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House of Lords

Wednesday, 23 October 2013.

3 pm

Prayers—read by the Lord Bishop of Ripon and Leeds.

Introduction: The Lord Bishop of Carlisle

3.07 pm

James William Scobie, Lord Bishop of Carlisle, was introduced and took the oath, supported by the Bishop of Ripon and Leeds and the Bishop of Birmingham, and signed an undertaking to abide by the Code of Conduct.

Employment: Zero-hour Contracts

Question

3.11 pm

Tabled by Baroness Royall of Blaisdon

To ask Her Majesty’s Government how they will deal with the abuse of zero-hour contracts.

Baroness Donaghy (Lab): On behalf of my noble friend Lady Royall, I beg leave to ask the Question standing in her name on the Order Paper.

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie) (Con): Zero-hours contracts are not new, but since 2005 there has been an increase in their use. More recently, government has been made aware of anecdotal evidence that has highlighted instances of abuse. As a result, the Business Secretary of State announced that his officials would undertake a fact-finding exercise to explore how these contracts work and what the issues are. This was undertaken over the summer. On 16 September, the Business Secretary said that he would publish a consultation seeking views on zero-hours contracts and on how to address the concerns raised in the summer fact-finding exercise. The consultation will be published in mid-November.

Baroness Donaghy: I thank the Minister for his reply. He has confirmed the very belated inquiry into this subject. Will he confirm that it will cover cases where employees work regular hours but have zero-hours contracts, their pay levels and a code of conduct? How wide will the scope of the inquiry be?

Viscount Younger of Leckie: Certainly, the noble Baroness has hit on a number of the issues that will be covered. They will include exclusivity; a lack of transparency within the contracts; a lack of information, advice and guidance; and a lack of certainty of earnings. However, any response that comes through as a result of the consultation needs to be proportionate and well considered.

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Lord Hodgson of Astley Abbotts (Con): My Lords, while I am sure that there have been some abuses of zero-hours contracts, perhaps I may ask my noble friend to keep the matter in perspective. The register of interests of your Lordships’ House reveals that I am the director of a brewery and a pub company. Our pub company staff find most welcome indeed the economic flexibility and freedom that zero-hours contracts give them.

Viscount Younger of Leckie: My noble friend makes a valuable point. Opportunities for zero-hours contracts allow, for example, students to enter the labour market. I have heard about instances of workers who used to work on the Tornado project using their legacy engineering skills in just such a way. They were particularly happy to do that. Also, zero-hours contracts particularly help the partially retired, who can work in a scaled-back manner.

Lord Howarth of Newport (Lab): Does the Minister think that zero-hours contracts are reconcilable with the responsibility that employers have in all circumstances to respect the dignity of the people they employ?

Viscount Younger of Leckie: Certainly, the bottom line for zero-hour contracts—this is one thing that the consultation will look at—is how employers and employees enter into them. Although there is nothing wrong per se with the contracts, you get opaqueness where there are differences of opinion or a lack of transparency in the contracts between the employer and the employee.

Lord Razzall (LD): My Lords, perhaps I may follow up on the supplementary question of the noble Lord, Lord Hodgson of Astley Abbotts. I am sure that the Government recognise that zero-hours contracts are absolutely essential in the pub and restaurant business, and often suit young people who want to work only certain hours. Does the Minister accept that this makes it even more important that the Government get the balance right between the use of these contracts and the abuse of the system?

Viscount Younger of Leckie: I certainly accept that. The consultation is designed to be wide-ranging. We do not have a closure date for it because it is important that we go into all the issues surrounding zero-hours contracts, including who is involved in them and the numbers of people. There is definitely opaqueness there; my noble friend makes a good point.

Baroness Morgan of Ely (Lab): My Lords, Wales has a higher proportion of people working on low pay than the rest of the UK, including many who are in insecure jobs. About 50,000 of them are on zero-hour contracts. Will the Minister explain how, if these people do not know from one day to the next whether they have work, they are benefiting from the great recovery that we are supposedly seeing at the moment?

Viscount Younger of Leckie: First, I should alert the noble Baroness to the fact that there is a recovery going on. Indeed, the employment rate was 71.7% and

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the unemployment rate was 7.7%, so progress is definitely being made, but there is more work to do. In terms of the contracts in Wales to which the noble Baroness referred, again, this is one of the issues we will be looking at as part of the consultation. It is not a good thing if contracts are entered into with both parties being unhappy with the contract.

Lord Christopher (Lab): My Lords, there is an issue that goes beyond that of zero hours. It was revealed today that the Revenue is investigating around 120 care homes and care-worker firms where the contract is not really one of zero hours—although that is technically what they are calling it—but zero minutes. They are not paying the full basic wage or for travelling time. The implication there goes beyond the issue of zero hours, which I think is disgraceful; there are also the possible consequences in care firms if they go out of business.

Viscount Younger of Leckie: The noble Lord raises an important point; we are aware that low pay is an issue for workers in the care sector. HMRC, which enforces the minimum wage on behalf of the Department for Business, Innovation and Skills, has been actively conducting enforcement activity in this area. Some investigations are very much ongoing and HMRC has identified relatively high levels of non-compliance, particularly with the national minimum wage. A full project evaluation is being carried out by HMRC and will be completed later this year.

Lord Stoddart of Swindon (Ind Lab): Does the House of Lords employ any people on zero-hour contracts? If so, how many are they and in what grades?

Viscount Younger of Leckie:The noble Lord raises some very specific questions. I can confirm that zero-hours contracts are a legitimate form of employment and they were introduced in both Hansardand the catering departments to replace existing casual contracts, so there is an improvement there. The zero-hours contracts, when compared to the previous contracts, give staff the same employment rights as those enjoyed by full-time staff.

Lord Roberts of Llandudno (LD): My Lords, when the Minister brings his report to the House, will he include those working in Parliament itself, especially catering department workers on zero-hour contracts?

Viscount Younger of Leckie: I believe that I have already given that reassurance and some examples to the House.

Lord Hunt of Kings Heath (Lab): My Lords, perhaps we can come back to the issue raised about care workers. It is widely reported that thousands of care workers are employed under zero-based contracts—often, as my noble friend Lord Christopher said, delivering care visits of no more than 15 minutes while not being paid for transport or time costs between visits to

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different care settings. Much of that arises from the commissioning policies of local authorities. Is the Minister as surprised as I was that two days ago, the Government tabled an amendment to the Care Bill which stopped the Care Quality Commission from investigating the commissioning duties of local authorities in relation to care homes?

Viscount Younger of Leckie: There is opaqueness between the zero-hours contracts and the payment of travel time relating to care workers. The noble Lord brings up an important point. I have already said how much importance we attach to the care sector. As the noble Lord will know, the payment for time spent on travelling is complex. I do not wish to go into the Care Bill at this stage.

Schools: Careers Service

Question

3.19 pm

Asked by Baroness Jones of Whitchurch

To ask Her Majesty’s Government how they address concerns about the schools career service highlighted in the Barnardo’s report Helping the Inbetweeners.

The Parliamentary Under-Secretary of State for Schools (Lord Nash) (Con): My Lords, we want all schools to follow the example of the best and provide inspiring careers advice for young people. The new statutory duty is an important step towards this. However, evidence from Barnardo’s and Ofsted’s review of careers guidance confirms that there is considerably more to do to bring all schools up to the standard of the best. On 10 September, the Government announced further support for schools in this regard. Proposals include publishing revised statutory guidance and improving national careers service resources.

Baroness Jones of Whitchurch (Lab): My Lords, I thank the Minister very much for that reply. Clearly, the best is regular individual face-to-face sessions with all young people from key stage 3 when they enter school. Unfortunately, that is the very thing that Ofsted and Barnardo’s say is lacking in many schools, particularly for the middle-attaining inbetweeners who are still expected to get their career advice from computers. How much longer will the Government stand by and let this poor practice continue when what is needed is a very simple guarantee of face-to-face careers guidance for all young people who would like it?

Lord Nash: I think that the noble Baroness’s ambitions and objectives for careers guidance are the same as mine. However, I disagree that the gold standard is a face-to-face interview with a careers adviser. The gold standard is what all good schools do, which is to seek to identify their pupils’ passions, interests, aptitudes, strengths and weaknesses at an early stage and to work with them throughout their time at school to provide a direct line of sight and contact with the

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workplace. That is what a good education is all about. A few interviews at the end of your time in school is a poor substitute for that.

Baroness Brinton (LD): My Lords, given that the Ofsted report said that three out of four schools were not working well with the new arrangement, despite a handful of excellent examples, this is a devastating indictment. The Barnardo’s research shows that pupils from disadvantaged backgrounds need that face-to-face quality, independent advice. In the recent Education Act, the new code of practice said that vulnerable pupils need this face-to-face advice. Will the Government tell us whether this is happening and, if they do not have the figures, should they not be asking for them?

Lord Nash: My Lords, the noble Baroness uses the expression “a devastating indictment”. The previous Connexions regime did not work and hardly anyone, from Ofsted to Alan Milburn, had a good word to say about it. That is pretty devastating. There is clear guidance on pupils who will specifically benefit from face-to-face advice—disadvantaged pupils and those with learning difficulties or disabilities. I think that I have made my position clear. What we regard as a really first-class education is what I outlined rather than last-minute careers advice.

Baroness Nye (Lab): Since the Government gave sole responsibility to schools for careers advice we have seen eight in 10 schools dramatically cut the careers advice they provide, according to a survey by Careers England. Even the director of the CBI has questioned the laissez-faire approach of this Government, so will the Minister explain why the Government are against benchmarking careers guidance to national standards which can be assessed within Ofsted inspections, as recommended by the Barnardo’s report?

Lord Nash: My Lords, Ofsted inspects careers guidance through the leadership and management strand, and the extent to which the school is offering a broad and balanced curriculum. Schools are also held to account by destination measures.

Lord Cormack (Con): My Lords, in a debate in this House in the summer, my noble friend responded positively to the suggestion that each secondary school would be well served by having a panel of local businessmen and women and professionals to advise on careers. Has he made any progress on that front?

Lord Nash: My noble friend’s example of a careers panel is an excellent example of good practice. I have seen other such examples. I recently visited Stoke Newington school and sixth form college—not an academy—where they follow excellent practice in offering careers advice. They have a speed dating careers day, which is very useful. There is a wide range of good practice that schools can use and a wide range of organisations such as Business in the Community, Business Class and the Education and Employers Taskforce with which schools can engage.

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Lord Martin of Springburn (CB): My Lords, when most students go to university, there is a hall of residence available to them and that is quite right and fitting. However, when young people are offered apprenticeships far away from home they have to look out for lodgings or digs in the vicinity of their workplace. Could the noble Lord look at this problem?

Lord Nash: I will undertake to look at this problem.

Lord Wills (Lab): My Lords, the Minister will be aware that Barnardo’s has estimated that 65% of the children of prisoners end up in prisons themselves. What specific measures are the Government taking to support this particularly at-risk group in making the difficult transition from education into the workplace?

Lord Nash: I am afraid I cannot answer that question now. I will write to the noble Lord on this very concerning issue. We must break the cycle of the perpetuation of children’s backgrounds, of which this is an example.

Lord Willis of Knaresborough (LD): My Lords, an investigation by the Engineering Employers Federation and SEMTA, looking at careers in science and technology, showed that more than 80% of careers advisers in schools come from an arts and humanities background. How likely is it that students who aspire to careers in science and technology will get good advice from people who have no experience of that at all?

Lord Nash: I agree entirely with my noble friend that we do not expect teachers to be careers experts. That is unrealistic, which is why we expect all schools to engage with their local business and professional communities. I was recently in Leeds and Sheffield, where the Glass Academy has been formed by glass manufacturers specifically to engage with their local schools extremely effectively.

Economic Inequality

Question

3.26 pm

Asked by Lord Greaves

To ask Her Majesty’s Government what proposals they have to reduce the level of economic inequality.

Lord Newby (LD): My Lords, income inequality in the UK is now at its lowest level since 1986. The Government are committed to ensuring that all families benefit from the return of growth to the economy and maintain that the best route out of poverty and the best way of reducing inequality is for households to move into work.

Lord Greaves (LD): My Lords, last week we had the report of the Social Mobility and Child Poverty Commission, State of the Nation 2013, under the leadership of Mr Alan Milburn and the noble Baroness, Lady Shephard. It concludes that:

“Britain remains a deeply divided country. Disadvantage still strongly shapes life chances. A balanced economic recovery, between different parts of Britain, is not currently within reach”.

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Do the Government agree with the broad conclusions of the report that, if we want more social mobility, that has to go hand in hand with a more equal society?

Lord Newby: My Lords, the Government agree with the broad conclusions of the report. As the noble Lord says, there are major problems of deep-seated, regional inequalities and imbalances. However, the Government are committed to tackling these, which explains why we have committed more than £2.6 billion to the regional growth fund, why we are committed to High Speed 2 and why apprenticeships, which now stand at 850,000 in the last academic year—some 370,000 more than in the last year of the Labour Government—are taking place largely outside London and the south-east.

Lord Morgan (Lab): My Lords, the Minister replied about income inequality. Is not the main thrust of the question about inequality of wealth? That has not really been tackled by any Chancellor since David Lloyd George. Should we not deal, particularly, with the question of inheritance and the way in which taxes on inheritance are systematically emasculated or evaded by rich capitalists?

