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House of Lords

Friday, 12 October 2007.

The House met at eleven o'clock: the LORD SPEAKER on the Woolsack.

Prayers—Read by the Lord Bishop of Exeter.

Building Societies (Funding) and Mutual Societies (Transfers) Bill

Read a third time.

Lord Naseby: My Lords, I beg to move that this Bill do now pass.

Moved, That the Bill do now pass.—(Lord Naseby.)

Lord Davies of Oldham: My Lords, I am conscious of the fact that I am breaking every conceivable convention in making a speech on Bill do now pass apart from congratulating the noble Lord, Lord Naseby, on taking the Bill through the House. Any contribution to a Bill do now pass debate should be brief and to the point. Mine will be to the point but not short. I apologise for that but the Treasury has a close interest in the sector to which the Bill relates.

Although the Treasury and the Government have fully supported the Bill’s passage through the other place and this House, and the noble Lord, Lord Naseby, deserves the thanks of the whole House for the way in which he has conducted it, it would be remiss of us not to comment on it, given that it relates to issues which were the subject of yesterday’s significant Statement by the Chancellor of the Exchequer. The Bill proceeds through this House after a period of significant market instability. As the Chancellor said yesterday in the other place, the Government are undertaking a review of the framework of depositor protection, and will introduce legislation in the next parliamentary Session. However, these reforms will take time and the Government are clear that they must balance the need for urgent action in the light of recent events with the need to consult as widely as possible.

In the interim, this Bill comes at an opportune moment. It introduces helpful amendments to building societies legislation. First—in the Government's view, this is the Bill’s most important improvement—it allows society members to be put in the same position in the event of insolvency as other creditors instead of taking a subordinated position as they do now. This will provide an important additional consumer protection until such time as changes can be made to the broader depositor protection framework. This measure will be implemented by an order made under the power in Clause 2, which is not dependent on anything else in the Bill.

Secondly, the Bill allows flexibility for the future in relation to wholesale funding, as the Treasury would be able to use the power in Clause 1 to increase by

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order the maximum level which building societies can borrow from the wholesale markets to 75 per cent. Clearly, in the light of recent events in wider financial markets, we will want to consider carefully whether such a power should be used—and this Bill provides ample scope for scrutiny. Such an order will require affirmative resolution, ensuring that there is a full debate in both Houses before the measure is implemented. The order can be made only once the position of members on insolvency has been equalised.

The Bill will also make it easier for one type of mutual society to transfer to the ownership of another type of mutual society as a subsidiary company while retaining important elements of mutuality; for example, voting rights for the individual members transferred to the new company. The mutual insurance companies and the equivalent European mutuals will be included as a result of the amendments discussed and agreed in Committee. The Government welcome this opportunity to update the legislation on building societies and other mutual societies. We are sympathetic to the reforms that are being introduced, particularly as they have the potential to benefit members of mutuals significantly. The Treasury will consult in due course on the secondary legislation that will implement the policy behind this Bill.

In view of recent events in the banking sector I will make a few comments about the Government’s policy on wholesale funding and building societies. The increase in access to wholesale funding for building societies will provide them with more flexibility in financing their mortgages. However, the concentration of funding will also pose risks that need to be effectively managed by firms. The recent case of Northern Rock is a clear example of the importance of risk management in this regard, where the firm’s reliance on wholesale funding and securitisation meant that it was particularly affected by the recent market turbulence and faced liquidity problems as a result.

The purpose of the change is to place building societies on a level playing field with banks in access to wholesale funding. This is consistent with the recommendations of the Miles review and the proposal that long-term mortgages be facilitated by building societies having greater access to wholesale funding. The effect of the Bill is to provide the means to greater freedom for societies to reach new and wider markets as they develop. There is no requirement that societies should operate at the proposed maximum level. It will remain for the society to manage its liquidity risk appropriately, and one important factor it will wish to consider is the appropriate balance of member and wholesale funding. This Bill simply gives them greater scope to manage that risk as they see fit, still subject to the full prudential regulatory requirements of the FSA that I will outline in a moment. Societies may choose to alter their funding level as their members’ needs dictate, within the existing or revised limits. The Bill also gives the Treasury the option of requiring societies to obtain a members’ resolution before exceeding the 50 per cent wholesale funding.

