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House of Lords

Tuesday, 17 March 2009.

2.30 pm

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

Banking: Toxic Debt


2.37 pm

Asked By Baroness Miller of Hendon

The Financial Services Secretary to the Treasury (Lord Myners): My Lords, the Government have asked Sir David Walker to undertake a review of corporate governance of UK banks. The review will cover a number of issues, including board management of risk and bank remuneration policies.

The Chancellor has asked the noble Lord, Lord Turner, the chairman of the FSA, to make recommendations for strengthening UK and international regulation. The review will be published on 18 March.

At the November G20 summit, leaders agreed an action plan to strengthen the global financial regulation, including enhancing risk management by firms. G20 Finance Ministers agreed further steps to strengthen regulation at their meeting on Saturday.

Baroness Miller of Hendon: My Lords, I thank the Minister for that detailed reply. What representations have Her Majesty's Government made to the OFT regarding the complete failure in any case to exercise its powers of enforcement over financial institutions which engage in “irresponsible lending”? Is the Minister now aware that this power was added to the Consumer Credit Act 2006 following my representations throughout the passage of that Bill?

Lord Myners: My Lords, I thank the noble Baroness, Lady Miller, for her question. I am not as well informed on the OFT matter as I should be and I will make it my duty to ensure that I am. However, the primary responsibility for reckless lending must rest with the management, boards of directors and shareholders of the institutions which made these reckless loans. We are strengthening governance and accountability, and we are doing so within a framework of enhanced regulation, about which we will no doubt hear more from the noble Lord, Lord Turner, later this week.

Lord Peston: My Lords, one matter puzzles me. How were these toxic assets bundled in the first place and how were they marketed? It seems to me that everybody is assuming that this was all down to the

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incompetence of the bankers. I am not convinced that that was the whole story. I find it impossible to believe that any of this happened with no fraudulent behaviour whatever. The Americans are certainly exploring the fraud and criminal activities that took place. Why have Her Majesty's Government not gone down that road and set up a full-scale inquiry into fraudulent behaviour in this area?

Lord Myners: My Lords, my noble friend asks an interesting and important question. I believe that the primary fault here must lie with those who were instrumental in creating and rating complex derivative-based products, but there is also a serious element of caveat emptor on the part of the purchasers of those products, which in many cases were other banks, insurance companies or pension funds. If there was criminal behaviour, that must clearly be pursued, and the primary responsibility for that will lie either with the Financial Services Authority or the Serious Fraud Office. To the extent that there is any evidence of fraudulent or criminal activity, I know that the Government will endorse a vigorous pursuit of those inquiries and a successful conclusion of matters in the courts.

Lord Tebbit: My Lords, how have the auditors managed to stay out of the firing line? Many people bought shares in these banks on the basis of the published accounts that had been certified as accurate by the auditors. Will the Government look at audit practice and at there being so few large firms of auditors with large clients, which makes them vulnerable to pressure from the clients?

Lord Myners: My Lords, in some ways, in classic business theory, the fact that there are few providers and many purchasers ought to provide oligopolistic powers to auditors. In practice, the auditing profession has been rather good at placing responsibility for accounts on directors: the audit certificate is deemed fair and reasonable on the basis of assurances given to auditors by directors. One cannot distinguish and separate out entirely responsibilities here, but the auditing and accounting profession clearly has questions to answer. I am very pleased that the communiqué from the OECD Finance Ministers meeting last weekend identified the need to get to grips with accounting issues, particularly around off-balance sheet items and derivative exposures, which are at the core of many of these accounting problems.

Lord Newby: My Lords, if Barclays seeks insurance for some of its toxic assets, what conditions will the Government seek to apply? For example, will they seek to secure a guarantee from Barclays that it will stop undertaking highly complex, but highly profitable, tax avoidance schemes?

Lord Myners: My Lords, on 19 January the Government laid out clearly the conditions that would apply to participation in the asset protection scheme, which Lloyds Banking Group and the Royal Bank of Scotland have entered into. Barclays has not made an application to participate in that scheme, but if it did, the same conditions would apply. UKFI, the entity which holds the Government’s investments in Lloyds

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and the Royal Bank of Scotland, has written to those banks, asking for a full explanation of their involvement in structured products and tax avoidance. The Chancellor of the Exchequer made a Statement yesterday about an action that he is taking on the taxation of banks’ profits, where clearly creative work has been going on.

Lord Lawson of Blaby: My Lords, is the noble Lord aware that my noble friend Lord Tebbit asked a very good question indeed, which his waffle about the OECD, if I may respectfully say so, had nothing to do with? When Johnson Matthey Bankers went bankrupt a quarter of a century ago, I authorised the Bank of England to sue the auditors. It did so and won. Why are the Government not doing the same with the companies that they have had to bail out?

Lord Myners: My Lords, in that the Lloyds banking group and Royal Bank of Scotland, to which I assume the noble Lord refers primarily, continue to be listed companies, such an action should be initiated by the shareholders or boards of directors of those two banks.

