extent in my response to the noble Baroness, Lady Royall. We are hoping and expecting to stimulate the construction industry through our programmes for new housing. It is absolutely essential to the growth of the economy that the construction industry should get going again, because it is in that sector where skills and training will be required for new jobs. I agree completely with my noble friend.
The Minister of State, Home Office (Lord Henley): My Lords, the United Kingdom uses the internationally agreed definition of the migrant, which is someone who comes here for over 12 months. It is right that students staying for that period are counted because during their stay they are part of the resident population. It would damage public confidence in statistics to discount them.
Lord Hannay of Chiswick: My Lords, I thank the Minister for that somewhat familiar reply. The main reason he has given in replies to earlier questions-he has just given it again-for not changing our present practice of classifying students for policy purposes in the net migration figures is the existence of a UN guideline to the effect that anyone who stays for a year is a migrant. Can he confirm that the guideline does not have the force of international law, is therefore not binding on the British Government and, further, is not applied in the calculation of net migration figures for policy purposes by our main competitors in the higher education sector-the US, Canada and Australia? Is it not about time that the Government ceased to handicap the most rapidly growing and most promising invisible export sector we have?
Lord Henley: My Lords, I fail to understand what the noble Lord and Universities UK are getting at in their objections to us applying proper statistics as agreed by international convention, which is what we follow. If the noble Lord is suggesting that by changing the way we count the statistics, we will make life easier for universities, again I fail to understand him. I do not see why they are discouraging undergraduates from coming to this country. All we require of the students is that they show an ability to speak English and that they have an offer of a place at a university in the United Kingdom. The statistics simply do not come into it, so fiddling with them would discourage students because it would imply that probably the only subject they ought to come here to study would be statistics.
Lord Eden of Winton: Can my noble friend assure the House that nothing is being done now that would in any way damage or reduce the substantial economic benefit that bona fide foreign students bring to this country, in particular to our universities, colleges and academies where the English language is taught? It is important that this should continue unabated.
Lord Henley: My Lords, I totally agree with my noble friend, and we want to continue to encourage them to come here. I do not see why changing the statistics is going to discourage them. We have, in fact, seen an increase in the number of students who come to reputable and proper universities, and a reduction in the number of those who come to bogus colleges and schools, who come here not to learn but to work.
Lord Winston: My Lords, is the Minister aware that Britain is regarded by foreign students outside the EEC as a no-go area? I see that that is the case when I visit the United States and see foreign students there.
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Lord Henley: My Lords, what the noble Lord says is complete nonsense. Britain is not seen as a no-go area; we are seeing an increase in the number of students coming here to reputable universities. If this was a no-go area there would be a decrease in the numbers of students.
Baroness Prashar: My Lords, now that the Government have taken the steps to deal with bogus students, what steps are being taken to encourage bona fide and genuine students to come to the UK, and who is taking responsibility for that?
Lord Henley: My Lords, it is for the universities themselves to encourage people to come to them. As I have put it on a number of occasions, we want to control the bogus students. We have not seen a reduction in the number of proper students who come to proper universities. We have, in fact, seen an increase over the years, and I do not see why any changes we make to the way in which we count our immigration statistics are likely to discourage people from coming to this country.
Baroness Hollis of Heigham: My Lords, the Minister will be aware, as the House is aware, that 60% of overseas migrants to this country are students, and the Government are concerned to cap the number of overseas foreign migrants to this country. However, the Minister will surely also be aware of his own Home Office research of November 2010, which shows, as other contributors to your Lordships' debate have said today, that 96% of students who are registered for degrees at bona fide universities return home at the end of their course. We are talking not about statistics here but about policy. Can the Minister therefore not put students who apply for bona fide degrees, and all the gains between this country and their home countries, in a different stream from the Government's efforts to cap foreign migrants who come to this country?
Lord Henley: That is what the Question is about, and I am answering it in those terms. We are talking about the statistics and how we measure the number of migrants coming here. Merely changing the way that we count those immigrants does not affect students coming into this country. I simply do not see how the way in which we count overseas students makes any difference to the decision made by them as to whether they come here. The only restriction we impose on them is that they have to speak English and need an offer of a place at that university.
Baroness Brinton: My Lords, given the Minister's response to the noble Lord, Lord Hannay of Chiswick, is he aware of the OECD definition of permanent migration, which has a subset that specifically excludes international students? On this basis, does the Minister agree that the UK should follow the example of the USA, Canada and Australia, all of which use this subcategory from the overall immigration numbers?
The Minister of State, Foreign and Commonwealth Office (Lord Howell of Guildford): My Lords, we do not provide arms to the Syrian opposition. A European Union arms embargo is in place. Any EU citizen or company in breach of the EU arms embargo may be subject to prosecution under the laws of each individual member state.
Lord Wright of Richmond: My Lords, I am grateful to the Minister for that reply and I am very glad to hear that we are not supplying any military equipment to Syria. I have asked the Minister on several occasions for the Government's assessment of how many foreign fighters and munitions are being supplied to Syria by other countries. Is the Minister aware that there are persistent reports that fighters from Afghanistan, Libya, Iraq and central Asia, paid for by Saudi Arabia and Qatar, are being infiltrated into Syria with the aim of changing the Shia regime in Damascus? There have also been more recent reports of heavy Saudi troop movements towards the Jordanian and Iraqi borders.
I hope the Minister can assure the House that we will continue to resist any suggestion that NATO might become involved in what has for some time been a Sunni/Shia-if not an Arab/Iranian-dispute. Does the Minister accept that any military intervention from outside, from whatever quarter, in the highly volatile and dangerous situation in Syria could provoke even greater deterioration in the security situation and further complicate Kofi Annan's extremely difficult mission?
Lord Howell of Guildford: I totally understand the noble Lord's concern about an escalation and military intervention. With regard to the assessment that he has asked for repeatedly, I cannot, by the nature of the activities he is talking about, give him a precise assessment. We are talking about activities that are inevitably
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Lord Trimble: My Lords, can my noble friend confirm that the Turkish aircraft that was shot down recently was shot down by Russian equipment and that there may very well have been Russian personnel involved? Is it not the case that the Russians continue to supply equipment to the Assad regime that enables it to continue to oppress its people?
Lord Howell of Guildford: Regrettably, I can confirm that the Russians are continuing to supply attack helicopters and equipment to the Syrian regime, which of course is a regime of unparalleled violence that is using its equipment in the most evil and oppressive ways. I am afraid that I cannot give any confirmation as to what weapons actually shot down the Turkish fighter. The Syrians have offered to hold an inquiry with Turkey, but that is being resisted for the moment. It is a very serious matter and the Turks are arguing that it is an attack on NATO as a whole. I am afraid that the circumstances are all in dispute and I cannot confirm the first part of what my noble friend said.
Lord Triesman: My Lords, I think the House will understand the concern in the Question of the noble Lord, Lord Wright, and indeed in parts of the Answer; there will be general support for the arms embargo and a desire not to see any increased volatility. However, alongside the concern about the spread of armed conflict, it is wholly understandable that people should seek to defend themselves from a barbaric and murderous regime, and that is another key part of this equation. If we are to sound sincere-and not sanctimonious-what do Her Majesty's Government believe can be done to assist those people who may have an ambition to acquire munitions, if they are to feel that there is any other hope of achieving at least a degree of safety as the regime tries to kill them?
Lord Howell of Guildford: I share the sentiment behind the noble Lord's views. He asked what can be done. My right honourable friend the Foreign Secretary has made very clear indeed what can be done, both at the ministerial action group over the weekend in Geneva and at previous meetings, and will continue to make that clear: namely, that we want to find a basis on which we can bring forward a robust resolution by the UN Security Council that has the support of all those, including the Russians and the Chinese, who hitherto have not been ready to display the robust action and condemnation of violence and terror that we would like to see. We would like to see the text for that resolution worked on this week-in fact, we are pressing that it should be so-but there is the obvious obstacle, of which the noble Lord will be aware with his experience, that not all members of the P5 are in agreement.
Lord Howell of Guildford: The prospects of success obviously remain clouded while there is no sign of all the warring and killing parties in Syria agreeing to anything. However, the movement that was agreed at the weekend was not all that we would have wished but it was something. The agreement was that there would be a combined move to try to achieve-with the aid of the Kofi Annan plan-a transitional government body, upon which the beginnings of peace and dialogue could be built. So, the Kofi Annan plan is there. It is the path to the transitional government body that has now been agreed. There was disagreement about who should be on that body. This was an undoubted difficulty that we cannot gloss over. However, the Kofi Annan plan is a means to an end and it is still in place.
Baroness Falkner of Margravine: My Lords, given that the plan agreed this weekend has a mutual consent clause that bars the US and Russia from either getting rid of President Assad or keeping him there, it is evident that the plan will not go anywhere. Will the UK Government work with the UN to review our sanctions regime in light of the fact that 40,000 fighters now belong to the free Syrian army and the carnage is continuing unabated? Should we not review this to allow the Syrians to defend their wives and children rather than be massacred in cold blood?
Lord Howell of Guildford: These again are sentiments one totally agrees with, and of course we have some pathway forward with the European Union. Within the European Union, we are all agreed to apply and strengthen the sanctions and we are working all the time to see how that can be done. Once we get to the United Nations level, we are back with the difficulty that my noble friend, from her experience, understands full well-I know that she does. This is that, if we cannot get the wholehearted agreement through the United Nations Security Council of those who are supplying arms and of those who apparently resist the adequate condemnation of the slaughter, we cannot get the resolution in place. We will continue to work extremely hard to break through on this matter but we have not got there yet.
That the Commons message of 29 June be considered and that a Committee of six Lords be appointed to join with the Committee appointed by the Commons to consider and report on the draft Enhanced Terrorism Prevention and Investigation Measures Bill presented to both Houses on 1 September 2011 (Cm 8166) and that the Committee should report on the draft Bill by 9 November 2012;
Lord Eatwell: My Lords, the amendment stands in my name and that of my noble friend Lady Hayter of Kentish Town. Members of the Committee will be aware that there has been considerable debate about the relationship between directions of the Financial Policy Committee and the attainment of a satisfactory rate of growth and employment in the economy. The issue at stake has been whether financial stability is achieved at the expense of growth and employment or whether financial stability can enhance the growth performance of the economy.
