Baroness Hayter of Kentish Town: Let us hope I have a little more success with this one, which is completely different. Amendment 187AB concerns the limits—currently £85,000—for compensation which can be awarded by the Financial Services Compensation Fund. As the Committee will know, this is not a complaints-type award for mis-service but compensation following the insolvency or similar of a financial service company. While £85,000 may be suitable as a limit for individuals, since not many of us have that much in our bank accounts, it is clearly insufficient for charities. Charities are greatly at risk but normally being only

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the holders of cash rather than other sorts of fixed assets they are unable to protect themselves against the risk of losing all their money. Under the Government’s proposed banking reforms in the draft Financial Services (Banking Reform) Bill published on Friday one change would put a significant number of charities at financial disadvantage. The depositor preference principle would ensure that all deposits which are eligible for compensation under the FSCS would be made preferential debts—although most charities will not fall into that category—so that if there was an insolvency of a bank these smaller ones would rank ahead of the claims of other unsecured creditors. This means that charity deposits will rank further down the creditor hierarchy. Thus charities would risk losing a higher proportion of their deposits should a bank go under so, clearly, alternative ways are needed of granting fairer protection for charities.

The NCVO and the Charity Finance Group have considered the matter carefully. Ideally, they would like charities to be preferred creditors—which I recognise would not be an issue for this Bill—or else for there to be a different limit for charities. However, the advice of Her Majesty’s Treasury is that that would break EU fiscal rules—hence the particular wording of Amendment 187AB to ascertain whether that objective could actually be achieved. One way would be to introduce a higher compensation limit for charities. The current £85,000 may be suitable for small charities but clearly it is pretty meaningless for ones such as Oxfam or Save the Children which have millions of pounds in the bank. It is really not big enough. The sector as a whole probably has about £18 billion in cash deposits, so the consequences and impact on beneficiaries would be extremely serious if even a small proportion was lost.

Earlier this year in response to the White Paper on banking reform the voluntary and charity sectors called on Government to grant registered charities preferred creditor status so that charities’ liabilities are prioritised alongside those of the Financial Services Compensation Scheme in the event of a bank failure, but the Government felt unable to accept that proposal. Perhaps there should be no cap at all for charities, although we also understand the effect on levies that that option would have.

Any losses to charities would have a devastating impact on those they support, who are usually the most vulnerable in society. The Icelandic bank experience caused ongoing concern to charities and their trustees. In tabling this amendment we seek to ask the Government to find a way forward to protect this vital part of the big society and the third sector. I beg to move.

5.30 pm

Lord Peston: My Lords, in supporting my noble friend’s amendment, I say that I am a strong supporter of the European Union, and that I hope one day to live in a country where the Government is also a strong supporter of our membership of the European Union—something that has not been the case for many years. I refer not just to the present Government but to the previous one. However, although I regard myself as a supporter of the European Union, I am well aware that often it drips into areas that are none of its business. When I first saw the amendment, I thought: what possible grounds are there for the European

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Union to consider supporting charities, let alone setting limits on how they can be supported? I assume that this is a probing amendment, although my noble friend has not told me so. Really the European Union has no business to be in this field; that is the message we would like to get over.

Lord Hodgson of Astley Abbotts: My Lords, my Amendment 187CA in this group relates to another aspect of the operation of the Financial Services Compensation Scheme. The current wording by which the scheme operates gives it a lot of discretion in the way that the costs of the scheme are allocated. Section 213(5) of FiSMA states:

“In making any provision of the scheme … the Authority must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised persons reflects, so far as practicable, the amount of the claims made, or likely to be made, in respect of that class of person”.

There are two get-outs.

I make it clear that this is not about restricting the rights of consumers to obtain compensation. It is a critical and essential part of maintaining proper confidence in our financial system that there are proper and appropriate ways for people to claim and get compensation for mis-selling or other malfeasance. However, the amendment is about ensuring that the polluter pays. It has become more difficult in recent years to trace the allocations and levies made by the Financial Services Compensation Scheme to the particular class of persons and businesses to which they have been applied. Often, there appears to be a shifting of the pea around the plate, with a disproportionate share landing on those perhaps least able to complain. I hope that my noble friend will listen to the amendment with sympathy. The funding system must reflect the differences in risk and instability posed to the public and to the wider economy by firms and the financial products they offer.

I make it absolutely clear that my amendment does not enforce an unacceptable level of correlation. The words “as far as practicable” will remain, and will therefore provide the scheme with a degree of flexibility—a get-out, if you like. However, the additional words, “take account of the desirability of ensuring”, are too woolly. They lead to situations where people feel that the scheme is not operating fairly. Therefore, I would like to see those words replaced by the single word, “ensure”, as a means of ensuring that the Financial Services Compensation Scheme penalises the polluter and not the wider financial community.

Lord Newby: My Lords, Amendment 187AB, moved by the noble Baroness, Lady Hayter, would require the Government to notify other EU member states that the limits on compensation payments to charities in the event of a loss of their bank deposits should be reviewed. The noble Lord, Lord Peston, asked what on earth this had to do with the EU. I suspect that he, like me, had not heard of the deposit guarantee scheme directive, which is an extremely valuable piece of legislation. It means that across the EU there is a maximum harmonised limit of compensation per depositor in the case of banks or other financial

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institutions going bust. It makes sure that across the EU there is a common framework for paying out when organisations get into financial difficulties.

Lord Peston: The Minister said that that was a very good idea. I cannot imagine why it is such a good idea. What business is it of the European Union what the taxpayers of an individual country decide they will spend on compensating people who have lost money because of the misbehaviour of banks? Why is it a European issue? I do not want to pursue this because it is a European question that is broader than what the Bill is about. I merely made the rather tart remark that occasionally the overpaid officials in Brussels have to justify their overpaid existence by finding things to do. Otherwise, they might eventually be asked to retire—although I might say that then they get incredibly good compensation arrangements. I was just being my normal tart, nasty self.

Lord Harrison: My Lords, I came to listen to the Statement. However, it may be of interest to some of my colleagues that we on Sub-Committee A of your Lordships’ European Union economic and finance committee are studying the banking union proposals and the recovery and resolution directive. The deposit guarantee scheme is an integral part of Herman Van Rompuy’s proposals, and of the response that we have got from the four presidents. That is the reason I am here today. I was slightly taken aback when my noble friend Lord Peston mentioned charities. As I understand it, the deposit guarantee scheme is a separate matter. The proposal has yet to mature. This will be done in Brussels over the coming weeks and months. I do not know whether that helps.

Lord Newby: My Lords, it is extremely helpful—and it will be done over the coming months. First, it is a single-market measure, not a eurozone measure. The aim is to establish a level playing field for consumers across the EU that is funded not by the state but by the financial services sector wherever the scheme is in operation. This means that as people move around the EU, as they increasingly do, they will know that they will get broadly the same degree of consumer protection wherever they are. That is a good idea, not a bad one. However, whether it is a good or a bad idea, this is the framework within which the deposit protection level operates in the EU, and therefore in the UK. Within the discussions about the directive that are going on at the moment, the level of compensation and the bodies that are eligible for it are being considered.

I say to the noble Baroness that we have listened very carefully to her concerns, and that the Government will consider whether it is appropriate to review the eligible limit to charities in the context of our overall negotiating priorities on this proposal. This is just one of a number of issues that we are considering in the round and as part of the negotiating posture we will take up. I assure her that we will give careful consideration to whether this is the way of achieving what she wants to achieve.

I move on to Amendment 187CA in the name of the noble Lord, Lord Hodgson of Astley Abbotts. This amendment would amend FiSMA to require the

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regulators to ensure that levies imposed on a particular class of firm reflect the claims made, or likely to be made, on that class. Before I address this amendment directly I would like to use this opportunity to draw noble Lords’ attention to the fact that a draft of the statutory instrument allocating rule-making responsibility for the FSCS between the two regulators will be published on the Treasury’s website this week as part of a broader consultation on draft secondary legislation required by the Bill. I will place copies of this paper in the Library of the House.

I am not entirely convinced by the case for Amendment 187CA. FiSMA already requires the regulators, as the noble Lord, Lord Hodgson, said, to take account of the desirability of ensuring that the amount of levies imposed on a particular class reflects, so far as practicable, the amount of claims made, or likely to be made, in respect of that class. Ensuring that classes are levied in a way that fully reflects claims, or likely claims, as proposed in the amendment is likely to be an impractical and disproportionate approach to evaluating how the fund should be funded. The current drafting in FiSMA reflects my noble friend’s concern but also leaves sufficient flexibility for the expert regulators to use their judgment.

The FSA’s recent consultation document on its funding model in the new regulatory system gives a good indication of the complexity involved in determining the funding model of the FSCS. I have it here, and its 100-odd pages demonstrate that this issue is somewhat more complex than might immediately be apparent. It demonstrates, among other things, how difficult it would be to ensure, in any strict sense, that levies fully reflect claims, or likely claims, on a particular class while delivering a fair and equitable scheme.

I suggest to the noble Baroness that the correct way to address her concerns is to contribute to the consultation on this document, which is open until 25 October. On that basis I would ask her to withdraw her amendment.

Baroness Hayter of Kentish Town: I thank the Minister rather more positively than I did his colleague on the previous amendment. It appears clear that he and the Government have understood the problem and I thank him for agreeing to look at this again. Charities of course, unlike people, do not move around; British charities are only in this country. I thank the Minister for saying that they will look at that. If it is not possible by that method, perhaps he could ask others in the Government if there is another way to assist. That would be extremely helpful. On the basis of that offer I beg leave to withdraw this amendment.

Amendment 187AB withdrawn.

Clause 35 agreed.

Schedule 10 : The Financial Services Compensation Scheme

Amendment 187B

Moved by Lord Sassoon

187B: Schedule 10, page 239, line 33, at end insert—

“( ) In subsection (7), omit “board members,”.”

Amendment 187B agreed.

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Amendment 187C

Moved by Lord Teverson

187C: Schedule 10, page 240, line 12, at end insert—

“(5A) In making any provision of the scheme under subsection (3), the relevant regulator must so far as practicable establish classes of authorised person on which levies may be imposed such that the claims that are likely to be made in respect of that class of person share a close affinity.

(5B) For these purposes, a claim shares a close affinity with another claim if both the nature of the services or activities and the type of financial instruments in relation to which the claims arise exhibit a high degree of similarity.”

Lord Teverson: I can see that everybody wants to discuss the Statements on Europe and the potential independence of Scotland, so I will try to be brief. However, I say to the noble Lord, Lord Peston, that I have heard of the deposit guarantee schemes directive as well as the investor compensation schemes directive, both of which the Commission published in 2010 but neither of which has got anywhere very much since last year. The two directives have held up much thought around the financial services compensation service.

In this amendment I am trying to put into primary legislation a key principle regarding the close affinity of organisations which must help to compensate when other organisations have gone into liquidation or cannot meet their obligations to their customers. I am also putting down two tests: the first concerns the similarity of the service and the second the similarity of the financial instrument. Many Members will be aware of the history of this in that the Financial Services Compensation Scheme does make levies. In fact, in the fund management area it can ask for up to £270 million with 30 days’ notice, and indeed last year £233 million was called up, which is estimated to be 4% of the turnover of the total sector. Those of us who have worked in business will know that if you suddenly take 4% of your turnover out of the business, through a statutory note or the equivalent of a tax or a notice, it can hugely affect your business. The largest problem was Keydata resulting in a quarter of a billion pounds’ compensation having to be found, and it was a major problem. There have been a dozen smaller cases, and in the past five years there has been £600 million compensation involving investment intermediaries. In those cases of failure the overwhelming burden fell on the fund managers and independent financial advisers, who paid for the damage of what often were issues from spread betting, unquoted shares and life settlement portfolios. In practice there was a lack of affinity. There is also a question of what happens when regulators themselves have not been as good as they should be in ensuring regulated and authorised persons have worked responsibly in the past.

5.45 pm

The EU has come to an end of its consideration of this area but the FSA’s consultation, launched in July, is advocating very much the same sort of compensation scheme except that it would effectively divide the scheme between the organisations regulated by the PRA and those regulated by the Financial Conduct Authority. What that means, if it happens, is that

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banks and insurers will not face compensation claims for the sale by intermediaries of their own products. Such claims will fall back once again on the FCA pool, which includes investment managers. This amendment attempts to find a solution by saying that the affinity has to be very much closer than it has been and that offenders from a similar risk sector should pay the compensation rather than those from more broadly related sectors. If the problem is too large the solution must be to go into a much wider pool, which includes both the PRA and FCA-regulated businesses. I beg to move.

Lord Flight: My Lords, I speak briefly in support of this amendment. Keydata did actually expose a great deal of feeling of unfairness among different parts of the industry. The point was made about the heavy burden on fund managers but SIPP administrators, who are purely administrators and not involved in managing money, are for some reason lumped into the same category as fund managers. There is a very substantial burden on their resources. The whole area wants looking at, particularly if we are increasingly to become a compensation culture and if the sorts of amounts expected from the scheme are going to grow and grow. There is quite a problem and quite an issue to address in deciding how to cut the cake in deciding who, in fairness, should pay what.

