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To be realistic about it, if you are to become a citizen that much quicker, you will volunteer in order to become a citizen—not because you care about the volunteering. That seems to be the immediate answer to what the Minister said in trying to convince us that this system was genuinely voluntary. It is only voluntary in the sense that you do not have to do it, but there is a major imperative to get into the activities on those who may not have the slightest interest in voluntary service. I profoundly agree with the noble Lord, Lord Judd; this really needs a lot more thought, and I am by no means certain whether it is best placed in this Bill.

Baroness Falkner of Margravine: It strikes me that I should have declared an interest when I spoke on the earlier amendment, so let me do so now. I was chief executive of a student volunteering body, Students Partnership Worldwide, and saw volunteering right up close. It seems that there is a rather romanticised view in the Committee of what volunteering is. I wonder whether those who believe that it really is so altruistic, and conducted simply because of passion for a cause, would consider internship for young people as a form of volunteering. Would they accept perhaps that many people, particularly in times of recession, wish to build up their CV and do things that others would consider to be useful contributions to society, things that would give them skills or things that might enhance the employer’s perspective of the broadness of their background? Might they accept that those people do not have ill motives, because they are trying to extract some personal advantage from volunteering, but that they also perhaps have an interest in the cause? You can have multiple motives for what you do at different times of your life. It is not a matter just of needing to be persuaded by the passion of the cause. So incentives are not perverse. “Incentives where we can and compulsion almost never” would be my motto. I suggest to the Minister that he think extremely carefully before he responds affirmatively to the amendment, if that is what he intends.

Lord Judd: The noble Baroness makes some important points. Does she not agree that there is even the danger that the proposal, far from encouraging sincere commitment and integrity in the forthcoming role of citizenship, may encourage falsehood, because somebody may espouse a cause not because they believe in it at all but simply because it is a way of gaining citizenship? That is not a way of promoting integrity in the decent society. Furthermore, in terms of the credibility of the legislation, we are entering a dangerous and sensitive area in demanding such behaviour of would-be citizens when there is plenty of evidence, as has been said in earlier debate, that it is not the prevailing culture in our society. The prevailing culture, as seen by many at the moment, is that you make as much money as fast you can and that is the way in which you are a successful citizen.



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Baroness Falkner of Margravine: I fear that the noble Lord, Lord Judd, did not grasp the content of what I said in my earlier intervention on the relevant amendments, because I was being extremely cautious. Perhaps I may answer his question very directly. You may have a perverse outcome, and you may go down a road that you do not sincerely believe in. However, all of us in this Chamber volunteer three or four days a week in all sorts of things—accepting a dinner invitation to be a speaker when we do not particularly want to do it and scratching our heads to think what we might say or do, or moving amendments where we are under pressure from our parties or from lobby groups towards which we feel well inclined. We often undertake activities about which we are not entirely convinced.

My personal experience has been that when I look at the detail of things with which I am unfamiliar, when I work with people to whom I have not been exposed previously and when I venture into areas where I have no expertise, I have often developed a passion for those people and causes. I learn through my interaction with other people outside my scope of knowledge, friendships and employment. They are amazing people. So volunteering often has the opposite effect to that mentioned, particularly for migrants and newcomers to this country, because it provides the opportunity to work alongside other people who are not newcomers.

Newcomers, particularly from my part of the world, are often ghettoised. If you are a woman, you will be ghettoised in your home and with your extended family, many of whom live with you. You will be expected to perform conventional forms of daughter-in-lawship or sister-in-lawship, or whatever else are the bases of your being there. You are seldom permitted time away from those duties, which I consider often to be unpaid domestic chores, even to do English lessons. You will live in a street full of people similar to you and you will have very few opportunities to go out of your ambit, which is often that of the village from which you previously came, and interact with other people.

7.15 pm

An incentive to volunteer might convince your husband that you might be let out of the house to do it. You might be given a bit of rope to be an adult and make up your own mind about what you wish to do. You might even learn a few words of the language while you are at it. From volunteering in a legal advice centre or a women’s refuge, you might discover how the law works in the country for which you are applying for citizenship. Having spoken to men and women who live in those communities, I only wish that we could create the avenues for them to go out and volunteer, because it is quite often the community that holds them back and keeps them segregated. Unusually, therefore, I am not at one with the noble Lord, Lord Judd, on this matter.

