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2.28 pm

Baroness Noakes: My Lords, I thank my noble friends for their support in this debate. I was going to say that I was glad that so many of them were kind to the Minister, as I tried to lead them to be at the beginning of my speech. However, having listened to the last five or 10 minutes of his speech, I am not quite so sure that they should have been. Of course, while my noble friends were kind to him, they were quite properly very unkind about the Bill. Many of them emphasised the importance of credibility and confidence in markets, in which the UK will need to fund the massive deficit that we face. They agreed that markets have paid, and will pay, no attention whatever to this Bill.

Several of my noble friends, led by my noble friend Lord Lawson, emphasised the need to start to tackle the deficit earlier and more forcefully than this Bill appears to require. That makes this Bill of marginal interest to us, but we still object to it on the grounds that it is damaging and disreputable, to use the words of my noble friend Lord Hodgson.

The noble Lord, Lord Myners, tried to tempt me to talk about our approach to what is now coyly referred to as fiscal consolidation. I shall follow the lead of my noble friend Lord Lawson and say, "I'll show you mine if you show me yours". The fact is that, for all the talk of glide paths, the Government have not set out what they will do. All of this is beyond the scope

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of today's debate, as is our position on the euro. However, I thoroughly endorse Mr Cameron's views on whether and when we should join the euro.

My purpose in tabling my amendment today was to draw attention to the lack of parliamentary scrutiny of this dreadful Bill. The noble Lord, Lord Desai, suggested that perhaps not scrutinising Clauses 2 to 6 did not matter, but Clauses 2, 3 and 4 at least should have been scrutinised and the supposed duties, reports and accountability-

Lord Peston: My Lords, does the noble Baroness recall that, at the beginning of our debate, the Lord Speaker read a passage from the Companion about what we cannot do? I thought that she said that we must say nothing that would implicitly criticise the Speaker in the other place or criticise the way in which the other place conducted its business. The noble Baroness seems to be going down the path of criticising the way in which the other place conducted its business. I am not sure who can read out the relevant bit of the Companion that was read out earlier. I mention this partly because I had intended to criticise the other place but, the moment I heard what the Lord Speaker had to say, I thought that I must not do it. I am now worried about the path that we are on, but I am not sure who is in a position to advise us on this.

Baroness Noakes: My Lords, perhaps I can help. When I spoke earlier, I was at pains to point out the lack of scrutiny that the Bill received in another place; I was at pains not to criticise the other place but to criticise the Government for the way in which they used the procedures of the other place to achieve the result that this Bill had virtually no scrutiny. I stick to that. I do not believe that I have departed from that in these concluding remarks. If I have, that was wrong and was not what I intended. I think that I have made plain what I intended. That was my purpose and I believe that the clauses that were not scrutinised-they deal with duties, reports and accountability, which in statutory terms is a nonsense-should have been exposed to scrutiny. In the normal case, your Lordships' House can remedy insufficient scrutiny in another place with its own careful deliberations but, of course, we cannot do that on a money Bill. I hope that today's debate has illustrated the desirability of full scrutiny of at least one House of Parliament in the context of good, constitutional government. If it has, I have achieved my purpose. On that basis, I beg leave to withdraw my amendment.

Amendment withdrawn.

Bill read a second time. Committee negatived. Standing Order 47 having been dispensed with, the Bill was read a third time and passed.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2010

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2010
6th Report from the Joint Committee on Statutory Instruments

Motion to Approve

2.34 pm

Moved By Lord Myners

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The Financial Services Secretary to the Treasury (Lord Myners): My Lords, it is good to see your Lordships again. It is also good to see such refreshing, young faces-not the sort who had to be brought in to be seated behind Mr Cameron when he spoke to so-called university students at a lecture earlier this week, who subsequently proved not to be students of the institution in question. These certainly are students of the institution in question: the Opposition.

This order seeks to make a change to the definitions regime for regulated activities, as laid out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Specifically, the order seeks explicitly to exempt alternative finance investment bonds from the current collective investment scheme regulations and to create a new specified investment under the regulated activities order. The order further seeks to introduce a unique regulatory definition of alternative finance investment bond for this purpose.