Lord Newby: My Lords, this amendment seeks to remove the possibility of any element of cross-subsidy between different classes of authorised firms. We do not feel that it is either necessary or helpful. We do not consider that the practice of allowing some cross-subsidies between classes is inherently wrong, and nor should it be prohibited in every case. Not only does the potential for cross-subsidy help ensure a sustainable scheme with lower levy thresholds, but it helps to ensure that the compensation supports consumer confidence in the financial services sector as a whole, by limiting the risk that compensation claims cannot be met. If the scheme has insufficient funds to pay out claims to policyholders of a failed insurer, bank customers are unlikely to have confidence that the scheme will be able to pay out if their bank fails.

As I have already stated, the decision on how the FSCS is funded is best made by the regulators and implemented through their rules. In particular, it is the regulators who understand what is appropriate and affordable by different classes of firms and so are best placed to determine when, or indeed if, cross-subsidisation is appropriate. I equally accept, however, that there is a need for proportionality in the different classes of firms that are expected to contribute. I am well aware, for example, that in the past the building society sector has felt that it has had to pay a disproportionate burden.

However, as I have mentioned, the FSA is consulting on how the FSCS will be funded, although in broad terms, as the noble Lord, Lord Teverson, said, both the PRA and the FCA will have rule-making responsibility for the scheme. The PRA will make rules for deposit takers and insurance providers and the FCA will make compensation rules for all other types of financial activity covered by the scheme.

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The best way to deal with the specific issue raised by my noble friend is via the FSA’s consultation on the draft scheme, which I mentioned earlier. It is ongoing—it has several weeks left to go—and it is the best way now of ensuring that the scheme we end up with is the best possible scheme for all the different classes of firms which will be covered by it. On that basis, I ask my noble friend to withdraw his amendment.

Lord Teverson: My Lords, I thank the Minister for his reply. Obviously I am somewhat disappointed. Clearly the consultation is an area in which the sector and I will participate but there is a real issue around justice and equity in this sector and how the scheme will work. I shall perhaps take the opportunity to speak to him further between now and Report, but, in the mean time, I beg leave to withdraw the amendment.

Amendment 187C withdrawn.

Amendment 187CA not moved.

Amendment 187D

Moved by Lord Sassoon

187D: Schedule 10, page 242, line 11, at end insert—

“In section 221 (powers of court), in subsection (2), after “director or” insert “other”.

In section 222 (statutory immunity), in subsection (1), omit “board member,”.”

Amendment 187D agreed.

Schedule 10, as amended, agreed.

Clause 36 agreed.

House resumed.

EU: European Justice and Home Affairs Powers


5.52 pm

The Minister of State, Ministry of Justice (Lord McNally):My Lords, with the leave of the House, I shall now repeat a Statement made in the other place by my right honourable friend the Home Secretary. The Statement is as follows.

“With permission, Mr Speaker, I would like to make a Statement on European Justice and Home Affairs powers.

Under the terms of the Lisbon treaty, the Government are required to decide by 2014 whether we opt out of, or remain bound by, all those EU police and criminal justice measures adopted prior to the entry into force of the treaty.

The Government are required under the treaty to reach a final decision by 31 May 2014, with that decision taking effect on 1 December. While this may seem a long way off, as with many EU matters the process of decision-making is a complicated one. We wish to ensure that before that point we give this House and the other place sufficient time to consider this important matter.

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In total, there are more than 130 measures within the scope of the decision to be considered at this stage. A full list of the measures concerned was provided to the House on 21 December last year, and a further update was given on 18 September this year.

The Government are clear that we do not need to remain bound by all the pre-Lisbon measures. Operational experience shows that some of the pre-Lisbon measures are useful, some are less so and some are now, in fact, entirely defunct. But under the terms of the treaty, the UK cannot pick and choose the measures from which to opt out. We can only opt out en masse and then seek to rejoin the individual measures.

So I can announce today that the Government’s current thinking is that we will opt out of all pre-Lisbon police and criminal justice measures and then negotiate with the Commission and other member states to opt back into those individual measures which it is in our national interest to rejoin. However, discussions are ongoing within government and therefore no formal notification will be given to the Council until we have reached agreement on the measures that we wish to opt back into.

This Government, more than any other before them, have done their utmost to ensure that Parliament has the time to properly scrutinise our decisions relating to the European Union and that its views are taken into account. I can assure the House that the 2014 decision will be no exception. As the Minister for Europe has already told the House, the Government are committed to a vote on this matter in both this House and the other place. We are also committed to consulting the European Affairs, Home Affairs and Justice Select Committees, as well as the European Scrutiny Committee and the European Union Committee, as to the arrangements for this vote.

I fully expect that these committees will want to undertake their own work on this important decision. The Government will take account of the committees’ overall views of the package that the UK should seek to apply to rejoin. So that the Government can do that, I invite the committees to begin work, including gathering evidence, shortly and to provide their recommendations to the Government as soon as possible.

The Government will then aim to bring forward a vote in both Houses of Parliament. The timeframe for this vote will depend on the progress in our discussions with the Commission and Council. An update will be provided to Parliament early in the new year on when we can expect the vote to take place.

I hope that today I have conveyed to the House the Government’s full commitment not only to holding a vote in this House and the other place on the 2014 decision but on the importance we will be according to Parliament in the process leading up to that vote. I am sure that all parties will want to work together to ensure that the final decision is in the UK’s national interests.

It is in the national interest that the Government have taken this decision, and I commend this Statement to the House”.

My Lords, that concludes the Statement.

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5.57 pm

Baroness Smith of Basildon: My Lords, when I read reports in the press and heard about this Statement this morning, I had hoped that we would get some clarity from the Statement about exactly what the Government’s plans involve. Having listened to the Home Secretary and the noble Lord, I am not much wiser. Rarely can a Statement have been so devoid of detail.

I have expressed my concerns before that Home Office Bills, specifically in relation to crime and courts, have come before this House before the detail has been worked out. The community sentencing clauses, for example, used a procedure of recommitting a Bill that I have never seen before in 15 years in both Houses.

I suspect that I know why. It is not often that we get Conservative Party policy from the Dispatch Box, particularly from a Lib Dem Minister, and that probably explains why there is a lack of clarity. If the press reports are to be believed, Liberal Democrat sources have played down the significance of today’s Statement. If I have understood the report correctly, the Home Secretary and the Minister today have “limited authority” in what they can say, because government policy has not yet been agreed. The Minister cannot go as far as the Prime Minister—I doubt that he would want to—when he said that the Government would opt out of all police and criminal justice measures.

I cannot recall any other Statement of such significance where a Secretary of State has announced that the Statement represents the Government’s “current thinking” and has added that “discussions are ongoing within government”. We all know what that means: it is the pro/anti EU tension at the heart of this Government that makes this announcement confused and shambolic and seem like yet another example of policy being drafted on the back of an envelope.

Several questions about the detail need to be answered. I apologise to the noble Lord for referring to detail, but the House deserves to have some. If the European arrest warrant had not been in place, what action would have been available to UK police in co-operating with their French counterparts to ensure that the French police were able to arrest Jeremy Forrest and ensure that he and Megan Stammers were returned to the UK in the same timescale? No one is suggesting that the European arrest warrant is perfect, but the independent Scott Baker report commissioned by the current Home Secretary strongly recommended keeping it. Yes, it could be improved and updated, and that very process is taking place now; it is being reformed. As a further example of this Statement being premature, the Government do not even know at this stage what they would be opting out of.

The European arrest warrant is responsible for nearly 600 criminals being returned to the UK to face trial. It has allowed 4,000 citizens from other European countries to be sent back to their home country or another European country to face justice. In light of some of the Government’s briefing on this issue, your Lordships’ House might like to be aware that 94% of those sent back to other European countries to face trial under the European arrest warrant are foreign citizens.

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The Home Secretary has said that the Government may want to opt out—because no one is sure yet—and then may consider opting back in again. There is a process for opting back in, but can the Minister say what happens in the mean time—in that gap between opting out and trying to opt back in? What processes will be in place, and what happens if the opt back in is refused? My understanding is that Denmark has had around 50% of its applications to opt back in refused.

If the UK opts out of policing and criminal justice measures, what process do the Government envisage putting in place to deal with some hugely significant issues? These include: counterterrorism; the sharing of criminal records, including those of sex offenders; conventions to protect member states’ financial interests in the event of major international economic crime; minimum standards of collection of customs and police information to tackle cross-border crime; co-operation on the identification of laundered money; co-operation between member states in tracing and freezing criminal assets; and the setting up of Europol. That list is not exhaustive.

It would have been far more satisfactory if the Minister had been able to give us some clarity today, if he had been able to say which of those areas he would want the Government to opt back in to, and if he had been able to say why the Government think the position is so unsatisfactory that they are considering opting out of the entire police and criminal justice powers. Which of these are so offensive that the Government are prepared to put at risk European co-operation on some of the most serious and abhorrent crimes that damage British citizens? The Statement gives no reasons for the Government taking this view. There is no justification for this view, and there is no information on which provisions the Government think are valuable and would want to opt back into.

We have a process from the Government but we do not have a policy. The reason is that this is still only the Government’s current thinking, as the Minister stated, and discussions are still ongoing within the Government. Will anything ever change? It seems an absolute shambles. On issues as serious as this, this House and the public deserve better. This sounds too much like a political gimmick drummed up on the back of an envelope.

6.03 pm

Lord McNally: I thank the noble Baroness for her response. I suppose I should also thank the Opposition for leaving this measure in the negotiations that they carried out on the Lisbon treaty.

First, on clarity, I do not think there could be a better and clearer declaration of pre-legislative scrutiny—something that I think the House wholly approves of. If I had come here today with a definitive list of measures to be opted into or out of, the House would quite rightly have said, “How can you pre-empt the decision in this way?”. I will borrow the noble Baroness’s phrase: we have put in place a process, not a policy. The process will allow this House, the other place and their committees to look at this matter in a proper, considered way, and to bring forward recommendations that will in turn form the Government’s final decision.

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That does not sound to me anything like policy on the back of an envelope. It seems a very measured way of looking at matters, and one reason why we are starting early is to make as much progress as possible on these matters so that there is not the gap to which the noble Baroness referred in relation to the opt-out and implementation.

The European arrest warrant is a perfectly good example. No final decision has been taken. The European arrest warrant has had some successes, but there have also been problems, including the disproportionate use of the EAW for trivial offences. As with all the other measures, the point is that it will now be open to scrutiny and consideration by those who have experience of how these things have worked, so that we can make that final decision on these measures in the national interest. As I say, this is one of the clearer Statements I have come across about how a Government intend to develop policy, and one that sets forth for both Houses a process that will give them maximum influence on policy.

6.06 pm

Lord Lloyd of Berwick: My Lords, I start by welcoming the fact that the Government are consulting so soon on whether or not to opt out. That seems an entirely good thing. I also welcome the fact that they are consulting the various committees listed in the Statement.

I suggest that those committees, and indeed the Government, could do no better than to start by reading—and, if I may say so, inwardly digesting—a working paper very recently produced by a group of very distinguished academics under the leadership of Professor John Spencer of Cambridge University, entitled Opting Out of EU Criminal Law: What is Actually Involved?. It was the result of much work over the summer and was published only last month. The report starts by disposing of various myths that have surrounded this subject since first it raised its head: in particular, the myth that one can pick and choose what one is going to opt out of. Happily, the Government accept that we simply cannot do that.

However, the Government believe that we can opt out of the whole and then try to negotiate our way back in where it suits us—the so-called Danish solution. But what if we do not succeed? It is quite wrong to suppose that all 130 pre-Lisbon police and criminal justice measures are bad. On the contrary, they are not. We will in any event be bound by all post-Lisbon police and criminal justice measures—that is another myth that is widely believed. So it will be partly one and partly the other. If we opt out, we may in the end get the worst of all possible worlds in deference to the pressure that I think we all understand.

The noble Baroness, Lady Smith, has already referred to the “current thinking” of the Government on this matter being to opt out. I implore the Government to keep their current thinking on this matter under review.

Lord McNally: My Lords, the whole point of the exercise is that the Government can keep their thinking under review and can take on board the kind of evidence and study that the noble and learned Lord referred to. He puts his finger on it entirely. We were

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faced with the position, as the Lisbon treaty stands, that we could not pick and choose what we opt out of; we can simply opt out and then negotiate on the basis of opting back in. Is that a high-risk strategy? We will take the evidence of the debate that unfolds in both Houses, from the committees of both Houses and from academic, judicial and other advice that we receive. However, I do not think that the Government can be accused of taking an irrational way forward. It seems a very measured way forward that gives us time—the noble and learned Lord welcomed how soon this decision had been made. It is because we are taking this early decision that we are going to be able to make the kind of measured decision in the national interest that I think both Houses will welcome in the end.

Lord Reid of Cardowan: I thank the Minister for repeating the Statement, although I confess that I am not much better informed than I was before it. Will he clarify three things to take us a little bit further in detail, something with which the Statement was not replete? First, during this period when the Government are “minded” to do something—one of those useful words that civil servants taught me—will the present provisions continue to operate until such time as the Government become “minded” to stop things? Secondly, given that law and order is both now an international and transnational phenomenon and among the highest priorities of people in this country, can the Minister tell us whether any impact assessment has been done of the effect of abandoning these regulations on law and order in this country during the interim, between when he becomes minded to do something and the negotiations finish? In particular, has any consultation taken place with the police and the intelligence communities about it? Thirdly, if either has taken place, can he give us a little more detail on the anticipated effects, were such regulations to be abandoned, in particular or wholesale?

