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House of Lords

Wednesday, 17 October 2012.

3 pm

Prayers—read by the Lord Bishop of Manchester.

Devolved Administrations: Industrial Strategy


3.07 pm

Asked By Lord Roberts of Conwy

To ask Her Majesty’s Government whether their industrial strategy is fully supported by the three devolved Governments.

Lord Gardiner of Kimble: My Lords, the Government’s industrial strategy sets out a long-term, whole-government approach to delivering economic growth. Although some measures will be UK-wide, economic development, including financial assistance to industry, is a devolved matter. Her Majesty’s Government lead regular discussions with the devolved Administrations to ensure that the strategy reflects this. This involves consulting devolved Administrations on key policies as well as sharing information and good practice on a regular basis. The Government support growth across the whole UK by introducing ultrafast broadband into Belfast, generating new investment in Scotland for North Sea oil fields, and bringing mobile coverage to 60,000 rural homes in Wales.

Lord Roberts of Conwy: I thank my noble friend for his Answer and, of course, compliment him on his elevation to the Front Bench on this auspicious day, when unemployment has fallen by 50,000. Bearing in mind the fact that the unemployment rate in those devolved government areas is higher than the UK average, and bearing in mind their dependence on the state and the public sector, does my noble friend agree that special measures should be taken by the Government to encourage the private sector in these areas? Can he assure me that the Department for Business, Innovation and Skills is collaborating closely with the devolved Administrations to that end, although they are of different political persuasions? That is very much in the interests of the United Kingdom as a whole.

Lord Gardiner of Kimble: My Lords, first, I thank my noble friend for his very generous and kind remarks. He is a great champion of Wales. I am delighted by the news this morning that employment has grown to its highest levels since records began in 1971. Indeed, in Wales, there has been an increase in total employment since April 2010 of 67,000.

The Government’s objective is to make the UK the best place to start, run and expand a business. The success of the private sector in all parts of the UK is key to the recovery, and 900,000 private sector jobs

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have been created in the past two years. I reassure my noble friend that we are working closely with the devolved Administrations. Regardless of political colour, the national interest comes first.

Lord Stevenson of Balmacara: I, too, welcome the noble Lord to the Dispatch Box and commiserate that it is not he but the noble Lord, Lord Marland, who is topping up his tan. I listened carefully to his reply to the noble Lord, Lord Roberts, but note that he has failed to explain exactly the detail of the industrial strategy of which he speaks. Without knowing that, it is hard to understand how he can make the judgment that it is fully supported by the three devolved Governments. Will he take this opportunity to confirm that he agrees with the Secretary of State of his department, who said recently:

“The Government lacks the compelling vision … to get the economy growing again”?

Lord Gardiner of Kimble: I thank the noble Lord for his initial remarks, but I have to say that the Government’s plan for growth is very clear and outlines 250 measures to deliver the four growth ambitions: the creation of the most competitive tax system in the G20, at the lowest level in the G7; as I said before, to make the UK the best place to start a business; to encourage investment and exports; and to create a more educated workforce that is the most flexible in Europe.

Lord Elystan-Morgan: My Lords, the Minister has assured the House that regular discussions take place with regard to devolved subjects. I am sure that the House will agree that that is most laudable, in that it in no way trespasses on the distinctiveness of the devolved Assemblies, but at the same time brings about as much cohesion as possible. However, perhaps I may ask him about matters that have not been devolved. Does the Minister recollect that when the legislation of 1998 was being considered by both Houses, solemn undertakings were given with regard to matters that were not devolved, whereby concordats would be formed so that there could be such a discussion, even in relation to matters that still remain under the authority of this House?

Lord Gardiner of Kimble: My Lords, I reassure the noble Lord that all matters, whether reserved or devolved, are regularly discussed with the devolved Administrations. As I said before, the whole purpose of what the UK Government and the devolved Administrations are doing is to work in the national interest to achieve greater economic growth.

Lord Roberts of Llandudno: My Lords, what discussions have already taken place with the Welsh Assembly Government to ensure that businesses in Wales have access to loans and the small-business grants that have been announced recently, and that in any promotion of this UK investment project, assistance is available to Welsh industry?

Lord Gardiner of Kimble: My Lords, across the United Kingdom, and in Wales of course, there is encouragement for that. In Deeside Enterprise Zone, for instance, the Government have agreed enhanced capital allowances,

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which will deliver up to 5,000 new jobs. Indeed, the Government are working very closely with the Welsh Government and have provided them with almost £57 million to help to bring broadband to everyone, and superfast speeds to 90% of Welsh homes and businesses. This is all very good news for Wales.

Lord Wigley: My Lords, I also wish the Minister well in his new responsibilities, but does he accept that when the devolution settlement was made, the fact that some aspects of economic policy were devolved to Cardiff, Edinburgh and Belfast was a reflection of the need to have flexibility in policy that reflects the needs and aspirations of the three devolved areas? In those circumstances, does he agree that there is two-way traffic on the question of co-operation and will the Government at Westminster support the devolved regimes in their policies, where those are seen as the priorities for those areas?

Lord Gardiner of Kimble: My Lords, as I said before, we will of course be sharing information with all devolved Administrations.

Lord McConnell of Glenscorrodale: My Lords, are the Government aware that unemployment has gone up in Scotland today, while it has gone down elsewhere in the United Kingdom? Will the Government have immediate discussions with the Scottish Government to ensure that the uncertainty that will now exist in Scotland over the next two years as we lead up to the referendum on Scottish independence does not lead to higher unemployment in Scotland due to uncertainty over investment?

Lord Gardiner of Kimble: My Lords, there are regular discussions; and, in fact, there has been an increase in total employment of 54,000 people in Scotland since the general election.

Energy: Shale Gas


3.15 pm

Asked By Lord Naseby

To ask Her Majesty’s Government what is their policy on shale gas extraction in the United Kingdom.

The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma): My Lords, my department’s key objectives are to ensure that the UK has safe and secure energy supplies for the future. It is also committed to reducing carbon emissions. That is why we are encouraging a diverse and sustainable energy mix and therefore support industry’s endeavours in pursuing new energy sources in the UK such as shale gas.

Lord Naseby: I congratulate the Government on the recent announcement encouraging the extraction of gas by fracking. When your Lordships’ House realises that nearly 40% of the United States is now supplied by natural gas, does this not offer a huge opportunity for the United Kingdom to develop cheap and reliable

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domestic sources of energy, to create jobs, in particular in the greater Blackpool area, to reduce imports of gas and, finally, to improve the environment? At the same time, your Lordships’ House will remember that when North Sea oil was developed, it was a success because of the combination of government working with the industry. This must happen with shale gas as well.

Baroness Verma: My noble friend is of course right that the Government are very alert to the possibilities for boosting growth and employment in Lancashire and across the country. If shale gas does prove to be commercially viable, there is every reason to suppose that it will be positive for the economy and employment. However, the industry is at a very early stage of development and we need to make sure that all our commitments to ensuring that it is safe and secure to extract are formally looked at.

Lord May of Oxford: The Government are currently on course to fulfil their legally binding commitments under the Climate Change Act—only, however, by virtue of the recession. A second “dash for gas” rather than a speeding up of our decarbonising of electricity generation is flatly inconsistent with the commitments to 2030. Am I correct in assuming that the only way to square this is to maintain the recession, and that that explains some of this?

Baroness Verma: No, my Lords. I think the noble Lord knows from his question that that is not the case. We need to look at a wide range of energy sources and make sure that in the long term we fulfil our commitment to the 2030 target, but also that we utilise new renewable sources .

Lord Howell of Guildford: Further to my noble friend Lord Naseby’s Question, has my noble friend noticed that in the United States domestic gas prices are up to one-third lower than they are here, that its CO2 greenhouse gas emissions are falling and are the lowest for 20 years, and that it is attracting a great deal of new industry and manufacturing back into America and creating new jobs? Is this not the sort of balanced model we should be considering?

Baroness Verma: My noble friend is absolutely right. However, the conditions in the United States are different from those in the United Kingdom. We first need to make sure that we thoroughly explore the ability to develop shale gas safely and securely. However, it is something that we are looking at very constructively.

Lord Taylor of Blackburn: My Lords, can the Minister tell us whether the Government have any idea when shale gas will be viable or not?

Baroness Verma: My Lords, I have tried to make it quite clear that we are still exploring all the possibilities for extracting shale gas. As soon as we have the go-ahead, we will report to your Lordships’ House and make a general statement.

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Baroness Parminter: My Lords, fracking to extract shale gas uses enormous quantities of water, three-quarters of which remains down the wells. Given that the overabstraction from our rivers is already causing huge problems, what can the Minister tell us about the consideration that is being given to water resources in determining our future energy policy?

Baroness Verma: My Lords, my noble friend is right to raise her concern, and I hope that I can reassure her that any abstraction of water for industrial purposes is subject to control by the Environment Agency or by corresponding bodies in Scotland and Northern Ireland. The agencies will not permit additional abstraction in any area if they consider that it is not sustainable.

Baroness Worthington: My Lords, whether gas comes from fracking or more conventional sources, it is still a source of carbon dioxide and greenhouse gases. Therefore, will the Minister reassure us that in the horse trading that we believe is going on around the Energy Bill at the moment, there will be no concession to reduce our investment in carbon capture and storage in favour of decarbonisation? We must do both, and we must have carbon capture and storage on gas if it is to play a role in the future.

Baroness Verma: I absolutely agree with the noble Baroness. It is an exciting technology that can decarbonise coal and gas-fired power stations and large industrial emitters. The Government are absolutely committed to CCS. We have one of the best offers anywhere in the world, including £1 billion in capital funding for our new competition, contracts for difference for low-carbon generation through our electricity market reforms, and £125 million to support research and development.

Equality: EC Policies on Women on Corporate Boards


3.21 pm

Asked by Baroness Falkner of Margravine

To ask Her Majesty’s Government what is their assessment of European Commission policies on women on corporate boards.

Baroness Stowell of Beeston: My Lords, the European Commission has yet to announce its proposed policy for women on boards. The Government agree with the Commission that increasing the representation of women on the boards of UK-listed companies is important. However, we are not in favour of EU legislation or regulation, including quotas. National-level solutions are best, and evidence shows that, following the Davies review that the Government commissioned in 2010, the UK’s voluntary, business-led approach is working.

Baroness Falkner of Margravine: I agree with my noble friend that the EU is probably not the body best placed to deal with this problem, particularly as corporate governance varies from country to country. However,

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does she agree that the real problem is the lack of progress on getting women executive directors on to FTSE 100 company boards? We have had good progress with non-executive directors; we have something like 22% against the Davies targets, which is progress. However, our flagship companies are not nurturing and developing talent to get people promoted from within. What are the Government proposing to do about that?

Baroness Stowell of Beeston: My Lords, my first point is to reinforce what progress has been made since the Davies review on the recruitment of women to boards. Notwithstanding the point that my noble friend made, it is worth saying that the percentage of women on FTSE 100 boards is now 17.3%; that is up from 10.5%. However, my noble friend is right to say that progress in executive ranks is not as fast. More effort is needed in that area, particularly around what is called strengthening the pipeline, so that women are recruited from a wider pool of backgrounds to these executive posts and that we do not rely just on the kind of criteria that are normally placed on men who are recruited to those jobs.

Baroness Nye: My Lords, I, too, welcome the increase in the number of women on boards, but does the Minister agree that the voluntary code needs to be reviewed, as the evidence suggests that while the 30% target for female applicants on the long list is being met, these women do not make it on to the shortlist? Surely the code should be extended to include targets for the shortlist as well.

Baroness Stowell of Beeston: As I said about the shortlist, the executive search companies are putting forward 30% of women to companies; clearly that is working in getting women into non-executive positions. However, more work is needed to target the executive ranks. As I explained, this will take longer. It is worth noting that in countries such as Norway where there are quotas, the quotas in force for non-executives have not led to a greater improvement among the executive ranks at the same rate. This is a difficult problem that goes much wider than the narrow point we are discussing.

Lord Watson of Richmond: My Lords, does the noble Baroness not agree that public opinion plays a very important role in this and that the battle has to be won with public opinion? After all, what is the chance of recovery from recession unless women play a more important leadership role in our top companies?

Baroness Stowell of Beeston: My noble friend is absolutely right. The case for women in senior positions, whether they are executive or non-executive, is clear. Women account for nearly half the workforce and women outperform men educationally at every level. We are also responsible for about 70% of household purchasing decisions so it makes sense to have women in positions of authority in the corporate world.

Baroness Howe of Idlicote: My Lords, does the noble Baroness agree that a great deal of credit should be given to all sides of the House for encouraging more women in executive positions? Would she also

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agree that encouraging more boards to make flexible arrangements for men to work will increase the numbers of women who also have family responsibilities and are likely to come through to top executive positions?