This change will benefit institutions looking to issue corporate sukuk by creating regulatory clarity and reducing potential legal and compliance costs. In the Finance Bill 2009, we introduced relief from stamp duty land tax and tax on capital gains for any transactions undertaken as part of the issue of alternative finance investment bonds. The purpose of this legislation is to remove further obstacles to the issuance of corporate sukuk in the UK. The FSA has estimated that these regulatory changes would reduce the overall costs of corporate sukuk issuance by around £35,000 for sukuk of five years' duration.

It may help the House if I briefly outline what alternative finance investment bonds are, how they are currently treated within the regulatory framework and the background to this order. Alternative finance investment bonds refer to a type of financial instrument commonly known as sukuk, or Islamic bond, but can also refer to any financial instrument with similar characteristics. These instruments replicate the economic effects of conventional bonds. Sukuk aim to do that in a way that conforms with the principles of Sharia. Sharia compliance is not a requirement for an instrument to be treated as an alternative investment bond under the order. The Sharia-compliant features of sukuk, which include the principle of mutual co-operation and risk and profit-sharing arrangements, mean that in some cases these would fall within the broad regulatory definition of a collective investment scheme in Section 235 of the FSM Act 2000. Arguably, that puts alternative finance investment bond issuers at a disadvantage to issuers of conventional debt securities, as authorisation as a collective investment scheme involves application fees, ongoing supervisory fees and, more importantly, internal and third-party costs associated with compliance procedures. Although the structure of sukuk may be such that they do not fall within the collective investment scheme regulations, this uncertainty was cited by the Islamic finance industry as a barrier to the issuance in the UK of corporate sukuk.

In December 2008, Her Majesty's Treasury and the FSA launched a joint consultation into the regulatory treatment of alternative finance investment bonds.

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Four policy options were identified. Option 1 was to introduce legislative amendments to exempt explicitly these instruments from collective investment scheme regulations and create a new specified investment under the regulated activities order and to introduce a unique regulatory definition of alternative finance investment bonds for this purpose. Option 2 was the same as option 1, but with alternative finance investment bonds being defined by the existing tax definition. Option 3 would be the same as option 1 but would include alternative finance investment bonds under the existing specified investment of creating or acknowledging indebtedness. Option 4 was to do nothing.

HM Treasury proposed that the first of those-to introduce legislative amendments to exempt explicitly these instruments from collective investment scheme regulations and create a new specified investment under the regulated activities order and to introduce a unique regulatory definition of alternative finance investment bonds for this purpose-be taken forward. The 20 responses to the consultation paper showed that there was broad industry support for that course of action. The views of the industry were summarised and the authorities' feedback given in a second document, published in October 2009. We received three responses to this during a second consultation phase and took these views into account in our further refinement of the statutory instrument. We intend that the legislation will come into force on 24 February so that the legislative changes and the changes to the FSA's handbook can take effect at the same time.

The effect of the order before the House today will be to make alternative finance investment bonds a specified investment for the purposes of the Financial Services and Markets Act 2000 and to afford them equivalent treatment to conventional bonds. I beg to move.

Baroness Noakes: I thank the Minister for introducing the order. I shall be brief, because this is all that stands between the Lenten Recess and those of us who deal with Treasury business in your Lordships' House.

My party supports the adaptation of UK regulatory and tax law to accommodate Sharia-compliant instruments. The UK's financial services industry is famously innovative and has adapted to the demand for Sharia-compliant products. We would not want to stand in the way of that, provided that any costs imposed are proportionate and risks are capable of effective regulatory oversight.

If it is the FSA's judgment that its regulatory oversight of the relevant products is unimpaired by this reclassification, clearly there is no problem. However, I could not find that clearly stated in the paperwork accompanying the order or in the consultation that preceded it. Perhaps the Minister could today give that confirmation.

The original consultation in December 2008 showed that the FSA had not yet calculated the costs. If the costs of option 1 in that document, which is the solution being put forward in the order, were unavoidable and material, the FSA, it was said, would examine other legislative solutions that would avoid such costs. The document did not say what sort of level was

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material. The October 2009 summary of responses noted the support for option 1 but was silent as to the FSA's costs.

The impact assessment for the order shows that the one-off costs for the FSA amount to £175,000. That seems rather a large amount of money to add one specified investment to the FSA's systems, although in the context of the FSA's budget of around £300 million it is clearly small beer. Can the Minister say who pays the £175,000? Will it be borne by those who issue relevant bonds or will it be lost in the general pot and therefore be borne more broadly?