I urge the Minister to desist from agreeing to the amendment. He will have heard expressed during the previous hour and a half the divergent views on, and strong reservations about, the Bill. If we were to introduce an element of partisanship by including trade unions—the other side will say, “In that case,

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why not also political parties?”—we would immediately kill off any good that he is trying to achieve in the Bill, because it will not get through. I think that he will recognise that trade unions and political parties would introduce an element of incentivisation that may not be construed by others to be just for the good of active citizenship; it may be construed as a means of their recruiting members to their cause and making them partisan.

If political parties were to come into the frame, you would have another problem. We know of many migrants who, once they have come here, want to close the door behind them. It is a common phenomenon for migrants to say, “I’m here now; we shouldn’t let any more of those bloody foreigners in”—I hope that your Lordships will forgive my unparliamentary language. What would we do if joining political parties was considered active citizenship and the BNP managed to recruit a large number of members as a result? Extremist parties might benefit, too. My noble friend Lord Wallace of Saltaire mentioned religious groups whose political ethos we may not like.

I would have thought that trade union and political party activity was ruled out because you would have to pay a membership fee. The Bill states that you cannot have financial interaction of any sort. Payment of a membership fee for passive citizenship, whereby you have joined a political party, you carry the card in your pocket, but you do nothing more than that, is not what active citizenship is about at all. I urge the Minister on that basis to resist the amendment at this stage until we have a clearer idea of where we going.

Lord Brett: With opposing views expressed, I hope to be able satisfy everybody. I should explain first that my enthusiastic nodding represented not necessarily government policy but the experience of someone who has spent most of his life in the trade union movement, a lot of it as a full-time officer and general secretary in a trade union that never paid one penny to any political party. However, I was always genuinely grateful for the many activities of the union—not those that directly benefited the membership, but those that benefited the community at large—that were carried out by people serving as nominees of the trade union’s governing and regional bodies at no expense to the union and at no benefit to the people doing them. There are some 7 million people in the trade union movement who are doing a whole host of things, such as health and safety education and the various representative activities mentioned by my noble friend Lord Lea. There is a lot of opportunity there, which, in the context of volunteering overall, it would be a mistake to ignore.

However, I am seeking to resist the amendment. It would not be appropriate to include trade union activities in the Bill. That makes it necessary for me to answer the question posed by noble friend Lord Lea, which was where trade unions fit in, and that of my noble friend Lord Morris, on qualification.

I think that the answer is relatively simple. We should ask the design group to consult the TUC. The TUC knows which of its activities would fit in the areas that are identified as being voluntary work. We would know from that discussion how that would

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relate to the question of refereeing and monitoring. That would provide the opportunity to avoid some of the fears that the noble Baroness, Lady Falkner, expressed in her contribution, the first part of which I was in total agreement with. I have volunteered for a number of organisations, including political parties, in my life, but I have to say that in few cases have I been moved by passion. It has come about normally by accident, or I have been pushed by somebody who has said, “Do me a favour and come along to this meeting”. Often, getting involved without any great commitment has led to my being very interested and continuing the involvement long after the pressure from friends has subsided.

I agree with the point made by the noble Baroness that we should not see volunteering as some kind of passionate activity, with everybody having to be motivated by passion and no one having to be incentivised. It is different from being told, “You, you and you will volunteer”. When my noble friend Lord Judd felt that he could not resist the volunteering request, he knew that there was a penalty, which presumably was not necessarily that he would be put on charges, but that something would be held against him in relation to his service by the same NCO. It was therefore an invitation that he could not refuse. We are not doing that in the Bill. People who do not wish to volunteer will still qualify as citizens. They will take a decision based on their understanding of what they can volunteer for, which is why the point made by the noble Lord, Lord Avebury, is very important: we must tell people what they can do that will benefit them, as well as society, when they become active citizens. I ask my noble friend to withdraw the amendment, but express my enthusiasm for what is being done by trade unions by nodding my head.

Lord Judd: I know that my noble friend is trying to answer the points, but would he not agree that there is a credibility problem here? For the person applying for citizenship, where is the evidence that any of the people who will be handling his application have ever undertaken voluntary community service? It is not something that is required of people who are born into citizenship in this country. We do not require citizens to participate in voluntary activity. It seems to me that there is a credibility problem that the Government need to address if they want to move forward with this idea.

Lord Brett: During the hour and a half that we spent discussing the previous group of amendments, we identified and talked through this issue, recognised that it is work in progress and gave assurances that it will come to law only after noble Lords have had the opportunity to judge and make a decision. I do not want to reopen that wider debate on this narrow amendment. I will happily discuss this again on Report. In the mean time, I ask my noble friend to withdraw his amendment.