The amendments in this group-those in my name and that of my noble friend Lady Hayter, as well as those in the name of the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham and those in the name of the noble Lord, Lord Sassoon-all seek to include growth and employment within the broad remit of the Financial Policy Committee. My amendment would balance a similar requirement on the Monetary Policy Committee to have regard to the general economic policies of the Government and argues that the Financial Policy Committee should have regard to the Government's growth, employment and other economic objectives.
I suggest that "having regard to" is the appropriate admonition to the Financial Policy Committee at this stage and that the amendments in the names of the noble Baroness, Lady Kramer, and friends and of the noble Lord, Lord Sassoon, are defective. They are defective because they are too insistent. The noble Baroness's amendment, Amendment 35, states,
In 2006, the economic policy of Her Majesty's Government resulted in an unsustainable boom. "Supporting" or "promoting" that policy would have been exactly the wrong thing to do. The role of the Financial Policy Committee is to lean against the wind in terms of what is happening in financial markets. When markets are overheated and expanding too fast and when the economy is growing too fast, it is the role of the Financial Policy Committee to use the
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I have great respect for the position that the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham are taking, because their intentions are entirely sound. Especially at a time of recession in Britain we all want to support growth and employment but we have to be careful in assessing the role of the Financial Policy Committee. In the amendments tabled by the noble Lord, Lord Sassoon, which were announced by the Chancellor in the Mansion House speech a few days ago, the emphasis on supporting is again excessive.
I suggest that the noble Baroness, Lady Kramer, and friends and the noble Lord, Lord Sassoon, look to a more careful wording than they have here. I think they have gone over the top in these recessionary times, but good times will return one day and in circumstances where growth is high, perhaps excessive, it will be the role of the Financial Policy Committee not to support the growth and employment policy of the Government of the day. I beg to move.
Baroness Kramer: My Lords, I appreciate the introduction to the topic from the noble Lord, Lord Eatwell, and I hesitate to speak on behalf of all of my friends but I think we have become aware in this country and across the globe that shifting the balance of policy in favour of economic growth is a desirable target. Therefore, to use language, as he has, which downgrades that role in the way that it is approached by the Financial Policy Committee frankly strikes me as unfortunate. We are talking to some degree about semantics but we have learnt the hard lesson that promoting is more important than simply paying regard. He could argue that when his own party was in government it chose the wrong policy path and was pushing on a boom. But had it really examined that boom, it would have recognised that underneath it the fundamental necessary structures for economic growth were not being achieved.
We have all heard in a variety of other debates that manufacturing was declining steadily, certainly as a percentage of this country's GDP and in comparison to competitive economies such as Germany. We know that there was an incredible overreliance on a banking sector that was reporting forced profits because we were hearing an inflated set of reports from the banks that were not based on a genuine economic boom. We know that underlying that whole period, youth unemployment was steadily growing even though it was masked by overall employment figures. We know that that particular boom was being fuelled by consumer debt that led to both intensive borrowing by individuals and therefore a lot of purchasing, which in a sense was a false contribution to the underlying economic growth, and also inflated house prices creating a house-price bubble. Requiring the new FPC to dig beneath what is
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I am glad in many ways that the whole issue of economic growth does not have much in the way of party characteristics. I hesitate to quote from the BBA at this point but, like a curate's egg, everybody has good stuff in parts and this is one of the good parts. It talks about the Chancellor's commitment to an economic growth objective to stand beside the financial stability objective and says:
"This is to be welcomed as we have said on many occasions that there is a risk that insufficient weight will be placed upon the achievement of economic growth and jobs which must be the overarching objective. This we believe feeds through to ensuring that the FPC be set the symmetrical task of using its tools and powers not only to subdue demand at the top of the economic cycle",
I wanted to take this opportunity to comment on part of the amendment in my name and those of the noble Lord, Lord Sharkey, and the right reverend prelate the Bishop of Durham, because it contains within it one further element that the noble Lord, Lord Eatwell, at this particular point in time, has not addressed. That is the language that includes within the objective the promotion of,
The reason we have done that is probably evident to many in your Lordships' House. We have all shared frustrations over Project Merlin, quantitative easing and credit easing, and I fear we may have the same problem as we look at the consequences of the Government's new "funding for lending" scheme. The Government, or the Bank, effectively push money into the system, which gets as far as the banks but does not emerge the other end. The second quarter report from the Federation of Small Businesses shows that demand for credit among its members was stable but that more small firms than ever were being rejected, with the rejection rate now reaching 41%.
The Bank of England's credit conditions survey, for that same second quarter, shows that for small businesses, interest rate spreads actually widened, despite the Government's loan guarantee scheme, which is meant to bring down interest rates for small businesses, and despite a sharp drop in default levels among them. Small businesses are demonstrating that they are less risky than they might have seemed historically, but are being rejected at a greater rate and also found that
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There is a reason why, in our language, we have used the word funding and not just credit. The supply of finance is not just a debt issue but one of equity capital. Capital willing to take risks is hard to find. Angels are fewer than ever and venture capitalists are finding funds harder to raise. Indeed, long-term money of any kind is difficult to find at the moment, as I suspect the Government are finding as they try to look at ways to develop infrastructure projects. Some disintermediation of the banks is, if anything, aggravating the problem.
The UK differs from many other countries because it has very low retail investment in bonds and equities. Retail money is less volatile and tends to stick through the good times and the bad times. Germany is a good example, although there are many others, of a country where businesses, particularly small businesses, have been far less impacted because that retail sector, investing in both bonds and equities, is available to them.
There is another area where it is crucial that we have the attention of the FPC because the regulator can make a difference. We have a system now where the small end of the spectrum is very ill served-the small stockbroker, who often followed the small company, has largely gone. Most of the funding we have is simply fairweather funding. To change this, we have to develop a reliable funding supply. I understand that that is not for the regulator alone, but the regulator has a huge role to play if we are ever going to close those kinds of yawning gaps. This amendment puts it in a position to act. Some will say that there is already a competition objective in this Bill. There is a competition objective for the FCA, but it is very much designed to encourage a multiplicity of products-not to bring in new players or expand the scope of existing players, but to cover access to funding right across the business spectrum. Those are two very different things and we believe that we must capture that second aspect in the language that we use.
The FPC has to be engaged and to be part of making sure that there is capacity for funding the system across the whole spectrum, whether it be small, medium or large businesses. I would argue it also covers disadvantaged individuals and social enterprises, charities and other bodies which play a crucial role in our society today and will play bigger roles in the future. I suspect that other people will have much more to say about that, perhaps around this amendment and others. It is to push those underlying principles that we have put down Amendment 35.
Baroness Valentine: I am grateful to the Government for tabling Amendment 35A. This is a very important and conceptually challenging issue. I hope noble Lords will excuse me if I talk around the subject a little because, while it is certainly a step in the right direction, it is not at the moment clear to me whether, in legal terms, this amendment sets the right framework.
We should, perhaps, first consider that whatever framework we adopt must be flexible enough to operate effectively in three primary sets of economic conditions: first, the healthy state when one would expect the Financial Policy Committee to be scanning the horizon for future shocks at the same time as being conscious of any impact its actions might have on economic growth; secondly, crisis, where stability must be paramount; and, thirdly, the current state where uncertainty, principally from the eurozone, must be expected to continue for some time. This is, of course, a situation over which we have little control.
In this instance we can see absolute financial stability as a safe port but it would be ironic, given our island's history as a trading nation, if the port were so secure that our businesses could not put to sea.
At a simple level, this is seen in the tension between capital ratios set by regulators and the demand that the banks increase lending, variously voiced by parts of the Government, some parts of the business lobby and the media. It is sometimes forgotten that the collective interests of the banks are, in fact, aligned with those of the Government in seeking economic health and financial stability, but both sides of the lending equation have curbed their appetite for risk. Just as banks are mindful of their own exposures, small businesses, because of economic conditions, will be both less robust to lend to and less keen to take on debt.
On this point, it is essential to have a common understanding between the Bank of England, BIS and the Treasury, and for the banks and the real economy to have the same understanding of where we sit on the risk spectrum. We also need the Government to be clear whether, and to what extent, they can or want to influence lending in the marketplace through initiatives such as the Business Growth Fund, the green investment bank or, indeed, their shareholdings in certain banks.
The amendment, as proposed, makes it clear that financial stability retains primacy. Some have argued that there is a logic to this because it mirrors the hierarchy of the Monitory Policy Committee's objectives. The flaw in this argument is that the primary objective of the MPC is clear and measurable. Inflation is X%. Conversely, I know of no indicator as simple as inflation that would provide a proxy for financial stability. The primary objective of the FPC therefore requires judgment. We cannot state that financial stability is 23 whereas last month it was 27. So the point at which the secondary objective comes into play can remain for ever opaque.
I think this argues for one of two approaches: either tightening up the FPC objective to one which is measurable or leaving it as is but then recognising that the interplay between the primary and secondary objective is necessarily different and therefore that the current drafting may not in fact be fit for purpose.
The challenge for the FPC is that it is unlikely that any Government will be prepared to state explicitly where the axis between stability and growth should sit.
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Taking a leaf from the rulebook governing the MPC's accountability, it may be that a formal exchange of letters will suffice. Under that, the FPC would write periodically to the Chancellor stating its confidence that the financial system was at that moment sufficiently resilient to withstand any expected or reasonably foreseeable pressures, explaining any decisions taken or interventions made and providing details of the economic considerations taken into account in reaching those decisions. The Chancellor would be free, in turn, to respond, asking the committee to consider or advise on the impact that other economic initiatives might have on financial stability or to question whether economic considerations had been given sufficient weight in its deliberations.
As with the other components of the regulatory system, the Treasury Select Committee could play a crucial role in testing and challenging the decisions of both parties to the correspondence. Such an approach could provide the appropriate level of transparency to reassure us that the financial system was not heading into another storm but that, at the same time, our boats were not left languishing at the dockside.
As ever, wherever the legal wording ends up in the Bill, there will inevitably need to be interpretation. Perhaps, then, I might close with what I hope is a constructive suggestion, which is that a small working group of the Treasury, BIS, the Bank of England, banks and representatives of the real economy could work through the implications of the objectives and come up with some recommendations for the Government to consider in due course. That would help to ensure that all those with an interest in this important dilemma have the opportunity to contribute to its resolution.
Lord Sharkey: I shall speak briefly in support of Amendment 35, in particular the inclusion of the requirement to promote the Government's objectives for growth and employment. I emphasise the importance of promoting a healthy and flourishing SME sector in achieving those objectives. The report of the noble Lord, Lord Young, last month, Make Business Your Business, noted that 50% of private turnover, excluding financial services, and 60% of private jobs are provided by SMEs, but SMEs still face great difficulty in finding funding.