Baroness Stowell of Beeston: The noble Baroness makes an interesting point. The sooner employers think about the flexible arrangements to which she refers in the context of men as well as women, the more quickly women will be seen not as a special case but as what they rightly are—equal in terms of ability, and the type of people that we want in those positions.

Baroness O'Cathain: My Lords, does my noble friend agree that the work commissioned by this Government and continued by the noble Lord, Lord Davies of Abersoch, still continues and that he is very concerned about the issue raised by my noble friend on the pipeline leading to executive directors? I am convinced that progress has been made since 2010 whereby 13.3% of FTSE 100 companies had women on boards at that stage and now 34% of non-executive directors are women. At that stage, there were 21 male-only boards and now there are only eight. However, the work will continue and we do not need an EU directive on quotas because they are patronising.

Baroness Stowell of Beeston: There are lots of statistics to show that progress is being made. As far as I am concerned, business needs to show that it wants women and not just that it is willing to put up with them

Baroness Thornton: My Lords, notwithstanding the party opposite’s visceral hostility to all things European, I think the Minister concedes that the fact that the European Commission has initiated this discussion will have focused the minds of many FTSE 350 companies on the need to address this problem. What are the Government doing to address the presence of women on public bodies, for example on health boards and clinical commissioning groups? Are the Government monitoring the number of women who are coming forward and are being appointed to those bodies as well?

Baroness Stowell of Beeston: Just to be absolutely clear, while we do not support the quotas or the European legislation, we feel very strongly about this issue. I think that I am right in saying that we have a target of 50% for appointments to public bodies by 2020. If I am wrong I will write to the noble Baroness, but we are definitely ensuring that as much effort is made in that area as it is in the corporate world.

Lord Forsyth of Drumlean: My Lords, as two-thirds of the European Commission membership are themselves men, would not the Commission do better to put its own house in order before deciding on other people?

Baroness Stowell of Beeston: My Lords, I shall not say anything.

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Care Services: Elderly People


3.30 pm

Asked By Lord Hunt of Kings Heath

To ask Her Majesty’s Government what action they propose to take in the light of reports that vulnerable elderly people are obliged to rely on care workers with criminal records.

Lord Hunt of Kings Heath: My Lords, I beg leave to ask the Question standing in my name on the Order Paper, and I refer noble Lords to my health interests.

The Parliamentary Under-Secretary of State, Department of Health (Earl Howe): My Lords, providers of services are responsible for the safety and quality of the care they provide, and the well-being of the people they care for. Providers should undertake a risk assessment as to whether a criminal record check is needed or not, and what action to take as the result of such a check. Providers should keep a record of this process as an audit trail of their decision-making.

Lord Hunt of Kings Heath: My Lords, I am grateful to the noble Earl, and of course we all welcome the rehabilitation of ex-offenders. However, I refer the noble Earl to reports that recent CQC inspections show that more than 220 care agencies working for older people in England have failed to show that they were employing properly qualified and vetted staff. What action will be taken about this? Further, does this not show that the time is now ripe for the statutory regulation of care-home workers?

Earl Howe: My Lords, it is the responsibility of the employing organisation to carry out appropriate checks on the people they intend to employ. They should take decisions in the context of their responsibility for the well-being of the people who use the service. That position has not changed, and indeed it must be at the core of the safeguarding agenda. Organisations need to risk-assess the suitability of their staff for the role, considering all the information they have on the person, including criminal record checks. If someone has a criminal conviction, the employer should consider how old and relevant that conviction is in the context of the activities that the person would be undertaking and the characteristics of the people they would be looking after. That situation cannot, I think, change substantively.

Lord Patel: My Lords, will the Minister follow up on the question asked by the noble Lord, Lord Hunt? What progress is his department making towards establishing skills requirements in the training and regulation of nurse support workers and care assistants?

Earl Howe: My Lords, we recognise that there is a need to drive up standards in this area. More care workers will be trained, including an ambition to double the number of care apprenticeships by 2017. We have commissioned Skills for Health and Skills for Care to develop, before the end of January next year, a code of conduct and minimum training standards for healthcare support workers and adult social care workers

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in England. We expect that these will cover minimum training or induction standards for a range of support tasks, including personal care and other activities. Through the Health and Social Care Act 2012 we are creating a system of external quality assurance for voluntary registers.

Baroness Gardner of Parkes: My Lords, is the Minister aware that it is not just an issue about criminals, but an issue about the total shortage of care, which the previous question addressed very clearly? Does he not think that in general care and healthcare we are sadly missing the SENs, and is it not time to develop additional levels of training to fill the gaps both in care homes and the National Health Service?

Earl Howe: My Lords, we need to focus on a mixture of things. As my noble friend rightly says, we need to look at workforce numbers and capacity. We need to look at minimum training standards, which I have referred to, and we need to look at quality. We are doing that by targeting for the first time personal assistants and their employers with greater support and learning through the Workforce Development Fund, which will help with recruitment and retention. We need better leadership because high-quality leadership is essential for the delivery of all the proposals in the care and support White Paper, and we are setting up a new leadership forum to bring together expertise. I should add that we need better intelligence on the ground as well, and that we shall see from the local Healthwatch organisations when they are established.

Baroness Pitkeathley: My Lords, the Minister has pointed out that the employer, the provider, is responsible for the recruitment and training of care workers, and I am sure he will confirm that that applies whether they work in the private, the public or, indeed, the voluntary sector. In view of some of the scandals that there have been involving care workers, does he agree that we need to encourage value-based recruitment so that people are recruited not only for their technical skills, which can be provided through training, but for their compassion and empathy?

Earl Howe: Yes, I firmly agree with that. It bears upon the point that I alluded to very briefly, which is that the risk assessment process should not just be a tick-box exercise. It should assess the suitability of the individual and their own characteristics, the environment in which they will be working, the kind of people for whom they will be working and whether they have the right skills and characteristics as the people required to do that job.

Baroness Masham of Ilton: My Lords, does the Minister agree that it is not only the elderly who are vulnerable but also some very disabled people, including some with learning disabilities?

Earl Howe: Yes, like the CQC, we are very clear that when providers are assessed for the recruitment processes that they undertake in relation to those groups of patients and service users, no corners whatever should be cut in the requirements for vetting those people.

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Baroness Jolly: My Lords, safeguarding the vulnerable needs real commitment from us all. Will the Minister tell the House whether the Government intend to support this by ring-fencing funds, as have Wales and Scotland?

Earl Howe: My Lords, we are not taking that approach. However, we have declared our intention to strengthen safeguarding arrangements to prevent and reduce the risk of significant harm to adults in vulnerable situations. That is a key priority for the Government. We intend to put safeguarding adult boards on a statutory footing. This will assist in furthering the agenda which my noble friend rightly raises, by ensuring that organisations involved in safeguarding have to make a co-ordinated contribution to local adult safeguarding work. Of course, it continues to be an offence for a provider to employ a person barred by the Independent Safeguarding Authority.

Constitution Committee

Membership Motion

3.37 pm

Moved By The Chairman of Committees

That Baroness Wheatcroft be appointed a member of the Select Committee in place of Lord Shaw of Northstead, resigned.

Motion agreed.

Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) (No. 3) Regulations 2012

Child Support Maintenance Calculation Regulations 2012

Child Support Maintenance (Changes to Basic Rate Calculation and Minimum Amount of Liability) Regulations 2012

Motions to Approve

Moved By Lord Freud

That the draft Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) (No. 3) Regulations 2012, the draft Child Support Maintenance Calculation Regulations 2012 and the draft Child Support Maintenance (Changes to Basic Rate Calculation and Minimum Amount of Liability) Regulations laid before the House on 2 July be approved.

Relevant documents: 6th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 15 October.

Motions agreed.

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Forestry Commissioners (Climate Change Functions) (Scotland) Order 2012 (Consequential Modifications) Order 2012

Motion to Refer to Grand Committee

Moved By Lord Wallace of Tankerness

That the draft Forestry Commissioners (Climate Change Functions) (Scotland) Order 2012 (Consequential Modifications) Order 2012 be referred to a Grand Committee

Motion agreed.

Financial Services Bill

Financial Services Bill 4th Report from the Delegated Powers Committee

Committee (8th Day)

3.38 pm

Relevant document: 4th Report from the Delegated Powers Committee.

Clause 57 : Treasury power of direction

Amendment 190ZE

Moved by Baroness Noakes

190ZE: Clause 57, page 136, line 4, leave out from “to” to “the” in line 5 and insert “any of the Bank’s powers or functions, including but not limited to”

Baroness Noakes: My Lords, Amendment 190ZE is in my name and that of the noble Lord, Lord McFall of Alcluith. This represents the last of the amendments in our joint names which respond to the first report of this Session by the Treasury Select Committee in another place.

Clause 57 provides a welcome power of direction that enables the Treasury to direct the Bank of England when public funds are at risk. The Treasury Select Committee initially recommended that such a power be created when the Bank notified the Treasury that there was a material risk to public funds. The committee regarded such a power of direction as a necessary corollary of the leading role of the Chancellor in any financial crisis. Unfortunately, the Bank of England sought to water this down to a power of direction operating only in relation to certain instruments of crisis management. Even more unfortunately, the Government have sided with the Bank and have restricted the power of direction to the three areas listed in Clause 57(2).

The Treasury Select Committee remains unhappy with this and believes that if the legislation is to stand the test of time, it should not be restricted to the specific tools listed in subsection (2) but should be capable of being exercised in relation to tools not currently considered appropriate; for example, those tools that would be available to the Financial Policy Committee or other tools that have not yet been developed. The Treasury Select Committee believes that this power should be broader and future-proofed.

Amendment 190ZE seeks to achieve this by saying that the direction can relate to any of the powers or functions of the Bank of England, leaving the three specified tools as a non-exclusive list of such powers.

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I am told that the House could not hear me in my previous position so I have moved.

Lord Peston: Start again.

Baroness Noakes: This is a probing amendment for today, not least because I think that it is too wide. For example, it would allow the Treasury to direct the Bank in relation to monetary policy functions, which would not be appropriate. Section 4 of the Bank of England Act 1946, which took the Bank into public ownership, has a general power of direction, which puts monetary policy out of scope. I believe that any Clause 57 power should similarly be constrained but I cannot see that there needs to be any further restriction on the Treasury’s power of direction when public money is at stake.

When my noble friend the Minister replies, can he also explain the relationship between the 1946 Act’s power of direction and the new powers of direction in Clause 57? The 1946 version is very broad and, monetary policy apart, seems to cover everything that is in Clause 57, and more. I do not believe that the 1946 Act power is being repealed or otherwise amended in this Bill, so I am puzzled as to the relationship.

I am aware that general powers of direction have rarely been used in practice, because their force lies mainly in the threat of their use rather than their actual deployment, but I hope that my noble friend the Minister can say what effect Clause 57 has on the existing power of direction. I beg to move.

Lord Peston: My Lords, this is a most interesting amendment, which enables us to clarify one or two aspects of the Bill. I literally did not hear the first part of what the noble Baroness was saying, so I was not joking when I suggested that she started again and she may well need to repeat what she said at the beginning.

This amendment brings into focus the relative power of the Bank of England in the areas that the Treasury is concerned with. This has worried quite a few of us throughout the proceedings on the Bill. To put it too simply, the question that emerges is: who really is in charge of the stabilisation process? Before I press that a little bit further, I take it that when in this part of the Bill we are talking about stabilisation powers, we are restricting ourselves to stabilisation powers within the financial services sector and not discussing a subject to which I have devoted most of my academic life; namely, powers to stabilise the whole economy—or, if people had followed my advice, probably destabilise the whole economy. We are not discussing the general question of the theory of economic stabilisation here. We are discussing just stabilisation.

Can the Minister throw some light on the simple question here? Who really is in charge? The noble Baroness includes in her amendment “not limited to”. However, unless this was part of what I did not hear, I do not think she said what else she had in mind that might then arise if it was not limited to these things. It may well be that she did say it and I missed or it may well be that she would like to say it now.

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3.45 pm

Baroness Noakes: It might help those Members of the Committee who did not hear my opening remarks if I say that my amendment is designed to ensure that the power of direction can be used for all of the functions of the Bank of England not simply those listed in Clause 57(2). I also said that it probably ought to exclude the functions related to monetary policy.

Lord Tunnicliffe: I spent some years sitting on the Benches opposite facing the noble Baroness, Lady Noakes, and it comes as a refreshing new experience to find myself so frequently in agreement with her on this Bill. I am sure that will distress her as much as it is distressing me. Unfortunately, her caveating remarks are every bit as important as the lead remarks recommending the amendment.

