Insisting on our rights in the single market is absolutely correct. Going to the Court when we think that these rights are under attack is absolutely correct. I am sure that we can play a good defensive game. But markets will make their own judgments. Financial services can relocate very fast, far faster than any other industry. That is one reason why I am so worried about our increasing isolation in Brussels, and about the signal that we have sent this week. The Channel is getting wider so quickly that I fear the movement may be visible from Tokyo, Beijing and New York. We already know that our friends in Washington have seen it and worry about it. I think that we should all worry about it.

5.12 pm

Lord Hamilton of Epsom: Like the noble Lord, Lord Kerr, I pay tribute to our chairman, the noble Lord, Lord Harrison. He has always been a very genial and capable chairman. I am particularly grateful to him for the fact that we now seem to be getting before our committee rather more representative witnesses, who on occasions represent the majority of the British people. Unlike the noble Lord, Lord Kerr, who I enjoy having on our committee—we have our differences but they are always agreeable ones—I am not going to speak too much about the Prime Minister’s speech as my noble friend Lady Noakes has a debate on it next Thursday, to which I hope to contribute. All I would say is that it is a very clever speech. Rather like the Old Testament, there are bits in it which suit absolutely everybody. It does not really matter whether you are a Europhile or a Europhobe. There is something in the speech to keep everybody happy.

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On our report, I do not know how many people have actually read it; certainly not an awful lot of action has been taken on it. We must be well aware that the single supervisory mechanism has been adopted, but an awful lot of other things that were heavily recommended in our report have not. I refer particularly to the recovery and resolution directive, which is possibly equally important, if not more so. Of course, the intention was that it would be introduced at the beginning of this year. I now gather that the Dutch and others who see themselves as picking up the tab for ECB intervention into banks have backed off. They do not want to get involved in that anymore. They are going back on earlier undertakings, which is rather typical of how the EU operates most of the time. It takes two steps forward and one step back, and if everything gets rather difficult or if things, as it seems to believe today, are looking rather better, it is a wonderful excuse to do nothing. If that is the EU of which we all want to be part, that is fine, but it certainly does not seem to be the answer for the United Kingdom. Earlier this week, we had some witnesses who described the state of European banks as they now are: they are European in life but still remain national in death.

We are now in a very significant situation. The problem with the EU is that it does things, with enormous reluctance, only when faced with a very major economic crisis. You merely have to lurch from one crisis to another before any difficult measures are taken. There may be people in this House who are dreaming of the day when Europe moves towards much greater integration but it is quite difficult to see how that will happen. It also seems quite clear that it will happen only when there has been one crisis after another.

In 2011, the Prime Minister called for the “big bazooka”. He wanted a major move made that would stabilise the sovereign debt crisis in the EU. What happened? Absolutely nothing happened and things got worse and worse. Interest rates on Club Med debt went through the roof. It became such a crisis that eventually the Germans agreed that Mario Draghi should make his statement that he would do anything necessary to stabilise the eurozone. At that stage, the markets calmed down. It was only because it took that long for German agreement to come through and, by that time, confidence had been undermined all over the eurozone. Sovereign debt was getting completely out of control. Investment decisions were being put on hold. When you get that across a large economic area such as the eurozone, you see the economy moving into recession and things getting very much worse.

I always get a wonderful narrative from my son-in-law, who is German and works for a German bank in London. He says that Merkel is playing a fantastically clever game. She is delaying like mad and restructuring the economies of countries in the eurozone. But what she has actually done is bring recession across the whole of the eurozone. Germany itself is now in recession. That does not strike me as being statesmanship. It comes as no surprise to me that she has just lost some Länder elections in Germany. I will be quite surprised if she wins the general election in September

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of this year. I do not think that there is much to be happy about with the way in which the eurozone is performing at the moment.

Earlier this week, our witnesses said that eurozone bank indebtedness would disappear like the snow in the sunshine once we had economic growth in the eurozone. There are two problems with that. First, we have absolutely no idea of the scale of bank indebtedness in the Club Med countries in the eurozone. However, we know that we are reaching a situation where a number of countries—because they are faced by serious social problems—have said that their banks cannot repossess properties and throw people on to the street. That means that people in those houses stop paying their mortgages because they cannot afford to do so. The next thing you have is moral hazard when someone says, “Well, hold on, my neighbour is not paying his mortgage repayments because he can’t. But I think I won’t pay mine either, although I can”. That leads to a very major problem in the banking sector because all the mortgages are going wrong and you are talking about sliding property prices anyway.

I agree that economic forecasting seems to have gone a bit wobbly right across the board, but if there is any consensus it is that there will be absolutely minimal growth in the eurozone for the next two years. I do not think there is any point in looking much beyond that. However, two years is a long time to have no growth and no relief on this side of things. For that reason, the banking crisis is certainly not over. If the ECB is not going to make itself liable for bank debt, another banking crisis will lead to a sovereign debt crisis and we will be back in much the same situation we were in a few months ago.

There are also serious questions about how much freedom the ECB has to buy sovereign debt. Officially, it is not allowed to print money and the Germans are desperate to try to keep a hold on how much money the ECB spends. They want to pass resolutions in Parliament before very much more money is extended to the ECB. We must accept that, although the recovery and resolution directive has not gone through, there probably will be a crisis which will eventually force it through. Then we will have a very interesting situation. There has been a lot of comment in this debate already about whether we are covered by a double lock voting system in the European Banking Authority. But, come on, let us live in the real world. In the real world, the executive arm will be the ECB, which will make up the rules as it goes along. I do not think that it will constantly refer back and say, “We have a crisis on our hands. Is the EBA happy that we can do this, that or the other?”. I think that the guidance that will come from the EBA will be extremely broad in anybody’s language and that the ECB will become very much more powerful as it goes along.

We also have the problem of what on earth we do about democratic accountability. It is not going to be a very satisfactory situation when the ECB moves in on a large bank and says, “This thing is going absolutely nowhere. Its liabilities are appalling. We must lay off half the people, break it down and get it into a more sensible state”. That will not be a popular move when thousands of people are put on the street. You can

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imagine that at that point the local politicians will all say, “This is nothing to do with us, you know. It is the ECB that is doing this. We don’t like to mention it but it is the Germans standing behind them”. That is the sort of situation you are going to get. If you have no democratic accountability—there is absolutely none as regards the ECB—you will have some very serious problems when things start to go wrong with banks. This is all far from being satisfactory and does not bode well at all for those eurozone countries which desire this great process of integration.

Lord Kerr of Kinlochard: The problem of democratic accountability is very real, as described, but I think that everybody is well aware of it. Certainly the European Parliament is extremely well aware of it, which is why it is linking the two texts. The ECB text is nothing to do with the European Parliament but it will not agree it until it has agreed the EBA text, which is to do with it. I am sure that it will insist on some sort of democratic accountability provision being built in.

Lord Hamilton of Epsom: I wish that I shared the noble Lord’s confidence, but I do not. I cannot see where this democratic accountability is going to come from because at the end of the day the EBA is the only thing that has any democratic accountability, and if it is laying down broad policies and the executive action is being taken by the ECB, that is where the rub is going to come—with the executive action being taken by the ECB. Perhaps something will happen, but there does not seem to be much sign of it at the moment.

We will face crisis after crisis, which will merely prolong the uncertainty and the general conditions that we have in the eurozone today whereby people are still very reluctant to invest in this area and stagnation seems to be continuing. Resentment will increase. Everybody says that we need a completely integrated fiscal union in the eurozone. Well, come on. You will have a growing problem with the Germans resenting massive transfers of money to the Greeks—to talk in extremes. The Germans will not allow those transfers of money to take place without enormous conditions being placed on the Greeks. The Greeks will all riot in the streets because they will say that the terms under which the money is being transferred are too stringent, and the Germans resent giving the money. Is this the sort of Europe we want to live in? Already we are beginning to see very extreme parties appearing in Greece. Everybody goes on about the fascists in Greece, but you have to bear in mind that the communists are much bigger than the fascists and much more likely to win the next election. Either way, we are seeing very extreme parties emerging.

Then we have the Prime Minister’s speech and the idea that we should have a referendum in 2017-18 on whether we should be in or out of the European Union. If the eurozone is going absolutely nowhere and is no better than it is today, as many people think will be the case, I cannot see this country ever voting to stay within the European Union.

