5.30 pm

Lord Myners: My Lords, I fear that the noble Baroness, Lady Kramer, might not have been listening to my noble friend Lord Eatwell. He supports the inquiry to be chaired by Mr Andrew Tyrie as well as the Wheatley review. I believe that the proposal of my noble friend is complementary to and necessary as an addition to those reviews.

Yesterday the Chancellor of the Exchequer said in the other place,

“we know what has gone wrong”.—[

Official Report

, Commons, 2/7/12; col. 613.]

I do not think that the people of this country know what has gone wrong. With all respect to the noble Lord, Lord Kerr, this is not simply a question of LIBOR. I first tabled a Written Question for the Minister about the manipulation of the LIBOR rate in March last year and got a very backhanded response from him; I have raised it several times subsequently. But this goes well beyond LIBOR. The lying and deceit around LIBOR manipulation that we know has taken place systemically across the banking industry—it is not limited to Barclays alone—is but a symptom of a wider cancer at its heart.

You can go to your bank manager to have your passport photograph signed. Banking was a profession held in high regard. It was associated with trust, integrity and prudence. How has that changed, and why? That is why we need a commission of review. The terms of reference of the Tyrie review are, as my noble friend said, extremely limited. They are ring-fenced and precise, so they do not ask the sort of questions that should be asked. Yesterday in this House the call was made for a review that would focus on the transparency, culture and professional standards of the banking industry. The Tyrie terms of reference do not look at the transparency, culture and professional standards that were called for by the speaker in this House—and that speaker was the Minister. We need a fundamental review of what has gone wrong in banking.

How can it be that a bank built on the Quaker traditions of Barclays can find itself in a position where three of its senior board members have resigned within 24 hours and where I confidently predict more will resign by the end of this week? How can we be comfortable with that? The noble Lord, Lord Kerr, referred to Mr Marcus Agius, whom I know well and hold in extremely high regard. It seems as if Barclays has been involved in a car accident where Mr Agius was the passenger sitting in the back. Yesterday he resigned, taking the blame for the accident. Today Barclays has concluded that it is the driver who should take responsibility, and now Mr Agius has got back into the car, which he has to drive from the back seat. This is a state of complete chaos. How can a great British industry, one in which we have led the world, have got itself into such an awful mess?

To answer those questions, we probably need to go back to the 1980s to see how the transition has taken place. Tyrie and Wheatley are not going to do that. Their work should continue, but the call by my noble friend Lord Eatwell for a thorough, deep and considered evidence-based review of what has gone wrong in banking, and what we can do to ensure that it does not

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happen again, seems to be an undeniable case. I shall certainly support the amendment if my noble friend presses it to a vote.

Lord Higgins: My Lords, we should be grateful for the opportunity to have a debate this afternoon because it enables us to focus on what our priorities should be. We have essentially been considering two things: how wide an inquiry do we need and how urgent is it that it should produce results quickly? What has become quite apparent is that one inquiry is not going to be enough. What has happened is this: on the one hand we need a short-term inquiry, but on the other hand we need a strategic inquiry. We also need the kind of investigation which the noble Lord, Lord Carlile, has put forward, but in a sense it is a separate issue because the outcome of that inquiry will presumably be the prosecution of particular individuals. In no way would the noble Lord’s inquiry tell us how to reform the banking system. So that is something which is self-contained and separate.

We come then to the question of the best tactical answer. I fear that the position has been somewhat confused by the references to Mr Tyrie. Let me make it absolutely clear—I speak as someone who was the chairman of the Treasury Select Committee for 14 years—that I have the greatest respect for Mr Tyrie, who has been doing a magnificent job as chairman of the committee, which I understand is to take evidence from Mr Diamond this week. But the question then arises of whether Mr Tyrie should also be the chairman of the Joint Committee, the proposal put forward by the Government. I think that this confuses the matter. The shorthand around the use of the word “Tyrie” has actually become extremely confusing. Yesterday I expressed a view that I shall repeat now: to do the jobs both of chairman of the Treasury Select Committee and chairman of the Joint Committee is too much. It will distract from the normal work of the Treasury Select Committee, while the Joint Committee will need the full attention of whoever is appointed as its chairman.

I am not clear on how it suddenly became apparent that Mr Tyrie would chair the Joint Committee. My noble friend the Minister pointed out yesterday that the Joint Committee will presumably decide who its chairman should be. I would prefer Mr Tyrie to continue as chairman of the Treasury Committee because he is doing such a good job, and I believe that someone else should chair the Joint Committee. However, that will be a matter for him and the respective committees to decide. At all events, the Joint Committee is the right way to go as regards the immediate investigation and rapid conclusions on what needs to be done urgently. That leaves unanswered some of the more fundamental positions that need to be considered. The body which could most appropriately do that was suggested by the opposition Front Bench.

To summarise, leaving the separate Carlile issue on one side, the Treasury Committee should continue with its work in the normal way; the Joint Committee should consider the immediate actions that need to be taken as it unearths the problems, as no doubt it will; and there ought also to be a longer-running inquiry. There will not then be any accusation that we are

3 July 2012 : Column 616

kicking the matter into the long grass, and at the same time we will get rapid results on the tactical situation. In the light of your Lordships’ debate, it is becoming increasingly apparent that that structure is the right approach.

Lord O'Donnell: My Lords, I support the sentiments expressed by the noble Lord, Lord Kerr, and the noble Baroness, Lady Kramer, and believe that we need to handle the very important issues raised by the noble Lords, Lord Eatwell and Lord Myners. There is a way of managing all of this.

First, importantly, we have a lot of information already. We want an inquiry to establish the facts, but we need to bear in mind that we have MoJ, CFTC, and FSA reports on the LIBOR issue that have raised enormous issues. I would very strongly support what the noble Lord, Lord Carlile said, but with the noble Lord, Lord Howard, variant, if I might put it that way; that is, that these reports have raised serious issues of criminality. We need to investigate those issues quickly, with sufficient resources, and with all the power and vigour that we would use if this were some other form of crime. That process is crucial. It should happen straight away, and it should not be resource-constrained.

Secondly, the Wheatley report will be important specifically to the way in which we handle the LIBOR issue. It is urgent, and plenty of others would like to take this business away from us. The Wheatley report, which should be with us through the summer, will suggest some amendments to this Financial Services Bill. I particularly like the suggestion of LIBOR being a qualifying financial instrument, which might well get us through a lot of these issues.

We then come to the more general set of issues on what is wrong with banking and how we can restore confidence in it. Those are very important questions. In my maiden speech, I suggested that we should have a Joint Committee of both Houses chaired by the chairman of the Treasury Select Committee who would have authority and power. Given the experience of Members of this House, it could come up with some answers that would get past the problem of reputational issue. Both Houses acting together would command confidence and such a committee more generally at what emerges from the LIBOR case.

Some issues will emerge directly from the LIBOR case which will relate to our future banking reform legislation, touching on the whole question of splits and the like. That Joint Committee could guide us as regards the changes we would need. I am in favour of changes to that legislation and I would look at total assets rather than only at risk-weighted assets, and at total leverage ratios rather than only at what is proposed. However, that is a separate issue that we will come to later in this House.

5.45 pm

As the noble Lord, Lord Eatwell, said, in looking at what is fundamentally wrong with banking, we will look the whole area of confidence, and that relates to values, leadership, the culture, and the existing incentive structures. A lot of those issues will arise in that Joint Committee and this episode will suggest examples of

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ways forward to us. However, I suggest that we get on with all of these committees, because the public will not want to see us try to push this into the long grass.

I was involved very much in setting up the Leveson inquiry, and my experience of judge-led inquiries is that you have to be incredibly careful about tying them down to specific issues and timetables. What people have said they want from this specific inquiry means that it will grow bigger and take longer or that it will be incredibly superficial. I believe that it should be kept quite narrow. For now, let us get on with Wheatley and with our debates on the Financial Services Bill where we can make amendments; let us think about changes to the banking reform legislation; and let us get on with the Joint Select Committee. If those do not produce the effect that we need, we can consider whether we need to go further.

I asked for three things in my maiden speech. I asked for the financial stability objective to have growth related to it, and I am glad that the Chancellor has responded to that. I suggested that we set up a Joint Committee of both Houses, chaired by the Treasure Select Committee, and I am glad that that now has a use. My third request, which I would like the Minister to respond to, is for more resources for the Treasury. Judging by the number of committees and inquiries it will have to deal with, that is more urgent than ever.

Lord Peston: My Lords, the background to my few remarks is the text:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

I am delighted that some of the better educated—no doubt those who were taught economics—are well aware of the provenance of this remark, which was by Adam Smith. He would not have been in the least surprised by what happened with LIBOR or by all the other conspiracies that, if we had enough time, I could tell you about, including the price fixing that still goes on in our economy.

Turning to my main remarks, I have a feeling that I will be in somewhat of a minority. I found what the noble Lord, Lord Sassoon, said yesterday, in announcing the Government’s proposal for what we will call the Tyrie inquiry to be totally unconvincing. The public require an objective inquiry which they can believe without a shadow of doubt is not a stitch-up. I do not believe for one moment that the remit given to the chairman of the Treasury Select Committee enables that inquiry to take place in any way whatever. I speak for myself in saying that, although I regard myself as totally objective and totally honest, if I were asked to be on that inquiry I would refuse because I do not believe that the public want people who are involved inside to be conducting it. We have very much to face up to that. I might ask the noble Lord, Lord Sassoon, why, if he is so anxious to keep politics out of things, does he make political remarks in almost every address he gives to this House—but that is simply me being my usual acerbic self.

Am I right, that the Prime Minister—given that this is a matter of absolute national importance—did not consult the Leader of the Opposition in deciding how

3 July 2012 : Column 618

we should go forward? The Government ought to backtrack and try to find a consensual way of going forward that would involve the Prime Minister talking to the Leader of the Opposition. I am not saying that we would definitely get a good outcome to that but I am absolutely convinced that that is the approach that ought to have been adopted.

I want to say a brief word about how speedily anything can happen. We are going to rise in three weeks’ time and, in the case of our House, not come back until October. As far as I can see, that means that any inquiry will certainly have to be short—whether it will be sweet, I do not know. This notion that it is all going to be done very quickly I just do not find believable, whoever does it. I have a holiday booked so I am not very keen on coming back earlier but we may have to. Again, perhaps the Minister can talk to us about the speed of the inquiry.

Perhaps I might ask another practical question: am I right that the corrupt practices on LIBOR have stopped? Do we know for a fact that they have definitely stopped? Perhaps the Minister could tell us. I hope that they have definitely stopped.

What is unavoidable is that we have to look at what the regulators have been doing. An inquiry that does not do a full examination of the regulators themselves would simply not be worthwhile. We are told that neither the FSA nor the Bank had the power to investigate the setting of LIBOR. I would have thought that the head of the FSA and, even more, the governor could have sent for some of the people involved with LIBOR for an informal chat—forgetting about what their powers might be—just to find out what they were doing, looking for some enlightenment. I find it astonishing that we are being told that neither the governor nor the main regulator knew about LIBOR, and did not think to apprise themselves of what went on, whatever they thought their formal powers were. I must say, if I had been one of them, I would have done that—perhaps that is why I have never been appointed to anything.

I have also been going through the nightmare of rereading your Lordships’ Second Reading debate, in which I was unable to take part. What is absolutely fascinating is that the one acronym that never appears in any noble Lord’s speech is LIBOR. There we are, all the great experts, and what we are really doing—as always happens—is fighting the battles of the past. Most of the speeches were looking at accounting for the financial crisis that started a few years ago and discussing a Bill to prevent that financial crisis ever happening again.

The great Chicago economist Frank Knight—who was very much on the right, I might add—wrote a classic work called Risk, Uncertainty and Profit. He said that risk was what you did not know was going to happen but that it was measurable, due to probability and that sort of thing. He argued that what really mattered was uncertainty, which you know about in an almost contradictory way: you know that what is really going to happen is something that is totally unexpected. The problem was how to prepare for it—how to expect the unexpected. He never found a satisfactory answer to that but he did say that the

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free market capitalist system was at least the best way of adapting to those unexpected shocks when they occurred.

This is where I disagree very strongly with the noble Lord, Lord Kerr, who said that what we have to do is make sure that LIBOR does not happen again. That is precisely to get it wrong: LIBOR is not going to happen again; something different is going to happen and we need a system that prepares us for dealing with something different. I do not think any of what the Government are proposing covers that.

En passant, the noble Viscount, Lord Trenchard, said that light-touch regulation was discredited. I have to tell him, I would be a light-touch regulator if I were one, because I do not believe that the role of the regulator is to run the businesses that it is regulating. That is my concept of light-touch. I believed it then and, if you accept my concept of light-touch, I believe it now. One place I would like us not to go to is the regulators essentially running the banking system, and I hope that the noble Viscount agrees with that.

Going back to the issue of the Joint Committee, it should not be ad hominem, as I think has been said; it is nothing to do with Andrew Tyrie. The real question is: should the Treasury Select Committee in the other place, which deservedly has a tremendously high reputation, be involved in this in any way? I do not want to go down the path of the Joint Committee; I would much rather go down the path suggested by my noble friend Lord Eatwell. I would be interested to know if other noble Lords know anything about this, but I think it would be a terrible mistake, in trying to maintain the very high reputation of the Treasury Select Committee, if it got involved in this inquiry. That would be a mistake beyond belief.