The Breedon report of March this year estimates that by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs
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There is another urgent reason for providing finance to the SME sector. That is to do directly with job creation. The Kauffmann Foundation, a highly respected United States think tank, published a study in July 2010 entitled, The Importance of Startups in Job Creation and Job Destruction. I will have more to say about the findings of the report later in the debate, but its most striking findings were that in the 28 years it surveyed, all net new jobs came from start-ups and that during recessionary years, job creation in start-ups remained stable while net job losses in existing firms were highly sensitive to the business cycle.
That surely has lessons for the UK. If the Government are to succeed in creating the right number of new jobs, they must strongly and actively promote not just SMEs but the start-up subsector of SMEs. To have the appropriate effect, they must do that particularly in our deprived communities. Without such strong and directed promotion, the growth and employment objective is in danger of remaining just that-an objective.
Lord Blackwell: My Lords, I apologise to the House that I was unable to contribute to the Second Reading debate. The fact that all these amendments recognise the interlinking of financial stability policy and the wider economic objectives is a major step forward. However, the amendment proposed by the noble Lord, Lord Eatwell, is mistaken in its wording. It is a fallacy to believe that monetary policy and financial policy can be conducted orthogonally, independently of general economic and fiscal policy. The two inevitably interact, and it is fallacious to believe that we can have a government Chancellor of the Exchequer in one corner deciding on a fiscal policy and an independent bank deciding on monetary policy in complete isolation-and, if necessary, disagreeing and conducting an alternative economic policy.
We are in this situation only because the previous Government separated monetary policy from the independence of the Bank of England in 1997. Until that point, the assumption was that the Chancellor of the Exchequer and the Government were accountable to Parliament and to the electorate for economic policy in the round. The Governor of the Bank of England certainly had a crucial role in advising the Prime Minister and the Chancellor of the Exchequer on monetary policy.
At the end of the day, however, a common policy was agreed that ensured that monetary policy and fiscal policy were aligned to the same objectives. They might be the right objectives, they might be the wrong objectives, but at the end of day the Government and the Chancellor of the Exchequer were accountable to Parliament and to the electorate for those decisions. The idea, as the noble Lord said, that at times you want a Bank of England or a financial policy committee
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I therefore much prefer the wording of my noble friend's amendment, Amendment 35A. Although I agree with much of what the noble Baroness, Lady Kramer, has said, my noble friend's amendment has the great advantage of simplicity, and I support him in that.
Lord Peston: My Lords, I criticise both Amendments 35A and 35 on the grounds that they are both illogical and make no economic sense, to put it as bluntly as I can. I am amazed, however, at the intervention by the noble Lord, Lord Blackwell, just now, because he comes to the wrong conclusion. How can he support Amendment 35A on the basis of his analysis of interlinking?
Let me start with Amendment 35A. If you asked anyone why you would want to achieve what is in paragraph (a), the answer would be, "Because it makes the economy work better". It is not wanted for its own sake, as far as I can see, because it involves a total confusion of means and ends. Therefore, sensible economics would delete the words-a favourite activity of my noble friend Lord Barnett and me-"subject to that". All that is required is the word "and"-forget the "subject to that".
The same applies to the amendment in the name of the noble Baroness, Lady Kramer, et al. What she wants to achieve is desirable; no-one would doubt that. However, if we ask, "Why do you want to have a stable and sustainable supply of finance to the economy?", the answer is, "Because it makes the economy work better". We cannot assume that the Government's economic aim is to make the economy work worse; quite the contrary. My view is therefore that I would be reasonably happy with either of the amendments if "subject to that" was taken out, but in no other circumstances.
If I can, I will go back to the Monetary Policy Committee, which the noble Lord, Lord Barnett, and I have criticised for years now because of the "subject to that" clause. It gets around this dilemma by ignoring "subject to that". I have said in this House before that in my judgment the MPC breaks the law under which it was set up, because there are now real inflationary dangers. You do not have to be a Friedmanite to say that expanding the quantity of money, which is what monetary easing is, is immensely dangerous when it comes to the future inflation rate of this economy.
Somehow or other, most members of the NPC-I am not certain that they all do-ignore that bit of the subject, go ahead with quantitative easing and forget their inflation objective, even though they are not achieving it. These two amendments might well be equally innocuous. Maybe in practice the whatever it is called-I am still having trouble with the acronyms but I think I am talking about the FPC-will become totally cynical and forget the subject of that bit at certain critical times. It would be better if the three little words "subject to that" were taken out; and then, to be perfectly honest, I do not care which amendment we agree to.
Viscount Trenchard: As other noble Lords have said, all three amendments are well intentioned. I also welcome the Government's intention to introduce a new objective for economic growth and employment. However, it is a pity that we are not contemplating the introduction of a requirement to have regard to international competitiveness. If you have regard to the international competitiveness of the marketplace, that will certainly serve the Government's declared objective to support economic growth and employment.
I do not understand why it is believed that the maintenance of international competitiveness is synonymous with the discredited system of light-touch regulation. We should not abandon at this stage any attempt to reintroduce into the Bill, in more places than at present, at least a requirement-if not an objective, which is what ideally I would like to see-always to have regard to the maintenance of the competitiveness of the marketplace, because that is what drives growth, creates employment and has made London what it is today.
I understand that the FSA's report on the failure of RBS suggests that the FSA's need to have regard to international competitiveness was one reason for regulatory failure, but I humbly submit that I doubt that. I believe that you can always have regard to competitiveness while at the same time protecting the consumer and ensuring the stability of the marketplace.
On the three amendments, I am afraid that I am unable to support Amendment 35 in the name of my noble friend Lady Kramer because it sounds very much like the command economy. It would give too much of a planning role to the Financial Policy Committee, and I suggest that it would be very difficult to give that committee on the one hand an objective to achieve a stable and sustainable supply of finance, and on the other a duty to remove or reduce systemic risks that include unsustainable levels of leveraged debt or credit growth. To give that body responsibility both to maintain sustainable credit and to prevent unsustainable credit at the same time would mean that it had to decide exactly how much was going to be lent to every business up and down the land. I submit that this command economy-type interventionist role would be inappropriate, and certainly would not lead to maintaining the competitiveness of the marketplace.
As for the other two amendments, I have great sympathy with the amendment of the noble Lord, Lord Eatwell, who treats the growth objective as being equal with the stability objective. Although I am happy to support my noble friend's objective, which subordinates the growth objective to the stability objective, I ask the Minister to explain in what circumstances he thinks the growth objective would have to be ignored.
Baroness Noakes: My Lords, I support the formulation of the Minister's amendment. While I understand what the noble Lord, Lord Eatwell, says about having regard to-not simply blindly following-the Government's policies, which the Financial Policy Committee might think are irresponsible, my noble friend Lord Blackwell answered that point effectively.
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I do not support the amendment tabled by the noble Baroness, Lady Kramer, because I am slightly appalled by the prospect of the FPC going out promoting government policy, let alone going out promoting various forms of finance being available to the City. That goes way beyond what the FPC was set up to do and is probably way beyond the competencies of the kind of people it has attracted.
Lord Davies of Stamford: My Lords, I will comment on the two previous contributions. I very much agree with the noble Baroness, Lady Noakes. It would be quite wrong to put the FPC in a position in which it was simply a mouthpiece for the government policy of the day. It is very important that it is independent. In response to the views of the noble Viscount, Lord Trenchard, on competitiveness-the suggestion that the FPC should pursue competitiveness as an objective in itself-my answer would be that competitiveness is an intermediate objective, not something that one pursues for its own sake. If one has an obligation to have regard to or to pursue-we will come back to the differences in a moment-growth and employment, anyone pursuing or having regard to those objectives is bound to take competitiveness into account because without it we will not get growth or employment. Growth and employment are ends in themselves, unlike competitiveness; that is the distinction.
We have a menu of choices before us this afternoon. All three amendments believe there should be a link between government economic policy, particularly on growth and employment, on the one side and financial stability on the other. No one has contended-nor could they easily do so-that those objectives should be pursued totally in isolation from each other. However, of the three choices before us, the amendment of the noble Baroness, Lady Kramer, and the right reverend Prelate the Bishop of Durham is the most coercive and creates an unqualified statutory obligation to pursue growth and employment. That is very dangerous because it is likely to result in a conflict of objectives. It is a great mistake to place in statute what could be regarded as contradictory objectives. The government amendment in the name of the noble Lord, Lord Sassoon, does not do that because the reference to government economic policy and growth is subsidiary to the obligation to pursue financial stability. The least coercive of the three amendments, and the one that I most incline towards, is that of my noble friend, Lord Eatwell.
It is particularly important that we should discuss this today, because the results of our discussions, deliberations and votes may have a very specific impact
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One is in relation to quantitative easing. The Government have promoted or encouraged the Bank of England to promote-in all events the 1946 Act makes it clear that the Bank cannot incur liabilities without the Treasury's agreement, so the Government must be responsible-a policy of quantitative easing that runs into several hundred billion pounds, as we know. That policy was designed to encourage banks to increase their lending by automatically increasing their reserve assets as they received money from the Bank of England in exchange for bills and other instruments that it is purchasing under the quantitative easing programme. It has not worked at all and that has been very marked indeed. The Minister must have noticed the figures that show that the two quantitative easing exercises have not resulted in any increase in bank lending. The bank lending figures do not seem to correlate at all to quantitative easing. The Government need urgently to ask themselves why that is.
One of the extraordinarily perverse and, frankly, foolish aspects of the quantitative easing programme is that the Bank of England is paying the clearing banks or the commercial banks for the deposits that result from the programme. Its whole purpose was to encourage banks to lend and to encourage an increase in the money supply-in M3 or M4. That has not occurred because the banks have been keeping their deposits at the Bank of England. They are not using them under the fractional reserve banking system to leverage out and increase their lending to the rest of the economy, to the private sector. It is extraordinarily foolish to pay interest on deposits at the Bank of England because that reduces the opportunity cost to the banks of not lending-of not responding to the quantitative easing programme by increasing their lending.