5.25 pm

Lord Davies of Stamford: My Lords, it has happened more times than I can recall since I have been in this House, nearly two and a half years, that I have had the

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pleasure of following the noble Lord, Lord Hamilton, or he has had the task of following me. Although I rarely agree with him about very much, it is a great pleasure to debate with him. However, I did agree with two things that he said this afternoon. First, I share his view that the ECB, in practice, is likely to have a dominating and increasing intellectual influence on the EBA. Secondly, I very much agree with his characterisation of the way the European Union makes progress as two steps forward, one step back. Although he probably would not agree, I think that is a very sensible, sound and prudent way of advancing in difficult territory, and I am very content that that has been and continues to be the process. Had he put the order the other way around, I would have very much disagreed with him, but his judgment and mine are very much the same in that way.

I want to add my own word of tribute to the noble Lord, Lord Harrison, and to everyone on the committee for having brought forward a very interesting and timely report. I want to address just two of the issues on which the committee focused in drawing up that report, and then to say a few words about the position of the British Government. First, I recognise that the testimony that the committee received was rather conflicting. A very important and fundamental issue is whether it is right to have the monetary authority—in this case, the European Central Bank—as the supervisory authority for the banking system. It seems to me that it is right. There is often said to be a conflict of interest between financial stability and monetary policy. I see it not so much as a conflict of interest but of objectives. It is not the sort of conflict that can be eased or solved by separation of responsibilities. On the contrary, it is the sort of conflict that can be made a great deal worse by the excessive separation of responsibilities, because if there is a problem and in difficult times the supervisory authority feels it necessary in the interests of financial stability to provide more liquidity to the market, for example, or to support a particular bank by replacing deposits that may be fleeing elsewhere, or otherwise, that decision would immediately have monetary consequences and could be implemented anyway only by the central bank.

The central bank needs to be brought in—inevitably, it must be brought in—and the earlier the better. What is more, the central bank is in a very good position because of its open market operations, because it can see to what extent banks are varying their levels of deposit with itself, and because it knows about any drawings through the back door by banks in its area of responsibility. It is in a very good position to see whether liquidity problems are emerging for institutions in their area. Therefore it seems to me extremely important that the supervisory authority and the central bank should work together anyway. The idea of having two different directorates within one institution—the ECB—responsible for stability and for monetary policy seems to me a very good solution. I personally have the greatest confidence that, if there is a difficult decision to be made—as there will be, inevitably—it should be Mario Draghi, a person in whom I have the greatest confidence, who has the responsibility of making that decision.

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The other issue that I want to address, which was dealt with in the committee’s report at some length, is whether it is desirable or acceptable for the banking industry come in in stages. Only the first stage so far has been agreed. Of course, it cannot be certain that there can be any agreement with the second or third stages, the first stage being the supervision regime and the second and third stages being retail deposit insurance and resolution procedure and mechanism. Clearly, it is not ideal; it is not the way one would wish these things to be, but I think it is a reasonably acceptable situation on a temporary basis, and a good deal better than nothing. I am glad that we have the process going.

I have to say that I think the Germans are not being rational. Maybe the Germans, and the Dutch, are resisting a European Union-wide resolution and retail deposit insurance system simply because if there were a problem and a run on the banks in one member state because in that particular context depositors no longer had confidence in the credibility of the retail deposit insurance system, and if that confidence depended entirely on the credibility of the national Government, unsupported elsewhere in the EU, there would inevitably be a systemic crisis. Similarly, if it was necessary for a particular member state to recapitalise the banks, and that task was out of proportion to the financial resources of that particular member state, that would engender immediately a sovereign debt crisis for that country.

What is more, such a crisis would never be limited to one member state. There would be knock-on and systemic effects for the whole of the European Union. If Greece went down, we know that there would be effects elsewhere, or if Portugal went down again there would no doubt be strong effects in Spain. The consequences of that would be that German and Dutch banks—to take the examples of the two countries that are resisting the logic of the banking union, which I think they are—would find that they are making great write-offs of their assets that were exposed to these particular markets and deposits with those banks, and so on. They could be supported only by their own banks, which would have to be recapitalised by their own national Governments.

The cost of such a bailout would be enormous and vastly greater than any credible drawing in respect of one, two or three particular institutions on a retail deposit insurance scheme. I think that the Germans are being quite illogical about this. They are not looking at the matter in the long term or in the round. No doubt intellectually they might agree with me, but they find themselves under political constraints. I hope that with the various events that are in the pipeline in the coming months they will find that it is politically possible to do what I think is the rational thing to do.

I now want to say something about the position of the British Government in all this, which seems to be perfectly ludicrous, if I may say so. I understand that they see the banking union as a good thing for others but not for us. That immediately is a slightly suspect argument, and one wonders why it is the case. I looked at the committee report to see what the British Government’s analysis of the national interest was, and why it was not in our interests to join the banking union if it made sense for other people. There is no

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such explanation in the whole document. I shall read what passes for an explanation to the House. Paragraph 129 states:

“The Government have repeatedly stated that the UK will not participate in the banking union proposals, on the grounds that the measures logically flow from monetary union and are designed to secure the success of the single currency”.

That is a quite unconvincing argument. If someone buys a car, a pharmaceutical product or a piece or electronic gadgetry, he is not worried about who the product was originally designed for; he is worried about whether it is suitable for him, and whether it will work for him. That is the argument that needs to be addressed, but it has not been addressed by the Government at all.

Lord Marlesford: Surely what the noble Lord has just been saying is precisely the reason why the British Government do not want to join the banking union. They are saying that there must be mutualisation through the European Central Bank and the banking union of the debt of banks in the euro area. Is he really suggesting that it would be sensible for the British Government to share in that liability, and that if, as he described graphically, there were to be a run on one of the banks in Greece, we, too, should have our share in picking up the pieces?

Lord Davies of Stamford: Indeed, I am suggesting exactly that to the noble Lord and to the House. It would be very much in our interests to do so, for the reason that I thought I had explained. Perhaps the noble Lord did not follow my argument, which was that if there were a run on the banks in a member state, left to itself it could engender a systemic crisis that would be far more costly to us, because British banks would write off a very large portion of their assets as a result of collapses elsewhere. In order to restore those banks to financial viability, we would need to recapitalise and support them in ways that would be much more expensive than the likely cost of any contribution to the system. I do not want to detain the House for too long, but I believe that we should have interventions such as this, so I will give way to the noble Lord.

Lord Marlesford: In that case, why did the American banks not recapitalise the British banks that went bust?

Lord Davies of Stamford: It is obviously necessary, if we are going to get involved in any kind of obligation of this kind, to make sure that we come under the same supervisory authority and that everybody works according to the same rules. That is palpably not the case with us and the United States.

The position of the British Government is clearly that they are not interested in making a dispassionate and functional analysis of the national interest in this area. If they were interested in doing so, it would have been quoted in the report and we would all know about it. They have simply decided that on party political grounds, because of the need to conciliate the Eurosceptics in the Tory party—we know that this is the way the country’s foreign policy is now being run;

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it is being bear-led by the Eurosceptics—it is impossible to do the rational and sensible thing, so they have simply excluded a priori any possibility of our joining the banking union, even as a participant that is not a member of the euro. A large number of countries will join on that basis—almost certainly a good deal more than the four that have already announced they will. I expect that every east European country other than the Czech Republic to come into that category. As the noble Lord, Lord Kerr, very convincingly argued, that would cause great problems for us. It is absurd for the British Government to say that one of the major difficulties here is the voting system, because the problem would be resolved if we were part of the system, and at least one of a minority of nine or 10.

If we do not join the banking union, there are only three logical possibilities. I do not think that any Member of the House will want to argue with my logic, which is very basic and elementary. The first is that we have a supervisory system that in practice simply tracks that of the ECB; we will do exactly what the ECB does in its area of responsibility, for example in matters of licensing, authorisation, intervention and guidance to banks. That would mean that we were de facto part of the system, with the important difference that we would not be part of the decision-making mechanism and would not have the kind of influence within the system that otherwise we would have had.

The second possibility is that we adopt a supervisory system that is somehow stricter and more severe than that adopted on the continent by, for example, the Republic of Ireland under the ECB. That would mean that banks here would find that they were at a competitive disadvantage doing their business out of London as opposed to doing it out of Paris, Frankfurt or somewhere else. That would not be a very intelligent thing to do.