We end up with two possibilities. One is that we divide and test the opinion of the House on what my noble friend Lord Eatwell proposes; he will decide this. The other, which is what I would like to see happen—and I know I am being immensely naive here and there is probably nothing the Minister can do to help us—is that the government proposals are withdrawn and the Minister’s right honourable friend the Prime Minister and my right honourable friend the Leader of the Opposition do what I suggested earlier: get together and see if they cannot come to us with some proposals. This is a matter of national importance.

The noble Lord, Lord Carlile, will notice that I have not said a word about prosecuting the guilty because that is not my subject. As an atheist, I believe that if we do come back to this planet, I intend to come back as a Queen’s Counsel and certainly not as an economist. I really do believe that in the national interest the leaders of both main parties should get together and come back to us with some jointly agreed proposals.

Lord Framlingham: My Lords—

Lord De Mauley: My Lords, I think I detect that the mood of the House is that we should move towards a conclusion. I do not want to stifle debate but perhaps I might suggest that my noble friend should speak and then my noble friend the Minister should wind.

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Lord Framlingham: My Lords, I shall be very brief. Issues such as this are extremely complicated on the one hand and very simple on the other. We are dealing specifically with LIBOR—at least I am—which I am not an expert in. I am sure that there need to be inquiries—what sort of inquiries will be determined today, or later—which need to get to the bottom of the problem as quickly as possible.

In his opening remarks, the noble Lord, Lord Eatwell, said he was not sure what the word “integrity” meant in this context. I know precisely what the word “integrity” means. I also know precisely what the word “greed” means. I also know precisely what the word “criminality” means. Finally, I know what the word “prison” means. I support the noble Lord, Lord Howard, in this. Whatever else happens in terms of inquiries, the Serious Fraud Office should get on to this immediately to find out what has gone on and who the culprits are, and bring them to justice. That will be the best way to make sure these things and others like them do not happen again.

6 pm

Lord Blair of Boughton: My Lords, I know that the Minister is about to speak but can I give a slight and practical example of how witnesses will approach these different inquiries. I find myself entirely in agreement, as any Cross-Bencher should be, with both sides of the House. How does a witness approach these different inquiries? They approach the criminal inquiry with the narrowest possible dimension about the facts in dispute. I have appeared at the No. 1 court at the Old Bailey, so I know what it feels like. You are always told that you should answer only the question you are asked. When you appear in front of a parliamentary inquiry, you have the same approach with a view as to where the political issues will come from, which you have to think about. When you appear, as I did, in front of Leveson, you do so on a completely different basis. My evidence to Leveson began in the 1820s. In other words, you are looking at the whole issue in the round. I do not understand why there needs to be any dispute between the two sides of the House in this debate. Have a criminal inquiry, have Tyrie and have a judge-led inquiry into the ultimate circumstances of the way in which the banking culture has taken over parts of our society.

Lord Sassoon: My Lords, first, let us be clear that these amendments have very little to do with the Bill before us today. They are all about the Opposition’s misguided attempts to slow down what we need to do to deal with the consequences of the LIBOR scandal. We need rapidly to restore public confidence in the financial services industry, which the Government are pressing on with. We do not need to kick these very serious matters into the long grass, as the Opposition now propose. It is time for Parliament, as well as the Government, to take clear leadership on these matters.The events of recent days have highlighted that the culture of banking is badly broken. The Government are in the process of fixing the system, but we need to change the mindset of the profession and those working in it. This is about restoring banking to what it should be about: to be the most, and not the least, trusted profession.

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The basic facts of the attempted LIBOR manipulation are clear. There have already been published reports from three regulators in the UK and the US. We do not need a judicial inquiry to tell us what the facts are. A judicial inquiry would be principally aimed at establishing the facts; it would likely take years to complete, might not be able to start until after prosecutions had been completed and would cost the taxpayer millions of pounds.

Now we need three things. First, we need the rapid prosecution of individuals who may have broken the criminal law. This is what the SFO and the Crown Office in Scotland are looking to do. Secondly, we need to look at how LIBOR cannot be fixed again, which is the subject of Martin Wheatley’s review. Thirdly, we need to look into the ethical and professional standards of the financial services industry and we need to do so urgently to ensure that the banking industry is serving the needs of the wider UK economy and the continued global competitiveness of London and the UK.

For this reason, the Government recommend that Parliament considers undertaking an urgent inquiry into the culture and ethics of the banking industry to help shape the urgent reform that is so much needed. The Government propose the establishment of a full parliamentary committee of inquiry, comprised of representatives from both Houses, and set up by a joint resolution of both Houses. The proposed terms of reference for the committee are building on the Treasury Select Committee’s work and drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt in relation to transparency, conflicts of interest and the culture and professional standards of the, financial services industry, including the interaction of these with civil sanctions and criminal law. While I hear noble Lords seeking to paint this as a narrow inquiry, on any construction, these words will give the Joint Committee a very wide remit.

I am also glad that the Opposition now seem to support the creation of this committee. I have laid out what is required. We certainly do not require a proliferation and duplication of reviews that could go on for several years. We recommend that the inquiry should commence immediately and conclude by Christmas. As noble Lords are aware, the Government plan to introduce the banking Bill that will implement the recommendations of Sir John Vickers’s Independent Commission on Banking in January next year. This will bring far-reaching and lasting changes to the structure of British banks. The Government’s preferred timetable for the committee of inquiry would allow the Government to use the Bill to make any appropriate further changes needed to the standards of the banking industry and the criminal and civil powers needed to regulate it, and hold people to account for their behaviour.

The Joint Committee will do its work well and comprehensively and will report by Christmas. However, if, at that stage, this House or another place was not satisfied with the work of the Joint Committee, it will be possible for Parliament to press for a further inquiry.

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At that time, the inquiry proposed by this amendment would not even have started. The Government fully intend that Parliament should play a significant role in getting to the bottom of what happened and helping make the system more robust. It is surely highly desirable and consistent with many of our previous discussions in recent months that your Lordships’ House should be fully engaged in the process, bringing the full breadth of its expertise to bear from Peers of all the main parties and none.

This is already a big Bill, on which time is now being taken up by debating the merits of an inquiry—a debate that will not help noble Lords with the key business of the House today, namely scrutinising the detailed contents of the Financial Services Bill. It may help your Lordships to know that in another place on Thursday there will be debates on two Motions—one an opposition Motion, another a government Motion—to consider in detail the questions that we have debated at some length this afternoon. It is appropriate to leave another place to debate those Motions on Thursday so that we get on with and stick to the Committee’s core task today on the Financial Services Bill.

Lord Carlile of Berriew: I am grateful to my noble friend for his response. Will he confirm that, if there is to be an SFO-led inquiry into any criminality arising from the LIBOR incident, the SFO will not be expected to meet the cost of that inquiry from its existing budget but will be given the separate funding needed so that the inquiry can be full, complete and properly resourced?

Lord Sassoon: My Lords, as was in the Statement yesterday, I can confirm that the SFO is on the case, looking at all the possibilities for criminal prosecutions and that the Crown Office in Scotland is doing likewise. There has been no request of which I am aware from the SFO for additional resources. I assure my noble friend that, if there was such a request, it would be looked at sympathetically by the Government. It has been an important and lively debate because these are critical issues for the financial services industry and I hope that, with those further explanations, the noble Lord, Lord Eatwell, will withdraw his amendment.

Lord Barnett: I am sorry to hear that it has been a wholly non-party political debate today until the noble Lord got up. However, will he at least consider—or, if not him, get somebody in government to consider—the point that my noble friend Lord Peston made? Given the circumstances of great national interest involved here, the Prime Minister should take the trouble to talk to the leader of the Opposition with a view to finding a way through that would be accepted on all sides. In those circumstances—if he could give us the kind of assurance that we need—I would certainly press my noble friend to withdraw the amendment. Can he give us any kind of assurance?

Lord Sassoon: My Lords, even better than that, two Motions will be tabled in another place on Thursday which will give an opportunity for the different views of the Government and Opposition on these matters to be aired fully. We should look very seriously at where that debates leads to.

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Lord Eatwell: My Lords, I am grateful to noble Lords who have taken part in a debate which, as the noble Lord, Lord Sassoon, said, is timely and important. I was impressed by the fact that virtually every noble Lord who spoke, with one or two exceptions to whom I shall refer in a moment, felt some wider consideration was needed than that currently envisaged in the Government’s proposals with respect to Mr Wheatley and—if I may be forgiven by the noble Lord, Lord Higgins, for using the shorthand—Mr Tyrie’s review. The noble Lord, Lord Carlile, wanted to go wider in a different way by introducing the innovation of a special prosecutor. Special prosecutors have at best a very mixed record in the United States, which should be taken into account. Focusing on the legal issues is too narrow an approach in the circumstances that we face. As the noble Lord, Lord Phillips, said, there is “a huge congregation of issues”; my noble friend Lord Myners said that a fundamental review was needed; a “strategic inquiry” was the phrase used by the noble Lord, Lord Higgins. As my noble friend Lord Peston pointed out, the next major financial crisis is unlikely to occur in the LIBOR market; the next scandal will occur somewhere else. Unless we look at the underlying foundations of problems in our banking industry, we will not be in the least prepared. The noble Lord, Lord Blair, with his experience of legal matters in financial regulation, referred to a need to consider things “in the round”—I could not have chosen a better phrase.

The major difference, as I detected, with the arguments that I put forward came from those who felt that I was trying to slow things down. That is the last thing that I am trying to do. As I pointed out, I am entirely supportive of Mr Wheatley’s proposals and I am supportive of the idea of a Joint Committee moving forward to deal with the specific implications and consequences of the LIBOR element—what Mr Tyrie refers to as the ring-fence proposals. However, as the noble Lords, Lord O’Donnell and Lord Kerr, said, if there is no sign of getting to a solution, then we can have an inquiry. As the noble Lord, Lord O’Donnell, said, we should perhaps consider whether we need to go further.

The key issue then becomes one of timing and why we should not get on with all three? We should understand of course the legal issues with respect to prosecution—I take that under advisement—but what is the problem with addressing these matters? There is no other reason not to deal with all three. I reject entirely the caricature that I was suggesting that things be slowed down; I certainly was not. We need to get on with the immediate issues, but there are much wider issues affecting the future of this country that need to be addressed.

Lord Howard of Lympne: The noble Lord has repeatedly talked about the need for a wider inquiry than what I think we have all agreed to call the Tyrie inquiry. Given what on any view are the extraordinarily wide terms of reference of which the Minister has informed the Committee today, can the noble Lord identify any specific angle, matter or issue that is not covered by those wide terms of reference?

6.15 pm

Lord Eatwell: Yes, indeed, my Lords, I can do that straightaway. Those terms refer to,

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“drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt from them in relation to transparency, conflicts of interest, culture and the professional standards”.

It is from them that lessons will be learnt—not from the wider characteristics of the industry; not from what the regulators were doing; not from the unintended consequences of the reforms of the 1980s; and not from the change in the nature and conglomeration of the banking industry. Lessons will not be learnt from any of those issues, which are much wider than those in the terms of reference. I am happy to provide the noble Lord with a copy.

Lord Anderson of Swansea: Has my noble friend considered the problems caused by the timetable set by the Government? If the proposed Joint Committee goes through the normal procedures, it will have to call for evidence. That process will take several weeks, which will eat up the rest of July until the Recess begins. This House does not return until the beginning of October. If the timetable is to end by Christmas, the committee will have to have several weeks prior to Christmas before the publication of its report, which essentially means that only the months of October and November will be available for its considerations. That would be a wholly impossible timetable.

Lord Eatwell: My noble friend has made an important point about the pressures that will be faced by Mr Wheatley’s committee and, if we may call it that, the Tyrie committee.

I do not want to delay the Committee. I have made two major arguments in favour of the amendments put before your Lordships. First, the terms of reference, to which the noble Lord, Lord Howard, has just referred, are too narrow. My Tyrie refers to them as “ring-fenced”. That is his expert view, which I accept. Secondly, we have to take this matter out of party politics. It was awful how yesterday’s discussions degenerated into a spat about which politician said what to whom and when, and who was responsible. That is not the issue; the issue is the future of our financial services industry. Let us get this matter out of party politics. I believe that I have heard around the Chamber support for the position that I have taken and therefore wish to test the opinion of the Committee.

6.18 pm

Division on Amendment 35AB

Contents 197; Not-Contents 251.

Amendment 35AB disagreed.

Division No.  1


Adams of Craigielea, B.

Adebowale, L.

Ahmed, L.

Anderson of Swansea, L.

Andrews, B.

Armstrong of Hill Top, B.

Bach, L.

Bakewell, B.

Barnett, L.

Bassam of Brighton, L. [Teller]

Beecham, L.

Berkeley, L.

Bilston, L.

Birt, L.

Blackstone, B.

Blair of Boughton, L.

Blood, B.

Boateng, L.

Borrie, L.

Bradley, L.

Bragg, L.

3 July 2012 : Column 625

Brennan, L.

Brooke of Alverthorpe, L.

Brookman, L.

Brooks of Tremorfa, L.

Browne of Belmont, L.

Browne of Ladyton, L.

Campbell-Savours, L.

Chandos, V.

Christopher, L.

Clancarty, E.

Clark of Windermere, L.

Clarke of Hampstead, L.

Clinton-Davis, L.

Cohen of Pimlico, B.

Collins of Highbury, L.

Corston, B.

Crawley, B.

Cunningham of Felling, L.

Currie of Marylebone, L.

Davidson of Glen Clova, L.

Davies of Abersoch, L.

Davies of Coity, L.

Davies of Oldham, L.

Davies of Stamford, L.

Donaghy, B.

Donoughue, L.

Dubs, L.

Durham, Bp.

Eames, L.

Eatwell, L.

Elder, L.