Lord McNally: I thank the noble Lord for those questions. I am sure we are going to get this continually. I make the point that the whole merit of this Statement is that it does not present either House with a fait accompli. On the contrary, it offers the House involvement in making these important decisions, which I think would be welcome to the House concerned. That is why this word “minded” is used, because the Government are awaiting advice and having discussions. I cannot imagine that decisions of this importance and magnitude would be taken without the input of those who have responsibility for policing and security matters. They will certainly be involved in giving evidence and advice. However, I am not sure that the process would be helped if Ministers or anybody else dribbled this advice out a little bit at a time. We will get a big picture and all the committees of both Houses will have the opportunity to take advice from a wide range of bodies. We will see that advice emerging when they have had the opportunity to give it.

Baroness Hamwee: My Lords—

Lord Hannay of Chiswick: My Lords—

Lord Wood of Anfield: My Lords—

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Lord Ahmad of Wimbledon: My Lords, I know many noble Lords wish to speak on this. Perhaps we can take the noble Baroness, Lady Hamwee, and then come across proportionately to the other Benches.

Baroness Hamwee: My Lords, does my noble friend agree that it is fundamental to the EU that there is freedom of movement and, that being so, that we need the tools to deal with negative consequences, when there are negative consequences? If that is so, will he give the House an assurance that the Government’s decisions will be based on evidence and informed opinion—of which there is quite a lot—because the Statement is not neutral? Does my noble friend further agree that playing hard to get is not always the best way to progress a relationship?

Lord McNally: I shall not go there. Instead, I assure my noble friend that the invitation before the House, and indeed the country, is to let us make these very important decisions on the basis of evidence and informed opinion. I am very confident that if we approach this on the basis of evidence and informed opinion we will make the right decisions for the country.

Lord Baker of Dorking: My Lords, I was the Home Secretary at the time of the Maastricht arrangements. Let me remind your Lordships of what Maastricht did. It said that matters of criminal justice and police powers should remain matters for independent states within Europe. In fact, John Major described it on coming back from Maastricht as one of the great independent pillars of that settlement. That independence has been eroded over the years by the natural effluxion of powers to the centre, which is remorseless in the case of Europe. Therefore, I very much welcome the statement that we will resile from undertakings and then pick and choose which we think are advantageous to our country. This seems to be an excellent exercise in subsidiarity and may well be the shape of things to come.

Lord McNally: I thank the noble Lord, Lord Baker, for that intervention. I think he would agree that things have moved on from Maastricht, not least in a matter that I think the noble Lord, Lord Reid, referred to—that many of the challenges that we face in these areas are transnational and international. That is why, while looking at the issues with an eye to subsidiarity and the responsibilities of the nation states, we also have to look at them from the realities of the much more international, transnational and global operation of many of the criminal forces that we are trying to counteract. That is why I rely on proper evidence-based examination of the decisions that we are taking forward.

Lord Hannay of Chiswick: My Lords, does the Minister recognise that the thanks for the Statement today would be a great deal more sincere if it was not such a sham? It is a sham because the Prime Minister has stated categorically that he will opt out—no ifs and buts and nothing about reinserting those measures we choose. He has ridden roughshod over the undertakings that were given in this House by the noble Lord, Lord

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Henley, and in the other place by the Minister for Europe that before the Government came to any conclusions at all on this matter they would consult very fully. The warm words he said about consultation today are, frankly, not very comforting. I can only repeat the words of the chairman of the EU Select Committee of this House, the noble Lord, Lord Boswell, when he wrote to the Home Secretary after the Prime Minister’s statement expressing his dismay. Does the noble Lord agree that it would be completely unthinkable to put the matter for decision to the two Houses until we are absolutely clear what the whole of the reinsertion or reapplication package is? We will not be able to judge what the consequences of the Government’s actions are unless we know not only that they are going to opt but what they are going to opt back into.

Lord McNally: The noble Lord is being unduly cynical about the approach being taken—or let us say pessimistic. When the Home Secretary of the day makes a considered Statement of government policy and I repeat it from this Dispatch Box in this House, we are asking noble Lords and Members in the other place to believe that the Government have not made a final decision on this matter. They have adopted a process which will enable us properly to look at the issues before us. I take note of the noble Lord’s point that the opt-out/opt-in decision is part of a single picture, and I shall certainly draw my colleagues’ attention to the fact that somebody with his long experience of negotiations of this kind is giving what I consider to be wise advice.

Lord Wood of Anfield: My Lords—

Lord Bowness: My Lords—

Lord Ahmad of Wimbledon: My Lords, if we take the Labour Benches and then we will move back to the Cross Benches and the government Benches.

Lord Wood of Anfield: My Lords, in the event that we opt out and then persuade 26 other EU countries of the importance of us opting back in on an individual item, would the act of opting back in trigger a referendum under the Government’s own legislation?

Lord McNally: We do not believe that that would trigger a referendum.

Baroness Williams of Crosby: My Lords, can my noble friend assure the House that, in the event that the United Kingdom Government decide to pursue certain elements to opt back into, we would know in advance that the other 26 countries would be willing to negotiate on that basis? It is crucial, if we are going to opt back in, that we have reason to believe that we will be heard and that those issues will be negotiated. Does my noble friend agree that it was under the European arrest warrant that, among other people, one of those who perpetrated the 7 July atrocities was arrested? Will he also assure and remind the House that Europol was at a very advanced position in breaking the dangerous international paedophile ring that until last year operated throughout the whole of Europe?

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Lord McNally: My Lords, the European arrest warrant and other measures of European co-operation stand very clearly as benefits to us—my noble friend cited two examples. That will be part of the debate that is unfolding. One of the reasons for our wanting to make the Statement today, which, as I have said, it would have been possible to delay by another year, was to start engaging in exactly the kind of discussions that my noble friend referred to. On both a bilateral basis and with the Council and the Commission, we will explore the very areas that will give us and both Houses a clear indication of prospects for success.

Lord Williamson of Horton: My Lords, I do not think that this is a high-risk strategy as has been suggested by others. We negotiated in the Lisbon treaty the right, if we so decided before the end of May 2014, to opt out en masse of the EU police and criminal justice measures adopted before the entry into force of the treaty. As for the treaty, it is a case of all in or all out. That is what the treaty says. It is the consequences that we are talking about now. The Government have, as I understand it, now decided to opt out. Of course, it is possible to opt in for other individual measures, but does not the Minister agree that one problem there is that the practical consequences of some of these measures are still rather difficult to foresee, because we are talking about a moving target? That is a serious point, but I welcome the Government’s intention to scrutinise the possibilities very carefully, to give Parliament the time to carry out the scrutiny, particularly in this House, and to require a vote in both Houses of Parliament. That is the right way to go and the British public deserve no less.

Lord McNally: My Lords, I welcome from such an experienced source the opinion that this is not a high-risk strategy. As I have acknowledged, there is a danger in taking the opt-out route, but the treaty left us no option other than to stay in en bloc or to adopt this strategy of opting out and then negotiating back in. By adopting a good timescale and involving committees of both Houses, we will have the opportunity to take both external advice and the political opinion of both Houses to keep track of the individual measures and look at the exactly the kind of consequences and movements that the noble Lord referred to. It is certainly not a political ploy, as has been suggested; rather, it is a political opportunity. It may be seen as a political opportunity for Eurosceptics. I urge those who have a belief in the European process and the benefits of European co-operation to use this exercise to argue their case strongly in both Houses and with the intention of a getting a final decision which is truly in the national interest.

Scotland: Referendum


6.27 pm

The Chancellor of the Duchy of Lancaster (Lord Strathclyde): My Lords, with permission, I shall now repeat a Statement made by the Parliamentary Under-Secretary of State for Scotland in the House of Commons a few minutes ago. The Statement is as follows:

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“You will appreciate that my right honourable friend the Secretary of State for Scotland is unable to deliver the Statement to the House today, as he has attended the meeting between the Prime Minister and the First Minister in Edinburgh to secure agreement on the independence referendum for Scotland.

In January of this year, my right honourable friend the Secretary of State for Scotland delivered a Statement to this House about the referendum. At that time, we acknowledged the Scottish National Party’s victory in the May 2011 Scottish parliamentary election and its manifesto pledge to hold an independence referendum. The Government also made clear their view that the Scottish Parliament did not have the legal power to legislate for an independence referendum. My right honourable friend the Secretary of State made an offer then that the UK Government would bring forward an order to give the Scottish Parliament that legal power. Since January, the UK and Scottish Governments have held consultations. There has been considerable public debate and numerous discussions between Ministers. Many of those discussions took place between me and Bruce Crawford MSP, Minister for Parliamentary Business and Government Strategy in the Scottish Government, and I would like to acknowledge his contribution.

Following 10 months of deliberation and four weeks of direct negotiations between the Scottish Government’s Deputy First Minister and my right honourable friend the Secretary of State, I am pleased to report to the House that, today in Edinburgh, the Prime Minister and the First Minister have made an agreement that will allow a legal, fair and decisive referendum to take place. This is a significant agreement. The two Governments have agreed that there should be a referendum. We have agreed that the referendum will consist of a single question. It will offer a choice between independence and remaining within the United Kingdom. We have agreed that it must be held before the end of 2014. The referendum will be based on the normal legal framework for UK referendums, with oversight from the Electoral Commission. This includes the key issues of how the referendum question will be determined and how the rules governing spending and campaigning will be established.

Following today’s agreement, the Government will bring forward an Order in Council under Section 30 of the Scotland Act. I have today placed a copy of the agreement and the draft order in the Library of the House. The agreement and draft order are also available to Members from the Printed Paper Office. This order will be laid before Parliament on 22 October and will be debated by both Houses of this Parliament and by the Scottish Parliament. All Members of this House will have the opportunity to consider and vote on the order. If both Parliaments approve the order, and after it is approved by Her Majesty in Council, the Scottish Parliament will have the legal competence to legislate for the referendum. We hope that the order will be passed by February 2013; once that has happened, the Scottish Government will introduce a referendum Bill setting out the wording of the question, the date of the referendum and the rules for the campaign for the Scottish Parliament to consider.

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As part of today’s agreement, the two Governments have agreed that the rules for the referendum will be based on the rules set out in the Political Parties, Elections and Referendums Act 2000. Those rules were used successfully in the two referendums that took place last year. The two Governments have also confirmed that the Electoral Commission will review the proposed referendum question and that its report will be laid before the Scottish Parliament. This is the same process as applies to other UK referendums. Interested parties will be able to submit their views on the question to the Electoral Commission in the usual way. The Scottish Government will then respond to the Electoral Commission’s report.

Both Governments are agreed on the need for maximum transparency in this process and for a level playing field. Therefore, as part of today’s agreement, the Scottish Government will consult the two campaign organisations that have been established for their views before proposing spending limits for the referendum campaign to the Scottish Parliament. The Electoral Commission will also provide the Scottish Government with advice on the appropriate spending limits for the two campaigns in the referendum, as has happened in previous referendums, such as the 2011 referendum in Wales on further powers for the Welsh Assembly. In that referendum, the Electoral Commission recommended that the spending limit for designated campaign organisations should be set by reference to the expenditure limits applying to elections to the relevant legislature. In its response to both Governments’ consultation documents, the Electoral Commission provided its view that this model remains appropriate for the Scottish independence referendum.

Both Governments agree that all those who were entitled to vote in the Scottish Parliament elections in May 2011 should be able to vote in the referendum. As for all other referendums held in any part of the UK, it will be the legislation that establishes the referendum that will set the franchise. It will therefore be for the Scottish Parliament to define the franchise in the referendum Bill, as it would do for any other referendum or, indeed, election on matters within its devolved competence.

Although both Governments are agreed that the basis of that franchise will be the franchise for the Scottish Parliament elections, the Scottish Government have previously set out their proposals for extending the franchise to allow 16 and 17 year-olds to vote. It will now be for them to make the case for that change and to deal with the technical issues that may arise. There are, of course, a range of opinions in this House about changes to the voting age. However, having agreed the principle that the Scottish Parliament should have the legal power to legislate for the referendum—that it should be a referendum “made in Scotland”—the Government accept that it should be for the Scottish Parliament to determine the franchise. I fully expect that the Scottish Government’s proposals will be robustly debated in that Parliament. Any decisions taken by the Scottish Parliament for the referendum will not affect the voting age for parliamentary and local government elections anywhere in the United Kingdom.

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Today’s agreement is important, as will be the consideration of the agreement and the order by this House, but I would also like us to reflect on what will come after. Now that the Governments have agreed the process for the referendum, it is vital that we get on with the real debate about the most important political decision that people in Scotland will ever take. The UK Government have already started to prepare the analysis and evidence that people in Scotland are calling for. Over the next year, this Government will publish thorough, evidence-based information that will set out the key issues in the independence debate. That analysis will be comprehensive, robust and open to external scrutiny. I fully expect it to show that Scotland is better off within the United Kingdom and that the rest of the United Kingdom is better with Scotland as part of it.