The third possibility is that we adopt a regime of supervision that is lighter and more complacent than that adopted by the ECB. In the short term, that might attract institutions that do not like the stricter regime on the continent, but in a crisis we would be much more exposed because we would have a lesser degree of credibility. It would be considered that our institutions and banks were less safe and sound than those across the Channel, or indeed across the Irish Sea. That, too, would be a bad day’s work for the country. We would face a situation in which either we would have no advantage at all, but the disadvantage of not having the influence that we ought to have and that is commensurate with the importance of the City, or we would be otherwise disadvantaged either in competitive terms or in our ability to withstand crises. That would be a profoundly bad day’s work for the country—and it is exactly the day’s work that this Government have done. I deprecate it very strongly indeed.

5.39 pm

Lord Dykes: My Lords, it is always a pleasure to follow the noble Lord, Lord Davies of Stamford, because, whatever other interests and policies he has in his mind, he is always a very robust, fervent and positive European. We need more of that in this country. I am glad, too, that in recent years the Labour Party has become much more positive on Europe

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following the passage of the Lisbon treaty. That is a very good development for this country. It can emulate the good example of the Liberal Democrat party as being always in the vanguard of the pro-European position—patriotic Britishers, of course, but also enthusiastic Europeans, and those two things can go closely together.

Yesterday the Prime Minister made his sad speech—actually, it was not a sad speech but a sad occasion. One has to acknowledge that there were some good bits in the speech and, as my noble friend Lord Hamilton of Epsom said, he tried to appeal to everyone, and in that sense was quite clever. However, it was a sad occasion because he has unleashed for himself a number of very disturbing things, depending on how they develop in future, that are going to destabilise British politics significantly. I will return to those themes in my concluding remarks.

Many good things have been said so far about the EBU report. I shall refer to it briefly but that is not to decry its quality. In fact, we in this House are used to having reports of high quality from the European Union Select Committee and its sub-committees. I am going to embarrass the noble Lord, Lord Harrison, deliberately by saying that this report is outstanding. I thank him and his sub-committee members for having created this excellent report.

It highlights, in a disturbing and worrying way, the acute complexities of the architecture of the system. A number of significant members, led, I suppose, by the United Kingdom, which, in a way, is the largest of them, are not going to be involved in this important developing system and framework. That is a matter of great concern, and the sooner we have the courage to align ourselves with these proposals, the better. That may take some time, and of course nationalism raises its ugly head all the time and we have to contend with that. My noble friend Lord Hamilton of Epsom would not admit this or agree with me but, as a result of being driven out of the exchange rate mechanism in 1992—that hugely humiliating moment under a Conservative Government—the United Kingdom was subsequently very scared of the euro, afraid of the single currency, nervous as hell about what it might develop into and always looking for things to go wrong.

The fact that the report looks at the way in which this new system will control the banks—the clearing banks, the joint stock banks, the commercial banks and the other banks—in the eurozone area is an outstanding achievement. I want to quote from what was said by President Van Rompuy, but first I will give way to my noble friend.

Lord Hamilton of Epsom: Does my noble friend accept that if the United Kingdom were in the eurozone today, with the deficit that we are running and the debt levels that we have, we would be in intensive care?

Lord Dykes: I do not agree with that, and anyway it is too theoretical even to consider. By the way, our deficit is £100 billion and we have a free-floating currency that has now been devalued about eight times since the war, either formally in the marketplace

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or informally. It is interesting to measure and to see where that got us when we were kicked out of the exchange rate mechanism by market forces, when the Treasury was for a moment probably the worst ministry of finance in Western Europe. It has not carried on being like that—it recovered and has produced some very good decisions since then—but that was the lamentable position at the time.

President Van Rompuy, who met the committee, is quoted in the third paragraph on page 57 of the report as saying that,

“the EU was in a better place than a few months ago. No-one was now speaking about imminent eurozone collapse. Although the problems had not disappeared, things were ‘on the right track’ but the EU might ultimately need to give Greece more time”,

which is a very fair point. In the preceding paragraph, he also said that he had to remind the committee that these member states—sovereign member states, all of them—are very lively democracies, so it takes time to reach these decisions. So, although people complained about the process being slow, the slower it was, the better the structure that was emerging, as I hope the Minister will agree.

In the third paragraph of the summary, the committee states,

“we welcome the publication of the Single Supervisory Mechanism proposals as a significant first step towards banking union. We agree that the European Central Bank, to be given ultimate supervisory responsibility for every euro area bank, is the only organisation with the necessary credibility and authority to take on this role”.

When the Minister comes to sum up, will he deal with that matter and the concern that the committee expressed about the concentration of so much power and its practical effects on the institutional banking market place?

In paragraph 3 on page 7, the report states:

“Although the Government have made clear that the UK will not participate in a banking union … the UK’s decision not to participate, should not and need not adversely affect London’s position as the leading financial centre in Europe, nor undermine the single market. The strength of this argument may soon be tested”.

That is quite an ominous point and I would welcome the Minister’s reassurance on that matter.

I repeat my warm thanks for a truly excellent report. It has helped a great deal in taking an immensely complicated subject further. In his distinguished opening speech, the noble Lord, Lord Harrison, set an admirable precedent by referring to yesterday’s referendum decision and so on. I should like to conclude by making a few points on that in this debate.

It was a sad day for the reasons that I have suggested and the effects will be very disturbing as time goes on. I am very glad to see that the Deputy Prime Minister, quite rightly, established a different position—that there might in future be a need for a referendum depending on the outcome of any negotiations, but to threaten one now, when no negotiating posture is being created and there are many years to go before we reach the end year of this decision-making suggestion, will create a great many difficulties and uncertainty, particularly in the business world. There have been many comments to that effect.

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It is sad that we have got ourselves into the position of being the bad member of the club. It is a great pity. It is rather foolish of this country to lecture other countries on the crucial importance of competitiveness and efficiency in their economies when we have a terrible statistical deficit in our own trading and do not have a very strong economy. To suggest to the Germans that they need to improve their economy in comparison with English examples is going too far. I wish I did not have to say that, but that is the reality of the situation. The Germans remain modest about their economic achievements.

The sheer awkwardness of examining the subjects in this report while not being in the eurozone will come out more and more as time goes on. If we could only restore our courage and become a mature and enthusiastic member of the European Union, it would be very good for this country.

There were some interesting points made in the press yesterday about Mr Cameron’s speech. In an article today in the best newspaper in the country—the Guardian, of course—Martin Kettle states:

“Cameron’s speech was not brave. It was reckless. The brave stance yesterday was Ed Miliband’s, sticking to Labour’s practical pro-Europeanism and refusing to follow suit. Instead, yesterday marks the moment when Cameron’s pragmatic centre-right political project finally bent the knee to the ideological fantasy about Europe that still grips the Tory party”.

Anthony Hilton, who has been a long-standing supporter of the euro and the eurozone and now feels that the eurozone has passed the danger point—after all, it has never been a weak currency; it has always remained a strong currency despite the crisis and it is only that there were four or five weak members of that currency which had to have assistance provided by collective action—says in today’s Evening Standard:

“If Cameron thinks these concessions”—

to what I believe he used to call the head-bangers—

“are going to appease his lunatic fringe and calm things down, he might equally consider applying to be Prime Minister of the planet Zog. The sad reality of his capitulation to Eurosceptic pressure is it virtually guarantees that Tory backbenchers and their media acolytes will talk about nothing else between now and an election which is still two years off”.

Of course, they might be tempted to cite the Irish as saying that it will be a good occasion, they are quite relaxed and will go along with it, but that is not true either. I quote the Irish reaction in today’s Irish Times, where Arthur Beesley says that,

“it is readily acknowledged in official circles that the British debate and uncertainty over its EU membership have clear potential to destabilise European politics and create friction with other member states”.

Finally, I shall quote my right honourable friend in the other place, Sir Menzies Campbell:

“This was never about the UK; it was always about Ukip. The declarations of satisfaction which came from the Tory right immediately following Mr Cameron’s speech were disturbing for those of us who are supporters of European engagement. Mr Cameron’s speech had nothing to do with Britain’s place in Europe and everything to do with his leadership of a bickering and divided party. Tory leaders of the past who have had to fight sections of their party over Europe have found it an unrewarding experience. Mr Cameron is fated to be among their number”.

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I regret that because I think that in many ways Mr Cameron has been an excellent Prime Minister and a very personable senior political colleague, so it is a great shame that he has allowed himself to be put in that position.