When the Minister responds to the debate, can he first tell me the amount of interest-I am not sure whether it is 50 or 75 basis points-paid by the Bank of England on these reserve assets and deposits, which is a completely wrong thing to do? Secondly, why is the Bank acting so perversely? If it did not pay any interest on those deposits, there would be a much greater financial incentive on the banks, given that they would not be earning anything on that aspect of their assets, to lend more to the private sector, which they are noticeably not doing. Had the Bank decided, under the quantitative easing programme, not to buy in instruments from the banking system-the financial institutions-but to go out into the market and buy instruments, such as short-term gilts at the short end or Treasury bills and so on, from the non-financial private sector, it would have automatically increased the money supply. The Bank did not do that, and I do not know why the Government did not decide to do it
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The Minister will not be surprised to hear my second point because I have made it two or three times already in this Chamber. It is contradictory to pursue a policy of encouraging bank lending to move the economy to greater growth, while at the same time forcing the banks to increase their capital ratios. In an ideal world, it would be a good idea for the banks to increase their capital ratios. It is something that we should have been doing in the good times when banks were running up their assets, perhaps to an excessive level in both quantity, which was too great in relation to their capital resources, and quality, which was subject to the law of diminishing returns as the assets were increased in the boom times. Those were the days when we should have been pursuing such a course. Of course I recognise that the Government of which I was privileged to be a member was in power at that stage, but the Tory party and members of the coalition cannot claim any virtue in this matter, given that, far from urging us at the time to bring in any such measures, they were always urging us to deregulate the banks further. Nevertheless, we are dangerously pressing on the accelerator and the brake at the same time.
The Minister normally replies to me by saying, "It doesn't matter. These new capital ratios do not have to come into effect until 2018". That is a somewhat naive approach. Anyone who has sat on the board of a bank, as I have, knows that if you know you have to achieve certain capital ratios in five years' time, that is the trajectory that you have to pursue from now until the end of that period. In other words, it constrains you in your lending. It means that you have to be much more selective in the loans you take on because you are concerned that otherwise you will not reach the target that has been imposed on you. I recognise it is very difficult, with the present state of the financial markets both here and in the eurozone, to go back on an announced programme of strengthening the capital ratios of banks.
However, it is an almost textbook example-which will probably be cited in business schools and seminars in economics departments for several decades to come-of the Government pursuing two completely contradictory policies and now finding themselves in great difficulty. Even if they want to extricate themselves from this contradiction, they have already engaged in this particular programme and sent instructions to the banks, and it would obviously cause considerable problems in the financial markets if we suddenly announced that we did not want to strengthen the capital ratios of banks.
These are two good illustrations of how easy it is to run into a contradiction between the Government's main economic policy objectives-which must always be to stabilise the economy, and in bad times, such as we are in now, to increase growth and employment-and the financial stability mechanism. From the menu of the most coercive, the medium and the least coercive amendments before us, I reject, as I have already said, the most coercive. I think that it is a mistake. I am fairly open-minded about the other two. It is very important that the FPC has an obligation to take into account my noble friend's formulation of "other, wider
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This controversy parallels discussions we have had in both this House and the other place. I remember the discussions in the other place 15 years ago, when we made the Bank of England independent, quite well. There were two great examples of successful independent central banks in the world at that time. One was the Federal Reserve system, which had a double objective statutorily imposed on it. Those objectives were price stability and employment, which in the short term can sometimes be in contradiction. It was left to the Federal Reserve board to resolve that contradiction. On the other side was the ECB which, basing itself on the Bundesbank tradition, had a single technical objective of price stability defined by maximum inflation rate of 2%. We had to choose between the two but ended up with something slightly between them, which may also be the right solution on this occasion, in this context.
Lord Hodgson of Astley Abbotts: The noble Lord, Lord Davies of Stamford, has given us a pseudo-economic lecture. I have to tell him that the lesson that will be drawn by future business schools will not be about the economic policy of this Government but about the economic policy of his Government, which led this country to the edge of ruin. That is the case that will be taught in business schools: how not to do it. It was his Government, of which he proudly said he was a part, that led us to the pass that we are now in.
Lord Davies of Stamford: I realised when the noble Lord said that I had given a pseudo-economic lecture that he was going to disagree with me. He appears to have ignored the point that I made, to which I should like him to respond. Although in retrospect it is true that the previous Government might have taken moves other than those they did on financial regulation and supervision-I regret that we did not but this is very easy with hindsight-at the time, the party that he was and is a member of was urging us to deregulate. It said that we were constraining the competitiveness of the City of London with excess regulations. I have no doubt that he would have been one of the first on his feet to object and protest had we increased capital ratios, supervision and the examination of the quality of the assets in banks in this country.
Lord Hodgson of Astley Abbotts: I am very glad that the noble Lord appreciates that the previous Government got it wrong. The reality is that it was the macroperformance of the Government, which they now seek to blame on sub-prime lending in the United States, that left the country without adequate protection, not having taken adequate financial decisions in time. That is what a Government are supposed to do. It is the prime responsibility of the Government to make sure that the economic security of the country is maintained.
Going back to Amendment 34, in the name of the noble Lord, Lord Eatwell, he used, if I may say-in no patronising way-the attractive phrase, "leaning into the wind", when he introduced it. Amendment 34 is stated in fairly general terms. It refers to,
That is a much more precise way of approaching this than the rather more general way that the noble Lord explained in his amendment. I am comfortable with Amendment 35A. It is more specific and purposive than Amendment 34 and does not contain the coercive elements of Amendment 35, tabled by the noble Baroness, Lady Kramer, with whom I agree on many other things but with whom I do not agree on this occasion.
Lord Phillips of Sudbury: My Lords, one takes one's life in one's hands if one tries to interpret the ineffable complexities of the Bill and of these amendments. However, I will try because I think that there has been some misunderstanding of Amendment 35, starting with the noble Lord, Lord Eatwell, and finishing with the noble Lord, Lord Davies of Stamford. If one analyses it closely, one sees that the fears that were expressed are not justified.
For the life of me, I do not see how the noble Lord, Lord Eatwell, can persevere with his concern, given that the right of promotion is subject and subsidiary to promoting a stable and sustainable supply of finance, and then has to be within the Bank of England's financial stability objective.
Furthermore, there is no coercion here given that the economic growth objective is third on the list of priorities. Frankly, there is not a straw of difference between "promoting" these things and-in Amendment 35A, tabled by the noble Lord, Lord Sassoon-"supporting" them. Some may say that there is a difference, but as a lawyer I say that there is little or none. I contribute these thoughts in the hope that more light will be cast on Amendment 35.
Lord Flight: My Lords, I support the Government's amendments. I would like to make two small points to pick up on the point made by my noble friend
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I well remember, following the Barings problem, having many discussions with the then Governor of the Bank of England, the late Sir Eddie George. What happened then was that the lender of last resort principle was deemed to apply only to banks that were too large to fail, so smaller banks such as Hambros were closed down and sold, and we ended up with a moral hazard problem and a cartel problem. I stress that adequate domestic competition is very much part of the stability objective, whereas with economic success it is international competitiveness that is arguably more important, particularly for the role of London.
We will come to this subject later on, but there is an important difference in the interplay between adequate domestic competition and being adequately competitive internationally in terms of the two objectives of stability and economic growth.
Lord O'Donnell: My Lords, I rise to support Amendment 35A and in particular to speak in favour of the phrase "subject to that". It is important that we understand why this was put there for the MPC. The basic economic principle was that low and stable inflation was the best prerequisite for long-term sustainable growth. Shocks to economies happen, which mean that inflation will move away either above or below. When that happens, the MPC has a choice. It has a choice of which path of its instruments-we thought at the time of just interest rates but obviously QE is part of it-it should choose. The legislation gives a very clear answer to that because it says "subject to that, look to the broad economic objectives", so it should be choosing that path which best meets those economic objectives while hitting long-term stable inflation.
It works for the symmetry with the FPC because we would all say that financial stability is a necessary and sufficient condition of sustainable economic growth. When you get shocks to financial stability-and boy have we had a shock-you then have choices about how you get back from those shocks. I strongly agree with the noble Lord, Lord Eatwell, that in these circumstances you do not want to have pro-cyclical regulation, which could make matters worse. It is really important that the "subject to that" is there and that that builds in the economic policy.
For those who want to explain economic policy in a lot more detail and put subsectors in, I would say that could be a very long list, so I think you have to rely on economic policy. The amendment is very clear. It refers to the Government's,
I, for one, would ask "What is the economic policy of the Government?". The Prime Minister made that clear when he said that we do not live by GDP growth alone and that what really matters is maximising well-
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The Lord Bishop of Durham: My Lords, I would hesitate to disagree with the strong voices who have accused me of coercion. It is some time since I was last accused of coercion-not since the Church Commissioners sold off my palace with its dungeons. Coercion is much less of an opportunity than it used to be.
The amendment is not coercive and I disagree with the views that have suggested that it is intended to be. It is part of a series of amendments which are meant to open up the market and make it easier to have more stable and sustainable supplies of finance across the market. It refers to a stable and sustainable supply of finance; not to creating it but to enabling it-making it possible. One of the characteristics of many areas of economic stress, such as those in my diocese, is the creation of microeconomies, which may be much weaker or stronger than the national averages may indicate. Many contributions from noble Lords have tended to look at the macro and national picture and have forgotten some of the local and smaller problems that happen but which nevertheless affect many people. Adequacy of finance varies significantly even within one size or sort of company, as I remember from my days in the oil industry during a collapse in the oil price. SMEs in the south of England may find a very different position from what they will find in the north-east. The noble Viscount, Lord Trenchard, called it an amendment for a planned economy, but the word used is not "planned"; rather the intention is reflected in the word "promoting".
The speeches of many noble Lords seem to assume that the present situation is working. In many parts of the country, it is not. Some areas are virtually demonetised, apart from cash, and this is a significant problem. The reports of the Bank of England agent in the north-east indicate the irregularity of finance. Anyone who has managed the finances of a company and a social enterprise, as I have, will know that that is a more serious problem than a continual supply or even a shortage of supply. You need to know what you are planning for. Moreover, a lack of attention to regulatory barriers to access to finance is likely to result, without attention, in a less competitive and open market that in turn will see a continuation of these inequalities across the country.
It may well be that the language of the amendment to which I have added my name is a little too forceful and coercive-I am rather attracted by coercion-and that seems to be a common view which I would probably be hard put to resist. I hope that the Minister will take note of the issues of closed and inadequately liquid markets in certain areas of our economy and of access to finance being more difficult in less fashionable areas where the need for employment creation is severe.