Elystan-Morgan, L.

Evans of Parkside, L.

Evans of Temple Guiting, L.

Evans of Watford, L.

Falkland, V.

Farrington of Ribbleton, B.

Faulkner of Worcester, L.

Foster of Bishop Auckland, L.

Foulkes of Cumnock, L.

Gale, B.

Gibson of Market Rasen, B.

Gilbert, L.

Golding, B.

Goldsmith, L.

Gordon of Strathblane, L.

Gould of Potternewton, B.

Grantchester, L.

Grenfell, L.

Grocott, L.

Hameed, L.

Hanworth, V.

Harries of Pentregarth, L.

Harris of Haringey, L.

Harrison, L.

Hart of Chilton, L.

Haskel, L.

Haworth, L.

Hayman, B.

Hayter of Kentish Town, B.

Healy of Primrose Hill, B.

Henig, B.

Hilton of Eggardon, B.

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6.33 pm

Amendment 35B

Moved by Lord Sassoon

35B: Clause 3, page 3, line 37, leave out “of that objective” and insert “by the Bank of the Financial Stability Objective”

Amendment 35B agreed.

3 July 2012 : Column 628

Amendment 36

Moved by Lord Eatwell

36: Clause 3, page 4, line 3, at end insert—

“( ) factors likely to lead to a loss of confidence in the financial system as a whole”

Lord Eatwell: My Lords, this group of amendments is a rather mixed bag but all of them refer to various duties of the Financial Policy Committee. The first, Amendment 36, which is in my name and that of my noble friend Lady Hayter, adds to the definitions of systemic risk in new Section 9C(3) of the Bank of England Act 1998 the collapse,

“of confidence in the financial system as a whole”.

Academic research has identified four major sources of systemic risk, at least to date: first, linkages, or the connections between markets, referred to in new Section 9C(3)(a); secondly, the distribution of risk, particularly in the context of cyclical variations in risk, referred to in new subsection (3)(b); thirdly, excessive leverage, debt and credit growth, as referred to in new subsection (3)(c); and fourthly, the general collapse of confidence, which is not referred to at all. This is a serious omission—probably a slip in drafting, but none the less a serious omission in the analysis of systemic risk.

There can be a major systemic failure that is not associated with any of new subsection (3)(a), (b) and (c). You can have a situation that is not represented by linkages between firms, is not to do with the distribution of risk, and is not due to excessive leveraged debt or credit growth, but is due to the collapse of a firm in a particular strategic position within the industry, which leads to a general collapse of confidence. There is no necessary visible linkage between the firms, but the collapse of confidence can lead to a general systemic failure. Adding this fourth component—which is completely standard in the usual list of four in the academic literature—would complete the set from which, for some reason, this element has been neglected. To use the felicitous expression of the noble Lord, Lord Sassoon, it would plug the gap.

Amendment 37 is a probing amendment, although it has more substance than that. New Section 9C(4) of the Bank of England Act says:

“Subsections (1) and (2) do not require or authorise the Committee”—

the FPC—

“to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect”,

et cetera. The phrase “in its opinion” seems to me to make the new section completely meaningless. How would you ever tell? If something happened and the committee pursued some set of objectives that had a significant adverse affect on the capacity of the financial sector to contribute to growth—something the noble Lord earlier this afternoon pointed to as a very positive provision in the Bill—how would you then know whether this had been “in its opinion” or not? You would go along to the committee and ask, “Why did you do this?”. It would respond: “In our opinion, it was the right thing to do. End of story”. Consideration of the implications of its acts has been ruled out of court. The phrase “in its opinion” seems to make the clause devoid of meaningful content. If we remove it,

3 July 2012 : Column 629

we will improve the overall import of the Bill and, significantly, of this section that refers to the functions of the FPC.

With Amendment 39, I have a real mystery. Systemic risks are defined as credit growth, debt and leverage. However, in new Section 9C(7), all those terms are defined with respect to the UK only. Why is that? We live in a global financial market. Why do they refer to the UK? If these conditions had been in place and the FPC was considering the position of the Royal Bank of Scotland, that bank would have been found to be totally secure, because almost all the problems that assailed it occurred outwith the UK. The growth of credit from that bank was excessive outwith the UK. Its debt position was defined not by the debt it owed to individuals in the UK but to bond-holders and individuals throughout the world. I must be reading this completely wrongly but am totally mystified as to why credit growth, debt and leverage, as referred to in the definition of systemic risk, are confined to the UK. I would be very grateful if I could be enlightened and told that somehow I have got this wrong and that this does not confine consideration to the UK but is dealing with some other, wider element.

Continuing the international theme in this pot-pourri of amendments, I turn to Amendment 44, which deals with page 5, line 39, and refers to the overall functions of the Committee, suggesting that it should be,

“assessing its functions in the light of the policies of the European Financial Stability Board”.

As we know, much of the structure of the regulatory rule book for the UK will be written in Brussels. The EU, like the UK, is feeling its way towards defining the proper role of its macroprudential regulator, namely the European Financial Stability Board. The EFSB will, over the next couple of years, build a toolkit not unlike one that we desire for the FPC—rules on leverage ratios, procyclical provisioning, risk-weighted capital ratios and so on.

It is essential that measures taken in the UK are compatible with measures taken at the EU level, and vice versa. That is why the FPC must, at the very least, assess its functions in the light of what the European Financial Stability Board is doing. We will have an independent position, and the EFSB does not have the same European-wide status as the banking securities markets and insurance regulators, but none the less we want the activities of our FPC to be compatible with those of the EFSB.

To sum up, this is somewhat of a bran-tub. You put your hand in and take out amendments to see which aspect you would like to look at, so it is a slightly diverse group. Amendment 36 adds to systemic risk the risk of collapse of confidence in the system as a whole. Amendment 37 removes “in its opinion” from the new subsection whereby the FPC must take account of its impact on the financial sector’s contribution to growth, as the phrase would render the clause meaningless, or at least inoperable. Amendment 39 raises the question of why growth, debt and leverage are defined purely with respect to the UK, when—for goodness’ sake—we in Britain are dealing with some of the largest global financial institutions in the world. Amendment 44 simply adds to the functions and the need to take into

3 July 2012 : Column 630

account the actions of the European Financial Stability Board. Going back to Amendment 36 and the collapse of confidence in the system as a whole, I beg to move.

Lord Sassoon: My Lords, I do not know whether this group is a pot-pourri or a bran-tub, but let me attempt to do justice to a number of these amendments. Fine group though they make, they do not entirely find favour with the Government, as the noble Lord will know, because I do not believe they are necessary. I shall address each of them in turn.

Amendment 36 attempts to add,

“factors likely to lead to a loss of confidence in the financial system as a whole”,

to the list of specific types of systemic risks. I can reassure the Committee and the noble Lord in particular that new subsection (3) is not intended to be an exhaustive definition of systemic risk. The types of risk that have been highlighted in this section are generally accepted to be the main types of macroprudential risk, but systemic risks may well arise in future that are not included in these categories. That is why the FPC is free to look at anything else that it believes might pose a systemic risk to financial stability, and I would certainly expect that something that would undermine confidence in the system as a whole would have an impact on stability. It could be argued that market confidence is a necessary component for financial stability. I therefore believe that this is already included in the FPC’s objectives as they stand, and that Amendment 36 is not necessary.

6.45 pm

On a related point, Amendment 39 seeks to remove the definitions of aggregate credit growth, debt and leverage for the purposes of subsection (3). I can assure the Committee that these definitions have been carefully constructed so as to capture the main aggregate metrics that affect UK financial stability. They were carefully considered by the Joint Committee—indeed, the Government have amended these definitions in light of the Joint Committee’s recommendations—but critically this does not mean that systemic risks that have their origins in other countries are outside the scope of the FPC. In fact, in response to a recommendation from the Joint Committee, we put this point beyond doubt by adding new subsection (6), which makes it clear that it is immaterial whether systemic risks arise in the UK or elsewhere. I think the noble Lord’s concerns are misplaced on this one.

Lord Eatwell: Yes, I can see that. I put a little question mark linking the two new subsections which seem to me to be contradictory, or at least inconsistent. I still do not understand why new subsection (3)(c) says that the systemic risks which the Financial Policy Committee has to consider are those which include,

“in particular … systemic risks attributable to structural features”,


“unsustainable levels of leverage, debt or credit growth”.

How do we define leverage? It means,

“the leverage of the financial sector in the United Kingdom”.

Why? Debt means,

“debt owed to the financial sector by individuals in the United Kingdom”.

3 July 2012 : Column 631

Why? Credit growth means,

“the growth in lending by the financial sector to individuals in the United Kingdom”.

Why? Why do we have these definitions when the noble Lord is quite right that new subsection (6) seems to contradict them?

Lord Sassoon: My Lords, the most important thing is that we are talking about financial stability in the UK, and the FPC needs to consider first and most importantly the metrics and indicators of financial stability in the UK. After all, the objective is for the FPC to protect and enhance the stability of the UK, so it is quite right that the definitions refer to the effects in the UK. We are not interested in the FPC deeming that it is not its business to deal with leverage in non-UK markets, but on the other hand it is quite right that the risks themselves may come from factors that arise outside the UK; I think that that is the point the noble Lord is trying to get to, which I believe is well covered by new subsection (6) and which we have made clear in the response to the Joint Committee. It is not the responsibility of the FPC to actually engender results outside the UK; it should be engendering results in the UK.

Lord Eatwell: I am sorry; the noble Lord must be wrong on that. If a bank is lending excessively outside the UK, then the FPC most certainly should be concerned. The idea that the FPC should be concerned only in managing results in the UK must be entirely wrong and could not be the basis of successful stability for the UK financial sector.

Lord Sassoon: No, my Lords, it is not wrong. If we are talking about a British bank, it is a British bank, and that is linked to these metrics and to the remit of the FPC. Of course that is captured in the FPC’s remit. I think we are getting ourselves excessively excited about a simple issue that is perfectly well drafted in the Bill, which is that the FPC has a wide and appropriate remit to deal with financial stability in the UK, but that it should properly take account of systemic risks that may arise both inside and outside the UK. That is exactly what the drafting of the two clauses taken together means. If the noble Lord had been critiquing the Bill as it was introduced in another place, he would have proper grounds for questioning that, but we have plugged a possible gap, and the construction now works.

Baroness Noakes: I do not wish to be unhelpful to my noble friend, but I am probably going to be. What the noble Lord, Lord Eatwell, says seems to make sense. The systemic risks in subsection (3)(a) and (b) are defined in subsections (5) and (6) as not having any geographic restriction, but subsection (3)(c), which is defined by subsection (7), as the noble Lord, Lord Eatwell, said, relates only to,

“individuals in the United Kingdom and businesses … in the United Kingdom”,

for credit growth, debt, and so on. That ignores the fact that many banks have global balance sheets. As we do not have rigid subsidiarisation, a UK balance sheet could have significant exposures to other territories,

3 July 2012 : Column 632

depending on how a particular bank’s overseas operations were organised. Many of them are run as branches out of the UK institution and therefore, I should have thought, would be posing the kind of risks on which the FPC would need to keep an eye. I am unclear why we have chosen that formulation. I accept that for the systemic risks it does not matter where it applies, but when we are talking specifically about credit growth, debt and leverage, it is as if it can impact on the UK only if it happens in the UK, and I do not think that that is correct.

Lord Sassoon: I shall have another go, because this is tricky but important. The Financial Policy Committee is charged with responsibility for the overall financial stability of the UK: the systemic risks and the macroprudential role. We need to distinguish that from the situation of individual firms which will or may contribute to the overall systemic risk. In this discussion we risk conflating two things. One is the systemic risk in the system, which the FPC is charged with dealing with. That is credit growth, debt and leverage as defined by subsection (7), which is referenced to the United Kingdom. The financial stability of the United Kingdom is the concern of the FPC. That does not mean that risk may not come from the international financial system—that is made completely clear by subsection (6). However, for individual financial institutions for which the PRA will have first responsibility, if the FPC considers that they contribute to the overall situation, it does not rule out or limit consideration of the factors that affect individual financial institutions. The clause and the definitions do not rule that out. We should not confuse what is being defined here. The definitions are not exhaustive of the systemic risks which the FPC should consider. It may consider whatever else it considers relevant.

Lord Eatwell: Let me try this just one more time, because the argument that the list is not exhaustive is a toss-away argument: we did not include that, but it does not matter, because it covers everything. Let us be a bit more serious and deal with precisely what is in the Bill. To make the discussion concrete, I shall deal with the first part of subsection (7), which refers to credit growth. In my opinion, credit growth is an important indicator of systemic risk. Indeed, Professor Shin of Princeton University, who is the authority in this field, has identified credit growth as one of the key variables which any macroprudential regulator should have in its sights.

Let us consider credit growth. We are told that with regard to systemic risks in particular,

“‘credit growth’ means the growth in lending by the financial sector to individuals in the United Kingdom and businesses carried on in the United Kingdom”.

That cannot be right, because the stability of banks and financial institutions in the UK often crucially depends on the nature of credit growth in lending to individuals outside the UK. The businesses to which they lend will operate within and outwith the UK. What is the notion that somehow it must be businesses carried on in the UK? Will, say, British Aerospace be included? It happens to be a British company, but I believe that most of its operations take place outside

3 July 2012 : Column 633

the United Kingdom. I may be wrong about that, but a substantial proportion of its operations take place outside the United Kingdom. Would British Aerospace be covered in respect of lending to businesses carried on in the UK?