As my noble friend Lord Hamilton of Epsom said, there is to be a major debate in this House next week on the decisions that were announced yesterday and the future outlook, in which I hope to take part. I shall therefore leave it at that for the moment, but it is part and parcel of everything that we will examine in our Select Committee and its sub-committees. It is all about the huge complexities of Britain remaining a bad member of the club and refusing to co-operate in these matters when co-operation is absolutely essential.

5.51 pm

Lord Flight: My Lords, perhaps I may take the House back to the European banking union proposals and start with my own tribute to the noble Lord, Lord Harrison, as an enormously courteous and conscientious chairman of our committee. At least for me, I allowed myself to go to Brussels, feeling slightly worried as to whether I might be contaminated by doing so. Two things struck me during the visit. The first was that President Van Rompuy is a much more impressive and determined person than I had perceived previously and, to my mind, he will have had considerable influence in persuading Germany at a crucial time that it was not a good idea to allow, encourage or force Greece to leave the euro. Secondly, I cannot resist teasing the noble Lord, Lord Kerr. While we were wandering around the buildings he said to me, “The trouble is that none of the young people in the Foreign Office want to come here any longer because they know we will not be members in five years’ time”. I thought that that was quite an interesting little judgment.

I want to make two further general points. The first is that while the single market sounds wonderful, what we really want, please, is single market free trade. I know from my own commercial career that a great deal of the single market serves the interests of the large players in their sectors and is highly uncompetitive. Wide access is a fair point, but to my mind the single market needs a really good dose of free trade if it is to achieve what it is supposed to achieve. Secondly, I want to make a point about the City of London and its business. It is becoming increasingly global and is not just an adjunct of Europe. The impression I am being given by various European operations in the City is that you would have to have an EU that was very protectionist and was even threatening to impose capital controls for it to be uncomfortable for people in London. If you had an EU which was doing that, I think that people would not want to put money there anyway. I am not complacent about the position of the City of London and I well remember many people warning that if the UK did not join the euro the City of London would collapse. But, of course, nothing like that actually happened.

On the European banking union, the first question to ask is: how important are these proposals, what are they about and what has given rise to them? I have to say that they do not address the real underlying problem,

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which is that of different levels of competitiveness, or the point made by my noble friend Lord Trimble, the risk of locking less competitive areas into permanent depression, which has happened in the deep south of America as well as in the south of Italy. The solution to that is not necessarily internal devaluation, when that is what I call gold standard austerity. In the big debate about what to do about the competitiveness issue, common banking supervision is somewhat peripheral.

To the extent that banking supervision is important and relevant, I thought it was supposed to be getting banks better regulated, with a view to the ECB managing the extent to which the ESM fund was used to bail out banks where necessary. Now it seems we are being told by Germany that that is not wanted and it has to be sovereign states that bail out their banks when they are in trouble and maybe the sovereign states will be helped by the ESM fund. That is entirely contrary to the principle of trying to separate the problem of the banks and the state rather than compounding the two problems. It is pretty important in terms of the underlying objective as to how this is going to be resolved.

I have two more points about supervision. First, I am not entirely clear how much of the banking system it is going to cover. It looks as if it will be only the large banks. There is a slight danger of moral hazard there. The German Landesbanken, the savings banks that control about €2,500 billion, seem not to be part of it, and lots of other smaller banks will be left to their local central banks. I make the point that I think others have made: Credit Anstalt, which started some rather nasty banking developments in the past, was a small bank. It is almost as important that small banks are regulated well as for large banks to be regulated well.

When it comes to deposit insurance, as Martin Wolf said when we interviewed him, Germany does not want to have to pay a penny more than it absolutely has to. I am rather doubtful that deposit insurance will develop if there is a free-riding risk. You may have similar principles as to how it operates but I think it extremely unlikely that you are going to get a system where each country in the eurozone is there to cover the risks of the others.

What about the UK and banking union? As we were considering the first point, I was struck by how considerably it reminded me of the Financial Services Bill, which we were debating here in Committee, and there was a quite extraordinary similarity between the proposals for the PRA as a sensible supervisor rather than regulator of the banking system and the proposals for what the ECB would be responsible for. Indeed, to whatever extent there was open discussion, it is absolutely clear to me that the two go hand in hand—nothing wrong with that at all—and that the Bank of England will be sensibly collaborating with the ECB, as it has for a long time, in trying to get the best of banking supervision both in London and on a pan-EU basis.

The point has been made, but it is important, about the extent to which the Government did a good deal in terms of the voting powers for the EBA. It is the EBA that lays down the rules so it is pretty important. I think it is probably reasonable. We have to have only

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four countries left that are not participating, which is fairly unlikely, and three have already indicated that they are unlikely to participate.

Others have made the point—in particular, the noble Lord, Lord Hamilton—about the lack of ECB accountability, which is crucial in a world of gold standard austerity. Rather cynically I make the point that when people in southern Europe find that the funds from Germany are not flowing in transfer payments in the way that is expected as the quid pro quo, that is going to become extremely difficult politically. The ECB will have to make a real effort to make itself accountable. Then you have the big issue as to whether it is going to be accountable to national parliaments or to the European Parliament. I think that citizens still look much more to their national parliaments.

I have not got a grain of criticism of the proposals, which seem pretty sensible in the main. I see them, in the future, rowing quite sensibly and practically—not negatively—in tandem with what we hope will be much better banking supervision by the Bank of England than we have had from the FSA. However, the real underlying purpose does not look as if it is being addressed. It should provide a mechanism for managing bailout funds from the ESM for the banking system but it does not look as if that is going to be on the agenda.

6 pm

Lord Desai: My Lords, I, too, join other noble Lords in thanking my noble friend Lord Harrison for an excellent report. I shall not talk about either Mr Cameron or the UK but want to concentrate on the banking union. One question I want to pose is why the eurozone members thought, in the middle of the crisis, that a solution to the problem was a banking union. If you think about the financial crisis, both the US and the UK had a banking union—they were each a single banking union—but it did not prevent a collapse. Having a single banking regulatory authority, in our case the FSA, did not prevent the collapse. It is very good that structures are created but we ought to ask whether those structures actually do the job they are supposed to do.

I remember in your Lordships’ House about two years ago, or maybe more, sitting in a discussion about the European system of financial supervision. A huge structure was set up for a banking authority, an insurance and occupational pensions authority, and a securities and market authority. It is obvious that none of those things helped when the crisis came—or they certainly did not make any impact in preventing anything that happened. We are now adding another institution and, as noble Lords have pointed out, there will be problems in respect of the overlap between the EBA and the ECB.

The basic problem here is that we are only slowly understanding the nature of the euro, which, in a sense, is a private currency. It is not a national currency, such as sterling or the dollar, where Governments have more control over money creation. Euros can be created only if the ECB is approached by a commercial bank that gives collateral, sovereign debt or something else, and counterpart money is created. As the noble Lord,

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Lord Flight, said, it is like a gold standard but without the Californian or Australian mines suddenly adding more gold to the total supply. In particular, the strong deflationary character of the euro was understood only when the crisis started. Until then, nobody quite understood what the euro was all about. It is a currency for which there can be no democratic accountability, because the whole Maastricht treaty was designed, on the lines of the Bundesbank’s authority, to have the central bank immune from any democratic control, which was thought to be the standard of monetary responsibility.

I think the ECB is a marvellous institution—right now it is the only institution which is working at the eurozone level, and it did a splendid thing by having its outright monetary transactions authority save Spain from seizing up. However, we have to understand that we have created a currency in the eurozone which will be permanently deflationary. Unless you break the Maastricht treaty and allow the ECB to directly monetise sovereign debt, it will remain deflationary.

As far as I can see, something miraculous will happen to our competitiveness, but, by and large for the next 10 years or so, the eurozone will be stagnant. It will be more or less a 0%-to-1% growth-rate economy. Let us remember that Napoleon looked at a map and said, “There is China; there’s a sleeping giant; let it sleep”. Well, that is going to happen to the eurozone. I am not a Eurosceptic—I am a great admirer of the EU—but this is what we have constructed for ourselves. Let us remember that, in the gold standard, you could thrive only with extremely flexible labour and commodity markets; now, you cannot.