Lord Newby: My Lords, there has been a very long-term increase in inequalities in wealth. This is largely based on inequality in housing, which is where the vast bulk of personal wealth belongs. In terms of getting a more balanced economy, whatever we do about wealth and inheritance, which has proved very difficult—and proved very difficult for Lloyd George—the key is to get more people into better paid jobs.

Lord Monks (Lab): My Lords, does the Minister agree that generally the more equal the society, the better the outcomes in a whole range of economic and social indicators, from health and education through to teenage pregnancy and so on? With that in mind, and the fact that real wages have declined by £1,500 since the general election, what practical steps are the Government taking—for example, by increasing the national minimum wage as a matter of urgency?

Lord Newby: My Lords, as the commission found, there is a growing problem of in-work poverty. That is why my colleague, Vince Cable, asked the Low Pay Commission last month to look at the possibility of raising the minimum wage without damaging overall levels of employment.

Lord Berkeley of Knighton (CB): My Lords, do the Government agree that the recent hike in energy prices is going to increase inequality in our society, and, if so, what do they propose to do about it?

Lord Newby: My Lords, the key is to have a sustainable and secure energy policy for the medium to long term. That is why the Government are investing so much in the energy sector and why the news about the agreement to build a new-generation nuclear power station was important. In the short term, all consumers should see whether they can save money—because many can—by switching their source of energy supply.

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The Lord Bishop of Ripon and Leeds: My Lords, bearing in mind the way in which wealthy pensioners, such as many in this House, are protected against the austerity cuts that other welfare recipients face, will the Government consider how to enable us to begin to bear our share of the burden, whether by taxing or means-testing the winter fuel allowance or otherwise?

Lord Newby: My Lords, one of the commission’s recommendations was that intergenerational equity could be improved if pensioners paid a higher share. That has not been the view that the Government have taken. Particularly given the very high levels of pensioner poverty, against which many noble Lords have campaigned over many years, we have taken the view that the real value of pensions should be protected during this period of fiscal consolidation. However, we accept that there may be more to be done. Indeed, for people who receive payments such as the winter fuel allowance, there are now a number of voluntary schemes under which they can make that payment available via charities so that it can be used for people on low incomes.

Lord Davies of Oldham (Lab): My Lords, why did the Minister not respond to his Liberal Democrat colleague who asked the initial Question with total honesty by saying that he is a junior member of the junior party in a coalition, of which the majority party has in its DNA the promotion and preservation of inequality?

Lord Newby: My Lords, the biggest task in reducing inequality, as the commission points out, is to get more people into work, and this Government are doing that. For example, the number of NEETs has fallen consecutively over many quarters, the number of people in work increased by 155,000 in the last quarter and the proportion of the population in work is at a record level. We on this side of the House will take no lessons from him about getting people into work and earning good money.

Baroness Farrington of Ribbleton (Lab): My Lords, will the Minister undertake to work with his colleagues to ensure that, when we are given figures for employment, they include a breakdown which tells the public how many people are earning a living wage, how many are in part-time work and how many are on zero-hours contracts? HS2 will not help my friends and colleagues from Wales. The Government keep trumpeting that the issue is getting people into employment, but tell that to people for whom getting into employment is getting into poverty.

Lord Newby: My Lords, of the three categories of figures that the noble Baroness referred to, those for part-time work are already available. For zero-hours, however, I think that the figures have been made available, have been challenged and are being looked at. If we want a rebalancing towards the regions, we are not going to achieve that overnight. We need long-term transformational projects, of which High Speed 2 is one. It is vitally important for the long-term well-being of the regions.

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Armed Forces: Human Rights Legislation

Question

3.35 pm

Asked by Lord Craig of Radley

To ask Her Majesty’s Government what steps they are taking to review and clarify the application of human rights legislation to members of the Armed Forces when they are based or engaged in operations overseas.

Baroness Anelay of St Johns (Con): My Lords, the clock has stopped. I say to colleagues who are trying to leave the Chamber that, on this occasion, we shall maintain dignity by remaining in our seats while the Minister responsible for defence makes an announcement about our armed services.

The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever) (Con): My Lords, I am sure that the whole House will wish to join me in offering sincere condolences to the family and friends of Lance Corporal James Brynin, Intelligence Corps, of 14 Signal Regiment (Electronic Warfare), who was killed on operations in Afghanistan recently. My thoughts are also with the wounded, and I pay tribute to the courage and fortitude with which they face their rehabilitation.

Turning to the Question, although the Government have already expressed their disappointment with recent judgments in this area, both in the domestic courts and at Strasbourg, many aspects of the relevant law continue to be uncertain. In view of the importance of the principles at stake, the Government will defend their position vigorously in the key cases still before the courts.

Lord Craig of Radley (CB): My Lords, why wait? Is there not now sufficient experience of the impact of legal hindsight when passing judgment on the activities of personnel engaged in operations or based overseas? Should not the Secretary of State revive, by order, Crown immunity, as the Crown Proceedings (Armed Forces) Act 1987 allows, to cover warlike operations in any part of the world outside the United Kingdom? Alternatively, will Her Majesty’s Government consider new legislation to define combat immunity, in order to clarify the current position? Could this be incorporated in the Defence Reform Bill now in passage through Parliament?

Lord Astor of Hever: My Lords, I share the noble and gallant Lord’s concerns. He is absolutely right to emphasise the relevance of the 1987 Act. Our Armed Forces should not have to put ECHR considerations ahead of vital operational decisions in the national interest. That is why we are not ruling out any options. An amendment to the Defence Reform Bill would probably be regarded as outside its scope, but we hope that the Court will provide clarification of combat immunity. For that reason we shall defend this litigation with vigour.

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Lord Rosser (Lab): My Lords, I too offer sincere condolences to the family and friends of Lance Corporal James Brynin. These sombre moments have, fortunately, become less frequent in your Lordships’ House, but this moment is a reminder, first, that the courageous members of our Armed Forces continue to risk their lives on behalf of us all, and, secondly, that on occasions the risk becomes reality, with all the heartbreak that that brings.

On 25 June in this House the Minister said, in response to a question, that “urgent cross-government discussions” were taking place to consider the options in the light of the 4:3 majority Supreme Court judgment of 19 June on human rights and our Armed Forces. He also said that advice would be provided to members of the Armed Forces “as soon as possible”. What has been the outcome of those urgent cross-government discussions, and what is the thrust of the promised advice, which has presumably now been provided to members of our Armed Forces?

Lord Astor of Hever: My Lords, we continue to be grateful to Her Majesty’s Official Opposition for their support on Afghanistan. I can assure the noble Lord that my department is exercised about this issue and Ministers are working closely on it with the service chiefs. A number of cases are still before the courts and the legal position is not yet clear. We will continue to monitor developments closely, but I can reassure the House that, even when the ECHR does not apply, UK Armed Forces are at all times required to comply with all applicable domestic and international law. Customary international law and UK criminal law explicitly forbid torture and abuse, and our domestic law applies to members of UK forces at all times, wherever in the world they are serving.

Lord Palmer of Childs Hill (LD): My Lords, I add from these Benches our sincere condolences on the loss so eloquently expressed by my noble friend the Minister. In his and the ministry’s view, will the actions of the Supreme Court lead to further substantial claims on the Government? What evidence is there of commanders in the field being inhibited because of the comments that have been made in these human rights cases?

Lord Astor of Hever: My Lords, we are concerned that the Supreme Court judgment creates uncertainties in the law that could well impair the ability of the Armed Forces to make robust and timely decisions which are necessary to our national defence. We intend to defend these combat-related claims rigorously.

Lord West of Spithead (Lab): My Lords, does the Minister not think that this is another example of a number of cases where people are looking at combat through the prism of peacetime? We have seen some extraordinary decisions made in coroners’ courts. We have seen some extraordinary things come out about Bloody Sunday, and we are seeing an extraordinary position as regards the issue being discussed today; I agree totally with the noble and gallant Lord, Lord Craig of Radley, on the subject. Is it not important that we should get the message across that combat is

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different? A number of us in this Chamber have been in combat and we know that decisions are made in a matter of minutes, if not seconds. People around you are either dying or are in fear of dying and sometimes information is very scant, whereas those with all of the information are taking hours and hours on a warm and balmy afternoon to come to decisions about our military. When we talk about the military covenant, in the end the most important for our military is to be given the ability and the tools to actually fight and win. All of these things are negating that ability.

Lord Astor of Hever: My Lords, I agree with every word that the noble Lord has said and welcome the opportunity to discuss the issue in much greater detail on 7 November during the debate tabled by my noble friend Lord Faulks.


Grangemouth Refinery

Statement

3.43 pm

The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con): My Lords, with the permission of the House, I should like to repeat in the form of a Statement the Answer to an Urgent Question asked in the other place.

“I wish to inform the House of the latest situation regarding the disruption at the Grangemouth refinery and petrochemicals complex in Scotland. I recognise the concern of many Members of the House, in particular the active involvement of the honourable Member for Linlithgow and East Falkirk. The Government have and continue to be in regular contact with both sides involved in the dispute. We are working closely with the Scottish Government and this morning I spoke to John Swinney, the Cabinet Secretary for Finance.

Earlier today, Ineos made a statement confirming the decision of its shareholders to place the Grangemouth petrochemicals plant into liquidation, which puts 800 jobs at risk. The Government are saddened by this move, particularly because of the uncertainty it will bring for the workforce and all those who indirectly owe their livelihood to the Grangemouth plant. The Government do not underestimate the plant’s importance to the local community. While respecting the right of Ineos to make this decision, it is regrettable that both parties have not managed to negotiate a fair and equitable settlement that delivers a viable business model for the plant. Even at this late stage, the Government urge them to continue a dialogue, and we will offer all possible help and support on that. We want this petrochemicals plant to stay open if at all possible, but if redundancies are made, support will be available from the Partnership Action for Continuing Employment, which includes the Scottish Government, Skills Development Scotland, Business Gateway and Jobcentre Plus.

The owners of the refinery, who are Ineos and PetroChina, have announced their intention to keep their refinery open and their wish to restart full operations as soon as possible. Government stand ready to help with the discussions between the management and the union to ensure that this can happen. The Secretary of State is speaking to both parties today.

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Throughout this disruption, fuel supplies are continuing to be delivered as usual. My department has been working closely with industry and the Scottish Government to put robust contingency plans in place to ensure that supplies of road fuels, aviation fuels and heating oils will continue to be available to Scottish consumers and continue to fuel the Scottish economy.

I will be giving a briefing at 4.15 pm today in Dover House for Members with Scottish constituencies and other interested honourable Members and noble Lords who wish to discuss the situation in more detail”.

3.45 pm

Lord McAvoy (Lab): My Lords, with permission I will repeat the response made by the Official Opposition’s spokesperson in the other place.

“The closure of the petrochemical plant at Grangemouth means that 800 people employed there and more employed as sub-contractors will lose their jobs. Ineos chairman, Jim Ratcliffe, had said at the weekend that if the petrochemical plant closed, it was likely that the refinery would go too.

There are reports this morning that Grangemouth might have fallen between the cracks, with neither the devolved Scottish Government nor UK Government Ministers getting to grips with the issue.

John Swinney, the Scottish Finance Minister, claimed yesterday that he was in discussion with potential buyers for Grangemouth. Can the Secretary of State tell the House whether he is aware of these discussions and what involvement he or his Ministers have had?

The Unite union had committed not to strike, with no preconditions, while negotiations over pay and conditions were undertaken. PetroChina, the 50% shareholder in Ineos’s refinery business, made a statement calling for all parties to get back round the table and reach a consensus. But today, rather than coming back to the negotiating table, Ineos has announced that it will close the profitable petrochemical plant. There were reports on the BBC this morning that management delivered the news with smiles on their faces.

Does the Secretary of State agree with me that Ineos should have got round the table to negotiate rather than delivering ultimatums? And can he tell the House what discussions he has had with Ineos management and the union in the past 24 hours and what support the Government are providing for those who have lost their jobs today?

In its report on UK oil refining in July 2013, the Energy and Climate Change Select Committee found a mismatch between refinery supply of petroleum products and demand, but the Government are still yet to respond. Can the Secretary of State be confident that the Grangemouth refinery will stay open? What contingency plans are in place to secure fuel supplies for Scotland, Northern Ireland and the north of England? And given the current shut down and uncertainty over the closure of Grangemouth, will the Secretary of State now commit to undertake the review of UK refining capacity which the right honourable Member for Wealden promised in June 2012 in response to the closure of Coryton refinery?”.

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3.48 pm

Baroness Verma: My Lords, the noble Lord raises a great number of questions. Of course we recognise that this is an incredibly unsettling time for workers at Grangemouth and for the wider community, but we need to try to work towards getting a resolution and therefore we stand ready to assist both sides to come to the table to discuss matters. We are also ready to engage with any potential purchaser that may make the case for the ongoing commitment to the UK if it were to take over Grangemouth petrochemicals. We are working very closely with the Scottish Government.

The noble Lord asked about contingency plans. We are working very closely with suppliers and retailers to ensure that Scottish forecourts increase their stock levels well above normal levels as a precaution. We have been working with airports to ensure that they have contingency plans in place to ensure the supply of jet fuel, and with heating oil distributors to encourage them to stock up early. A number of plans are already in place and we are working on them. Ultimately, the best solution would be to get both parties back talking to each other.