We could take out subsection (7) and lose nothing. It is the old adage that you teach pupils all the time: when in doubt, take it out. It adds nothing but confusion to the specification of the role of the FPC and the definition of systemic risk. Of course, the FPC is responsible for systemic risk in the UK, because that is its juridical domain, but that systemic risk can arise from activities by UK institutions on a worldwide scale. When in doubt, take it out. Let us drop subsection (7) and make the Bill more coherent.

Lord Sassoon: As there is doubt about this—considerable doubt, it seems, in the noble Lord’s mind—that is precisely why we need to leave it in. Again, he conflates the role of the FPC, which is to deal with financial stability issues, threats and risks in the UK. He says that it is clear that the Financial Policy Committee's remit is only for the UK. I do not know how he comes to that conclusion. If there were no definition of levels of unsustainable leveraged debt or credit growth, that would precisely raise in people’s minds the question of what is their geographic limit.

Lord Eatwell: My Lords—

Lord Sassoon: If the noble Lord will let me continue, this discussion precisely makes the point that the FPC is responsible for systemic risk, which may be measured in terms of these factors and others listed in the clause. In that respect, we are talking about the UK. That is independent of whether banks are or were lending excessively to foreign companies. That is dealt with in other ways, as I have explained: partly through the PRA looking at the individual leverage ratios or whatever for the individual bank. Equally, if there is a systemically important institution about which the FPC is concerned, this in no way limits the considerations to the business of that institution simply in the United Kingdom, because this is dealing with something else. This is dealing with the overall systemic risk that the FPC is trying to deal with, not any question about where individual firms are doing business.

7 pm

Lord Eatwell: My Lords, if it in no way limits the consideration of systemic risk, I would say again that it is otiose; it is worthless. It adds only confusion to the Bill. With respect to the noble Lord, the juridical domain of the FPC is defined by the definition of “regulated persons”.

Lord Sassoon: My Lords, we risk confusing different things again. The definition of “regulated persons” is wholly different from the question of financial stability for the UK. The concept of “regulated persons” is dealt with elsewhere. We are in a completely different part of the financial landscape. We are risking mixing up the microprudential with the macroprudential.

3 July 2012 : Column 634

When the noble Lord reflects on this debate, he will understand that these definitions are appropriate. He would say that they are unnecessary; I say that they are necessary in order to define the objectives of the Financial Policy Committee. However, a careful reading will show that they in no way restrict the FPC or the PRA in looking at the activities of individual regulated businesses, wherever they are, in so far as they relate to regulated activities or to the financial stability objective.

I shall move on to Amendment 37, which seeks to remove the words “in its opinion” from the economic growth “brake” that prevents the FPC taking action that would have a significant adverse affect on the ability of the financial sector to contribute to long-term sustainable growth. I disagree with this for three reasons.

First, in principle, the FPC is the best placed to assess the likely effect of its own actions. We do not want the FPC to rely on other people in forming this assessment. The FPC will be the expert macroprudential regulator. It is the right body to decide how the brake applies and the drafting should reflect that. Secondly, that assessment will be completely open, transparent and subject to outside scrutiny via publication of the decisions in the FPC’s meeting records. The government amendment, which we will discuss shortly, will go further and require the FPC to explain how it has complied with the duty to consider the “brake”. Thirdly, in practical terms I do not believe that there is any sensible alternative to this approach. In whose opinion would it be, if not that of the FPC itself? I am sure that the noble Lord does not envisage the FPC’s meeting adjourning while it seeks the opinion of some other body.

Amendment 44 would add to the FPC a function of assessing its functions in the light of the policies of the European Systemic Risk Board, or ESRB. I appreciate the sentiment behind this amendment. The Government believe that, given the international nature of financial markets, macroprudential policy will be most effective when co-ordinated internationally. I assure the Committee that, in the Government’s view, the current measures in the Bill and other arrangements are more than sufficient to achieve this.

The Bill requires the FPC to have regard to the international obligations of the United Kingdom. This will encompass the obligation to have regard to any warnings or recommendations from the ESRB that apply to the UK. It is also worth noting that the Governor of the Bank of England, like all European central bank governors, is a member of the ESRB. The current governor is also the first vice-chair of the board. The Bank is, and will continue to be, closely involved with the work of the ESRB and this will be reflected in the work of the FPC. The governor will be able to feed back the decisions and policies of the ESRB directly to the FPC. As the governor and the Bank will influence the policy of the ESRB, I expect that it will often be closely aligned to that of the FPC. As I am sure the Committee is aware, the UK authorities are required to respond to any recommendations that they receive from the ESRB. I am sure that they will give careful consideration to the policies of that board.

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On the basis of this more extensive debate than I had anticipated, I hope that the noble Lord, Lord Eatwell, will agree, on reflection, that his bran tub of amendments is not completely necessary. I would ask him to withdraw his amendment.

Lord Eatwell: My Lords, I think I am naïve, because I am bemused by the drafting of this Bill. Sometimes we are told that things are unnecessary; of course they are being done, but they do not need to be on the face of the Bill. At other times we are told, “We have got to describe everything in extreme detail. Even though there might be some apparent internal contradictions, at least it covers every base”. We do not seem to care very much, with respect to the logic of the story, whether we have the one or the other. I will comment on the amendments, so that we can take them formally as we go through.

With respect to the collapse of confidence in the system as a whole, that is just leaving a hole in the Bill. If the Minister wants to leave a hole in the Bill, that is up to him. I was trying to make it a bit better, and more comprehensive; just the sort of thing we are told that we should do. It would have helped; it would have provided the FPC with another stimulus in its overall definitions of its objectives, which would have contributed to its effectiveness. The idea that it is just rolled into everything else is not true. It is easy to construct models which do not have the other elements, and this element is important. I refer noble Lords to the literature: Professor Shin is the name reference.

If we turn to “in its opinion”, the noble Lord was very convincing on that one, so I take his arguments. On Amendment 39, and the whole addition of this business about the UK, I think that it is a mess. The noble Lord has been completely unconvincing. He has not been able to justify in any coherent way subsection (7) and that is regrettable. It is regrettable that the Bill is left like this. One would think that the Minister would at least say, “Let’s take it away and look at it, just to make sure that I have got it right”, since he cannot defend it on this occasion.

On Amendment 44, we are told, “Oh, it’s all going to happen anyhow. There are nice informal procedures, whereby these things will be taken into account. So you don’t need it, because it’s going to happen anyhow.” It is going to happen anyhow because the governor happens to have yet another hat: was it vice-president of the organisation? I am sure that the vice-president of that organisation is busier and better informed than the Vice-President of the United States is reputed to be on policy there. None the less, how can we be sure that our next governor—whoever it might be; maybe it will be the noble Lord, Lord O’Donnell, who is not in his place—will not also be the vice-president and be as engaged and whatever else it might be?

We cannot make laws on an ad hominem basis; that is not the right way to do it. Surely, if the noble Lord accepts that these functions are appropriate—indeed necessary—he should accept Amendment 44 or agree to have a look at it and come back with some rather better drafting than mine. In the mean time, I am sorry to be grumpy about this process, but I really thought that we were trying to improve the Bill. I beg leave to withdraw the amendment.

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Amendment 36 withdrawn.

Amendment 36A

Moved by Lord Sassoon

36A: Clause 3, page 4, line 4, leave out “(1)” and insert “(1)(a)”

Amendment 36A agreed.

Amendments 37 to 39 not moved.

Amendment 40

Moved by Lord McFall of Alcluith

40: Clause 3, page 4, line 21, at end insert—

“(8) The Treasury and the Financial Policy Committee must agree and publish a set of indicators which the Committee will use to measure its performance in meeting the Financial Stability Objective.”

Lord McFall of Alcluith: My Lords, this amendment is in my name and that of the noble Baroness, Lady Noakes. The Minister has just said that the FPC is responsible for overall financial stability in the UK. That was a question that exercised us in the Joint Committee on the draft Financial Services Bill, the question being, “How do we work towards establishing financial stability indicators between the FPC and Her Majesty’s Treasury?”. We realise that it would be difficult to set indicators for the FPC and, unlike the MPC, which has a single measured target—namely, the rate of inflation—the FPC does not do that. We think it important that our indicators, particularly for external assessment, should see whether the FPC is doing its job and achieving the government target, unlike the MPC, where it is very easy for people to see that it is dealing with that issue.

We understand that the FPC’s performance will be the focus, but it is important to put forward an amendment to the Bill. The Court of the Bank of England said in its response to the Treasury Committee that it did not want this in legislation, and in a follow-up letter to the Treasury Committee the governor said that there should not be hardwiring of a narrow set of indices in legislation. He wanted flexibility on this issue and a review at regular periods.

We realise that the snapshot element of stability has to mean that we need flexibility on this issue, and that the financial stability report would be an important tool for accountability, just as the inflation report is for the MPC. However, the Government responded to the Treasury Committee that in an annual remit to the FPC they would recommend additional indices if that needed to be fleshed out. Something needs to be in the Bill, and primary legislation is a good place to put that.

The governor set out in his letter to the Treasury Committee a number of indices that we could discuss. I would like this amendment to provoke discussion of a number of those indices—for example, a simple averaged leverage ratio of the major UK banks, the aggregate leverage ratio of the UK banks, the UK long-term real interest rates, the household debt-to-income ratio and the growth of lending in the UK to the non-financial sector, which has been topical now for four or five years without any solution in sight. These

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indicators are important, but if the Minister thinks that the Monetary Policy Committee and the inflation report, when it is produced to Parliament, are going to cause a bit of heat, in terms of the FPC this will really exercise politicians. We can imagine that certain judgments of the FPC would be unfavourable to a number of politicians who have particular constituency interests, and the FPC would find itself in the eye of the storm. Ahead of time, looking at certain indices and working out, the FPC is extremely important. When a body such as the FPC is given responsibility, it should be allowed to get on with that. I do not want to see it in the eye of the political storm. In order to ensure that that is not the case, we have to get these indices so that we understand what the FPC is about. There is some external assessment so that politicians and others do not just jump on the FPC for a job that it is pursuing as the result of inadequate indicators that have been supplied to it. That is the basis of the amendment. I beg to move.

7.15 pm

Baroness Noakes: My Lords, as the noble Lord, Lord McFall, has already said, my name has been added to this amendment. It is one of those that have been put forward in the spirit of co-operation with the other place, and is one of the items left over, in the opinion of the Treasury Select Committee in the other place, at the conclusion of consideration of this Bill there. I was happy to put my name to it so that we could have a proper debate on the issue in your Lordships’ House.

There does not seem to be any fundamental disagreement that some indicators of financial stability should be used in the dialogue about how well financial stability is going along and ultimately, I imagine, how well the FPC is doing its job. Consequently, I am unclear why there has been so much resistance to date to recognising the importance of this in the Bill. The Bank of England rightly said that this should not be hardwired into legislation—that is, the hardwiring of the particular indicators. I do not think that anyone has a monopoly of wisdom at the moment regarding what those indicators should be and it is clear that the nature of the indicators will change over time, so it is wholly inappropriate for specific indicators to be reflected in the Bill. The amendment would merely ask the FPC and the Treasury to agree and then publish a set of indicators, and clearly that can vary over time.

I find it difficult to understand the Treasury’s approach on this. Usually the Treasury likes to get stuck in on practically anything and not leave things to the Bank of England, but it seems quite content to leave the issue of financial stability indicators solely to the Bank of England and to have no direct locus itself. It was curious that when the Government responded to the Treasury Select Committee’s 21st report of 2010-12, when this issue was raised, the response said:

“If necessary, as part of its annual remit to the FPC the Treasury will be able to make recommendations about additional indicators that it feels the FPC should consider”.

I do not understand why we have to have this indirect dancing around recommendations made in the context of an annual remit to the FPC. The measurements

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that are used to tell whether or not the financial stability objective has been met should be so caught in the dialogue between the Treasury and the FPC that it should be a routine item for discussion, not one left to the possibility of recommendations.

This is all part of the link of accountability from the functions of the Treasury in relation to the FPC to Parliament. The Treasury should be accountable to Parliament for its role in agreeing the indicators and not just say, “Well, it’s really up to the Bank of England and we’ll give them a recommendation if we feel that they’re seriously out of line”. I am struggling to find why the Government have not embraced the very modest idea that the Treasury should be agreeing this issue with the FPC.

Lord Davies of Stamford: My Lords, I think that my noble friend Lord McFall and the noble Baroness, Lady Noakes, have been very persuasive on this point. All human institutions—indeed, all human beings—perform best in life and achieve the most when we set ourselves clear objectives, we monitor our performance in meeting them and we are quite clear and honest with ourselves and others about the extent to which we have met them. Clearly, with regard to an institution that has public responsibilities and fiduciary responsibility on behalf of the public as a whole to supervise our financial sector, those criteria and objectives and the extent to which they have been achieved or otherwise should be a matter of public knowledge and public debate. I am certain that matters should proceed like that.

As the noble Baroness has just said, the amendment would not in any way hardwire specific metrics or criteria into the legislation; it says merely that the FPC and the Treasury would have to agree among themselves what particular objectives or criteria they were going to adopt for a foreseeable period, and then we could watch to see whether they were adopted or not. I do not have any specific objectives or criteria to put forward except perhaps an addition to the sort of principles that my noble friend Lord McFall referred to. We should at least mention something that, while it is quite obvious, the public would expect to be there, such as that the FPC would expect to intervene sufficiently early and to be sufficiently alert to the difficulties that can arise in order to avoid situations where the Bank of England has to supply either solvency support to banks by way of deposits in a crisis or indeed liquidity support or solvency support if it requires accuracy or nationalisation. These are extreme examples of how things can go badly wrong. They have gone badly wrong over the last few years and there should be an explicit commitment to avoid those mistakes and those disasters in any agreed criteria which may come out of the discussion between the Treasury and the FPC foreseen by the amendment.