As many noble Lords know, the EU is not a genuine single market as yet and we are still waiting for the Lisbon treaty recommendations on flexible markets to be implemented. In that context, a deflationary currency has a problem. One of the problems facing the banking union, as the report quite properly points out, is that you cannot envisage the ECB looking after 6,000 banks. The ECB will look after the big players, especially those which have cross-border operations. It will be like the Premier League—I think the previous speaker said something about the Premier League council. The problem here is that you will have to be the national supervisory authority of those banks to concede power to the ECB. There will also be macroprudential problems. Those large banks will also have connections with smaller banks within their own territory, which will then be supervised by their national authorities. It is not clear that co-ordination between national authorities, which will be guarding the smaller banks, and the ECB, which will be guarding the larger banks—the hub-and-spoke idea that people are talking about—has been worked out as yet. You will therefore have to devise a set of engagement rules between the various national regulators and the ECB, because, as far as I know, the national regulators need not legally be subservient to the ECB—they may be, but they will not be. That is going to be a substantial problem.

Along the way, in a deflationary climate, there might also be mergers and consolidation. Those 6,000 banks will not remain 6,000 banks; we will probably

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see consolidation. I wish that we had fewer banks in Europe than we have right now, because if you have got a single currency, why do you need so many different banks? It is not clear to me how the ECB will deal with the trickier problem of the dynamics of consolidation, mergers and acquisition and still maintain its authority as a regulator.

Where the issue will finally come to a head is in whether banking union will help the recapitalisation of banks which could possibly fail. When in June 2012 the proposal was made to speed up banking union, the idea was that it would somehow make it easier to recapitalise banks. As the noble Lord, Lord Flight, pointed out, there are difficulties about that, because we lack in the eurozone a genuine pooling of risk. Governments are not willing, so far, genuinely to pool risks. They would rather that each Government look after their local failing banks and recapitalise through issuing more sovereign debt, which the market may not want to buy at any reasonable price.

If so, what happens to the larger banks which are being directly supported by the ECB? Who will bail out the larger banks? We then go back to the national rule. I do not think that Deutsche Bank will fail, but if it was about to, would that be Germany’s or the ECB’s responsibility? Would the money come from the European stability mechanism? How will that be done?

The banking union throws up a number of interesting issues. We are still in the early days. It is not at all clear to me that, having said, “Let us have a banking union”, all problems are solved. The problems of the banking union are just beginning.

As I do not want to speak for more than 10 minutes, all I can say is that I hope that the noble Lord, Lord Harrison, is there to give us the next report when things get worse—or better.

6.10 pm

Lord Liddle: My Lords, I begin with two personal points. First, I declare an interest in that the think tank that I chair, Policy Network, has in the past received support from the City of London Corporation. Secondly, it is a pleasure to welcome the noble Lord, my brother-in-law, to the Front Bench opposite. Therefore, there will not be an excess of partisanship on this occasion on my part.

As always, it has been an interesting debate, not least because of the final contribution from my noble friend Lord Desai, which I am still trying to absorb. My noble friend Lord Harrison began the debate with an admirable summary of his report. As usual, one wishes that the country was governed by the committees of your Lordships’ House rather than by the prejudices of its Executive, because we would be much better governed. It is an admirable report.

An interesting, rather off-the-wall point was made by the noble Baroness, Lady Falkner. It is something on which I have long reflected: why is discussion of Europe such a male-dominated subject? That is not something that we should discuss at length today, but we have to take it very seriously if the pro-Europeans want any chance of winning a referendum, so thank you to the noble Baroness for raising that issue.

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I want to make three points. First, on the state of the euro itself, I believe that adjustment is on the way. Things are a lot better than they were. The question is whether what is occurring is socially and politically sustainable. I do not think that it will be without more fiscal flexibility. Nor do I think that it will be sustainable without considerable debt write-offs, particularly after the German elections in September. There will have to be an element of a transfer union to make the position of the mezzogiorno of the south, which the noble Lord, Lord Trimble, mentioned, sustainable. That will require further steps towards banking union, particularly in the case of Spain, because there is such an obvious link between bank debts and the sovereign debt position.

My second point is on the Britain in Europe debate. Banking union is the fourth major institutional development since the euro crisis started from which the United Kingdom has stood aside. There was the European stability mechanism, the euro-plus pact, the fiscal compact and now the banking union, which was agreed in principle in June 2012, and which the British urged the eurozone to get on with. Indeed, I think George Osborne first recommended it as long ago as January 2011. He was very foresighted about that, but it is something from which we have chosen to stand aside.

If you read what this is about, while in the British debate it is presented as a measure to rescue the single currency, in the continental debate it is about the creation of what is called a financial market union. I think the noble Lord, Lord Kerr, pointed that out. In the British Government’s view, this is all part of a clear narrative in which the eurozone is integrating and we have to establish a new kind of settlement and relationship with the members outside it; that is the British Government's narrative. However, the real question is: to whom does this narrative apply, other than the United Kingdom? How many other euro-outs share this conception of the British narrative? I might ask the Government what their view of that is.

That is a crucial point, first, in informing a view about the sustainability of the safeguards that the Government obtained on the banking union in the December 2012 summit. Secondly, it is fundamental to whether David Cameron’s essential assertion in his speech yesterday—that the core of Europe is the single market—is right. For most members, however, will it actually be the single currency? This point is fundamental because it is a question of whether we are going along with the support of other euro-outs, to try to negotiate a balanced relationship between outs and ins, or whether we are just making a case for special treatment for Britain, which will be far more difficult to negotiate.

The third point I want to make is about the position of the City of London. These are not just intellectual exercises; we are talking about something that is fundamental to our national interests. I have long believed that the UK is overdependent on financial services and I support the whole concept of rebalancing the economy towards manufacturing. My noble friend Lord Mandelson’s comment was right; there has been too much financial engineering and not enough real engineering. I agree with all that. However, the City is a crucial national interest and the financial centre of

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the single market. I also agree with the noble Lord, Lord Flight, that it is global and very resilient but it has benefited a lot from the single market in Europe—particularly from the opening-up of the financial single market, a lot of which occurred under the previous Labour Government.

Of course, no one worried about this at the time because it was the era of light-touch regulation. No one worried about the financial imbalances that were building up between countries and the lack of cross-border regulation. Well, the banking crisis changed all that and the Government recognised the need for regulation at EU level. It was a good thing that the Conservative Government, including Chancellor Osborne, accepted when they came in what Chancellor Darling had already agreed to: the establishment of European regulatory agencies.

Lord Flight: Could I just make this point to the noble Lord? The investment management industry, in which I spent 40 years of my career, has still failed to penetrate the EU. There are a variety of cultural and other barriers, but a lot of American firms came over thinking that Europe was like America and that all they had to do was have offices. If one looks at how much money the London retail funds business has got from the EU, it is still pitifully small.

Lord Liddle: I agree that things vary from sector to sector but one of the reasons why so many foreign-based banks are in London is because it is the financial centre of the single market.

The point is that the banking crisis has changed the way that we thought about the City. It has made regulation absolutely essential. The euro crisis has made banking union essential in order to break the link between sovereign debt and the fact that nation states have had to underwrite their banks. It raises difficult issues for us in the UK. As long as we see ourselves as being outside the single currency, the centre of the European financial market will be remote from the core of the banking union. There is also the block vote problem: if regulation is concentrated through the ECB, we could be outvoted.

The UK made a disastrous attempt in 2011 to try to tackle this problem of what to do. This was at that year’s December summit, where a paper was circulated late at night without prior consultation with anyone. Full of complex detail, it had at the top the horrible word “unanimity”. Basically it was asking for unanimity on questions of financial services. Not only was this tactically maladroit, it was strategically misguided. If the sincere wish of the British Government is to deepen the single market in the European Union, we cannot go around demanding unanimity on a specific UK interest, because every other member state will demand unanimity on an interest specific to it.

That is why the proposals of, for instance, the Fresh Start group are extremely worrying. They do not demand unanimity but in cases of financial services they do demand use of the Luxembourg compromise and they talk about emergency brakes. If you believe in the single market, you cannot put forward such things in the European Union. I should like to hear

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from the Government that they have no intention of pressing for the Luxembourg compromise or emergency brakes in this area. This would be so damaging to Britain’s interests in pressing forward to the single market.

However, the Government achieved a notable success in December with the acceptance of the double majority principle. I agree with my noble friend Lord Davies of Stamford that, for protecting our position, this is a lot better than nothing. Yet I also agree with the noble Lord, Lord Kerr, who asks how robust this is and whether it will last.