This Government believe passionately in the United Kingdom. We will work tirelessly over the next two years to show the Scottish people—and everyone else in this country—that together we are stronger, that together we can overcome the challenges confronting us and that together we can build a better future for Scotland as an integral part of the United Kingdom. The debates ahead will no doubt be long; they will no doubt be challenging and, at times, heated. But I fervently believe that, with the support of colleagues across this House, across Scotland and across the whole of the United Kingdom, in autumn 2014 fellow Scots will join me in choosing to stay part of the United Kingdom. We are indeed better together”.

My Lords, that concludes the Statement.

6.35 pm

Lord McAvoy: My Lords, I thank the noble Lord for repeating the Statement made in the House of Commons. As my honourable friend Margaret Curran has stated in that place, this is indeed an historic day for Scotland. We—the Labour Party—welcome the fact that an agreement has been reached and we can now start to get beyond the process. Nevertheless, there are a number of matters on which this House would like more information. These relate particularly to the franchise, the campaign finance and the wording of the question.

If votes at 16 and 17 are to be introduced, legislation should be introduced across the UK for every election so that proper scrutiny can be given to such a process, not just a one-off referendum. There are awful practical difficulties in this. Scottish Labour has estimated that as many as 54,000 16 year-olds could miss out on being able to vote, so we need clarification on how these arrangements will be made to ensure that those qualified to vote actually get the chance to vote. Has any advice been sought from the Electoral Commission on the fairness and practicality of allowing this change to be made?

On campaign finance, the Scottish Government cannot be the referee and the player. The deal is clear: the Electoral Commission will act as an independent overseer of the process, including finance and the wording of the question. No Government have overruled the Electoral Commission; the First Minister should

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not start. We need independent, external oversight of campaign finance from the Electoral Commission to ensure fair play. It should also be borne in mind that the Scottish Government are retaining the £1 million paid-for army of spin doctors throughout the campaign. What guarantees have the UK Government received from the Scottish Government that Electoral Commission limits and the fair rules of the UK Political Parties, Elections and Referendums Act will be followed?

It is right and proper that Scotland’s trade unions and businesses should be able to have a say on an issue of this importance to our nation’s future. How does the agreement ensure that they will be given a fair chance to have their say and support the campaigns? There is another question on which many of us have been approached. Will Scots living in the rest of the UK, who will not have a vote, be able to support the campaign?

On the referendum question, we want a clear and unambiguous question that provides a fair choice for the Scottish people. Any questions should be thoroughly tested by the Electoral Commission. The agreement that has been reached by the Scottish and UK Governments allows for the Scottish Parliament to set the question in consultation with the Electoral Commission. As we all know, how a question is put can play a great part in how people respond to it, so we are looking for the UK Government, in these discussions with the Scottish Government, to seek and get these guarantees. There is a lot of discussion about detail to be entered into from the UK Government’s point of view.

Having experience in Scottish politics—as has the noble Lord, who at the very least has been an observer—I believe that we need to ensure that what is actually said on behalf of the First Minister or by the First Minister is thoroughly scrutinised and checked to make sure that what he says is what he actually means. This is clearly the most important issue facing the Scottish people. We in the Labour Party believe that our place in Scotland is within the United Kingdom, as the Minister has said, both for Scotland’s sake and for the United Kingdom’s sake. We in the Labour Party hope that the Government are competent enough to handle these negotiations and we will play our part in trying to convince the Scottish people that their future and the UK’s future are better with Scotland as part of the United Kingdom.

6.39 pm

Lord Strathclyde: My Lords, I very much welcome what the noble Lord said in his closing remarks. He is right to say that all of us, across the political divide, should work together to get a result whereby Scotland feels part of the United Kingdom and wants to continue in what has been one of the most successful, if not the most successful, partnership that the world has ever seen.

The noble Lord asked a variety of detailed questions and I shall try to answer them. He started by saying that this was an historic day. It is; it is the most extraordinarily historic day and one that I never wished to see. I, for one, never thought that the Scottish nationalists would be able to achieve the majority that

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they did under the electoral system used for the Scottish Parliament, but in May 2011 the SNP won an outright majority; it won 69 of the 129 seats and part of its commitment was that there should be a referendum, even though it knew that it did not have the legislative ability to achieve that.

The noble Lord asked about the franchise. I expect that we will come back to that in the course of this debate. The first and most important thing to say is that the franchise is up to the Scottish Parliament to decide; it is not up to this House to decide.

Lord Cormack: No!

Lord Forsyth of Drumlean: No!

Lord Strathclyde: My Lords, I hear some “noes” around the place, but that happens to be the position. Noble Lords may not agree with it, but that is the purpose of the Section 30 order: to allow the Scottish Parliament to decide the franchise. The Scottish Government have said that they intend to try to include 16 and 17 year-olds, or certain 16 and 17 year-olds, in the franchise. We believe that there are some difficulties in doing so. I cannot speak for any other political parties, but Conservatives in the Scottish Parliament will campaign and vote against that provision. I, for one, as a parent of teenagers, would rather that my children were learning a bit more maths and physics in school than working on whether they should be voting in the referendum.

Of course, advice from the Electoral Commission is not statutorily binding on the Scottish Government or the Scottish Parliament, but when it comes to the question I think that there would be a political price to pay not to take the advice of the Electoral Commission, which has been specifically set up to offer such advice. It has given advice to the Scottish Government in the consultation process on the franchise and will no doubt do so on the question. The same goes for the financing of the referendum and the referendum campaigns.

As for Scots living in the rest of United Kingdom, I see no reason why they should not be part of the debate on policy and funding, but that will ultimately be a matter for the Scottish Parliament.

The noble Lord’s penultimate remark was about scrutiny of the First Minister. That will depend on the quality of the scrutiny carried out in the Scottish Parliament. I hope that a great deal of scrutiny of these measures is given in the Scottish Parliament.

6.43 pm

Lord Forsyth of Drumlean: My Lords, has my noble friend had the opportunity to look at the Scottish Government’s website this afternoon? It states quite clearly that after the Section 30 order has been agreed, the Scottish Government will bring forward legislation that will set out the date, the franchise, the wording of the question, the rules on campaign finance and other rules governing the conduct of the campaign. It states:

“A final decision on these aspects will be taken by the Scottish Parliament, taking full account of the responses to the Scottish Government’s referendum consultation”.

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If a final decision has not been taken, and will be taken by the Scottish Parliament, what exactly have my right honourable friends the Secretary of State for Scotland and the Prime Minister been negotiating about? If we are being asked to buy a pig in a poke and to pass a Section 30 order before we know the contents of the Bill, is that not marginalising the House of Commons? Would it not be better, at the very least, given that we cannot amend a Section 30 order, that we do not pass that order until we have seen the draft Bill that is to be put before the Scottish Parliament?

Lord Strathclyde: My Lords, I always like it when my noble friend agrees with me and when I am in agreement with him. Sadly, that is not the case on this occasion. The key question is: what does this agreement today mean for the people of Scotland? It means, first of all, that there will be a single question on the ballot paper—no more than that. We understand that many in the Scottish Government wanted a two-question referendum. Secondly, there is a time limit. We now have certainty that the referendum must take place before the end of 2014. That is a tremendous advantage to clear the air, to remove the poison at the heart of Scottish politics and to give real certainty to politics throughout the United Kingdom.

I cannot disagree with the list that my noble friend read out. These will be matters for the Scottish Parliament. We are today announcing a Section 30 order that will devolve to the Scottish Parliament the ability to run the referendum and, naturally, it will have to answer those questions.

Lord O'Neill of Clackmannan: Will the Leader of the House confirm that a Section 30 order is required to be passed by both Houses of this Parliament? That may be a tall order to achieve. From what he said today, and the manner in which he answered the points made by the noble Lord, Lord Forsyth, one gets the impression that the Scottish Tory Party has learnt nothing and forgotten nothing.

Lord Strathclyde: My Lords, on the first question, it will be up to both Houses of the Parliament to agree the Section 30 order. I did not understand the second question at all. To coin a phrase, we are all in this together. Across this Dispatch Box—I do not know where the noble Lord stands on these great matters; I thought that he was rather in favour of the United Kingdom—we will be working together to ensure the desired result in the referendum.

Lord Steel of Aikwood: My Lords, we have already had a year and a half of debate about Scottish independence and I must admit that the thought that we are to have another two years of debate fills me with gloom. We have the consolation of knowing that, through that period, public opinion has moved in favour of retaining our position in the United Kingdom and we must hope that that continues.

I was encouraged by what the noble Lord said a moment ago about the Electoral Commission, because the Statement itself was weak on that question. If the Electoral Commission takes the view that any question

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beginning with the words, “Do you agree that”, is a leading question, surely it will not be possible for the Scottish Parliament to ignore that. Would it not be better than having a yes/no question simply to have two conflicting statements against which the electorate put a cross: either, “I am in favour of Scottish independence”, or, “I am in favour of retaining the United Kingdom”?

Lord Strathclyde: My Lords, under this legislation, the referendum must take place by the end of 2014—I think that essentially it is understood that it should be in the autumn of 2014—so there is plenty of time to go. Some people will find that hard to put up with; some people will find it reasonable that we should have plenty of time to discuss these important issues. As for the question, the Electoral Commission is not binding on the Scottish Parliament. The Scottish Parliament must ultimately approve the question. The point that I was trying to make is that if there was a leading question with which the Electoral Commission disagreed—its report will be made available to the Scottish Parliament—I suspect that there would be a political price to pay for that.

Lord McConnell of Glenscorrodale: I welcomed the intervention of the Prime Minister earlier this year because I felt that many outstanding questions had to be addressed. One was the proposed date of the referendum. On that, to secure this agreement, the Government have capitulated. The two years that is now proposed for debate on this referendum could do untold damage, and not only to the Scottish economy—it could affect the British recovery as well. That has been a mistake. On the other side, it is positive that we have now secured agreement that there will be a legally binding referendum. The Scottish Government did not want a legally binding referendum; they wanted a softer option of an advisory referendum and we have stopped that. That is to be welcomed.

On the rules of that referendum, there are serious questions to be answered. Frankly, I am astonished that we have in front of us today the Section 30 order that could be passed by this House and the other House but not the draft referendum Bill that that Section 30 order will enable. In the months since the Prime Minister’s statement in January, I always expected that there would be the Section 30 order at the end of this process and that at the same time the draft referendum Bill on which that Section 30 order was based and on which the agreement had been reached would be published. I am disappointed that that is not in front of us today and I urge the Government to think seriously about pressing the Scottish Government to publish that referendum Bill in advance of the deliberations of this House rather than afterwards.

Lord Strathclyde: My Lords, the referendum process is now legally watertight. The draft Section 30 order will provide the Scottish Parliament with the confidence to legislate for an independence referendum if it is passed by both Houses of Parliament.

As to the question of the Bill, there is no Bill before us. We have not seen a draft Bill. We wait to see what the Scottish Government publish. They have not yet

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published the answers to their consultation process. We would hope to see that soon. The noble Lord started by saying that two years is a long time to wait. We cannot force the Scottish Parliament to publish their draft Bill. We have had this negotiation, we have a time limit and I think that the months will pass by very quickly.

Lord Martin of Springburn: My Lords, I put on the record that I welcome the fact that there is one question and one question alone. That is right and fitting and it saves confusion. However, in the Statement a lot has been made of faith being put in the Electoral Commission. It should be borne in mind that only five years ago, in 2007, at the parliamentary elections the Electoral Commission had to step aside and the taxpayers of this country had to invite a Canadian expert, Mr Ron Gould, to investigate why 85,000 electors had their ballot paper rejected. That is the equivalent of one and a half constituencies in the Scottish Parliament. Because the Electoral Commission had played a part in preparing the electronic machines and making up the ballot paper, it could not get involved. That was a big mistake. I ask the Minister to pay close attention to the internal workings of the Electoral Commission to make sure that no one in this election has their ballot paper rejected.

Lord Strathclyde: My Lords, I join with the noble Lord in saying that we have come to the right conclusion that there should be only one question. The most important thing in this debate is that we have absolute clarity of result and the only way of doing that is by having a single question with a yes/no answer.

I very much welcome what the noble Lord has said about the Electoral Commission. It is true, as he knows very well, that there was a problem in 2007 and I am sure that the Electoral Commission has learnt many lessons as a result of it. However, his main point was that Ministers should pay close attention to the workings of the Electoral Commission to make sure that this does not happen in this all-important referendum, and on that I completely agree with him.

Lord Cormack: My Lords, unless and until any constituent country in the United Kingdom becomes independent, it should surely be bound by the rules of the franchise which apply in the United Kingdom. Does my noble friend not accept that it is wrong to alter the franchise by the back door? That will be the consequence of our kow-towing—that is what it is—to the demands of the First Minister of Scotland. Can we please have the opportunity at the very least to see this draft Bill before we approve the order? If we do not, some of us may not feel inclined to approve it.

Lord Strathclyde: My Lords, I cannot give my noble friend the comfort that he wants. There is nothing that we can do to oblige the Scottish Parliament to publish a draft Bill, and this very much depends on the process of the passage of that Bill in the Scottish Parliament.

On the second point on the franchise, such voting already takes place in Scotland. The Scottish Parliament decided that 16 and 17 year-olds who turned 18 during

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the lifetime of the register would be able to vote in the health board elections. It may be a small example but it is an example of where devolution on the franchise has already taken place. I reiterate that I am not in favour of a change in the franchise but it will be a matter for the Scottish Parliament to decide.