Lord Northbrook: I support the very sensible amendment in the names of the noble Lord, Lord McFall, and my noble friend Lady Noakes. As the noble Lord, Lord McFall, stated, the MPC’s remit is to target inflation. Finding an indicator—or a set of indicators—for the FPC is difficult. There is merit in amending the Bill to ensure that a set of statistics

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is available to help external bodies, including the Treasury, to assess the performance of the FPC. The recommendation in the Treasury Committee’s report says:

“The selected range of indicators must be flexible and under constant challenge and review, not only by Parliament, Government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public. The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance. The FPC should report against these criteria at regular intervals”.

To the same extent, the Joint Committee said:

“The FPC should begin work towards developing indicators of financial stability in dialogue with the Treasury. They should be published and the FPC should report against them. The set of indicators should be flexible and subject to regular review”.

The recommendations of these two committees are very powerful and, as the noble Lord, Lord McFall, has already stated, the court was generally supportive but did not believe that they should be put in the Bill. I happen to disagree: I think it would be much clearer to have these in the Bill.

Lord Eatwell: My Lords, I support the amendment in the name of my noble friend Lord McFall, and the noble Baroness, Lady Noakes. This is—reflecting our earlier discussions—one of the Tyrie amendments. It is very cleverly drafted because it does not attempt to specify a particular set of indicators. It knows that the FPC is in a learning experience: that we are all going to be in a debate over indicators, instruments and so on in the years to come. Nothing could further that debate better than to propose a set of indicators, such as, for example, the rate of credit growth, which we have just been talking about, although not just in the UK. This is an extremely valuable amendment which, is, I hear, supported all round the Committee and I would expect the Minister to take account of the weight of this support.

Also in this group is a series of amendments in my name and that of my noble friend Lady Hayter. I would like to take a few minutes to address these. They are all concerned with the reports that the Financial Policy Committee is required to make and they all specify characteristics of the report. The first one requires the presentation of scenarios: the attempt by the Financial Policy Committee to look at various potential crises—stress-testing, we call it at a micro level—and assess the impact of their policies and of various events. We have learnt from the Office for Budget Responsibility how useful this technique can be and I am sure it will be extremely effective in the assessment of macroprudential measures. Amendment 73, requiring the presentation of scenarios, fits in with the philosophy of policy-making and of the empirical basis of evidence-based policy-making in finance today. I therefore hope the Government will accept it.

Amendment 74 is consequential upon today’s acceptance of the Government’s Amendment 35A, which we agreed earlier this afternoon. After all, if the Financial Policy Committee is required to take into account government policies on growth and employment, then it is surely appropriate that it should report on its performance on what it is required to take into account. This should really have been down as a consequential

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amendment to Amendment 35A but I am happy to help the Government out and introduce their consequential amendment for them.

Amendment 75, on the issue of indicators, referred to by the noble Lord, Lord McFall, and the noble Baroness, Lady Noakes, places those indicators in the reporting structure of the FPC. Amendment 76 would relate the FPC’s report to the functioning of financial markets and of the wider economy. If they do not discuss that then I am blowed if I know what they are going to discuss. So let us at least hope that that is agreed by everyone around the Committee.

These are just four amendments to flesh out the characteristics of FPC reporting which will be a crucial part of FPC accountability. Given that we are handing these powers to unelected officials, the reporting structure is an important component. That reporting structure— and the debates over the role of the FPC—would be enormously enhanced by the acceptance of Amendment 40 in the name of my noble friend Lord McFall and of the noble Baroness, Lady Noakes.

Lord Sassoon: My Lords, I wish we had a simple tag that we could use for amendments which come up so often when talking about legislation where we all agree on the substance but there is a kind of debate on whether it needs to be in or not. We are substantially in that territory with a number of amendments in this group. I will take them in turn.

First, Amendments 40 and 75 seek to require the Financial Policy Committee to publish a set of indicators of financial stability. I agree that financial indicators will aid the Committee, Parliament and the public in assessing the effectiveness of the FPC’s actions, but I hope I can assure the Committee that the amendments are unnecessary. The noble Lord may groan, but I acknowledged at the outset that this is one of those “is it necessary or not” amendments. Let me try to give the evidence because it is important to adduce the evidence of how things are going already—of which there is quite a lot—to put flesh on to the bones of why I believe it. We have looked very carefully at the Treasury Committee’s recommendations and have accepted a lot of amendments as a result. The Government’s record in picking up the Treasury Committee’s recommendations is very clear. We have been through them very seriously, and we have accepted a lot of them. I am grateful to the noble Lord, Lord McFall of Alcluith, and my noble friend Lady Noakes for assiduously going through them and provoking a further debate on the ones we have not picked up. That is quite right and proper. This is one amendment that we believe is unnecessary. I will give some reasons why I think the Committee should be satisfied on this.

The starting point is the Bank’s statement, in its response to the Treasury Committee’s report on bank accountability, that the FPC will publish and report against a set of indicators. Further than that, the FPC has already given some signals of the indicators it finds most useful for assessing risk through its oversight of the Bank’s financial stability reports over the past year and so too has the governor via a letter to the Chairman of the Treasury Committee last year.

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7.30 pm

The interim FPC has already begun its analysis of potential indicators. The Bank’s discussion paper, Instruments of Macroprudential Policy, published last December, contained an annex that discussed several potential indicators. The paper stated:

“The identification of such indicators is an important area for further work as analytical approaches develop and data availability improves”.

In addition, the FPC will be required by the Bill to produce policy statements to accompany each tool for which Parliament has provided it with direction-making powers. The Bank intends to make draft policy statements available in time for these to be considered during the passage of the secondary legislation that will provide for the FPC’s initial toolkit. There will therefore be occasions specifically to consider what the Bank is proposing. Those statements will include details of the indicators that the FPC will consider when making decisions over those tools. I expect that the indicators that the FPC reports against will evolve and change as the committee gains experience and the academic literature on the subject expands, as has been recognised by Members of the Committee. It is therefore important that the committee has the flexibility to change the indicators it uses as international best practice develops.

My noble friend Lady Noakes questioned in particular the Treasury’s role in all this. It is important to stress the independence of the FPC and, although this was not what my noble friend was suggesting, for the avoidance of doubt, it is important that the Treasury ought not to be able to tell the FPC definitively which indicators to consider. I can imagine the situation if the Treasury said, “We do not want you to consider house-price growth”, for example. This would be a serious curtailment of the FPC’s independence.

Baroness Noakes: My Lords, my noble friend is mischaracterising what I was suggesting in relation to this matter. The amendment states merely that the Treasury and the FPC,

“must agree and publish a set of indicators”.

There is no suggestion that the Treasury could use this mechanism to tell the FPC not to look at certain things. The issue is whether or not the Treasury should take the responsibility of agreeing a range of indicators that are appropriate to the FPC’s objectives, just as the Treasury does in relation to the indicator that is set for the MPC. We know that it is radically different from the MPC, and that a single indicator cannot be set and that it cannot be the sole responsibility of the Treasury. However, the Treasury should have some responsibility for agreeing with the FPC the range of indicators that will be used.

I hear the cry of a child in the Public Gallery. It is amazing the effect that one has when talking about financial stability.

It is important that the Treasury should be engaged formally in the process, and it should not just leave it to the Bank of England. Equally, the Bill should not be silent and leave it to the Bank of England to choose whether or not to put forward indicators. I agree that it is doing so at the moment, but is it wise to legislate that there should be no requirement for it to do so?

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Lord Sassoon: My Lords, I am sorry if my noble friend thinks that I mischaracterised her argument. My interpretation of the words,

“The Treasury and the Financial Policy Committee must agree … a set of indicators”,

is that effectively the Treasury would have a veto over the set of indicators. What would happen if the Treasury and the FPC did not agree? It states in the amendment that they must agree. They would therefore have to find some common ground and it would be difficult if the Treasury dug its heels in and said, “We believe that this and that should be in the indicators”. Our starting premise here is that the FPC is the expert body and it should be left to define the indicators. As I have tried to indicate to the Committee, the Bank and the FPC are already on the case, providing a high degree of transparency, and there will be a series of draft policy statements available in time for consideration of the passage in the relevant secondary legislation. There will be appropriate scrutiny, but we would be going into pretty dangerous territory if we were to hard-wire the Treasury into the set of indicators that should be for the experts to set. Appropriate parliamentary and public scrutiny is allowed for in the Bill in the way that I have described.

Amendment 73, which would require the financial stability report to include the FPC’s predictions about the likely future state of the UK financial stability, is unnecessary. Subsection (3)(d) of new Section 9T, which appears at the bottom of page 11 of the Bill, already requires the report to include an assessment of the risks to stability that is very similar to the suggestion of the noble Lord, Lord Eatwell, that it includes a “range of … possible scenarios”. Subsection (3)(e) of new Section 9T already requires that the report includes the committee’s view of the outlook for the stability of the UK financial system. The interim FPC has already published three financial stability reports since its establishment. As I am sure the Committee is aware, the most recent report, published just last week, contains a whole chapter devoted to the committee’s outlook and the actions that the FPC felt necessary to tackle risks that it had identified.

I move on to Amendment 74. It is important that we learn from the mistakes of the previous system of regulation. In that system, the Bank was given responsibility for maintaining financial stability but no means of achieving that objective. That is why it is vital to give the FPC effective and proportionate powers to use certain macroprudential tools. However, the use of those tools will need to be monitored carefully. That is why the Bill already requires that the financial stability report includes an assessment of the extent to which the committee’s actions have succeeded in achieving its objectives, including its new secondary objective for economic growth. That is also why the FPC is required to publish and maintain policy statements for each of its macroprudential tools. We expect these statements to include estimates of their impact on both financial stability and growth. As we will discuss in due course, other amendments will require the FPC to produce explanations of how its actions are compatible with its objectives, including the costs and benefits of those actions. I do not therefore think that Amendment 74, which would require the financial stability report to

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include an assessment of the impact of each of its macroprudential measures on employment and economic growth, is needed.

Lastly, on Amendment 76, the smooth and efficient functioning of financial markets is a key requirement for financial stability. As such, the FPC’s objective to protect and enhance the resilience of the UK financial system extends to the functioning of markets. As I have mentioned, the Bill already requires the FPC to include an assessment of its actions as part of the financial stability report. The amendments that I have made require the FPC to explain how its actions are compatible with its objectives with regard to financial stability and supporting the Government’s economic policy. I therefore regard Amendment 76 as unnecessary because the same ground is already amply covered by the Bill.

I hope that on the basis of those explanations and reassurances noble Lords will withdraw or not move their amendments.

Lord McFall of Alcluith: My Lords, this was the gentlest of amendments ever. The genesis of it was the tripartite authority, and how the link between the Bank and the Treasury did not work as well as it could. Here we have an ill-defined term—financial stability—for which there is no definition whatever. On that basis, in getting the balance right between the two institutions, the Joint Committee at the time recommended—and I promoted, because I did not want anything prescriptive—that they should agree indicators. That is a very general term, so that people knew what the Treasury was expecting, and what the Financial Policy Committee was asked, and tasked, to do. That was the genesis of it. If we do not get that balance right we could find, in a few years time, someone saying in this very place—if it still exists—why did they not come to some agreement, so that there was a general consensus on what was happening?

Far from it being dangerous territory, I think it is nothing more than plain common sense. I hope that the Minister will look at this again, particularly when we come back to the Report stage, but I do not intend to move the amendment tonight. I beg leave to withdraw.

Amendment 40 withdrawn.

Amendment 40A

Moved by Lord Sassoon

40A: Clause 3, page 4, line 21, at end insert—

“9CA Specification of matters relevant to economic policy

(1) The Treasury may by notice in writing to the Financial Policy Committee specify for the purposes of section 9C(1)(b) what the economic policy of Her Majesty’s Government is to be taken to be.

(2) The Treasury must specify under subsection (1) the matter mentioned there—

(a) before the end of the period of 30 days beginning with the day on which section 9C comes into force, and

(b) at least once in every calendar year following that in which the first notice under that subsection is given.

(3) Where the Treasury give notice under this section they must—

(a) publish the notice in such manner as they think fit, and

(b) lay a copy of it before Parliament.”

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Amendment 40A agreed.

Amendment 41 not moved.

Amendments 41A and 41B

Moved by Lord Sassoon

41A: Clause 3, page 4, line 29, at end insert—

“( ) the responsibility of the Committee in relation to support for the economic policy of Her Majesty’s Government, including its objectives for growth and employment;”

41B: Clause 3, page 5, line 13, leave out from “while” to “seek” in line 14 and insert “complying with section 9C(1),”

Amendments 41A and 41B agreed.

House resumed.

West Bank

Question for Short Debate

7.42 pm

Asked by Baroness Brinton

To ask Her Majesty’s Government what is their assessment of access to water in the Palestinian territories of the West Bank.

Baroness Brinton: My Lords, although it is not a formal interest, I want to say that I am a member of the Watford Friends of Salfeet, an informal gathering of concerned residents in and around Watford, who have been working with the Salfeet municipality on the West Bank for the last five years.

I am grateful for the scheduling of this debate, on a vital issue, but one that is not well publicised. Access to water is a fundamental human right. Without it, people cannot survive; they cannot grow crops or livestock; they cannot dispose of sanitation and effluent safely. We in the West take water for granted, rarely thinking about how it is provided: merely turning on a tap, even when we have a hosepipe ban.