We would not be able to support the amendment as drafted because, as she rightly points out, it could involve a direction to the MPC. This part of the Bill is a limiting list. The noble Baroness may want to consider either extending the list—we would look at that with great interest—or reversing it and extending the powers to the whole of the activity as her present amendment does and then caveating it with a number of areas where this power could not be used. This is a very useful amendment to develop the debate. I look forward to the Minister’s reply and thank the noble Baroness for proposing it.

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, first let me be clear that I do not believe that it would be appropriate to extend the scope of the power in the way that is suggested by this amendment. It would make the power unusable. I was going to remind my noble friend, but she already made the point, that the Treasury already has a very broad power of direction over the Bank. As my noble friend pointed out, Section 4 of the Bank of England Act 1946, which continues and will continue to be operative, as my noble friend says, allows the Treasury to,

“give such directions to the Bank as ... they”,

the Treasury,

“think necessary in the public interest, except in relation to monetary policy”.

I think we are all agreed that the amendment was not intended to cover monetary policy.

Lord Tunnicliffe: Does the noble Lord agree that every Committee that has looked at this and reported and all professional commentators take the view that the power is so wide and so nuclear that no Chancellor would ever use it?

Lord Sassoon: My Lords, the noble Lord, Lord Tunnicliffe, is getting ahead of me. That was precisely what I was going on to explain. He is absolutely right that the power has never been used. Even at the height of the recent financial crisis, the then Chancellor felt unable to use this power to direct the Bank. Indeed, Alistair Darling’s book is rather interesting on this point. He explains in it that he was told,

“that it might be legally possible”,

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to direct the Bank, but that,

“there would be wider implications of such an action. We had set great store by making the Bank independent and a public row between myself and Mervyn would have been disastrous, particularly at this time”.

The 1946 Act direction power is considered, and was considered by a Chancellor very recently, to be such a nuclear option because it is so broad that it would be very difficult to use. This means that any use of the power would likely be interpreted as the Chancellor overruling decisions and judgments that should rightly be for the Bank. This would be seen as a direct challenge to the Bank’s independence and a judgment on the competence of the Bank’s senior executives, which could cause a crisis in leadership in the Bank and a serious loss of public confidence. That line of thinking has prevented Chancellors from using the 1946 Act power in the past, as the fallout could be more damaging than the situation that they might be trying directly to address.

That risk was recognised by the Treasury Committee. That is why their report recommended that,

“the Chancellor should be granted a power to direct the Bank in a crisis which is free of the problems associated with the power under the 1946 Act”.

That is why the new power of direction in Clause 57 is designed to be a targeted and usable power. There will still be the power in the 1946 Act, for the reasons that underlie what my noble friend and the noble Lord, Lord Tunnicliffe, said. It is probably worth maintaining that reserve power somewhere in the system, albeit with the caveat that it is difficult to see the situation in which it might be exercised.

On the other hand, and going to the heart of who is in charge and who is responsible for what is in the new system, it was muddled and confused under the tripartite system but we want to make it much clearer in the new system that the Chancellor and the Treasury are principally there as guardians of public funds. That is why the specific direction in Clause 57 is designed that way. It is targeted. It does not allow the Treasury to overrule the Bank’s decisions and judgments; it allows the Treasury to take the decisions that are rightly for the Government to take. It is designed to allow the Chancellor to intervene to require the Bank to take specific action in a crisis management situation where public funds are at risk. That is why the power covers only the Bank’s crisis management functions, specifically the provision of liquidity and the operation of the special resolution regime. Again, I hope that that helps the noble Lord, Lord Peston, with the intended scope of this.

Lord Peston: My Lords, the noble Lord has clarified that very well. I take it that there would still be, as happens all the time, informal meetings between the Chancellor and the Governor, where the Chancellor might say, “Well, it is your decision but I am a bit worried about this or that”. Nothing will infringe on that because, as the noble Lord well knows, no system can work without informal and off the record meetings and things of that sort. This will not get in the way of what one might call ordinary human behaviour.

Lord Sassoon: No, indeed. The next time, in another context, the noble Lord challenges me about why we are not disclosing more meetings, I shall remember

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what he just said about informal and confidential meetings. It is important that they happen. Having seen how things happened before and how they happen now, it is striking to see the much greater regularity of meetings between the principals—they are critical—than happened at some periods in the past. That is very important as a background in peacetime as well as in crisis time.

I hope that is clear. The Bank is in charge of operating the resolution regime, but the Chancellor must agree to any use of public funds and has the final say when they are used. Even setting aside the unintended drafting of Amendment 190ZE to include a power that would be even more widely drawn than the 1946 Act, the targeted power that we have drawn is the appropriate one. If we had drawn the power more widely to allow for future proofing, as my noble friend puts it, I would be standing here defending why we had left such an important area open in the Bill. It is better to draft such a power related to the system as we know it. It is broadly future proofed in the sense that there is a clear distinction between the use of public funds and other matters, and after that helpful debate I hope that my noble friend will withdraw her amendment.

Lord Barnett: I thought that the Minister in his earlier answer was about to say that the meetings between the Governor and the Chancellor would be available on the web. The other day he rather misled me and probably the House when he said, in answer to my question about a meeting between the OBR and the Chancellor and how often he had had meetings in the last 12 months, that it was all transparent and on the web. I am no expert in these matters, but I spent quite a bit of time on the web and could not find it there. I asked my noble friend Lord Peston, who is perhaps better on the web. He too spent a lot of time on it and still could not find it, either transparently or non-transparently. Can the Minister explain to the House whether it is misleading to suggest that these things are transparent on the web?

Lord Sassoon: My Lords, although I believe that we are allowed to use portable electronic devices in the Chamber, I cannot in 30 seconds find it. I can assure the noble Lord, Lord Barnett, that it is done on either a quarterly or six-monthly basis. I do not know whether the search was made on the OBR website or the Treasury website, but my recollection is that the OBR releases something on its website periodically. I will find the appropriate link and let the noble Lords have it.

Lord Peston: I understood him to say the other day that it was on the Treasury website and I wasted three-quarters of an hour this morning. There is lots of good stuff on it. You can spend a happy day searching the Treasury website, but it did not contain anything that the Minister had told us it did contain. We can leave it at that.

Lord Sassoon: I apologise if I directed people to the wrong website. I will find the right one, which I think might be the OBR’s own website.

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Baroness Noakes: My Lords, I thank all noble Lords who have taken part in this short debate. I thank my noble friend for his response. I take the point on general powers of direction. They have not been used since these have been written into statute. They existed in all the nationalised industry legislation, which gives rise to the question as to why they are there, but I am sure Ministers feel more comfortable that they have this nuclear option should nuclear war ever need to break out.

The Treasury Select Committee would still say that it thinks that the power is too narrow. If there were a crisis where it is clear that he should be in charge, the Chancellor should not be restricted in what he can direct the Bank to do. For example, he may feel the need to direct the Bank on the use of macroprudential tools. These are in the hands of the Financial Policy Committee. If the Bank were slow in using them and where it took a particular view on something on which the Chancellor took another, public money would be at risk. The Chancellor ought to be able to get his way on things. On that basis the Government have drafted too narrow a power, but I shall not pursue it any further. It is the Government’s choice, and I beg leave to withdraw the amendment.

Amendment 190ZE withdrawn.

Clauses 57 to 60 agreed.

4 pm

Amendment 190ZEZA

Moved by Lord Tunnicliffe

190ZEZA: After Clause 60, insert the following new Clause—

“Duty of coordination: early warning

In furtherance of collaboration under this Part, the Bank of England, FPC, FCA or PRA must provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given under any provision of this Part, and must provide full information about circumstances.”

Lord Tunnicliffe: My Lords, the intention behind this amendment is twofold. It is to bring more players into the decision about an early notification and to bring in the requirement for early notification. Touching first on bringing new bodies into this, the clause effectively brings the FPC, the FCA and the PRA into the early notification procedure advocated in this clause. The essence of our concern has been rehearsed around the House. It is that the Bill gives enormous power to the Governor of the Bank of England and, in a crisis, he effectively ends up as the gatekeeper of information flowing from the Bank to the Government. We believe that there should be ways of making this gate wider and that where the FCA and the PRA—I shall talk about the FPC in the next amendment—believe that an early warning is required, they should have a duty to consider the circumstances; and where they believe that it makes sense, they should have a duty to communicate that to the Treasury or the Secretary of State. This would clearly require them, as part of their function, to be proactive in their stance when they are horizon-scanning or looking forward at various risks.

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The second part of the amendment is about the essence of an early warning. The concept of an early warning is that it is a warning short of a formal notice. The amendment lowers the bar from the form of words in the Bill that implies the “probability” of a material risk or the requirement of the use of public funds to the “possibility”. It echoes the concerns of the Treasury Select Committee in its 21st report which was published on 8 November 2012. Its recommendation at paragraph 166 was:

“We are concerned that the formal notification of a material risk to public funds may still not give the Chancellor enough time to consider other policy options. The Treasury needs to know as early as reasonably possible when it might receive a notification. We therefore recommend that the forthcoming legislation also require the Bank to give the Chancellor an early warning of the possibility that a notification of a material risk to public funds may need to be given, and full information about the circumstances”.

We very much agree with that recommendation and in this amendment we seek to give effect to it.

The process of crisis that we are debating will probably involve protecting the activation of the proactive intervention framework. The noble Baroness, Lady Noakes, knows what I am talking about because she is familiar with the document, The Bank of England, Prudential RegulationAuthority: Our Approach to Banking Supervision, published in May 2011. The PIF is described on page 18. It describes five stages of escalation, which presumably are the key stages that lead up to a crisis. There is almost a presumption that there is a clear difference between normal business and a crisis. I hope it never happens, but if it did, it would be an escalating situation. Some of the stages of the proactive intervention framework will be in private. Some will not want to be the subject of a notice, as the final notification as envisaged in the Bill should be. The ability and duty of the Bank to give a notice of possibility would allow those private activities, in the early stages of the PIF, to take place, alerting the Government that they have to start thinking about the possibilities and how they may develop.

The counterargument often revolves around the fact that the Chancellor and the Governor of the Bank of England talk to each other. Of course, at the moment we have two most charming individuals and I am sure that they have useful conversations. However, once again, if you go into the evidence of the Select Committee and its comments, clearly this has not always been true. I am rather sorry that the noble Lord, Lord Lawson, is not in his place so that he could reflect on the events of 1984 when he had to find a great deal of money to save a failing bank and, according to the Select Committee, was advised of that requirement on the morning of the crisis. Equally, one cannot read Alistair Darling’s book without a clear feeling that the day-to-day communication between the Governor of the Bank of England and the Chancellor was less than warm. Certainly, it was not enough to leave one comfortable that the necessary preliminary warning that this amendment envisages would take place at an informal level.

As this crisis gathers, one has to presume a situation that relationships could really be quite bad. They could be in seven years’ time. The new governor might turn out to be less charming than the present one.

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The Chancellor of the day could well be less charming and communicative than the present one. In fact, there could have been a total breakdown of trust between them. It has happened in the past. This amendment would require a preliminary notice and there would be a dereliction of duty if the Government did not provide this preliminary notice. This mechanism would allow the Government to start their preliminary thinking and consider mitigation measures other than the expenditure of public money—as envisaged in the Bill —and give the lead times necessary. Crucial is a situation of no surprise. We are very uncomfortable about the sense behind some of the remarks, and the extent to which the governor is the gatekeeper of information to the Government. We believe the Government should be equally sensitive and concerned and I commend the amendment to the them.

Lord Sassoon: My Lords, I am genuinely puzzled about this amendment. I know that it was put forward in another place by Mr Leslie, the colleague of the noble Lord, Lord Tunnicliffe, and that it is designed to implement a Treasury Select Committee recommendation to create an early-warning mechanism of a risk to public funds. No one would be keener than me to have such a mechanism in place if I believed that it was necessary because I thought that the Treasury would not, under the provisions of this Bill, get sufficient early warning.

However, this provision and the question of an early warning do not rely on what I think we all agree is very important; namely, that there is constant dialogue about a whole range of things between the Treasury and the authorities, including the Bank. The question of an early warning does not rely on that, although we would expect it to carry on because it is working well at the moment.

I believe that the amendment is unnecessary and inappropriate. Therefore, let me carefully go through why. First, as the Government made clear in their response to the Treasury Select Committee, the duty on the Bank to notify the Treasury of risks to public funds already achieves this aim. The existing duty is already designed to give the Treasury an early warning of a potential risk to public funds. That is because Clause 54 sets an extremely low bar for notification; for example, when the Bank or the PRA looks at the position of a firm or a group of firms, if it thinks that a possible future scenario could lead to a situation in which the Treasury might reasonably be expected to decide to use public money to protect stability or the public interest, a notification must be made.