Lord Lea of Crondall: I found this interchange very useful. The reason why I wanted Amendment 83 to stand outside the earlier group is that I thought that it might get lost otherwise. It has given us the opportunity to think about where the misunderstandings have arisen.

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I say to my noble and very good friend Lord Judd that I was beginning to wonder whether he was moving an amendment to his own Amendment 83.

I thank the noble Baroness, Lady Falkner, for being so frank in her concerns. One of them is absolutely misconceived, if I may say so, and that is the idea that we are somehow being “partisan”—that was her word—as though anything to do with trade unions implies the involvement of the Labour Party. My noble friend Lord Morris and I have about 100 years of trade union activity between us and we know that that is a total misunderstanding. For 90 if not 99 per cent of the time, it is not like that at all. You represent your members on day-to-day matters. In the context of the Bill, it is nothing to do with being partisan.

I would put the point the other way around. My concern—I have experience in these matters—is that when people talk about NGOs and this sort of thing, one minute they say, “Of course trade unions are included”, but when they set up meetings, the unions are not there. My worry is about being excluded. I am very glad that we have had this discussion. I have had this discussion in many forums. When CPA and IPU delegations have gone to Nigeria, I say, “Are we meeting the Nigeria Labour Congress?”. They say, “Why? What has that got to do with it?”. I say, “We are meeting so-called NGOs: what is wrong with the Nigeria Labour Congress?”. I hope that the noble Baroness, Lady Falkner, with her development experience, will recognise my point.

I thank the Minister for providing an indication of his intent to invite the TUC to be consulted about what is going on with the design group. That is absolutely proper, and everybody should welcome that.

Finally, the noble Baroness, Lady Falkner, raised the issue of people living in ghettos, such as single-faith ghettos.

Baroness Falkner of Margravine: I thank the noble Lord for giving way. I do not believe that I used that word; I avoid using it wherever I can. I think that I said “segregated communities”.

Lord Lea of Crondall: I am sorry; I wrote it down. This is my last sentence. The debate that we are having is 180 degrees opposite to that point. I thank noble Lords who have spoken and beg leave to withdraw the amendment.

Amendment 83 withdrawn.

House resumed. Committee to begin again not before 8.27 pm.

Financial Services Authority

Question for Short Debate

7.27 pm

Tabled By Lord James of Blackheath



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Lord James of Blackheath: My Lords, I am grateful for this opportunity to seek clarification of the preconditions that might justify FSA scrutiny and review, particularly following the experiences of my earlier career. On three occasions, I have placed before the FSA details of cases that seemed to me to be serious breaches of market regulatory practice and control, and on each occasion I have been refused. On two of those occasions, I have proceeded to take independent action; usually, I hasten to add, with the support of the noble Lord, Lord Dear, who now sits in your Lordships’ House and was then the head of the West Midlands Police. On each occasion, I secured custodial sentences for the company chairmen whom I was replacing; one for six years and one for two years.

The third case is even more concerning, as it represented a serious security hazard for the country. It unearthed a practice of the IRA, which targeted British listed public companies and used them to raise fictitious invoices that could be satisfied by the proceeds of criminal activity by the IRA, thus ramping up the profits of these companies, and with them their stock exchange values, for the benefit of the friends and allies of the IRA, who had been given prior warning to invest in those companies. Each of those three companies collapsed completely, with an aggregate market value of £2 billion. Unlike at the present time, there was no recession, but it was serious enough in its own terms.

I had to spend £10 million of my shareholders’ funds to pursue the first two cases. In each case, that was an unreasonable burden for the official investigating authorities to pass back to the shareholders. There should be some better willingness to pursue investigation on such cases. I got it back, because I managed to sue my auditors for £24 million—but I was lucky. As regards security, their attitude was that it was a financial issue and not one that they could cope with. So we now know at least that James Bond, whatever he is licensed for, is not licensed as an auditor. The FSA’s response was that it was a security issue, so I was caught completely between two stools, and nobody wanted to know.

As things stand from that point of view, I regret very bitterly the old days of the DTI. In the inimitable words of my noble friend Lady Gardner of Parkes, with her Australian twang, “you need a go-to person”. The DTI used to have a room full of go-to people to whom you could apply for advice and guidance on such issues. We do not have anything like that now; please give us back a go-to room.

In each of these cases, a huge amount of investors’ money was lost and there was massive, deliberate manipulation of the London stock market to the detriment of investors. Apart from those cases that I have noted, in both of which I acted as chairman, I have no interest to declare. I confirm that I have no participation in the past or present affairs of the principal concern which I wish to place before your Lordships tonight. My immediate and present concern is with another case in which the FSA has declined to become involved, which raises for me the question that if it does not become involved in such cases what is it for?