Baroness Sharples: My Lords—

The Lord President of the Council (Baroness Royall of Blaisdon): My Lords, we are in the ninth minute.

Armed Forces: HMS “Endurance”


2.45 pm

Asked By Viscount Montgomery of Alamein

The Parliamentary Under-Secretary of State, Ministry of Defence (Baroness Taylor of Bolton): My Lords, I am sure that the whole House will first wish to join me in offering sincere condolences to the families and friends of Lance Corporal Christopher Harkett, Corporal Dean John and Corporal Graeme Stiff, who were killed in operations in Afghanistan this past weekend.

HMS “Endurance” is due to return in April aboard the heavy lift vessel MV “Target”. Subject to a detailed survey, our intention is that the ship will be repaired prior to her return to service.

Viscount Montgomery of Alamein: My Lords, that is an interesting statement, but the noble Baroness will be well aware that “Endurance” has a dual function, not only as a supply vessel to the Antarctic but also in rescue operations. The vessel has given invaluable service with the increasing number of cruise ships there, some of which have accidents, as happened only two or three weeks ago. What will happen if “Endurance” is not ready by the start of the next Antarctic touring season later this year? What replacement has the Minister in mind for those valuable and important functions?

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Baroness Taylor of Bolton: My Lords, I should make it clear that the primary role of this vessel is to patrol and to survey the Antarctic and south Atlantic, maintaining a sovereign presence in that area and supporting the global community of Antarctica. The primary function of the vessel is not sea rescue, although it has performed that responsibility when in the vicinity. The ship has never been in the area for 12 months of the year, but we appreciate the importance of having a presence there. The Navy command has made a plan, the details of which we do not want to give at this point, but there will be a vessel in the area during the winter.

Lord Astor of Hever: My Lords, we, too, send our condolences to the families of the soldiers tragically killed in Afghanistan.

On HMS “Endurance”, does the Minister have any idea of the cost of all these repairs? Does she agree that such an incident should serve as a lesson on the impact that operating too few ships can have on naval capability?

Baroness Taylor of Bolton: My Lords, until the vessel returns, we will not be able to make a final estimate of the cost. The vessel is due for two sessions of repair and serious maintenance between May and October this year and between May and October next year. It is hoped that those two costs, which are already in the budget, will go a long way towards meeting the cost of the repair to the damage. On whether we operate too few ships, we think that we can provide an alternative ship for the area not at the expense of other deployments. A balance has to be struck between ships with extra capability or more ships; that always has to be taken into account.

Lord Wright of Richmond: My Lords, is the Minister aware that reports that “Endurance” was to be withdrawn in 1982 immediately led to serious misunderstandings on the part of the Argentine Government that Her Majesty’s Government were no longer prepared to defend the Falkland Islands? If the Government were ever to decide—presumably they will have to at some point—to withdraw “Endurance”, does she agree that it would be important for explanations to be given, through diplomatic channels, to the Argentine Government that we are, as I assume we are, ready to continue to defend the islands?

Baroness Taylor of Bolton: My Lords, “Endurance” is not planned to go out of service until 2015. As that time approaches, we will have to consider what we should do about a replacement. The Foreign Office and the Ministry of Defence have discussed who should take prime responsibility for funding this kind of exercise, given, as I said, that the ship’s primary purpose is the sovereign presence in the area. We think that this is an important area. Important discussions are coming up on the 50th anniversary of the signing of the Antarctic Treaty and submissions to the United Nations will be made by May of this year on possible future expansion. We are very well aware of the importance of having a presence in this region.

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Lord Lee of Trafford: My Lords, first, I enjoin these Benches in the earlier tribute. Will the noble Baroness comment on press reports that this serious incident arose through the changing of seawater filters while the ship was under way in the Magellan Straits rather than in dry dock or shallows, and that “Endurance” had her annual maintenance at Simon’s Town in South Africa rather than, as was normal practice, in the United Kingdom?

Baroness Taylor of Bolton: My Lords, the ship had its service and was signed off as being adequate and up to standard, so I do not think that we need have any concerns about that. The difficulty arose during routine cleaning of freshwater filters. I am told that a seawater valve was changed and that the crew could not close it properly, which led to water coming into the engine room and elsewhere on the boat. Therefore, it was decided to isolate the engine room to prevent further water from coming on board. As a result, the ship lost propulsion. It was a routine exercise and, until we have the full inquiry into what went on, which we cannot carry out until the ship is back home, it would not be wise for us to comment at this stage.

Baroness Hooper: My Lords, I understand that a Chilean naval vessel and helicopter went to the rescue of the “Endurance” along with the Norwegian cruise ship. This obviously underlines our long-standing relationship with the Chilean navy, from the time of Admiral Lord Cochrane onwards. What representations and thanks have been conveyed to the Chilean Government for this help?

