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Nevertheless, we have listened carefully to the arguments that the Government have made, and to the arguments that the London Investment Banking Association relayed to me in its letter of 6 February. I have taken the liberty of sharing that letter with the noble Lord, Lord Goodhart, because I was aware of his concern about the issue. I must say that I think that the difficulties about the uncertainty that would have been introduced have been overstated, and that it would have been possible within a two-year period to have had both a statutory instrument for the short-term and at the same time to have tracked legislation, subject to proper scrutiny, for the long-term.
However, in accepting the government amendments and welcoming the review—I genuinely welcome that review—I just remark that it places a great onus on the Government to carry out the most detailed consultation and to exercise their rights to propose such legislation very wisely. I think that it is unprecedented to produce such significant legislation by statutory instrument. The onus will clearly be on the Government to be careful in how they use the powers which the House has granted them without any complications of sunsetting. Once they have exercised their powers the review will be especially welcome, especially given the way that it is phrased.
On balance, and with a somewhat heavy heart, we are prepared to accept the government amendments and I will not be moving Amendment 30.
Lord Goodhart: My Lords, perhaps I may start with a very small point. The name of the company to which the Minister referred is not Layman Brothers but Lehman Brothers. I am in a position to know that because I am a member of the Lehman family. I have not declared an interest because my family ceased to have any involvement in Lehman Brothers some 25 or 30 years ago.
I can move on now to the serious business. It is a matter for the Delegated Powers Committee to advise your Lordships’ House on matters such as the question whether certain material should be on the face of the Bill rather than in the form of regulations. The Government are proposing here a potentially fundamental change in the law of insolvency as it relates to investment banks, and investment banks are a very important feature of our financial system. We could end up with investment banks being subject solely to regulations made by the Government—with parliamentary involvement, in the form of affirmative resolutions,
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The changes that the Government could make are, therefore, potentially fundamental; and not only are they fundamental, they are of a totally uncertain kind. I repeat the quote from “King Lear” which I gave at Report stage. The Government’s position is much the same as his when he said:
“I shall do such things ... what they are yet I know not, but they shall be the terrors of the earth”.
It would certainly be normal practice to put legislation of this kind, in relation to investment banks, on to the face of the Bill. We accepted in Committee that there was a possibility that when a Government were in a position to decide what they wanted to do, they should be able to do it very quickly. We therefore accepted that there could well be a necessity for regulations to take effect quickly. But we saw no reason why this should be anything other than a temporary arrangement, and we considered that the regulations should be replaced as soon as possible by primary legislation which could, of course, be in exactly the same form as the regulations.
There would be no question of any additional uncertainty arising from this. Indeed, the uncertainty would be weakened rather than strengthened because the potential existence of a sunset clause would not affect any bank that became insolvent before the sunset clause came into effect. That is our view; we did not quite understand why such provision should be necessary. As it is, there will be a great deal of uncertainty anyway over the two-year stretch. The Government will be at liberty at any time to change the regulations with the benefit of an affirmative resolution. That would be substantially easier than changing primary legislation, and the Government could-probably would and should-urgently introduce the necessary regulations and then follow them with primary legislation which would put the regulations on to the face of a statute. We believe that that would strengthen the certainty of the matter rather than weaken it, and that it would have been a much more effective way of dealing with this than what the Government now propose.
Therefore, in the circumstances, the committee had total agreement on the point. I still believe that it would have been more appropriate to accept what the noble Baroness, Lady Noakes, proposed: a totally unconditional sunset clause which came into effect in two years, but not requiring it to be left until the end of that two-year period; and either in the mean time or at the end of that period for the Government then to bring forward primary legislation that could have had a proper debate and would have ended up with the rules governing investment being in primary legislation in the same way as all other insolvencies are in legislation. That would have been better.
I am not in a position to move any amendments but I want to say, as I still believe, that it would have been better had the Government accepted the recommendations of the Delegated Powers Committee.
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Lord Davies of Oldham: My Lords, I am grateful to both noble Lords for their responses, which reflect the seriousness of this issue. As I have indicated to the noble Lord, Lord Goodhart, the Government do not lightly pursue a course that they know is not in accord with the committee’s recommendations. He will, however, appreciate from the amendments that we have tabled that we have taken on board the thrust of the argument that underlay the recommendations his committee made. We have not followed them in quite the terms that he would have wished, but we clearly expect the review to produce an analysis of how these regulations are working. If the review says that the issue is significant enough for primary legislation, the Government will have to respond accordingly.
As I indicated in my opening remarks, we all appreciate the complexity of these issues—they are so complex for me that I cannot even pronounce “Lehman” accurately. I never suffer from the mispronunciation of my surname but I spend my life correcting its misspelling, so we all live with these difficulties. I apologise to the noble Lord if I got the name wrong. Far greater difficulties awaited me when I examined these issues at all stages of the Bill and at this point. I hope he will accept that in the Government’s approach to these matters we are all too aware of the anxieties that he has expressed and those of his committee, but we are also well aware of the significance of this for the banking community—for investment banks in particular, but for the City of London as a whole and its financial role.