Lord Forsyth of Drumlean (Con): My Lords, first, I thank my noble friend for organising the meeting this afternoon. This is a vital national resource of great strategic importance in an area where jobs are in short supply. Will my noble friend encourage my right honourable friend the Prime Minister to knock some heads together and get agreement on the way forward? Quite frankly, the idea of finding a purchaser is a complete red herring. This plant is losing money on a substantial scale and it will be necessary for both sides to give way. It really is important to the United Kingdom as a whole, and to Scotland in particular, that the Government use their highest authority to get a resolution as speedily as possible and that these redundancy notices are withdrawn.

Baroness Verma: My noble friend is absolutely right that it is an incredibly important issue. That is why my starting point is that we need to get both parties back around the table. We in the Government here are doing our level best to ensure that happens and are working very closely with the Scottish Government.

Baroness Liddell of Coatdyke (Lab): My Lords, is the Minister aware that a further 141 jobs have been lost today at the BASF plant at Hawkhead Road in Paisley? It is hard to overestimate just how critical the situation now is in Scotland. I echo the request of the noble Lord, Lord Forsyth, for the engagement of the Prime Minister. We need a little more detail about the nature of the assistance that can be given to try to get these redundancy notices withdrawn with a view to saving these jobs, which are critical to the infrastructure of Scotland and to Scotland’s economic future.

Baroness Verma: The noble Baroness raises a very important point. This is not just about one area but affects the whole country. This debate will be watched very closely and I will of course take back the requests of my noble friend and the noble Baroness that this is

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taken to the highest levels to ensure that we get proper engagement. What we want to see of course, at the end of it all, is the two parties around the table to resolve their differences.

Lord Martin of Springburn (CB): The plant is on the east coast of Scotland. I live on the west coast and some of my neighbours and some of my former constituents travel on a daily basis to the plant. The impact therefore goes across the central belt of Scotland. For many reasons, I echo the case that has been put by noble Lords on both sides of the House. It is important to deal with this at prime ministerial level and that is where the negotiation should come from.

Baroness Verma: My Lords, I can only reassure noble Lords that we take this issue incredibly seriously. We are doing our utmost to ensure that there is engagement from both parties and are working very closely with the Scottish Government on this as well. As I have already said, this debate will be watched very closely and I am sure that everyone will take this debate seriously and encourage discussion.

Lord Foulkes of Cumnock (Lab): My Lords, does the Minister share my concern that this Government, the Scottish Government and the workforce have been blackmailed by a billionaire sitting on a £130 million yacht in the Mediterranean? Is that not awful? Will the Minister confirm that the UK Government will consider, along with the Scottish Government, all options for keeping this plant open, including bringing it into public ownership?

Baroness Verma: My Lords, we need to be very careful about the language we use and how we progress this debate. It would be wiser for all of us to try to work very carefully and closely with the parties and get them to come together around the table for discussions.

Lord Steel of Aikwood (LD): My Lords, is it not the case that this dispute has been going on for some weeks? Those of us who have been watching it from a distance have been concerned at the lack of high-level intervention to try to get it resolved. There appears to be an intransigent union on one side and a rather distant operator on the other. I simply want to add my voice to those who are saying that we really must try at the highest level to get this sorted out.

Baroness Verma: My Lords, I have noted my noble friend’s comments, as I have noted those of all noble Lords around the Chamber. So that noble Lords are reassured, I will again repeat that we take this matter seriously and we want to get the parties around the table. That means that we all have to work together very closely at every level.

Baroness Smith of Basildon (Lab): My Lords, as the noble Baroness will be aware, I raised the issue of refinery capacity in the UK previously, when the highly efficient refinery at Coryton in Essex had to close down. The Government refused even short-term financial support to keep it open, unlike the French and German

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Governments with their refineries. We must not make the same mistake again. How sure and confident is the Minister that the UK has adequate refinery capacity?

Baroness Verma: My Lords, we feel confident that we do have adequate capacity. On the broader point about support for the Grangemouth complex, we are happy to work to support it as long as there is a good business case there. Before we go to that stage, let us do the most important thing and get both parties to start talking to each other.

Energy Bill

Order of Consideration Motion

3.56 pm

Moved by Baroness Verma

That the amendments for the Report stage be marshalled and considered in the following order:

Clauses 1 to 7, Schedule 1, Clauses 8 to 38, Schedule 2, Clauses 39 to 41, Schedule 3, Clauses 42 to 50, Schedule 4, Clauses 51 and 52, Schedule 5, Clauses 53 to 66, Schedule 6, Clauses 67 to 69, Schedule 7, Clauses 70 to 74, Schedule 8, Clauses 75 to 91, Schedule 9, Clauses 92 to 97, Schedule 10, Clauses 98 to 106, Schedule 11, Clause 107, Schedule 12, Clauses 108 to 120, Schedule 13, Clauses 121 to 135, Schedule 14, Clauses 136 to 147.

Motion agreed.

Inheritance and Trustees’ Powers Bill [HL]

Inheritance and Trustees’ Powers Bill [HL]

Second Reading

3.56 pm

Moved by Lord Ahmad of Wimbledon

That the Bill be read a second time.

Bill read a second time and committed to a Special Public Bill Committee.

Alan Turing (Statutory Pardon) Bill [HL]

Order of Commitment Discharged

3.57 pm

Moved by Lord Sharkey

That the order of commitment be discharged

Lord Sharkey (LD): My Lords, I understand that no amendments have been set down to this Bill, and that no noble Lord has indicated a wish a move a manuscript amendment or to speak in Committee. Unless, therefore, any noble Lord objects, I beg to move that the order of commitment be discharged.

Motion agreed.

23 Oct 2013 : Column 1010

Financial Services (Banking Reform) Bill

inancial Services (Banking Reform) Bill8th Report from the Delegated Powers Committee10th Report from the Delegated Powers Committee

Committee (3rd Day)

3.58 pm

Relevant documents: 8th and 10th Reports from the Delegated Powers Committee.

Amendment 92

Moved by Lord Lawson of Blaby

92: Before Clause 16, insert the following new Clause—

“Meetings between regulators and bank auditors

(1) The FCA and the PRA must make arrangements to meet the auditors of each bank at least twice in each calendar year.

(2) The FCA and the PRA may conduct meetings under subsection (1) jointly or separately (but each bank’s auditors must be met separately).

(3) The purpose of each meeting is to discuss matters about which the FCA or the PRA believe that the auditors may have views or information.

(4) A bank has a duty to ensure that its auditors attend meetings in accordance with this section (and compliance with that duty may be considered for purposes of the exercise of functions under FSMA 2000).”

Lord Lawson of Blaby (Con): My Lords, Amendment 92 is in my name and those of the noble Lords, Lord Turnbull and Lord McFall. Grouped with it is Amendment 104D, which I will also speak to, although it has to be said that these two amendments have nothing whatever to do with each other. I will speak first to one and then to the other.

If I may be forgiven, I will go back a little bit in time to when I was Chancellor in the 1980s. As a result of what came to light with the collapse of the Johnson Matthey bank, and the total failure of supervision exercised by the Bank of England, which at that time had that responsibility, I became concerned about the quality of banking supervision in this country. I therefore introduced what became the Banking Act 1987 in order to greatly enhance the quality of bank supervision and bank regulation in the United Kingdom. If I may say, it was not helpful that the Labour Government tore that system up in 1997, but that is another story.

4 pm

One of the things that concerned me was the lack of any intercourse between bank supervisors and bank auditors. Indeed, it was prevented because the duty of commercial confidentiality in those days meant that bank auditors could not speak to the regulators or the supervisors. That seemed extremely damaging. A dialogue between the auditors and the supervisors is particularly important, not just because the risks are far greater when things go wrong in banking than in the automobile industry or any other industry—as we know to our cost—but because if the auditors of another kind of company are very concerned, they might well qualify the accounts of the company they are auditing.

Auditors are, for very good reason, extremely reluctant ever to qualify the accounts of a bank—I cannot even remember when it has ever been done—because of course that might lead to a run on the bank and cause a banking collapse, which would have huge repercussions. So it is all the more important that they can talk confidentially to the supervisor and the regulator.

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Among the measures in the Banking Act 1987, I broke down the iron curtain of confidentiality between the auditors and the bank supervisors. I did not make it a statutory duty—which I regret—because at that time the Bank of England did not want it to be. But I wrote into the Act the expectation that there would be—because there should be—this dialogue between the auditors and the supervisors. So if the auditors were troubled about something that was going on at a particular bank and the bank did not seem to be remedying it, they could tip off the supervisor. Equally, if the supervisor had reason to be concerned about something that was happening at a particular bank, they could ask the auditor to take a good look at it.

That worked to begin with—but it did not work. This is documented: the meetings between the bank auditors and the bank supervisors became less frequent over the years. In the run-up to the great crisis in 2008 there were virtually no meetings at all, and we all know that the auditors were among the dogs that did not bark. They did not alert anybody to the huge problems there were in a considerable number of our major banks.

When, a few years back, the Economic Affairs Committee of this House looked again at auditing, not simply in the context of the banks but including them, we recommended that this should be put on a statutory basis. There should be a statutory requirement for this dialogue to occur. This was not accepted by the Government, on grounds that I think were totally unconvincing. We repeated this recommendation in the conclusions of the Parliamentary Commission on Banking Standards. We said:

“We would expect that for the dialogue to be effective, both the PRA and the FCA would need to meet a bank’s external auditor regularly, and more than the minimum of once a year which is specified by the Code of Practice governing the relationship between the external auditor and the supervisor. This should be required by statute, as recommended by the House of Lords Select Committee on Economic Affairs”.

That was the firm recommendation of the banking commission and I regret that, so far, it has been rejected by the Government.

The argument that the Government make is that there is a code of practice. Their response states:

“This means that there is an expectation set out in law, that there will be a regular dialogue between the regulator and auditor”.

Expectation is not enough—we have been there before. We had the expectation before, following the 1987 Act. To begin with that expectation was fulfilled but increasingly it was not, and we know what disasters arose from that. I therefore ask the Government—there is no difference between us on the necessity of having this continuous, active dialogue much more than once a year; we probably should have it on a quarterly basis—whether there should be a statutory requirement. Given the lamentable history of the period when it was not a statutory requirement, I urge the Government to think again and make it one.

Amendment 104D concerns the form in which bank accounts are prepared and the requirement—because we felt very strongly that the new accounting system, IFRS, was totally inadequate, certainly so far as banks are concerned; indeed, that proved to be so in the run-up to the crisis—that there should be a requirement

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in law for a second set of accounts. Those should not be prepared on the IFRS basis but in a way that the supervisory and regulatory authorities feel is necessary in order to give them the information they require. They should be for the benefit of the regulators and supervisors and should not be published in the first instance. However, if the PRA felt that it was in the public interest that the second set of accounts be published, it could require them to be published.

The difficulties with IFRS are huge. Noble Lords may have seen the interesting article in the Accountant by Emile Woolf—one of the best known chartered accountant—who writes from time to time. I commend the whole article: noble Lords might find it beneficial, although they will be glad to know that I will not read it all out. Woolf writes that:

“The lapse of accounting and auditing rigour that has allowed IFRS compliance to dissemble truth and fairness has brought shame on our profession and begs the question of exactly what is our purpose”.

That is pretty strong wording, but it is well justified. The true and fair have effectively gone and the importance of prudence has given way to box-ticking. I understand why valuation by mark to market has come in. There were different difficulties with the historical cost basis but the result of mark to market has meant that in many cases, purely fictitious paper profits are in the accounts. Not only does that make the bank look stronger than it really is but, of course, these are then distributed in bonuses or whatever. It is a disaster. And there are other defects. The change in the provisioning requirements is totally inadequate.

It is probably true that there is a grudging acceptance of that throughout many of the leaders of the accountancy profession. The problem is that IFRS is enshrined in European Union law. Therefore, it cannot be changed without the agreement of all the members of the European Union. They are talking and talking and talking, and they are producing documents on one aspect or another. Goodness knows when they will reach agreement. Goodness knows if they will ever reach agreement.

The Parliamentary Commission on Banking Standards has said, “Okay, we accept IFRS as it is but for banks there needs to be this second set of accounts for regulatory and supervisory purposes”. What are the Government’s grounds for rejecting this? The Government are saying: Okay, you have made a good point, but,

“this needs to be balanced against the increased costs imposed by introducing a requirement for an additional parallel set of accounts”.

Compared with the massive costs of banks going belly up, the cost of having a second set of accounts which helps the regulators and the supervisors to do their job is peanuts—it is piffling. It is absurd to talk about it in the same breath.

Neither of these amendments is opposed to the Government’s approach to the issue of banking and I hope that the Minister will see fit either to accept these amendments or, if not, to introduce amendments of his own on Report which will achieve precisely this effect.

As for the reports of the inquiry, and as this is the beginning of the last day of the Committee stage, I draw the Committee’s attention to the extraordinary nature of this Bill. When we received it from the House of Commons it consisted of 35 pages. Assuming

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that the government amendments which have been passed on previous Committee days and the ones that will be debated later on are added—as I am sure they quite rightly will be; I am not going to vote against them—the Bill will be 189 pages. The Bill has increased already between fivefold and sixfold. There will probably be further amendments on Report and it will be even bigger. It is an extraordinary way to legislate. We need time to absorb all this, and I hope that the Minister will be able to persuade the business managers to give us adequate time to do so before we reach Report on this very important Bill.

