Amendment 69A supplements this important addition by requiring the FPC to prepare an explanatory statement when exercising its powers of direction and recommendation in relation to the PRA, FCA, the Treasury or the Bank in relation to the Bank’s regulatory functions. Such statements must clearly explain how the FPC considers the exercise of its powers to be consistent with its objectives, including both its primary stability objective and its secondary objective for economic growth—the “brake” which prevents the FPC taking any action that would seriously damage long-term growth. The statement must also explain the FPC’s view of the compatibility of its actions with its duties under new Section 9E, which require it to have regard to the Bank’s financial stability strategy; to the need to avoid, as far as possible, requiring the PRA or FCA to act in a manner prejudicial to their own objectives; and to the important principles in regulation of proportionality, transparency and international co-operation and co-ordination. Amendment 76A requires the statement to be published in the next financial stability report.

The effect of these amendments will be to ensure that all interested parties—Parliament, the financial services industry and members of the public—will be able to examine, and indeed challenge, the balance that the FPC seeks to strike between stability and growth. I hope that noble Lords will agree that these are important additions to the FPC, increasing its transparency and accountability, and that they will therefore agree to them.

However, the Government are going further than this. Once the FPC has taken action, through its powers of direction and recommendation, Amendment 69B requires it to keep any open action under regular review. In the case of extant directions—that is, directions which have not been revoked—the FPC must review them at least annually. In the case of recommendations, the FPC must make arrangements to keep under review those recommendations it considers to be of continuing relevance. This will ensure that, once it has taken a specific action, the FPC will from time to time consider whether that action remains necessary and proportionate.

Amendment 76B requires the FPC to publish summaries of such reviews in the financial stability report, once again providing for improved openness and accountability. These are important procedural additions which underline the Government’s commitment to establishing the FPC as a balanced and proportionate macroprudential regulator. I beg to move.

5.45 pm

Lord Myners: As I listened to the Minister, it seemed to me that he was implying that there may be times when the FPC has no recommendations outstanding.

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Surely, however, the FPC will always have recommendations outstanding. It will always have a preferred leverage ratio or a gearing ratio or a deposit to loan or some other of the macroeconomic tools that it has to apply to the banking sector. I am not sure how keeping recommendations under review and reporting on them actually works in a situation in which there will always be recommendations in place. I cannot envisage a situation in which the FPC will say, “We have no views on anything, and therefore there is nothing that we need to be reporting and monitoring”. I may have misunderstood the point; if I have, I apologise, but I would appreciate some guidance from the Minister.

Lord Eatwell: My Lords, we broadly welcome these amendments, in the sense that they are adding to the overall scrutiny and assessment of the activities of the FPC and thereby reinforcing, we believe, its general acceptability and strength of purpose. However, I want to raise a warning flag with respect to new Section 9QA(3), in which it is argued that the FPC will have to prepare,

“an estimate of the costs and an estimate of the benefits that would arise from … the direction or recommendation in question”.

These are macroeconomic measures. It is virtually impossible to provide a simple numerical estimate of the cost or benefit of a macro measure. There will be either a tendency to overestimate the costs, or a tendency to overestimate the benefit, in this particular case. Presenting an assessment in quantitative terms will give spurious precision and, indeed, spurious credibility to a particular measure. I assure the Minister that for any macro measure, I could write an entirely credible report saying that the costs exceeded the benefits and an equally credible report saying that the benefits exceeded the costs. This is simply extending the whole notion of cost-benefit analysis beyond the range in which it can effectively operate. It would be valuable to take account of an attempt to describe in broad qualitative terms the costs and benefits. However, please let us not have the spurious precision of numerical calculations of variables which, by their very nature, cannot be expressed in precise terms.

Lord De Mauley: My Lords, I am grateful to noble Lords for those questions. The noble Lord, Lord Myners, says that effectively there will always be a recommendation that is extant. He is probably right about that. The requirement is to review regularly any recommendations that have a continuing effect, and that includes any recommendations to set or maintain any particular level of leverage or capital, as the noble Lord suggests. I broadly agree with him, actually.

The noble Lord, Lord Eatwell, is right to say that a cost-benefit analysis is a difficult thing to do. That does not mean that the committee should not attempt it, so that at least interested parties have an opportunity to review it and make their comments.

Amendment 69A agreed.

Amendment 69B

Moved by Lord Sassoon

69B: Clause 3, page 10, line 18, at end insert—


9QB Duty to review directions and recommendations

10 July 2012 : Column 1067

(1) The Financial Policy Committee must—

(a) before the end of each review period, review each direction given by it under section 9G, other than a direction revoked before the end of the review period, and

(b) prepare a summary of its conclusions.

(2) A review period is—

(a) in relation to the first review, the period of 12 months beginning with the day on which the direction was given, and

(b) in relation to subsequent reviews, the period of 12 months beginning with the day on which the previous review was completed.

(3) The Financial Policy Committee must maintain arrangements for the review at regular intervals of any recommendations that it has made under any of sections 9N to 9Q and are of continuing relevance.”

Amendment 69B agreed.

Amendments 70 to 74 not moved.

Amendment 74A

Moved by Lord Sassoon

74A: Clause 3, page 12, line 9, leave out “Committee’s objectives” and insert “objectives set out in section 9C(1)(a) and (b)”

Amendment 74A agreed.

Amendments 75 and 76 not moved.

Amendments 76A to 76C

Moved by Lord Sassoon

76A: Clause 3, page 12, line 9, at end insert—

“(4A) If during the reporting period the Committee has made any decision in relation to which section 9QA requires the preparation of an explanation, the financial stability report must include the required explanation.”

76B: Clause 3, page 12, line 9, at end insert—

“(4B) If during the reporting period the Committee has completed the review of a direction or recommendation, the financial stability report must include a summary of the review.”

76C: Clause 3, page 12, line 14, leave out “subsection (3) or (4)” and insert “subsections (3) to (4B)”

Amendments 76A to 76C agreed.

Amendments 77 to 88 not moved.

Amendment 89

Moved by Lord Eatwell

89: Clause 3, page 14, line 12, at end insert—

“9WA Financial Stability Advisory Panel

(1) There will be a Financial Stability Advisory Panel.

(2) The membership of the Panel will be—

(a) the Deputy Governor for Financial Stability;

(b) 6 members appointed by the Treasury, subject to approval by the Treasury Committee of the House of Commons;

and the members appointed under paragraph (b) will be academics, members of staff of international organisations, practitioners, or others with particular skills in the analysis of systemic risk.

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(3) The Financial Stability Advisory Panel will—

(a) provide written advice to the Financial Policy Committee concerning the analysis of systemic risk;

(b) once a year prepare a report assessing the analysis of systemic risk by the Financial Policy Committee over the preceding 12 months (the first report to be twelve months after this section comes into force);

(c) assess the effectiveness of measures prescribed under section 9K in the attainment of the financial stability objective of the Bank;

(d) assess the effectiveness of directions and recommendations of the Financial Policy Committee under sections 9G and 9N in the attainment of the financial stability objective of the Bank;

(e) prepare an annual report on matters referred to in section 9WA(3) to be presented by the Supervisory Board of the Bank, and subsequently published on the Bank website.”

Lord Eatwell: My Lords, the development of macroprudential regulators, the instruments for introducing macroprudential regulation, is a common theme in the UK, the European Union and the United States. Different models have been developed for the institution that is to be responsible for macroprudential regulation. In our own model, the Financial Policy Committee, we see what could be called a “central bank model”, where the alternative voices being brought to the table are to be represented by the independent members of the FPC. It will fall to them to challenge Bank of England house thinking and provide alternative perspectives. There is only a very small number of external members on the FPC and finding members with the experience and skills necessary to perform the role that we demand of them is, as has already been seen, very difficult, although at the moment we have an excellent group in the shadow FPC. An alternative model, which has been adopted by the United States Financial Stability Oversight Council, pursues a more stakeholder-oriented approach in which the appropriate voices from stakeholders actually have a direct role in the organisation of macroprudential measures within the United States.

Both the central bank model that we have pursued, which also applies to the European systemic risk board, and the stakeholder model have disadvantages. The key disadvantage of our central bank model is that we do not have enough diversity of opinion or access to new research and critical assessments of FPC measures that the stakeholder model might have. The problem with the stakeholder model is that the United States may find that its Financial Stability Oversight Council becomes mired in differences of opinion from different stakeholder interests and has difficulty in pursuing the coherent macroprudential policy that is required of it.

As we know, this whole area is, as I said earlier, an experiment—or, if the Minister prefers, a project. We are dealing with areas and matters that at present are uncertain. There is little agreed analysis or clear empirical assessment of how some of these tools will actually work. We will find out. We are going to experiment. We therefore need to harvest the widest possible spectrum of analysis. The amendment proposes that there should be a financial stability advisory panel, not a panel that is intimately involved in designing and implementing the measures. Those independent voices are provided by the independent members of the FPC but they are necessarily compromised by their role in dealing with

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very sensitive matters as they might have conflicts of interest if they have a wider role in the financial services industry. The financial stability advisory panel could contain individuals with such conflicts of interest because they would not have a role in actually managing the macroprudential organisation of the FPC.

The amendment suggests that we have this financial stability advisory panel providing that diversity of view from academics, perhaps from members of staff of international organisations such as the Bank for International Settlements, which is making a lot of the running in the development of macroprudential tools, and potentially from others who have particular skills in the analysis of systemic risk. It will be their responsibility to provide written advice to the FPC, prepare an annual assessment of the FPC’s performance, look at the effectiveness of individual measures and assess the effectiveness of particular directions and recommendations in the context of an annual report or assessment. This cannot do anything but good. It is simply an institutionalisation of the detailed examination, the variety of voices and the consideration of effectiveness that are so necessary in providing both coherence to the FPC and its general acceptance. A panel of this sort, given the responsibilities that are set out in the amendment, would add significantly to the effectiveness of the Financial Policy Committee. I beg to move.

Lord Stewartby: My Lords, I was interested to hear the comments from the noble Lord, Lord Eatwell, on the nature of the work that will face the panel. It sounds like something that overlaps considerably with the Board of Banking Supervision in the late 1980s. Obviously that was working in different circumstances, but each of the bodies require, or required, people of an unusual stripe who combine a practical experience of banking, and the difficult areas that it brings with it, with a particular canniness in identifying areas where they think that things are not as they should be, particularly in cases where that is not always evident until later when events have already taken place.

Are the would-be members of the panel now shadowing the work that will be theirs in statutory form as a result of the Bill? It is terribly important to get the people involved carrying a great deal of weight and clout but at the same time having inquiring minds—something that will help us to ferret out areas that have been unsatisfactorily dealt with. I will not say more now, but I am pleased that some of the reasons for having a panel such as this—20 years ago or more it was called the Board of Banking Supervision, or the BoBS—have been recognised as important in today’s different but difficult circumstances.

6 pm

Lord Davies of Stamford: My Lords, I have considered carefully over the last 24 hours whether I should say what I am now about to say to the House, but I have decided that it is right to. My noble friend’s amendment, which I support in principle, says in proposed new Section 9WA(2)(a):

“The membership of the Panel will be … the Deputy Governor for Financial Stability”.

In light of his answers yesterday to the Treasury Select Committee, it is completely wrong that the present

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deputy governor for financial stability should be given these responsibilities on this financial advisory panel, or any other responsibilities for financial stability. In the course of the performance yesterday, during which I assume that his answers were entirely honest and frank, he effectively made a plea of guilty to incompetence and complacency at a quite heroic level. He admitted having chaired a meeting at which several people said that there had been discrepancies between the LIBOR rate and the rate at which banks had been paying for deposits on the interbank market. In his defence yesterday, he said he thought that some of those discrepancies might have been due to transactions intermediated through brokers, but he did not ask what the position was. He did not pursue it. He did not make an attempt to discover what the real facts were. That was astonishingly negligent, to put it mildly.

The other incident, the conversation that he had with Mr Diamond of Barclays, which has been so much in the public mind in the last week or so, also casts a strange light on his actions in carrying out his responsibilities in the Bank of England. He said that he was under great pressure at the time and that there was a great financial crisis, so much so that he was not able to make a note of even very important telephone conversations. I assume that the conversation was not a casual one, but that it was deliberate and designed to achieve a particular purpose. The only purpose that it could have achieved, and the only effect that it could have had, would have been to have persuaded or encouraged Barclays to understate the cost that it was paying for deposits on the interbank market. Clearly, Barclays could not do anything about the actual cost that it was paying. It would have been taking on deposits at as low an interest rate as possible. There have been some strange things going on. I have little confidence in the personality of the present deputy governor of the Bank responsible for financial stability.

There is a defence of his actions which noble Lords might have seen in yesterday’s Financial Times. It was the first letter in the paper, with the heading going something like “Tucker and Barclays saved the British financial system”. The argument was that it was correct in difficult circumstances, when banks were being squeezed on the interbank market or the interbank market was drying up, to give a false impression of what was going on by recording and publishing false LIBOR statistics. I do not accept that defence. First, it is not a defence that either Mr Diamond or Mr Tucker is making. Secondly, even if it were their defence it would be wrong. It is important that no financial stability organisation or anyone concerned with financial stability should be tempted to believe that by falsifying statistics in a difficult situation that is contributing to a solution. That risks undermining not merely the credibility of the index that you are falsifying, but every announcement and index. If the Bank of England was prepared to collude with a clearing bank to falsify the LIBOR statistics, the markets would immediately assume that collusion might take place if it was convenient in other circumstances, and that perhaps regulators and banks would collude to understate their provisions. As soon as that rumour or suggestion got about, there really would be a crisis.