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Within the scope of its principles-based regulatory regime, the FSA has a range of powers available, should it consider that a society is taking an inappropriate risk in its funding approach. It should be noted that, unlike banks, building societies also have statutory constraints placed on them under the Building Societies Act. As a result, the Government consider that there will be sufficient safeguards in place at the time the wholesale funding limit is extended.

I appreciate that this is an extraordinary intrusion on a Bill that the Treasury has backed all the way through. It is a very late contribution, and I apologise to the House for that. The Treasury and the Government are fully behind the Bill and are grateful to the noble Lord for the way in which he has conducted it through the House, but it would have been inappropriate for the Bill to have gone through without the Government making some statement in the light of what was said yesterday. I apologise to the House for breaking all known requirements with regard to the procedure on the passing of a Bill, but I hope that it will be understood on this occasion that it is meant to be helpful both to us and to the wider community.

Baroness Noakes: My Lords, I am very grateful to the Minister for the statement that he has just made and to the Government for continuing to support the Bill and for not taking fright at the last minute. This is an enabling Bill, and no individual part of it need be brought into effect if it were thought to be inappropriate. We had a discussion yesterday and I do not want to repeat that, but it is very important that the Government satisfy themselves on the effectiveness of the FSA’s regulatory oversight procedures for building societies before extending the powers in relation to wholesale finance. Otherwise, I completely support what the Minister has said.

Lord Newby: My Lords, I am grateful to the Minister for explaining the Government’s position. We might have found it helpful to have had some advance notice of this statement, not least because we discussed this yesterday. While it is obviously very important that the mutuals do not go on a wild, reckless spree, the problem in the banking sector does not rest with the mutuals. Many of us feel that if fewer mutuals had not demutualised, the banking sector would be more diverse and rather safer for many investors. However, we take note of what the Minister said. We support the Bill, and we look forward to future consultation.

Lord Naseby: My Lords, I do not really want much of a right of reply other than to say that I am most grateful to all sides of the House for the help that they have given in seeing this Bill through and for the amendments that we have taken on board. On reflection, it appears to me that the Bill is even more apposite now than when it started its life in this House.

On Question, Bill passed, and returned to the Commons with amendments.

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Economic Sanctions: (EAC Report)

11.15 am

Lord Wakeham rose to move, That this House takes note of the report of the Economic Affairs Committee, The Impact of Economic Sanctions (2nd Report, HL Paper 96).

The noble Lord said: My Lords, although the committee’s report on sanctions was published in the summer, the terrible situation in Burma today and the calls from various quarters for tougher sanctions mean that our debate is very timely. First, I thank my colleagues on the Economic Affairs Committee for their painstaking work on our report. As usual, the report is evidence-based and entirely non-party political, and has been agreed by all members of the committee. I also thank our specialist adviser for this inquiry, Dr Eric Herring, as well as our Clerk and his small team.

I have to say at the outset that I find the Government’s response to our report very disappointing. The Secretary of State concedes one important point on exit strategies, to which I shall revert in a moment. But elsewhere in the response, along with a few points where there is room for honest difference of interpretation and judgment, I find a mass of fudge, evasion, and bald assertion, without either substantiation or even any real attempt to engage with the criticism. A few examples of issues raised in the report—not least Burma—will show what I mean. The committee recognised that sanctions, when combined with the use of other foreign policy instruments can, on occasion, contribute to the achievement of objectives. However, we also heard a great deal of evidence that sanctions were often ineffective or, worse, counterproductive. Burma may well be an example of counterproductive sanctions.

We stressed the likely severe human cost of comprehensive sanctions, as in Iraq, and argued that the application of such sanctions is not compatible with the Government’s own principle that sanctions should,

The Government’s response on this point is simply that severe suffering is not inevitable, that humanitarian exemptions can help to reduce the suffering in some degree, and that anyway it is the target Government who are to blame. None of those points seriously addresses the argument in the report, which demonstrates the very high likelihood that comprehensive sanctions on a ruthless Government will indeed lead to great suffering among the people, as in Iraq. The Government do not address the point that such sanctions are not compatible with their own principle of not hitting the people. It appears, unfortunately, that the Government are ready to discard that important principle when it is convenient to do so.