4.15 pm

Lord McFall of Alcluith (Lab): My Lords, I support the noble Lord’s amendment enthusiastically because the auditors were the weak link in the financial crisis. In terms of profits, the banks booked expected profits and then found out they were not there. So the question is: where were the auditors in that situation?

I was chair in 2007 when the Treasury Committee looked at Northern Rock. There were no meetings between the regulators and the auditors. The auditors of Northern Rock received more income from consultancy for Northern Rock than they did from audits. If I remember correctly, the auditors wrote 10 letters on behalf of Northern Rock, from which they gained £800,000. That is £80,000 a letter: not bad for a day’s work. Again, if I remember correctly, there were about seven meetings between the regulators and Northern Rock. At the time the mentality in the Financial Services Authority was the bigger the bank, the bigger the risk; the smaller the bank, the smaller the risk. Of these seven meetings, four were conducted by phone. Three were face-to-face, with no minutes taken. If you were the secretary of your local community council or your golf club and came up with such practice, you probably would not be the secretary at the end of the year. The regulator, however, kept on swanning along. That practice was a terrible practice—the voice of the auditor was missing.

The Treasury Committee report was clear. We said that within the limits of what they are required to do, perhaps the auditors did an adequate job. However, if they did an adequate job in terms of what they were required to do, the question remains: what is the point of an audit? That question continues to haunt the audit profession and it has not started to answer it.

The Government say there is talk about a code of practice, but in 2011 in a letter to the Economic Affairs Committee, Andrew Bailey of the Bank of England was very clear that,

“the working relationship between external auditor and the prudential supervisors had broken down in the period prior to the financial crises”.

So the code of practice does not work. The aim of this amendment is to ensure that there is a statutory basis so that no one can come along in future and say “That aspect was overlooked”. There has to be a serious duty on individuals to look at that.

From an accounting and disclosure perspective, RBS, Halifax and Northern Rock went down because of factors such as huge wholesale funding and property

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exposures. It was clear from the accounts two to three years previously exactly what the risks were, but nobody took heed. That is why the voice of the auditors has to be that much stronger. At the time, RBS shareholders approved the ABN AMRO deal by 95% to 5%, but that was just months before it collapsed.

When he was on the Economic Affairs Committee the noble Lord, Lord Lawson, asked John Connolly of Deloitte a pertinent question about auditing. The answer was that perhaps Deloitte would have had a different interpretation of “going concern” if it had realised that the Government were not standing behind the banks at the time. How flexible and flimsy is this focus on auditing from the auditors themselves?

There is a long way to go on audit, not just with regard to a statutory basis. There has to be a look at what auditing uncovers and what information it gives. I suggest that the Government look at three key features of an early warning system, having said that the auditors knew what the risks were before. First, there has to be a duty on auditors to raise these issues early with the supervisor. They knew what lay ahead if the reckless approach continued. Secondly, and very importantly, the auditors need to become more professional and sift large numbers of high-impact, low-probability events so that the regulator can understand what the risks are. Remember that the regulator was operating on the basis of business models—the profits and loss accounts of companies—which had nothing to do with the regulator, so they never looked at that. That is why we ended up with such huge scandals as PPI, interest rate swaps and whatever else. Business models are crucial to the regulator, as they should be to the auditors, so it is crucial to sift that large number of high-impact, low-probability events.

Given the point I made earlier about nobody taking heed, there needs to be an increase in credibility to ensure that all stakeholders pay attention to what auditors are saying. In terms of auditors and auditing and the link between auditors and the regulator, there has to be a less compliance-driven and more comprehensive approach. There has to be an enhanced role for the auditor as an independent expert to check and challenge all the trivial and complex issues that banks present. There has to be clear and unequivocal communication from the auditor to the company, and it is important that the regulator is aware of that information. From the auditors there has to be an insight into the company’s risk management system. More than anything, there has to be a universally consistent interpretation and application of standards. Given that we have to increase the confidence of the stakeholders by auditors, financial reporting needs to ensure that investors understand what is happening in a company.

The Government’s response to the commission’s report is totally inadequate. They said that they are,

“not convinced of the need to define the frequency of this dialogue in statute”.

The Bank of England has also said:

“The PRA has published a code of practice on the relationship between an external auditor and the supervisor”.

That code of practice, by the way, was ignored and jettisoned in the past. The FSA, given its culpability in

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Northern Rock, Halifax and the Royal Bank of Scotland, has the cheek to say that it supports an open dialogue with external auditors.

Andrew Bailey’s letter states quite clearly that the code of practice does not work. The empirical evidence states quite clearly that the auditors and regulators did not do their job in the past. If all we have is an exhortation to the financial community, auditors and regulators, to do things better, we will be back here in a few years. I therefore ask the Minister and the Government to look at this issue very seriously, and if they cannot give us a full answer today, to ensure that when we come back on Report and have had adequate time to look and present our amendments on that, at least we can have a positive way forward.

Lord Flight (Con): My Lords, I strongly support these two amendments and the points made by the noble Lords, Lord Lawson and Lord McFall. I will add only the point that IFRS renders accounts virtually impenetrable, and fund managers have to convert them into a more understandable form of accounting to understand what on earth is going on within the organisation. I have been critical of IFRS for more than 10 years. The point was made to me initially that this was not a matter for Parliament but for the profession. It is of crucial importance to Parliament, because if it leads to things such as the banking mess, the nation at large is responsible. Secondly, as the noble Lord, Lord Lawson, pointed out, not only did it exaggerate profits in good times and create fictitious profits on the back of which excessive bonuses were paid, but it also exaggerates the other way in bad times, and therefore arguably can lead to an underappreciation of a bank’s strength. I had thought that France and Germany had some sympathy with this view and, notwithstanding other criticisms, I had been hopeful that the EU was looking to address this issue. I am disappointed that, to date, nothing seems to have happened.

I also make the point that, going back 20 years, Switzerland actually put a legal obligation on the auditors to do the compliance regulatory checking. The auditors were then liable if they had not done their job properly. I think it is a pity that Switzerland changed from that practice because I thought that it worked extremely well. I am not necessarily recommending it for this country but it was a novel idea, and the auditors ought to know what is going on within a bank if they have done their duty in auditing that bank properly. Switzerland has since changed its approach. Indeed, it was after it did so that Switzerland, too, encountered problems.

When the crisis broke in 2007-08, I asked myself: where were the auditors? Since then, candidly, there has been justified criticism of the regulators, but the issue of what the auditors were doing and why, and why bank accounts were so unsatisfactory, has not been adequately examined. I believe that the Treasury Select Committee has looked at this, but I am not sure whether it has done so in any detail. It is still quite an important issue and I believe that this Government should exercise pressure to effect reform of IFRS. In addition to the havoc it caused in the banking industry, it has also been significantly responsible for massive damage to our pension systems by overestimating the

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liabilities, especially when bond interest rates are artificially low. That has led to massive closure of justifiable defined benefit schemes. It really is a problem and it needs addressing.

Lord Barnett (Lab): My Lords, I strongly support the amendment moved by the noble Lord, Lord Lawson. I declare what I suppose is a former interest, as many years ago I was a senior partner in an accountancy firm of modest size—I say “modest size” by comparison with the three or four firms that audit banks or, indeed, any of the FTSE 100 companies. That firm became bigger since I retired, because it merged with a fairly large international group, but at the moment it is not one of the likely auditors of any bank, whether small or large.

The noble Lord who just spoke asked where the auditors were. That question arose constantly, and understandably. If a bank gets into that kind of trouble, what were the auditors doing over the years? Never mind dialogue with the regulators; what about a dialogue with themselves or with the banks? Something serious will have to be done by the Government or by the profession about there being only three or four firms which audit all banks or, as I said, any FTSE 100 company. It is a serious matter and will obviously have to be addressed. It has been broadly spoken about for years, but nothing has ever been done about it.

Amendments 92 and 104D relate to some extent to leverage, which is what Amendment 93 concerns, and to whether banks have adequate capital to do the job of being a normal bank. This clearly is a serious issue, which nobody has properly addressed. How do we get to the situation where other major banks can be called on to have some kind of competition for who does that auditing job? When a firm knows that it will have that job permanently, the likelihood is that it does not do the job as well as it could or should. That has been happening all the time.

I hope that the Government will listen very carefully to what the noble Lord, Lord Lawson, my noble friend Lord McFall and others said, and what previous Select Committees said. This is an all-party issue, as the noble Lord, Lord Deighton, knows. I hope that he will be able to tell us that the Government will seriously consider what has been said today. If they cannot accept the amendment because the drafting is not quite as it should be—which I would understand—I hope that they broadly agree with it and will come back on Report with an amendment that does the job. We cannot just leave this; something will need to be done. I hope that the Government will listen very carefully today.

4.30 pm

Baroness Noakes (Con): My Lords, I will say a few words, as a director of a bank and a member of an audit committee, to give a current perspective on these issues. We have heard interesting speeches from my noble friend Lord Lawson and from other noble Lords that were not directly relevant to the amendments in this group.

One of the amendments before us concerns whether there should be a statutory requirement to make arrangements to meet auditors twice a year. As a

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consequence of last year’s Financial Services Act, there is already a requirement on the PRA and the FCA to make arrangements for relationships with auditors, and indeed actuaries. That has led to the revision of the code of practice developed under the FSA into the ones that have recently been produced by the PRA and the FCA.

The noble Lord, Lord McFall, referred to Andrew Bailey and the previous existence of relationships between auditors and the FSA. It may well have been true that that did not work well in practice. However, I assure noble Lords that in my experience, both the PRA and the FCA are wholly resolved to make the arrangements for working closely with auditors work extremely well. That is the nature of what they have done in producing their codes of practice. If the noble Lord, Lord Lawson, or any other noble Lord looks at the codes of practice, they will see a very different intensity of engagement from any previous code. In particular, for category 1 firms—which, I am sure, are the firms about which noble Lords are concerned—not only are two formal meetings scheduled but the guidance makes it absolutely clear that it is expected that there will be additional meetings and informal contacts with the auditors throughout the process.

We have to accept that the world has moved on. There is now a statutory underpinning of the arrangements that are made for relationships with auditors. From my perspective, both the new regulators have taken to heart any lessons to be learnt from the past and are very focused on ensuring that the arrangements work well, going forward.

Lord Hollick (Lab): My Lords, I support the two amendments in this group. They address real flaws in the current arrangements. The comments of the noble Baroness, Lady Noakes, were interesting on whether the flaws are now covered by the codes of practice. The concern in the committee report to which the noble Lord, Lord Lawson, referred—I was part of that committee—was that there was no active and effective dialogue between the auditors and the regulators. Regulation requires as much light as possible to be shone on what is going on in the organisation being regulated. In part, that is to do with the provision of information and data—of which there are tonnes in banks. At another level, it is very important to give a perspective and a judgment. This goes to the heart of some of the problems.

First, and bluntly put, the auditors—as has been pointed out—are appointed, paid and retained because they work with the management of the bank. Their duty is to shareholders, of course. However, the reality is exemplified by Barclays, which had the same auditor for, I think, 240 years. It is very important that we underwrite the independence of the auditor. The statutory requirement to talk to regulators helps auditors have the necessary degree of independence so that they can inform the regulators of what they are concerned about.

The second issue is that of the accounts. As the noble Lord, Lord Flight, made clear, investors have a completely different set of accounts. They put IFRS to one side because it is incomprehensible and meaningless. It is completely pro-cyclical in banking, which is the

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most dangerous thing to be. The fund managers look at their own accounts, but of course if you sit on the board of a bank—as a number of Members of this House do—you see a different set of accounts as well. You see the management accounts about how the bank is trading. You look at the bankbook and try to assess the risks. Before IFRS came along, when times were good it was a practice for prudent bankers to say that some of the loans might turn bad and that it was necessary to put some provisions to one side. IFRS has stopped that practice, although we were told in our committee that IFRS is reconsidering the rules; its rules committee has recognised the shortcomings of IFRS. A Member of this House has also written a very good report which tries to get accounting back from being totally rules-based to being principles-based and asking: “Is this a going concern? Is it a true and fair view of accounts?”.

The audit firm that signed off Northern Rock to say that it was a going concern—when it was funded entirely by overnight money—made a clear misjudgment, shall we say. The bank’s own management accounts—and indeed the auditor’s own judgment—would have helped the regulator to look at that much more closely. It is therefore important that the Government think again on this. The argument about cost is not a real one; that is a bit of nonsense, to be blunt, because these sorts of accounts are published and provided to board members to review the performance of the organisation.

As for relying on expectation, we owe it to the taxpayers in this country to have rather clearer rules. Expectations and codes of conduct are all very well, and one would wish to have them clearly set out and published. However, in a matter as serious as this, it is very important that there is a legal requirement to do this. The noble Lord, Lord Lawson, wishes that he had put one into the 1987 Act. The Government owe it to the taxpayers to think again on these issues.