As my noble friend Lord Peston said, the two amendments are reasonably innocuous. I can certainly accept both of them with the exception of those three little words, and this is the first time that I have heard a real defence of them. Indeed, the noble Lord probably printed them himself. Last week I said that the noble Lord, Lord Sassoon, does not need to reply to most of these debates because we have three noble Lords here in the House who would be even better able to do so. However, as I say, I have not previously heard a proper defence of the words "subject to that". The noble Lord is the first to do so, and I am sorry to have to disagree with a potential Governor of the Bank of England, if he still thinks that after all our debates.
The words "subject to that" have always seemed to be totally unnecessary because the Government of the day will certainly want to deal with inflation and, not subject to that but always on top of that, to look at economic objectives. I cannot see why that should not be so, and if I may say so, I have still not heard a good defence of it. But the amendments seem harmless enough, subject to the removal of those three words.
The question of QE has been mentioned in this brief debate. I do not wish to extend it, but it so happens-probably luckily for the Government rather than as a result of their policies-that inflation has remained relatively low. My noble friend Lord Peston, who is my professional adviser on these matters, may be right to say that that has nothing to do with the Government. However, what concerns me about both of the amendments is that I am not sure where the objectives of the Government lie on growth. I wish they could explain them, but perhaps on another occasion rather than today. Perhaps the noble Lord, Lord Sassoon, or one of the other defenders of the Government's policy could also tell us what their policy is on economic growth and employment, because it is not succeeding. However, I will not pursue it any further except to say that I hope that the Government will be able to accept the removal of those three words.
Lord Phillips of Sudbury: I have a great deal of respect for the noble Lord, Lord Barnett, who says that he wants to see the words "subject to that" taken out. Am I quite clear that, in saying that, he is not in favour of a stable and sustainable supply of finance ranking as a higher priority than growth?
Lord Stewartby: My Lords, I well remember the debates that we had all those years ago on the Monetary Policy Committee, and how many objectives could be added to the central one. This is a bit of a nostalgic occasion, because we are going through different subject matter but the same basic problems. I start from the point that the more of these extras you have, the more confusing they are likely to become for those who have to identify them and classify them under a heading-for example, "You've got a bit of employment here, and perhaps supply of finance. How is that getting on in
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That leads me to say that I am probably a bit more cynical than sceptical than most noble Lords here today. There is a tendency to be overexpansive in economic policy-making, because Governments tend to be optimistic, and are therefore more likely to err on the side of overcooking than undercooking. Their focus also tends to be short-term rather than long-term. It is very difficult to feed in long-term assessments of this when it takes a good while for the implications of individual policies to be evident. I am, therefore, at the cautious end of this argument, and we ought to be very careful about not loading the process with too many objectives.
We should definitely say that nothing should conflict with growth or whatever we want, but it is different when one puts it in a negative rather than a positive way. You can add any number of "promoting", "contributing", "having regards to" and so forth, but the fact that there are all these different explanations illustrate that it is not a precise science. To treat it as though it were would be a recipe for difficulty and internal conflict. I may, therefore, be in a minority of one about this, but most of what has been said this afternoon comes from a starting point that itself is questionable.
Lord Sassoon: My Lords, the Government have always been clear that the Financial Policy Committee, as the body responsible for ensuring the stability and safety of the financial sector as a whole, must have financial stability as its primary focus. That is our starting point. However, we have been equally clear that the FPC must balance the pursuit of its primary objective for financial stability with the wider impact of its actions.
into the FPC's objectives. In addition, my right honourable friend the Chancellor made clear, when giving evidence to the Treasury Select Committee almost exactly a year ago, that we do not seek "the stability of the graveyard". Our first shot at achieving this symmetry within the FPC's framework was the creation of an economic growth "brake" for the FPC. The provision set out in subsection (4) of new Section 9C prevents the FPC from taking action that would significantly adversely affect the ability of the financial sector to contribute to medium- or long-term economic growth in all cases, regardless of the strength of the financial stability rationale. That is a very strong backstop provision.
However, the Government have listened to calls, both in another place and in our Second Reading debate in this House, for the FPC to be given a positive duty to support economic growth. In response to those calls, government Amendment 35A amends the Bill to give the FPC a secondary objective to support,
The noble Lord, Lord Eatwell, has used similar wording in his Amendment 34, but in the form of "having regard" rather than a secondary objective. I believe that in this case a secondary objective is more appropriate-more purposive, in the words of my noble friend Lord Hodgson of Astley Abbots-than "having regard". We mean to be purposive here. The Government's intention is to require the FPC to seek proactively to support economic growth. For this, you need an objective, not simply "having regard".
Some noble Lords have questioned how such an objective bites in the context of the MPC. I am very glad that the noble Lord, Lord Barnett, is at last starting to get answers to his questions from the noble Lord, Lord O'Donnell, who is much more expert in these things than I am, and long may he continue to keep the noble Lord, Lord Barnett, supplied with explanations. In my inadequate way, I shall attempt to give one or two examples; first, of how the new secondary objective will impact on the FPC's decision-making. I do not want to get sidetracked too much on the MPC but I will make one or two remarks to suggest that similar wording has impacted on the MPC as well. It is most important to think about the FPC, because that is what we are talking about here.
Let us imagine that the FPC takes action, such as imposing additional capital requirements, during the upturn of the cycle, when systemic risks are building up and financial stability concerns are heightened. If the situation changes-for example, the expansion subsides and the financial stability risks reduce-the secondary objective for economic growth will incentivise the FPC to remove those additional capital requirements in order to free up money for lending to the real economy. This effect will work in tandem with the new requirement for the Bank to review previous actions, which we will discuss in due course.
Lord Davies of Stamford: My Lords, will the noble Lord recognise that what he has just described as being the result of his amendment is precisely what the Government are not doing in the present circumstances? The economy is not reviving and the Government have not reconsidered their policy of imposing additional capital requirements on banks.
Lord Sassoon: My Lords, first, I was talking about different economic conditions, and, secondly, I would have thought that the point made by the noble Lord, Lord Davies of Stamford, would endorse why it would be extremely helpful to have such a secondary objective on the FPC.
Moving on, a second example of how such a secondary objective will operate is where the FPC is choosing between various different courses of action to address a systemic risk. Assuming that the actions under consideration are equally effective in addressing the risk to stability, the secondary objective will require the FPC to select the action that is more compatible with the Government's economic objectives.
Lord Peston: Before the noble Lord goes on with his agreement, which I am looking forward to, I still have not heard any argument from him about "subject to that". What he has to say requires the word "and", not "subject to that". There is no way that "subject to that" makes any sense. To give him an example, could he imagine the head of the FPC being interviewed on the "Today" programme? The first question is, "What are you doing?". "I'm contributing to the stability objective." "Oh, and, incidentally, do you support the Government's economic policies?" "Oh, no." Can you imagine him saying, "Oh, no"? I cannot imagine any circumstances in which he would say, "Oh, no". I cannot even imagine any circumstances-unless he wants to be regarded as insane-in which he would say, "I am unable to answer that question". His only possible answer to the question "Do you support the Government's economic policies?" is "Yes", which is why the word "and" ought to be there and not "subject to that".
That is why I regard the view that the Treasury took on the MPC as fudging the thing. I am afraid the ex-Treasury people have to recognise that that is what the MPC does. Could you imagine the Governor of the Bank of England saying, "I don't support the Government's economic policies"? We are not discussing the MPC. We are discussing the FPC-I always forget its name. Why does the Minister not use the simpler language, rather than "subject to that", which is totally spurious?
Lord Sassoon: My Lords, as I was coming on to say, I agree with the noble Lord, Lord Eatwell, which is very much to the point of the noble Lord, Lord Peston. The FPC has to, and should, be able to lean against the wind-in appropriate circumstances-which is why the FPC's primary objective is and should remain financial stability. It is right that it is "subject to that" primary objective that the FPC should seek to support the Government's economic policy. The wording picks that up in the way that an "and" would not. We will have to disagree on that. I have given examples of where I believe that the FPC will interpret the language we have used appropriately.
Although I do not want to go too far into MPC territory, it is relevant to look at the MPC because there are examples one can draw out from its analysis to suggest that language is used in the MPC context in a very similar way to the way I would expect it to be used in the FPC context. I draw the attention of the noble Lord, Lord Peston, to what deputy governor Charlie Bean said in February 2012: that if the MPC,
Although this is not the time to go into it further, it is possible to argue-and the evidence is very much there-that the MPC is affected by the wording in the same way in which the suggested wording of the Government's amendments will bite on the FPC. I am grateful to the noble Lord, Lord O'Donnell, for further illuminating some of these issues.
The three situations in which the noble Baroness, Lady Valentine, quite rightly postulated that the new secondary objective needs to work were good times, crisis and uncertainty. I can only say that I completely agree with her and that the wording that the Government propose strikes the right balance and will take account of all those scenarios. Of course, we are not relying solely on the secondary objective for growth, but I am sure that she understands that.
The noble Baroness suggested a working group to look at the implications of the new secondary objective and to make recommendations. I agree with her that it will be important to evaluate how the FPC's objectives ensure an appropriate balance between safety and growth, but the right time to undertake such an assessment will be once the regime has operated for a sufficient time to evaluate the success of the arrangements. Her suggestion would then have bite.
I do not want to diverge too far into some of the questions that the noble Lord, Lord Davies of Stamford, raised, because they are not all directly relevant and I am sure that the Committee will want to move on. For example, I recently provided information on interest paid on banks' deposits with the Bank of England in a Written Answer. On the effect of quantitative easing, the Bank of England has estimated that the first round of QE from March 2009 to January 2010 raised UK inflation by 0.75% to 1.5% and increased real GDP by 1.5% to 2%. I therefore refute any suggestion that QE is not working.
I should briefly explain the effect of the government amendments in this group. Amendment 35A will give the FPC a secondary growth objective. Amendment 40A will give the Treasury a power to specify how the FPC should interpret its secondary objective. This mirrors an identical power for the Treasury to specify the meaning of the MPC's secondary objective. I expect the content of these annual notifications to be similar for the FPC and MPC, although there may be some differences owing to the different spheres of responsibility of the two committees.
Government Amendment 41A will extend the Treasury's power to make recommendations about the FPC's responsibility in relation to its objectives to cover the new secondary objective for growth. The other government amendments in this group make consequential changes.
I am pleased to see that Amendment 35, in the name of my noble friend Lady Kramer and others, would replicate the effect of government Amendment 35A by giving the FPC a secondary objective for growth. However, as my noble friend will understand, I cannot support other elements of it.