I do not think that the bar could be set much lower than that. For example, in the type of scenario described by the noble Lord, where the Bank is aware that at some point in the future a risk to public funds could arise, the Bank should be making a notification of a risk to public funds under the existing duty in Clause 54. I am happy to put that on the public record again. The Bank completely accepts that and there is no debate about the interpretation of the duty under Clause 54.

With this amendment, the noble Lord also risks undermining the clarity and force of the statutory duty to notify the Chancellor of risks to public funds by broadening the grounds on which it could be

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triggered to include risks to the FCA’s objectives which do not involve public money. Just as in the previous debate we were talking about issues which related to the line between risk to public money and other matters, again, in relation to this particular early warning, the duty is drafted very deliberately with the line drawn, which is not reflected in the noble Lord’s amendment.

Lord Tunnicliffe: I feel that the words used by the Minister are quite a shift. He referred to a “possible future scenario”. As I read Clause 54, it is much closer to a probable future scenario. Will he explain to me—I am sure that he is much more familiar with the Bill than I am, much as I have tried to study it in the past few days—where in statute I can draw the comfort that a possible very low bar to notification is emphasised.

4.15 pm

Lord Sassoon: My Lords, the fact is that a regulator would have to look at future scenarios when it is thinking of its duty under Clause 54. The clause refers not to a situation that has arisen but to,

“a material risk of circumstances”,

which links it, as I have said, to the provision of financial assistance. It is clear and simple. There is a lot of other stuff in Clause 54(1), but the key things are,

“that there is a material risk of circumstances within any of the following cases”,

which are then explained in detail. As understood by the Government and the Bank, this is a forward-looking statement and requirement, which obliges them to think about possible future scenarios that could lead to the situations that are then developed in Clause 54. Of course, the duty in Clause 55 is to notify any changes to that.

Lord Tunnicliffe: I think that some of what the Minister has just said is quite a shift from what Clause 54 says. I would be delighted if he came forward on Report with some amendments that contained a duty to look at scenarios and a duty to bring forward a notification at the point of a possibility. There has been considerable debate in another place and in various committees, as to what “a material risk” means. There is a commitment in Clause 61 that it must be in the MoU, but as I search the MoU I cannot find it coming readily out to me—I shall be asking about that later. I invite the Minister to consider what he has said and see whether he can improve the legislation so that there will be no ambiguity about the test that the Bank has to apply in bringing forward a notification.

Lord Peston: My Lords, perhaps I can help the Minister—it is not a question of persuading him to say yes or no at the moment. Looking at Clause 54, I take “material risk” to mean a significant probability; “possible” is much less than that. I think that my noble friend suggests in his amendment that Clause 54 would be strengthened if we went down the “possible” line, the technical point being—and I do not press it—that there is deep philosophical argument, particularly within probability theory, about the difference between possible and probable.

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I interpret the amendment to mean that if the relevant body—whether the Bank of England or another regulator—is looking at a specific part of the financial services sector, or even a specific firm within it, it should let the Government know that it is doing so and that one definitely possible outcome is a need for the use of public funds. The amendment, as I understand it, is simply an attempt to be helpful to HMG when it comes to the control of public money. The Minister may say, “We do not want to know about possibles; we only want to know when the real demand for the money is coming”. That may be his argument, but that is the difference—am I not right?—as to what we are talking about here.

Lord Sassoon: Perhaps I did not make sufficiently clear the rather obvious point that we need to look at the heading of Clause 54, “Duty of Bank to notify Treasury of possible need for public funds”. At the risk of stating the obvious—it seems that we need to come back to the obvious—this whole duty is about the notification of a possible need for public funds. If we wanted to say “probable need for public funds”, the Bill would say “probable” in the clause heading, but it does not, it says “possible”. I advise the noble Lord that we are looking at the heading of Clause 54 in part 4 on page 134 of the Bill.

Lord Peston: Forgive me. I am willing to accept that I am wrong. I agree that the top line says “possible” but “material risk” is what goes into the material section of the Bill. That seems to me to undermine the clause heading. That seems to me the real point. Why have the Government put in “material risk” if they meant possible risk?

Lord Sassoon: My Lords, there are some points where, frankly, I have to take the advice of the legal experts here, which I have done. Frequently Bills, this one included, contain constructions which follow some sort of drafting formula and are sometimes difficult to understand. As I say, my starting point is that if I really thought that the Treasury was not going to get the sort of early warning which the noble Lord, Lord Tunnicliffe, and the Treasury Committee rightly ask for, I would propose a government amendment. I take the point that “possible” appears in a heading and not in Clause 54(1) but it is very clear from the heading that we are talking about the material risk in the context of the possible need for public funds. I assure the Committee that all the advice that I have been given is to the effect that this will achieve the purpose that the noble Lord, Lord Tunnicliffe, desires. Finally, I draw the noble Lord’s attention to paragraph 13 of the draft MoU to find the interaction between the MoU and these issues. On the basis of those explanations, I hope that the noble Lord will feel able to withdraw his amendment.

Lord Tunnicliffe: My Lords, this has been a useful debate. However, members of the Treasury Committee are concerned that there is confusion about material risk. We will come to the extent to which the MoU does or does not define that. I believe that a Prime Minister once said, “Circumstances, old boy, circumstances”. As I said, I am happy to accept the Minister’s assurance

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that the legislation will work under the present charming governor and charming Chancellor, but it needs to be future proof. The words that the Minister used in connection with this important point were reassuring but they need to be in the Bill if they are to persist beyond the tenure of the present Government. I hope that he will consider bringing forward an amendment to achieve that. In the mean time, I beg leave to withdraw the amendment.

Amendment 190ZEZA withdrawn.

Amendment 190ZEZB

Moved by Lord Tunnicliffe

190ZEZB: After Clause 60, insert the following new Clause—

“Collaboration under this Part: power to make regulation

(1) The Secretary of State may, by order subject to affirmative resolution in each House of Parliament, add to the list of bodies specified in section 54(4).

(2) The first such order made under this section shall add the FPC to that list.”

Lord Tunnicliffe: My Lords, I apologise to the Committee for this extraordinarily clunky amendment. I give a prize to anybody who really understands what we are trying to do. Those who are committed members of the conversation on the Bill will know that at the end of the previous sitting, the Chair, as is typical or traditional, or whatever the right word is, swept through a whole series of clauses which we approved. Unfortunately, that destroyed about five amendments which we had tabled that day.

I am not suggesting malpractice on any part, but it rather ruined the arguments that we wanted to make today, and we have had to find a way around it. The first amendment slipped around it quite comfortably but the second one looks rather difficult to understand.

For the avoidance of doubt, this amendment puts the FPC into the notification process; it is as simple as that. Indeed, if we bring the amendment forward on Report, we will make sure that it is very clear, straightforward and in the right place and that the Committee does not plough it out by accident.

The FPC is at the centre of this Bill. In many ways the FPC is the new activity that will give force to the consideration of stability. I could not find any one place where it is nicely described. The best that I could find is in the Explanatory Notes to the Bill, where paragraph 35 states:

“New section 9C provides that the objective of the FPC is to contribute to the achievement by the Bank of the financial stability objective provided for in section 2A of the BoE Act … Subsection (2) provides that the FPC is to contribute to that objective primarily by identifying, monitoring and taking action to remove or reduce systemic risks (such as those set out in subsection (3)) with a view to protecting and enhancing the resilience of the UK financial system”.

In the FPC, we are seeking to put together the people who are the most able in the country to monitor, consider and mitigate financial instability. We are requiring them to opine on it and to make directions on it. We are requiring them to be the best informed people in the country and the FPC to be the most important body in the country in terms of financial instability.

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It is therefore strange that the new body is not able to pull what I would call the Clause 54 trigger. The Bill leaves this entirely in the hands of the Governor of the Bank of England. The presumption is that the governor will always provide the best information and the best notification of where a risk is likely to come about.

It is difficult to understand that, because at first sight of the Bill you would expect it to be a narrative about setting up structures and organisations to address the whole issue of financial instability. You would expect it to give those institutions the appropriate powers to understand, to control and to mitigate financial instability. Broadly speaking, the Bill does that; and, broadly speaking, the Bill is not opposed by these Benches in how it seeks to do that.

However, suddenly the narrative stops. The FPC, watching instability occur in the economy, is expected to take actions—quite powerful actions. It is able to instruct the PRA to take certain actions with respect to banks, perhaps to consumer credit, and so on. Yet suddenly, once the deteriorating situation is labelled a crisis, there is no involvement by the FPC. There is the presumption that the Bank of England Governor will be all-knowledgeable, that the FPC will no longer have any role, and that it should not opine on whether the Clause 54 trigger is pulled.

The facts of life are that real organisations have a diversity of opinion, and the FPC, if it is doing its job well, will have interesting and difficult discussions about a gathering storm. We contend that it should be able to decide that, as a result of those discussions, it can advise the Chancellor that a situation is deteriorating and that there may well be a situation in which public funds would be required. If we require this body to have that role, then the FPC will be a safeguard against the possibility that voices that should be heard by the Chancellor are not heard. I beg to move.

4.30 pm

Lord Newby: My Lords, amendments to probe the role of the FPC in triggering a public funds notification under Clause 54 were also laid in Committee in the other place. They were inaccurate then and they remain inaccurate now, primarily because these amendments would have no legal effect. The FPC does not have any powers under Parts 1 to 3 of the Banking Act 2009. So in referring to the powers of the FPC under those provisions, the amendment refers to powers that simply do not exist.

The thrust of the noble Lord’s amendment is that the FPC should be able to give notification of risks to public funds separately from the Bank itself. As we have explained previously, the new system that the Government are putting in place is based on making the Bank a single point of accountability for financial stability. Consistent with this, we are making the Bank, and the Bank alone, responsible for notifying the Chancellor of risks to public funds. This is because, as we have seen so strikingly with the tripartite system, the risk of splitting responsibilities over various institutions is that each one thinks that one of the others is responsible, or blames another, when things go wrong, thereby allowing serious risks to fall through the gaps. This will require the Bank and its senior management

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team to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA, the FCA and the FPC.

However, the statutory responsibility for formally notifying the Chancellor must be clear and unequivocal. It is not that the FPC is going to be separate somehow from the Bank and, given that the governor in his new enhanced role is going to chair the FPC, if the governor, representing the Bank, goes to speak to the Chancellor under the terms of Clause 54 he, of necessity, will also be representing the views of the FPC.

We therefore think that the amendment is unnecessary and inappropriate, and ask the noble Lord to withdraw it.

Lord Tunnicliffe: My Lords, the essence of this situation was caught in the last part of the noble Lord’s response. If the governor goes to see the Chancellor and, say, does not represent the FPC’s view, that would to some extent be unthinkable. However, our concern is if he does not go to see the Chancellor—that he listens to the debate at the FPC and may find himself in a minority, but still concludes that he has no responsibility to share FPC’s doubt with the Chancellor. We are not talking about competing roles where it is not clear who is responsible. We are not in any way challenging the split of responsibilities set out in the Bill. We accept that the Bank has the executive responsibility to take action in a crisis. We accept that there need to be rules about where the Chancellor comes in and has executive responsibility.

This is not about who is responsible, other than the points raised by the noble Baroness, Lady Noakes, earlier in the debate, where we may think the line has to be moved about a bit on direction. We are not, broadly speaking, challenging the thrust of the Bill and the division; we are challenging the idea that only the Governor of the Bank of England can advise the Chancellor that there is a gathering crisis that may involve the use of public funds. We believe that it is safer to have more bodies involved in that situation and we particularly believe the best qualified body in the land should have a duty to consider whether there is a crisis situation developing and should have a right, if it considers that to be true, to advise the Chancellor.

I can see that I am not persuading the noble Lord but nevertheless the point is important and valid. We may come back to it on Report but in the mean time I beg leave to withdraw the amendment.

Amendment 190ZEZB withdrawn.

Clause 61 : Memorandum of understanding: crisis management

Amendment 190ZEA

Moved by Lord Davies of Oldham

190ZEA: Clause 61, page 137, line 32, after “England” insert “, the FCA”

Lord Davies of Oldham: My Lords, in moving Amendment 190ZEA, I will speak also to the other amendments grouped with it. I imagine the Minister feels that his reply earlier was so definitive that the

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Opposition ought really to pack up their bags and go home at this stage. I have bad news for him—we still have open bags with plenty of issues that we seek to explore, not least because we do not think the Government are clear about the issue of crisis management. This, after all, is the absolute heart of this Bill. We all know the reasons why we are greatly concerned about financial crisis management and the difficulties that have obtained in the past. Therefore, I am afraid that the Minister will have to tolerate the fact that we are going to probe as far as we can within the framework of these Committee proceedings. However, he can of course rest assured that when his answers are totally satisfactory, that will only foreshorten the amount of debate we will need on Report. He stands to gain from giving as full answers as he possibly can that may allay our anxieties at this stage.