Lord Phillips of Sudbury (LD): My Lords, I am going to build on what has been said by the noble Lords, Lord McFall, Lord Barnett and Lord Hollick. Then I will make one suggestion in respect of Amendment 92, which I support. Comment has been made about the fact that the accountancy profession has got too concentrated for public benefit. It is altogether too cosily placed vis-à-vis the very largest banks and companies. The noble Lord, Lord Hollick, referred to Barclays using the same auditors for more than 100 years; it that is not a recipe for slack auditing, I do not know what is.

The noble Lord, Lord McFall, noted that many accountancy firms provide both auditing and consultancy services. Sometimes, the non-auditing services are more valuable than the auditing services, which is a crazy situation. It is a pity that the Bill does not address that because if, as auditor, you ought to be saying some things with “rigour”—the word quoted by the noble Lord, Lord Lawson, from an article by Mr Woolf—how can you avoid a deep conflict of interest? I suggest, and experience bears me out, that you cannot bring to the very difficult task of auditing the rigour that is on occasions necessary to bring a bank or a large company to heel and to ensure, as far as any audit can, that some of the disasters we have seen are thereby avoided.

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As I say, I am sorry that we are not addressing that issue in this Bill. Perhaps it is not too late to table such a provision on Report. However, I fear that a great deal is lacking. I think I am right in saying that all the big four accountancy firms have been penalised or fined many millions of pounds in the past few years. I remember that in America, KPMG was fined more than $450 million for running fraudulent tax schemes for years on end. What happens to these firms’ reputation and business? Very little does, as far as I can see. I suggest to my noble friend Lord Lawson and his co-proposers of Amendment 92 that it is not clear beyond peradventure that the bank under consideration should not be present at these statutory meetings. It may seem an obvious common-sense point that you cannot have such a statutory meeting with somebody from the relevant bank being present. However, given the cynicism of our world, we should make that clear. Given that we are at a flexible stage of our consideration of the Bill, if Amendment 92 goes forward, I recommend that that provision be included in it.

Lord Blackwell (Con): My Lords, I do not think anyone can disagree with the arguments put forward by my noble friend Lord Lawson that the regulators should have access to the best available information from the auditors and should be able to request the information relating to the accounts that they want. What I am less clear about from this discussion is whether there is a need for that to be built into this legislation. I should be very grateful to my noble friend the Minister if he would clarify whether there is anything in the current law that prevents regulators doing exactly what these amendments suggest.

Like my noble friend Lady Noakes, I sit on the board of a bank and on its audit committee. Things have moved on considerably since 2008. It is clear to me that as regards the major banks, the PRA has frequent confidential discussions with the auditors; and those are perfectly proper. It is also clear to me that the PRA can, and does, request information from the relevant bank in any form that it feels it needs to have to perform its duties. Therefore, the question is whether there is anything in the current legislation that would allow an auditor to refuse to meet the PRA or to refuse to provide information on the grounds of commercial confidentiality or conflict. Are those powers extant in existing legislation? Is there anything that allows a bank to withhold financial information if it is requested by the PRA? If those powers are already available, I am less clear what these amendments would add.

Lord Eatwell (Lab): My Lords, it is clear from remarks made around the House that noble Lords support the intention of these amendments—that there should be regular dialogue between the regulators and auditors, and that accounts submitted to the regulators should be fit for purpose and provide the relevant information to inform their decision-making. I understand that the contested issue is whether these meetings take place at the moment, and whether there are sufficient codes of practice—or simply what is regarded as normal practice—to enable these meetings to take place. However, I do not think that that is enough. As my noble friend Lord Hollick said, we have a responsibility to the

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taxpayer to ensure that these meetings take place and that the appropriate accounts are provided to the regulators.

When he replies to this debate, the noble Lord, Lord Deighton, will have to tell us that he can guarantee that these meetings will take place and that accounts will be provided in appropriate form: not simply relying on codes of practice, but on the force of statute.

4.45 pm

The Commercial Secretary to the Treasury (Lord Deighton) (Con): My Lords, these two amendments concern the role of auditing in banks. Many excellent points have been made about the historical challenges and weaknesses and to some of the problems they have created. However, not all of these have specifically addressed the amendments themselves.

Amendment 92 seeks to strengthen quality engagement between auditors and supervisors. We agree we want to accomplish that and the noble Lord, Lord Eatwell, made the same point. The question is about the most effective way to ensure it is consistently brought about and the difference between us is about how we accomplish that. It may appear attractive to require greater engagement in statute as a guard against complacency in the future, but the clause risks weakening the auditor dialogue and perpetuating the tick-box approach that was found wanting in the last financial crisis. That was one of the most important lessons about regulation we learnt from that crisis. The FSA was widely criticised for measuring adherence to its rules—like how many times you met the auditor—but not coming to an informed judgment about the risks in individual companies and the wider market. That is where the focus of our regulation needs to be.

I may have been in the private sector too long, but solving a major problem by legislating for a number of meetings has never been the best way to get quality outcomes to serious problems. The FSA was criticised, beforehand, for not engaging enough with the auditors of the banks they supervised. The then statutory requirement for regulators to meet with auditors at least once per year simply became another process and the wider purpose of the meetings was not properly developed. The whole point of the Financial Services Act 2012 was to make sure such failing was addressed and that the regulators follow a judgment-led approach to supervision. This means that all enforcement activities must enhance the regulators’ understanding of the business and the wider market to better enable them to detect risks before problems become serious.

FSMA now includes a new Section 339A—which deals with the powers to which my noble friend referred—requiring the PRA to have arrangements for sharing information and opinions with auditors of PRA-authorised persons, and to publish a code of practice setting out the way in which it will comply with this obligation. This code of practice, which we have talked about, sets out the principles governing the relationship between the regulators and bank auditors. The code has been laid before Parliament, so provision has already been made, both in and under FSMA, for a regular dialogue between the regulator and the auditor. These requirements mark a change in focus away from

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process—stipulating the number of meetings—to actual outcomes: getting them to do the job properly. This requires regulators to consider serious engagement with auditors and subjects their stated approach to scrutiny so we can see if they are complying with the code of conduct: it does not just fall away. This process is not only more rigorous in the short term, but gives the opportunity for parliamentary scrutiny when the codes of practice are laid before Parliament and provides a check on potential complacency in the future.

My noble friend Lord Lawson referred to the need to make sure the dialogue was at least quarterly: the PRA code says that it should be. Most noble Lords will not be familiar with the details of the code of practice, but for the major firms—the ones that are perceived to represent the greatest risk to the stability of the financial system—at least three or four meetings per year are encouraged. This is a risk-based approach and the meetings are: at least one routine bilateral meeting between the lead audit partner and the supervisor; one routine trilateral meeting between the lead audit partner, supervisor and the chair of the firm’s audit committee; and one bilateral meeting between the lead audit partner and supervisor in the lead-up to and during the annual audit of accounts.

Conversely, the amendment’s legal requirement for more regulator meetings with auditors would just follow in the footsteps of the tick-box policy from before the crisis. I am really talking about the smaller, much lower-risk firms, where the guidance is, generally speaking, for at least one meeting a year. Having two meetings a year would simply increase the workload of regulators and take them away from exercising judgment and away from prioritising the most concerning engagements. They would simply be setting up meetings, irrespective of individual circumstances, just because they needed to fulfil a rigid requirement. In our view, such rigidity would weaken engagement and impair the regulators’ ability to adapt their approach as circumstances change.

Because of all that, the Government remain unconvinced of the need to define the frequency of this dialogue in statute, as the PRA code already specifies this and invites scrutiny. My noble friend Lady Noakes put it very well when she spoke about how the world has moved on and how this now operates.

In relation to the second amendment, the Government have been clear that the crisis highlighted deficiencies in accounting standards and the fact that there was room for improvement. We all agree with that, and that is what we said in our response to the final banking standards report. The regulators must have the information they need to do the job of safeguarding financial stability, and in some instances that may require disclosure of financial information on a basis different from that used by other audited bodies. In response to the noble Lord, Lord Hollick, the PRA will have access to management accounts, for example.

In response to the banking standards report, the Government asked the PRA, working with other authorities and the FPC, to undertake a broad-based review of this subject. That review will take account of the nature and scope of information required to create

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a separate set of accounts, the costs and benefits of the initiative, and international requirements. From 2014, the new Capital Requirements Directive IV will require banks to disclose supplementary information which goes beyond the international financial reporting standards. Therefore, it is not yet clear whether we need an additional, separate set of accounts in the light of the extensive prudential and other regulatory reporting requirements that are being imposed through the CRD IV framework.

However, I can assure noble Lords that, whatever the outcome of this review, the powers that have been given to the regulators under the Financial Services and Markets Act, as amended in 2012—this, again, goes back to my noble friend asking about the existing powers—are already sufficient to permit the regulators to do everything that this amendment gives them the power to do. Their current powers would permit the regulators to make rules requiring banks to prepare additional accounts, to the extent that this is permissible under EU law, to specify the principles that should govern the preparation of such information and to make it public. To the extent that the amendment merely gives the regulators the powers they already have and does not require anything else of them, it is unnecessary. I therefore ask the noble Lord to withdraw the amendment.

Lord Lawson of Blaby: My Lords, I have listened to what the Minister has said. On the second of his two points, I think that he is very close to the position that I and other noble Lords who have spoken are in concerning the IFRS accounts and their defects. He is very much closer than he is on the first one, and he is very close to what I was trying to say. He said that the Government are going to see whether they can get an improvement. He referred to CRD IV, which goes some of the way but is not entirely satisfactory. The only way that we will get accounts in a form that is satisfactory for the regulators and the supervisory requirements is if they ask for that. He is absolutely right that they can do that now. In practice, they could have done it before the 2008 crash, but they did not. That is the problem. Those of us who support the amendments are saying: once bitten, twice shy. It could have been done before; it can be done now. But it was not done before. Therefore there should be a statutory duty, which would make it more likely that it will be done. How can that be objectionable?

On the first issue the principle is the same: once bitten, twice shy. The idea that this is simply a bit of box-ticking is an insult to the intelligence of this House. As we say in the amendment, the meetings should take place more than once a year—and they will be nothing to do with box-ticking. They will be meetings of the kind that the supervisor and the regulator find most useful. Those people will use their discretion; there is no box to be ticked at all. That idea is—if I may say so, with great respect to my noble friend the Minister—a total absurdity.

It is perfectly true that under the code of practice and so on, such meetings could take place anyway. But that was also the case before: not only could such meetings have taken place, but the Banking Act 1987, which was then in force—that part was not repealed—

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encouraged them to do so. However, although meetings did take place to begin with, towards the end they did not happen. That is why it makes sense to make it a statutory duty for those meetings to happen. They will not take the form of box-ticking; they will take the form that the regulators and the supervisors find most useful. We leave that to their discretion, but we do not wish to leave to their discretion—this is, in effect, the Government’s position—whether the meetings take place at all. We may wish to discuss this further, but for the present I beg leave to withdraw the amendment.

Amendment 92 withdrawn.

Amendment 93

Moved by Lord Lawson of Blaby

93: Before Clause 16, insert the following new Clause—

“Leverage ratio

(1) The Treasury must make an order under section 9L of the Bank of England Act 1998 (macro-prudential measures) enabling the Financial Policy Committee to give a direction under section 9H in respect of a leverage ratio for banks.

(2) The direction above may specify the leverage ratio to be used.

(3) For the purposes of this section “leverage ratio” has the meaning which the Financial Policy Committee considers that it has in European Union law or procedure from time to time.

(4) The order under subsection (1) must be made within the period of 6 months beginning with the date on which this Act receives Royal Assent.”

Lord Lawson of Blaby: My Lords, the amendment concerns an issue of critical importance. As was said in the previous debate, the regulatory and supervisory system clearly failed badly. The regulators were not primarily responsible; the bankers were primarily responsible—but the regulatory and supervisory system performed badly, as did the auditors. We are all of us seeking to prevent that sort of problem from occurring again, and part of that endeavour is to have a supervisory regime that requires the banks to be more prudent than they were in the years leading up to the disaster of 2008.

This subject was considered by the Independent Commission on Banking—the Vickers commission—and one of its conclusions was that basing the regulatory requirement on what are known as risk-weighted assets was unsatisfactory. That is, incidentally, also the considered view of the Bank of England and the PRA. One of the reasons why that is unsatisfactory is that the amount of risk with which one weights particular assets is to a large extent subjective. It is done by the banks, using their own models. The Basel people set a test for a whole lot of different banks. They gave them all the same portfolio of assets and asked the banks to risk-weight them. The difference between the risk weighting of the overall package in one bank was getting on for three times that of another. Indeed, for particular classes of assets, the difference between the risk weighting of the banks was eight times. To a large extent, the banks were able to use whatever risk weighting they chose.

5 pm

The Vickers commission, the Bank of England and the banking commission concluded that a more robust and reliable basis for ensuring that banks are prudent would be to lay down a leverage ratio—as our American

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friends call it. It is simpler and more straightforward; it is the ratio between the capital of a bank and the assets on its books. The Basel committee said that the capital should be at least 3%, which is a very low level. That is why it is not surprising that the Vickers commission, the Independent Commission on Banking, said that it should be a little over 4%. The Government rejected that on grounds which I and, I think, the commission found inadequate. It is striking to note that in the United States, looking at the major banks where there is a potential for systemic risk, the ratio varies between 5% and 6%. When this was pointed out at Second Reading, my noble friend the Minister replied that the Americans work it out differently. I looked into this carefully and consulted the Bank of England, and am assured that the difference in practice is trivial.