Ensuring a stable and sustainable supply of credit to the economy is one of the Government's main priorities. I agree with my noble friend Lord Sharkey about SMEs' financing needs in the current economic conditions. In a similar vein, the right reverend Prelate the Bishop of Durham rightly drew attention to financing in parts of the market which are illiquid or unfashionable, or where there are regional issues. These are all matters very much at the heart of the Government's concerns. Indeed, the Chancellor's and the governor's recent
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However, my noble friend's amendment would include the promotion of a particular level of finance to the economy as part of the FPC's primary financial stability objective. This would not be consistent with the principle I outlined at the beginning that the FPC must have financial stability as its primary focus. I agree with my noble friend Lady Noakes and other Peers on this point. I even agree with the conclusion of the noble Lord, Lord Davies of Stamford. More specifically, I do not agree with the suggestion of asking the FPC to target or promote a particular level of finance to the economy, a point which has also been made by some other of my noble friends. This suggestion was actually considered and rejected by the Joint Committee that scrutinised the Bill. The committee said:
"Preventing excessive or inadequate growth of credit will be an important part of the way that the FPC meets its objective. However, it will also need flexibility to consider other factors which bear on the stability of the financial system. Moreover, it would in our view be premature to attempt to set quantitative targets for credit growth before the FPC has experience of developing and applying macro-prudential tools. So we do not recommend setting a credit based objective for the FPC".
The Joint Committee's recommendation highlights the two primary reasons why I am against including some reference to a sustainable supply of credit or finance to the economy. First, while it could be argued that many macroprudential actions will have an indirect impact on the supply of credit, other aspects of the FPC's remit have very little to do with the supply of finance to the real economy. For example, the FPC's role in monitoring the perimeter of regulation is designed to ensure that unregulated activities are not carried out in a way that involves a level of risk that would justify them being brought within the regulatory perimeter. That function is plainly unconnected to the supply of credit to the economy. Secondly, as the Joint Committee pointed out, there are genuine questions about whether it is possible to define what a sustainable level of finance looks like. As the governor put it in evidence to the Joint Committee:
"What does 'sustainable supply of credit' mean? If it is zero, which is where we are now, that is certainly sustainable, but that is not desirable. The natural supply of credit will vary over the business cycle".
Requiring the FPC to promote a particular level of credit provision is impractical and would risk sidelining areas of the FPC's remit that are not directly related to the supply of finance to the real economy. The Government's amendments, which create a secondary objective for growth, achieve the broad objectives behind my noble friend's amendment without the risks that I have outlined.
In answer to the question of whether the Government's amendment goes too far, I stress that the FPC's primary objective is, and will remain, financial stability. The secondary objective is subject to the primary stability remit. This means that the FPC cannot act to further
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Lord Eatwell: My Lords, I am grateful to all noble Lords who have taken part in this debate. I was going to say "short debate" but it got a bit longer as we went along, as these things tend to do. The reason is because, although it appeared at the beginning to be a debate on semantics, it actually addressed the fundamental issue of giving powers to unelected officials in the form of the Financial Policy Committee, the exercise of which would in the past have typically been associated with elected, accountable politicians. That is a fundamental philosophical issue in the Bill and it is interesting to reflect for a moment on why it has arisen.
First, there is a fundamental difference among many in this House about whether it is more desirable to have a separable economic policy, in which monetary and financial policies are pursued entirely separately from policies on growth and employment, or a collective economic policy conducted with the Bank, the Treasury and all relative institutions collectively deciding on the overall stance that should be taken. That is a fundamental debate in economic analysis. However, it is not the point here, which is why we have been slightly diverted.
The point here is about the role of the Financial Policy Committee, which is an innovation that has arisen because of the change in economic circumstances, involving the speed at which innovation in financial policy can dramatically change the environment of a given government policy. The Government can suddenly find that a particular economic stance is being undermined or distorted by significant innovation in financial markets. The development, for example, of the credit derivatives that underpinned sub-prime mortgages in the United States changed the whole housing finance policy of the United States-an innovation by financial institutions that changed the environment of government policy.
The key role of the Financial Policy Committee is to watch out exactly for those sorts of things. That is what it is there for: to maintain a persistent study of what is happening in financial markets and how that might change the environment for government policy, and of the implications of any particular stance that the Government and/or other economic policy actors, such as the Bank, have taken.
Having said that, this was an interesting debate and we have eventually focused on the issue of "supporting" or "having regard to". Obviously, since I put the amendment down with my noble friend, I think "having regard to" is a more appropriate relationship given the role of the Financial Policy Committee, but, in light of the debate, I beg leave to withdraw the amendment.
"(a) contributing to the achievement by the Bank of the Financial Stability Objective, and
(b) subject to that, supporting the economic policy of Her Majesty's Government, including its objectives for growth and employment."
"(1A) The Financial Policy Committee is to exercise its functions with a view to contributing to the achievement by the Bank of the FCA's integrity objectives, including but not limited to those set out in subsection (2)(f) of section 1D and section 1DA of FSMA 2000 as inserted by section 5 of the Financial Services Act 2012."
Lord Eatwell: My Lords, I rise to move manuscript Amendment 35AB and speak to manuscript Amendment 110ZA, which is associated with it. First, I apologise to the Committee for introducing a manuscript amendment and, indeed, for introducing a manuscript amendment to replace a manuscript amendment. It displays the serious defects in my own drafting abilities and I hope to do better in future. I apologise for that but it is a testimony to the flexibility of your Lordships' House that we are able to consider these amendments now, which are designed to give the Committee the opportunity to address a very important matter that, as we know, has arisen in the last few days. It would be foolish to pretend that these amendments have not been brought forward as a result of the revelations of the LIBOR scandal in the last few days. However, it is valuable to give the Committee the opportunity to debate these issues in a concrete way and with a concrete proposal on which it can opine.
The consequences of this scandal are so serious and so far-reaching that their implications for this Bill are immediate. Fortunately, we had not reached what might be deemed the relevant part of the Bill that should be amended to take account of what we now know-something that, a week ago, we did not know. We now know that the setting of benchmark prices is a fundamental element in the efficient operation and stability of financial markets as a whole-that is, of the generation of systemic risk as defined in the operating principles of the FPC-and that the process of setting one of the most important benchmark prices in world, the dollar LIBOR, has been severely compromised.
At the heart of the stability objective of the FPC is the integrity of markets. If markets have no fundamental integrity, then any stability objective is otiose. That is why Amendment 35AB links the FPC's objectives to the integrity objective elsewhere in the Bill. This is made clear in the objectives of the Financial Conduct Authority, remembering of course that under this
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hence incorporating LIBOR-style operations and imposing a goal of social efficiency, defined in terms of the best interests of society as a whole, which is a standard shorthand used in economic analysis.
So far, so good. We have got the FPC concerned with integrity and we have defined the integrity objective to include the setting of benchmark prices. But still left hanging in the air is the question of what does integrity-vital for the FPC and for the FCA-really mean? Perhaps last week we all thought we knew. Now, in the light of the shocking revelations of the last few days, we are not so sure. To ensure that the integrity of markets is comprehensively investigated within the context of how financial markets are operating today, the amendment requires an independent inquiry into the,
If this independent inquiry does its job, then the FPC can make its contribution to the general stability objective of the Bank, and the FCA can pursue its statutory objective of maintaining the integrity of Britain's financial markets, secure in the knowledge that the definition of integrity rests on firmly considered ground.
That is why Amendments 35AB and 110ZA are indissolubly linked together. I should make it clear that the inquiry proposed in these amendments in no way detracts from the other proposed inquiries led by Martin Wheatley and Andrew Tyrie announced by the Treasury yesterday. They have their particular contribution to make, but the financial services industry is too big, too complex, too far-reaching, and too important for there not to be a full independent judicial inquiry as proposed in this amendment. An inquiry will secure the effective operation of this Bill, and the industry deserves it.
Of course I recognise that a full judicial inquiry will take time, but the issue of urgency can be dealt with by sequencing the inquiry. Interim reports can cover matters deemed most urgent, such as material for the banking Bill that we will be dealing with next year; I understand that the Government have already designated it as a carryover measure, so it is going to be quite late next year. We can also set a time limit on the final report under the terms of the Inquiries Act.
I should also say something about the cost of an independent inquiry, a matter that greatly exercised the noble Lord, Lord Sassoon, yesterday. Given the billions lost in the banking crisis, the material losses to every family and business in this country, we surely can afford a judicial inquiry to get this matter right.
There are two fundamental reasons why a public inquiry is needed. First, the terms of reference of the Tyrie inquiry, if I may call it that, are far too narrowly drawn. I commented yesterday that the terms of reference of the proposed parliamentary inquiry were far too narrow to achieve the ultimate goal of restoring public confidence. The noble Lord, Lord Sassoon, disagreed, but my reading of the terms of reference was confirmed yesterday by Mr Tyrie himself. He told the BBC that it is a ring-fenced job, which is not about,
A ring-fenced job is not enough. As the noble Lord, Lord Sassoon, commented yesterday with such clarity, referring to the Bill and to prospective legislation on the Vickers proposals, the inquiries announced in the Chancellor's Statement,
I agree completely with the noble Lord. We can reasonably hope that those limited inquiries will plug the gaps, but plugging the gaps is not enough. We need the wide powers and forensic judgment of an independent judicial inquiry run by people with experience of taking evidence under oath and with the personal independence to make proposals that swim against conventional wisdom and established opinion.
The procedure proposed by the Government will not do. It will not provide a sound foundation for the operation of the financial services industry or for the effective working of the FPC or the FCA in the Bill. That is the first fundamental reason: the narrowness of the terms of reference of the other inquiries.
The second fundamental reason why a public enquiry is needed is that we must take the future of this most vital of British industries out of the cockpit of party politics. We have already seen in the past 24 hours what can happen within the party-political arena. It is simply not right for the future of Britain's most important industry to become a party-political football. Indeed, despite the tempests of the past 24 hours, calm voices from across the political spectrum have called for a proper, independent inquiry. They include Mr David Davis MP, from the Conservatives, the noble Lord, Lord Carlile, from the Liberal Democrats and the noble Baroness, Lady Neuberger, from the Cross Benches.