In 2010, for the first time ever, the UN Human Rights Committee addressed the difficult area of denial of access to water and sanitation in Palestine. The report found that Israel was in violation of its commitments under international law—which included denying Palestinians access to safe drinking water and sanitation—and said that this was a violation of the right to life and the right to equal protection under the law.

Specifically, the most serious water and sanitation problems lie in Area C, controlled by the Israelis, but where services are provided by the Palestinian Authority. However, the Palestinian Authority has such limited control over water in the West Bank that it cannot fulfil its duty. This is important, because Israel frequently tries to lay the blame at the door of the Palestinian Authority, without recognising that its job is impossible without access to the water that the Israeli state holds back for its own use.

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I want to illustrate the problem with reference to two villages that I visited in the West Bank in February this year. The first is the village of Faqu’a, on a hill, right on the edge of the north-eastern line of the 1948 green line, south-east of Nazareth. Faqu’a means “bubbles”, and the village is rightly named. It has more than 50 natural water springs and wells, and sits on an aquifer. It is part of the beautiful area of citrus groves and wheat fields that are key to the local economy.

Despite its name, Faqu’a is a community in crisis. It no longer has the right to access its own natural resource. Their water is siphoned off by the Israeli Government over the boundary—or, I should say, under the boundary—and locals are not permitted to use the natural wells. Any attempt to do so results in the wells being filled with cement, and the farmers or users punished. Farming citrus crops without irrigation is fruitless—literally—so family incomes have dropped.

With no natural access to water, this village has to rely on buying back its own water from Israel. The nearest tap standpoint is kilometres away and transporting it by tanker to the villages increases the cost to the villagers. Worse than that, contamination of water increases the more it is handled, and the children of Faqu’a now have a high incidence of water-borne disease, such as dysentery. A recent research study showed that there are now a number of hospital cases of infection caused by faecal contamination.

The World Health Organisation says that water resources for communities must be within one kilometre of the village. Faqu’a has been fighting in the Israeli courts for five years to have a standpoint brought to within seven kilometres. The result of this is that the average use of water per capita per day in Faqu’a is a shocking 25 litres, brought to the village every day by tanker.

In Palestine the average use per capita per day is 80 to 90 litres. For Israel it is 250 litres. I stood beside the 1948 line, and saw arid fields on my left in Faqu’a, beside the lush green fields, on the right, of Israeli farmers, just the other side of the wire fence: a very strong visual image that demonstrates the inequality that these West Bank residents face every day. The residents of Faqu’a are among nearly 200,000 Palestinians who live without running water.

Other West Bank communities face a range of difficulties. The illegal industrial area of Broqeen sits above Kefra Diq and other villages that make up part of the Salfeet area. The plastics factory there—which proudly advertises that it makes goods for Pilkington glass—puts its chemical waste directly into the local water source, polluting the only access to water that the Palestinian villages below them have.

The pollution of water is one of the subtler mechanisms used to cow the Palestinians, and sits alongside the better publicised confiscation of land, demolition of houses, cutting down of olive trees, and settler and army incursions into the villages. Residents also suffer from toxic fumes as the polluted water travels through their villages in the river, causing concern about birth deformities and other illnesses following long-term exposure to chemical effluent.

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The Ariel settlement stretches across the hillside above these Salfeet villages, housing 30,000 people. This very large illegal settlement takes first access of the water resources, and their sanitation effluent goes into the water before it goes down the hill to the Palestinian villages.

In a report published this March, the UN Office for the Coordination of Humanitarian Affairs said it had surveyed 530 springs in the West Bank and found that 30, mostly in areas where Israel retains military control, were taken over by settlers. It added that Palestinians currently had limited access to 26 other springs where settlers had moved in and threatened to take control. The area round Kefra Diq is one such. The olive groves have been there for thousands of years, but without clean water to irrigate them, the chances of the trees being able to produce a good crop are reduced. So, reduction in access to water becomes tool of economic oppression.

Of the water available from the West Bank aquifers, Israel uses 73%, the West Bank 17%, and illegal settlers 10%. While staying with families in the Salfeet area, we saw how they manage to survive day to day with very little water. Their cooking practices, flushing of toilets and turning on of taps are all severely curtailed and carefully thought about.

Finally, as if all these examples of unfair practices were not enough, the state water company has differing charging levels for water. It will come as no surprise, given what I have said, that the Palestinians on the West Bank are expected to pay a significantly higher unit price for water than are Israeli citizens, even though much of the water comes from natural wells and aquifers in Palestine.

I welcome the Government’s clear message to the Israeli Government about illegal settlements and other illegal acts such as house and olive tree demolition. Will they make strong representations to the Israeli Government to address these issues and accept the findings of the UN Human Rights Committee; immediately cease these violations under international law; end the differential level of water charging between Israel and Palestine; prevent the poisoning of water sources on the West Bank, whether industrial or domestic, by settler communities; give the people of Faqu’a access to a tap standpoint within one kilometre of the village rather than seven kilometres; and allow them to use their own water resources? Will the UK Government also raise this abuse of water provision and access to water with the United Nations, the United States of America and other countries that are able to help influence Mr Netanyahu and his Government?

Access to water is one of the most fundamental human rights. Now is the time for the United Kingdom, the EU and the UN to put pressure on Israel to ensure that all the people of the West Bank are given access to their own clean water, at a fair price, and that those who oppress them through polluting or restricting water are brought to justice.

7.52 pm

Lord Warner: My Lords, I congratulate the noble Baroness, Lady Brinton, on securing this debate. I will use my six minutes to speak about the related and

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linked issue of access to water in Gaza, where there is a very similar situation and lack of water is being used as an oppressive measure. In doing so, I declare my interest as a trustee of the Council for European Palestinian Relations.

I have been to Gaza twice in the past two years and seen at first hand the parlous state of the water and sewerage systems, and the impact on people’s health and on an already totally inadequate healthcare system. More than 90% of water from Gaza’s taps is unfit to drink, according to the World Health Organisation. This is in a population half of whom are children and young people aged under 18.

However, I will not speak from my own experience but will use the recent report by Save the Children and Medical Aid for Palestinians, the launch of which I had the privilege to chair last week. This report reveals some devastating things about water and its pollution in Gaza today. It found that Gaza is not a safe environment for children or adults because its water supply and land are contaminated with pollutants. A September 2010 assessment found that, “1.1 million Gazans”, out of a population of 1.6 million,

“are at high risk of consuming biologically contaminated drinking water from private vendors, the source of water for most Gaza residents”.

Concentrations of chloride and nitrates are as much as 10 times the safe levels established by the World Health Organisation. According to the WHO, ingestion of nitrates in drinking water has been linked to anaemia and some cancers. Some 70% of Gaza’s children are anaemic. The new report states:

“The most recent studies from 1998 and 2002 of infants and children indicated 48% prevalence of nitrate poisoning. Many more children are thought to be at risk today”.

A UNICEF report of March 2011 suggested that in five to 10 years’ time, Gaza’s already depleted aquifer, the sole water source, will stop producing water suitable for human consumption. Seawater has already penetrated the aquifer and the pollution has been compounded by Gaza’s inability to dispose properly of its sewage. Much of the sewerage network has been destroyed or is in a state of acute disrepair. According to the new report, 60 million to 90 million litres of untreated or partially treated sewage have been dumped in the sea every day since 2008. This has an impact not just on Gaza but on neighbouring areas. The report also points out that air strikes in 2011 destroyed $1.3 million- worth of water and sanitation structure, including a new sewage pumping station connecting 130,000 residents of Gaza.

Despite this appalling situation, the new report points out that.

“Sixteen internationally-led projects to address Gaza’s water and sanitation needs, valued at $75 million, continue to await facilitation following the easing of the blockade in June 2010. Only one-fifth of the materials required for these projects have been allowed to enter Gaza, with the remainder sitting in warehouses. No progress has been made on large-scale desalination projects addressing the lack of drinkable water”.

In conclusion, I will mention one of the five key recommendations of the Save the Children and MAP report. It states:

“Given the direct relationship between a supply of clean water and deteriorating water and sanitation systems, on one hand, and

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child mortality on the other, all planned water and sanitation projects should be implemented immediately, and a clear timetable provided by the Israeli authorities for their completion”.

What action will the Government take, in conjunction with EU partners, to press the Israeli Government vigorously to implement this very sensible recommendation?

7.57 pm

Lord Alderdice: My Lords, I join the noble Lord, Lord Warner, in expressing appreciation to my noble friend Lady Brinton for securing this debate and for the knowledgeable, passionate and well informed way in which she presented a very moving case. It did not come merely from other people’s understanding; she has been involved. She has gone to the places she speaks about and met the people she talks about, and therefore can speak with great knowledge and passion.

The noble Lord, Lord Warner, in speaking about the situation in Gaza, also outlined the urgency of this appalling situation. I recall that in Northern Ireland, while we disagreed on many things, one thing on which all communities came together was the question of water. This is true everywhere; we simply cannot live without it. It is a fundamental human right. For it to be used in any way as a source of political pressure is not only morally wrong but profoundly dangerous, because people will not only react but remember. Some things involving water that are happening in the region concern me deeply.

In October 2011 I brought to your Lordships’ House a debate on the question of water in the Middle East, and how it might be turned from a potential source of great conflict to one of co-operation. I thank my noble friend the Minister, who responded to the debate. She ensured in her preparation for it that there was a constructive and positive response from the Foreign Office. That work continued and continues still, and I hope that a little later in the year it will be possible to have a round-table conference addressing those questions. It is not easy to put these things together, particularly from a distance. We often press our Ministers to do things, and when they are done it is very much appreciated.

This area will not be easily resolved. First, there is a profound difference in the standing of the Israeli and Palestinian water commissioners in the Joint Water Commission. The Palestinian water commissioner does not have the power to implement almost any of the decisions that he may take, whereas the Israeli water commissioner must be consulted and has the final say on all these matters. There are considerable differences in understanding some fundamental data in regard to water and water distribution, and almost endless arguments about pollution, its distribution and so on.

I was a little encouraged in February of this year when I spent some time in Israel and talked to both sides about this question, including the Israeli water commissioner’s office. An appreciation is beginning to develop, among not just NGOs but technical experts, that it is simply not possible for Israelis—Jewish or Palestinian—to isolate themselves from issues of pollution of the aquifers, for example. The disturbing question is whether this is being done to drive Palestinians off the land in order to have a one-state solution that excludes them. As someone who has supported the

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two-state solution for some time, there is a real question in my mind as to whether the two-state solution is becoming a non-viable proposition. We have to understand the dilemmas we are talking about in that wider political context.

I have to say that the Palestinians have not always reacted wisely in their handling of some of these issues. For example, some young Palestinians told me when I was there this year that one of the mistakes was that Israelis changed the facts on the ground and argued about the politics subsequently, while the Palestinians wanted to solve the political questions while the facts on the ground were changing all around them. I think that many young Palestinians realise that strategic mistake and want to engage in changing the infrastructure to the benefit of their people and discuss the politics subsequently.

If I said positive things about the Minister, I also want to say that I think our ambassador in Israel has also understood the importance of this question and has been pressing it and trying to get people to the discussions. Through the medium of your Lordships’ House, it would be appropriate to indicate our support for what he is doing to enable those in politics, in government and in NGOs on both sides to get together and address these questions. Whatever we say in your Lordships’ House, and whatever the Government try to do, unless we can engage those in the Israeli Government and in the Palestinian Authority, we will not achieve the kind of outcome that we all want to see in your Lordships’ House. We must therefore encourage those initiatives that are taking place, properly funded and properly encouraged, as best we can, and not simply make demands that we all know will not be achieved in the next six, 12 or 20 months.

8.03 pm

Lord Winston: My Lords, I am sure the whole House is deeply grateful to the noble Baroness, Lady Brinton, for introducing this debate on a most important subject. It is good to hear the noble Lord, Lord Alderdice, praising Matthew Gould, the British ambassador, for his work in Israel and for his trying to cement relationships and do good diplomatic things for our country.

There is a huge amount of vilification of Israel, and often that vilification is expressed in the way certain statistics are presented. Sadly, we have heard some pretty misleading statistics this evening. It turns out that the Palestinians have 125 cubic metres of water per year, which is 351 litres per head per day. Given that the average American family needs between 200 and 300 litres, that is quite a lot of water. It is slightly higher in Israel at about 421 litres per day. More water will be used where there is industry and increasing agriculture, as the noble Baroness, Lady Brinton, pointed out, will also increase water usage.

Israel has had a legal agreement with the Palestinians since 1995. It was signed in Washington and was also signed by the European Union, Norway, Russia and the United States. It is interesting to point out that on 13 June Alex Kushner, the representative of the Israeli water authority, met with Dr Shaddad Attili, the Palestinian representative. The meeting was held in a very co-operative, pleasant and agreeable fashion and

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it was clear there was a lot of agreement between them. The problem is that, whatever might be said at this level, the situation that we should like to see with the various authorities in Palestine does not always follow. Unfortunately, disorganisation means there are huge problems with water. For example, none of the speakers has mentioned that some 6,000 wells have been illegally drilled in the country, which has resulted in the sewage that is referred to.

I find it difficult to understand how anybody could accept that Jews are poisoning wells. This almost sounds like the medieval blood libel. There is absolutely no reason for Israelis to poison wells and poison the aquifer; there is nothing to gain from that. The problem is that most of the sewage in Gaza certainly comes from Gaza. Israel has offered all sorts of help to Gaza, including pipes, technology and so on. Certainly, desalination would be expensive at around $400 million, and there is the issue of how you get that and continue it with the lack of power in Gaza. None the less, there is a total failure by anybody else to help the Gazans in their situation at present. It is shocking that the pollution that affects Israeli water by spilling over the border is so often seen as something that Israel has caused; it is something that is very much at the feet of the Palestinians.