First, this double majority applies only to the banking agency, which is about the implementing regulations, and not to ECOFIN, which draws up the legislation. So we do not have a special position there. Secondly, the noble Lord, Lord Hamilton, is right that the ECB will be the big player in this and the EBA a weakly staffed and resourced organisation. How do the Government intend to deal with that? Thirdly, there is the question of time limitation. How many euro-outs, which are actually banking union-ins, will there be? If there are a significant number of euro-outs who will be banking union-ins, how long do we think that this special double majority arrangement will last?

There are alternatives. I am not saying that this is what the Labour Party would propose but, as my noble friend Lord Davies said, we have not had from the Government a proper cost-benefit analysis of what the alternatives might be. Did they look at how, as a euro-out, we might be a member of the banking union and whether it could be made to work? Could we have built on the model of the European Systemic Risk Board, of which the president of the European Central Bank is chair and the Governor of the Bank of England is vice-chair? Could we have used that as an umbrella? The Government have a duty to look at all the possible alternatives here because this is an issue of such vital importance to the future of the City. The fear that a lot of us have is that for reasons of ideology and prejudice, the UK has opted for very much a second-best, possibly a third-best, solution that would be gravely damaging to our interests in the long run. I will be grateful to the Minister if he can deal with some of these points.

6.25 pm

Lord Newby: My Lords, I thank the noble Lord, Lord Harrison, and the European Union Committee for the report and for the typically thorough work they undertook before they drew up their proposals and thoughts on the European banking union. As we made clear before, we believe it is vital for the UK that financial stability is restored to the eurozone, and these proposals set out ambitious reforms to help achieve that. Their potential impact is significant in the UK as well as in the eurozone, and it is important that they are properly scrutinised and that the issues they give rise to are properly debated. So I am grateful for the committee’s efforts and for the chance to do just that today.

As noble Lords are aware, the Government support proposals to establish a comprehensive banking union in the eurozone and have been engaging positively

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in the negotiations. Achieving a genuine economic and monetary union and restoring stability within the eurozone will require a comprehensive set of measures, including a single supervisory mechanism, risk mutualisation plans, such as mutualised deposit guarantees, a common fiscal backstop and a common framework for rescuing eurozone banks. These measures together will help to break the dangerous, and mutually destructive, link between indebted countries and unstable eurozone banks by mutualising financial risk across eurozone countries.

The December Council meeting marked a significant point in the negotiations to establish a single supervisory mechanism and, importantly, as we have been discussing, the Council agreed a number of safeguards for the single market which will ensure that neither the City nor the UK will be marginalised. A number of noble Lords have referred to some of them, but I hope the House will not mind if I set out some of these protections.

First, the ECB will have a duty to have regard to the unity and integrity of the internal market in performing its supervisory tasks. The noble Lord, Lord Kerr, said that that may not be a new duty, but it is quite helpful to have it reiterated. Not only that, it will also be subject to an obligation to ensure that no action, proposal or policy of the ECB shall directly or indirectly discriminate against any member state or group of member states as a venue for the provision of banking or financial services in any currency. The ECB will be required to agree a bilateral memorandum of understanding with the UK—by which we mean the PRA—setting out how it will co-operate in discharging its supervisory tasks, so we can look forward to a constructive and collaborative supervisory dialogue underpinning the robust supervision of cross-border firms and activities throughout the EU. The way in which the supervisory authorities in the UK and the EU work together now, not least the ECB and EBA, is through close, professional working. It is not done in the spirit of two mutually opposed forces coming together on a day-to-day basis with different views. They are technicians, very often, trying to deal with common, difficult, technical problems, and that has infused the discussions to date.

In December, there were two important decisions on parity within the single market, which mean that the PRA and ECB will be operating on equal terms. The Council agreed the principle that the ECB’s supervisory powers should be analogous to those available under Union law to national supervisors in non-participating member states. Powers and decisions of the EBA, for example in cases of binding mediation in the event of disputes between supervisors, will apply equally to the ECB and other supervisors. So the ECB has no special status.

Perhaps most importantly, as a number of noble Lords have pointed out, the Council agreed that key decisions in the EBA will be made by a double-majority voting system. Therefore, although we hope that the EBA will continue to be driven by consensus, with votes very much the exception, the voting arrangements will ensure that all member states, whether or not participating in the banking union, will continue to have a meaningful voice. In practical terms, where the

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EBA votes on a standard which applies to firms throughout Europe, this will require the support of those in the banking union and those outside it. Not only will the usual qualified majority apply, but a majority of the group of non-participating member states—which, of course, includes the UK—will also have to support any proposal.

A number of noble Lords have expressed support for these protections. It is fair to say that even if the Council had not actually read the report of the committee of the noble Lord, Lord Harrison, it did address a number of the other issues raised in it. First, it clarifies the scope of ECB supervision. It establishes robust governance arrangements in the ECB which separate the performance of the ECB’s monetary policy and supervision tasks. These arrangements will also ensure that those non-eurozone member states which choose to participate in the SSM will have a voice in decision-making. We should not think that separating those two elements of what the ECB does is too difficult a job. That is, broadly speaking, what we are going to be doing with the Bank of England, the PRA and the other bodies that we have just established here. It is eminently doable. The way in which the EU and the ECB are setting about doing it looks perfectly reasonable.

The Council decision also confirmed that the EBA will ensure a geographical balance in its appointments. On this point I need hardly remind noble Lords that the UK plays a leading role in the EBA and currently holds one of the six seats on its management board, which is based in London.

While the Government are broadly content with the outcome of the December meeting, noble Lords will be aware that negotiations are ongoing. However, I assure you that we are working hard to ensure that the final agreement continues to reflect these points. As for the next steps, negotiations concerning the recovery and resolution directive are similarly active. I will come back to those shortly.

However, proposals relating to the second and third pillars of the banking union—the common resolution mechanism and the common deposit insurance scheme—have not yet been issued. We recognise that the decisions relating to the funding of any resolution mechanism and deposit insurance scheme are politically difficult, particularly within participating member states, and decisions relating to debt mutualisation and common fiscal backstops are more difficult still. None the less, in the context of a banking union for participating member states, the UK supports these concepts in principle. Having said that, we cannot provide more detailed views until the proposals have been published, although of course we take note of the points that members of the committee have raised in their report and today.

On the specific points raised by noble Lords in their speeches, the noble Lord, Lord Harrison, was the first to raise the question of the concentration of power in the ECB, which I have spoken about in part. As I have said, there is an analogy with the Bank of England to a certain extent. For clarity, although there are 6,000 banks within the eurozone area, the ECB proposes to directly supervise on a continuing basis probably a couple of hundred of them. However, it will retain the

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power to go in if there is a particular problem, where a national supervisory body may be thought by the ECB not to be dealing with an issue adequately.

In that respect the noble Lord, Lord Flight, used the analogy of the ECB’s role being a bit like the PRA as opposed to the FCA in the UK. It is not a direct analogy but there are some relevant comparisons. We think that the system we have set up will be robust. If that is the case, in principle, the one being envisaged here also should be. The problem is that it is a multiplication of the kind of problems that we had here when the crisis struck. When everything is going well, you can make things work. But, here, we had a real problem with managing a financial crisis because two or three individuals could not make the system work.

We hope that we have changed the system to make it less dependent on individuals but when you have a system involving a minimum of 17 national supervisors and a super-supervisor, as it were, no one in their right mind would think that dealing with a crisis will be easy. In particular, by definition, no one will have been through it before, so they will be learning on the job. That is an inevitable consequence of doing anything new. The ECB is working very hard to put in place systems which it hopes will be very robust in stressful times.

The noble Lords, Lord Flight and Lord Trimble, asked about what is happening next and whether the steam has gone out of the negotiations. We are very confident that the steam has not gone out of the negotiations in terms of the SSM. The Irish have got this as one of their top priorities during their presidency. We are hoping that relatively soon there will be the final agreement on the regulation which will underpin these changes. We hope that the SSM will be operational by March 2014, which, in anyone’s view, is as quick as one could reasonably expect.

The noble Lord, Lord Harrison, was the first to raise the dread word “referendum”. He described it as new-fangled. I have very fond memories of the 1975 referendum. However, I remind him that the Government have legislated for referendums to take place on European matters in the UK when significant changes are due to take place. That was before the Prime Minister’s speech yesterday. I am delighted that next week the House will have the chance to spend considerable time talking about this matter; not least because it enables me to say today that I am not going to talk about it because the House will have considerable time to talk about it next week. As noble Lords can imagine, that is a considerable relief.