This is an important and potentially dangerous area. However, we did not say what we think the leverage ratio should be. What we said was that it should not be set by politicians. It should be set by the Financial Policy Committee of the Bank of England, which would look at this objectively and decide what is necessary. Again, there is a read-across with the United States because the responsibility for setting the leverage ratio there does not lie with the Treasury, but with the Federal Reserve as the supervisory authority. We have said that in this country it should not be for the Treasury or the politicians, who are heavily lobbied by the banks—we all know about that—it should be for the FPC to decide what the ratio should be and then to lay it down. That is why the amendment states simply that the importance of the leverage ratio is such that it should be left to the FPC to decide. I beg to move.

Lord Eatwell: My Lords, this amendment, which I hope will become a new clause in the Bill, is probably the most important in the Bill. It defines whether we are really serious. If we are not serious, we will reject the idea of having a leverage ratio as one of the armaments of the FPC. If we are serious, the Financial Policy Committee must have this tool.

As the noble Lord, Lord Lawson, has argued, risk-weighted assets have been discredited as a measure of risk within the banking system. It is regrettable that so much legislation both here and in some of the discussions in Basel and in the European Union still use this discredited measure as a means of devising appropriate regulatory measures.

The leverage ratio is simple, it is clear and it provides a protection to the overall stability of the financial system; it provides protection for a resolution regime; and it provides protection for depositors because, with the regulatory determination of the amount of capital relative to the asset base of the bank, that regulatory determination pursuing those goals will have the effect of reducing an important component of systemic risk. It is not me who makes that argument; the Government did so in the Financial Services Act 2012. In defining systemic risk, that Act defines one of the characteristics of systemic risk as “unsustainable levels of leverage”.

If the Financial Policy Committee is supposed to be managing systemic risk and a component of systemic risk is unsustainable levels of leverage, why cannot the

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Financial Policy Committee have the tools to do anything about it? At the moment the Government are telling us that they will review whether the FPC should be given this particular tool in 2017. They will review it: we are not even sure that the Financial Policy Committee will receive the ability to manage the leverage ratio in 2017-18.

By the way, even if it does appear in 2018, the Financial Policy Committee and the Governor of the Bank of England will be given this tool just as Mr Carney gets on the plane back to Canada. We have managed to secure someone who the Government tell us—and I think is generally acknowledged—is a highly skilled central banker and we are not giving him the tools to do the job which he is asked to do in the 2015 legislation. I notice that it was said in the Commons Public Bill Committee that:

“The Financial Policy Committee cannot be expected to work with one hand tied behind its back”.—[Official Report, Commons, Financial Services (Banking Reform) Bill, 26/3/13; col. 207.]

Not giving the Financial Policy Committee this particular power ties both its hands behind its back because it is, as I have already said, required to take account of unacceptable levels of leverage and yet it has no tool to do anything about it. The amendment of the noble Lords, Lord Lawson and Lord Turnbull, and of my noble friend Lord McFall, achieves that goal. Surely this is what is necessary if we are serious and are not overwhelmed by the lobbying of the banks.

Lord Turnbull (CB): My Lords, I support the amendment and the account given by the noble Lord, Lord Lawson. I shall add a bit of background to this matter. For probably two decades, up to about 2004, the leverage ratio of the British banking system fluctuated between 20 and 25. It then rose, reaching a peak in 2008 of somewhere over 40. The Government’s wish that the number of the leverage ratio should not be greater than three implies that the limit of their ambitions is to get this leverage ratio back to 33, which is still, by historical standards, a very high ratio.

A very interesting chart in the Vickers commission report shows how risky people thought assets were. It shows that they fell—this is the assessment that banks put into their own models—between 2004 and 2008. How can anyone believe that 2008 was a year of greater financial stability? I believe the way this came about was as follows. You said in 2004, “I have a portfolio of commercial property and have not lost a penny on it in the past 10 years, so I will give it a weight of X”. You come to 2008, four or five years later, and say, “I have still not lost any money on this, which tells me that this portfolio is not as risky as I thought it was in 2004, so I will give it a lower risk rating”. What is happening all the time when you have an upswing is that, as the upswing gets riper and riper, the risk weights go down and down, until there is a crash. The whole purpose of having a leverage ratio is to provide a backstop to that. One or two people argue that we should run on basic leverage ratios alone but, in my view, both the leverage ratios—unweighted and risk-weighted—should run in tandem. Each provides a check on the other. Relying solely on risk-weighted assets leads you into the farce of banks marking their

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own homework and doing the opposite of what they should be doing by marking things as less likely at precisely the moment in the cycle where they become more likely.

Another argument that has come up in relation to 3% and 4% is that we must not get out of step with regulation abroad. However, when it comes to risk-weighted assets, the Government have accepted that they want to impose a higher figure—partly because we have more systemically important banks and it is important for a medium-sized economy running a very large banking sector for that sector to be safe. When you say, “Does that not mean that what we thought was a 3% figure should move pari passu”, the answer is, “Oh no, we can’t do that because we will get out of line with what everyone else is doing”. But if you can do it for one of these measures, why can you not do it for the other? I find that argument completely unconvincing.

There was a view in the commission that higher leverage ratios were a good thing. However, that is not what this amendment is about. Although we thought that, the amendment says that it should be the FPC that makes the judgment. As my noble friend Lord Eatwell has pointed out, the absurdity of hiring this super-duper, global-standard central banker and then not giving him this essential tool until the very point at which his contract ends is beyond belief. It seems an absolutely simple point that the FPC should start this. Elsewhere in the world, other people will be thinking about this and it seems very strange indeed to leave the Bank and the FPC unable to start deploying this measure.

There is an argument that certain kinds of banks, particularly those with low-risk assets, will find that this 4%, or the leverage ratio, becomes the binding ratio. People making that argument cite, principally, various former building societies. You have to look around and ask where the biggest failure in Britain was. It was former building societies thinking that they had a portfolio that was a good deal safer than it really was. Some of them also got into quite a lot of commercial real estate. Northern Rock, for example, would have been well advised to have followed a leverage ratio of this kind. If it turns out that the supply of mortgages is not adequate—although we are doing lots of other things to promote it—you might want to differentiate between one kind of organisation and another. That should be done by the regulator as a derogation from a world in which we are working with higher leverage ratios than the Government currently envisage.

5.15 pm

Lord Blackwell: My Lords, from the discussion, I am once again not clear on whether this needs to be built into the legislation in the way that is being suggested. As the noble Lord, Lord Turnbull, has said, I do not think that anyone would now dispute that it is a useful backstop to have a leverage ratio alongside the risk-weighted assets calculation of capital. However, that is built into CRD 4, and the PRA and FPC have recently demonstrated that they are perfectly capable of anticipating that in terms of the capital guidance that they give to institutions on the capital that they are required to hold.

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There is an argument about whether 3% is the right level or not. I can assure my noble friend Lord Lawson that in the UK at least, whatever banks may have done in the past, they would not get away with applying whatever risk weighting they chose to devise against their own risk assets. All the risk weightings applied in the risk-weighting process are reviewed intensely by the PRA. It has to approve the internal model in order for it to be used to assess your own risk capital, and that process is now extremely well scrutinised by the regulator.

Nevertheless, there is a good argument that, because the process is bound to be imprecise, having a backstop of an overall leverage ratio makes sense. I think that is generally agreed. However, if you make that leverage ratio too restrictive, you may distort behaviour in a way that you do not desire by encouraging banks and other financial institutions to put too many of their assets into risky assets. If you have only a leverage ratio that does not discriminate by risk, and you are allowed only to hold that amount of assets, then you will stop risk weighting them and simply go for the riskiest assets you can get within that overall leverage ratio. The two have to work together. We should be careful about believing that having too hard a biting overall leverage ratio will reduce banks’ risks as it may work in the other direction.

Lord Lawson of Blaby: The issue here is not whether you should have a leverage ratio; it is not whether it should be statutory or not. The issue is who should determine it: the Chancellor of the Exchequer or the Financial Policy Committee of the Bank of England. That is the issue. Although I speak as a former Chancellor of the Exchequer, I still think it would be better left to the FPC. That is the issue; not whether it should be statutory or whether it should be alone without any consideration of risk-weighted assets. The issue is simply who should determine it.

Lord Blackwell: I thank my noble friend for that clarification, but I was responding to the points that were made by him and other noble Lords in advancing their arguments. If you come down to the question of “Does the PRA need more powers in order to enforce a higher or more restrictive leverage ratio?” then it can, under its existing powers, require capital add-ons to banks if it is not satisfied with the risk weightings. That is the way it would deal with it. It seems a slightly tangential point as to whether it is setting the overall leverage ratio or whether it is setting the capital ratio by other means. I should like to hear the Minister’s response on whether he thinks there is a case for this being built into the legislation.

Lord Hollick: I, too, strongly support this amendment. This is a serious matter. It is not a backstop, or at least I do not see capital as a backstop; I see it as the foundation upon which safer financial institutions can be built. We debated in great detail, quite properly, the regulatory process and all of the regulatory initiatives, but at the end of the day there is nothing that can protect the public and the depositors other than a strong capital foundation.

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In a characteristically robust article in today’s Financial Times—which of course I will replace in the Library—John Kay said:

“It is hard enough to find people capable of running financial conglomerates—the fading reputation of Jamie Dimon, JPMorgan Chase chief executive, confirms my suspicion that managing these businesses is beyond the capacity of anyone. The search for a cadre of people employed on public-sector salaries to second guess executive decisions is a dream that could not survive even the briefest acquaintance with those who actually perform day-to-day supervisory tasks in regulatory agencies. They tick boxes because that is what they can do, and regulatory structures that are likely to be successful are structures that can be implemented by box tickers”.

He goes on to say:

“Financial stability is best promoted by designing a system that is robust and resilient in the face of failure”.

That is what a strong capital base does.

It is very important that the Financial Policy Committee has the power to do this. Of course, politicians can always be relied on to make the right decisions but, as we know, when political priorities are to encourage Chinese banks to come to London, for instance, they are allowed to open branches. I am sure that China is a better credit risk than Iceland but it gives you an insight into how decisions can be made by politicians. It is very important that the Financial Policy Committee is given the power to make these decisions, and to make them independently, just as the Bank of England does over interest rates.

Baroness Noakes (Con): My Lords, I agree with much of what my noble friend Lord Blackwell said—in fact, I probably agree with all that my noble friend Lord Blackwell said—but I would like to pick up something that my noble friend Lord Lawson said when he intervened on my noble friend Lord Blackwell, that the issue was who was to decide on the leverage ratio.

The amendment before us says that the direction, which is the Treasury’s direction,

“may specify the leverage ratio to be used”.

The key issue with this amendment is not who potentially decides on the amount of the leverage ratio but the timing of the leverage ratio. People have been clear, and it is going to be a requirement of CRD IV, that there will be a leverage ratio, and the current international timing is to be 1 January 2018. As I understood it, that timing was going to drive the Government’s decision on what leverage ratio to introduce, given that they have the power to include it within the macroprudential toolkit under the legislation that has already been passed. We should not rush into a leverage ratio because there is still much work to be done on understanding how these leverage ratios, which have not been used much recently, actually work in practice.

My noble friend Lord Lawson also pooh-poohed the idea that the difference in practice between the US and the UK was significant. Some analysis done by the British Bankers’ Association has identified that on any given balance sheet the difference can be 3% under CRD IV and 5.3% under the current US rules. So we potentially have quite a significant difference, and the BBA talks about different leverage ratios as well. We also need to understand the impact of any given level of leverage ratio once the definitions are sorted out.

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Mark Carney, who is chairman of the Financial Stability Board as well as Governor of our own Bank of England, has been clear that this is to be a backstop measure and that it is important to calibrate it so that the risk-weighted asset calculation of capital bites before the backstop method. Unless we are very clear when we introduce the leverage ratio about what the impacts will be, we potentially lay ourselves open to the unintended consequences of positively driving the capital requirements of the banks or, more likely, their lending capacity.

It is important that we let the current timetable for the development of the leverage ratio proceed and let the calculations be done properly. Banks are already disclosing leverage ratios to the regulators and will be disclosing considerably more information as time goes on, so there can be much more of a public debate about the impact of different leverage ratios on banks and other financial institutions.

Lord McFall of Alcluith: I support the amendment moved by the noble Lord, Lawson, which stands in my name as well. As the noble Lord said, the amendment is, quite simply, about who is doing it. Whatever they do at some future stage, we will let them get on with it, because it is about authority. There are two issues here: learning the lesson, and the authority.

On learning the lesson, I noted the comments of Adair Turner, former chairman of the FSA, when he said:

“We allowed the banking system to run with much too high levels of leverage, inadequate levels of capital, and we ignored the development of leverage in the financial system … That was a huge mistake”.