I want to say only this in this very short debate. If we really want to see a peaceful solution, and a two-state solution to which the noble Lord, Lord Alderdice, has referred as being one that we can promulgate and support, it is crucial that we make certain that we do not vilify one side or the other. While we allow ourselves to be persuaded by inaccurate and often misleading statistics, we reduce the cause of peace. We make it more difficult for there to be an accommodation between the two sides. It is extremely important at this time that we are careful and accurate in our assessments of what is happening in the Middle East.

I was in Israel only a few weeks ago; I will be there again this coming weekend. I am there rather more frequently than my noble friend Lord Warner. I have been on both sides of the divide, and I have to say that Israel is trying very hard to make certain that the water supplies are kept intact, that the sewerage issues are controlled and that the damage is repaired.

8.08 pm

Lord Wright of Richmond: My Lords, I also congratulate the noble Baroness on introducing this important debate and I thank her for her very moving personal account of her visit to Palestine.

I first point out that access to water in this part of the Middle East, as elsewhere in many parts of the world, is a critical issue for all the countries of the region, and has been the subject of dispute between many of them for years. For instance, there are problems between Turkey and its Iraqi and Syrian neighbours, let alone the problems around access to water for Israel and Palestine, much of it flowing from countries that are still at war with Israel. Indeed, it has often been said that water may be the cause of the next serious conflagration in the region. One of the tragic consequences of the present crisis in Syria and the so-called Arab spring is that it has diverted the world’s attention from the problem of water supplies.

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I turn to the subject of this debate and, in stark contrast to the points made by the noble Lord, Lord Winston, the statistics available to me from international sources are truly horrendous. At the risk of repeating some of the points that have already been made, one crucial fact behind many aspects of this problem is the continuing illegal settlement of the West Bank by the Israeli occupying power. The settler population continues to grow, in spite of ineffective attempts by the Government of the United States and the European Union to persuade the Israeli Government at least to freeze their growth, if not to reverse it. At approximately 500,000, the growth rate of Israeli settlers on the West Bank and in east Jerusalem has averaged 5.1% a year, compared with an Israeli population growth as a whole of only 1.9%. What is called the mountain aquifer on the West Bank is hugely overexploited by the Israelis, who take 80% of the water, thus leaving only 20% for the Palestinians. More than 190,000 Palestinians live in 134 West Bank villages without any running water. In recent years during the summer months, the Israeli army has stepped up pressure on Palestinian border communities to force them out of the Jordan valley by confiscating their water tankers and depriving the villagers and their flocks of water at the height of the hot season.

Others will no doubt disagree with these facts and figures, but surely we cannot dispute the illegality of the Israeli settlement policy on the West Bank. What we have, in effect, is 500,000 Israelis who, under international law and the Geneva Convention, should not be there at all, using 80% of the available water and leaving only 20% for the indigenous population. For a Government who pride themselves on being not only the sole democracy in the Middle East but one who accept the rule of law, this is a shameful story. Even if, as it appears, the United States is unable or unwilling to do anything about it, surely the European Union should be doing something to correct this flagrant injustice. Mr Netanyahu may not have blood on his hands, to quote a frequent accusation against the Syrian regime next door, but he should certainly have water on his conscience.

8.12 pm

Lord Turnberg: My Lords, I too am grateful to the noble Baroness, Lady Brinton, for introducing this debate. I should express my interest as a member of the Labour Friends of Israel. It is obvious to anyone who has looked at the condition of the Palestinian water supply and the terrible state of the sewage disposal facilities, particularly in Gaza, that the situation there is increasingly intolerable. Noble Lords have spoken eloquently about these difficulties, and I resonate in particular to the analysis made by the noble Lord, Lord Alderdice, and not least that of the noble Lord, Lord Wright, who it always seems to be my problem and privilege to follow. I differ hardly at all in my recognition of the problems for the Palestinians, but I differ in my view of the causes and possible cures. The prime cause, of course, is the stand-off between Israel and the Palestinians, and the cure for the water conditions would follow a peace treaty, but we are where we are.

I shall start with Gaza because that is where the problems are undoubtedly most acute. According to the United Nations, Gaza has a desperate shortage of

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pure drinking water. Between 90% and 95% of Gazan water is polluted and a threat to health. If ever a place desperately needed a desalination plant, Gaza is it. Recently, UNICEF came in with a plan to do just that, but it came up against a Hamas Administration that, I am afraid, put their politics ahead of their population’s health. UNICEF wanted to purchase at favourable rates all the equipment that it would need from Israel because Israel has all the necessary expertise in desalination that could be wished for. Moreover, Israel was ready to help. But unfortunately all hell broke out. Hamas absolutely forbade any Israeli involvement. The Palestinian contractors’ union condemned UNICEF and announced a boycott of the agency, which then had to shut down its offices.

This episode is just one example of why it has been so difficult for Israel to influence the development of clean water and a proper sewage disposal system in Gaza, both of which have been Gaza’s own responsibility since 1995. Hamas just will not have anything to do with Israel, even when it offers to help. If it is said that Israel has prevented the transfer of necessary materials, while that may have been true, it is no longer the case. All the pipes, pumps and chemicals that are needed for water purification are now going across.

On the West Bank the situation is far from perfect, but it is much better than in Gaza. My figures—we all have different statistics, of course—suggest that 95% of the population is connected to a clean water supply and that the people have access to almost as much water as the Israelis. We can argue about the data. The problem in the West Bank is again one of a lack of willingness on the part of the Palestinians to collaborate on water and sewage projects with the Israelis. From what I hear, the relevant experts in water treatment meet and talk on friendly terms, but any agreements reached are quashed by the politicians. I fear that the Palestinian Authority is at least as much to blame as the Israelis. It does not want to be seen to be collaborating with the enemy in Israel.

A couple of years ago, Israel agreed to an American proposal to hold joint hydrological workshops with the Palestinians, but again that has been put on hold by the Palestinians. Water and sewage management in the small area of land in which Israel, the West Bank and Jordan sit closely together demands a co-ordinated approach on which they all work together. Placing all the blame on Israel or on any one of those countries is unhelpful. We in the UK must focus hard on how to get the parties together, if not in a total peace agreement —that is probably asking too much—at least on water, which is vital to them all.

In debates on the Middle East in your Lordships’ House I always try to bring out the possibility of what we in the UK might usefully do that is positive, rather than the usual constant carping and criticism. In that light, will the Minister consider inviting representatives with expertise in water management from those countries to meet on the neutral ground of the UK, where, perhaps, they can work something out far away from the scenes of conflict?

8.18 pm

Lord Liddle: My Lords, on behalf of the opposition Front Bench, I would like to say how much we welcome the fact that the noble Baroness, Lady Brinton, has

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got us this debate. It is a vital but not very well publicised issue, and she is certainly right that questions of water supply are about human rights. She has pursued this with her typical determination, which I admire, as well as her personal diplomacy through her twinning efforts between Watford and the Palestinian territories. I therefore have the greatest respect for what she is trying to do in highlighting these issues.

All noble Lords who have spoken in this debate accept that there are serious issues at stake here. The noble Lords, Lord Warner, Lord Alderdice and Lord Wright of Richmond, also spoke passionately about the problems. I agree with my noble friends Lord Winston and Lord Turnberg that certainly we have no wish to vilify the Israelis, and I am sure that many ordinary Israelis are horrified by these facts as much as anyone in this House. I also fully accept that the politics of the Palestinian Authority and of Hamas are not always the most constructive.

However, when you research the reports written by a number of international organisations and reputable NGOs on these issues, as I did briefly for this debate, one can only come to the conclusion that the Israelis have a serious case to answer. The most recent report I looked at was produced by the World Health Organisation last month. In that report the WHO says that the average supply of water to the Palestinians is only 50% of what it regards as a reasonable daily requirement, and that it is much worse in some parts of the territories—in Gaza and the so-called Area C—than in the rest. It also says, as did the noble Lord, Lord Wright, that Israel dominates the take of water from the aquifer on the West Bank—over 80% of it is taken by the Israelis—and similarly of the underwater aquifer in Gaza. Settlement building has made the problem worse: they are building deep wells, the building of which affects the water table and makes life more difficult for the Palestinians. The greatest injustice of the lot, in a way, is that the Israelis then sell a lot of the water back to the Palestinians, at quite a hefty profit. One estimate is that 50% of water in those parts of the territories has to be bought from Israel.

What is the Government’s view of this? This is something on which the British Government ought to have its own independent assessment of how serious these problems are. I hope that the Minister will be able to tell us that at the conclusion of this debate. We ought also to know what representations and what action the Government are taking to pursue this issue. I picked up in my researches an interesting report on these issues produced by Amnesty International in 2009. One of its suggestions, which seems perfectly sensible, is that there should be much closer co-ordination between the international donors who are trying to help to resolve these problems; a system of transparent reporting of difficulties and obstacles that they encounter, whether they are on the Israeli side or the Palestinian side; and a proper mechanism for reporting what is going on. That transparency and reporting mechanism seems to me to be an important part of trying to resolve the difficulties. What are we doing through our own aid efforts and the EU to try to ensure that that is done?

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I have been passionately pro-Israeli all my political life but when one hears about some of the problems that the Palestinians encounter, it makes one wonder about the seriousness of the present Israeli Government’s commitment to a two-state solution. There are steps that the Israelis could take. As the noble Lord, Lord Wright, eloquently said, if they do not want to have blood on their hands, they should not have water on their consciences.

8.24 pm

Baroness Northover: My Lords, I congratulate my noble friend on securing this debate on this very important issue. As the noble Lord, Lord Liddle, has noted, she and other noble Lords have spoken with passion and a great deal of knowledge about a challenge for the region that in itself reflects the huge political tensions of the area. We are indeed very concerned about the issue of access to water in the Occupied Territories and Gaza. I can assure the noble Lord, Lord Liddle, that we regard this as very serious indeed.

It is clearly very important that Palestinians have equitable access to the dwindling water resources in the area. The Palestinian population is allocated an average of 60 litres per capita per day, well below the World Health Organisation’s recommended level of 100 litres. In communities without water infrastructure, consumption dips to 20 litres per person per day. As the noble Baroness, Lady Brinton, indicated, not having regular access to water has a serious impact on the daily life of Palestinians, including their ability to tend their crops and therefore to provide for their families.

As noble Lords have indicated, there are various factors at play. There has been a lack of rainfall in recent years, the population has grown and the management of water resources could be improved. However, the main reasons why the Palestinians have inadequate access to water are political: the inequitable distribution of water resources compounded by Israeli restrictions on building and movement.

Less than 1% of Area C has been planned for Palestinian development by the Israeli Civil Administration. This kind of restriction does not lend itself to the creation of infrastructure that makes it easy to tackle this issue. As scientists, the noble Lords, Lord Winston and Lord Turnberg, are right about the misuse of statistics, which is why I am glad that we have independent analysis of this. Palestinians have access to only 20% of the West Bank’s water resources, the lowest access to fresh water in the region. The Office for the Co-ordination of Humanitarian Affairs has calculated that the average Palestinian receives 60 litres per capita per day. In comparison, Israeli settlers receive on average 280 litres per capita per day. This huge difference in allocation is unacceptable and indefensible. To help address this inequity, the UK is funding a project working with both the Palestinian and Israeli authorities to help improve co-operation on water issues to the benefit of all.

Of course, this is only one of the many problems associated with the illegal settlements, as the noble Lord, Lord Wright of Richmond, made so very clear. The Government’s policy on settlements is clear: they are illegal under international law and undermine the

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possibility of a two-state solution to the Israeli-Palestinian conflict and those working for a sustainable peace. I can assure my noble friend Lady Brinton that we have repeatedly condemned Israel’s announcements to accelerate settlement building in the Occupied Territories.

Another cause of the water shortage is the restrictions imposed on Palestinians, particularly in Area C, to develop their household and communal infrastructure. Based on the provisions of the Oslo agreement, both sides agree to co-ordinate the management of water and sewerage resources and systems during the interim period, as has been referred to by noble Lords. Development infrastructure projects in the water sector require the prior approval of the Israeli-Palestinian Joint Water Committee and subsequent construction permits and licences from the Israeli Civil Administration. The complex Israeli requirements and approval processes are an obstacle to the tangible development of the Palestinian water sector and to the Palestinian economy as a whole.

The demolition of Palestinian properties continues in the West Bank. Cisterns and water wells have been demolished. This has meant the loss of primary coping mechanisms in times of water scarcity. Such demolitions cause unnecessary suffering to ordinary Palestinians, are harmful to the peace process and, in all but the most limited circumstances, are contrary to international humanitarian law.

On 14 May this year, the EU Foreign Affairs Council called on Israel to meet its obligations regarding the living conditions of the Palestinian population in Area C by accelerating approval of Palestinian master plans, halting the forced transfer of the population and the demolition of Palestinian housing and infrastructure, simplifying administrative procedures to obtain building permits, ensuring access to water and addressing humanitarian needs. The Foreign Ministers further reiterated the EU’s joint commitment to provide financial assistance for Palestinian development in Area C.

While this debate deals with the West Bank, water is also a serious issue in Gaza, as the noble Lord, Lord Warner, made very clear, where 90% of drinking water does not meet international standards. The Israeli blockade and restriction of the import of goods and equipment into the Gaza Strip have resulted in significant delays in implementing major water-related development projects in the strip. Water and sanitation projects worth over $70 million are still awaiting Israeli approval for access of materials, the implications of which the noble Lord, Lord Warner, highlighted.