Lord Reid of Cardowan: My Lords, everyone in this House accepts that in these discussions compromise is necessary. But that compromise has to be informed by the need and the criteria for clarity, fairness and legitimacy. Let us accept that having one question certainly meets those criteria. However, there are two areas which fail to meet those criteria.

First, the idea of having the Scottish Parliament and the SNP effectively decide the question is not liable to assist in either legitimacy in the long run or fairness in the short term. There may be inadequacies, as has been pointed out, about the Electoral Commission, but I am sure that if anyone in Scotland was asked who was likely to be more objective in choosing a question between the SNP and the Electoral Commission, I would not bet against the Electoral Commission winning that judgment.

Secondly, as my noble friend Lord McConnell pointed out, to ask people to vote for a Section 30 before they know what they are voting for is similar to asking people to vote on devo-max before they know what they are voting on. Since we argued successfully against that—that people should not be asked to vote for a “pig in a poke”—if that applies in the Scottish referendum surely it applies in this House and the other Chamber.

Lord Strathclyde: My Lords, the noble Lord said that compromise was necessary and I think that all those who have followed this process would agree with him. He also mentioned clarity and we do have clarity in the single question. I am one of those who have never entirely understood what is meant by devo-max, and if you ask three people what they think it is you always get four different answers. Therefore, it is entirely right that we remove the opportunity for that question to be asked.

The question on the paper will be a question on independence. The precise wording will be for the Scottish Parliament to determine and will be set out in the referendum Bill to be introduced by the Scottish Government. However, the Scottish Government have agreed to refer the proposed referendum question and any preceding statement to the Electoral Commission for review of its intelligibility. It is important that interested parties will be able to submit their views on the proposed wording to the Electoral Commission as part of the commission’s review process in the normal way.

We have had experience of this already, although admittedly perhaps not on something this important or involving the Scottish Parliament. The Scottish Government will respond to the report, indicating their response to any recommendations that the Electoral Commission may make. The point is that this will be a very public process. Equally, constitutionally it is right that it must be up to a parliament to decide what question should be on the paper. That is what this

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Parliament would demand and I can understand why we have concluded that it is right for the Scottish Parliament to do the same thing.

Baroness Liddell of Coatdyke: My Lords, I am grateful for the opportunity to add to this debate. There has been a startling degree of naiveté on the part of the Government in the negotiations that have taken place so far. I noted that the noble Lord the Leader of the House talked about the need for transparency and a level playing field, and he discussed the fact that a body of work is to be undertaken to ensure that the facts are properly put before the people of Scotland. I say to him that that is not enough. We have already had a degree of sophistry and confusion over whether Scotland would automatically be a member of the European Union and would have to adopt the euro. I have no doubt that, as a Scotsman, the noble Lord the Leader of the House has used the old toast, “Here’s tae us. Wha’s like us? Damn few, and they’re a’ deid”. That means that anyone who suggests that after independence Scotland will not be a land of milk and honey will be rubbished. It is not enough to say that a body of work will be undertaken. There will be a requirement for rebuttal and I ask the Minister to look hard at establishing a panel of neutral experts who will be available for that process of rebuttal.

Lord Strathclyde: My Lords, I slightly object to the accusation of naiveté. Many of us warned the Labour Party many years ago that this is exactly what would happen, and it was senior members of the Labour Party who continually told us that this was the thing that would stop the nationalists in their tracks. However, the years go by and now here we are, all working together to try to stop this process. I do not think there is any naiveté anywhere in this Government about the role that the First Minister of Scotland takes or the verbal gymnastics and occasional distortions that take place. The Government are utterly committed to providing evidence-based information to the people of Scotland so that they can very clearly see what the impact of breaking up the United Kingdom would be and what the separatist cause would lead us to.

Lord Selkirk of Douglas: My Lords, will the Leader of the House accept that, while some tactical advantages may have been gained by the Scottish Administration during the formation of this agreement, these are outweighed by the fact that there will be one single question? Will he also accept that the large increase of powers for the Scottish Parliament in the Scotland Act have been consistently underestimated and that further issues relating to devolution should be set aside until the result of the referendum is made entirely clear?

Lord Strathclyde: Yes, my Lords, I agree with my noble friend that there is no need to discuss any further devolution settlement until the referendum has taken place and that there is also a pipeline of provisions in the Scotland Act. I am not sure that the nationalists have received a tactical advantage, but it is now right that the decision should be brought to the Scottish people.

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Lord Foulkes of Cumnock: My Lords—

Baroness Symons of Vernham Dean: My Lords—

Lord Foulkes of Cumnock: My Lords, there is a paragraph in the agreement which says that,

“the referendum should meet the highest standards of fairness, transparency and propriety”.

I have one simple little question. If, after we pass the Section 30 order, the UK Government think that the proposals do not meet the highest standards of fairness, transparency and propriety, what recourse do they have?

Lord Strathclyde: My Lords, I have tried to explain that the Scottish people—who, as the noble Lord knows well, are a fair-minded and educated people—will see through anything that is not fair-minded and responsible. The time has come to trust the people of Scotland. As my noble friend Lord Steel pointed out a few minutes ago, it is true that as this debate has raged in the past couple of years the opinion polls have swung in favour of maintaining the United Kingdom.

Financial Services Bill

Committee (7th Day) (Continued)

7.04 pm

Schedule 11 : The financial ombudsman service

Amendment 187E

Moved by Lord Flight

187E: Schedule 11, page 242, line 16, at end insert—

“After section 225 insert—

“225A General obligations

(1) In discharging its functions, the scheme operator must comply with the requirements of this section.

(2) The scheme operator must, so far as is reasonably practicable, act in a way which is compatible with the FCA’s strategic and operational objectives and regulatory principles.””

Lord Flight: My Lords, the series of amendments in my name are among those from Amendments 187E to 187T, and are all concerned with the interaction between the Financial Ombudsman Service and the new regulatory bodies under the new order set out in the Bill. I start by saying that I have been extremely impressed with the success of the Financial Ombudsman Service and the work that it has done. When it was set up, I was slightly concerned that its brief went beyond the law, but it has established a very successful record.

I shall go through these amendments. Amendment 187E seeks to require the Financial Ombudsman Service to exercise its functions in a way that is consistent with the FCA’s strategic and operational objectives, and with its regulatory principles—on the same sort of basis on which the Legal Services Ombudsman is subject to a high-level requirement to operate within the regulatory framework for legal services.

Amendments 187F through to 187L reflect some reservations about the new requirement on the FOS to publish reports of all its determinations. While supporting transparency in key FOS decisions, these amendments

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are designed to focus on more purposeful disclosures, which would be more beneficial for consumers and firms than the necessity to publish all decisions. A more balanced and focused approach to the legislation should give the FOS the statutory option, rather than the statutory obligation, to publish its determinations. This option should be balanced by safeguards for a firm to challenge publications which it considers inappropriate.

Amendment 187N seeks to make the FCA responsible for responding to regulatory issues with wider implications arising from complaints, while Amendment 187P seeks to require the FCA to conduct strategic high-level oversight of the Financial Ombudsman Service to ensure that it operates in a way that is consistent with the FCA’s objectives. In particular, to strengthen the accountability of the FOS the FCA should conduct regular reviews of its overall operations, policies and procedures. This would not and should not compromise the operational independence of the ombudsman when adjudicating on individual cases.

Amendment 187Q seeks to set out that the FCA should set out a clear process for decision-making on cases requiring regulatory or legal clarification. Amendment 187S intends that the FCA, not the FOS, should make the scheme rules. The legislation should more clearly define a fair and reasonable test, and the ombudsman should be required to take into account the FCA’s objectives, laws and regulations in force at the time of the complaint. Finally, Amendment 187T would require the FOS to be obliged to consult stakeholders before it issues guidance or technical notes about its procedures and its approach to handling common categories of cases.

Baroness Sherlock: In addressing this group of amendments, I remind the House of my declared interest as the senior independent director of the Financial Ombudsman Service. I hope that the House will bear with me while I go through the many amendments of the noble Lord, Lord Flight, beginning with Amendment 187E. I am concerned that this amendment would begin to compromise the independence of the ombudsman service. The ombudsman’s responsibility is to resolve complaints informally and promptly by considering what is fair and reasonable in respect of each individual complaint. That role is very different and distinct from that of the regulator and it feels important to all concerned that the two are kept distinct.

In making decisions, the ombudsman is already required by the rules to take into account a series of things: the law and regulations, the regulator’s rules, the guidance and standards, the codes of practice, and good industry practice at the time. In that way it is for the regulator to interpret its objectives and for the ombudsman to reflect this interpretation by taking into account the rules and guidance which the regulator publishes. I therefore do not think that this change is necessary, but I will go further and say that it potentially risks the unintended consequence of requiring the ombudsman to interpret the regulatory objectives of the FCA directly. Given that the nature of those proposed regulatory objectives is very wide—going, for example, up to the competition objective—it does

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not seem to me desirable that the ombudsman service should be put into the position of having to interpret them.

Those comments relate also to Amendment 187P, which seeks to change the relationship between the ombudsman service and the FCA in a way that again risks undermining the model of an independent ombudsman service. The ombudsman should clearly be accountable, and I welcome the provisions already in the Bill to strengthen that accountability: for example, by making formal requirements which the ombudsman has already undertaken voluntarily. The ombudsman will, for example, become subject to audit by the National Audit Office—something that it has embraced by going ahead early and voluntarily asking the NAO to come in and do an audit. However, to move to a compulsory annual review on top would involve significant diversion of effort, both by the FCA and the ombudsman service.

Related issues emerge in Amendment 187S, which would give the regulator the power to decide not just which complaints the ombudsman should decide, as now, but how the ombudsman should go about doing this, which would undermine the operational independence of the ombudsman service as an alternative to the courts. The regulator already determines the jurisdiction of the ombudsman—that is, which complaints can be considered—but the ombudsman service makes its own rules, which set out how it will deal with cases. Those are its own internal procedures, covering, for example, criteria for dismissing cases, evidential requirements, delegation by ombudsmen, rules about case fees and any costs rules. The ombudsman service is required by FiSMA to consult those likely to be affected and to have regard to any representations made by them. The rules are, of course, already subject to approval by the FSA and will be by the FCA, but deciding how to resolve cases is a crucial feature of the ombudsman’s independence, and that must be retained.

A slew of amendments, Amendments 187F to 187L—the noble Lord, Lord Flight, has been prolific—relate to the publication of ombudsman decisions. I am concerned that their effect would be to undermine the main advantage of the publication of decisions, which, it seems to me, is to share a fuller picture—a complete picture, indeed—of the cases the ombudsman deals with and his approach to resolving them. As drafted, the Bill provides a very clear obligation on the ombudsman to publish decisions unless there are very good reasons not to do so. That clarity is very welcome. The ombudsman has talked to stakeholders about how he might go about doing something such as this should Parliament decide to go down that road. Many stakeholders were very supportive of the proposed approach to publish all decisions. In my view, transparency has benefits for all involved; it can help to increase the accountability of the ombudsman, but it can also mean that cases that could be wasteful may be diverted right at the outset.

Amendment 187N also causes me concern for a different reason; it might risk challenging the work of the ombudsman to provide a prompt as well as an informal resolution of complaints, which is an important safety net for consumers. If the aim of the amendment—perhaps the noble Lord, Lord Flight, could clarify

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this—is to enable the regulator to deal with issues that have wider implications, it is unnecessary because the regulator is already able to do this by using Section 404 powers under FiSMA to impose a redress scheme which the ombudsman is required to follow. Of course, all the FiSMA organisations work well together anyway. The ombudsman regularly meets the FSA, the OFT and the compensation service to discuss emerging issues that could develop into risks, and wider implications can thereby be tackled. Actually, many cases could have wider implications, so if the legislation says that any case with wider implications means that all similar cases should be put on hold, that could be of significant detriment to consumers by introducing potentially massive delays into the system.

7.15 pm

Amendment 187Q potentially misunderstands the way in which the ombudsman service is designed to resolve complaints. As I have said, the ombudsman resolves what is fair and reasonable in all the circumstances of the case, including relevant laws, regulations and industry practice. In the same way that a court interprets legislation, the ombudsman interprets laws and regulations. He already has access to guidance published by the regulator and regularly meets the regulator, providing opportunity for any clarification. If the regulator takes the view that he needs to take specific action, he can use Section 404 of FiSMA to impose a redress scheme.

Finally, I am very concerned about Amendment 187T. As proposed, it would mean that the ombudsman would be prevented from publishing almost anything without having first consulted. That would be an unprecedented burden on an organisation that needs to communicate with its many stakeholders. If, as seems likely, the amendment is intended to address the technical notes published by the ombudsman—I see the noble Lord, Lord Flight, nodding, so I will address that point—it is worth noting that the ombudsman is not a regulator and so does not produce guidance on how to comply with regulatory requirements. Those technical notes are not out there as instruction as to how someone should go about complying with what the regulator does; they are simply a better account of what the ombudsman has done in reaching a decision on individual cases, which may go on to be helpful to both businesses and consumers in considering which cases are likely to succeed and how they might be dealt with. They are not regulatory notes and the ombudsman is not in that territory. It seems to me to be crucial that the ombudsman service retains the autonomy to establish and set out its own approach. That is essential to maintaining the independence of the scheme.