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That is a road down which no one should go. I do not accept that defence of Mr Tucker’s actions. It is not of course the defence that he has been making. He has no defence because he has confessed to an extraordinary act of negligence. Had he not undertaken it, had he not let that meeting go past—and yesterday there were suggestions that at the time he had other evidence that the LIBOR market was not as straight and transparent as it ought to have been—the crisis that we have experienced recently would not have occurred. I am sorry to have to make these harsh comments about a man whom I have not met and whom I had not heard until I listened to his evidence yesterday. However, in present circumstances, it seemed to me important that if one felt sufficiently strongly about such a matter one should raise it in the House.

Lord Myners: My Lords, I take note of my noble friend’s comments, but I feel compelled to say a few words in response. Without drawing the ire of the Minister, I can link it back to the subject of the amendment.

I worked with Mr Tucker, the deputy governor, during the banking crisis. We should wait for the outcome of the Treasury Select Committee’s report and the Joint Committee report. It is wrong to say that if the manipulation of the LIBOR-setting process had not occurred we would not have had the global financial crisis. It was undoubtedly bad and reprehensible, in the words of Mr Diamond, but it did not itself cause the crisis. Listening to Mr Tucker yesterday and reflecting back on the extraordinary circumstances of October 2007, I sympathised with him. The banking system was on the verge of complete collapse. It is still not fully appreciated how close we came to the edge of the cliff. In those circumstances, when one seemed constantly to be in meetings and constantly to be on the telephone, not taking notes of meetings is pretty forgivable. I was delighted that Mr Tucker was able to settle the issues arising from Mr Diamond’s file note about the senior Whitehall figures. I look forward to the Chancellor of the Exchequer responding to the clarity that Mr Tucker has brought there.

Reflecting on my noble friend’s amendment, I ask whether we are creating positions in the Bank of England and in the architecture which are simply beyond the talents of any one person to fulfil? Mr Tucker is one of the outstanding candidates to be the next governor. He is not the only one, but it is not a long list and it has got decidedly shorter in the past seven days. Two people previously spoken about as candidates, Mr Varley and the noble Lord, Lord Green, have probably dropped off in the past few days, so it is not a strong list.

Looking then at the FPC and its oversight, where are we going to find the people with the necessary talents to do this job? We are on the horns of a dilemma. On the one hand, you want knowledgeable people—people who do not have to be taken through everything step by step, but come to the issues with a good and clear knowledge and the ability to spot where the critical questions lie. On the other hand, you do not want to start these committees with people who in some way are conflicted by their current employment, their past employment, their pension arrangements and so forth.

10 July 2012 : Column 1072

I do not have a view about whether the shadow FPC is doing a good job. I think one or two of its members appear to be. Mr Robert Jenkins, in particular, appears to be an independent spirit who is not in any way caught up in the groupthink and consensus that I associate with much of the heart of the Bank. The simple fact is that most members of the FPC have a career background in investment banking. They have a career background in the very activity which was associated with the global financial crisis. I think we have a problem here. How do we get the right people into the right committees and the right courts and the offices of governor and deputy governor? No architecture makes sense if we are creating it on the presumption that we can find people of integrity, raw talent and understanding to fill the jobs when that is not a realistic assumption. I think the heart of the matter raised by my noble friend in his amendment is: how can we be satisfied that the people sitting on the FPC are appropriately competent and are managing conflicts of interests, as they probably will always have conflicts as a prerequisite for qualification to sit on these various committees?

Lord Liddle: My Lords, that was a very interesting exchange between my noble friends Lord Davies and Lord Myners on the crucial question of how these matters should operate. I would like to add a point in favour of my noble friend’s amendment on the basis of work I have done on how the new European system is operating. I had a conversation in Brussels recently with André Sapir, who is on the board of the European Systemic Risk Board, about the role of independent economic expertise in assessing systemic risk. On that board, the independent economists have made a decision that they will not rely on the internal expertise of the European Central Bank, precisely for the reason that the noble Lord, Lord Eatwell, said. We are operating in a very uncertain world and no one really knows what the right road map is. What we need is the maximum amount of well informed, independent expertise on these matters. I feel very strongly that this amendment should be supported.

Lord De Mauley: My Lords, before I start on the amendment, I shall say in response to the noble Lord, Lord Davies of Stamford, that the deputy governor for financial stability is a very fine and highly respected deputy governor. As the noble Lord, Lord Myners, said, it is for the Treasury Select Committee to assess what he said yesterday.

Turning to Amendment 89, it would create an advisory panel with a two-fold brief: first, to advise the FPC on systemic risks to financial stability; and, secondly, to assess and report upon the effectiveness of the FPC in assessing systemic risks to financial stability, the macroprudential tools provided by the Treasury to the FPC and the actions taken by the FPC. The membership of the panel would include the deputy governor for financial stability and a number of external members appointed by the Treasury, drawn from a range of relevant professions, including academia.

The Bill already creates, in the FPC, a committee on which the deputy governor for financial stability sits, together with external members, some of whom

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may indeed be academics. The noble Lord, Lord Eatwell, was good enough to compliment the external members of the interim FPC. Let me give some details of the specific expertise of the current external members to give a flavour. Alastair Clark has, in addition to extensive real-life experience, degrees from Cambridge and the LSE and is an honorary visiting professor at the Cass Business School. Robert Jenkins, who the noble Lord, Lord Myners, referred to, not only has extensive experience of trading and asset management but is also an adjunct professor at the London Business School. Donald Kohn, in addition to extensive experience in financial regulation in the US also has academic experience. Michael Cohrs has experience at senior level in the private sector in investment banking but is also a Harvard MBA and an adjunct professor at Beijing University. We want, and we have, multifaceted people. We agree with the noble Lord regarding the need for extensive broad experience, including academic experience, but we do not think this needs to be set down in legislation.

6.15 pm

The additional construct of the advisory panel would not add to the Government’s proposals. I think the noble Lord, Lord Myners, is right that what is important is that we get the FPC right. If the FPC wants to take advice, it is entirely able to do so, but it should have the autonomy to do so on its own terms if it is to be properly responsible for financial stability. It might be argued that the advisory panel will fulfil an important function by assessing the performance of the FPC. Like the MPC, the FPC’s primary route of accountability is directly to Parliament, including to the Treasury Select Committee, which holds it to account via scrutiny of its published meeting records and financial stability reports. In addition, the Bank’s newly created oversight committee will be responsible for overseeing the FPC’s performance and will have an explicit remit for commissioning and publishing a review into the FPC’s policy performance.

I have two further concerns with this aspect of the amendment. First, it seems odd that a committee chaired by an executive of the Bank who is a member of the FPC and responsible for providing advice to the FPC should also be expected to assess its performance. Secondly, and more importantly, the Government have already brought forward amendments, which were debated and agreed two weeks ago, to create the independent oversight committee that I just referred to with responsibility for carrying out performance evaluation. So in this respect, too, the effect of the amendment would be to duplicate responsibilities, blur accountabilities and diminish focus, so I ask the noble Lord, Lord Eatwell, to withdraw the amendment.

Lord Myners: The Minister used the word “independent” on several occasions relating to oversight. Noble Lords will remember that when the Monetary Policy Committee was established, there was quite a brouhaha about whether the independent members of that committee should have access to independent advice. The Bank resisted that so the independent members had to rely upon the Bank’s own economists.

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It was only after a threat of resignation by one of the independent members of the MPC that they were granted the ability to appoint, I believe, a single researcher.

The culture of the Bank does not foster independence. It is a very hierarchical organisation. The view of the Bank is the view of the governor. The court has recently announced three independent reviews into aspects of the Bank’s conduct. They are all quite interesting because they date from October 2008. None of them will actually look at the real errors that were made by the Bank, which were pre-2008. We really want to ask what the Bank was doing in 2006 and 2007. These reviews exclude any examination of Northern Rock, and I think one could argue that if it had been handled in a different way, it might have had some impact on how the UK was impacted by the global financial crisis.

I put down a Question on these independent reviews. The independent reviewers were appointed through a process led by the governor. The independent reviewers do not have their own secretariat. They are reliant upon the Bank’s staff for support, so I put it to the Minister that for this approach to operate, it is important that the FPC has access to truly independent advice. In my view, advice that comes from career employees of the Bank can never have that element of total independence that is necessary in order to achieve the objective that I believe the Government have for the FPC and which my noble friend has at heart when proposing this amendment.

Lord De Mauley: I will, if I may, respond on that point. The noble Lord, Lord Myners, is right, and my noble friend Lord Sassoon acknowledged earlier, that previously the Bank was slow to recognise the MPC external members’ need to have access to dedicated support. The Bank has learnt its lesson.

Lord Eatwell: Gosh, that is a bold statement. In replying to the comments made by the noble Lord, Lord De Mauley, I would point out that he has overlooked two crucial elements that underpin the logic of this amendment. First, there are indeed highly skilled and independent members of the Financial Policy Committee, but they are involved in making the decisions and the recommendations. They are the organised part of the organisation which will in due course be responsible for what happens. They are not in any sense an evaluative mechanism. They are adding grist to the mill of a decision-making mechanism; an evaluative mechanism is a different thing altogether.

Secondly, the noble Lord referred to the role of the new oversight committee. I would remind Members of the Committee that the oversight committee will be composed of members of the court; it will not be anybody outwith the internal structure of the Bank. I am enormously disappointed—the most disappointed I have been with anything I have done in relation to this organisation—that the Government have not taken this on board. We are trying to formalise a continuous process of debate, review and assessment by people who have high levels of skill in this area but who are not otherwise involved. That is what a truly effective advisory panel should do. I was struck by my noble

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friend Lord Liddle’s comments on what is happening at the European Systemic Risk Board. As the noble Lord, Lord Stewartby, said, we want people with the right sort of skills doing this sort of assessment. He is absolutely right.

I ask the Government to think again on this issue. This area can contribute significantly to the overall success of the FPC. I assure the Government that I will return to this matter at later stages, but for now I beg leave to withdraw the amendment.

Amendment 89 withdrawn.

Clause 3, as amended, agreed.

Amendment 90 not moved.

Schedule 1 : Bank of England Financial Policy Committee

Amendments 91 to 96

Moved by Lord Sassoon

91: Schedule 1, page 170, line 11, leave out “Bank” and insert “Oversight Committee”

92: Schedule 1, page 170, leave out lines 12 to 14

93: Schedule 1, page 170, line 32, leave out “Bank” and insert “Oversight Committee”

94: Schedule 1, page 170, line 35, at end insert “Financial Policy”

95: Schedule 1, page 170, line 42, leave out “Bank” and insert “Oversight Committee”

96: Schedule 1, page 171, leave out lines 3 to 5

Amendments 91 to 96 agreed.

Schedule 1, as amended, agreed.

Clause 4 : Further amendments relating to Bank of England

Amendment 96A

Moved by Baroness Hayter of Kentish Town

96A: Clause 4, page 14, line 35, at end insert—

“( ) Within a year of commencement of this Act, the Bank of England shall publish a review of the effectiveness of coordination by the regulators of the exercise of their functions relating to membership of, and their relations with, the European Supervisory Authorities (namely, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority), and their relations with other regulatory bodies outside the United Kingdom.”

Baroness Hayter of Kentish Town: My Lords, Amendment 96A stands in my name and that of my noble friend Lord Eatwell. Despite the increasing importance and powers of the new European Systemic Risk Board and its three ESAs—including, on occasion, the power to override our own regulators—the Bill’s new architecture does not map with theirs. So while Europe cuts by area—with a committee for banking, one for securities and markets and one for insurance and occupational pensions—the Bill divides between prudential and conduct. As AXA warns,

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“There is a significant danger that the new structure will diminish the UK’s capacity to influence European regulators as”,


“new ... bodies will be organised along different lines to the European Supervisory Authorities”.

London First, which represents over 200 of London’s leading employers, including many in the financial world, expresses similar concerns about the new framework not mapping onto that of Europe. While it welcomes the establishment of an international co-ordinating committee, it remains worried about the committee’s effectiveness unless it is appropriately resourced and staffed.

We have ceded powers to the EU on many areas of financial services regulation, but there are areas where we may want to retain powers; for example, to impose higher capital requirements on banks. There are also areas for future negotiation where it is imperative that we give leadership and have a good negotiating stance and team in order to have a good outcome. That depends on good preparation within domestic regulators—and that will require considerable co-ordination, which we will rely on a committee to produce.

Our own European Union Committee warned about the mismatch between our new structure and that of the ESAs last July, but the Government did not appear to take much heed of the potential problem. Perhaps the Government are right, and whichever way one cuts and divides, there will not be a brilliant fit. However, given the Government’s commitment to,

“ensuring that the UK authorities … take a leadership role in the ESAs”,

and given the importance of Europe in regulating, in standard setting and in influencing our financial regulators, it might be wise to have a built-in review to check whether we have got it as good as it could be, and to give this House and the other place a chance to see whether any adjustments are called for in the light of experience.

The Governor of the Bank of England has said that the new architecture is,

“a bit by way of an experiment”.

He went on to say that we,

“need to experiment and see how it evolves”

in regard to the whole schema, which he thought should be revisited after five years. In the case of our relations with the European bodies, however, we cannot wait that long. Decisions are being taken even as we meet.

These overlaps—or underlaps—are not theoretical. We know that Michel Barnier, the EU Commissioner overseeing financial services, is to amend EU market abuse rules in the light of the LIBOR scandal. Much of this work will overlap with the probe led by Martin Wheatley of the FCA which is examining almost the same issues. While the EU initiative is likely to complement Mr Wheatley’s conclusions on whether to apply criminal penalties to the manipulation of LIBOR or any other indices, there is potential for a clash over whether to regulate this or other indices.