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The issue here is this: Merrill Lynch and its subsidiaries organised a bid for the equity of a company named Greycoat PLC, and that bid was successful. Merrill Lynch then proceeded to suck out the equity from the company without setting aside sufficient cash to repay the company’s bonds, which ranked in priority to the equity. In order to get round the asset covenants in the bond conditions, intercompany loans were put in the Greycoat balance sheet at full value when, in fact, the money had been paid up to Merrill Lynch to repay part of the purchase loans. As the intercompany loan could, thus, never be repaid this treatment was, at best, questionable.

When the bonds matured there were, as a result of the Merrill Lynch scheme, insufficient assets to repay more than part of the bonds’ face value, in spite of the fact that such bonds had been covered over five times by real assets before the Merrill Lynch takeover. The liquidator, on the instructions of the liquidation committee, commenced legal action against the directors but, due to their lack of resources, these together with the remaining assets in the company and allowing for several years of unpaid interest since the default still leave today a loss to bondholders in excess of £35 million when the interest is included. Where is that money today? One must assume that it is in the hands of Merrill Lynch.

Many of the bonds are held by tens of thousands of smallholders through bond funds, and they will suffer loss as well as the larger holders. As a result, the only way in which compensation can be obtained from Merrill Lynch is through action by the FSA against Merrill Lynch on the grounds of, first, market abuse—leaving the quoted bonds outstanding when bidding for the equity and not putting cash aside for the redemption of the bonds before removing the equity; and, secondly, the FSA’s duty to protect investors, particular small ones, against such manipulation. I am informed that when MEPC was acquired in a similar manner to Greycoat, the purchasers ensured that funds were set aside to repay the bonds in full, before the purchasers took out cash. The FSA, which was initially sympathetic when the case was first presented to it, became progressively less interested and finally stopped answering letters and phone calls.

The FSA’s remit in relation to Greycoat must surely relate to the period when it had listed securities and covered only the company’s compliance with listing rules and whether there had been market abuse in relation to the securities. As I have said previously, such matters, whether illegal or not, fall within the FSA remit as they were in effect a device to suck resources from Greycoat via the equity in priority to repayment of the bonds which ranked ahead. Surely, that is market and regulatory abuse in any language. A responsible purchaser of Greycoat would have purchased the bonds at the same time as the equity or ensured that there were sufficient funds left in the company to meet repayment obligations.

At the time of the purchase by Merrill Lynch companies, the Greycoat bonds were covered five times by real property assets, yet the holders received nothing. Sir Callum McCarthy, then chairman of the FSA, wrote to me on 20 December 2007 defending the

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FSA’s position on the grounds that Greycoat had not been a listed company at the time of the alleged offence. I believe his letter contained a crucial error, in that the Greycoat bonds in question were still quoted until 1 October 2003, and payments up to Merrill Lynch companies, which may well have been illegal, were made from September 1999 to May 2003, so they fall directly under the FSA by its own definition. That was during a period when the present FSA’s chairman, the noble Lord, Lord Turner of Ecchinswell, was vice-chairman of Merrill Lynch Europe. That does not cause me any concern, and I am sure that it will not concern the noble Lord, Lord Turner, because we have a reputation in this country of very skilled and knowledgeable people rotating between senior positions, and as such they take with them their integrity, commitment and experience. I know that the noble Lord, in his avowed intention to review the terms of the FSA at this moment, would not be in any way influenced by his past association and would ring-fence himself from any investigation that took place.

Callum McCarthy replied to me further on 12 March 2008, stating that the FSA’s remit in relation to Greycoat is limited to its compliance with the listing rules and whether market abuse has been committed in relation to the securities. I can see no reason to doubt that the purchase of the equity in the market, and then the denuding of the company of its assets to the detriment of the quoted bonds left outstanding, is an appalling case of market abuse judged by Callum McCarthy’s own criteria, in that Greycoat remained a listed vehicle throughout the key period.

This issue is not less outrageous for being a fairly simple matter. Legally, the bondholders ranked ahead of the equity and were protected by the assets. However, over the period, those assets changed from being tangible properties to being an intercompany loan, given a parent that itself had no assets. Subsequently, after a majority of the assets had been sucked out of the company, Greycoat defaulted on its bonds. The intercompany loans proved worthless, because the parent had used those funds to repay the initial loan to Merrill Lynch together with a substantial profit, which is presumably where the funds remain today.


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