We continue to call for the full implementation of the relaxation of access restrictions for Gaza. We welcome all suggestions to improve the deeply worrying health situation in Gaza. We are very carefully reviewing the Save the Children report. In recent years, there has been some limited movement towards the easing of the restrictions, which we welcome. However, more remains to be done. We hope that further easing of the restrictions will follow.

Water scarcity is a major issue not only for Israel and the Palestinians but for other countries in the region, too. Water has been a scarce resource in the Middle East since early civilizations, as the noble Lord, Lord Wright of Richmond, indicated. Rivers in the region

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are few. Water demand is increasing as populations grow. Underground reserves are shrinking. The current water usage in the Middle East is unsustainable. Shortages are likely, unless Governments take action to solve the impending crisis, which is why we very much welcomed the work undertaken by my noble friend Lord Alderdice.

The UK funds the Global Water Partnership, which has supported a regional water partnership for the Mediterranean. Partners have included Israel, Jordan and Lebanon among others. These independent regional partnerships have promoted the concept and implementation of integrated water resources management as a vital approach to managing the world’s water resources. Following on from this, we very much welcome the work that my noble friend Lord Alderdice has been doing with the Strategic Foresight Group, which the House debated on 27 October 2011. I am glad that the initiative that he called for then is being taken forward; I wish him well with it and thank him for his kind words.

We supported the Negotiations Affairs Department of the PLO in developing improved data on water issues in order to promote effective negotiations with Israel on water sharing and co-operation. However, strengthened dialogue and co-operation between the Israeli and Palestinian authorities on water issues do not need to wait. I noted what the noble Lord, Lord Turnberg, said; we would like to hear more about the noble Lord’s suggestion about bringing those Israelis and Palestinians who are involved in this area to the United Kingdom to discuss it. I will ask FCO officials to follow up on it and see where we can take it.

The UK regularly discusses access to water in the Occupied Palestinian Territories with the Israelis, including the urgent need for Israel to ensure fair distribution of water in the West Bank and Gaza. We call on both parties—and, as the occupying power, particularly Israel—to take urgent, practical and immediate measures to improve this unacceptable situation, which has been so well described in this debate.

International interest in this area is keen. What happens between Israel and Palestine has a knock-on effect within the region, which has a knock-on effect far wider than that. The noble Baroness, Lady Brinton, and others have asked what representations we are making to the UN, the USA and others on this matter. We work closely with international partners, including the EU and the US. We will raise this issue in our discussions with them, as we have done. As I mentioned, the EU Foreign Affairs Council addressed the issue of access to water in its conclusions of 14 May.

The noble Baroness, Lady Brinton, asked about the village that she visited. I make the commitment that we will ask the British consulate-general in Jerusalem to visit the village and see how Her Majesty’s Government might be able to assist the villagers in gaining access to clean water.

The noble Lord, Lord Liddle, asked about the independent assessment of the situation. As he probably knows, the United Nations Office for the Co-ordination of Humanitarian Affairs conducts regular assessments of access to water in the OPTs. Many have quoted from those assessments here today.

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Water is one of several important issues for negotiations between Israelis and Palestinians, and anything that can be done to bring the sides together is very welcome. With this resource being so limited in the region, effective co-operation is required from all parties to manage it to ensure enough for all. This evening’s debate only reinforces the urgent need for negotiations to resume and for a final status agreement to be reached between the Israelis and the Palestinians. Such an agreement must include a just solution on shared water resources.

8.36 pm

Sitting suspended.

Financial Services Bill

Committee (2nd Day) (Continued)

8.42 pm

Amendment 42

Moved by Lord Eatwell

42: Clause 3, page 5, line 16, after first “of” insert “its strategic objective and”

Lord Eatwell: My Lords, this is another of those bran-tubs full of amendments, to jump us around various aspects of the functions of the FPC as set out on pages 5 and 6 of the Bill. Let us deal first with Amendment 42. I do not know whether this is a slip in drafting—although I know those never occur in the Treasury—but with respect to the need to understand or support the objectives of the FCA, the strategic objective of the FCA is left out. Since the FCA very emphatically has both operational and strategic objectives, it is interesting to know why the FPC does not have to avoid prejudicing the strategic objective of the FCA. According to this drafting, the FPC can readily prejudice the strategic objective that markets should function well. That is a mystery. We are going to have the FPC being able to ensure by its measures that markets do not function well. I think if it got up to that, it would rapidly get short shrift from the Treasury and, indeed, from Parliament, so I presume that this is just a slip and that the strategic objective of the FCA will be added to the operational objectives.

In Amendment 47, here the issue is knowledge collection for the FPC, in the sense that it is important that the FPC has knowledge of levels of leverage, as we discussed earlier this afternoon. Knowing levels of leverage is a vital part of systemic risk analysis so the amendment ensures that the FPC will have access to that information, either from the FCA or from the PRA, divulging levels of leverage as defined clearly in the Basel III agreement. You could take other definitions but the Basel III agreement is a perfectly reasonable definition of leverage and that is why my noble friend and I have used it here.

Amendment 51 is a probing amendment, tabled because I did not understand the issue of a “publication”, as referred to in new Section 9G(10) of the Bank of England Act 1998. Describing directions issued by the FPC, it says:

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“The direction may refer to a publication issued by the FCA, the PRA, another body in the United Kingdom”—

so any other body, such as my local sports club—

“or an international organisation, as the publication has effect from time to time”.

I am sure that “publication” in this sense must be a term of art and I am missing something. I would be grateful if the noble Lord could elucidate the issue both of what a publication is in this context and what is “another body” in the UK. Does it include my local sports club, and if not, why not, since it is another body in the UK?

Amendment 53 is one of the standard openness amendments, which have been encouraged by the Treasury Select Committee in another place, requiring the chairman of the Treasury Select Committee to be informed and given reasons if a copy of a report on a direction is not laid before Parliament. A persistent problem that we are going to face in the workings of the FPC is that it is going to be using powers that have traditionally been those of the Executive or of Parliament. There is therefore always going to be this tension of accountability between the FPC and the Executive and Parliament until, after a few years, the process has settled down, we hope. In these circumstances, it seems important that if for some reason a report on a direction is not to be laid before Parliament, the chairman of the Treasury Select Committee should be informed and given reasons.

Amendment 64 is rather more important, particularly in respect of some of the discussions we have had over the last few days, including this afternoon, and relates to the definition of “regulated persons” and the scope of exemptions. We know from the whole LIBOR debacle that one of the problems was that this particular market did not come within the scope of regulation. I am sure the FPC would have been quick off the mark last March, when the Treasury first knew, or presumably even earlier when the FSA knew what was going on, and would have included the setting of benchmark prices within the definition of regulated persons or dealt with it under the scope of exemptions. The recommendations that the FPC should make on the scope of financial regulation are enormously important and it is vital that the FPC has the powers to keep these matters under review. Amendment 64 is, if anything, the most important amendment in this whole group. We have to give the FPC the power to make recommendations with respect to the scope of regulation as it affects financial stability and systemic risk.

Amendment 65, which applies to page 9, line 34, is one of these amendments to which I have already referred where the committee is given discretion over its own action, even though the action seems to be firmly defined in the particular new subsection of the Bill, which reads:

“The Committee may make a recommendation under subsection (2)(e)”—

with respect to additional persons who may be required by the PRA to provide information, so this is very important indeed—

“only if it considers that the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.

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It is only “if it considers” that. Why should it be its consideration that limits whether it makes a recommendation? Either this is just trivial—in other words it would not have acted if it had not thought it should act—or this is limiting the scope of any legitimate limitation on the recommendations that the committee might make. If we took out the phrase “it considers that”, it would read “The Committee may make a recommendation under subsection (2)(e) only if the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.

There the test is the desirability of the Treasury’s action, whereas at the moment the test is whether “it considers that” it is a desirable action. How do we want the test to be posed? Should the test be posed that the committee decides to act, or that there is an objective consideration of the desirability of the action under consideration?

Amendment 88 is thrown into this group for reasons which are not entirely obvious, but I will speak to it because again it is a straightforward openness amendment requiring that the chair of the Treasury Committee be informed and given reasons should information concerning a direction not be published.

These amendments are all to do with the very important activity of directions and recommendations by the Financial Policy Committee. We have the need for information derived through directions and the openness issues, which are hugely important. The most important, particularly in the light of what we have seen over the last couple of days, is the question about the scope of financial regulation and the recommendations that the FPC may make about that scope as set out in Amendment 64.

To go back to the beginning of this bran tub-list, let us deal with Amendment 42. I simply want to ask the noble Lord why the FPC can actually, if it wishes, endanger the FCA’s pursuit of its strategic objective of having markets function well. I beg to move.

Baroness Noakes: May I clarify one item with the noble Lord, Lord Eatwell? He said in relation to Amendment 64 that the important thing was the definition of regulated persons and that that would have been necessary to ensure that the events in relation to LIBOR were kept under review. Is it not the definition of regulated activities rather than regulated persons that would have been relevant in that instance? That is to say, the activities were already being carried out by regulated persons but they were not regulated activities.

Lord Eatwell: The noble Baroness has made a very interesting point. I have forgotten the precise names, but you have a person who submits the information, and a person who receives it and then has the responsibility of transmitting that received information into the LIBOR setting. That is the person I have in mind.

Lord McFall of Alcluith: My Lords, I shall speak to Amendment 43. The four main Financial Policy Committee functions have been outlined in the Bill, but I would like the Minister to consider providing clear regulatory statements for both the FCA and the

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PRA, given that clarity is essential: there is an outside audience here, so transparency and clarity are very important. For both those bodies, that would be a helpful submission from the FPC.

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, we are into another bran-tub—not a pot-pourri this time, but a bran-tub, I note; I am not sure what the distinction is. This is a varied group of amendments about the functions of the FPC.

I say to the noble Lord, Lord Eatwell, and all other noble Lords taking part in Committee that if there are definitional difficulties—we have got into one or two tangles about definitions, construction of difficult clauses and the interrelationship between clauses and subsections —I am very happy for the noble Lord or any other noble Lord to have meetings including the Bill team to try to thrash out some of those difficult issues outside the Committee if that would be helpful. Some of these things might more easily be done away from the constraints and formality of the debate. I lay that offer on the table to all noble Lords who are interested.

I will come back to Amendment 42, but let me start with Amendment 43, which would require the FPC to prepare and publish regulatory statements for the PRA and FCA. One of the most glaring flaws of the tripartite system of regulation was a lack of clarity about who was responsible for what. As we know, the Bill will create regulatory bodies with clear and separate responsibilities. Although the FPC will have the power to direct the FCA and the PRA, that will apply only in the case of actions required to address systemic risk. The Bill makes it clear that the FPC cannot make recommendations or directions that relate to specified persons—that is, individual firms. Decisions on the policy approach of the PRA and the FCA will be made by their respective boards, not the FPC. As such, the amendment would risk blurring those clear responsibilities of the regulators.

Amendment 47, which would provide the FPC with the power to direct the PRA to require the disclosure of leverage ratios, is simply unnecessary. The Government agree that the disclosure of leverage ratios would be beneficial. That is why we supported the Basel III proposals to require its calculation from 1 January 2013 and its disclosure from 1 January 2015. The Government have pushed for full implementation of Basel III.

The interim FPC recommended in November last year that the FSA encourage UK banks to disclose their leveraged ratios from 1 January 2013, and an update on the progress of that recommendation was included in the financial stability report published last week. I will not, but I could quote extensively from that report. It is clear from reading that FSR that the FPC is already using recommendations to address disclosure issues effectively, so I suggest that Amendment 47 is unnecessary.

Lord Eatwell: I do not want to delay the Committee, but will the noble Lord elaborate a little on “addressing effectively”?

Lord Sassoon: Perhaps the best thing is to quote what was written by the FPC in its most recent financial stability report, which was published last week. It states:

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“Following FSA discussions with chief financial officers earlier this year, the major UK banks and building societies are expected to disclose leverage ratios, calculated according to the fully implemented Basel III definitions, in their end-2012 annual reports. Thereafter, UK banks and building societies will report on both a half-year and end-year basis”.

That is an example of the FPC in interim form, already using recommendations to address disclosure issues to pointed effect.

9 pm

Amendment 51 would remove the power in new Section 9G(10), which allows the FPC to give directions to the regulators that make ambulatory references to documents published by the regulators or other bodies. The noble Lord, Lord Eatwell, asked about the bodies to which this would refer. The noble Lord referred to a sports club, or some such. I am sure that he pointedly and knowingly refers to a plainly absurd example to make the point; however, the sorts of bodies that it might be appropriate to refer to would be such bodies as the Financial Stability Board, or, indeed, to guidance issued by the FCA. It is appropriate to refer to publications by other bodies and we should leave it up to the FPC to apply that sensibly.

As to the noble Lord’s question of what constitutes a publication, that could include rules, codes and guidance, as well as formal statements by other appropriate bodies. I hope that that answers—

Lord Eatwell: I should have been clearer at the time about what I had in mind. Would it, for example, include a speech made by, say, the Governor of the Bank of England, if that speech had not actually been printed somewhere or issued on a website, but the governor had made a statement about some matter relevant to the FPC?

Lord Sassoon: First, it would be difficult to define the governor as a regulator or other body. If the governor had made a speech that had not been published, it would certainly not be a document. Even if it is a published speech, it is unlikely to be a document in the sense of what I am suggesting—rules, codes, guidance or formal statements. The situation which the noble Lord postulates would not be one that would fall within what we are talking about here; there is no question of that.