All these amendments relate to the memorandum of understanding on crisis management—the blueprint on who has to do what and what would happen in the particular circumstances of any crisis situation. The substance of the memorandum is not in legislation and therefore not quite subject to the scrutiny that we are afforded on other aspects of crisis management. It is being published separately and does not go through quite the same degree of parliamentary scrutiny as the other agents and factors involved in crisis management. Therefore, the Minister is bound to expect us to press hard in this area.

The broad message of this group of amendments is to call for the Financial Conduct Authority to be given an explicit role in the process and its related mechanisms. The tenor of all our amendments today is that the collaboration between the Treasury, the Bank and the regulators is exceptionally important. In particular, why does the Bill allow the Bank, the Treasury and the Prudential Regulation Authority to include in the memorandum provisions on co-operation between any of them and the FCA, but the FCA itself seems to have no reciprocal power? It can like it or lump it; it can accept what is put forward as an agreed position or it can seek to veto, but it is not party to the drafting process. We are concerned about this because the risks of disruption and instability in the financial markets, which are overseen by the FCA, are not being given sufficient weight.

We all appreciate that we are reckoning with the future and that we cannot predict it. We also know that the last people we want to be are generals solving the problems of the last war and not being ready for the next. We understand the very real difficulties that the legislation seeks to address. We can put in place as many suitable mechanisms as possible to try to implement appropriate safeguards, but we cannot be certain that we have got it right, and we cannot foresee totally the type of crisis that might arise. Therefore, we on this side of the House think that properly involving the FCA in crisis management preparations can only enhance the collective pool of knowledge and increase the likelihood of better outcomes.

I recognise that there is an element of repetition in these amendments. The Minister addressed this earlier when he explained how Clause 54 addressed many of these issues. However, we believe that our case merits

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consideration by the Government. The amendments are framed in a constructive fashion and I hope that the Minister will accept the spirit in which they were tabled and perhaps indicate that the Government might think again. I beg to move.

4.45 pm

Lord Sassoon: My Lords, I am very happy to accept the spirit in which the noble Lord, Lord Davies of Oldham, has spoken to the amendments in the name of his noble friend Lord Tunnicliffe. However, the rather hesitant and apologetic tone in which he presented them would make it all the more surprising if I were to say that they found favour with me. They do not, but I will take them seriously because although they replicate amendments that were debated in Committee in another place, of course we as a Government should respond to them.

Why do I believe that it would be a mistake to include the FCA as a full participant in the crisis management MoU? The issue goes right to the heart of what the new regulatory architecture is trying to achieve. The Government are committed to moving away from a tripartite model where accountability was confused and diluted, and responsibilities were overlapping and unclear. There cannot be an issue in the Bill that goes closer to the heart of it than the MoU. A key element in achieving the clarity of responsibilities that we need is making the Bank a single point of accountability for financial stability. We debated that, and it goes to the heart of the architecture. This will help to ensure clarity and focus of communication; it will reduce the potential for delay or confusion; and it will provide the best chance of delivering a timely and successful solution to a risk to public funds. The construction of the MoU, and who is and who is not a party to it, flows directly from that central part of the architecture which this Bill seeks to put in place.

Of course there will be occasions on which the FCA might need to be involved in discussions around financial crisis management. For example, the FCA might have a role in identifying how a scenario might impact on the interests of consumers and in suggesting what action should be taken to protect those interests. However, the FCA does not need to be one of the primary participants in the MoU for those interactions to take place. The legislation provides explicitly for this co-operation between the participants to the MoU and the FCA to be covered in the MoU. That is why, as I am sure the noble Lord, Lord Davies of Oldham, will have noted, paragraph 34 of the draft memorandum sets out that the Bank and the Treasury will involve the FCA and other organisations as necessary. Again, I fully understand and respect the substantive point made by this amendment but it is dealt with through the obligation in the legislation for the co-operation. It is backed up by a paragraph in the draft MoU and that is where we believe it should rest in a way that is compatible with this greater clarity of responsibilities that we have to get into the new system.

To underline the point, the FCA does not have a significant role in the crisis management itself. It is not responsible for responding to or managing serious threats to stability—that is for the PRA and the Bank—

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nor for prudentially regulating firms that are likely to pose a risk to public funds; a matter for the PRA. Therefore, the FCA does not need to be a primary participant in the crisis MoU alongside the Treasury and the Bank of England. Indeed, I would suggest to the Committee that, if the FCA were included in this way, it would force the FCA to be a participant in meetings and discussions where it had no clear role.

The approach taken by the Bill is the most sensible solution. It ensures an appropriate level of FCA engagement in crisis management, without requiring the conduct regulator to get involved in aspects of crisis management where it has no remit or expertise. I would hope that, on the basis of this explanation of the rationale for the position, the noble Lord would feel able to withdraw the amendment.

Lord Blackwell: Before the noble Lord responds, clearly one area where the FCA has particular responsibilities are competition issues relating to the industry. Can my noble friend put on the record that, if a competition issue is raised in a crisis management situation, there will be an explicit expectation that the FCA would be involved it that?

Lord Sassoon: My Lords, I believe that paragraph 34 of the MoU is sufficiently widely drawn that the MoU will provide for the Bank and the Treasury to involve the FCA in that circumstance. However, we do not specify, and it would not be right to specify, the particular circumstances because the competition and other remits are made clear in the general objectives and obligations that the authorities are under. I do not believe that there is any lacuna in that respect.

Lord Flight: My Lords, I want briefly to support the Government’s position here. I am one of the few people still around who participated in the lifeboat back in 1974 in the wake of the secondary banking crisis then. Although I felt that the Bank of England had been less than perfect in allowing that crisis to develop, the way in which it handled it was first class. It did not cost the taxpayer a penny and the lifeboat got to grips and sorted out the various banks that were, in essence, bust.

The fears that I expressed in the other place at the time of the FiSMA about the tripartite agreement were exactly what transpired. The three parties failed to reach agreement, as I think is now widely recognised and known, and it is a miracle that the banking system did not actually collapse because it was dangerously close to doing so. In a banking crisis which is not about, if you like, conduct and how customers are treated, but for whatever reason is about the potential pack of cards implosion of the banking system, it is crucial that it is the banking regulator entity—in essence the Bank of England in consultation with the Chancellor of the Exchequer of the day—that has clear authority to get on and take the necessary measures promptly.

Lord Davies of Oldham: My Lords, I am not sure that we are disputing that last point. We are arguing that there may be a crisis in which the contribution of the FCA would be of considerable importance.

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Perhaps the Minister will answer this point for the clarification of the Committee and all those interested in this matter. We are not quite clear why the other regulator, the PRA, operates in a different fashion from the FCA with regard to the consultation on the memorandum. I should like the noble Lord at least to identify that factor.

Lord Sassoon: I am not quite sure I have understood what clarification the noble Lord is asking for. The simple fact is that we are talking about a memorandum to do with crisis management. Crisis management is to be led by the Bank of England under the clear responsibilities that we have in this framework and therefore the memorandum is focused entirely on matters where the responsibility lies between the Bank and the Treasury in so far as public money is at risk. We are talking about matters where essentially the FCA is an ancillary party because dealing with crisis management is not the FCA’s principal role. It has a lot of other responsibilities in the new system, but crisis management is not one of them. That entirely drives the logic behind who is and who is not party to the MoU. I do not know whether that helps the noble Lord.

Lord Davies of Oldham: The Minister is always helpful, if not always totally convincing. We shall think further about this matter and the answers he has given today. For the time being, I beg leave to withdraw the amendment.

Amendment 190ZEA withdrawn.

Amendment 190ZEB

Moved by Lord Davies of Oldham

190ZEB: Clause 61, page 137, line 38, at end insert “which must include risks which significantly impact upon the safety and soundness of PRA-authorised persons, or which put at risk relevant markets functioning well”

Lord Davies of Oldham: My Lords, again I apologise to the Committee that this amendment is also a casualty of the fact that we ought to have tabled and discussed it the other evening in the context of Clause 54, but in fact we failed to do so. I would therefore ask the Committee to show a degree of patience and bear in mind the content of Clause 54 which, as the Minister has already identified, is absolutely critical to this part of the Bill. We want to make our argument as it relates to Clause 61 because that is where the amendment is actually located. However, Clause 54, which sets out the circumstances under which a decision is made to notify the Treasury about the need for financial assistance to address a risk to public funds, is the background to the amendment.

The amendment seeks to arrive at a clearer definition of what “material risk” means. We have already had one shot at this issue today and I think we made a modicum of progress, but as my noble friend Lord Peston indicated, if we are not careful we might become engaged in a somewhat philosophical debate about the definition of risk. However, the term “material risk” appears in the Bill and therefore we ought to be as clear as we possibly can about what the term means.

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In the context of the memorandum of understanding, this amendment states that the memorandum needs to make provision for what the Bank and the Treasury regard as material risk. The amendment requires the definition to include risks that significantly impact on the safety and soundness of PRA-authorised persons and factors that put at risk relevant markets functioning well.

These are specifically and deliberately definitions which directly refer to the roles and objectives of the PRA and the FCA respectively. This is because the Opposition argue that the Bill and the draft memorandum are too vague about the role of the FCA and PRA in circumstances of material risk to public funds. I do not think that our discussion earlier this afternoon cleared this matter up. That is why we are once again giving the Minister the opportunity of being clearer about the matter, perhaps. We want to ensure that the Bank—the governor—will involve the FCA and PRA in these matters. The importance of defining material risk, and concerns that the Bill currently falls short on this, was raised by the committee convened to look at the draft legislation. That pre-legislative committee argued that it should be subject to parliamentary approval and should not be left to the memorandum of understanding.

We have parliamentary colleagues who have a real anxiety about this matter. I do not think that the discussions we have had thus far this afternoon allay all those anxieties. However, the Minister may be able to have a better shot at it a second time. I beg to move.

Lord Sassoon: Well, I will have another shot at it, but I do not suppose the schoolmaster opposite will necessarily mark me any better, however well I do. I am under no illusions. Nevertheless, I take this amendment suitably seriously. I will go through the arguments in the expectation that perhaps all will become clear and I will get an alpha plus for this one.

Amendment 190ZEB would link the threshold of the “public funds notification” detailed in Clause 54 to risks that could significantly impact the safety and soundness of PRA-authorised persons or undermine the orderly operation of financial markets.

This amendment would make the public funds trigger confusing, and less, rather than more, effective. I should explain why. The phrase “public funds notification” set out in Clause 54, which is a notification that public funds could be at risk, is precisely that. It is not a notification that there are circumstances in the financial sector that threaten the PRA or FCA’s objective.

The PRA will be responsible for prudential regulation of a large number of small deposit-takers and insurers, many of which can and do fail without any risk to public funds. Requiring the Bank to make a formal notification to the Treasury under Clause 54 every time and any time any of these institutions got into trouble could lead to a relatively large number of notifications where there was in fact no risk to public funds.

Similarly, adding a reference to the FCA’s objective to the definition of material risk in this way would broaden the grounds on which the duty to notify would be triggered to risks which do not involve

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public money. It would mean that the notification under Clause 54 was not in fact a public funds notification at all. Crucially, this would mean that the Treasury’s power of direction in Clause 57, which is available where there is a live public funds notification, would be available when there is no risk to public funds. I do not know whether that is what was intended here but I hope that the noble Lord would agree that that is not what should be achieved. This matters because decisions to use public funds to resolve a financial crisis are for the Government to take, usually the Chancellor personally. As such, the purpose of Clause 54 is to ensure that the Treasury is always informed when there is a material risk to public funds, and not for other, wider purposes.

5 pm

The noble Lord is nodding, which is encouraging. I shall carry on. This does not apply in the same way to problems in the financial sector that do not affect public funds. These matters are the responsibility of the regulators and the Bank of England, not the Treasury. As we discussed in the debate on early warning mechanisms for the notification, the trigger is already wide, with a low threshold: if there is any doubt that public funds may be at risk, the Bank must notify the Treasury.

Of course, there are all sorts of other publication mechanisms for all sorts of other matters, which we have discussed, but here we are talking about a very deliberately targeted issue to do with public funds and a trigger mechanism that relates to that issue, and we do not want to confuse it with other types of notification, which this amendment risks doing.

In conclusion, of course the FCA and PRA should keep the Treasury informed when they are managing significant issues that are of wider public interest but do not impact on public funds, not least because it is Treasury Ministers who will need to explain these issues to Parliament where necessary. This type of communication already goes on routinely between the Treasury and the FSA, on matters such as PPI mis-selling or bank charges. There are provisions in Part 5 of the Bill, which we will be discussing in Committee next week, to ensure that the Treasury and indeed Parliament are informed where there has been potential regulatory failure. However, these are very different matters from the formal notification that public funds may be at risk, which is the sole purpose of Clause 54.