Clause 235: Regulations: procedure
31: After Clause 235, insert the following new Clause—
(1) The Treasury shall arrange for a review of the effect of any investment bank insolvency regulations.
(2) The review must be completed during the period of 2 years beginning with the date on which the regulations come into force.
(3) The Treasury shall appoint one or more persons to conduct the review; and a person appointed must have expertise in connection with the law of insolvency or financial services.
(4) The review must consider, in particular—
(a) how far the regulations are achieving the objectives specified in section 233(3), and
(b) whether the regulations should continue to have effect.
(5) The review must result in a report to the Treasury.
(6) The Treasury shall lay a copy of the report before Parliament.
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(7) If a review recommends further reviews—
(a) the Treasury may arrange for the further reviews, and
(b) subsections (3) to (6) (and this subsection) shall apply to them.”
Bill passed and returned to the Commons with amendments.
EU Regional Policy (EUC Report)
Motion to Take Note
5.29 pm
Moved By Baroness Cohen of Pimlico
That this House takes note of the Report of the European Union Committee on the Future of EU Regional Policy (33rd Report, Session 2007-08, HL Paper 141).
Baroness Cohen of Pimlico: My Lords, I am pleased to have this opportunity to debate the report on the future of EU regional policy, produced in July by Sub-Committee A of the European Union Committee. Thanks are due to my committee, to my special adviser, Dr John McCombie, of Downing College, Cambridge, to my clerk, Simon Blackburn, who has now moved on to greater things than me, and the committee specialist, Petros Fassoulas.
I welcome my noble friend the Minister who may possibly not have thought that his maiden speech would be made on EU regional funding. I am sure that we will all welcome it cordially, even if he makes it in Welsh.
We produced this report in July and the Government responded in October, which is about the average speed. It was the product of our consideration of the EU budget for 2009. In fact, the delay in getting to this debate has worked to advantage. In the current financial and economic crisis, there is huge pressure on EU regional policy and sometimes it seems to me that not a week passes without us being required to scrutinise and pronounce on an EU proposal to extend, increase, widen and generally tweak some part of regional policy.
European regional policy is important to us all. In 2008, 36 per cent of the EU budget was spent on regional policy. The policy has its basis in Article 158 of the European treaty which states that the Community will aim to reduce,
- “disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas”.
So economic cohesion—that is what it is—the idea that no part of the Community should drag very far behind the other, has been a policy consideration for the European Community for half a century. It has become increasingly important; it has risen from 17 per cent of the European Union budget in 1988 to 36 per cent today. If the Lisbon treaty is ratified, Article 3 will state that the Union,
- “shall work for the sustainable development of Europe based on balanced economic growth and ... shall promote economic, social and territorial cohesion, and solidarity among Member States”.
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The aims are quite clear, but the administrative structures are extremely complex. There are three funds: the European regional development fund, which provides direct finance for companies, infrastructure and financial instruments; the European social fund, which finances projects to improve skills and access to employment; and the cohesion fund, which finances transport, energy and environment infrastructure projects.
Three objectives underlie those policies, which do not match perfectly the way the funds are divided. The first and most important policy is convergence, which takes 81.5 per cent of our spending on regional policy. It aims to speed convergence between regions and is aimed at the poorest regions. The second is regional competitiveness and employment, which takes 16 per cent of the spending, and strengthens competitiveness and the attractiveness of regions not eligible for convergence funds. The third is the European territorial co-operation, which strengthens cross-border co-operation through joint projects, such as railways.
The question of who is eligible for these funds is not wholly straightforward. It is based on a measurement of gross domestic product per head, which has the advantage of being easily understood and widely used in international comparisons of standards of living. There is a very wide range between member states, a range which has widened with the most recent introductions, the poorest regions being found in Romania and Bulgaria, as I think we would expect. For example, the Nord Est region in Romania has an index of 24, as against Hamburg which is 202 or inner London which, when the report was written, was 303, although it may not be quite as high at the moment.
To be eligible for assistance from any of the regional funds, a region has to be below 75 per cent of the average index figure, or below 90 per cent for some. Other considerations also apply, such as relative prosperity, the number of employed and the number of jobs. When you add to these complications the fact that any money distributed is sensibly limited by a formula that takes into account the particular country’s or region’s ability to absorb the funds, you get the unsurprising result that there is no particularly clear relationship between the value of funds received per head and GDP per head. The result is that regions in some of the wealthier member states receive more funding per inhabitant than eligible regions in the poorer member states. To give an idea of how the indicative financial allocations for 2007 to 2013 work, Poland, as a very large, very poor country, will get around €60 billion, 19.4 per cent of the total funds for those years, and the UK will get 3.1 per cent of the funds, being much richer.