I had never gone back to basics and asked, “Why do we allow banks to run with 30, 40, 50 times leverage?” Neither had anyone else, funnily enough; so it is about time that somebody asks that question and keeps it in their mind on a daily basis. My point is that politicians—Chancellors, Prime Ministers or whoever—will not keep that in their mind on a daily basis. We learnt that from the financial crisis before. If we set up a new organisation we should give it the authority. I noted the comments made by Lawrence Tomlinson, who was brought in to BIS recently as an “entrepreneur in residence”. He questioned why the British Bankers’ Association needed,

“60 people working full-time lobbying”,

when the Government owned majority stakes in two of the banks, Lloyds and the Royal Bank of Scotland. As he said:

“We already own the banks. Why are Lloyds and RBS paying the BBA to lobby us? They can just get lost! … It’s amazing we let RBS spend tens of millions advertising its services with 80% of our money”.

I mention that because the banking sector is the best sector in the country for lobbying. The banking sector, unlike any others, gets direct access to No. 10 and No. 11 Downing Street. That happened with the previous Government and it is happening with this one. If you do not allow the proper authority—the FPC—to have this leverage ratio, you are weakening its authority in an instant. I suggest that the institutional memory of a Chancellor or a Prime Minister is much less than the institutional memory of the Financial Policy Committee.

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In terms of the leverage requirements, we have had the Vickers commission, the Parliamentary Commission on Banking Standards, and the interim Financial Policy Committee asking for that leverage to be handed over. The Government have refused. If the Government do not want to be accused of playing politics, it is important that that is put to the Financial Policy Committee.

Let us look at leverage even today. I looked at Barclays, which has been,

“the poster child for excess leverage. Its balance sheet is roughly the size of the UK’s GDP. It funds 1.5 trillion pounds of risk-taking with 97.5 per cent debt and 2.5 per cent loss-absorbing equity … The average hedge fund trades with less than 3 times leverage … Barclays has chosen to operate with 45 times leverage … So Barclays deploys gearing 15 times that of most hedge funds. If the bank’s assets eroded in value by a mere 1.5 per cent, it would be 100 times leveraged. How confidence inspiring is that?”.

If we do not allow the FPC to look at these issues on a daily basis, when No. 10 and No. 11 Downing Street will not be looking at them, we will find ourselves in trouble in the future. As mentioned by the noble Baroness, Lady Noakes, Dr Carney said that it is,

“essential to have a leverage ratio as a backstop to a risk-based capital regime”.

We are saying that, if we have appointed Dr Carney with all the thrills and frills of a Chancellor’s appointment, we should give him that authority so that he can get on with the job straightaway and we can keep it away from the hands of the politicians.

5.30 pm

Lord Flight: My Lords, as the noble Lord, Lord Eatwell, pointed out, this is crucially important territory. However, I am not certain that the amendment gives the right answer.

I recollect that when I was studying economics at Cambridge 40 something years ago, a capital base of 8% and a gearing ratio of 12.5% was viewed as the prudent formula for a bank. Things have changed a great deal since then. Who was it that allowed banking ratios to get to such ludicrously low levels in this country? It was the regulator. Although we have a change of regulator organisation, there are still, to some extent, the same people and I am not sure that I necessarily trust the regulator in its new name as being sound in overseeing such things.

Look what has happened, I repeat, in the past 10 or 15 years. I think it was the noble Lord, Lord Lawson, who made the point that risk-weighted asset formulae are somewhat discredited. Again I agree and, having had some recent experience of it, I have little confidence going forward.

I also note in terms of ratios permitted that the regulator for some extraordinary reason—at least until the recent present—had ridiculous differences between the capital ratios required for large, too-big-to-fail banks and smaller and new banks. The ratio for mortgage lending was something like 20 times as much for a small bank as for a large bank. So, again, how come the regulator allowed crackpot different capital ratio requirements to creep in in a way that was thoroughly anti-competitive?

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I am not sure that the Treasury may not be the safer party to ultimately have the power to determine capital ratios. As has been pointed out, the amendment states:

“The direction above may specify the leverage ratio to be used”.

The direction is given by the Treasury and so the amendment ultimately gives the last-call power to the Treasury and not to the PRA.

So where are we? I do not think the issue is resolved. It certainly needs addressing.

Viscount Trenchard (Con): My Lords, I agree with much of what my noble friend Lord Flight has said. I also agree with a great deal or all of what my noble friends Lord Blackwell and Lady Noakes have said. I was also impressed by the way in which the noble Lord, Lord Turnbull, stated that he believed that the straightforward, unweighted leverage ratios should operate in tandem with a risk-weighted ratio.

I noticed that noble Lords opposite smiled when my noble friend Lord Blackwell pointed out that if the absolute ratio bites first and becomes effectively a frontstop rather than a backstop, it will lead banks to concentrate more heavily on risky assets, on lending on assets which they think will give them higher returns. I am convinced that that is correct. It is therefore important that the absolute ratio should be a backstop rather than a frontstop.

I am confused by the difference in responsibility between the FPC and the PRA. The amendment suggests that the Treasury should enable the FPC of the Bank of England to determine what the leverage ratio should be. However, as noble Lords have pointed out, the FSA had already become more involved in interfering with and providing advice, exercising influence over banks’ lending policies and questioning their formula and the basis on which they applied certain leverage to certain categories of asset class.

I am not sure where the writ of the FPC stops and where that of the PRA starts. I know that they are both part of the Bank of England and this is confusing. I would welcome clarification from the Minister.

Lord Brennan (Lab): My Lords, Mr Andrew Tyrie, the chairman of the Parliamentary Commission on Banking Standards, described leverage ratio as,

“the single most important tool to deliver a safer and more secure banking system”.

In their reply last July, the Government accepted this importance. Indeed at paragraph 5.50, they plainly stated that in the future the FPC should determine the ratio, provided that it was not allowed to fall below the international standards reflected in Basel III. However, at paragraph 5.51, that commitment having been repeated, it is then said that it is,

“subject to a review in 2017”.

The question therefore arises, if the Government are committed in principle to the FPC determining the ratio, what in this review in 2017 might affect that principle? Questions of amount or the approach to ratio in the light of Basel III go to the process rather than the principle of who determines the ratio. I presume that over the next four years, the Treasury will determine the leverage ratio and will place such requirements about it as it thinks fit on the banking industry.

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At page 68 of the response, the Minister will recall that under the heading “leverage ratio”, it is stated that the Treasury is presently reviewing with the FPC the balance between backstop and frontstop considerations. The intention is to publish the results before the end of the year. Given the six weeks or so of parliamentary time that we have left until Christmas and assuming that Report is, for example, in December, will the Minister undertake to ensure that that review is published before Report? It will affect the debate, should it recur on Report, on the question of who makes the decision. The key point, however, is: why 2017, if the principle is accepted now?

Lord Deighton: My Lords, I welcome the engagement of noble Lords on this critical issue of the leverage ratio and the FPC’s toolkit. Everybody agrees the importance of making sure that our financial institutions are appropriately capitalised. There is no dispute about that and the lessons we should have learnt from the financial crisis. The real question—and again my noble friend Lady Noakes hit the nail on the head—is about the journey we take to get there, how it integrates with what is going on in global standards, and what powers the FPC and the regulators already have to ensure that we are in the right place in the mean time. I think that also comes back to the points made by the noble Lord, Lord Brennan.

I shall try to give some context, particularly for those who are not so familiar with all the aspects. With each of these amendments, I ask myself what the point of substance is between the amendment and the Government’s position and whether I can reconcile the two with the existing actions we are taking. In this case I have been able to comfort myself that adequate protections are absolutely in place, given the objectives of this amendment.

The FPC has two main sets of powers at its disposal. The first is a power to make recommendations. This includes recommendations to both the PRA and the FCA. They can be made on a “comply or explain” basis. The second set of powers, which we are talking about here, is to give directions to regulators to adjust specific macroprudential tools. Amendment 93 proposes that the Government give the FPC direction powers to implement a minimum leverage ratio in the UK. Before explaining why the amendment is not necessary or desirable, let me explain the international and domestic context, beginning with the international.

In order to address recognised problems with the system of risk-weighted capital requirements—which we have all talked about and acknowledged—the Basel III accord recommends a complementary binding minimum leverage ratio. Again, we have all agreed that the right way ahead is for the two to work together, so there is no dispute about that. That standard comes into force in 2018, following a final calibration of the leverage ratio in the first half of 2017 so that we get it right. Separately, at the European level the European Banking Authority will undertake a review of the leverage ratio with a view to the European Commission introducing legislation in 2017. The Government agree, and have consistently argued, that banks must be subject to the binding minimum leverage ratio requirement, which supplements the risk-weighted capital

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requirements as set out by the Basel III accord. Therefore the Government fully anticipate the development of internationally agreed minimum standards of leverage.

The Government take the view—and we believe that the regulators agree—that the optimal approach to creating a lasting binding minimum standard is to work towards international agreement and its implementation through legislation. As Mark Carney wrote in the Financial Times on 9 September:

“Yielding to calls for unilateral action to protect domestic systems would risk fragmenting the global system, slowing global growth and job creation”.

Once that minimum is agreed domestically, the Government propose—and this directly addresses the point made by the noble Lord, Lord Eatwell—to furnish the FPC with a specific macroprudential tool to vary the leverage ratio, through time, obviously subject to it not falling below the minimum.

However, the question raised by the amendment is: what powers do the regulators have to take action on leverage between now and 2018 in advance of the introduction of that internationally agreed binding minimum requirement through European legislation? Let me reassure noble Lords that the regulators already have extensive powers to address the issues raised by this amendment. The FPC has broad powers to make recommendations to the regulators, on a “comply or explain” basis, including on leverage. The PRA has all the powers necessary—which we have talked about—under Section 55M of the Financial Services and Markets Act 2000 to require individual firms to take specified actions, including on leverage. Under Section 137G of FiSMA it may make rules in pursuance of its general functions, including rules on leverage ratios.

The killer fact, if I may call it that, is that on 20 June—interestingly, one day after the publication of the PCBS report containing this recommendation—the PRA announced that it would require eight major UK banks to meet a tougher leverage ratio than that prospectively required by Basel III. They have already done that. That action followed a March 2013 recommendation from the interim FPC to the PRA to consider applying higher capital requirements to any major UK bank or building society with concentrated exposures to vulnerable assets, or where banks were highly leveraged relating to trading activities. Put simply, the regulators already have the powers to do what the noble Lord appears to be suggesting in advance of international agreement.

Lord Eatwell: I am intrigued by that argument. The noble Lord started off with a powerful argument for the necessity of a leverage ratio that is allied with risk-weighted assets and other measures. He is now saying that we do not need it because it is all there already. Why, then, are we even bothering to think about introducing it in 2017 or 2018? As he said, we have all the powers already. He is absolutely contradicting himself in a single speech. Will he also address the fact that the Bank of England’s response today to the banking commission’s final report states that the FPC will publish its assessment of the appropriate level of the leverage ratio by the end of this year? When the FPC publishes that assessment, what will the regulators and the Treasury do about it?

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Lord Deighton: There was nothing contradictory in what I said, but I will clarify it. For the longer term, we absolutely agree that we need an internationally consistent standard that will work with a minimum leverage ratio. In the mean time, before we are able to employ that in a way that is consistent with how those rules work out, we have the powers individually to make sure that leverage ratios exist which protect the system. I do not think that there is anything contradictory about that. It simply shows that in the short term we have the capacity to protect the financial system, and that is exactly what the regulators have done. There is nothing contradictory in that at all. The regulators have the powers to do what they need to do and will continue to have those powers after international agreement has been reached, at which point we will integrate them through the power that we will give the FPC to set the varying leverage ratio through time.

5.45 pm

I will say, to give noble Lords the international context, that international agreement is on its way. It is in this context that the Government’s commitment to providing the FPC with this additional tool in its toolkit should be understood. Once the baseline minimum level has been set, the Government have made clear their intention to give the FPC an express power of direction to vary through time the baseline leverage requirement for deposit takers and investment firms, subject to it never being below the requirement, as you would expect, determined by Basel III. The precise design of the tool will therefore depend on the provisions of the relevant European legislation. This is a mechanical reserve to ensure that they fit together effectively. It would not make much sense to add this macroprudential tool to the toolkit until the baseline has been set. Indeed, as the FPC noted at its September meeting in response to a recommendation directed to it by the PCBS,

“a full assessment of the appropriate leverage ratio will depend on the definition of leverage agreed internationally”.

While work on the international standards is under development, in addition to the powers described the FPC will also have specific powers available to tackle systemic risk stemming from, for example, excessive leverage or any identified issues with risk weights on one or more classes of assets. In particular, the Government have already agreed that the FPC should be made responsible for policy decisions on the countercyclical capital buffer, which I think was a point raised strongly before. That will be in the hands of the FPC. It will also be given a power of direction over sectoral capital requirements. Those would be deployed if concerns of bubbles in certain asset classes took place—for example, in commercial property. The statutory Financial Policy Committee gained its powers over sectoral capital requirements on 1 April 2013, so that is already in place. For the reasons I have given, I call on my noble friend to withdraw this amendment.

Lord Eatwell: My Lords, will the Minister answer the question I asked about the statement that the Bank of England has made today that the Financial Policy Committee will publish its assessment of the appropriate level of the leverage ratio by the end of this year? When it publishes that assessment, who is then going to act and what are they going to do?