It is quite right that we tease out these issues. If the noble Lord feels that there are gaps in Part 5, I am sure that he will raise them in debate next week and I look forward to that. For the moment, I can assure the noble Lord, Lord Davies of Oldham, and the Committee that the provisions in the Bill as drafted have this direct link between the warning mechanism and the public funds power of the Treasury, with a bar that we believe is sufficiently low, and that we should not risk confusion with the much wider trigger mechanism that Amendment 190ZEB would introduce.

I hope on that basis that at the very least the noble Lord will consider withdrawing his amendment, even if he does not give me an alpha plus for my further explanations.

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Lord Davies of Oldham: My Lords, it is almost half a century since I was a schoolmaster so I have forgotten what alpha plus means. I cannot remember ever offering one to a student. I might have done to undergraduates later but certainly not in school.

However, I am not going to grade the Minister. I would not want to flatter him too much. After all, he derives enormous satisfaction from these interesting debates and I do not think that I should add to his sense of self-satisfaction at this stage by marking his last effort. Where I was nodding is obvious enough. Of course I agreed with the Minister when he was emphasising that what we are concerned about with the warning mechanism is where public funds might be engaged. That is the nature of Clause 54 and our amendments with regard to Clause 61 also take that very much into account.

I am grateful to the Minister for his commendable contribution today, which I very much enjoyed and I hope the rest of the Committee did. Like him, I am looking forward to our engagement next week on Part 5. As he predicted, he has not heard the end of this matter, although I beg leave to withdraw the amendment.

Amendment 190ZEB withdrawn.

Amendments 190ZEC and 190ZED not moved.

Amendment 190ZEE

Moved by Lord Tunnicliffe

190ZEE: Clause 61, page 138, line 2, at end insert “, and how a temporary Stability Committee would be convened and function in a crisis”

Lord Tunnicliffe: My Lords, I shall refer to the memorandum of understanding, particularly paragraph 20. I am mindful that people reading Hansardmay wonder which memorandum of understanding it is and where it is. It is Annexe E to A New Approach to Financial Regulation: Securing Stability, Protecting Consumers, Cm 8268, from January 2012.

Paragraph 20 of that document states:

“During a potentially fast-moving crisis, it will become especially important to ensure close and effective coordination so as to maintain coherence in the overall crisis management process. At the heart of institutional coordination during a live crisis will be frequent contact between the Chancellor and the Governor. However, the Chancellor and the Governor may agree to establish ad hoc or standing committees at other levels to support this process”.

That is fine as far as it goes. Our amendment seeks to require in the MoU more detail of how a temporary stability committee—as we have called it but we do not mind what the Government call it—would be convened and how it would function in a crisis. We are essentially saying that we would like a commitment in the Bill to emergency preparedness—to planning how the crisis might be handled.

I have a very strong relationship with the concept of emergency preparedness. It has been part of my whole professional life. My first job was as an airline pilot—third class; I struggled up to second class. We spent our time

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hurtling down runways with engines on fire and so on and coping with it—not for real, I hasten to add, or there would be piles of burning metal all over the place, but in simulators. It was a crucial part of our role. The public who use those services have every right to expect that people in that critical position spent a great deal of time preparing for emergency.

The next phase of my career in which this was particularly important was when I was managing director of London Underground Ltd. A year before I came into that office we had 31 people at Kings Cross. We got more or less everything wrong that could possibly have been got wrong. Emergency preparedness was part of the series of errors. If we had had good emergency preparedness processes and all other things had gone wrong, in probability nobody would have died. Later in my career I was chairman of the United Kingdom Atomic Energy Authority, which has the potential of course to release radioactivity into the atmosphere and we took the whole issue of emergency preparedness right up to what the role of the non-executive chairman would be in such circumstances.

In the airline business, London Underground and UKAEA, we had the potential to kill tens or hundreds of people—in LU, it was thousands of people. I am happy to reassure anyone reading this debate that we engineered out the scenario that involved thousands of people and London is much more secure for that. Nevertheless, they were grave and important consequences and we took them very seriously. Yet the damage that we could cause through our failure in that mode pales into insignificance compared with the pain the country is suffering in this double-dip recession.

I do not want to go into the causes of where we are today. There is not the slightest chance of the Minister and I having any serious common ground in such a debate. Despite the time we have in front of us this afternoon, it would be rather fruitless to start such a discussion. Yet I do not believe that we would disagree that the banking crisis made a significant contribution. We might argue over what came first or so on, but if the banking system had remained stable through the circumstances as they developed in the last part of the previous decade and the first part of this one, we would be in a much better position. A banking crisis does absolutely enormous damage to an economy—and to the world economy—and needs to be prevented, avoided or handled at all costs.

This amendment invites the Government to set out, at least in terms of duties or some such way, how they do the necessary emergency preparedness for such a crisis. For anybody who has been through a crisis—I have been through some modest ones in my professional career—there is absolutely no question that the extent of emergency preparedness has a significant impact on the ability to handle that crisis. Knowing who to talk to, who to bring together for skills and how to communicate with appropriate external agencies, and the effort put into developing scenarios and looking at the various tools that can be addressed by them, is massively repaid in those scenarios happening.

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In my previous professions, very serious scenarios were very improbable. Very serious scenarios in the banking world have proved all too probable. They really happen and cause enormous damage. This amendment seeks to encourage the Government to set out what planning they are doing, how they would convene the committee envisaged in paragraph 20, what functions it would have and how it would involve the main players. In our experience, you have to have the top players involved. I am sure that, for instance, in contemplating a possible unfavourable military situation in the Middle East, the Prime Minister spends part of his time working through how the Government would respond to that and how the process of debate, analysis and so on would take place. I put to the Committee that exactly those sorts of capabilities ought to exist within Government for a possible future banking crisis. I am reasonably confident that they are in place. As a minimum, I hope the Minister can outline what preparedness is envisaged. I ask him to accept the amendment, which would require him to set out that preparedness in a memorandum of understanding. I beg to move.

5.15 pm

Lord Newby: My Lords, we have stated many times during this debate that the Government place great importance on effective co-ordination between the relevant authorities. We accept that this will be particularly important with regard to crisis management. That is why the Bill places a legal duty on the Treasury, the Bank and the PRA to co-ordinate their functions, and requires that they prepare a memorandum of understanding setting out how they intend to co-ordinate in a crisis management situation.

Obviously in such a situation the Treasury, Bank and PRA will need to be in regular contact. These events are often by their nature fast-moving or take place outside office hours. The protocols in place for ensuring co-ordination need to be flexible to accommodate this uncertainty. A committee is not necessarily the most appropriate way to deal with every crisis. For example, setting up a formal committee for a crisis event that lasts the duration of a weekend would be overly bureaucratic and cumbersome if the event required a particularly swift and flexible response.

These crises require that. They require frequent and immediate contact between Ministers and senior officials at the Treasury and senior executives at the Bank of England. Each financial crisis situation is different, and sometimes the circumstances will mean that a formal committee process would not be appropriate. If you look at three events which have either been, or had the potential to trigger, a financial crisis, without going into the details you can see how greatly they differ. There was for example BCCI, which was referred to earlier. There were the concerns in the immediate aftermath of the 7/7 bombings. There was the RBS crisis. These happened at different times of the day and at different points in the week. Some were put to one side relatively quickly while others have had long-term consequences. In those circumstances, it is difficult to imagine how you could set out in a memorandum of understanding either how a committee might be

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formed—we do not think that you always need one—or, if one is formed, how it will be convened and would function.

The memorandum of understanding is currently 39 paragraphs long. I do not know whether, when the noble Lord, Lord Tunnicliffe, was doing his training on the plane or when he was at London Underground, they had instruction manuals and crisis manuals. From working in humble PR, I recall that crisis management plans there ran to page after page. An MoU would not be the right place for these plans. This is not to say that the authorities do not plan. I can reassure the noble Lord that the authorities now have regular war games to prepare for a range of financial crises and participate in a range of cross-governmental operational crisis war games. This is to try to make sure that when a crisis explodes its participants have some preparedness for how they can respond.

That is different from saying that you need a committee in every case, even though we have said in the memorandum that in some cases you might. Certainly it is different from saying that in a memorandum of this scope and length you could set out how a committee could be convened and function. I hope that the noble Lord will be reassured that officials are spending quite a lot of time in crisis management planning and that that is the appropriate way of making sure that we are ready to deal with a crisis, rather than having the formal structure that his amendment would require.

Lord Tunnicliffe: My Lords, I thank the noble Lord for his response. I am reassured to a degree about the issues. We are not likely to press this further. The Committee might be reassured if he could flesh out some stronger sense of the preparedness and if he could write us a note that sets out the levels at which people are involved. I am not asking him to make a commitment now. He does not have to do anything as dangerous as that.

The thoughtfulness that has gone into the pre-crisis preparation is crucial. So many organisations fail to do it properly. British Petroleum successfully wrote off something like a quarter of its value through not having an adequate level of preparedness. In the defence sphere, for instance, the committee systems within government for national security and so on are documented as part of the strategic defence plan. Anything the Minister can do to add to our understanding of the depth and height of this preparedness and who is involved would be reassuring. With that request, I beg leave to withdraw the amendment.

Amendment 190ZEE withdrawn.

Amendment 190ZEF

Moved by Lord Davies of Oldham

190ZEF: Clause 61, page 138, line 6, at end insert “, and ensure that the Governor and all Bank of England Deputy Governors and the Chief Executive of the FCA may consult with the Treasury directly”

Lord Davies of Oldham: This amendment furthers the points that my noble friend and I have already made this afternoon about widening the range of

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individuals who should be in a position to contribute their knowledge, experience and advice to a crisis management scenario. We remain concerned that the Government have narrowed the point of action in crisis management. I listened very carefully to what the Minister said about the advantages of that narrowness and fully understand it, but I am still unconvinced that the Government have the Bill right about who should contribute fully to the management of what we all recognise is an issue of very great significance to the nation.

The memorandum of understanding on crisis management must, according to the Bill, make provision about obtaining and sharing information. This amendment seeks to facilitate this requirement and enhance the Bill. We need to ensure that certain key personnel can consult directly with the Treasury. The amendment develops our clearly argued concern that reference in the legislation to “the Bank” is too often taken to mean, or certainly risks being interpreted and acted on as meaning, simply the governor. We argue that the Bank’s deputy governors and the chief executive of the FCA should in the Bill be explicitly enabled to consult directly with the Treasury in such extreme circumstances.

We are worried about the concentration of power and feel that relevant alternative voices must be given the opportunity to be heard in the management of an issue of such great concern for the nation. This is particularly important if there proves to be a difference of opinion within the Bank. We know there are differences of opinion in the Bank on very important matters. One would expect that highly capable individuals with different experience would not always reach an identical opinion. If they did, they would not deserve the high position they occupy because they would be merely yes men or, in one or two cases, yes women.

Under the current formulation of financial regulation, the Chancellor can hear directly from the chairperson of the FSA. Under the new system and the memorandum of understanding, the Chancellor could hear from no one but the governor.

In the other place, the Minister said, “Well, of course, the Bank encompasses a range of people”. We are not convinced about that. We do not feel that the position is explicit enough. It does not address the point about including the FCA in the vital process of obtaining and sharing information. Nor does it indicate that, at a moment of great crisis for the nation, voices which might present a somewhat different view from that of the governor will have their position adequately reflected to the Chancellor. In every other aspect of the role that the Chancellor plays, he welcomes engaging with the opinions of a large section of the population, represented by Parliament. We are talking about crisis management here. It is an extremely important dimension. We all recognise the constraints; I am not sure that it is right that the legislation should so circumscribe those who advise the Chancellor. I beg to move.

Lord Sassoon: My Lords, the arguments represented by the amendment have been raised at virtually every stage of this Bill’s progress in both this House and another place. Indeed, my honourable friend the former

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Financial Secretary speculated that it seemed to reflect the Opposition’s obsession with dominant figures preventing any dissent emerging from within an organisation. That is probably more a reflection of where those concerns are coming from than anything to do with how the Bank of England operates. This is an extraordinary line with which the Opposition persist. I start by repeating what the Government have said on every previous occasion when this point was made. I agree entirely that frequent communication between Treasury Ministers and the senior executives of the central bank and financial regulators is important. However, there is absolutely no need to legislate to ensure that the deputy governors of the Bank and the chief executive of the FCA can speak directly to the Treasury. There is categorically nothing prohibiting that in the legislation or anywhere else. In fact, Treasury Ministers regularly meet the current deputy governor for financial stability and senior executives in the FSA. Senior Treasury officials maintain a virtually constant dialogue with the deputy governors and senior FSA figures via meetings, phone calls and e-mail. The same was true under the previous Government. I was a senior Treasury official in this area for three years. There were many things that did not work well under the previous regime—that is why we are changing it—but I know perfectly well from experience over a long period that official contact with deputy governors works extremely well. I see no reason why that should change in future. It has existed over a considerable number of years and is just a natural part of the way the system operates.