Clear, focused input into EU thinking is therefore essential for the UK markets. We must ensure that we have the processes and structures right to make sure that those decisions suit our needs. This amendment

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seeks the information needed to help us assess what adjustments might have to be made to ensure that the decisions taken both here and in Europe really are as good as they can be. I beg to move.

Baroness Noakes: My Lords, I completely take the main thrust of the noble Baroness’s amendment, which is that the lack of mapping of our structure onto the European regulatory structure potentially creates problems. We have certainly heard from bodies in the City that they also are concerned that the particular issues that arise in their areas might not be well represented. There is a particular concern about the FCA and ESMA, given the FCA’s inevitable consumer centre-of-gravity and the perceived problem of issues relating to proper representation of the markets in Europe. So I completely buy the need to keep this under review. I question, however, whether the Bank of England is the right body to do that. If we need to hard-bake some kind of review process into the Bill, the review ought to be done by the Treasury, because it is the Treasury that could do something about it if it is not working well.

6.30 pm

Lord Flight: My Lords, it strikes me that this amendment points an important finger at a number of territories. In some ways the mismatch concerns me less; there are always likely to be mismatch problems. For starters, I was disappointed that the previous Government, as it were, gave away power in the territory of financial regulation to Europe. Substantial things are happening: we have MiFID 2; the banking supervision proposals; and, following on from those, the recent proposals arising from greater European economic and financial union. First, I would like to know that the UK parties batting for the UK are doing a good job and have raised all the issues. Secondly, I agree with the noble Baroness, Lady Noakes. I am not certain whether this is a Treasury or a PRA matter but the PRA at least has the lead for the regulators in negotiating with the EU bodies. I should like to know how the Bank of England thinks it has done in dealing with the issues and protecting British interests.

The MiFID 2 proposals are coming up and I think that they could be extremely damaging to the UK if they went through as presently proposed. A lot of work needs to be done for them to be workable. If there were no public review or airing of what has been going on and the issues, it would perhaps be—in a fast-changing territory—somewhat undesirable. However, I am not quite sure what the right mechanism is for achieving what I seek to achieve.

Lord Liddle: My Lords, I rise briefly to support my noble friend Lady Hayter’s amendment. She has drawn attention to a crucial issue for the United Kingdom. The fact is that we benefit greatly from the existence of the European single financial market. I believe that one of the reasons why so many overseas banks base themselves in London is that we are part of a single regulated market. There are grave dangers for us in going down the road of separating ourselves from that single market.

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It is important that we keep very closely in touch with European developments at all times. It is a very fast-moving scene. As we understand the results of the last European Council, banking supervision within the eurozone will be put under the European Central Bank by the end of this year. I noted with interest the Governor’s comment, as reported in the Financial Timesat any rate, that this would make it easier for the Bank of England to deal with regulatory issues because there would be, as it were, a single telephone number to ring in the European Central Bank. It is also the case that the UK has a critically important influence in the European Systemic Risk Board. It is vital that we play a crucial role in that board, of which the Governor of the Bank of England is the deputy chair.

Lord Sassoon: I think that he is the first deputy chair.

Lord Liddle: Britain’s position is given a special status given that we are the financial centre of the European single market. The governors of the central banks who make up that body are alive to London’s concerns at all times. It is very important that we play a major role there. It is therefore crucial that we keep these issues under review. I do not think that the way in which the Government have handled the proposals for a banking union is in the UK national interest. It is a bit rich to say, “It is none of our business because this is to do with the eurozone”, but then to complain that the creation of this thing might mean that there was an inbuilt majority against Britain on all financial regulatory decision-making. It is rather contradictory.

The position we have to adopt is that although we are not in the eurozone and will not be in the eurozone, we have to sustain the single financial market. That involves us having the closest possible relationship with the relevant European bodies and keeping abreast, in terms of our own arrangements, with developments there. For those reasons, I strongly support my noble friend’s amendment.

Lord Davies of Stamford: I also strongly support my noble friend’s amendment, which was very well conceived and—if I may say so—very persuasively moved. I also agree very much with my noble friend Lord Liddle in the way that he approaches this problem. I think that there are four major issues on which the House needs to ponder carefully. The first is the emerging mismatch between the evolving structures in financial regulation on both sides of the channel. Something has already been said about that so I will not go into it any further.

The second issue is subjective, but I fear that it is very difficult to deny. It is our declining influence in matters of financial regulation and supervision around the world. Many of us can remember a time when the British were regarded as great experts in these things. We obviously were brilliant because we had such a successful financial services industry. Therefore, when we said something about financial regulation, supervision or the right way of creating a framework for a thriving financial services industry, whether it was said in Washington, New York, Brussels or Frankfurt, it was listened to with great attention. We naturally had a very strong influence. I am sorry to say that a combination

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of the Euroscepticism of this new coalition Government and our recent failings in financial regulation and supervision—one thinks of the failings of the FSA in matters of RBS and so forth, and now the terrible and very upsetting scandal of LIBOR fixing, which I will not go into any further—inevitably will, and is, undermining the influence that we used to have. That is a very worrying situation.

There is, thirdly, the competitive issue, which we will come on to in later amendments. It is quite clear that as the framework for financial regulation diverges between this country and the continent, there is always a danger of competitive advantages changing, and possibly not in our favour. One of the obvious examples of which people are well aware is the possibility of lower capital-adequacy ratios on the continent. Presumably, particularly in the light of the crisis that we have all been through, they will always be set at a fairly sensible prudential level. However, there may be significant differences—for example, in retail deposit insurance schemes—which would lead people to want to hold their accounts on the continent rather than here. All kinds of things could emerge from regulatory and supervisory initiatives that would change the competitive balance. We need to be very alert to that.

Finally, the jury is out on whether or not it is in the national interest for us to be part of the emerging European banking union. I can see a great many theoretical reasons why it might be very strongly in our interest to join, but I do not have the slightest hope of persuading colleagues in the House today of that. Indeed, I am happy to wait and see, but we need to keep the matter under review. The regular review which my noble friend proposes in this amendment is exactly the kind of procedure and discipline that we want.

All British institutions involved should be aware that they are being reviewed in this matter; that their collaboration and effective participation in European structures is being watched; that they are expected to use their influence as effectively as they can on our behalf; and that they should be very conscious of the role they are playing. All that is very important and we need to monitor the results. We need, a few years after it comes, to be able to look back over the record as revealed by these reviews and otherwise—quite pragmatically and open-mindedly, without dogmatism or emotionalism—and to take a rational decision on the best way of achieving the national interest going forward.

Baroness Cohen of Pimlico: I support the amendment proposed by my noble friend Lady Hayter. Not only are we poorly mapped on to the new European financial regulators, but we are poorly represented in relation to our weight in financial services in Europe. We are under-represented, in fact. We are where we are, but this is one of the areas on which, in a year’s time, it would be useful to have a review and to see how best we might change or adjust our position, either by adjusting our own institutions, or by hoping to make greater progress in Europe. However, financial services are key to this country. Immense amounts of regulation being debated in Europe at the moment, and we are not quite in the best position to be doing all this. I very much welcome the idea of a review in a year.

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Lord Neill of Bladen: My Lords, I have one comment to make on the text of the amendment. Just to have a report for one year seems such a limited objective. If it is worth doing at all, I do not understand why there is no language allowing for continuity. It was said that the noble Baroness, Lady Hayter, was providing for that. However, the actual language is:

“Within a year of commencement… the Bank of England shall publish a review”,

et cetera. It is to be a one-off. The idea is a good one. Have a regular review, and you can see whether things change. Whether it is going to be embarrassing for the governor, representing the Bank, to say what his relations are with all the other regulatory bodies outside the UK, I do not know. A case could be made for an independent body to produce this. However, the governor and the Bank probably have the information that is needed.

I add as a footnote that we need to keep in mind the terrible damage that has been done by the LIBOR scandal. There was an article in the Independent last week deploring the damage that it will do to the good name of the financial industry in this country. They are the sort of factors that are rather important.

Lord Sassoon: My Lords, we have had an interesting run-around this issue. There have been quite a few divergent voices about the way of handling the challenge that is the subject of this amendment.

First, I certainly did not read this amendment as relating to the mapping of the UK structure as it will be against the European structure, because the start of this amendment talks about,

“a review of the effectiveness of coordination… and their relations with, the European Supervisory Authorities”.

This seems to go very much with the responsibilities under the co-ordination memorandum. I have a bit of trouble in my mind matching this up with the substantive concern of the noble Baroness, Lady Hayter of Kentish Town, which I understand.

I start with the question as to whether the UK architecture does or should adequately map against the new European supervisory authorities. I do not believe it is necessary for the responsibilities of domestic regulators to exactly map on to the corresponding ESA for engagement with them to be effective and well co-ordinated. The regulatory systems of other EU member states do not match up with the activities-based structure of the ESAs. Of course, as has been discussed already, the European architecture is itself likely to be moving around, so that we are probably not going to be aiming at a fixed target. Although it has been stated that the City has had some concerns about the mapping, the broad consensus in the evidence given to the Joint Committee was that having a different regulatory structure to that of the ESAs, will not present any issues for the UK authorities in representing the UK’s interests. The Government have accepted the recommendation of the Joint Committee, and the Bill requires that the international organisations’ MOU establishes an international co-ordination committee, so we have fully responded to the concerns of the Joint Committee in this area.

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6.45 pm

I do not believe that the noble Baroness, Lady Cohen of Pimlico, is right to say that we are under-represented. For example, the FSA’s senior officials have very important positions within ESMA. We have already heard that the governor of the Bank of England is the chair of the European Systemic Risk Board. As the noble Lord, Lord Liddle, pointed out, the special position of the UK is represented in that way. So we should not undersell the way we are getting on now, or overstress the need for an exact mapping, which was not found to be necessary by the Joint Committee. Nevertheless, I absolutely agree with the noble Baroness in moving this amendment that clear, focused input to EU discussions is absolutely essential—I think that was how she put it.

The question then is, how much scrutiny will there be, and how will we know how effective this has been? The noble Baroness suggested a review within one year. The noble Lord, Lord Davies of Stamford, talked about a review after a few years. The noble Lord, Lord Neill of Bladen, suggested that if it is worth doing once, we should do it every year, or at least periodically. There is a wide divergence of views on how often it should be done. Perhaps more importantly is the question of who should do it, and whether there are other ways in which it will be done without this amendment. I agree with my noble friend Lady Noakes—the point was also indirectly made by my noble friend Lord Flight. If anybody should be responsible for ensuring effective co-ordination on international matters, it should be the Treasury, not the Bank because, as my noble friend says, it has the powers to do something about it. The Treasury will also be in the chair of the international co-ordination committee, which the Joint Committee asked to be established. If anybody should do it, it should be the Treasury.

My noble friend Lord Flight also talked about the Bank having primacy—that was not exactly his word—in taking most of the strain in the interface with Europe. However, as my noble friend Lady Noakes said, the FCA has a very important relationship with ESMA. It is difficult to say who is going to be taking more of the strain; it will depend partly on which directives are being negotiated at the time.

I agree with the noble Baroness and my noble friends that light needs to be shed on this. Let me say how this will be done. First, Schedule 3 to the Bill requires the new regulators to include in their annual reports an account of how they have complied with the international co-ordination duty. That will be the first line of public reporting. Secondly, the National Audit Office will have the ability to investigate and report on the economy, efficiency and effectiveness of both regulators and to lay those reports before Parliament. Thirdly, the Treasury Committee may also wish, and is likely to want, to undertake periodic enquiries into the effectiveness of the regulators regarding their interactions with international bodies.

I believe there are comprehensive provisions that will hit the right target. The noble Baroness raises an important issue. I am glad we have had a chance to discuss it, but I would ask her to withdraw her amendment.

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Baroness Hayter of Kentish Town: First, I thank those who have contributed to the debate and have spoken very much, I think, in support of what I have been saying. I thank the noble Baroness, Lady Noakes, the noble Lords, Lord Flight and Lord Neill of Bladen, and my noble friends Lord Liddle, Lord Davies and Lady Cohen.

I am surprised that the Minister did not quite know what was coming. I said all this in my Second Reading speech, which I thought would be a little clue to what this was going to be about. However, I think that there is wide acceptance of the mismatch between the new architecture and what exists across the water. The Minister said that there were divergent voices. I do not agree. I think everyone is saying that we need to look at this issue. The noble Lord, Lord Flight, may be right that it would be better for Her Majesty’s Treasury to do it rather than the Bank of England, but that is quite a small point compared with the thrust of the amendment, which is that this matter needs to be reviewed.

This issue raises quite important questions, as I saw when I helped to regulate actuaries. Many of the rules were written down in Europe through CEIOPS, as it was called at the time. We did not have direct access to CEIOPS; we had to go to the FSA, which was our representative on it, and that made the negotiation much more difficult. Therefore, this is not an easy matter and it will be very important to review how the international co-ordination committee is coping, how effective our input is, whether what we are doing really is sustaining and enhancing the single financial market and whether we are properly, adequately and well represented on it.

The noble Lord, Lord Neill of Bladen, may well be right that a regular review is needed. We proposed a one-off review because our domestic architecture is new and it may need some adjustment. However, the Minister is right: it is an EU moving target, so it may well be that a review will be required more often.

I hear what the Minister says about the NAO looking at this and the possibility of reviews by the Treasury Select Committee. However, it seems to me that the commitment to produce the evidence should come from the Treasury rather than the Bank of England, and any of those bodies could then take a view on the information. In particular, it needs to be automatically brought before Parliament so that this House and the other place are able to opine on whether adjustments should be made.