Among other things, the noble Lord, Lord Trimble, asked about the timetable on the recovery and resolution directive, which is obviously of huge importance for the whole of the EU. Again, these are one of the priorities of the Irish presidency, which is looking for an agreed approach in the first quarter of this year. Member states, including ourselves, are actively and positively engaged in these negotiations. We strongly support this timetable as it is essential that all member states need to get a common set of credible tools and powers to deal with resolution and recovery as soon as possible.

The noble Baroness, Lady Falkner, was worried about the male-dominated nature of the debate. I think that this gets back, in part, to the male-dominated

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nature of the financial services sector, which will take a long time to sort out. However, as other noble Lords have pointed out, on this subject, we have some extremely eminent female economists and knowledgeable women in your Lordships’ House. I hope that they will speak in future debates.

The noble Baroness referred to bond yields and breaking the debt spiral. I think that I can give her more than a glimmer of hope in terms of bond yields. The bond yields of Greece, Spain and other countries under stress have fallen significantly. In Greece, they have fallen by one-third over the past two months. This is a very big shift in the right direction as far as they are concerned. Bond yields now in the vast bulk of the eurozone, even among the difficult economies on the periphery, are at a sustainable level.

The noble Baroness referred to the financial transactions tax and asked whether this could damage London. The Government’s view is that we have no intention of joining the FTT. We do not believe that it will have a deleterious effect on London, quite the opposite; however, I have severe doubts as to whether the FTT will ever raise anything like the funding that is envisaged for it. I remind noble Lords that we already have our FTT in the City on shares; it is known as stamp duty, so this concept is not totally unknown to us. However, it has to be said that the City is very keen for us to abolish it and believes that there would be significant economic benefits if we did so.

The noble Lord, Lord Kerr, as always, asked a number of very specific and penetrating questions. He asked how many countries will remain with us in our “out” group, and what they have said so far. Their attitudes are, like ours, dictated by their domestic debates. Some have confirmed that they will not join for now, some have confirmed that they are unlikely to join in the long term and others have said that they intend to join at some point. However, given that the eventual package is not known, we do not think that it is wise for us to give names at this stage because it would be unfair to say that all those countries have formed an absolutely settled view about what they are going to do. As noble Lords say, if the number of “outs” falls, there will have to be a review and we are confident that we will be able to secure a sensible voting arrangement going forward. However, we do not envisage that we will be in that position for some considerable time, if at all.

Lord Kerr of Kinlochard: I am very grateful to the noble Lord for giving way. Can he help me? In the cases where countries have declared a position, will he write to me and set out what that position is? I drop my third question, which is: what is the Government’s assessment of where those who have not declared are likely to go? However, my first two factual questions are the following. What are the public positions? Where there are public positions, will the noble Lord write and let me know what they are?

Lord Newby: Yes, of course. It will not be a comprehensive letter in the sense that not all the countries have expressed a position, as I said, but one or two have and we can collate those relatively easily.

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The noble Lord referred, as I did in my introductory remarks, to the importance of the MoU between the Bank and the ECB. We agree with him that it is crucial in setting the tone for the supervisory relationship. The Bank and the FSA are already working with their ECB counterparts and both sides, as it were, are keen to ensure that we have a robust approach to supervision of cross-border banks and cross-border financial services activities.

The noble Lord, Lord Hamilton, was the gloomiest voice in the debate. I would like to comment on two of the points that he raised. The first was about accountability and the extent to which there is a democratic deficit. The ECB is accountable to the European Parliament and the European Council. National parliaments of participating member states will be able to hold it to account through questions. I think that for the foreseeable future national parliaments will play a larger role in terms of the profile of the accountability than does the European Parliament, given its low profile. This debate here is an example of the kind of thing that one hopes would be happening across the EU.

The noble Lord, Lord Davies of Stamford, raised a number of issues and came up with three logical outcomes in terms of our supervision compared with that of the ECB: either we do what it says or it will be more or less strict—I paraphrase the noble Lord. That is slightly misleading, given that we are working towards a common rulebook. So the supervisory approach will be broadly common. For example, the recovery directive is one way in which there will be a broadly similar approach across the EU, with or without the banking union.

Lord Davies of Stamford: I am very grateful for the Minister’s comments. Of course, the rules themselves—such as those relating to liquidity ratio, capital ratios, capital adequacy and so forth—will be set up by the EBA, and there will be a common rulebook. However, supervision is about how strictly the banks’ activities are looked at, and that affects authorisation, licensing and review of the asset quality of the banks concerned. In these areas potentially there will be very considerable scope for a difference of approach by different supervisors. That is exactly what I meant by more and less strict approaches.

Lord Newby: To the extent that there will be, in effect, two major supervisors—ourselves and the ECB—I think that the MoU will help in that respect.

The noble Lords, Lord Dykes, Lord Flight and Lord Liddle, all talked about the role of London and what the impact of this will be. Undoubtedly for many companies, particularly financial services companies, the City is their entry point to Europe and to capital markets more generally. Regardless of whether they are successful in actually trading in Europe to the extent that they want, that is undoubtedly the way it is seen. It is very important that we work extremely hard, as we go forward, to make sure that the single market is embedded and strengthened and that we protect the City at the same time. I would love to have a long debate with the noble Lord, Lord Desai, about the future of the eurozone economy, but I fear today is not for that.

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The noble Lord, Lord Liddle, asked whether we had looked at being a member of the banking union. The truth is that once we had decided that we were not going to join the euro, that was off the table. All parties have agreed in recent years that joining the euro is not for the UK at this time; sadly, that is where we find ourselves. I agree with the noble Lord that there is a real problem about social and political consent for the austerity packages across the EU. Nevertheless, in some countries—Ireland is probably the best example—there is a real sense of a corner having been turned and major new foreign investment in that country, which suggests that foreign investors also think so.

The Government support comprehensive banking union in the eurozone, and we will do what we can to promote its development while safeguarding the UK’s role as a regional and global banking centre. We look forward to being informed and influenced by the noble Lord, Lord Harrison, and his committee.

6.47 pm

Lord Harrison: My Lords, I thank all Members who have spoken this evening in what I think has been a stimulating and enlightening debate. I am very grateful to the Minister for promising to write to us on those points that he has not had time to take up. At one point I began to worry when I was accused of being “genial” and “courteous”; but, on a lighter note, I must say that I began to think of the power and persuasiveness of our report when one noted Eurosceptic wandered into the Chamber and, so persuaded by what he heard, came and joined the Labour Benches.

I will finish on two comments made by the noble Baroness, Lady Falkner, which the noble Lord, Lord Liddle, identified. The first is the, perhaps, paucity of contributions from the distaff side of the House. I can tell the noble Baroness that the austerity seminar that our committee is holding next week will feature Vicky Pryce, not only to speak on financial services but also to report on Greece. The other point made by the noble Baroness that the noble Lord, Lord Liddle, identified, which is hugely important, is that these matters are not European; they are British and European. Every report we ever write has a large section on how the United Kingdom will be affected by what is going on within the European Union. It is time that we in this House took these matters seriously and that we had debates at appropriate times for all Members of the House to respond. I close with that hope and thank everyone for contributing tonight.

Motion agreed.

Green Deal Framework (Disclosure, Acknowledgment, Redress etc.) (Amendment) Regulations 2013

Green Deal Framework (Disclosure, Acknowledgment, Redress etc.) (Amendment) Regulations 2013 15th Report from the Joint Committee on Statutory Instruments

Motion to Approve

6.50 pm

Moved By Baroness Verma

That the draft Regulations laid before the House on 10 December 2012 be approved.

Relevant document: 15th Report from the Joint Committee on Statutory Instruments

24 Jan 2013 : Column 1298

The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma): My Lords, the Government are today bringing before the House amendments to the Green Deal framework regulations. We have been further developing the framework over the past few months, in readiness for the full launch later this month. This has resulted in a number of SIs being developed and laid before the House. These changes are necessary to optimise the legal framework and are taking advantage of learning we have already gained.