When thinking about all of this, we found ourselves able to agree not only with the previous report of the committee but also with the Government’s thinking. We were strongly in agreement with the aims of regional policy; we agreed that it was important to reduce disparities between regions by encouraging economic and knowledge transfer from richer to poorer regions. As economic development is not even, we supported intervention in the market to counter underemployment and the use of resources in the poorer regions. We were also glad to be able to agree that, along with
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Perhaps one of the most important conclusions is that we should change the way these funds are targeted. At present, about 20 per cent of the total regional policy budget is available to all regions, wherever they are. We concluded that funding should be concentrated in the poorest regions and reflect the principle of subsidiarity. This would result in a substantial loss of funding to richer member states, specifically to the United Kingdom. But the principle of subsidiarity—that action should be taken at European Union level only where it adds value to the reaction—can be used to justify richer member states taking responsibility for their own regional funding. Arguments against this conclusion, mostly deployed by the Commission, focused around the idea that regional policy should enhance member states’ co-operation and knowledge-sharing and that it was not acceptable to divide member states into donor and recipient countries. We saw the force of this argument but in the end we discarded it and we were very glad that the Government were able to endorse our conclusion, despite the fact that, on present distribution, an annual loss of £1.6 billion to the UK could be involved. However, in their response the Government said that this view depended rather on a rebalancing of the European budget generally, specifically rebalancing the funds allocated to the common agricultural policy. We were none the less glad that the Government were able to support our conclusion.
There are various other aspects of the report. I am sure everybody is familiar with the fact that, in many cases, member states cannot use their full funding. For this reason, all member states have an absorption cap based on their gross national income which limits the funds available to them by on average around 50 per cent. For example, the region of Lubelskie in Poland, from where we took evidence, was able to use only 80 per cent of its funds between 2004 and 2006. This led many witnesses to argue that increasing regional funding made available to member states, as we recommend, will not necessarily raise their economic performance. We found that much of this problem was caused by inexperienced fund management structures in new member states and that, to help remedy this, the older member states were advising newer member states on fund management, which the committee supports in its report. For instance, the Office for National Statistics has advised eastern European countries on the collection of statistics. This has particular relevance in the current economic downturn, as many are citing regional funding as a way to inject cash into the economy. However, as many member states are
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We also welcomed the integration of the funds with the Lisbon strategy for growth and jobs. Under the financial perspective 2007-2013, regional policy spending is linked with the Lisbon agenda, which means that money needs to be spent on competitiveness and employment objective spending. This enables member states to develop a more forward-thinking spending plan, linking spending on infrastructure with the development of employment, rather than just building roads.
The committee welcomes the approach of the Commission that one policy does not fit all. As such, it agrees that regions should continue to draw up their own regional spending plans, rather than policies being decided on a centralised basis.
We also agreed with the Government that spending should not be used other than to reduce regional disparities;for instance, it would be unwise to divert any spending to major issues such as climate change, which should be addressed on its own. This will help prevent projects funded by the funds conflicting with other European Union policies.
Since we wrote the report, there have been several other developments. In September 2007, the European Commission published the Fourth Report on Economic and Social Cohesion, which presented the basic data and key assumptions with a view to debating the future after 2013. As listed in the report, the EU will face new threats and important challenges such as population ageing, rising energy prices and immigration pressure. A concrete presentation of cohesion policy after 2014 is not expected until the fifth report on economic and social cohesion is published around 2010, but the committee will probably take a look at it at that stage.
The debate on the future reform of cohesion policy appears to revolve on two different views: on the one hand, that cohesion policy needs to keep its traditional role of reducing disparities and ensuring convergence for regions; on the other hand, that the priorities of cohesion policy should closely be linked to the Lisbon agenda and that improving competitiveness and innovation must be the main objective for future cohesion policy. The most important debate is coming up in the budget review 2009, which provides the opportunity to recommend an overhaul of the budget and the possibility of reforming the CAP and reducing the funds that richer members receive. We look forward to that debate.
5.43 pm
Lord Trimble: My Lords, the noble Baroness, Lady Cohen, said that the most significant recommendation in our committee’s report is that regional policy should concentrate on the poorer areas. The implication of that is that the convergence objective alone should be pursued, with the so-called competitiveness objective no longer existing, because, while an objective of competitiveness might seem attractive, it is simply a means of spending some
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I have a little anecdote which I shared with the committee and which I propose to share with the House, relating to my time as First Minister in Northern Ireland. When I was talking about regional policy with a senior official from our finance department, he observed that regional policy was sometimes more trouble than it was worth. That might seem to be a strange comment, but it is not. The money that, notionally, is spent by various agencies and regions in the United Kingdom under regional policy does not go directly to them from the European Union. European Union money goes to the United Kingdom. My interlocutor told me that the Northern Ireland Department of Finance then found that it was under pressure from the Treasury to arrange its capital expenditure in such a way that would draw down the largest amount of regional policy money. This meant that its capital expenditure programmes did not prioritise, and were not based solely on, what the department thought were the key priorities for Northern Ireland. Those priorities were distorted to increase the amount of money that was drawn down. He found that a disadvantage. To this disadvantage is added the fact that money has to be provided to match the money that comes from the regional fund. There is always an element of matching, which varies from around 50 per cent to 85 per cent, depending on the circumstances. Matching money has to come in, which can also be a problem in running regional policy.
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