I am very happy to withdraw the amendment at this stage but I hope that we will be able to come back to this matter to look for an appropriate way of building in a review. I beg leave to withdraw the amendment.

Amendment 96A withdrawn.

Clause 4 agreed.

Schedule 2 : Further amendments relating to Bank of England

Amendments 97 and 98

Moved by Lord Sassoon

97: Schedule 2, page 174, line 3, at end insert—

“(8A) After paragraph 12 insert—

10 July 2012 : Column 1083

“Publication of record of meetings

12A (1) The Bank must publish a record of each meeting of the court—

(a) before the end of the period of 6 weeks beginning with the day of the meeting, or

(b) if no meeting of the court is subsequently held during that period, before the end of the period of 2 weeks beginning with the day of the next meeting.

(2) The record must specify any decisions taken at the meeting (including decisions to take no action) and must set out, in relation to each decision, a summary of the court’s deliberations.

(3) Sub-paragraphs (1) and (2) do not require the publication of information whose publication within the time required by sub-paragraph (1) would in the opinion of the court be against the public interest.

(4) Publication under this section is to be in such manner as the Bank thinks fit.””

98: Schedule 2, page 174, line 3, at end insert—

“(8B) In paragraph 14(1), for “it” substitute “the Oversight Committee”.”

Amendments 97 and 98 agreed.

Amendment 98A

Moved by Baroness Kramer

98A: Schedule 2, page 174, line 3, at end insert—

“( ) In paragraph 13, for sub-paragraph (3)(a) substitute—

“(a) a director of the Bank to chair its meetings (“the chair of the Court”), and”.”

Baroness Kramer: My Lords, I think that I can be very brief in moving this amendment. Its purpose is to close a gap between the Government’s clearly stated intent and the language in the Bill. I am sympathetic to those who have drafted the language, because the complexities of the Bank of England Act 1998, as amended by the Banking Act 2009, make it quite hard to follow through a single train of thought, and I suspect that that is what has caused a trip-up in the language in this instance.

On the first day in Committee on this Bill on 26 June, the Minister was absolutely clear that the oversight committee—whose existence and procedures he put forward and the Committee accepted—should be made up of non-executive members of the Court of the Bank of England, and that its chair should also be a non-executive member. However, the language in the Bill does not allow that train of thought to follow through. It would permit the Chancellor to appoint the governor or deputy governor to the role of chair of the court and hence see that individual put into the position of chair of the oversight committee. I shall not bore the Committee at this point by trying to track through that but I assure noble Lords that that is the consequence of the current language. I simply say to the Government that I hope that someone can go away and fix this more elegantly than I have been able to do and, on that basis, I shall not be pressing the amendment.

Lord Sassoon: My Lords, I do not know whether anyone else wants to come in on this but it may be helpful if I speak now. This amendment in the name of my noble friend Lady Kramer returns us, as she says, to the territory of not only Bank of England governance

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but nomenclature, which we discussed at some length two weeks ago. As my noble friend says, one of the changes made in the Banking Act 2009 was intended to amend the Bank of England Act to require the court to be chaired by a director, which, as we established two weeks ago, means a non-executive member—again, as my noble friend pointed out. However, she has gone further because it is only my noble friend, with her razor-sharp eye, who has noticed that the relevant provision inserted into the Bank of England Act 1998, while allowing the court to be chaired by a director, does not require that it be so. That is clearly not correct.

Therefore, although I cannot accept the amendment as drafted because it does not cover all the necessary ground to give full effect to this change, I assure my noble friend and the Committee that we will go away and draft the necessary changes. I thank my noble friend for bringing this to the Committee’s attention.

More generally, I am aware from the discussion that we had two weeks ago that there are some irregularities in the terminology in the Bank of England Act which I certainly had difficulties with and I think that other Members of the Committee did too. A prime example of this is that the so-called Court of Directors includes the executive members of the court who are not, and cannot be, directors. This is plainly absurd. To say that this is all justified because the Bank has been in existence for 300 years so we just have to live with it is not the right approach. As I think I wrote following the first day in Committee, I will consider further whether any other changes might be made to the 1998 Act to clarify these terms, making them more consistent with current usage. We cannot proof the legislation against further changes over 300 years but we can at least try to update a few things.

With thanks to my noble friend, I ask her to withdraw her amendment, as she has already indicated she will do.

Baroness Kramer: I beg leave to withdraw the amendment.

Amendment 98A withdrawn.

Amendments 99 to 101

Moved by Lord Sassoon

99: Schedule 2, page 174, line 4, leave out “No provision of this paragraph” and insert “Nothing in sub-paragraphs (2) to (6)”

100: Schedule 2, page 174, leave out lines 34 to 38 and insert—

“(b) for sub-paragraph (2) substitute—

“(2) The terms and conditions on which a person holds office as a member of the Committee appointed under section 13(2)(c) are to be such as the Oversight Committee may determine.”, and

(c) omit sub-paragraph (3).”

101: Schedule 2, page 174, line 42, at end insert—

“(7A) In paragraph 9—

(a) in sub-paragraph (1)—

(i) for “Bank” substitute “Oversight Committee”, and

(ii) in paragraph (a), for “the Committee’s meetings” and “the Committee’s consent” substitute “meetings of the Monetary Policy Committee” and “that Committee’s consent”, and

(b) omit sub-paragraph (2).”

Amendments 99 to 101 agreed.

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Amendment 101ZA

Moved by Lord Sassoon

101ZA: Schedule 2, page 175, line 13, after “Bank’s” insert “functions under the Financial Services and Markets Act 2000, of its other”

7 pm

Lord Sassoon: My Lords, this is a large group of minor and technical government amendments that I hope we can dispatch very quickly. The amendments address a number of technical issues such as updating the Bill to accommodate changes in European law made since the Bill was introduced, amending some rogue references to the FSA in FiSMA, making consequential amendments to enactments that have been passed since the Bill was introduced and making other technical improvements. I am happy to discuss them, or write in more detail, if any Member of the Committee would like to discuss them. I beg to move.

Baroness Hayter of Kentish Town: I will just say that I am very happy to accept the assurances from the Minister that, first, these are technical amendments and, secondly, that he would be very brief in what he said today. I have tried to see whether I could speak for longer than he did. I have not been through every amendment but did look at a sample. Each one I sampled was, indeed, technical and minor.

Amendment 101ZA agreed.

Schedule 2, as amended, agreed.

Clause 5 : The new Regulators

Amendments 101ZB and 101ZC

Moved by Lord Sassoon

101ZB: Clause 5, page 15, line 25, leave out “or”

101ZC: Clause 5, page 15, line 26, at end insert “or

(d) a qualifying EU provision that is specified, or of a description specified, for the purposes of this subsection by the Treasury by order.”

Amendments 101ZB and 101ZC agreed.

Amendment 101ZD

Moved by Baroness Noakes

101ZD: Clause 5, page 15, leave out line 31

Baroness Noakes: My Lords, I am standing in again for the noble Lord, Lord McFall, in respect of the amendments that are in our joint names. In moving Amendment 101ZD, I shall speak also to Amendments 101B and 118B, which continue on from the concerns of the Treasury Select Committee in another place as expressed in its first report in this Session.

These amendments concern the FCA’s strategic objective, which was the subject of debate on our first day in Committee when, unfortunately, I was not able to be here. The effect of the amendments is to remove

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the strategic objective set out for the FCA and leave it with its so-called “operational objectives”. The FCA would then have simply objectives.

The FCA’s objectives have been amended quite considerably since they first saw the light of day in a draft nearly two years ago, but it seems to have been a case of two steps forward and one step back. The Treasury Select Committee believes that the Government should aim at simplicity and clarity when framing statutory objectives and that the existence of a separate strategic objective adds confusion. When the Government responded to the Treasury Select Committee’s earlier recommendation in this regard, they said both that the strategic objective,

“has a valuable role in supplementing the operational objectives”,

and that,

“it operates as a check and balance on the operational objectives”.

As the Treasury Select Committee has noted, that is rather contradictory and the Government appear confused. It is difficult to disagree with that conclusion.

The Government also said that the strategic objective acted as a mission statement for the FCA. The Minister repeated that two weeks ago when he responded to the group of amendments led by Amendment 42. The Treasury Select Committee’s view, as set out in paragraph 4 of the 28th report of the 2010-12 Session, is that:

“A ‘mission statement’ has no place in primary legislation. At best”,


“adds nothing. It may be harmful. Multiple tiers of objective risk adding to complexity and diffusing the focus within the FCA”.

Under new Section 1A, the FCA has not only this mission statement-cum-strategic objective but also has three operational objectives, a requirement to promote competition in the interests of consumers, two “have regards” and four functions. As the Treasury Select Committee has pointed out, this really is not clear and simple. I might have understood why the Government had used this contorted formulation if it had been repeated for the PRA or the FPC. However, the Bill does not take this multiple-levels-of-objective route for those bodies, nor was it the route taken for the FSA under FiSMA. I regard it as an unusual formulation for bodies created by statute.

The Minister said last week that there were precedents for this framework but he did not cite them. Perhaps he will do so today so that we can judge whether they are good precedents. The noble Lord also did not explain why this formula is good for the FCA but not for the other bodies in the new financial stability universe. Again, perhaps he will do so today.

When the Minister replies, can he also explain what,

“so far as is reasonably possible”,

means in the opening words to new Section 1B(1)? Surely, the FCA should always act in accordance with its objectives, strategic or otherwise. What do the words mean? How could the FCA possibly act in a way that was not compatible with its objectives? I do not have a specific amendment on this point for Committee and the drafting of the Bill does not permit any sensible stand part debates, but I hope that the Minister can explain this when he responds. I beg to move.

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Lord Eatwell: My Lords, I have an amendment in this group of a slightly different variety but I have enormous sympathy with what the noble Baroness, Lady Noakes, has said about the strategic objective. When I first read the Bill, my note in the margin said “vacuous”. This notion that “relevant markets … function well” really is gamma minus stuff. It is pathetic and does not mean anything at all. One immediately asks for a definition of “function well”. We find that the objectives for competition, integrity and consumer protection are all defined, but there is no definition of what “function well” might mean.

Moreover, not only is this expression vacuous but it has no separate life. Whenever the FCA’s objectives are referred to in the Bill, it is the other objectives—the consumer objective, the integrity objective, the competition objective and the operational objectives—that are referred to. This strategic objective only has coherent life in other references in the Bill in so far as it lives through these more concrete proposals. If it is to be left as it is, it adds nothing other than spurious solidity and real complexity to the structure of objectives for the FCA. I have tried to give it some life. In our Amendment 101D in this group, my noble friend Lady Hayter and I have added the phrase,

“in the best interests of society as a whole”,

to the term “functions well”. That phrase captures the concept of the social optimum as defined in classical welfare economics. One does not want the technicalities of welfare economics within the definition of the Bill, but serving the best interests of society as a whole is the sort of expression that is used by Professor Amartya Sen in his discussions of evaluations of philosophical propositions relative to the social good. By adding,

“in the best interests of society as a whole”,

I would hope to provide this previously vacuous statement with some structure that could be referred to as a mission statement. Although I take on board the objections of the noble Baroness, Lady Noakes, to mission statements, I must say that I tend to agree with them. A mission statement could provide some framework within which the other operational objectives could be seen. For example, on the competition objective, one would look at the objective of stimulating competition in terms of the best interests of society as a whole. There may be circumstances in which the stimulation of competition is not in the best interests of society as a whole perhaps because it causes some distortion to the operation of the market, but, more generally, we would expect the encouragement of competition to act in the best interests of society as a whole.

We have a simple binary choice. Either we must give this vacuous statement some substance or we should remove it from the Bill, as proposed by the noble Baroness, Lady Noakes. What we should not do is leave this statement, which can do no good other than cause a bit of innocent amusement about how silly some clauses in the Bill might be.

Lord Sassoon: My Lords, I was not quick in getting to my feet because I am not sure whether Amendment 101D was moved, taken separately, or where we are.

Lord Eatwell: I have just spoken to the amendment, which is in the group.

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Lord Sassoon: I wanted to be clear whether that amendment had been spoken to and on whether we should have something with substance in the provision or take it out all together.

It will not surprise the Committee if I say at the outset that, unlike my previous responses when I have been very accommodating or have tidied things up, I cannot support this group of amendments to delete the FCA’s strategic objective. The Government recognise the importance of getting the objectives of the FCA right. As my noble friend Lady Noakes said, there has now been a considerable period in which we have made substantial changes on the objective question since the first proposal, so we are, and have been, listening. It is perhaps worth going over where the suggestions for improvement have come from.

The Government took note of calls from the Independent Commission on Banking and others on the objective proposed in the draft Bill that,

“protecting and enhancing confidence in the UK’s financial system”,

needed to be changed. The Bill now provides that the FCA’s strategic objective, as has been noted, is,

“ensuring that the relevant markets function well”.

That change has been broadly welcomed, by the Independent Commission on Banking, and by consumer and industry stakeholders alike. Even the Treasury Committee considers that the revised drafting is,

“a significant improvement on the proposal in the draft Bill”,

as in its report of 31 May this year.

Let me attempt to reprise the argument, without delving into classical welfare economics and areas that are a bit beyond me. The Treasury Committee may assert that a mission statement has no place in primary legislation but the Government believe that it is right to enshrine something as important as the FCA’s overall purpose in primary legislation, whether or not we call it a mission statement. It is the FCA’s overall purpose.