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Lord Deighton: I apologise to the noble Lord. I was so excited about the first question that I forgot about the second one. It is consistent with what I have already said that the FPC intends to address this recommendation in that timescale, but a full assessment will depend on the definition of leverage agreed internationally, so it all rather depends. In terms of who is going to implement it, as I said, the regulators already have the power to do so. In June this year, they changed the ratios on our key eight institutions to protect them in the mean time, so they have these powers and they have exercised them. I think that is a killer fact.

Lord Lawson of Blaby: My Lords, in some ways this has been a rather puzzling debate. I warmly endorse what the noble Lord, Lord Eatwell, said. This is one of the most important—if not the most important—issue that we have to discuss in the course of this extremely long Bill. For that reason alone, I think it likely that we will wish to come back to it at Report. Meanwhile, I am encouraged to some extent by what my noble friend the Minister said. However, he seemed to be saying at least two completely different things, if not three. One was that we would have to have the leverage ratio—we are all in agreement that we have to have a leverage ratio—that was internationally agreed. Then he said that we would also have discretion, with the FPC, to decide the leverage ratio, and therefore that there was no need for the amendment because the provision was already there.

First, I am not convinced that it is already there. I shall read very carefully what the Minister said. When my right honourable friend the Chancellor responded to the recommendation of the Parliamentary Commission on Banking Standards, he said nothing of the sort. Nor did he say whether he disagreed with it. He said the first part of what my noble friend said: namely, that we have to accept the international standard.

There are only two major global financial centres: New York and London. It is important that we do what is right for our financial centre—and the United States takes the same view. We should not rely on international agreements. Too often it is the lowest common dominator that is agreed. The United States is going its own way, particularly with large banks. It realises that it is a major global financial centre and that New York is so important to the American economy that they have to get it right.

In the United Kingdom, the banking and financial sector is even more important to the British economy. In relative terms, it is five times as important to our economy as the American banking and financial sector is to theirs. Therefore, it is all the more important, if we are to have a strong and successful financial centre and a strong and successful economy in this country, to do what is right.

It is quite clear that that means that we should have a leverage ratio that may be the same as what is agreed internationally—if it is agreed internationally—but may well be a more prudent one. It certainly would not be a less prudent one, but it may be in the interests of the City of London and the British economy that it should be more prudent.

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The amendment states that the decision should be taken by the Financial Policy Committee of the Bank of England. In a sense, my noble friend agreed with that when he said that the duty was already there and that we had given it to the committee. If that is so, it is good news. However, I suspect that it is not entirely the case. Therefore, it is very likely—in fact, more than likely—that we will come back to this very important issue on Report. In the mean time, I beg leave to withdraw the amendment.

Amendment 93 withdrawn.

Amendment 94

Moved by Lord Lawson of Blaby

94: Before Clause 16, insert the following new Clause—

“Proprietary trading

(1) The PRA and the FCA must carry out a review of proprietary trading by banks.

(2) The review must be completed before the end of the period of 3 years beginning with the day on which this Act is passed.

(3) The PRA and the FCA must give the Treasury a report of the review.

(4) The report must include—

(a) an analysis of any action taken by the PRA and the FCA to monitor whether and to what extent banks engage in proprietary trading and any action taken by the PRA or the FCA to discourage banks from doing so;

(b) an account of any difficulties encountered by the PRA or the FCA in taking that action and an assessment of its efficacy;

(c) an account of any requirement imposed on banks which the PRA or the FCA consider may be engaging in proprietary trading to publish a statement of the banks’ exposure to risk in their trading operations and of the controls applied to limit that risk;

(d) an assessment of the impact of the ring-fencing rules on proprietary trading by banks;

(e) an assessment, drawing on experience in countries other than the United Kingdom, of the feasibility of prohibiting banks from engaging in proprietary trading or limiting the extent to which, or circumstances in which, they may do so (having regard, in particular, to any difficulties of definition); and

(f) a comprehensive analysis of the advantages and disadvantages of prohibiting banks from engaging in proprietary trading or limiting the extent to which, or circumstances in which, they may do so.

(5) The Treasury must lay a copy of the report before Parliament.

(6) The PRA and the FCA must publish the report in such manner as they think fit.

(7) The Treasury must, following receipt of the report, make arrangements for the carrying out of an independent review to consider the case for the taking of action in relation to proprietary trading by banks.

(8) The appointment by the Treasury of persons to carry out the review requires the consent of the Treasury Committee of the House of Commons.

(9) The reference in subsection (8) to the Treasury Committee of the House of Commons—

(a) if the name of that Committee is changed, is to be treated as a reference to that Committee by its new name, and

(b) if the functions of that Committee (or substantially corresponding functions) become functions of a different Committee of the House of Commons, is to be treated as a reference to the Committee by which the functions are exercisable;

and any question arising under paragraph (a) or (b) is to be determined by the Speaker of the House of Commons.

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(10) The persons appointed to carry out the review must give the Treasury a report of the review once it has been concluded.

(11) The Treasury must lay a copy of the report before Parliament and publish it in such manner as it thinks fit.

(12) In this section—

(a) “proprietary trading”, in relation to a bank, means trading with funds on markets on the bank’s own account (whether or not in connection with business with the bank’s customers),

(b) “ring-fencing rules” has the meaning given by section 417 of FSMA 2000.”

Lord Lawson of Blaby: My Lords, this amendment is in my name and those of the noble Lords, Lord Turnbull and Lord McFall. It concerns proprietary trading, which gave the banking commission so much concern that we produced a report entirely devoted to the subject.

Proprietary trading is speculative activity conducted by an institution entirely for its own benefit, where no clients are involved at all. It uses its own financial resources to conduct the speculative activity, which can be very profitable. I have no argument with it taking place, but I have always believed that it is the sort of thing that hedge funds should be doing—and good luck to them. It is not something that banks should be doing.

There are two main reasons for this. One is that it can be exceedingly risky—and we know that there is enough risk in the system without that. Since the activity can be perfectly well done—and in a free market, should be done—by other institutions, namely the hedge funds, that is fine.

The other reason that it is dangerous for banks to do this is the issue of culture. When the Parliamentary Commission on Banking Standards was set up, one thing that we were charged to do was to look at the issue of banking culture, because it was clear that it had gone radically wrong. Two aspects of banking culture in particular are relevant here. One is prudence. It always used to be the case—and it should now be the case—that this is an essential part of the culture of any bank. People put their deposits in banks thinking that it is a safe thing to do because bankers are prudent. The other aspect of the culture is service to clients. Of course, with proprietary trading, by definition there is no client; there is no service to clients at all. It is pure speculation on the financial markets, and on the bank’s own books, without any clients being involved.

That is why my old friend Paul Volcker—whom I have known for many years; he was chairman of the Fed when I first became Chancellor, and I had a lot to do with him—lobbied the American Government to introduce what was called the Volcker rule, which forbids American banks from conducting proprietary trading. He did this for the same reasons that I outlined. However, we did not go that far.

Incidentally, it is interesting that proprietary trading was rife in British banking before the crash. As much as 30% of the business of some banks was proprietary trading. Now it has almost completely disappeared, in the aftermath of the crash. The banks are saying, “Why are you bothered about proprietary trading? We don't do it any more”. That is true—they do not. But they will. They will come back, as they did before. When they feel that they have got over the aftermath

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of the disaster, and the blood is coursing rather faster through their veins, they will take these risks and do it all over again.

What we have said is that this is a serious issue that needs to be addressed, and that in three years’ time there should be a serious review of this, which will take into account what is happening in the banking world and will see how the Americans have got on with banning proprietary trading for banks. I am not totally optimistic, because the Americans have a crazy legislative system in which, once a piece of legislation has been introduced, the legislators festoon it like a Christmas tree with all sorts of baubles of this, that and the other. The simple rule that Paul Volcker wanted has been encrusted with page after page of appalling legislation, which he regrets; he makes no bones about that. I am quite sure that we in this country, with our much superior system of government, would not do that.

Nevertheless, we will be able to learn something from the experience of the United States. We will learn from the experience of what happens over the next three years, and I strongly hope—again, I cannot see any objection—that the Government will accept the amendment, which calls for a review to be held in three years’ time, and, in the light of that, for the Government to decide whether we should have a Volcker rule in this country and whether we should ban banks, although certainly not hedge funds, from engaging in proprietary trading.

6 pm

Lord Eatwell: My Lords, I support the noble Lord, LordLawson, in this amendment. It seems a modest amendment, calling for a review in three years’ time when the appropriate information from the United States will be available. It will be valuable to have this clause in the legislation to ensure that that review takes place, because it is so easy—given the exigencies of the moment—for major issues, which were recognised as major in the past, to be neglected because of day-to-day pressures. Therefore, having done all our work on banking in the Bill, if we set this process in motion so that the review happens, we will be performing a valuable service.

Lord Phillips of Sudbury: My Lords, I, too, support the amendment. I moved Amendment 91B at the close of our second day in Committee, which overlapped to a considerable extent with this amendment. In my amendment, I also talked about looking at the cultural as well as economic effects of this mass of gambling, as it is, within the financial markets. I hope that the Government will smile upon this; it may be that if it comes back on Report I will try to amalgamate my amendment and this one.

Lord Higgins (Con): My Lords, I also support my noble friend’s amendment, but with some qualifications and a request for some clarification. The amendment simply refers to “proprietary trading by banks”; that does not distinguish between one part of a ring-fenced bank and another. The arguments on this issue are so clear that we should take a perfectly clear view that there ought to be no proprietary trading whatever by any ring-fenced bank.

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There is also no real need to wait three years for such an inquiry. My noble friend referred to the Volcker rule in America; not all of us in this Chamber have Paul Volcker as a personal friend, but I have great respect for him. He is absolutely right that this should not be carrying on in the United States. Although it may be that there has been a decrease for the moment, over a period of three years the situation might change somewhat. Therefore, we could take a clearer view on this between now and Report than is set out in the amendment. As my noble friend has pointed out, this is effectively the banks’ carrying out risky trading on their own behalf—in the past, not infrequently, it was risky trading on their own behalf with clients’ money—and this, again, is a crucial point. Perhaps we should clarify that aspect of the matter, but I have not the slightest doubt that this is a move in the right direction and I hope that we can make rapid progress on it.

Lord Turnbull: I reassure the noble Lord, Lord Higgins, that it is certainly not intended, while this activity might remain within a banking group, that it should be done, under the plan, by a ring-fenced bank. One of the reasons why we took the view that we should wait and see is that the dividing line between a proprietary trade and a trade on behalf of a customer is not straightforward, which is why it is very difficult in the US. For example, if I lend the noble Lord money he may seek some kind of hedge which I would provide. That might mean that my position as the bank is no longer what I really want it to be. As a bank, I would look around to see what my colleagues have done during the course of the day, and we would then add up all the positions that we have taken. We may well find that that position is not where we really want to be, so on the following day the bank goes out and undertakes a trade which gets it back to the degree of hedged position that it wants. Was that a proprietary trade or was it a trade that was a consequence of serving a customer? That is why this is actually very difficult and why we are wise to wait and see whether workable definitions could be found of what constitutes real proprietary trading and of what constitutes trading in response to a customer. This measured amendment enables us to do precisely that.

Lord Deighton: My Lords, the ICB considered in detail the case for a ban on proprietary trading in the UK, but decided in favour of ring-fencing. The PCBS heard evidence from a wide range of sources that prop trading does not appear to play a large role in the UK at the moment—as my noble friend Lord Lawson pointed out—nor did it play a significant role in the financial crisis. The noble Lord, Lord Turnbull, has already addressed the question of my noble friend Lord Higgins, but it should of course be noted that the ring-fenced banks will be banned from proprietary trading as well as from market-making and other forms of trading activity that would expose them to risks from global financial markets. Therefore, from a prudential perspective, much of the risk posed by prop trading can be addressed by a suitably robust ring-fence which is, of course, the thrust of our legislation. This was the point made by the PRA in response to questions from the PCBS.

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It is also worth noting that the evidence heard by the PCBS also suggests that prop trading is not necessarily the sole avenue for the cultural contamination of banks. For example, the PCBS highlighted in its excellent report the serious failings in culture and standards at HBOS, a bank which did not engage in any prop trading at all. Indeed, it is perfectly possible to run an integrated securities business with full integrity in a way that manages any potential conflicts of interest quite satisfactorily, so they do not necessarily follow. It is far from clear, therefore, that prop trading is the real problem facing the UK financial system, or that structural solutions address cultural problems. In light of that, and of observations about the practical difficulties of a ban on prop trading, as it is being attempted in the US through the Volcker rule, the PCBS did not recommend a ban on prop trading.

It is not wholly clear what further evidence would support a different conclusion to that reached by the PCBS in its own assessment, so it is unclear what a further review into proprietary trading within such a short period of the PCBS’s own report would add. Still less is there a need for such a review to be followed immediately by an independent review of the same question. Of course, we have no issue with reviews as a matter of principle: we are just not sure that, in this case, legislating for one in advance really does much for us.

As the findings of the PCBS do not suggest that prop trading presents a serious prudential risk at this time, I do not think we need to legislate for the regulator to carry out a further review. The absolutely valid point made by my noble friend Lord Lawson was that this could change in the future. That is what we are trying to address. Should that happen, the PRA has made it clear that it already has the powers it needs to bear down on prop trading where it endangers the safety and soundness of a firm or where the risk incurred is not consistent with the publicly stated risk appetite of a bank.