The amendments in this group, although individually some of them may seem to address specific issues, are almost all either unnecessary or problematic, but taken together they would tighten control of the independent ombudsman service by the FCA. In doing that, two things would happen. First, we would risk compromising the independence of the service and the very nature of an independent ombudsman service. Secondly, we would risk blurring the distinction between the regulator and what is basically just an alternative dispute resolution service. Any blurring in that territory would be bad for consumers, bad for business and bad for public policy.

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Baroness Hayter of Kentish Town: I shall deal with our own amendment in this group, Amendment 187RZA, which is virtually the same as Amendment 187T. We should clarify that our idea is not to cover everything that the FOS produces. The Financial Ombudsman Newsletter is one of the best publications I have seen; it beautifully describes the cases and gives a lot of guidance, with a small “g”. The intention of our amendment is that any guidance is fully consulted upon where such guidance could lead to a “safe harbour”, and should therefore take account of all relevant interests, including those of the industry and consumer groups.

I turn to some of the other amendments tabled by the noble Lord, Lord Flight. Two major changes are suggested that worry us. One would virtually make non-publication the default option, with the Financial Ombudsman Service having to justify in each “particular case” when it wants to publish, having given the respondent—but not, interestingly, the complainant—the right to argue for non-publication. In our view this is not in line with the Hunt report and would not amount to the transparency and openness to which consumers have a right.

The second issue is the one that my noble friend Lady Sherlock has just been talking about—cases that have wider implications, such as PPI, where it soon became evident to the ombudsman that the mischief went far wider than a particular provider. While we welcome an early alert from the Financial Ombudsman Service to the FCA that something is going amiss and that regulatory action or new guidance might be required, it seems to us quite wrong to put on hold an individual’s claim for compensation when they have clearly been mis-sold a product and might be out of pocket. We do not agree that the individual consumer’s justified complaint should be suspended while a large bureaucracy—I am afraid that that is what the FCA will be, with its need to consult and so on—gets its act together.

As we have heard, the ombudsman’s role is to resolve complaints—speedily, we hope—that have not been satisfactorily dealt with by the service provider, which is of course always the first and best option. If PPI is anything to go by, though, the banks could and should have refunded the money themselves pretty speedily and stopped selling the product unwisely. It is this that would have stopped the consumer detriment, and incidentally saved the banks a lot of money further down the track.

Other amendments from the noble Lord, Lord Flight, in this group seek to include the rationale for each published decision to be explained. However, our fear is that this would add considerably to the process for handling cases and undoubtedly to the costs, and we would be surprised if the industry were in favour of that since it funds all this.

By including “operations, policies and procedures”, Amendment 189P would appear to us, as my noble friend Lady Sherlock said, to risk undermining the independence of the ombudsman service. We hope that that was not the intent, but we have a similar concern about Amendment 187S, which would appear to give the regulator the power to decide not only which complaints the ombudsman can decide on but, worryingly, how the ombudsman should do so. That

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would undermine the very independence of the ombudsman, which is of course meant to serve as an informal alternative to the courts.

With regard to Amendment 187Q, as my noble friend Lady Sherlock also reminded us, the FSA—or, as it will be, the FCA—is already able to make a redress scheme under Section 4 of FiSMA, the effect of which is to bind the ombudsman, so there is probably no need for it.

Lord Newby: My Lords, I am very tempted to say that I agree with the noble Baroness, Lady Sherlock, and sit down.

Lord Flight: Quite right.

Baroness Hayter of Kentish Town: Hear, hear.

Lord Newby: Sadly, however, I ought to explain the Government’s view of these amendments. Amendment 187E would require the FOS to exercise its functions in a manner consistent with the FCA’s strategic and operational objectives and the regulatory principles. Obviously the FCA will have an important role making and approving the rules of the ombudsman scheme, and must comply with its regulatory objectives and principles in doing so, but I do not believe that the regulator and the FOS should share the same objectives or be held to the same regulatory principles.

The FOS is not a regulator and should not be expected to act like one. Its role is to provide an impartial alternative dispute resolution service for consumers and firms. It is not a consumer protection body, and I would be concerned that by giving the ombudsman consumer protection objectives we would put that impartiality at risk. Moreover, in practice such a duty would be burdensome and difficult to interpret.

Amendment 187P is similar to Amendment 187, in that it seeks to hold the FOS to the FCA’s objectives and principles. However, it goes further by giving the FCA a role in ensuring that the FOS complies with those objectives and principles, and in carrying out an annual review of the FOS operations, policies, and procedures. The FSA already has a role in overseeing the FOS, which the FCA will retain—appointing and removing the board of the scheme operator, for example. However, the FOS’s claim to impartiality, and hence its legitimacy in making determinations that are binding on firms, is credible only if it is operationally independent of the regulator. This does not mean that it should be unaccountable or free from scrutiny—this is why we have brought in provisions requiring the FOS to be audited by the NAO. Associated with these new powers, the NAO will be able to launch value-for-money studies of the FOS. However, to require the FCA to ensure that the FOS complies with its objectives would require detailed oversight and control of the FOS’s day-to-day operations, which in our view would not be compatible with the FOS’s independence.

Amendments 187F to 187L relate to the new transparency requirements for FOS, under which the ombudsman scheme operator will have a duty to publish a report of determinations unless, in the opinion of the ombudsman, it would be inappropriate to do so. Amendments 187F, 187G and 187H seek to reverse

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the proposed new provisions, leaving the scheme operator merely with a power to publish determinations if it decides that it is appropriate, and a duty to explain the rationale for publication in that case.

Previously, ombudsman decisions have been published by one or other of the parties involved, leading to a partial and sometimes misleading picture of the way in which the FOS made decisions. Now that the FOS is subject to the Freedom of Information Act, ombudsman decisions may also be published in response to requests for information under that Act, so there is clearly a need for change.

Amendment 187J seeks to modify the transparency arrangements to provide anonymity for the respondents except where they agree to be identified. However, in many cases it will not be possible to redact all the information by which a firm could be identified without thereby withholding key elements of the substance of the decision—for example, the content of a firm’s advertising material, policy wordings, and product names—and there is no reason to think a firm’s reputation should be unfairly tarnished by the publication of a decision. However, I entirely agree with my noble friend that there is a case for withholding genuinely commercially sensitive information. The FOS will have the power to do that, and has made it clear in its consultation on transparency earlier in the year that it intends to protect commercially sensitive information.

Amendments 187K and 187L would provide for a minimum period of 28 days between the scheme operator considering a determination for publication and its taking the decision to publish, during which the respondent may make representations. It is of course important that firms get a fair hearing but, as I have said, by the time a decision is published, firms have had many opportunities to explain their side of the case already, and the ombudsman scheme rules already provide for firms to be able to provide sensitive information to the ombudsman in confidence. Given that this route already exists for the firm to identify information that it would be inappropriate to make public, I would be concerned that firms may see a process to make further references, as the amendments propose, as an opportunity to appeal the substance of the decision itself. However, I reassure my noble friend that the FOS would be very open to listening to proposals from firms about how best to ensure that it does not publish sensitive material.

Amendment 187N would require the FOS to suspend cases and refer the matter to the FCA when it encounters an issue with wider implications. Obviously the FOS will encounter issues that demand a response from the regulator, and there need to be clear duties and routes for the FOS to raise these issues with the FCA. I draw my noble friend’s attention to the measures in the Bill that provide for this. In future the FOS will be required to share information with the FCA that it considers relevant to the FCA’s objectives. The FCA is in turn required to take account of this information. In addition, the Bill introduces a mechanism whereby the FOS and the firms concerned can refer issues of mass detriment to the FCA, and the FCA will have to publish a response within 90 days, which is a very much improved procedure over what has obtained in the past. The response from the FCA might set out a timetable for regulatory action that would allow the FOS to consider

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whether or not to place a hold, or stay, on complaints. I reassure my noble friend that the Government share his concerns, and we think that we have taken measures in the Bill to address them.

Amendment 187Q seeks to require a clarification procedure for regulatory matters arising from complaints to be resolved by the FCA or for the FCA to provide guidance. While supporting the spirit of these amendments, my concern about the clarification procedure proposed is that it would be overly bureaucratic and could blur the distinct remits of the regulator and the ombudsman. The FOS’s role is to provide swift and low-cost dispute resolution. In doing so it must of course take into account, among other things, the relevant law and the regulators’ rules and guidance. It cannot, in practical terms, be expected to refer an issue to the regulator every time it encounters regulatory matters, any more than it could be expected to refer a matter to the courts every time it encountered a legal matter. We have included a package of measures in the Bill to improve co-ordination and co-operation between the FCA and the FOS. These include the new information-sharing and co-ordination provisions, as well as a new mechanism for the FOS and firms concerned to refer issues of mass detriment to the FCA.

Amendment 187S would require the FCA to make the detailed procedural rules for the ombudsman scheme rather than approve rules made by the FOS itself as at present; and to define the factors the FOS must take into account in its “fair and reasonable” test in legislation. On the first part of the amendment, the FSA already makes rules concerning key elements of the FOS’s compulsory jurisdiction. The more detailed rules of the ombudsman’s procedures are made by the FOS itself with the FSA’s consent. This strikes the right balance. As part of its operational independence, the FOS is responsible for preparing the detailed procedural rules which the regulator must approve. The alternative would be for the regulator to be directly responsible for running the ombudsman.

7.30 pm

The second aim of the amendment is to fix in legislation the matters which the FOS must take into account in determining what is fair and reasonable. This is currently set out in ombudsman scheme rules. As such, the amendment does little to change the way in which the FOS applies the fair and reasonable test. Its main effect is to fix in primary legislation part of a description of detailed factors which is currently in more flexible scheme rules.

Amendment 187T would require the FOS to publicly consult on any and all information, guidance or advice it produced prior to publication. It is identical to an amendment tabled and withdrawn in Committee in another place, where it was debated at length. I do not want to dwell too long on the detailed arguments. The Government are clear that it is important that the FOS consults on a wide range of things—its rules and business plan, for example—but not on absolutely all the information it publishes, as the amendment would require. The fact that the FOS receives very little feedback on these notes at the moment suggests that full public consultation prior to publication is not justified.

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I hope that the noble Lord can take some comfort from that, and will understand why I cannot accept the very broad amendment to require the FOS publicly to consult in advance on all the information it publishes. On the amendment of the noble Baroness, Lady Hayter, in practice the FOS will publicly consult in those areas which are, understandably, of particular concern to her. In the light of these explanations, I hope that my noble friend will withdraw his amendment.

Lord Flight: My Lords, I started off by paying tribute to the success of the ombudsman’s service. There is a clear argument here for saying that if it ain’t broke, don’t fix it. A number of the points underlying these amendments have been raised with me by the insurance industry, to a large extent in a probing fashion. I am pleased to note that quite a lot of the underlying points have already been dealt with; if there is anything ongoing which the ombudsman’s service and the FSA want to pick up between them, they can have a word with the insurance industry. On that basis, I beg leave to withdraw the amendment.

Amendment 187E withdrawn.

Amendments 187F to 187L not moved.

Amendment 187M

Moved by Lord Sassoon

187M: Schedule 11, page 243, line 17, at end insert—

“In section 232 (powers of court), in subsection (2), after “director or” insert “other”.”

Amendment 187M agreed.

Amendments 187N to 187Q not moved.

Amendment 187R

Moved by Lord Sassoon

187R: Schedule 11, page 244, line 22, at end insert—

“In paragraph 6 (status), in sub-paragraph (2), omit “board members,”.”

Amendment 187R agreed.

Amendments 187RZA to 187T not moved.

Amendment 187TA

Moved by Lord Kennedy of Southwark

187TA: Schedule 11, page 246, line 28, at end insert—

“29 After paragraph 22 insert—

“Part 5Complainant representativesIntroduction

23 This Part of this Schedule applies to a complaint under the compulsory jurisdiction, the consumer credit jurisdiction or the voluntary jurisdiction in respect of which the complainant has entered into an agreement with a complainant representative.

24 A “complainant representative” is a person who has entered into an agreement with a complainant with respect to a complaint pursuant to which any fee has been, will be or may be paid by the complainant.

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Complainant representative rules

25 The scheme operator must make rules, to be known as “complainant representative rules”, which are to set out requirements applicable to complainant representatives and to complaints falling within paragraph 1.

26 Complainant representative rules may, among other things—

(a) require that a complainant representative disclose to the scheme operator the agreement referred to in paragraph 2 when a complaint within paragraph 1 is made;

(b) require a complainant representative to take reasonable steps to obtain from the complainant, and as appropriate to supply to the ombudsman, such information as an ombudsman might reasonably require to determine a complaint;

(c) provide for the consequences if a complainant representative does not comply with complainant representative rules or other applicable legal or regulatory requirements, including requiring or enabling the ombudsman not to consider any complaint or to consider a complaint only if conditions specified by the ombudsman have been satisfied;

(d) enable the ombudsman to dismiss a complaint without consideration of its merits where the complainant representative has not cooperated with reasonable requests made by the respondent, including not providing adequate information as to the true nature of the complaint.

27 Complainant representative rules shall not require the disclosure to the ombudsman scheme of any material which is legally privileged.


28 If the scheme operator proposes to make any complainant representative rules it must publish a draft of the proposed rules in the way appearing to it to be best calculated to bring them to the attention of persons appearing as likely to be affected.