Finally, we seem to be dealing with Islamic finance on a piecemeal basis. That may have been appropriate in the past, with low demand and transaction volumes but, if the UK is to capitalise on its strength as a financial centre, is there a case for a wider review of the ways in which the tax and regulatory regimes might be modified further? I have absolutely no idea whether further changes would be desirable and would certainly need the assistance of my noble friend Lord Sheikh on that. I am pleased to see him in his place. However, I want to see the UK being more proactive, rather than reactive, so that we can capture as much of this global business as possible. Perhaps the Minister will comment on that.

Lord Newby: My Lords, I shall start where the noble Baroness finished. Just over a couple of years ago, the Prime Minister, then Chancellor, said that it was his aspiration that the City should be the global centre for Islamic finance. As with so many other government initiatives, the Treasury has had-on a charitable viewing-other things to do over the past couple of years. However, the assertion having been made, there has been precious little activity to support it. I strongly support the noble Baroness in putting further impetus behind that aspiration.

As luck would have it, yesterday morning I somewhat improbably found myself at a breakfast seminar on Islamic finance. One of the questions raised was whether the Government were contemplating, or had contemplated, issuing sukuk-compliant orders as a partial way of meeting the deficit. The speakers said that they understood that the issue had been actively considered by the Treasury until a couple of years ago. At that point, it appears, active consideration stopped. Given the size of the market and the strait in which the Government find themselves, it seems to me that having sukuk-compliant products of their own might be an extremely good way of tapping into a market that is currently unaccessed by the Government and their debt office. I would therefore be grateful if the Minister could respond today on that or look further into it. The order seems eminently sensible and we support it.

2.45 pm

Lord Sheikh: My Lords, I certainly welcome our increasing involvement in Islamic finance. We have the largest finance industry in the western world and are very keen to promote this. I see us as being the stepping stone into more penetration into Europe. Islamic finance is taken not only by Muslims but by

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non-Muslims because of its ethical nature and the fact that it is mutual. Therefore, the idea of promoting sukuk is marvellous. There is a large Islamic banking sector here-not only wholesale but retail banks. We are also keen to promote Takaful Islamic insurance because there is a demand for it. I repeat that this change will appeal to Muslims and non-Muslims. If the world had followed Islamic Sharia principles, perhaps we would not have had such a drastic credit crunch. Islamic finance is based more on mutuality, assets and transparency. We need to promote the order and I welcome the Minister's comments.

Lord Myners: My Lords, we believe that alternative finance investment bonds should, as far as possible, be afforded a level playing field with their conventional equivalents. We have said that the aim of the order is to create clarity over the regulatory treatment of corporate sukuk and to reduce potential legal and compliance costs that may have been a barrier to increased issuance. The joint Treasury and FSA consultation concluded that the most appropriate way forward was to introduce legislative amendments to exempt explicitly these instruments from collective investment scheme regulations and to create a new specified investment under the regulated activities order. The FSA estimates that these regulatory changes could reduce overall costs of sukuk issuance by around £35,000 for a sukuk of five years' duration. The responses that we have received to our consultation have been generally supportive.

The Government believe that the additional cost of around £175,000 to upgrade the FSA's technology is justified by the increased prospect of corporate sukuk issuance in the UK and related developments in the UK market. We see these as a public benefit for many who will, potentially, be able to access them. The HMRC impact assessment for the amendment of tax legislation on alternative finance investment bonds, published in April 2009, estimated that there will be up to 20 issuances per year under the revised tax and regulatory framework. As the market gains momentum, as the noble Lord, Lord Sheikh, has suggested it could, and London becomes Europe's centre, we could see a much more active market that will attract the involvement of other agents who have no previous skill or knowledge in this area.

We have dealt with the £175,000. The noble Baroness, Lady Noakes, asked whether FSA assurance on the regulation of alternative finance bonds is appropriate and whether treatment would be the same as for conventional bonds. Alternative investment ensures that economically equivalent instruments are afforded equivalent regulatory treatment. That is to say that sukuk are the same in substance as conventional bonds and accordingly it is appropriate that they should be treated as such. The Treasury and the FSA engage with industry on an ongoing basis to take views about the opportunities and challenges in the area of Islamic finance. In particular, I would welcome an opportunity to discuss this further with the noble Lord, Lord Sheikh.