Baroness Taylor of Bolton: My Lords, the noble Baroness is quite right. We received assistance from the Chilean navy in the immediate crisis and when it provided two tugs to tow the ship to safety. Appropriate thanks have been expressed.

Lord Anderson of Swansea: My Lords—

The Lord President of the Council (Baroness Royall of Blaisdon): My Lords, forgive me, but we are in the 16th minute.

Water Supply: Charges


2.52 pm

Asked By The Lord Bishop of Ripon and Leeds

Lord Davies of Oldham: My Lords, a range of discussions has taken place between my department and Ofwat, at official and ministerial levels, regarding water charges for non-business and non-domestic customers.

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The Lord Bishop of Ripon and Leeds: My Lords, I am grateful to the Minister for that response and I should be even more grateful if I saw anything much happening as a result of the conversations which have taken place. The changes in the ways that water companies charge for the drainage of surface water and highways would cost churchgoers and the Church of England some £15 million a year, and the total effect for community groups would be very much higher. It seems to be one of those situations where everyone is agreed on what should happen, but no one can do anything. Will the Minister undertake to end the buck-passing by revising and reissuing the guidance to Ofwat and the water companies to make it absolutely clear that community halls and church buildings should not be charged for surface water drainage on the same basis as businesses?

Lord Davies of Oldham: My Lords, I can certainly give some assurance on the last point, but the guidance is unexceptionable—that properties should pay for the clearance of surface water. The basis has changed since 2000, after consultation, and has met broad approval. What has gone wrong is the way in which individual companies have implemented the guidance; in particular, nearly all complaints revolve around United Utilities whose charges have increased by several hundred per cent in a number of cases. The Government have made it clear that this is unacceptable; Ofwat has made that clear to the company involved; and the company has apologised for its actions and is taking remedial steps.

Baroness Gardner of Parkes: My Lords, is not the basis on which this is determined at fault? I had a garage which was considered separate from my house and the water rates charged on it were attached to an old rateable value totally out of touch with the present metering and new ways of providing water. Eventually, when it was agreed that it would become part of my house, it all came in under my meter. It did seem to me that anyone who had property in the category that the right reverend Prelate has spoken about, is at a disadvantage. Are they still using a rateable value as the basis of assessment? All these other changes in water charges have been to the benefit of the customer.

Lord Davies of Oldham: My Lords, the complaints are the other way round. The movement has been from the old rateable value to the new surface water drainage charges. That is what has caused the consternation. The principle is unexceptionable; namely, that properties should pay for the clearance of surface water on the simple grounds that the community has to pay if the property owner does not pay, because we need to have this water removed. The question is about fairness and the treatment of particular categories. What is clear, as the right reverend Prelate was indicating, is that the churches deserve special consideration, as do some other organisations like charities and sports clubs. Those issues are being looked into to make a separate arrangement for them. The issue about the general principle I think is not contestable.

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Lord Tyler: My Lords, what is to stop another rogue water company taking similar action on a one-off basis against all the advice of the Government as the Minister has indicated, and against everything that Ofwat has assured consumers will happen?

Lord Davies of Oldham: My Lords, water companies are expected to act responsibly. Where they do not there is a fair amount of public furore. That is why I have identified the particular company which has caused the greatest problems. Other companies have implemented the new charges without this degree of controversy and concern. How do we prevent the issue arising in the future? I think it is hugely unlikely that any other water company would follow the course which United Utilities has been obliged to do, which is to revise its position with regard to charges to take account of public criticism and to apologise for the actions it has recently taken.

Lord Taylor of Holbeach: My Lords, can the Minister help the House with numbers and tell us how many non-business, non-domestic users there are and how many of these will be paying more than the 9 per cent average increase in charges as a result?

Lord Davies of Oldham: My Lords, I do not have a breakdown of figures, but I have categories in terms of the concern that we should have exemptions for reductions for faith buildings, community amateur sports clubs—their definition is a subject of further consultation—and scout huts. However, the position is clear as regards other properties; they are charged on the surface water that accumulates. If they do not pay, if we create exemptions, the ordinary householder has to make up the deficit. As a consequence, it will be clear that we have to look at reductions and exemptions very carefully. I am merely indicating that the furore has broken out—and I can give numbers on this— because certain charges for which United Utilities has been responsible are 16 or 17 times larger than those for comparable buildings in other water authorities.

Baroness Howarth of Breckland: My Lords, in addition to the apology, is the water company likely to make a refund?

Lord Davies of Oldham: My Lords, the company has said it is reverting to the old style charges in the interim; in other words, it is going back three years in the charging mechanism. However, refunding is a different matter. The company is clearly aware that the practice it has followed is not acceptable.

Lord Pearson of Rannoch: My Lords, does the Minister wish he had at his disposal the £68.3 billion which according to the Government we have so far spent on EU water purification directives which have done nothing for our infrastructure, supply or clearance of surface water, or indeed served any useful purpose at all?

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