29 The draft must be accompanied by a statement that representations about the proposals may be made to the scheme operator within a time specified in the statement.

30 Before making the proposed complainant representative rules, the scheme operator must have regard to any representations made to it under paragraph 7.

31 The consent of the Authority is required before any complainant representative rules may be made.””

Lord Kennedy of Southwark: My Lords, in moving this amendment I am seeking to get a proportionate framework in place that is good for consumers, but which is also good for the financial institutions complained about and the responsible claims management companies that take up complaints on behalf of consumers. That will move us all on from the unsatisfactory situation we find ourselves in at the moment.

A number of CMCs do not adhere to best practice and the consumer has little redress. My amendment would improve that situation for them with the drawing up of claimant representative rules, which are long overdue. Between April 2011 and March 2012, CMCs operating in the PPI sector generated 74% of consumer complaints overall. Of these, the majority related to some 15-20 CMCs. The source for these figures is the Ministry of Justice claims management regulation unit, so they are government figures.

I am very clear that in the mis-selling of PPI, the banks and other financial institutions behaved very badly. It is right that consumers have proper redress and compensation for their loss. I agree with my noble friend Lady Hayter that the banks could have done much more much sooner to deal with these issues.

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However, the bombarding of financial institutions with claims from people who have never had any sort of relationship with the financial institution is bad practice. It is a fishing expedition that wastes the time and the money of the institution, and it clogs up the system for people who have a legitimate claim, making them wait even longer for redress.

Why is this done? Because there are huge sums of money to be made in fees. Who has not had an unwanted text message or phone call? While there are regulations already in place and mechanisms to deal with these breaches, we all know that they are not enforced and it is the consumer that suffers. An example of this is the Hinckley and Rugby Building Society, which revealed that 97% of the PPI-related complaints it has received in the three months to September 2012 were from people who are not members of, or have any relationship whatever with, the society. While that figure is lower for banks, there is still a huge number of pointless vexatious claims. Last year 69% of all PPI cases went to the ombudsman via CMCs. A small number of CMCs which are not playing by the rules are making an unfortunate situation even worse. They are not acting in the consumers’ interests. My amendment is an attempt to find a positive way forward, good for consumers, good for the financial institutions and good for the responsible claims management companies.

I hope that the noble Lord can give us a full response so that we can understand where the Government are on this matter. While I have no intention of pressing this to a vote, I hope that the noble Lord will agree to my meeting the relevant Minister outside the Chamber as I want to use this process to improve the lot for consumers, and the time has come for the Government to act.

Lord McFall of Alcluith: My Lords, I support my noble friend Lord Kennedy in his proposal, not least because, on my way down on the train today, I received a call from 0843 5600827. They wished to talk to me about my PPI claim of £3,350. Notwithstanding that, I received a text message saying that “time is running out”. I have never taken out a PPI policy.

This is an example of the instability which the industry is suffering at the moment because of this situation. I did chair a committee with consumer and industry representatives two months ago, in order for them to approach the MoJ to try to sort this issue out. Given these demands that have been made on the industry, the £8 billion that has been put aside for PPI mis-selling will surely increase. Let us not forget that we have interest rate swaps. On one of the sub-committees of the Parliamentary Commission on Banking Standards, of which I am a member along with the noble Lord, Lord Lawson, I asked an expert on interest rate swaps about the £8 billion. He said that that mis-selling could dwarf the £8 billion for PPI.

So this issue is current and will have a destabilising effect on the industry for the next few years, and also on consumers’ confidence. I do not think that the Government can escape their responsibilities on that by saying that this is not really a financial services matter, but for the MoJ. It is most certainly having an impact on financial services at the moment. Therefore,

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as a matter of urgency, the Government should take note of my noble friend Lord Kennedy’s amendment so that they can look at this issue in the cold light of day, outwith this Chamber, and get an adequate and decent solution, both for the industry and for the consumers who are suffering.

Baroness Kramer: My Lords, I suspect that everyone in this House has been plagued by the various attempts by the claims industry to get us to pass over all kinds of personal details. That worries me. Anecdotally, I have heard reports of people who responded positively to one of these messages and handed over their credit card details. They then found themselves being charged without realising that they were getting themselves into that situation. We have talked to various institutions, many of which say that half the claims presented to them are from people who have never had any relationship with them whatever. It was entirely a fishing expedition. At a time when we want our banks to focus on appropriate lending to individuals and small businesses, which they are all struggling to do effectively, to have the complete distraction and cost associated with keeping this abusive industry afloat is surely unacceptable to all of us.

Baroness Sherlock: I support in particular the comment made by my noble friend Lord Kennedy at the end of his contribution. He asked the Minister whether he would meet with my noble friend and other interested Members to consider if not this then what other action can and should be taken. I think that the House would be particularly interested to hear the Minister’s response on that.

It seems quite obvious that as a market the CMC sector simply is not working. Not only are significant numbers of people being pressured essentially into doing things which they do not want to do, but there appears to be no price competition in the market at all. All the evidence shows that consumers are just as likely to use a claims management company which charges 40% as one that charges 15% of any money that they might get back. Many simply are not aware that they could do it for themselves for free by going directly to the ombudsman.

If the Minister is not minded to go in that direction, will he tell the House two things? First, what would the Government be able to do very soon that would have a significant impact on targeting in particular the minority of claims management companies that are behaving very badly? Secondly, will he at least agree to meet interested Peers to discuss that matter very soon?

Lord Newby: My Lords, I share the concerns behind the amendment about the activities of CMCs in relation to financial services products. Like all noble Lords, I have been approached by them with the most spurious and ridiculous arguments about why I should give them details about my financial affairs in return for some often unspecified benefit. We start off by sharing that concern.

I would be more sympathetic to the amendment if I did not think that the Government were already doing something about it. I am very happy to meet noble Lords who would like to discuss the matter, along with

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colleagues from MoJ, to see what might be done to expedite effective action. But I do not think that it is necessary or appropriate to expect the FOS to step in as a quasi-regulator and make its own conduct rules. The role of the FOS should be to act as an independent dispute resolution service and not to act as a quasi-regulator of CMCs. It is just the wrong organisation to do that.

As I have said, I am sympathetic to what the noble Lord is seeking to achieve and I give an undertaking to set up a meeting to discuss it further. On that basis, I hope that the noble Lord can withdraw his amendment.

Lord Kennedy of Southwark: I thank the noble Lord for his response. I certainly think that we need to work on something. I know he says that things are in place but it is fair to say that they are not working well at the moment and that we need to do much better. On that basis, I beg leave to withdraw the amendment.

Amendment 187TA withdrawn.

Schedule 11, as amended, agreed.

Clause 37 : Lloyd's

Amendments 187TB to 187TD

Moved by Lord Newby

187TB: Clause 37, page 120, line 20, at end insert—

“(ii) in paragraph (b), for “section 315” substitute “provision made by or under this Act”, and”

187TC: Clause 37, page 121, line 27, at end insert—

“(ii) in paragraph (c), for “section 315” substitute “provision made by or under this Act”.”

187TD: Clause 37, page 121, line 38, at end insert—

“( ) In section 317 (the core provisions), in subsection (1), for “X” substitute “9A”.”

Amendments 187TB to 187TD agreed.

Clause 37, as amended, agreed.

Clause 38 agreed.

7.45 pm

Schedule 12 : Amendments of Parts 11 and 23 of FSMA 2000

Amendment 187TE

Moved by Lord Tunnicliffe

187TE: Schedule 12, page 247, line 24, at end insert—

“(c) after subsection (10) insert—

“(11) The PRA should require the submission of reports from any PRA-authorised person for the purpose of assessing the extent to which a financial activity or financial market in which the PRA-authorised person participates may pose a threat to financial stability in accordance with the PRA’s general objective.

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(12) The PRA shall collect, in a manner determined by the PRA and in consultation with the FPC, financial transaction data and position data from the PRA-authorised person companies.

(13) For the purposes of subsection (12)—

(a) “financial transaction data” shall mean data pertaining to the structure and legal description of a financial contract, with sufficient detail to describe the rights and obligations between counterparties and make possible an independent valuation; and

(b) “position data” shall mean data pertaining to data on financial assets or liabilities held on the balance sheet of a financial company, where positions are created or changed by the execution of a financial transaction and which includes information that identifies counterparties, the valuation by the financial company of the position, and information that makes possible an independent valuation of the position.

(14) The FCA shall assist the PRA in accordance with section 3D to ensure that the PRA is able to exercise its function as described in subsections (11) and (12).

(15) To facilitate the effective collection of data, the PRA should prepare and publish, in a manner that is easily accessible to the public and in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person—

(a) a database detailing relevant counterparties;

(b) a financial instrument reference database; and

(c) formats and standards for PRA data, including standards for reporting financial transaction and position data to the PRA.

(16) Where possible, the PRA shall co-operate with foreign regulators to the extent required to collect relevant information on PRA-authorised persons already collected by those foreign regulators.

(17) The PRA shall develop and maintain sufficient resources to review the collection of data referred to in subsections (11) and (12) in order to—

(a) develop and maintain metrics and reporting systems for risks to the financial stability of the United Kingdom;

(b) evaluate stress tests or other stability-related evaluations of financial entities overseen;

(c) investigate disruptions and failures in the financial markets;

(d) conduct studies on the impact of policies relating to systemic risk;

(e) promote best practices for financial risk management to PRA-authorised persons.

(18) The PRA shall publish a report which compiles the data collected in accordance with subsections (11) and (12) on a periodic basis as determined by the PRA, which shall be—

(a) made available to the public in an easily accessible medium; and

(b) in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person.””

Lord Tunnicliffe: My Lords, Amendment 187TE, in the name of my noble friend Lady Hayter of Kentish Town, is essentially about the quality of information and its provision. To put it in context, I should like to go back to the purpose of the Bill. I put to the House that its purpose is to prevent or mitigate a crisis in the financial services industry. The crisis from 2007 to 2009 came from the selling of subprime mortgages

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principally in the US. As we know, these mortgages were repackaged and moved down the line. Eventually, they ended up on the balance sheet of what one would have thought at the time were highly sensible banks of great stature and stability.

How did that happen? It happened because of the malicious intent of the original designers of these products and the people who designed the various packages to disguise the essential weakness that they contained. But when you read the various reports about the crisis, there is no question that a fundamental part of this crisis was caused by the poor knowledge and information that passed through the system. In a sense, the poor knowledge was in two places. It was within the firms, and between the firm and the regulator. In particular, the FSA’s report on the RBS brings this out well. Essentially, parts of RBS simply were not effectively communicating with each other.

Lord Flight: Perhaps I may add that in my estimate the US also wiped off about $1,000 billion of its overseas debt as a result of the failure of subprime mortgages.

Lord Tunnicliffe: As a great admirer of the US, I would never underestimate its ingenuity but I did not realise that that had been a principal objective. I thank the noble Lord for my improved education. Returning to my speech, the failure in RBS in particular was once again an internal management problem. The refreshingly honest report of the FSA brings that out but it goes on to criticise its own performance as a regulator. It criticises various ways in which it behaved and its allocation of resources but it also criticises the information that it was able to get during the crisis. That was because firms were unable to provide information that was sufficiently accurate, comprehensible and timely.

The Joint Committee on this Bill took a considerable interest in the whole matter of information and pointed out that in the US the,

“Dodd-Frank Act created the Office for Financial Research which was given responsibility for monitoring of systemic financial risks and, in order to undertake this task, has been given powers for the setting of data standards for the industry. In order to allow effective monitoring of systemic financial risk, the Dodd-Frank Act also requires that OTC derivative contracts are recorded in trade repositories, a step that requires standardisation of reporting across the industry”.

The recommendation from the Joint Committee, which the Government effectively rejected, was:

“The Bill should be amended to place a duty on the Bank of England (or its subsidiary the PRA) to develop information standards for the UK financial services industry and to report regularly on progress in improving these information standards in order to support financial stability”.

This amendment does its best to give effect to that recommendation.

In researching the background to this amendment, I looked over a number of areas but perhaps the most inspirational thing I came across was a speech by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Securities Industry and Financial Markets Association, “Building a Global Legal Entity Identifier Framework” symposium in New York on 14 March. That is a long introduction but it was called simply “Towards a common financial

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language”. He contended that a common financial language would improve risk management in firms because of better flows and understanding of information; improve risk management across firms; map the network of financial transactions; and, shock-horror, lower barriers to entry. He pointed out that the information standards and information systems within the industry are probably 10 or 20 years behind those in other industries, and particularly the major distribution industries.

We put forward this amendment and it will no doubt be countered by the noble Lord saying, “Well, they can do this anyway”. We are trying to say something different. We are trying to say that this is not just an enabler but a doer. It is a requirement not just that the PRA has the ability to take a positive role in the matter of information and information standards, but requires it to take a role. It is quite long so I will not go through it in any detail but it requires the PRA to require firms to report; it requires them to set standards in the manner in which they report; it requires that they should have sufficient resources to be able to use that information; and it requires them to publish reports.

The Bill has a purpose. It is about institutions, it is about governance and it is about enabling. The amendment is designed to give it some teeth. It is designed to make a requirement in the Bill. This is a “must” amendment, not a “may” amendment. I beg to move.