The amendments do not restrict the narrow inquiry by Martin Wheatley nor, if deemed appropriate by Parliament, do they restrict Mr Tyrie from doing his ring-fenced job. They provide an opportunity which occurs but once in a generation to set up financial industries under a new, firm foundation of market integrity. They provide one of the crucial building blocks of an operational framework within which the FPC and the FCA can manage the systemic stability of markets. Most important of all, through the device of an independent inquiry, they create the forum within which the public can reforge its trust in the financial services industry and the financial services
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We on this side of the House fully understand that a public inquiry may lead to some criticism of the policies adopted by previous Governments, including Governments formed by the party of which I am a member. We will just have to take that on the chin. This matter is too important to allow such issues to be decisive. We must learn from what has happened, and the way to learn is to have the fullest information possible. That is why an independent judicial inquiry is necessary. I beg to move.
Lord Kerr of Kinlochard: Given that the noble Lord has explained that the public inquiry he seeks is not an alternative to the Tyrie inquiry, can he confirm that the Opposition will be co-operating in full with the Joint Committee to be set up under Mr Tyrie?
Lord Eatwell: I certainly think that Mr Tyrie and the Treasury Committee can and will pursue their activities in their normal way, including perhaps the pursuit of this particular inquiry. As to the future policy of the Opposition on the organisation of that inquiry, we are trying to achieve the best possible outcome. I see the best possible outcome as a three-dimensional one.
Lord Carlile of Berriew: My Lords, I welcome the opportunity for this short debate on a matter of great public interest. I have to say to the noble Lord on the opposition Front Bench that the Opposition have asked the right question but given the wrong answer to that question. The LIBOR issue is an immense financial scandal. It appears to have not just the scope of one bank, but possibly to affect other financial institutions. It affects not only what has happened in the United Kingdom, but affects at least four jurisdictions, including the United States of America. It affects the reputation of the City of London in a major way. Those of us who are as old as I am remember bankers in the City of London by the adage, "My word is my bond". Now we see, "My Maserati is my success", as the evidence of what happens in the City of London. I hope that noble Lords of all parties and none will agree that, as a result of this scandal, we need to emerge from it with "my word" being "my bond" once again. The trust in the City of London is why the City of London succeeded in the past. It will not succeed in the future if those who do business there, if I may use a Scouse expression, are seen merely to be "wide loads".
What has happened undoubtedly potentially merits investigation for criminality. I do not believe that a parliamentary inquiry is the right way to winkle out criminality, welcome though a parliamentary inquiry is. It is not a way in which criminal investigations are carried out. In fact, it is a ludicrous proposition to suggest that this is the job of a parliamentary committee, however well led. I do not for one moment question the leadership and integrity of Mr Tyrie. He is obviously very good at what he does. I do not favour a judicial inquiry, because a judicial inquiry can quickly become a behemoth. I do not draw a comparison with the
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I would respectfully suggest that the Government should consider adopting a practice that has been used-although, I admit, with mixed effect-in the United States: the establishment of a special prosecutor. A special prosecutor could work under the instructions of the new and very capable director of the Serious Fraud Office, Mr David Green QC. I do not believe that the Serious Fraud Office is equipped with the personnel or resources to carry out this kind of inquiry within its present dispensations, but if its director were permitted to appoint a senior lawyer as special counsel or special prosecutor, who was given a team to carry out the sort of inquiry that is needed, my belief is that we would then quite quickly get to the bottom of this whole ugly affair.
Being a lawyer myself, I shall tell your Lordships the sort of offences that would fall to be considered. I make no judgment because this has still to be investigated, but it is possible that there has been a conspiracy to defraud; that there has been false accounting on an industrial scale; that pecuniary advantages of such magnitude that we rarely imagine possible have been obtained by deception; that some money has been obtained by deception, again on a large scale; and, if some of the reports that I have read were to be true, it is also possible, regrettably, that there has been misconduct in public office by one or more persons. I have no criteria to judge that but it certainly merits investigation.
In my view, it is much better that this criminal investigation should take place here than in the United States of America, where a criminal investigation is almost inevitable in any event. The right place for an investigation into events that essentially happened in London is in London, not in New York or Washington. The consequences of an investigation in the United States are unattractive. Do we really want a "NatWest Three" situation applied to people who have carried out the whole of their relevant business lives at relevant times in the City of London?
Lord Howard of Lympne: Could not the investigation that my noble friend asks for be carried out without the appointment of a special prosecutor but by the Serious Fraud Office, which has already embarked on such an investigation, with the director, if necessary, asking for additional resources to enable him to bring such an investigation to a speedy conclusion?
Lord Carlile of Berriew: I am grateful to my noble friend, who has considerable experience of dealing with high-level legal matters. I believe that might be achieved, but in my view there needs to be the clearest statement of intent by the Government. My intention,
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I do not want to detain your Lordships' House for too long. However, I want to make the point that we have not yet reached the situation in which the essential issue is being investigated properly-that is, the potential criminality of those whom we were entitled to trust.
Lord Phillips of Sudbury: My Lords, I came to the City as a young lawyer in 1964 and am still there. Until last Christmas, I was a non-executive director of a well known City insurance entity. I agree wholly with the sentiments of the noble Lord, Lord Eatwell. However, the writing has been on the wall about the state of values in the City for very many years. The most recent shock-the LIBOR scandal as one might call it-is but one of many and there will be many more still to come, I am sad to say. It has been an open secret in the City that the culture has declined over the years to one of near amorality, where the law rather than normal moral instincts has been the arbiter of conduct. That in turn has declined, predictably, to a situation where too often if amorality is confronted with a significant loss of a good deal then there is little resistance left in the system and criminality occurs. Most of it is impossible to trace as it is in the form of market manipulation and oral conspiracies-whether within a firm or between different firms. It is a sad spectacle. To be fair, the vast majority of people in the City deeply regret where we have got to. Unfortunately, however, the culture of huge corporations tends to crush the moral life out of people in those entities. You get the occasional whistleblower who will stand out against the herd but one knows, I am afraid, what has happened recently to those few brave people.
The noble Lord, Lord Eatwell, is absolutely correct in his strategic overview of where we now are. We must, however, ponder this a little more than the space of this debate will allow. I am inclined towards giving serious thought to some sort of commission. It does not have to be a royal commission-a phrase which has attracted a good deal of adverse thought lately-but it is such a huge congregation of issues, not just confined to the City and certainly not confined to narrow misdeeds such as the LIBOR matter, that we may be better off with a royal commission that can look at the thing in the round, take its time, and let the criminal side of all this be separated and dealt with by the Serious Fraud Office or, conceivably, a special prosecutor.
My Amendment 109-to which my noble friend Lady Kramer and the noble Baroness, Lady Meacher, have added their names, and which we will probably get to next time-ironically achieves almost the identical effect to that of the first part of Amendment 110ZA, tabled by the noble Lord, Lord Eatwell, so I am obviously in favour of that.
In closing, the other quick point I should like to make is to wonder whether there should not be a wider duty of integrity in the Bill than that which applies only to the FCA in proposed new Section 1D on page 17 of the Bill. The prudential authority should be subject to a similar integrity objective, and it might make sense to have such an objective for the whole financial regulatory sphere. That is all I wish to say beyond thanking the noble Lord, Lord Eatwell, for raising this matter at this time.
Lord Neill of Bladen: My Lords, I should like to make a few observations about the amendment. We are at Committee stage of the Bill. While it is passing through your Lordships' House there has been an enormous scandal about the fixing corruptly of the LIBOR rate by Barclays over, I understand, a period of years-a practice in which it is possible that other banks took part. They have thereby done enormous damage to the reputation of the City of London as a place where you can get honest dealing. The matters thus far brought to light show innate corruption, whereby it is seen as perfectly all right to rig the figures that you supply in order to fix the LIBOR rate and to bring in profit or reduce losses. That is a form of corruption.
One can go back to one's early days with a bank. I banked with Barclays from the mid-1940s onwards. The notion of the bank then being involved in this type of activity was absolutely laughable. The banks have turned into merchant banks of the worst possible character, and that ethos is reflected in conduct that reveals a completely disgraceful picture.
The question is: what is the best way to have a wider inquiry into that matter? At the moment, it is a pity that what is called the Tyrie inquiry is being allowed to carry on on its own, without any thought as to whether or not the investigation of those facts would be central to any wider inquiry about the integrity of banks. However, how do you investigate integrity? The theory is that you are not allowed to look at other cases because Tyrie is dealing with the matter. In fact, it is the best possible evidence you can have of the way that bankers think today. You want to know all the details of that case and not exclude them from it, rather than ask a generalised question: how do we establish integrity or lack of it in the City?
I therefore assume that today we are having an exploratory discussion, that the amendment will be withdrawn, and that there will be time, at least by Report, to consider revised proposals of what might be done by way of investigation. The suggestions of noble Lord, Lord Carlile, are interesting and persuasive, but all this has just been pitched upon the House of Lords because of a curious financial scandal coming to light at this very time while we are in Committee. I hope that consideration will be given as to whether matters in relation to the banks and financial institutions
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Lord Davies of Stamford: My Lords, I am very glad indeed that we have an opportunity to discuss this extremely important matter. The news over the past few days has been dramatic and horrific, and the public would think that our parliamentary system was woefully inadequate if we did not take time not just to discuss this matter but to come rapidly to conclusions, which is why I profoundly disagree with the noble Lord, Lord Neill, that we should not take any decision today and that the amendment be withdrawn. I hope that my noble friend who spoke extremely powerfully on his amendment will press it in due time.
There seems to be prima facie evidence of widespread abuses, dishonesty and corruption-a good word that I take from the noble Lord, Lord Neill, with pleasure, because it is the right word-in our banking system. None of us would have supposed that that would arise here in the City of London. All of us have been excessively complacent about the standards of conduct which are applied in the City of London.
I hope that all noble Lords will have seen, among much of the other material in the press over the weekend, the extraordinary article in the Telegraph-which was anonymous, so we have to read it with due reserve-on behalf of an employee who suggested that there were scores of people who were party to this, knew about it, and thought it was perfectly normal to rig LIBOR. No doubt if they thought it was normal to rig LIBOR, they also thought it was normal to go in for any other kind of dishonesty that would lead to some profit for themselves or some advantage for their firm.
This is a very nasty state of affairs. It is a cancer at the heart of what we all know to be the greatest industry in this country, in terms of our international competitiveness. We need to deal with it as rapidly as possible.