7.15 pm

I do not agree with my noble friend’s suggestion that this creates an unduly complex or maybe contradictory set of objectives. The three operational objectives of consumer protection, effective competition and market integrity are matters that the FCA must seek to advance. In doing so, it must bear it in mind that ultimately it should be done in a way that ensures that markets function well rather than being damaged or undermined. We believe that that is worth setting out clearly. Why is that? The FCA will have a diverse number of functions, roles and responsibilities, ranging from protecting the potentially inexperienced consumer in retail markets to policing wholesale markets to spot an act of misconduct, such as the one that has come to light over the manipulation of LIBOR. It will take on the functions of the UK listing authority and will also have a strong role in promoting effective competition. These are very different jobs with superficially different objectives and goals but we want the strategic objective to act as an overarching goal so that anybody working in the FCA in future, when asked what the ultimate purpose of their work is, can say very clearly that it is to ensure that markets function well.

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Lord Eatwell: Will the noble Lord indulge me? What does function well mean? “Function well” for whom? Does it mean functioning well for a consumer? Does it mean functioning well for a trader? Does it mean functioning well in terms of working smoothly without any hiccups but not allocating resources terribly well? Does it mean allocating resources efficiently? All those things come under the term “function well” but contradict one another. What does it mean, and for whom?

Lord Sassoon: My Lords, in giving those four examples the noble Lord knows very well that the first and fourth of his examples very much fit the bill, and the second and third very much do not. This is all about markets that work essentially to assist the end user of those markets. It has nothing within it to do with working well for a trader or something superficial that all looks smooth on the surface but does not provide the end result of liquidity, price discovery or choice for consumers. The noble Lord knows very well that it would be impossible within the compass of such a piece of legislation to try to define the well working of a market, but the Bill spells out the main ways in which the FCA will seek to promote the well functioning of markets—those operational objectives that I touched on.

Those operational objectives give clues and pointers to the FCA. It will be for the FCA’s board to consider if and when it needs to consider these questions of well functioning markets. I believe that it will be well equipped with its expertise to consider market by market what well functioning means. I see absolutely no problem with this. However, there needs to be something that brings together the FCA’s very diverse and individual functions, roles and responsibilities.

That relates to one of the questions asked by my noble friend Lady Noakes, who asked why the FPC and the PRA do not have strategic objectives. It is precisely because they have much more narrowly focused objectives that they do not need the overall strategic objectives that the FCA needs because of the breadth of its responsibilities. I agree with my noble friend and others that we have not provided this strategic objective for the FCA on some whim. We have not put it in for the FPC and the PRA because it is not necessary. It is precisely because of the diversity and the potentially conflicting nature of the objectives of the other bodies that we believe it is right to have it in the case of the FCA.

By the same logic, the strategic objective will act as a check and balance. If, say, the FCA seeks to advance its consumer protection objective by placing detailed requirements on firms, we want it always to ask itself whether what it is doing contributes to the ultimate end goal of ensuring that markets function well. What functioning well means will be determined with some commonality across all markets, but some of it will be market-specific, particularly depending on whether it is a consumer or a wholesale market. This is no afterthought. It reflects the Government’s desire to enshrine regulation which seeks to ensure that markets can do their job.

My noble friend also asked a question about how the FCA could act in a way that was not compatible with its objectives. There are examples which we need

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to take into account, one of which might be a short-selling ban which is, arguably, in the interests of end-consumers but is a measure which is not normally thought to be compatible with a well functioning market.

Baroness Noakes: I thank my noble friend for that example, in which a short-selling ban could be introduced because it was compatible with one of the operational objectives yet was incompatible with the strategic objective. What, then, is the point of having the strategic objective sitting in this Bill?

Lord Sassoon: My Lords, I have explained why a strategic objective is necessary in order to tie together the very disparate responsibilities of the FCA. Nevertheless, in answer to my noble friend’s question about the “in as far as reasonably possible” carve-out, I give her an example of why there will be circumstances where those words are necessary. It is entirely compatible with the need for the general, overarching statement to admit and allow for the possibility that there will occasionally be instances of conflict with that overarching objective. We have done that in the Bill and this does not in any way invalidate it.

I turn briefly to Amendment 101D in the name of the noble Lord, Lord Eatwell. This seeks to extend the FCA’s strategic objective to ensure that markets function in the best interests of society as a whole. Consistent with what I have already said about the well functioning of markets, I support the sentiment underpinning the amendment. We want markets which serve the wider economy, underpin growth and contribute to a more prosperous society as a whole. We are not talking about markets that are working exclusively for those who are operating in them. This sentiment is very much part of what drives this whole programme of financial services reform.

Having said that, I am conscious about the amendment for two reasons. First, it is not the FCA’s job to decide what is ultimately in the best interests of society. The FCA is being set up as a focused, tough and proactive conduct-of-business regulator. If its new style of conduct regulation contributes to ensuring that the financial sector serves the wider economy, that is good and what we want to see. However, I suggest that deciding what benefits society as a whole cannot be the role of a financial services regulator.

Secondly, and linked to that, is an important question of expectations. The FCA will have some important powers but it is questionable whether we could argue that it has all the powers to deliver a market that benefits all of society all of the time.

There are difficult judgments to be made here, not least because there will always be trade-offs between policy choices. It is my strong belief that these societal choices are, ultimately, for the governor and not the regulator. I cannot, therefore, support Amendment 101D. I may be proved wrong in just a moment, but I sense that I have not completely won over my noble friend—no, I will not be proved wrong. However, she is always very reasonable about these things and she recognises the very considerable way that the Government have moved on the FCA’s strategic objective. I ask her to withdraw her amendment.

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Lord Eatwell: Before the Minister sits down, did I hear him correctly when he said that the choice of the benefit to society as a whole was not a matter for the regulator but a matter for the governor? Or did he say Government? I did not quite hear him properly.

Lord Sassoon: I said the Government. I hope he would agree that it was for the Government, not the governor. Good.

Baroness Noakes: My Lords, I am glad that my noble friend has cleared that up because I heard him say “governor” too. Perhaps there was a small slip, but Hansard will doubtless make sure that what he intended to say is recorded as having been said.

I thank the noble Lord, Lord Eatwell, for his support for my amendments and I agree with him that the current drafting is not much more than a vacuous statement. The Minister said that this is going to be an overarching goal, that it is going to be a check and balance but the first example he gave me, of short-selling, means that it can be ignored. This seems to be some form of window dressing. It is trying to appear that the Government agree with as many people as possible. It probably has no meaning whatever and it is therefore possibly something that we do not need to get overexcited about. It certainly does not add to clarity in the Bill. I shall think further on what my noble friend has said before we return to this on Report. For now, I beg leave to withdraw the amendment.

Amendment 101ZD withdrawn.

House resumed. Committee to begin again not before 8.30 pm.

Alcohol Strategy: Role of Drinks Industry

Question for Short Debate

7.30 pm

Asked by Baroness Coussins

To ask Her Majesty’s Government what they consider to be the role of the drinks industry in helping to prevent alcohol misuse and anti-social behaviour, and in promoting responsible drinking, in line with the Government’s alcohol strategy.

Baroness Coussins: My Lords, I begin by declaring my interests. I am a former chief executive of the Portman Group and the Drinkaware Trust, and a former member of the Alcohol Education and Research Council and the Advertising Standards Authority. Currently I am a paid consultant to two drinks producers, Brown-Forman and Heineken, but I emphasise that neither company has asked or suggested that I table this debate, nor have they had any discussions with me about it.

Despite these connections, I would be the first to say that when it comes to irresponsible behaviour the industry has certainly not been blameless. I joined the Portman Group in 1996 at the time alcopops burst

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onto the market and I saw some dreadful examples of products and marketing campaigns that were inexcusable and that would now breach every rule in the book of the codes of practice that were subsequently developed and which apply today. However, I believe the industry has come a long way and is now genuine in its intentions to promote responsible drinking and prevent misuse. I also believe the industry is effective in its actions and, indeed, has been a helpful model to other sectors.

Promoting responsible drinking and being a successful, profit-making business are not conflicting, mutually exclusive objectives. I am pleased that the latest alcohol strategy and the responsibility deal acknowledge the industry as a key partner and press exactly the right buttons to stimulate innovation and link the industry ever more closely into the community partnerships which are, frankly, the only way in which we will ever make a lasting impact on the drinking culture in this country.

The situation is not altogether negative. Latest figures from the Office for National Statistics show that the vast majority of people—78%—are drinking within government guidelines. Per capita consumption fell from 9.5 to 8.3 litres between 2004 and 2011, putting the UK a fraction above the European average and lower than France, Spain and Austria. According to the ONS, young people’s binge-drinking is at its lowest ever recorded level, and fewer children aged 11 to 15 are trying alcohol than ever before. Drinking at harmful levels is falling and drink/drive fatalities have fallen by 85% since 1979.

Yet there is still a significant minority who do drink to excess and cost the UK economy a staggering £21 billion every year. Alcohol-related hospital admissions are up and alcohol-related deaths have doubled since the early 1990s. Alcohol-related violent crime has fallen significantly but still accounts for nearly 1 million incidents every year. Individuals, families, communities and businesses are being damaged.

To tackle these problems, the Government are right to treat the industry as a key stakeholder who can have a significant positive impact. This is partly about demanding strict standards of commercial behaviour which prohibit the industry from doing things such as targeting its marketing to under 18s and linking alcohol with sexual success, and a host of other strict and detailed rules which are policed by the Portman Group, the ASA and Ofcom.

However, it is also about what the industry can do proactively. For example, 61 companies fund the Drinkaware Trust, now a charity under independent governance with trustees from many sectors, including health professionals. Almost all ads for alcoholic drinks now carry the Drinkaware website address and that attracts 300,000 people a month. In-kind media support from industry totals £26.5 million, significantly exceeding the Government’s target of £15 million. This also compares positively with the Government’s spend on alcohol campaigns of only £4.65 million for the past two years. Perhaps the Minister will tell us whether this is likely to go up.

However, it is the Responsibility Deal that demonstrates the most imaginative and transformative potential of corporate responsibility. Nowhere else in Europe has achieved anything like it—and all without red tape.

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It has four key commitments. First, to take 1 billion units of alcohol out of the market by 2015 by reformulating existing brands to contain less alcohol and by innovating to bring new, lower-strength brands on to the market, helping more people to drink within the guidelines by providing a wider choice of lower alcohol products. This is significant because it shapes the drive to reduce consumption in a consumer friendly way: the issue becomes one of drinks, not of alcohol.

Secondly, the industry will help consumers understand units better and it has pledged that by December 2013 over 80% of the products on the shelves will carry clear unit content, the Chief Medical Officer’s guidelines and a warning about drinking while pregnant. It is well on track to fulfil this commitment, with over 60% of labels and containers already complying with 18 months still to go. Mandatory labelling would almost certainly need EU legislation and take years to achieve, so the UK industry is leading the way by doing this voluntarily.

The third pledge is to provide more support for communities to develop local schemes such as Best Bar None, Purple Flag, community alcohol partnerships and business improvement districts. This is vital because alcohol harms in the UK vary hugely across different regions. For example, data from the North-West Regional Health Authority show rates of alcohol specific mortality and liver disease in Blackpool at nearly three times the national average; hospital admissions in Liverpool, nearly 2.5 times the national average; and binge drinking in north Tyneside, 1.5 times the national average.

One of the reasons these community schemes work is because they offer a win-win outcome. For example, in Durham there has been a 75% increase in trade in pubs which run the Best Bar None scheme because it makes the pub a safer and more attractive place to go. At the same time, figures suggest an 87% decrease in violent crime.

Finally, under the responsibility deal, producers have committed continued support to Drinkaware, not only by paying their dues and sitting back but by using their brand marketing to promote the charity’s campaigns and government guidelines. During the last FA Cup competition, for example, more than 50 million football fans saw Drinkaware branding through a beer sponsorship which featured Drinkaware on the stadium perimeter. Every sixth ad shown at the matches carried the Drinkaware message. We know that it had a positive effect because during the two semi-final matches in April there was a 30% increase in direct traffic to the Drinkaware home page.

Being a partner in the alcohol strategy of course means, by definition, that there are other groups involved too. The industry should not be the scapegoats for all the blame when something goes wrong. Pubs often get it in the neck for offering so-called 24 hour drinking when in fact only a minute percentage of the UK’s licensed premises have a 24-hour licence, and most of those are in airports or hotels. The fact is that we have seen a reduction in consumption since we have had a relaxation in the licensing regime.

Producers often get it in the neck, too, for their advertising but, as I said earlier, there are stringent restrictions on the content, placement and timing of

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alcohol ads and the new strategy has given a clear mandate to the ASA and the Portman Group to review the rules further.

Supermarkets often get it in the neck for selling alcohol too cheaply—I find some of their discounting practices very worrying—but even price is not a straightforward issue. There is certainly a proven link between price and consumption but I am not so sure that there is a proven link between price and harm. After all, alcohol is even cheaper in France and yet alcohol harms there are falling. Our real target should be the drinking culture and harmful patterns of drinking, whatever the price of the stuff.

Other partners include parents, and one might ask why, according to Drinkaware, most parents do not plan to talk to their children about alcohol until well past the age when they are likely to have had their first drink.

Law enforcement, too, has a role. One might ask why you can count on one hand the number of prosecutions of licensees for selling drink to customers who are already drunk, when this has been against the law for years. Voluntary initiatives on the part of the industry should be a complement to, and not a substitute for, proper law enforcement. I would be grateful for the Minister’s comments on that point.

The drinks industry will always and rightly come under close scrutiny and deserve even tighter regulation if it falls short of the standards which it has set for itself and which others expect of it. It must make sense to harness business skills, marketing expertise and product innovation to the effort to reduce alcohol harm, where, self-evidently, the traditional health education approach alone has failed.