In a financial crisis where public funds were at risk, if one of the deputy governors or the CEO of the FCA felt that there was something that the Treasury should know about, they would of course be able to speak to the Treasury directly. They are senior figures who are well aware of their responsibilities and quite used to making their feelings felt. In the case of the deputy governors, as well as the CEO of the FSA and the future FCA, they will be in front of the Treasury Select Committee. It is extraordinary to suggest in some way that legislation should be required to allow those senior figures in the system to make their views clear, as they have always done in the past.

However, when it comes to the statutory duty to notify the Chancellor formally of a risk to public funds, this responsibility is rightly given to the Bank of England as an institution. In practice, I would expect that in most cases a notification would be made by the governor personally to the Chancellor, but there is no reason why one of the deputy governors cannot send it on behalf of the Bank. The key thing is that it must be a decision of the Bank. As the Government have made clear on multiple occasions, the Bank must come to a view internally about the best way to fulfil the duties and responsibilities that are placed on it, including the duty to notify the Chancellor of risks to public funds.

On the basis of that further explanation of the position, I ask the noble Lord to withdraw Amendment 190ZEF.

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Lord Davies of Oldham: I am grateful to the noble Lord, who seems to have retaliated because of my failure to give him alpha plus last time by suggesting that I am guilty of excessive plagiarism in my arguments this time. If that proves to be the case, I apologise. However, I insist that he at least accepts that in tabling and speaking to these amendments we think that there is real substance to them and that the Government have a case to make in answer to them. I am grateful for the way in which he has presented that case.

5.30 pm

I am not totally convinced. The Opposition still have great anxieties about the concentration of power in relation to what we all recognise are the most extreme circumstances in which the nation might find itself, short of armed conflict. The collapse of financial institutions and the difficulties we have all faced in recent years is a situation which we have to take every step to ensure never recurs. That is why we feel that we in the Opposition are under an obligation to test the Government in every aspect of the Bill on their understanding of how the legislation will work. I am grateful to the Minister for clarification on this occasion. I beg leave to withdraw the amendment.

Amendment 190ZEF withdrawn.

Amendments 190ZEG to 190ZEK not moved.

Amendment 190ZEL

Moved by Lord Tunnicliffe

190ZEL: Clause 61, page 138, line 24, leave out subsection (7) and insert—

“(7) The memorandum is a measure prescribed by the Treasury by order which shall not be made unless a draft of the order has been laid before and approved by resolution of both Houses of Parliament.”

Lord Tunnicliffe: My Lords, the MoU is an important document. We believe that it is incomplete. Earlier, we suggested that it should have some additions relating to what I will call, more generally, emergency preparedness, if only to acknowledge that there should be an acknowledgement that there is a duty to do that. There is a real question mark over whether the commitment to explain material extent is fulfilled in Clause 61(2)(a). I have read the memorandum with care and I do not see in which paragraph that commitment is discharged. I should be grateful if the noble Lord could bring that out in his response. I see curiosity spreading across the faces of the Government.

Lord Newby: For clarification, will the noble Lord repeat which duty he is referring to?

Lord Tunnicliffe: Clause 61 is entitled “Memorandum of understanding: crisis management”. Clause 61(2) states:

“The memorandum must, in particular, make provision about—

(a) what the Treasury and the Bank regard as a material risk for the purposes of section 54(1)”.

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We have had quite a debate about material risk but I cannot see which paragraphs of the memorandum address that duty. I should be grateful if the Government would flesh that out. I do not want to cause the Government undue problems. We would be very happy to see a letter setting that out, although a response now would be delightful. The memorandum is important. It will change because, in my view, it already has question marks over it as it stands, but also because the world will change and, as the world changes, the Government, the Bank and the Treasury will want to change the memorandum. It is crucial that Parliament is involved in such an important document.

This MoU deserves to be a formal document and it deserves to be approved by both Houses. The amendment is a standard amendment such as we find in these situations. It requires an affirmative resolution, first, to register the document and, secondly, to allow for when it might change. I cannot see why it is being resisted. The concept of an MoU is entirely sound but the document, frankly, should be more formal than it is at the moment. Its alteration in the future should be by affirmative resolution of both Houses. I beg to move.

Lord Newby: My Lords, I shall start by answering the noble Lord’s question as to where in the memorandum of understanding the question of material risk appears and where it is defined. The principal paragraphs dealing with this matter are paragraphs 8 to 18, but paragraphs 13 to 16 set out the matters that the Bank should take into account in determining the material risk.

The Bill does not actually say that the memorandum of understanding has to define material risk. It says that it must,

“make provision about … what the Treasury and the Bank regard as a material risk”,

which is a slightly different requirement. The paragraphs in the memorandum of understanding to which I have just referred do exactly what the Bill requires the Treasury to do.

Lord Tunnicliffe: Forgive me—the noble Lord was going faster than my brain. Will he repeat the paragraph numbers that cover the point?

Lord Newby: The whole section is headed “Notification by the Bank of a risk to public funds” and it runs from paragraph 8 to 18. It explains the background and sets out, particularly in paragraphs 13 to 16, the matters that the Bank needs to take into account in determining whether the material risk test is met.

The amendment would transform the MoU into a statutory instrument. In our view, that would severely limit the usefulness of the MoU as secondary legislation is, like primary legislation, extremely prescriptive. It sets out what must and must not be done and confers powers that have legal effect. Although we agree that clear responsibilities are important for effective crisis management, we believe that the Bill sets out the framework for this extremely clearly and the MoU then fleshes that out. That is the role of an MoU. It goes beyond what must, in all cases, be done or not done. It allows the authorities to set out what is likely

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to happen in given situations and why that is the case and provides an insight into the aims of the authorities involved. We do not believe that it would be possible for the MoU to fulfil this purpose effectively if it were required to be in the form of secondary legislation. That is because it is difficult to impose clear legal constraints on how a crisis is managed because of the wide variety of situations that could be considered as a crisis, each requiring bespoke handling that suits the characteristics of that particular event. Earlier I talked about the different kinds of financial crises we have had in recent years which I think exemplify that point.

It is our view that the MoU should be a living, responsive document, able to change as is needed. Requiring that it should be a piece of secondary legislation would severely curtail the authorities’ ability to change the MoU as circumstances change. As things stand, the MoU can be changed within a matter of days. That requires no huge amount of legal input because it is a working document about how to handle a crisis. That is very different from dealing with a statutory instrument which goes through a different formal process. It would be difficult to deal with a statutory instrument when the House is not sitting and that would be inappropriate.

The Bill already provides for the MoU to be laid before Parliament. It will then be open to scrutiny. The Treasury Select Committee will be able to scrutinise it, as will the Economic Affairs Committee in this House if it decides to do so. In my view, that is the best way to get parliamentary input rather than through an overprescriptive and inappropriate statutory instrument. In view of those arguments, I hope that the noble Lord will withdraw his amendment.

Lord Tunnicliffe: My Lords, my experience is that statutory instruments do not have to be that inflexible. Statutory instruments that have to have early effect can be laid and come into effect immediately, if that is appropriate. However, they do require formal scrutiny by Parliament. I have not won many points today and I am not going to win this one. I beg leave to withdraw the amendment.

Amendment 190ZEL withdrawn.

Clause 61 agreed.

Clause 62: Memorandum of understanding: international organisations

Amendment 190A

Moved by Lord Flight

190A: Clause 62, page 139, line 24, at end insert—

“( ) The memorandum must make provision for the UK authorities to consult with the financial services industry and, where appropriate, consumers on initiatives brought forward by the European Supervisory Authorities, the EU institutions and other international organisations.”

Lord Flight: My Lords, as everyone will be aware, Clause 62 concerns the MoUs among the Treasury, the Bank of England, the FCA and the PRA and how

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they intend to co-ordinate their respective functions as they relate to their relations with the various European supervisory authorities, the EU itself and other international organisations. It is perhaps implicit that in order to handle such relations effectively, they should naturally consult the industry and even consumers. However, Clause 62 does not prescribe that that should be the case. As this legislation is generally fully prescriptive, it certainly seems to me that it is at least worth discussing that in arriving at the MoUs there should be consultation. My amendment simply requires that provision is made for the UK authorities to consult thus.

5.45 pm

I also make the wider point that there has almost been a sort of global excess regulatory reaction to the banking crisis. We have the ESMA at a European level; we have the European Banking Authority, which, under the present EU proposals, would have powers to have the last say with regard to banking regulation in this country; and we have international regulatory authorities. All of those bodies effectively are saying what should be done without very much accountability. Therefore, at least to avoid mistakes, it is important for the UK entities to have consulted very fully with the relevant parts of the financial services industry. I pay tribute to the fact that in the main that has happened in practice and that by and large the UK representatives in Brussels seem to have done a pretty good job of looking after UK interests. Nevertheless, as prescriptive legislation is the fashion of the day, I think that there is a strong case for this Bill to prescribe for such consultation.

Lord Northbrook: My Lords, I rise to support my noble friend Lord Flight in his Amendment 190A. As far as I can see, Clause 62 currently contains no reference to consulting the financial services industry or, where appropriate, consumers in this area. I think that the clause should be amended to this effect as it is a useful and important potential extra area of consultation.

Lord Sharkey: My Lords, my noble friend Lord Flight seeks to amend Clause 62(6). The paragraph states that the MoU that we are discussing,

“need not make provision about co-ordination between the FCA and the PRA in relation to membership of, or relations with, the European Supervisory Authorities”.

However, subsection (1) of the same clause states:

“The Treasury, the Bank of England, the FCA and the PRA … must”—

I emphasise “must”—

“prepare … a memorandum describing how they intend to co-ordinate the exercise of their relevant functions so far as they relate to membership of, or relations with, the European Supervisory Authorities”,

and some others. On the face of it, these two paragraphs appear to directly contradict each other. I am sure that that is not actually the case, but I would be very grateful if my noble friend the Minister could explain why there is no contradiction here and perhaps also explain the purpose of subsection (6).

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Lord Davies of Oldham: My Lords, I rise briefly to say that it gives me considerable and indeed a rare pleasure to agree with the noble Lord, Lord Flight, and we support his amendment.

Lord Newby: My Lords, what we are talking about here is how we make sure that all those who should be consulted are consulted in respect of the work of the European supervisory authorities, the EU institutions and other international organisations. We are talking about the international dimension of the work of the financial services authorities as opposed to the domestic work that we have been looking at up to now.

We agree absolutely that consultation is an important part of the formulation of policy at the international level as well as the domestic level. It is perhaps worth starting by saying a bit about the way in which the international bodies themselves have sought to consult. The EU, following the Lamfalussy report in 2001, has increasingly appointed expert groups comprising industry, academics and consumers as the first stage of formulating policy. The UK has provided many distinguished members of those working groups. For example, the Commission set up a financial services user group, whose members included Mick McAteer, who was a founder director of the Financial Inclusion Centre, and Robin Jarvis, professor of accounting and head of SME affairs at Brunel University. We have therefore had strong UK representation on those European bodies for a long time.

One of the other main pillars of the international regulatory framework is of course the Basel Committee on Banking Supervision. It has consulted widely on its proposals for Basel III, and the Financial Stability Board’s charter clearly states:

“In the development of the FSB’s medium- and long-term strategic plans, principles, standards and guidance, the FSB should consult widely amongst its Members and with other stakeholders including private sector and non-member authorities”.

So at the international level, there has been growing recognition that the board itself needs to consult, and in many ways that will be the most effective level of consultation in respect of provisions that the board is making.

National regulators also have an important role to play in the consultation and feed their views through to the European supervisory authorities. The FSA already takes that responsibility extremely seriously, and the PRA and the FCA plan to do the same.

The regulators will be required to consult on any proposed new rules that are required to implement EU or international regulatory initiatives, except in cases of urgency. The FSA already does that. For example, in July this year, the FSA published a consultation asking for views on how to transpose Solvency II into the UK rulebook. In addition, the FCA and PRA’s contributions to international policymaking processes will be informed by engagement on an ongoing basis with the industry and other relevant bodies. That means that the views of affected parties will be considered at all stages of the policymaking process.

The UK practice has been a mixture of formal and informal consultation, which has meant that the regulatory bodies—the FSA and the Treasury—when going into negotiations in Brussels or at Basel, have taken a lot of

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trouble to gauge the views of the UK financial services sector and have sought to reflect them effectively. I may be wrong, but I think that the sector feels that that is the case.