I agreed with much of the analysis of the noble Lord, Lord Carlile, but I do not agree with his conclusion. I have no problem with setting up a special prosecutor if that is going to be an additional instrument, forged in the Serious Fraud Office or by the Director of Public Prosecutions, to assist him in this case. However, it is not a solution and certainly not a substitute for a public inquiry of the kind my noble friend Lord Eatwell has put forward, for two reasons. First, we are not the United States, and we do not have the same traditions. It is dangerous, both pragmatically-because you cannot anticipate the exact practical risks and problems that may arise-and more importantly, in terms of reputation, the public impact and the credibility of the exercise, to suddenly change the model of investigation when something like this happens. It is better to use tried and tested means of dealing with a serious, dramatic and frightening challenge to the integrity of a major part of British society and industry.
Secondly, another reason the special prosecutor does not fit the bill is that a special prosecutor will by definition, of course, be focused on criminality. This also applies to the suggestion of the noble Lord, Lord Howard-which makes complete sense-of making sure that the director, or the Serious Fraud Office, as the case may be, are given additional resources. Where they see evidence of criminality they must follow it up, and where they see a basis for prosecuting on their normal criteria, they must pursue it. We all hope that they pursue that as rapidly and as effectively as possible, and many eyes will be on them as they do it. However, where they find that there is something less than criminality-where there is evidence of something that does not actually justify prosecution-they are not in the business of spending public money on pursuing that and reporting on it in detail.
We need to look at the whole range of what has gone wrong here. The public have hundreds of questions in their mind. It is possible for Barclays to misreport the interest it is paying on deposits, but what about its counterparties-the banks which were depositing with it, at a higher level of interest than they were declaring? They must have been aware of this discrepancy. This was apparently going on for months, or even years. It is quite clear that it would have been an open secret among a great many banks that they were getting from Barclays an interest rate on their interbank deposits that was different from that which was being declared as the LIBOR rate.
What were the supervisors doing? What was the Bank of England doing? The fact that a bank is paying above LIBOR for its deposits is an alarming sign of something going wrong, and of a bank's solvency or credibility being under threat in some way. It would have been the obligation of the Bank of England and the FSA at the time to investigate that, if any news of it had come to their ears. Did no news of it come to their ears at all? We need to know about that. We need to know about the inadequacies of supervisors, as well as the inadequacies of the management of banks, the behaviour of traders, and those who had the task of reporting on LIBOR and how they came to the conclusion about what figure they should put in. We need to know all of that, and it can be achieved only by a wide-ranging, comprehensive inquiry-a judicial inquiry -which goes where it needs to go and gets the results that we need.
I was very struck by what my noble friend Lord Eatwell said yesterday. We have had judicial inquiries about the City of London on two occasions: the Macmillan inquiry in the 1930s, and the Radcliffe inquiry in the 1950s, both of which were very positive moments for British banking and the British financial services industry. We do not need to feel that the precedents are unfavourable in terms of doing that again.
My final point is that clearly the alternative is to regard the Tyrie committee as a substitute for a judicial inquiry and to leave it at that, which is what the Government appear to want to do. I am second to none in my admiration for Andrew Tyrie, who is a very old friend and colleague. I have the highest regard for him. The way he has conducted the chairmanship of the Treasury Select Committee has been absolutely peerless. I greatly admire it. However, it is unfair to
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The reason is that politicians-I am sorry to say it; no doubt I shall offend many people because occasionally I do offend people-are not in very good standing in this country. Our reputation is understandably not very high. Bankers' reputations do not stand very high, either. Those two statements might qualify as the understatements of the week. The idea of politicians investigating bankers will be frankly risible in many parts of our country. On a committee of the kind that is proposed-inevitably, because it is the way the constitution works-the coalition will have a majority and the chairman will have a casting vote. Again, that will make it impossible for people both in our country and around the world to feel-despite the integrity that I do not doubt for a moment of any Member of either House who might be on the committee-that the committee will be adequate to the task.
Finally, I will draw a different analogy with the Leveson inquiry from that drawn by the noble Lord, Lord Carlile. The Prime Minister was absolutely right to set it up. I do not think much of most of what he has done, but that was a very positive achievement that will stand to his credit in the historical record. The experience of the last few months has been that a judicial inquiry is able to get to grips with problems in a very sophisticated and substantial industry. The media and communications industry is about as substantial and complex as the financial services industry. No doubt there are lawyers who are making money out of the inquiry, as they would out of any judicial inquiry. However, that is not inhibiting Lord Justice Leveson from doing a good job, or the public from feeling that the job that must be done in relation to the media industry is being done effectively. We want the same kind of credibility with the inquiry into the financial services industry that is obviously necessary.
Lord Kerr of Kinlochard: My Lords, like the noble Lord, Lord Neill, I hope that the noble Lord, Lord Eatwell, will withdraw his amendment. His three-dimensional answer to my question made it impossible for me to support it, because I fear that he is taking a hostage. The most important thing that must be done is to establish quickly how we can ensure that the fixing of LIBOR cannot happen again. That is the crucial operational thing to do. I agree with those who say that this is an international scandal. I agree that around the world, people know about this. There are plenty of other scandals in the banking system that must be addressed, such as the mis-selling scandal and questions of remuneration and bonuses. There is plenty of time for a study of the culture of the banking and financial services industry. That is important but not urgent. What is urgent is to do something operational now.
I understand from the Prime Minister's Statement that the Wheatley report will be published this summer. That fits very well with the Tyrie exercise, which will finish this autumn and can establish what happened. It should not go into areas of criminality. What was said by the noble Lord, Lord Carlile of Berriew, was fully justified; I would not go down the special prosecutor route but would follow the advice of the noble Lord,
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I will say one further thing to remedy an omission in our discussions, and those of the other place, yesterday. I am confident that Mr Agius is an honourable man. It is a pity that no tribute was paid yesterday to the way in which he immediately accepted responsibility and felt that the buck must stop with him.
I was reminded of the noble Lord, Lord Carrington. Nobody thought he was responsible directly, hands on, and involved in the loss of the Falklands. I do not believe for a moment, and I do not believe that anybody in this Chamber believes, that Marcus Agius was in any way involved in fixing the LIBOR rate, yet he undoubtedly did the right thing, and it is important that that should be put on the record. It makes a striking contrast to the behaviour of some others in public life these days. I advise anyone intrigued by this reference to read a remarkable speech made on Friday on the Steel Bill by the noble Lord, Lord Fowler, referring to another Member of the present Government.
Baroness Kramer: My Lords, I want to associate myself with the words we have just heard from the noble Lord, Lord Kerr, on the importance of acting quickly. I speak as someone who has spent most of her career in banking, working with clients on transactions that involve the LIBOR rate and I understand the significance of the issues we have discussed in this House.
As others have said, this is not just a UK issue. The earliest that any inquiry, as proposed by the noble Lord, Lord Eatwell, could begin would be the autumn, so we are looking at something like a two-year inquiry. I am not sure that he understands-
Lord Eatwell: If the noble Baroness would allow me, perhaps it would be for the benefit of the Committee if I said that I certainly did not rule out the Wheatley or Tyrie inquiries: I argued that both have something to contribute. I say that to the noble Lord, Lord Kerr, as well. Therefore, I accept the whole notion of acting quickly-it can be handled-but we then have to ask: what next?
Baroness Kramer: When the noble Lord, Lord Eatwell, talks about the Tyrie inquiry, I am still not clear whether he is talking about the Joint Committee of both Houses, in which the Lords are as involved as the Commons, or whether he is simply talking about the Treasury Select Committee acting, if you like, in its normal way. I think that he has avoided giving us clarity around that issue.
The critical thing here is that other jurisdictions will act. The United States will not sit around while a committee lasting one or two years talks about the fundamental issues of banking, so the actions that we are going to take have to be decided in a far more immediate way. We have great opportunity with this Bill and with the forthcoming banking reform Bill. The changes will have to be embedded in those Bills at the latest if we are to stem the tide of real disadvantage.
If anyone doubts that work is afoot elsewhere to deal with the problems that we have been so slow to pick up and deal with, I suggest they take a look at today's Wall Street Journal. There is an article in there called "Lining Up Potential Successors to Libor". It is very clear that we in the UK are on the back foot and we need right now to get on to the front foot and not start playing for the long grass, however worthy that is. It is that sense of urgency that I want to convey. If we hear that the answer for the British Government is going to be a commission, there will be a very cynical reaction in the United States that once again the Brits are going for another long-term committee with navel-gazing and endless discussion, rather than immediate action. Perhaps someone can tell me what the value is of a commission that reports after all the changes have taken place. That sounds to me like a method for closing a stable door long after the horse has bolted. It is crucial to get that horse moving now, without delay.
I also have to say that I regard a Committee of both Houses as an extraordinarily effective way of getting to the root of a problem. Think of the expertise we have in this House. Surely that is exactly what we should be using. The breadth of the experience we can bring is important. Moreover, it is very different from Leveson because at the heart of that inquiry is the reality that it is investigating a relationship between politicians and the media, one in which there is a high suspicion-outside here I would probably go further, but that would not be tactful-of collusion and corruption. Politicians cannot investigate themselves under those circumstances, but I do not think anyone is suggesting that that is the situation in the banking industry. We are not talking about political collusion or corruption here.
Indeed, if we doubt the effectiveness of the political system in handling this, let us look at Bob Diamond's resignation this morning. It is easy to see what happened. He knew he would face the Treasury Select Committee on Wednesday, so he sat down with his lawyers-I am guessing that, but I suspect I am right-and started to role play how he would behave in the meeting. Soon he realised that his position was totally untenable. That is effective action, and it is what we should be building on, not going back to some sort of long-term commission. The additional benefit is that if there is leadership from Parliament, it will continue to observe and supervise the banking industry for many years. It will not pack up and go away after 18 or 24 months. We should build on that, not lose it.
Perhaps I can make a last comment. We seem to be going through an extraordinary trend, if you like, of subcontracting out our responsibilities. As politicians with the privilege of being part of this Parliament, surely we ought to be taking the tough decisions. We should not be trying to find someone else to contract out to every time there is something tough to do, otherwise we might as well just become a commissioning body. I would argue that we should look at our strengths and skills and take this opportunity to act. That would show the banking industry and the wider world what we can do. The longer term is too late, and we have to be aware of that.
Lord Myners: My Lords, I fear that the noble Baroness, Lady Kramer, might not have been listening to my noble friend Lord Eatwell. He supports the inquiry to be chaired by Mr Andrew Tyrie as well as the Wheatley review. I believe that the proposal of my noble friend is complementary to and necessary as an addition to those reviews.
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