7.40 pm

Lord Brooke of Alverthorpe: My Lords, I am grateful to the noble Baroness, Lady Coussins, for promoting the debate this evening. I commence, too, by declaring an interest: as trustee of Action on Addiction and several other charities which are in the business of trying to help people who have suffered the consequences of alcohol abuse.

I shall not go through the usual litany of problems which arise from the continuing massive overconsumption of alcohol in this country and its widespread abuse. It is true that the level of drinking has declined marginally in recent times, but, compared to 15 or 20 years ago, it is still extraordinarily high and the price of alcohol in this country is still quite low. As the noble Baroness concedes, 1.2 million alcohol-related hospital admissions were recorded in 2010-11 alone. The level of binge-drinking among young people, particularly among 15 and 16 year-olds, is still very high compared with what we find in other European countries. My first question to the Minister is: when will the Government not only review advertising targeted particularly at the young but ask the drinks industry also to stop doing it, especially through increasing use of social media? Social media are heavily populated by the young these days and that is an area where the drinks industry feels that it can make the biggest impact. If we are truly to bring about a change in culture, it should come from the young, from targeting them positively and from not encouraging them to drink.

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I congratulate the Government on the steps that they have taken to try to tackle the problem. The noble Baroness did not mention the Government’s announcement to tackle the issue of minimum pricing. I congratulate the Government on the bold steps that they have taken there. I know that they are consulting at the moment, but I hope that they will stick to their guns and not be persuaded by those who will come with counter-arguments to shift their policy.

I thank the Government for the changes which they have made to local licensing laws, on which we had some extensive debates last year. One of the factors which many of us believe lead to excessive drinking is our easy access to alcohol these days compared with 20 or 30 years ago. While the Government are working through the changes in licensing arrangements, I hope that they will continue to keep them under close review. I hope, too, that they will review the possibility of a change being made to the criteria used in granting licences locally to take into account the effects on public health of excessive drinking in particular areas and locations. They should use localism to benefit people who are suffering from some of the adverse consequences of abusive drinking in their areas.

It would be churlish on my part if I did not concede that some substantial changes have been made by the drinks industry in recent years. Drinkaware is making good headway in certain areas, but its communication with the wider public is in many respects fairly limited. The number of people who visit its website is fairly small by comparison with the millions of people communicated with, for example, by wide-scale Carlsberg adverts shown during preparations for the Olympics.

It is important that we do not disregard the position which the BMA has taken on Drinkaware and the joint initiative taken by the Government in the form of the Responsibility Deal. It felt inclined in the light of the way that conversations were going to withdraw from that. I hope that the Minister will say whether the Government are taking any steps to try to bring the medical profession back into partnership. The report produced 12 months ago by this House’s Science and Technology Select Committee on behaviour change raised very serious questions about the extent to which the Responsibility Deal could work.

I recognise that I am running out of time. I wanted to press the Minister on why there has been no movement on changing drink labelling to give coverage of the calorie levels and contents of alcoholic drinks. I have done a blog today, so if the Minister is kind enough, he can go away afterwards and read it, because the Government need to take action. Regardless of what is happening in Europe, we could move on that front. That would be a way of communicating on a mass scale with many drinkers.

7.46 pm

Lord Clement-Jones: My Lords, I congratulate the noble Baroness, Lady Coussins, both on securing this short debate and on her outstanding work in this area. I believe that this is the first debate that we have had on this subject since the Government published their alcohol strategy in March.

I declare a very historic interest as a former employee of Grand Metropolitan plc, as it then was, in the

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1980s, but, as a result, I am a firm believer in government and local government working with the industry—both the on and off-trade and the manufacturers—in implementing an alcohol strategy.

It partly depends on having clear common understanding of the facts, but these are sometimes not straightforward—the noble Baroness set out the facts very clearly. It seems that the prevalence of binge-drinking has fallen over time, but there are many conflicting statistics and it is not always easy to draw conclusions. Nevertheless, the key factor for me is that, as Drinkaware says, binge-drinking remains a social norm. We are fighting a huge cultural battle. Many would say that binge-drinking—the inability to take in alcohol in a civilised way—has sadly been an English cultural characteristic for hundreds of years. Depressingly, it may be spreading more widely abroad.

This is a culture we have to change. Some say that social responsibility initiatives and education are not enough. They are probably right on this, but they often go further and say that it is wrong that industry should be involved in public health initiatives. This is too purist a line. I believe strongly in the value of the Responsibility Deal launched in March 2011, as agreed between the Department of Health and the industry, in a number of areas which, again, the noble Baroness set out. They include: alcohol labelling; awareness of alcohol units in the on and off-trade; tackling underage alcohol sales; support for Drinkaware; advertising and marketing of alcohol; and community action to tackle alcohol harm.

Under this umbrella and otherwise, there are a great many community schemes where the industry is working with local government to minimise alcohol abuse and the problems flowing from it. They include Best Bar None, Purple Flag; community alcohol partnerships, of which there are now some 36; Pubwatch; and Challenge 25, designed to tackle underage drinking —to name but a few.

There is clearly no single magic bullet, as all policy makers recognise, but we need to keep trying different approaches. I broadly support the Government's alcohol strategy, published in March this year. The Minister may be aware that I was sceptical about Government’s so-called rebalancing approach to the licensing regime in the Police Reform and Social Responsibility Act, in particular as regards the evidential test being changed both for the new EMROs and for licence conditions and the removal of the vicinity test, not to mention the blanket nature of the late-night levy. Time will tell, but there are many other areas of government strategy to support.

In particular, there is the question of minimum alcohol pricing. A Home Office paper was published in March 2011 which, albeit tentatively, suggests that there is enough evidence to say that the minimum pricing of units of alcohol would have an impact on behaviour. Of course, that is not popular with the industry, but, along with many who run pubs and clubs, I believe that one of the key components of binge drinking is preloading—drinking cheap alcohol purchased from supermarkets and off-licences before going out. The Government paper says that there is evidence of a link between alcohol pricing and violence and that pricing could have an impact on young people and binge-drinking.

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What progress is being made on the consultation? What concrete proposals are being put forward? Are the pricing proposals that the cost price should be no less than the cost price of a unit, or a figure, such as 40p or 50p? Those are important issues and I hope that firm proposals are being prepared.

I am not yet convinced—I think that the Government have the same approach—that a more draconian approach to advertising is in order. We have the guidelines laid down by the ASA and the marketing code of practice of the Portman Group, designed principally to prevent alcohol advertising being directed at children. As a result of the latter, more than 80 irresponsible products have been banned in co-operation with retailers. We should have clear evidence of abuse before plunging into further regulation.

All of us would acknowledge that this is an important industry. Let us not demonise it but work with it.

7.51 pm

Lord Bilimoria: My Lords, I declare my interest as the founder and chairman of Cobra Beer and the chairman of two joint ventures with Molson Coors: the Cobra Beer partnership here in the UK and Molson Coors Cobra in India.

Sadly, I have seen the terrible effects of “country liquor”, which is still widely consumed in India. Country liquor is usually about 50% alcohol by volume, if not more. It causes huge health and social problems, destroying families and communities.

Prohibition has never worked anywhere in the world. If people are going to drink, I would prefer that they drink beer, a drink with far lower ABV than country liquor, even if that means drinking the higher ABV beers commonly found in India. I hope that one day country liquor, a scourge in India, will be eradicated and that most Indians who choose to drink will choose to buy a beer as a lifestyle choice and for refreshment.

I thank the noble Baroness, Lady Coussins, who is a real expert in this field, for initiating the debate in this crucial area. Not to be ignored in this debate is the fact that, for us in the UK, VAT and duties have a strong impact on what British consumers choose to drink. Unfortunately, the Treasury has not kept up with an evolving drinks market. Over the past 30 years, spirit consumption has been flat, but beer consumption has fallen 1% year on year, while during the same period cider and wine consumption have grown by 5% year on year. Despite that, cider and wine, which are stronger drinks, now account for 41% of all alcohol consumed but only 37% of government alcohol revenues.

If the duty framework is not adapted to the current market environment, it will have serious negative consequences, including people switching to stronger drinks. For example, the average ABV of cider is more than 5%, while the average ABV of beer is 20% lower at 4%. It is a lose-lose situation for the Government, with people drinking stronger products and the Government getting less revenue. Does the Minister agree that a balanced duty framework will increase revenue and should be part of a co-ordinated wider government policy to address alcohol harm by reducing units consumed?

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In this country, as the noble Baroness, Lady Coussins, outlined, the Portman Group has done tremendous work in promoting responsible drinking. The truth is that the vast majority of adults in the UK drink socially, and 78% of them keep within the government-advertised consumption limits. Social patterns around drinking are improving. The drinks industry is promoting responsible drinking, supporting a number of programmes and working with local and national government bodies that really make a difference in tackling the various facets of alcohol issues.

Molson Coors supports two of the best alcohol responsibility programmes for its customers. First, there is Best Bar None, which has been referred to, for the on-trade. That programme celebrates the running of responsible venues, including how alcohol is marketed responsibly. It has been running for 10 years and there are more than 100 BBN programmes across the country, with more than 3,000 venues involved, so there is still scope to expand enormously. It has been very effective. For example, Doncaster’s BBN scheme reported a 36% drop in alcohol-related crime with 70% fewer police call-ups. Not only that, the night-time economy for towns and cities benefits. As the noble Baroness, Lady Coussins, said, Durham licensees reported a 75% cumulative increase in trade. The night-time economy is worth £66 billion and employs 1.3 million people. Programmes such as Best Bar None help to ensure that the industry is sustainable in the long term.

Secondly, there are community alcohol partnerships for the off-trade. That is about tackling under-18 drinking in local communities, with supermarkets and licensees getting together with local NGOs and working to engage and support local areas. It has been highly successful and there are great examples of cross-collaboration working. Molson Coors funds both those schemes alongside other drinks companies.

The Government can and must do everything that they can to encourage the development and take-up of those initiatives. Will the Minister assure us that the Government will support them?

Other successful programmes are Street Partners and Street Angels. They involve church groups getting together and being good Samaritans, giving up their time on late nights and early mornings to ensure that people on nights out are safe and helping them avoid getting into bad situations. Areas have reported an up to 60% reduction in crime because of those schemes.

That is why, when the Prime Minister speaks of the big society, I think of those people working late at night or early into the morning, engaging with their local communities. They are true heroes. As the noble Lord, Lord Clement-Jones, said, there are other schemes, such as PubWatch and Purple Flag. Can the Government help those schemes to work more closely together?

I conclude that the common theme of those schemes is businesses and communities coming together on the ground to resolve local issues. That is where the Government, despite their cuts, must not be penny wise and pound foolish. Can the Minister confirm that the Government must find the funds to work with the drinks industry to support those schemes, which so greatly improve our communities in terms of the health and general well-being of their citizens?

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7.56 pm

Lord Roberts of Llandudno: My Lords, first, I welcome the opportunity that the noble Baroness, Lady Coussins, gives us to discuss this problem. The question of drink is one that you attack with great reluctance or a flak jacket—one of the two—because that is not popular. We might be called fuddy-duddies, or I might be called a wild Welsh Wesleyan Methodist teetotaller. I am, and I make no apology for it.

How seriously do we treat this issue? Today, the Chief Medical Officer for Wales, Doctor Jewell, issued his report. He states that across Wales, life expectancy has been increasing for the past two decades. For men, it is now 77.6 years; for women, it is 81.8 years; but in the most deprived areas, deaths from alcohol are three and a half times higher for men and twice as high for women. For instance, we can contrast the inner-city Grangetown area in Cardiff with Dinas Powys in the Vale of Glamorgan. In Grangetown, the life expectancy for men is 71.5 years. Four miles away in Dinas Powys, it is 81.8 years. There is a 10-year difference according to the area and culture in which you live.

In a previous report, Russell Davies said that the real opiate of the Welsh was alcohol. The hopelessness of destitution demanded a shortcut to oblivion; a short route out of their misery. That will be the reason for many people drinking excessive alcohol. Today in Wales, 15% of hospital admissions are because of alcohol, at a cost of between £70 million and £85 million per year. Imagine what we could do with that in the health service in Wales.

Other parts of the UK have similar, if not worse problems, but there are 1,000 alcohol-related deaths in Wales every year. Is it possible to tackle this problem effectively? There are many suggestions. Scotland has introduced the 50p per unit minimum price for alcohol. It could well be introduced in the rest of the United Kingdom to halt youth binge drinking. I support it, but I wonder whether it affects those older people who just want an evening of relaxation, which then costs them more.

Responsible licensees are the best friends of responsible drinking, because they had to safeguard not only their reputation but their licences. The problem of the supermarkets—not only big supermarkets, but the so-called booze shops—is that drinks are far cheaper than in pubs. Minimum pricing could help, and for health’s sake, as has already been mentioned, we need to get rid of special offers. It used to be said in the old days that the notice in a pub would read, “Drunk for a penny, dead drunk for tuppence.” That was a special offer. Could we end these completely? That would not be a popular move. But one street in Cardiff, St Mary’s Street, was recorded by an American journalist as being like the night of the living dead. Do we need stronger regulation?

The drinks industry also has a responsibility when it comes to pricing soft drinks. I know friends who are trying to ease up on their drinking, but a drink of Coca-Cola will cost as much sometimes as a pint of beer. Somehow we need to ask the drinks industry to co-operate by pricing soft drinks far more responsibly and reasonably. Is it also time to bestow star ratings on pubs, clubs and supermarkets?