Moreover, the Government reject our recommendation that some public account should be given of the United Nations’ assessments of the humanitarian impact of sanctions. No reason is

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given. Presumably one reason is to avoid embarrassing public criticism. I hope that the Government will think again on this. Without giving succour to target regimes, some public accountability in this area is essential.

The committee heard evidence that sanctions are,

There is little sense of how the objectives are to be achieved or of how sanctions will help. The conditions that the targets of sanctions need to meet to have them lifted—the exit strategy—are often too poorly worked out. The Government’s response is that since the 1999 Whitehall review, sanctions have had clearly stated objectives including an exit strategy. The progress in the development of clear objectives is welcome. However, our report stressed also the importance of having realistic objectives as well as a strategy for achieving them. On both counts, serious doubts remain.

On exit strategies, the Government concede that those for EU sanctions,

But we found little evidence that the exit strategies existed at all. In any case, some sanctions still in place originate from before the 1999 review. For example, sanctions have been in place against Burma for more than 10 years with no discernible impact in terms of progress towards democracy and respect for human rights. Indeed, in some ways, the situation has deteriorated. Meanwhile, little seems to be known about how hard the sanctions are hitting the Burmese people. The Government maintain that the sanctions are targeted against the military regime with little humanitarian impact. Important measures such as the strong discouragement of trade and tourism are said to be not formal sanctions. This entirely misses the point. The effect is the same—to hurt the Burmese people.

We were fortunate to be able to take evidence from the Minister of State in the Foreign Office. Dr Kim Howells said he felt “deeply uneasy” about the sanctions on Burma, which, he said, were “not working very well”. These comments contrast sharply with the Government’s complacent response now. They describe current policy towards Burma, including the sanctions, as “appropriate”. Dr Howells also called for,

about how Burmese sanctions can be made more effective. Such a debate would almost certainly be served by a proper inquiry into the sanctions, as has been suggested by the committee. I very much regret that the Government have rejected the committee’s proposal.

The Government argue that the sanctions on Burma are already subject to internal EU review each year. But these EU reviews are not made public and it is entirely unclear what, if anything, they are achieving. Perhaps the Minister will enlighten us later. Since the Government’s response to the committee’s report, the world has witnessed the brutal military crackdown against protesters across Burma. This has led the Prime Minister and others to call for renewed sanctions. The need for effective actions against an

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appalling regime and to help Burma move towards democracy is evident. But, as our report shows, sanctions against Burma have been an utter failure. Indeed, they may quite possibly have been worse than a failure. In attempting to put pressure on the regime, they may have made it even more recalcitrant.

Of course, there is an evident political dimension and, indeed, a moral one to the situation in Burma, as elsewhere. The regime is so repugnant, and the plight of the people so dreadful that every political and moral instinct calls for urgent and effective action that reflects our outrage. But there lies the dilemma. Sanctions may appear a strong response, but do they work? All the evidence on Burma says no. It is evident that a serious examination of the effectiveness of the sanctions, and of other possible measures, is needed before new sanctions are introduced, however politically attractive these may appear. However, I recognise the difficulties in finding a productive way forward. The last thing the long-suffering people of Burma need is measures that make an awful situation even worse.

The Minister stressed in the House earlier this week the recent change in the position of Asia, which had previously, “turned a blind eye”, as he vividly put it. He saw this as significant. But I hope he will forgive me if I remain sceptical. The underlying geopolitical and economic realities behind the regional interest in Burma and the consequent “blind eye” remain unchanged.

Turning to North Korea and Iran, our report argued that reliance on sanctions as the main means of resolving the current disputes was a recipe for failure. The Government claim that sanctions on North Korea are a success. But the alternative view put forward in our report seems to me far more plausible: that the key factor in achieving the agreement in February this year was the change in the Bush Administration’s position in recognising that a policy of reliance essentially on coercion would not work and that incentives were needed.