Baroness Deech: My Lords, this may display my total ignorance about Islamic finance, but can we be assured that the Islamic finance industry in London

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treats women in every respect as equal and that there are no discriminatory obstacles to the progress of Islamic finance?

Lord Myners: This is a matter on which you would expect the Minister to reply, but if the noble Lord, Lord Sheikh, thinks it appropriate, I would be delighted to hear a contribution from him. I think that there is nothing in the regulations that would in any way prejudice or adversely affect the treatment of people of either gender under the law of this country or under Sharia law. To some extent, that point is slightly off the centre of the rather specific order that we are discussing today.

We have a group that regularly meets to discuss Islamic finance, tax and technical issues and the noble Lord, Lord Sheikh, may wish to share his considerable knowledge in this area with that group. As I said before the noble Baroness on the Cross Benches asked her question, I was much taken by the speech made by the noble Lord, Lord Sheikh, about the importance of the ethical dimension, which the House will know has been lacking in much of our financial sector for some time. He also talked about the concept of mutuality.

Whether the Government will issue in the sukuk market is a matter that we will monitor and continue to keep under assessment. In deciding to date not to issue a sovereign sukuk-it would be reasonable to say that there are no plans at all for an issue to take place in the foreseeable future-the Government took into account the current situation in world financial markets, including the sukuk market, and the fact is that the Government's debt management policy is doing admirably well, with a range of conventional instruments of a depth of maturities and duration that have been sold through both the tender process and syndications and which are proving to be attractive to investors. I think that I have covered everything that has been raised. I commend the order to the House.

Motion agreed.

EU: Directive on the Protection of Animals Used for Scientific Purposes (EUC Report)

Eu Directive HL Paper 164-I
Eu Directive HL Paper 164-II

Motion to Take Note

2.53 pm

Moved By Lord Carter of Coles

Relevant Document: 22nd Report, Session 2008-09, HL Paper 164.

Lord Carter of Coles: My Lords, I am pleased that the House has the chance to consider the proposal to revise the EU directive on the protection of animals used for scientific purposes, particularly at a time when discussions are still under way in the European institutions.

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The most recent statistical report by the European Commission shows that just over 12 million animals were used in scientific procedures in the 25 member states that made up the European Union in 2005. France, Germany and the United Kingdom were the member states with the highest numbers of animals used, accounting for half of the 12 million. This is not a new state of affairs. In 1986, the European Community adopted the first directive on the protection of animals used for experimental and other scientific purposes. Also in 1986, in the United Kingdom, the Animals (Scientific Procedures) Act was enacted, which put in place the current system of controls in this country regulating scientific work on living animals, as well as implementing the 1986 directive.

In carrying out our inquiry, it was made clear to us that since 1986 the UK has maintained controls which have promoted good standards of animal care and use. However, we were left in no doubt that the 1986 directive has not been implemented consistently across all member states and that the standards achieved in the UK are not replicated in all parts of the EU.

When the European Commission published the proposal in November 2008, it highlighted the following objectives: to strengthen the protection of animals used in scientific procedures; to promote the replacement, reduction and refinement of the scientific use of animals, the so-called three Rs; and to put right the wide variations in the implementation of the 1986 directive, to ensure a level playing field across the EU.

As a committee, we supported those objectives, and we agreed on the need to revise the 1986 directive. Since 1986, there have been developments in science and in the understanding of animal welfare which, after 24 years, should be taken into account in new legislation. The process of revision provides an opportunity to put in place some really effective safeguards, to ensure that the new directive will be implemented consistently across all member states.

We are grateful to all those organisations which sent us evidence or appeared in person and made some very powerful arguments. I should also record our thanks to our special adviser, Dr Jane Smith, who enabled us better to understand a subject of some complexity. I also acknowledge the work of my colleagues on the committee, who ensured that the inquiry into this challenging subject was carried out with vigour and insight. It is right for me to pay tribute to my predecessor, the noble Lord, Lord Sewel, who I see in his place, for whom this inquiry was his swansong as chairman, after guiding the committee through many perceptive and influential inquiries.

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