Lord Newby: My Lords, as the noble Lord has explained, Amendment 187TE would require the PRA to collect and publish financial transaction data, and require it to maintain the necessary resources to collect and review data from firms. In doing so, it mirrors exactly the provisions of the Dodd-Frank Act and in particular the provision in that Act for the powers within the Office of Financial Research.

We do not think that such a power is necessary because the regulators here have their own powers to gather information, including all the information referred to in the amendment. Indeed in some cases the FSA already requires firms to hold information in particular ways; for example, through rules requiring firms to be able to present a single customer view. The fact that there is now the concept and the practice of a single customer view shows how the system has been able to develop in the light of the stresses and strains that it has found itself under in recent years. Firms already report transaction data and will continue to do so. Specifically mandating the regulator to develop data standards and to publish collected data, as the noble Lord suggests, is not in our view the answer. The legislation will set the regulators clear and deliverable objectives and the regulators already have powers that could be used to require them to hold their data in specific formats if they judge that to be an appropriate and proportionate way of meeting their objectives.

If the FPC requires particular information in a particular format, whether about counterparty exposures or about anything else, this will be provided by the PRA. If for some reason the PRA is not providing the necessary information, the bank has a backstop power to direct the PRA to gather it and provide it. There is a belt-and-braces provision in the Bill.

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The regulators will require a whole range of information from firms. It would not be possible or desirable to specify them all in legislation. The legislation gives clear and deliverable objectives and it is up to the regulators to maintain sufficient resources and to gather sufficient information to meet those objectives. They will be held to account for doing so. With that explanation, I hope that the noble Lord will feel able to withdraw his amendment.

Lord Tunnicliffe: My Lords, I have received an unsurprising response. The essence of it is that those powers exist anyway. Perhaps the noble Lord can help me—I am not asking him to do so now—by writing to me setting out where these powers are in the new Bill. I have followed up the invitation of the Treasury and downloaded its very helpful Bill as amended. When you download it, you are told that it is 624 pages long and, therefore, it is not entirely easy to find things. I would be very grateful if I could be told where in FiSMA, as revised, these powers are and which of those powers is new because of the Bill. If there are not new powers because of the Bill, we have had regulators with these powers for a considerable time and as far as I can see we do not have the level of standardisation of data, the matching priority or the counterparty exposure. We do not have anything like the ability to see into the systems that the new American provisions envisage. It is incumbent on us in this country, with our dependence on this important industry and the fact that the real economy depends on it as well, to have provisions which are not only wide in theoretical terms but provide actual knowledge of what is being done to make this industry safer, particularly as regards what this Bill does about making the industry safer. If the noble Lord leaps up now and reads his piece of paper I would not mind.

Lord Newby: Section 165 of FiSMA enables the regulators to require information or documents which may reasonably be required in connection with the discharge of their functions. Section 165A enables the regulators to gather information from certain categories of unregulated firms for financial stability purposes. Section 166 enables the regulators to appoint a skilled person to provide a report into any relevant matter that the authority may specify. The regulators can also make rules requiring firms to hold their data in specific formats, if the regulators judge that to be an appropriate and proportionate way of meeting their objectives. As I have already said, the FSA did so when it introduced the single customer view requirements.

In terms of the system as a whole and what is new about the Bill as regards ensuring that the regulators get the information that they require in order to prevent some of the problems that we have seen in recent years, the whole purpose of the Bill is to put in place an architecture that enables a clearer focus by splitting the regulators into two halves so that they will concentrate on those parts of the industry for which they have now been given specific responsibility. I am sure that having those powers in the legislation, coupled with a new, more laser-like focus on ensuring that the system is

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safe and secure, will ensure that the concerns of the noble Lord about the information that is collected are not realised.

Lord Tunnicliffe: My Lords, I do not want this to go on, but there is a world of difference between having powers and knowing what people are doing with them. It is absolutely clear where the Americans are coming from; they want something done and they want something changed. I can now try to find these quotes in FiSMA and see how they impact but really I want to know what the regulators are doing. We are not opposing the Bill in general, certainly not in this House, and we wish the Government luck in its implementation, but at the end of the day it only moves people about and has a lot of interconnecting clauses. It does not specifically mandate a requirement to improve the quality of information. Any reasonable observer of the recent crisis has to say that one of the key issues in that crisis was the quality of information moving around within firms, between firms, and between firms and the regulator. The Government have to make a persuasive case that they are doing something about this deficit. Having said all that, I beg leave to withdraw the amendment.

Amendment 187TE withdrawn.

8 pm

Amendments 187U to 187X

Moved by Lord Newby

187U: Schedule 12, page 250, line 35, at end insert—

“( ) at the end of paragraph (i), omit “or”,”

187V: Schedule 12, page 250, line 37, after “insert” insert ““or”

187VA: Schedule 12, page 254, line 20, leave out sub-paragraph (4)

187W: Schedule 12, page 255, leave out lines 29 and 30 and insert—

“(i) officers of, or members of the staff of, the regulator, or”

187X: Schedule 12, page 255, line 43, leave out “or members of its governing body”

Amendments 187U to 187X agreed.

Schedule 12, as amended, agreed.

Clause 39 : Auditors and actuaries

Amendment 188

Moved by Baroness Wheatcroft

188: Clause 39, page 124, line 20, at end insert—

“( ) In section 340 of FSMA 2000 (appointment of auditors and actuaries) after subsection (2) insert—

“(2A) Rules must require auditors of deposit taking institutions to provide a narrative report on the institution’s risk management policies and its exposure to risk as part of the audited accounts of the institution.””

Baroness Wheatcroft: This is a simple amendment which I believe could have significant effect. Your Lordships will recall that just before our major banks admitted catastrophic losses resulting in multibillion-pound bailouts and the Government becoming a major shareholder in Lloyds and Royal Bank of Scotland

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those banks were each given clean audit reports. The annual reports which the auditors signed off were packed full of numbers and told us nothing. The auditors received huge rewards for their efforts, yet within months of them signing off those accounts without any qualification the taxpayer was having to fork out £65 billion—that is £1,000 for every citizen in the country.

In February 2007 Northern Rock, which had a hugely risky business model, was given a clean audit report for its 2006 accounts. Within months it was clamouring at the door of the Bank of England for support as the queues mounted outside its branches. In February 2008 Lloyds and RBS each produced accounts for the preceding year. To judge from the unqualified audit reports each received, these were businesses which would happily carry on trading, yet just months later the Government were having to orchestrate a massive rescue package. Audit fees for those accounts were more than £13 million at Lloyds and £17 million at RBS. For what?

Audit is a profession in which the UK has played a dominant role but the profession’s role in the financial crisis does it no credit. The Economic Affairs Committee of this House has done some admirable work looking at the role of auditors but now we need action.

I do not believe that the auditors who signed off those bank accounts could have been entirely sanguine about what they were doing. They must have been aware of the perilous exposures that were building up, not just in derivatives but in loan books which were loaded with extraordinarily generous loans made against a ragbag of properties and businesses. Some of those still sit on the books at valuations which might be deemed “optimistic” at the very least. Yet such is the narrow interpretation placed on the duty of auditors that they were able to give those banks what is seen as a clean bill of health just as disaster was about to fall. Shareholders took comfort from those audit reports, only to see their investments shattered. The Economic Affairs Committee concluded that while the auditors may have carried out their duties properly in the strict legal sense, they had not in the wider sense, and that wider sense is surely crucial.

This amendment would change the requirement of an audit report for banks. It may be that other sectors would benefit from such a change but this is the Financial Services Bill and, as we have learnt, banks are not as other businesses. The amendment would require auditors to provide a narrative report on the risks they perceive in the bank they have audited. How different might those Lloyds and RBS reports have looked had this been the case then?

The Minister may feel that the content of annual reports is a matter for the Financial Reporting Council but this need not always be the case. This month the FRC has launched a consultation on guidance for the audit of financial instruments. I commend it to your Lordships as an exercise in overdosing on acronyms. Whether or not it would improve the audit of financial instruments, I do not feel qualified to judge, but it will certainly take a long time to wend its way through the FRC process. The Government can and regularly have intervened through the Companies Act to determine the shape of annual reports. Only recently the Business

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Secretary has decided to change the way in which remuneration is reported in annual reports. If there is a belief that the demands made on auditors and banks need to be strengthened, then the Government can use this legislation and provide the change that is required.

I have no illusions that asking auditors to report on perceived risks will go down well with everyone in the profession but some would welcome the wider remit. They would have to exercise judgment over what constituted genuine risks and they would be doing a service to shareholders as well as the wider community. Those familiar with company prospectuses will know that the list of risk factors can be comprehensive, bordering on the ludicrous, but it is not beyond the auditing profession, perhaps working with the Financial Reporting Council, to come up with ground rules that would make this a useful exercise. If all banks had to have such a narrative report, it would give auditors the opportunity to do their job properly. It would stop them being prone to any bullying tactics from executives. It would give shareholders and the community a better picture of what is truly going on in their financial institutions. I beg to move.

Lord Lawson of Blaby: My Lords, I would like to support very strongly the amendment moved by my noble friend Lady Wheatcroft. I shall speak briefly but my brevity does not indicate that this is not an important issue. It is a very important issue indeed. We are debating in the shadow of the worst banking crisis of our lifetimes and possibly the worst banking crisis there has ever been. As my noble friend pointed out, the Economic Affairs Committee of this House produced a report called Auditors: Market Concentration and Their Role which was published in March 2011. It was extremely critical and rightly critical of auditors in the context of the banking collapse that we have seen. This was, as is common with reports of Select Committees of this House, a unanimous report, but unanimity can be got in various different ways. This was unanimity where everybody of all parties who sat on that committee and heard the evidence was totally committed to what the report said. My noble friend Lady Wheatcroft mentioned one thing from the report. Let me quote one other thing from paragraph 204. It states:

“There was no single cause of the banking meltdown of 2008-09. First and foremost, the banks have themselves to blame. … But we conclude that the complacency of bank auditors was a significant contributory factor”.

This has to be addressed. How will we prevent—as far as we can—this sort of thing happening again?

In discussion of an earlier amendment, the noble Lord, Lord McFall, referred to the banking commission of which I, too, am a member. It is quite possible, such is the importance of this, that the banking commission will decide to look into the question of bank audits and auditors, and indeed auditing standards and IFRS, which leave a lot to be desired and are probably a step in the wrong direction. However, we must do what we can in the Bill to rectify the position.

I say en passant that what concerned me a great deal when the big four auditors gave evidence to us was the extent to which they seemed to think that they had simply to satisfy the management of the banks at

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the time, when under law their duty was to the shareholders. Furthermore, the putting in place of a proper system of audit for business and industry as a whole, but particularly for the banks, is a public duty; auditors had a duty to the wider public to do a good job, quite apart from their duty to shareholders of the banks—and they failed lamentably.

What can we do about this? I do not think that my noble friend Lady Wheatcroft would say that her amendment is the complete answer. Of course it is not: a lot more has to be done. However, it is very important that the Bill addresses this question, and I believe very firmly that the amendment before the House tonight is an important part of the answer, even though it is not the whole answer. I strongly support my noble friend’s amendment.

Lord Oakeshott of Seagrove Bay: My Lords, I, too, am delighted to support the amendment moved by my noble friend Lady Wheatcroft. With her characteristic delicacy and discretion, she did not mention the name of the auditors in question—but I will. I believe that Deloitte has very serious questions still to answer about its audit of RBS, particularly towards the end. There were some unhealthily close relationships between Deloitte’s auditors and the senior management of RBS. I also believe that PWC has very serious questions to answer about its final audit of Northern Rock before it went bust. I am sure that the Minister will remember that in this House, I moved an amendment calling for a special audit of Northern Rock, organised by the Bank of England. The amendment was agreed, but not approved in the other place. My noble friend has put her finger on a very important question and I very much hope that the Government will take it seriously.

Lord Flight: My Lords, I, too, strongly support the amendment moved by my noble friend Lady Wheatcroft. The first point I will stress concerns IFRS, which hugely exaggerated bank profits and hence capital in good times, and has done the reverse in bad times. IFRS has contributed substantially to the destruction of our pension schemes by discounting liabilities at inappropriate interest rates. There have been complaints about IFRS from many quarters. Accounts have been rendered almost impenetrable. Fund managers frequently have to rewrite the accounts of companies they examine in order to make an assessment of the trading state of the business.

I have consistently complained about this subject, but nothing has happened. Who is responsible? When I was shadow Chief Secretary, the point was made to me that it was the job not of Parliament but of the profession to dictate standards. That is entirely wrong. In the USA the political representative bodies have rightly taken up such issues, and it is the duty of both Houses of Parliament to do the same.

8.15 pm

Lord Marlesford: My Lords, I will add my voice to support very strongly the amendment of my noble friend Lady Wheatcroft. I will do it in a short and

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simple way, by giving a reason and an example. The reason is that a very important function of auditors concerns hazards, and it falls into three parts. First, they must identify hazards; secondly, assess them; and thirdly, expose them.

My example comes from something that I have agitated about for a long while: namely, the level of credit card debt in this country. This is not the credit card debt that noble Lords may have, and which they pay off monthly, but that part of the debt that overruns and is therefore subject to very high interest rates, which very often the people with the debt have no hope of paying back. That level of credit card debt for the British banks is currently still more than £50 billion. The figures are from the British Bankers’ Association and the Bank of England, which both publish a series of monthly figures.