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Finally, I was at the funeral of a friend of mine two weeks ago. She had five children. They had moved to a house in mid-Wales with a dangerous running stream at the bottom of the garden. People said to her, “You know, we should fence off that stream.” Instead she said, “No. I should teach the children to swim.” It is from the example given by their parents that children learn to drink moderately—if drinking at all—but it is a big responsibility.

I do not think anyone knows the full answer, but at least this evening’s debate will contribute something to that thinking.

8.01 pm

Baroness Finlay of Llandaff: My Lords, I am most grateful to my noble friend Lady Coussins for instigating this important debate. It goes to the heart of where the line is drawn in the relationship between government, all the public health concerns of government, and the drinks industry. There is a fundamental conflict of interest here. The Government pick up the costs, particularly the healthcare and social care costs, of the victims of alcohol abuse. You only have to go into an A&E department at night to see the large numbers there or visit a liver transplant unit.

The other side of this divide—and it is a divide—is that those who work in the drinks industry have a duty to their shareholders to maintain their profits. Therefore, however they work with Government, they are certainly not there to put themselves out of business.

There are some things which the drinks industry can do, and is uniquely placed to do. For instance, training bar staff properly to challenge those who are underaged or who are already intoxicated and wanting to buy more alcohol. That has improved greatly.

The labelling commitments, however, are lagging far behind. Some of us wonder, where are these clear labels? Where are the labels unified on a voluntary basis? There was an attempt to bring in legislation in this House during the term of the previous Government, but that has not come to fruition. The responsibility deal has yet to prove its worth. As has already been said, the BMA felt that it could not carry on. Neither could the Royal College of Physicians, for the same reason. It felt that the voice of the drinks industry was disproportionately strong in the way that the forward path for alcohol control and strategy was being developed.

There has been talk already about unit pricing, but I would ask the Government, what has happened to the question that I raised previously about such pricing being index-linked? As soon as we begin to have inflation the price per unit will become almost insignificant, unless that is priced as a proportion and index-linked as a percentage cost rather than an absolute cost. Indeed, it is worth noting that Scotland has already put up its so-called minimum price.

Some of the advertising we see is very clever. A phrase such as “Why let good times go bad?” has a subtle message behind it: that you have a good time by drinking. There is not a message there that you can have a good time on sparkling water. I am from Wales, and we have some wonderful sparkling water. It comes in blue bottles, called Ty Nant. It is extremely fashionable in Wales.

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There is a message that you can have a good time without even having to have a drink. But there is a subtlety behind some of this advertising that is worrying, particularly in the use of social media.

While I applaud the Government for the action that they are taking, I would ask them to take a long hard look at the conflicts of interest that lie inherently in having too close a relationship with the industry, and in not having a high enough profile for the voices of those in public health; in particular, working with local authorities and others to make sure that alcohol control measures are effectively implemented.

We hear a lot about education strategies; I am afraid that the evidence that those have actually altered behaviour is very weak, although there is certainly evidence that they have increased awareness. I am afraid I cannot say that all is going perfectly well. I would like to see a little more separation—not to stop any of the moves, but to try to get clearer labelling in place, and index-linked prices.

8.05 pm

Lord Shipley: My Lords, I am grateful to the noble Baroness, Lady Coussins, for initiating this debate and for enabling us to scrutinise the performance of the drinks industry. Here I declare my interest as a patron of Street Pastors in Newcastle upon Tyne.

Since the Portman Group was founded in 1989, the affordability of alcohol has increased by 32%. The number of alcohol-related deaths in England has doubled from 3,157 to 6,669, and the number of alcohol-related hospital admissions in England has doubled in the 10 years since 2002 from 510,000 to 1.173 million. Today half of violent crime and domestic abuse is linked to alcohol, some 1 million cases in 2010-11.

Industry bodies such as the Portman Group and Drinkaware promote education, but the evidence says that on its own, education does not change behaviour. In fact the World Health Organisation document, Alcohol in the European Union states:

“There is evidence that social responsibility messages … benefit the reputation of the sponsor more than they do public health.”

I question why the Portman Group has attacked independent reports that support minimum unit pricing despite independent evidence that says that reducing the affordability of alcohol is critical. Why does the Portman Group do this? The industry blames a small minority of people for drinking irresponsibly, but all the evidence tells us that it is no longer a small minority. Specifically, we should note that the industry spends some £800 million a year on alcohol marketing, and that the industry is not protecting children. In the UK we have some of the laxest alcohol advertising regulations in Europe. Why is alcohol advertising allowed in cinemas showing 12 and 15 certificate films? The regulations allow alcohol advertising to be shown as long as the under-18 audience does not exceed 25%. Yet the proportion of the UK population made up of under-18s is actually only 21%. Worryingly, the industry is moving its marketing spend online, where children are particularly vulnerable. Some 34% of Facebook users are under the age of 18. With regard to television, Alcohol Concern estimated that 5.2 million children

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could have been exposed to alcohol advertising during TV coverage of the 2010 World Cup.

Crucially, there is a fundamental conflict of interest. The alcohol industry has a legal duty to maximise its return for its stakeholders, and yet reducing harm relies on reducing consumption levels across the population. That can be done only by minimum pricing. Evidence from Professor Petra Meier from the University of Sheffield has estimated that if everyone drank within recommended guidelines, industry profits would fall by 40%.

The industry has, in my view, presided over the destruction of our traditional drinking culture. Most people now drink at home; most alcohol is purchased in supermarkets; alcohol has, until recently, been getting stronger; measures have been getting larger; alcohol has been sold as a loss leader and can be cheaper than water; and traditional neighbourhood pubs cannot compete and are closing. I have concluded that the alcohol industry has become part of the problem. Self-regulation and voluntarism does not work, and the industry should not be permitted to have a role in influencing the making of policy on alcohol when it has such a clear financial interest in the outcome. It should now, and in future, implement decisions made by others.

8.10 pm

Lord Rosser: My Lords, I add my thanks to the noble Baroness, Lady Coussins, for initiating this debate about the role of the drinks industry in helping to prevent alcohol misuse and in promoting what is described as responsible drinking. Presumably, though, not drinking alcohol is also responsible and socially acceptable. Other speakers have already referred to the nature and extent of the issue we face, with almost 1 million alcohol-related violent crimes and well over 1 million alcohol-related hospital admissions in a year. The industry—whether retailers, producers, pubs, bars, restaurants or shops—recognises the problem and the major producers have established the Portman Group as a self-regulator. I do not know whether the driving force behind the creation of a self-regulator was an ethical or moral one in this case or whether it was concern among the producers at the potential consequences for the industry if they were not seen to be taking action themselves. Perhaps it was both.

In 2009, the Commons Health Select Committee heard evidence that industry profits would fall by 40% if everyone drank within recommended guidelines, a point which I think the noble Lord, Lord Shipley, just made. I am told that over 10 million people currently drink regularly over the guidelines, so we are not talking about a problem affecting a small minority. Self-regulation can work but does not necessarily work, particularly if the objective is to do the minimum needed to try to keep the wolves from the door, as we have seen with the ineffectual Press Complaints Commission.

The drinks industry—that is, retailers, producers and the on-trade and off-trade—must make it clear, and be seen by its actions to be making it clear, that it will take whatever steps it can to eliminate the irresponsible sale and promotion of alcohol in order to make it easier for, and help encourage, those who wish to

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drink alcohol to do so both in an acceptable manner to society as a whole and in a less risky and dangerous way to their own health. However, to take those steps means looking at the issues of price, availability and marketing, which the Government’s responsibility deal with the industry did not really do. That was why key organisations, as has already been said, declined to become involved. The Government’s responsibility deal did not really address vital issues, despite their saying that too much of the industry still supports and encourages irresponsible behaviour through poor product location, underage sales, excessively cheap drinks and the encouragement of excessive drinking.

It is right that the industry should set out what action it has taken. The noble Baroness, Lady Coussins, referred to a number of such actions but at the moment it does not look as if it is enough. The industry is a source of pleasure to many and of jobs and revenue to the Exchequer, just like other industries, but the impact of its product when misused—as it is all too frequently—is also a source of expenditure for the taxpayer and of loss to other industries and the economy in general through resultant absenteeism and illness, leaving aside the social effects of excessive drinking. I hope that the industry will direct more expenditure and effort into self-regulation, publicity, public relations and campaigning towards actions and developments to reduce drinking and will not be tempted, as appears to have happened in at least one other industry, towards any actions behind the scenes to dilute efforts to address the problem that we all recognise exists.

8.14 pm

The Minister of State, Home Office (Lord Henley): My Lords, I join other speakers in offering my congratulations to the noble Baroness, Lady Coussins, on securing this debate and on the contributions that we have heard during it from other speakers. We have had a range of views and I think we could say that we are all agreed on one thing: the damage that alcohol can cause. However, as to the solutions, I think it was the noble Lord, Lord Roberts of Llandudno, who said that he did not know what they were and that there might be a whole range of them. The solutions seemed to vary from more regulation to self-regulation and a bit of both. I want to set out roughly where the Government are in relation to these matters.

We believe, and I think the House is in agreement with this, that drinking alcohol to excess is a key cause of societal harm, including crime, family breakdown and poverty, as well as being a leading cause of health harm. At odds with the trends across Europe, alcohol consumption in the United Kingdom has increased quite dramatically over the past 50 years, although there has been a positive reduction in overall alcohol consumption over the past few years. That is a good thing but we believe that it is still too high and that it causes misery and pain to individuals, destroys families and undermines communities. Binge drinking accounts for half of all the alcohol consumed in this country and the crime and violence that causes generates mayhem on the streets, spreads fear in our communities and drains hospital resources. I was grateful to the noble Baroness, Lady Finlay, for reminding noble Lords just what A and E can look like on a Friday or Saturday night.

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The Government are therefore convinced that tackling the problems of alcohol is a priority, which is why we launched our alcohol strategy in March. We have witnessed a dramatic change in people’s attitude to alcohol over the past decade. We have seen a culture grow where it has become acceptable to be excessively drunk in public and for people to cause nuisance and harm to themselves and, equally importantly, to others. A combination of ignorance, irresponsibility and poor habits have led to alcohol-related harm across crime, health and all other areas costing society an estimated £21 billion per year, which I think was the figure that the noble Baroness, Lady Coussins, quoted. Some 44% of all violent crime is carried out by individuals under the influence of alcohol. There were almost 1 million alcohol-related violent crimes in 2010-11 alone, and alcohol is one of the three biggest lifestyle risk factors for disease and death in the United Kingdom, after smoking and obesity.

I assure the noble Lord, Lord Brooke of Alverthorpe, that we take the health side of this very seriously. The alcohol strategy that we published in March might have emanated from the Home Office, but it had input from all other departments. The Department of Health takes these matters very seriously. In his foreword to the alcohol strategy, my right honourable friend the Prime Minister made it very clear that we will not tolerate this level of alcohol-related harm.

The Government’s alcohol strategy therefore sends out a strong message that we will crack down on the binge-drinking culture in our country; cut the alcohol-fuelled violence and disorder that still affects many of our communities; and cut the number of people drinking irresponsibly. If I take that original figure I gave, £21 billion per year, for all the costs of alcohol-related harm, the cost of crime alone is estimated to be in the order of £11 billion per year. That is simply unsustainable.

The strategy sets out a wide range of actions to tackle the excessive consumption of alcohol, including the introduction of minimum unit pricing. I remind the noble Lord, Lord Roberts, and the noble Baroness, Lady Finlay, that although Scotland has announced its intention to bring in minimum unit pricing, it has not been brought in yet. In our strategy for England and Wales we announced that we will bring in a consultation on the level of minimum unit pricing, not on whether we should have it. We will be doing that in the autumn; we shall put forward a range of options as to what would be appropriate. There will also be a commitment to consult on a ban on multi-buy promotions. I assure the noble Lord, Lord Brooke of Alverthorpe, that we have rebalanced the Licensing Act to enable local agencies to take the right action, including giving local councils the power to use early morning alcohol restriction orders and charge a levy for late-night licences to contribute to the cost of extra policing. Last week we published our response to the consultation, Dealing with the Problems of Late Night Drinking, and I commend that to noble Lords.

I am grateful, again, to the noble Lord, Lord Brooke of Alverthorpe, that he offered praise for the changes we have made in licensing. I imagine that he was one of those, along with the noble Baroness, Lady Coussins, who took part in the Police Reform and Social

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Responsibility Act that my noble friend, my predecessor, took through this House last year, which dealt with some of these matters.

The noble Baroness, Lady Coussins, also asked about the Government’s spending on alcohol awareness, and claimed that it was comparatively low compared to what the industry itself was spending. The strategy sets out how the Government and industry will work together to tackle alcohol-related harms and will help to give individuals the information that they need to drink responsibly. We launched a fully-integrated Change for Life campaign in February this year, communicating the health harms of drinking. Our intention is to extend this social marketing campaign if the evidence shows that it improves health outcomes and is good value for money. We all know that advertising does not always work; one remembers the story of the late Lord Leverhulme, who said he knew that half his advertising worked and half did not but that the trouble was that he did not know which half worked. We want to look at our advertising, therefore, and see what works and what does not.

On the subject of advertising, again there have been differing views from noble Lords. I appreciate what my noble friend Lord Clement-Jones said about there possibly not being a case for further regulation in this field, whereas others—I think it was the noble Lord, Lord Rosser—would prefer a greater degree of regulation. Extensive regulatory regimes are already in place to control advertising and marketing of alcohol products, which are pretty robust, despite what has been said, especially in relation to the protection of young people and vulnerable groups. Obviously, as I said, we will have to look at the evidence on that and at the evidence of the effect of that advertising. We would prefer to continue down a route of self-regulation but, obviously, if we find that advertising is causing problems, we might have to consider that as an area for regulation in future. My gut instinct would be not to go for further regulation at this stage, when we have a pretty robust regulatory regime as it is, with a great deal of self-regulation and co-regulation.