On Iran, our report argued that the key strength of the EU’s proposed framework agreement was its emphasis on incentives rather than sanctions and its key weakness was the lack of US support. The Government say that US support is “implicit”. But full support remains lacking and the situation clearly remains extremely difficult, not to say dangerous, as the French Foreign Minister was pointing out in the strongest terms only last month.

Finally, I am sorry that the Government are not ready to introduce regular parliamentary review of sanctions, as we proposed. However, I welcome the Government’s commitment to expand their annual Written Ministerial Statement to Parliament to include the objectives for each sanctions regime. These Statements should also address the question of how far each sanctions regime is achieving its objectives, what changes in policy, if any, are required, and the exit strategy. I hope that the Minister will confirm that this ground will be covered in the annual Statements.

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Lord Hamilton of Epsom: My Lords, does my noble friend agree that one of the problems in Burma is the thriving drugs industry in the north of the country from which the military regime benefits? Therefore, it has no shortage of money, while everyone else in the country does.

Lord Wakeham: My Lords, my noble friend is probably right and many factors such as that support our complaint that the sanctions regime is not working. That is evident from any examination of the situation. I beg to move.

Moved, That this House takes note of the report of the Economic Affairs Committee, The Impact of Economic Sanctions (2nd Report, HL Paper 96).—(Lord Wakeham.)

11.27 am

Lord Hannay of Chiswick: My Lords, this report and debate are very welcome. The impact of economic sanctions is an important and highly topical subject. As the report points out, since the end of the Cold War, the international community as a whole, acting under the charter of the United Nations, has had increasing recourse to what was, until that time, a virtually unused instrument in the diplomatic tool box. Before and since then, unilateral sanctions lacking that legitimacy have been tried on a number of occasions. We have a considerable case history and plenty of lessons to be learnt, if only we are capable of learning them and willing to do so.

I thank the noble Lord, Lord Wakeham, and his colleagues on our Economic Affairs Committee for this valuable and perceptive piece of work. If I have a general complaint, it is that the report tends to underestimate—perhaps understandably, given that its terms of reference related to the economic impact of sanctions—the potential political effect of sanctions, however modest their economic impact, and largely to overlook the important consideration that economic sanctions are almost the only rung in the ladder between mere diplomatic action and the use of force. Surely after the experience of recent years we must recognise that the use of force must remain a last resort—perhaps a later resort than it has been in recent years. Looked at in that light, it would be folly to abandon this tool or simply to accept as a given the imperfections and weaknesses revealed by its operation to date.

The international community needs to have more effective sanctions—not none or ineffective ones—at its disposal if the world is to move closer to being rid of the scourge of war. Nor would the Herculean efforts that countries make to avoid being put under any economic sanctions at all, let alone draconian ones, seem to bear out entirely the view that the noble Lord, Lord Wakeham, has just expressed that light sanctions packages are as ineffective as their critics would make out. Burma is a case in point, with the regime appearing to do all that it can to persuade Aung San Suu Kyi to give up her support for sanctions. Why on Earth should General Than Shwe do that if he thinks that they are totally irrelevant?

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In my view, the report deals fairly with comprehensive economic sanctions, of which Iraq and Serbia remain so far the sole examples. It identifies the paradox that totalitarian or authoritarian regimes are best able to spare their elites from the impact of such sanctions, to ensure the maximum humanitarian collateral damage and to manipulate domestic and international public opinion to their advantage, and yet it is against totalitarian or authoritarian regimes that they are most likely to have to be used. That paradox cannot be ducked, nor can the fact that attempts to palliate the humanitarian effects of comprehensive economic sanctions will never be fully successful.

It is tempting, therefore, to conclude, as some witnesses to this inquiry did, that the instrument of comprehensive economic sanctions should never be used again—tempting but, I suggest, wrong. I sympathise with the Government’s caution over discarding completely even such a blunt weapon as this. Can we envisage no situations in which comprehensive economic sanctions would be justified and might quite simply have to be used? I am thinking, for example, of the invasion and conquest of one country by another in defiance of Security Council resolutions or the threat of the use of nuclear weapons against a non-nuclear state. I could go on. I am sure that comprehensive economic sanctions should be used, if at all, more sparingly than in the past and with greater emphasis on the humanitarian side effects. To abandon totally their potential deterrent effect would be, I argue, unwise.

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