Regarding the question asked about why the MoU does not deal with PRA-FCA co-ordination with the ERAs, the PRA-FCA memorandum of understanding is covered in new Section 3E(3)(a) on page 31 of the Bill. I am afraid that I cannot read that out at the moment, but I refer noble Lords to it.

My noble friend Lord Sharkey asked an extremely good question but, as I have explained regarding the way that the authorities are approaching co-ordination, even though not every last detail will be set out in a memorandum of understanding—and some clearly are—the authorities plan to take consultation extremely seriously. Apart from anything else, they have learnt through harsh experience that unless they have done that and are able to carry the industry with them, it just stores up more problems for the future.

I am convinced that the culture of the regulators is that they consult widely with relevant stakeholders and will continue to do that, and that it is not necessary to have an explicit provision in the Bill to ensure that that continues well into the future.

Lord Flight: My Lords, I made the point that it had worked pretty well so far. However, we are dealing with new regulatory bodies being set up, and I just repeat the point that this Bill is pretty prescriptive in what it requires. I have, I regret to say, encountered some criticism that the FSA has not gauged the views and criticisms of the different bits of the industry adequately with regard to MiFID 2. We have some MiFID 2 proposals from the EU that are likely to be wholly unworkable and could be very damaging to this country by penalising trading between a London-based party and an overseas party. Although the record is pretty good, it is a little disappointing that on an important recent matter I found criticism of the consultation.

I cannot see why we should not put it in the Bill rather than just relying on it happening automatically. It is not a very great issue, but perhaps the Government might think a little further about this. I do not think it is an onerous requirement. In the mean time, I have raised the issue and beg leave to withdraw the amendment.

Amendment 190A withdrawn.

Clause 62 agreed.

5.58 pm

House resumed.

Sitting suspended.

Young Offenders: Employment and Training

Question for Short Debate

6.05 pm

Tabled By Baroness Healy of Primrose Hill

To ask Her Majesty’s Government what measures they have in place to help young offenders find employment or training on release from prison.

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Baroness Healy of Primrose Hill: My Lords, I thank the Government for granting this short debate, and I am grateful to the many organisations, including the Library, which offered briefings on young offenders and their opportunities for employment and training on release. I am concerned about the level of reoffending among young people. Most reoffending on release occurs in the first three months, so questions must be asked about the effectiveness of these prison sentences. Can we as a society find a better way for these young men and women to lead a more fulfilling and productive life?

It is believed that the total cost to the UK economy of offending by young people could be as much as £11 billion a year. This is a bad time to be young, with 22% of young adults not in education, employment or training, and just under 1 million 16 to 24 year-olds unemployed. The abolition of the education maintenance allowance, increased tuition fees, cuts to services and further caps to housing and other benefits are creating a hostile climate for our young people.

For young adult offenders, finding long-term, stable employment is an even greater challenge. Young adults in trouble with the law often have particularly high levels of complex needs and come from deeply disadvantaged backgrounds. Frequently they have few or no educational qualifications and no experience of work. Often they lack positive adult role models and suffer high levels of mental ill health and alcohol and drug misuse. This month Sadiq Khan said that a future priority for a Labour Government would be to give the Justice Minister specific responsibility for rooting out mental health problems in our criminal justice system.

In order to reduce reoffending, we must understand the underlying conditions that affect so many young people before we can find solutions that offer hope. Statistics reveal the stark reality of lives lived against the odds. Of young offenders imprisoned in 2012, two-thirds were unemployed, nine out of 10 had been excluded from school, one-quarter had learning difficulties and half had a reading age below that expected of an 11 year-old.

Once released, the picture does not improve. According to the Barrow Cadbury Trust’s Young Adult Manifesto, published in 2009 and developed by T2A, the Transition to Adulthood Alliance, one in five men between the ages of 15 and 21 leaving prison did not know where they were going to live on release. Many of those will have been in care. Black and minority ethnic young adults experienced even higher levels of homelessness and were less likely to have a family or support system to return to.

Unstable accommodation triggers a vicious cycle, severely hindering former prisoners from finding employment. It is believed that around a quarter of employers would not consider employing a homeless person. The Inquiry into the Future for Lifelong Learning organisation points out that difficulties in finding accommodation on release reduce the opportunities for training, education and employment. It suggested that ex-offenders need to find accommodation and employment or training within three weeks of release or they are likely to reoffend.

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At the end of June 2012 there were 7,443 young people aged 18 to 20 in prison in England and Wales. Although there has been a welcome steady decline in the number of young people in custody in the past decade, thanks in part to the work of the Youth Justice Board, there are still far too many. Greater use of restorative justice should be examined. What works best to reduce reoffending? T2A has run three pilot projects in Birmingham, London and West Mercia with 36 young offenders. Funded by the Barrow Cadbury Trust, they show very positive results, and the Government should take note. T2A argues that the transition to adulthood is happening later in people’s lives than in recent generations. Research has shown that the adult brain is not fully developed until at least the mid-20s, yet these young adults with complex problems often have to negotiate multiple transitions between services and systems when they reach 18. They can easily fall between the gaps and lose the support that might have helped them make a smooth transition to adulthood.

Young adults aged between 16 and 24 are the group most likely to commit a criminal offence, but with the right intervention and support they are also the group most likely to desist from offending and grow out of crime. Therefore T2A argues that the focus for public expenditure should be on encouraging desistance by concentrating on the factors which are known to reduce crime; namely, employment, housing and health. The pilots gave the young people individual support, resulting in a reduction in the six-month reconviction rate to 9%, compared with the national one-year reconviction rate for 18 to 20 year-olds of 46%. Those participating in the pilots experienced a trebling in employment and were more positive about apprenticeships and courses with a vocational and training element, rather than purely educational courses. The London pilot was particularly effective in finding its clients sustainable apprenticeships. However, accommodation remained a problem. The majority of those who were homeless to begin with did not move into stable accommodation.

The need for assistance with accommodation on release is confirmed in numerous reports. An HM Inspectorate of Prisons report on looked-after children found that a significant number of children and young people had not obtained early release because they had nowhere safe to be released to. HMIP also reported that one-quarter of boys and more than half of girls had been in the care of social services before entering custody.

I am very concerned by the Government’s proposals to deny young people aged under 25 housing benefit. It will mean that many young offenders who do not have families to return to, and who desperately need to find a job or training to help them desist from returning to crime, will be without any kind of home from which to go out and find work, training or education.

In attempting to find solutions to the problem of young people reoffending, the Howard League for Penal Reform argues that the current system sets children and young people up to fail. The league strongly argues that young people should spend much less time in isolation in their cells while in prison and must have increased and more purposeful activities during association

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and at weekends. This would make a real difference in preparing them for release and the possibilities of taking up employment, training or education.

There appears to be general agreement about what needs to be done. The Government’s Green Paper of December 2010, Breaking the Cycle, recognised that custody should be,

“used sparingly as a last resort as it separates young people from their families and communities, can seriously disrupt education, training and development and is an expensive option that does not deliver good outcomes for young people”.

Therefore, will the Government consider taking a number of steps which would not necessarily increase spending but would make outcomes more effective?

First, they could issue guidance to local authorities to link up with crime-reduction partnerships and the new police and crime commissioners to ensure those young people just released have access to appropriate accommodation.

Secondly, will they encourage local authorities to develop wrap-around support for young adults leaving custody, as recommended by the government-appointed panel which published the After the Riots report?

Thirdly, in partnership with voluntary and probation teams, the Government could develop greater use of “through the gate” support. Mentors can provide the role of a significant adult and enable the young person to stick to their tenancy agreement, training programme or supervision. Young people must not be left to sink or swim on release.

Fourthly, the Government should ensure that planning for resettlement should start from the moment a person enters custody, and include the young person and their families. Those who received visits from their family were twice as likely to gain employment and three times more likely to have accommodation on release.

Fifthly, they could incentivise employers to employ ex-offenders. A good example is the National Grid’s young offender programme of apprenticeships for those still serving sentences, which then guarantees jobs on release. This has resulted in reducing the reoffending rate to below 6%, as compared to the national average of 70%, and is estimated to save the UK taxpayer more than £350 million.

Sixthly, the Government could consider some special financial assistance for these young people to help them through FE colleges and access courses.

Finally, they should reconsider the abolition of housing benefit for those aged under 25. Securing appropriate accommodation on release has been shown to be vital for obtaining employment and therefore preventing reoffending. The Government need to support voluntary bodies, local authorities and employers to give these young people a fresh start for their sake and that of society, and to cut crime and save taxpayers’ money in these austere times.

It is incumbent on all in public life to try to solve this problem of young reoffending. There is growing agreement both here and abroad that access to employment and training, education and housing, health services and help with recovering from substance abuse are all part of the package needed to give young people a second chance on release.

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6.15 pm

Lord Bates: My Lords, it is a privilege to follow the noble Baroness. On behalf of all who will take part in this debate, I thank her for securing this time for this very important issue to be aired and discussed. I also thank her for the way in which she introduced the debate, which was very even-handed and fair, and reflected the fact that this is not a situation that developed in May 2010 but is something that all Governments have been wrestling with for many years, and needs to be approached as such.

There are a number of speakers who I am looking forward to hearing, particularly my noble friend Lady Stedman-Scott, who, through her wonderful organisation, Tomorrow’s People, has shown how even the most hard-to-reach young people can be picked up, have a future and a job, and work their way out of the problems they have found themselves in early in life. My own contribution comes through growing up on Tyneside, being involved in a church youth group and meeting lots of young people and seeing the problems that they encountered at that time; then through a long involvement in secondary education, and also having visited many young offender institutions, particularly in the north-east of England.

I want to put down one marker before moving on to some of the suggestions and analysis. There is nothing intrinsically different about the young people who enter the criminal justice system. They could be any child—and anyone’s child—but for the environment in which they spend their formative years and the choices that they make. I have no doubt that had a young offender had the good fortune to be born into a home where they were loved and affirmed by their mother and father, had attended one of our outstanding public schools, where expectations of life success were set at a very high level and where they mixed with similarly motivated and secure students, their life choices would have been different, their peer group very different and the outcomes profoundly different. In short, for better or worse, we are all the products of our environment but also of the personal choices that we make in responding to the circumstances in which we find ourselves.

We live in a very unforgiving world. That may seem like a strange thing to say at a time when we are supposed to all be very liberal, but in many ways it is a very dismissive world and culture, in which people are written off, whether they are young people or people in senior positions in public life or sport. It is far too easy for people to be caricatured and written off as problems, particularly in the media. Therefore, it is very important to see these young people as having the same potential and gifts of any young people and to approach the situation in that respect.

This subject is a statistician’s dream. There are statistics everywhere, including those in the excellent briefing pack prepared for this debate by the House of Lords Library. The noble Baroness has highlighted some of those statistics. If she will forgive me, I will repeat one or two because they so clearly point out where the problem lies.

Reference has been made to the fact that 54% of males and 71% of females have no qualifications, which reflects the fact that these young people do not

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just arrive in the criminal justice system. They arrive there having been excluded from school, having been sent to pupil referral units and having probably been in local authority care at some stage. It is difficult enough to get a job these days when you have a degree. When you have no qualifications and a criminal record, it is challenging to make your way into the jobs market. Again, that is where the work of Tomorrow’s People is so utterly inspirational for me.

We know that often people have mental health disorders. We know—I think this is a key element—that many are involved in drug or alcohol misuse. It is a common denominator throughout. Sometimes there is a tendency to take a soft approach to this and say that people need simply to control their habits. I have visited, an initiative called the Betel Trust. These Betel places say to young offenders who have come out, “What we will do is have a contract. We will offer you a bed, we will give you a job but there is absolutely no alcohol or drugs. It is zero tolerance”. Sometimes that can be a bit harsh because it means that if there is one transgression, the person has to leave the home. However, for those who remain the success rate is quite astonishing, showing drug or alcohol misuse to be a particular cause of offending.

We know that people get drawn into the criminal justice system and therefore it behoves us to do everything we can to keep them out of it. Some 70% highlighted the fact that the major driver for crime was that their peer group consisted of criminals. If you can stop them going into that environment that would seem to be eminently sensible. The costs of this, financially and socially, are dreadful for society but I would argue that they are worse for the young people themselves. The most important thing we can do is to battle for a culture in which we allow people to make a fresh start and tell them that their future is not determined by where they started in life but that their worth is determined by where they finish.

Examples such as the competitors at the Paralympic Games show how people can overcome all manner of difficulties in their early life to achieve incredible success. They are the kind of inspirations and role models that we need. We do not need self-pity. We need to inspire these young people to realise their full potential and full worth.

6.23 pm

Lord Warner: My Lords, I congratulate my noble friend on securing this important debate. I agree very much with what she said. I want to speak in more systems terms from my experience in designing Labour’s reforms of the youth justice system after 1997 and my six years as a director of social services in Kent, helping youth people in care and young offenders.