It is also acknowledged, and I think that most noble Lords would agree with this, that alcohol consumption in moderation can have a positive impact on adults’ well-being, especially where this encourages sociability. Well run community pubs and other businesses form a key part of the fabric of neighbourhoods, providing employment and social opportunities in our local communities. At a time of austerity and global economic pressures, the alcohol industry and the wider retail and hospitality sectors play a key role in our economy, contributing some £29 billion each year and playing an important part in our exports. In total it is estimated that some 1.8 million jobs in the UK are related to the alcohol industry, so a profitable alcohol industry enhances the UK economy.

The strategy puts a strong focus on a responsible industry that has a direct and powerful influence on consumer behaviours. It is the responsibility of the entire industry, alcohol producers and retailers in both the on-trade and the off-trade, to promote, market, advertise and sell their products responsibly, and that is what we want. We know that growth and responsibility

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can exist well together. The Government welcome self- regulation and active initiatives, driven by the licensing trade in partnership with the police and local authorities. I was very glad that both the noble Baroness, Lady Coussins, my noble friend Lord Clement-Jones and others mentioned Best Bar None, Purple Flag and businesses joining together to form business improvement districts.

The noble Baroness also mentioned Durham. I have visited the project in Durham; I did so partly because I had been at university there many years ago, and things have changed somewhat now. I was taken around by the Chief Constable of the Durham constabulary and I was very impressed with what they were doing. We have seen in Durham that a thriving and growing night-time economy can operate where excessive drinking is tackled consistently and robustly by business, the police and local authorities. As the noble Lord, Lord Bilimoria, said, over the three-year period of taking part in a Best Bar None scheme in Durham, licensees reported an estimated 75% cumulative increase in trade; a 50% increase in town-centre footfall and an expected 87% reduction in violent crime, and we should all note that last figure. As well as sending out clear messages that crime and disorder will not be tolerated in pubs, clubs and wider locations, such schemes have been proven to increase footfall and stimulate other businesses, whether cinemas, restaurants or whatever.

The Portman Group, which the noble Baroness knows well from her past—I believe that she was chief executive—introduced a Code of Practice on the Naming, Packaging and Promotion of Alcoholic Drinks in 1996. All alcohol products sold or marketed in the UK are subject to the rules of the code, which prevent alcohol being marketed to children in a way that would encourage excessive or irresponsible consumption. We are working with the Portman Group to ensure that, where unacceptable marketing occurs, it results in the removal of offending brands from retailers.

The Government’s Public Health Responsibility Deal also taps into the potential for businesses to work with the Government and public health organisations to improve public health through their influence over food, physical activity, alcohol and health in the workplace. The responsibility deal recognises that there are areas where doing nothing simply is not an option, but the something to be done is not always necessarily best done by the Government.

I see that my time is coming to an end. We are beginning to make progress in this area: the fall in alcohol consumption over the past few years is something that we should welcome, as we should the further progress that we hope to make as a result of the alcohol strategy. While progress continues to be made, there is still more to be done. That is why the strategy sets a new challenge to industry on product labelling, unit content, actions on advertising and product placement. We all agree, as I think my noble friend Lord Roberts of Llandudno said, that there are no simple solutions. However, we accept that we should rightly be challenged on our policies, and there is no better place for that than this House.

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Baroness Stowell of Beeston: My Lords, I am sorry that my timing is a bit wrong tonight. I beg to move that the House adjourn during pleasure until 8.30 pm.

8.28 pm

Sitting suspended.

Financial Services Bill

Committee (3rd Day) (Continued)

8.30 pm

Amendment 101A

Moved by Lord Flight

101A: Clause 5, page 15, line 32, at end insert—

“(c) does not harm the competitive position of the United Kingdom in the markets for the provision of domestic and international financial services.”

Lord Flight: My Lords, I am extremely happy with the domestic competitive objective of the FCA, where it is straightforward that a healthy competitive market is clearly in the interests of consumers. My amendment relates to international competitiveness. I well appreciate that the Treasury is sensitive to that being linked to the concept of easy and relaxed regulation which is being partly blamed for the problems that have occurred. This is why my amendment is in a negative form, reading “does not harm” competition rather than “actively promotes international competitiveness”.

In the context of this Bill the FCA is perceived primarily as looking after the interests of consumers, but it continues from the FSA to regulate in a wide range of territories. The balance sheets of life insurance companies and overall banking supervision go to the Bank of England. Left with the FCA is the investment management industry, retail and institutional. I should declare my interests, as in the register, in a number of investment management companies. What makes that industry stay and succeed in the UK is a mixture of a competitive tax regime, good regulation and a good supply of able people. I cast my mind back 30 years. On a largely fiscal issue I pleaded with the Treasury to enable the UK to compete with Luxembourg, but this did not happen for 20 years and more. As a result a huge investment management industry grew up in Luxembourg which London could easily have had. For institutional business in the various areas which the FCA regulates, it is important that it is at least mindful not to create situations that make the UK less competitive than it need be. There is a warning for the investment management industry that partly for fiscal reasons there has been an exodus from the UK over the past year or so by about 30% of the hedge fund industry and of other more straightforward investment management operations.

This is a practical matter. There is nothing to be ashamed of in having a requirement that what the FCA does should not harm the competitive position of the UK in the world at large. I beg to move.

Baroness Noakes: My Lords, I have two Amendments in this group, Amendment 104, which is in my name, and Amendment 139A, which stands in my name and

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in the names of the noble Lord, Lord McFall of Alcluith, and the noble Baronesses, Lady Cohen and Lady Kramer. Therefore, Amendment 139A has a pretty solid set of supporters. I shall come to that amendment in due course.

In different ways, both these amendments and the others in this group address the position of the UK’s financial services sector. This is a difficult time to be defending the financial services sector in the UK because it is far easier to be in attack mode, as we have seen in both Houses of Parliament and in the media. I thought long and hard about whether it would be appropriate to speak to these amendments at this time, but whatever the current difficulties, which are huge for the banking sector and individual institutions within it—I remind the Committee that I am a director of the Royal Bank of Scotland—we need to be dispassionate about this legislation. We cannot solve all the problems of the sector in this Bill and, thankfully, another Bill will be coming along soon if we need to respond in legislative terms to the latest issues. However, this Bill could, inadvertently or otherwise, damage the broader financial services sector, which is and has been a major contributor to the UK economy. We have a duty to ensure that when this Bill leaves your Lordships’ House we have taken a balanced view of the risks and threats to the UK and have responded in a measured way.

I will start with Amendment 104A. It is very similar to Amendment 101A which my noble friend Lord Flight has already moved. My noble friend’s amendment places lack of harm to the competitiveness of the UK’s financial services sector as a general duty in new Section 1B. My Amendment 104A adds to subsection (5) of new Section 1B a “have regard” item in respect of the international competitiveness of the financial services sector. My amendment merely reinstates the law as it currently applies to the FSA and makes the FCA have regard to the desirability of maintaining the international competitiveness of the UK.

My concern has been that the loss of the FSA’s specific duty to have regard to international competitiveness may be taken as a green light to have no regard whatever to the issue. That would be a mistake for the UK. I do not need to remind noble Lords of the size of the financial services sector. It amounts to very much more than the global banks and it is important for employment, tax revenues and its contribution to GDP.

At Second Reading my noble friend said that the Government’s view was that having high standards of regulation was all that was necessary to establish,

“the attractiveness and competitiveness of London”.—[

Official Report

, 11/6/12; col. 1262.]

I hope that he meant more than London because the financial services sector is important to many parts of the UK and is not confined to London. More importantly, high standards of regulation can never be enough on their own. We can have the highest possible standards, but they could be operated in such a way that they actually drive business away. There is a very real danger that in response to the financial crisis and more recent revelations the regulatory pendulum will swing to a place which, to use the phrase of my right honourable friend the Chancellor, achieves the “stability

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of the graveyard”. If there is no reference in this legislation to the wider context of the financial services sector, there is a very big risk that it will be ignored entirely, and that is a risk which I suggest that we ought not to take with this legislation.

I should say that I tabled Amendment 104A in respect of the FCA but did not table a similar amendment in respect of the PRA. At that point, my primary focus was on the fact that the FCA’s objectives are very consumer-focused. That is clear from the Bill and is also clear from what Mr Wheatley, the chief executive designate, has said in public. However, the FCA has a very broad scope in wholesale financial markets, including the recognised exchanges, where issues go way beyond consumer protection in a narrow sense. Wholesale markets are important, both internationally and as part of the infrastructure which supports the financing of British business. There may be other ways of ensuring that the FCA does not forget the wider picture, but my amendment is just one way of achieving it.

I should probably have tabled a similar amendment in respect of the PRA. The two bodies have different functions but they both have the capacity to do harm or good to our financial services sector. I am therefore supportive of Amendment 129 tabled by my noble friend Lord Flight.

Both the PRA and the FCA should have something about the success of the financial services sector hardwired into their framework, so I have also tabled Amendment 139A, which was suggested by the London Stock Exchange. Amendment 139A is slightly different. It amends the regulatory principles, which will apply to both the FCA and the PRA through new Section 3B of FiSMA. Under subsection (1)(b) of new Section 3B, the regulatory principles include the principle of proportionality—that is, that burdens should be proportionate to costs. I am sure that we will look at this in more detail later in our Committee, but for present purposes my amendment states that in considering benefits and burdens, the regulators should consider,

“the capacity of the financial sector to contribute to the growth of the United Kingdom economy in the medium or long term”.

The point is that regulators need to think about the impacts of their regulatory actions in the broader context of the financial services sector and its impact on the UK economy. There could be direct impacts, as in the direct contribution of the sector to GDP or employment; or there could be indirect impacts; for example, through the ability of the financial services sector to support the real economy.

I am not wedded to the precise formulation of this amendment, or indeed the other amendment in my name, but I would simply note that it is drawn from wording that applies to the way in which the FPC is required to go about its business as set out in new Section 9C(4) under Clause 2 of the Bill.

When my noble friend the Minister wrote to noble Lords after Second Reading on the issue of proportionality, he urged us to examine the FSA’s compatibility statements, which are used to evaluate proportionality. My noble friend misses the point, which is that the FSA currently has the “have regard” obligation in respect of international competitiveness

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and so of course it includes the financial sector’s position in the compatibility statements. If we take the “have regard” out of the legislation or indeed any other similar reference to the wider context, it will follow, as night follows day, that such issues will drop out of the compatibility statements. We cannot assume that these issues will remain anywhere in the minds of the regulators.

The substance of these amendments is crucially important and much more important than the exact form of the amendments in this group. I hope that my noble friend will give them serious consideration.

Baroness Cohen of Pimlico: I support Amendment 139A, also tabled in my name, along with the noble Baronesses, Lady Noakes and Lady Kramer, and my noble friend Lord McFall, who is not in his usual place. I remind the House that I am a director of the London Stock Exchange. The words are carefully chosen, and I would not disagree radically with the other amendments proposed. I believe that we are all seeking a regulatory regime, which, while preserving stability, leaves room for one of our most successful industries to grow and prosper. It can only do that if regulators are able, as the amendment suggests, to include consideration of the capacity of the financial sector to contribute to the growth of the United Kingdom’s economy in the medium or long term. It remains vital—even in hard times like this, when much of our financial services industry is under criticism —not to forget the long term and not to handicap the regulator, enabling the industry to grow as it should while retaining stability.

8.45 pm

Baroness Kramer: My Lords, I was delighted to add my name to Amendment 139A. The excellent speeches which precede me really laid out the case, so I have just a couple of comments. Although the financial services industry is currently the target of very much justified anger, I hope that this legislation sets a regulator in place which will last more than a decade. I think that the previous legislation lasted pretty much for 12 years. We have to take the long-term view and make sure that it is fit for purpose for the long term and when the period of correction within the industry has passed.

It also seems that the language is carefully crafted in such a way that it did not in any way encourage the regulator to look at this as an opportunity to take more risk but as an opportunity to make sure that there was healthy and sustainable growth within the financial services sector. Perhaps I may give a simple example: in a few later amendments we will look at social investment, which is one of the new fields that are beginning to gather some momentum. That is an aspect of the financial services industry which has initially gone to Luxembourg.

The City now is expressing serious interest in the opportunities. Many institutions in the UK could use those kinds of instruments. But the regulator has not been aware of the differences between that sector and other sectors and, therefore, the sensitivity of regulation necessary to support the growth in a new area. I think most people would agree that we are not talking about

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unethical behaviour or the kind of risk that might be involved in some aspects of the more casino side of investment banking.

There are many areas where there is huge potential going forward. It will be absolutely essential that the regulator takes that on board and is a supporter of the healthy and sustainable growth of this industry, both to support the real economy and the many direct jobs involved with the sector.

Lord Hodgson of Astley Abbotts: My Lords, I support Amendment 101A in the name of my noble friend Lord Flight about the importance of maintaining the competitive position and that that needs to be uppermost in our minds. But I am also attracted by Amendment 139A which has drawn in the regulatory principles that are to be followed by both regulators. It seems to me that here we will be starting to set the culture. It is the culture of the regulator that will have such an important impact on the way our financial services develop and the way the people who work in them behave. As my noble friend Lady Noakes said, it is important not just to see this through the prism of City eyes but to realise that there are a wide range of financial services in Edinburgh and the provinces of this country which require the appropriate regulatory framework.