However, before we begin to debate, I would like to take the opportunity to speak about the Green Deal—the transformational energy efficiency programme. I am delighted that it will be going live next week, unlocking unprecedented opportunities for both consumers and businesses alike. The Green Deal will provide a stable, transparent and long-term policy framework which consumers can trust and in which businesses can invest. It will allow consumers to pay for some or all of the cost of energy-saving property improvements through savings on their energy bills. The Green Deal can be used to lever in billions of pounds of private investment to improve the energy efficiency of UK properties. It will empower small and medium-sized businesses to enter a new market as well as offer consumers more choice and innovation than before. There has already been interest from industry in getting involved in the Green Deal and it is exciting to see a steady stream of participants becoming approved and using the Green Deal quality mark prior to launch on 28 January.

We already have 462 installer organisations registered, and 2013 is already off to a flying start with local authorities playing an active role in helping to kick-start our “go-early” initiative. The Government have supported this by providing £22 million to stimulate early demand for the Green Deal in seven core cities and to help other local authorities drive energy efficiency-boosting initiatives. Our cash-back scheme, worth £125 million, launched on 14 January will reward households taking early action to improve their properties through the Green Deal. Households making a number of improvements could receive more than £1,000, and £2.9 million will be spent on a communication campaign that will help to build understanding and trust in the Green Deal.

I will now introduce the statutory instrument that will form the basis of our discussion. We are making a small number of amendments to the Green Deal framework regulations which, subject to the outcome of today’s debate, will come fully into force on 28 January 2013. The framework regulations create an authorisation regime to regulate the conduct of Green Deal market participants and ensure that consumers are protected. They cover conditions that must be met when a Green Deal plan is established and how it should be disclosed. The amendments we propose will make enhancements to the Green Deal framework. We have increased the frequency of some reporting requirements from annually to monthly for all Green Deal participants. These include the number and value of plans, cancelled plans, and the number of resolved and outstanding complaints. This is to ensure that we can monitor

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compliance to protect customers without imposing undue burdens on business and to protect the reputation of the Green Deal itself.

Other changes enable us to streamline key processes. We are improving the clarity of our complaints system by defining when a complaint should be directed to Green Deal assessors and when to the providers. Further to ensure effective policing of activity in the market, Green Deal accreditation bodies have been added to the list of organisations that can report a breach of regulations by a participant to the Secretary of State.

In addition, an important technical update is being made to the circumstances under which an energy performance certificate must be updated by the Green Deal provider or customer. These include where an energy efficiency measure has been removed, where the provider has changed and where the liability of the bill payer to make payments has changed. This update will ensure that customers and businesses have access to up-to-date energy efficiency information for their property.

The regulations will help to improve the energy efficiency of homes across Great Britain, reduce our carbon emissions and, crucially, help households to manage their energy bills. I commend them to the House.

6.55 pm

Lord Grantchester: My Lords, I thank the Minister for her explanation of the regulations. As we have said on previous occasions, Labour continues to support the objectives of the Green Deal as a vital part of energy demand reduction and energy efficiency improvements for meeting greenhouse gas emission targets and achieving energy security and climate change mitigation.

With little time before next Monday’s launch of the Green Deal, the Government must react swiftly to urgent criticisms of the costs of the scheme to potential consumers. Up-front charges, high interest rates for finance, and penalties, are all increasing the reluctance of households to take up Green Deal plans. At a time of rising energy prices, falling living standards and stretched budgets, the Government must not allow scheme charges to undermine the confidence of consumers in going ahead with very necessary home improvements. Not only would a successful Green Deal cut long-term energy bills for households, it would reduce the nation’s energy demand and save the planet from excessive carbon emissions.

The amending framework regulations are accepted as part of the refining process to improve the operation of the Green Deal, with provisions regarding energy performance of buildings certificates, reporting requirements for the progress of the Green Deal and provisions regarding enforcement. We expect further amending regulations—I hope they will be few in number—as the Green Deal rolls out and experience is gained. The Green Deal has been a long time in gestation, and we will all welcome the official launch next week on 28 January. After raising a few points on the regulations, perhaps it would be an opportune time to reflect on the Green Deal and ask the Minister

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for her forecasts and assessments, and for us to pass comments, with constructive criticisms, on the likely uptake outcome.

The regulations regarding the energy performance of buildings certificates are largely technical and non-controversial. They will help to make sure that information following Green Deal plans is up-to-date and accurate. Schedule 2 of the regulations lists the new monthly reporting of information requirement for Green Deal providers. This will greatly assist in monitoring the progress of the Green Deal and will provide necessary statistics for analysis. However, one of the most controversial aspects of the Green Deal concerns cancellation charges and penalty charges for early repayment. It is generally regarded as one of the key parameters influencing the consumer’s final decision on whether to go ahead with a Green Deal plan. If these charges are disliked completely or labelled disagreeable, it may well be that the Green Deal plan may not be taken up. Why are reports regarding these questions not part of the monthly requirements? Will the Minister clarify that paragraph 1(g) of Schedule 2, on page 7 of the regulations, which specifies,

“the total number of green deal plans cancelled in the previous month”,

refers to plans already started?

Perhaps I might suggest some additional reports, for example of the total number of Green Deal plans proposed but not taken up. Another report could be of the total number of cancellation charges levied, together with the average fee. On the issue of amounts repaid early, covered in paragraph 1(f), could a requirement be included to monitor the number of early repayments bearing charges, and the average charge?

On the cancellations, it would also be useful to know what element or measures in a Green Deal plan of many actions were not going to be proceeded with. Does the Minister agree that this information may be critical in assessing consumer confidence? Will she look at how this could be added to the regulations, which, by convention, are not amendable? If she rejects this requirement, how does she propose that this controversial aspect will be monitored? Information must not just be for business-gathering purposes; it must also inform policy and help corrective action.

The Minister in the other place, in response to my honourable friend Luciana Berger, said that penalty charges could happen only when a Green Deal provider would make a loss as a result, and that the onus is on the provider to prove the case. Where is this in the regulations? How will the provider make the case? To whom will the current consumer have a course?

Another controversial aspect concerns up-front fees. When Labour raised the cost of assessments with Ministers during the passage of the Energy Act in 2011, Ministers replied that it was expected that companies would not charge for assessments. However, from a Guardian newspaper report, it appears that Ministers are wrong. Consumers will face charges of up to £150 as an assessment fee, whether or not they take out Green Deal plans. The report states that British Gas will charge £99 for its experts to go into homes and judge what measures, such as fitting cavity wall insulation, would be most appropriate for each property. Two of

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the companies contacted by the


say that they would refund the full assessment fee or part of it if works were carried out by them. Does the Minister accept the YouGov poll that found that 51% of consumers concerned about up-front costs rated them the biggest obstacle to making energy-efficiency improvements to their homes?

The third element of the regulations concerns improving the clarity of the complaints process by imposing sanctions and including the Secretary of State in the process, yet the regulations do not say what the sanctions are. Will the Minister clarify whether they have been included elsewhere and that it has escaped me? It is important to know and agree what powers and sanctions are being given to the Secretary of State. In a debate on these regulations in the other place, the Minister stated that he believed the expected cost to be £335 per complainant to the ombudsman, and that the costs would be borne by the Green Deal provider. Will the Minister confirm this figure and say whether there would be any judgments at all whereby the cost or some part of it ended up being paid by the complainant?

Will the Minister clarify the process of consultation? Were the measures in the regulations consulted on with the public in a discrete fashion and in a discrete consultation process? I have read the Explanatory Memorandum, which seems to suggest that the regulations have arisen from consultations and events generally from November 2011, closing a year ago on 18 January 2012. Will the Minister please clarify?

A few further considerations arise from the debate on these regulations last Monday in the other place, and indeed the Minister has echoed those remarks. In his opening remarks, Greg Barker, the Minister in the other place, said that things had already got off to a flying start in October with the Go Early initiative. Is this the initiative that resulted in just five assessments? Is this the initiative that highlighted problems in the software for assessments? Will the Minister confirm whether the Minister in the other place was correct to state, as she indeed has done today, that £22 million had been provided to stimulate early demand in seven core cities? In the press release a figure of £12 million was put forward. While a test or pilot is to be recommended, this seems to be a soft launch. Was there a reason why the important city of Liverpool was excluded from this list?

The Minister in the other place went on to speak about the cashback scheme, worth £125 million, launched on 14 January. I am surprised that this is a government scheme when, according to Ministers, “the market will provide”, and other matters seem to be a commercial matter for the Green Deal Finance Company. Already this scheme seems to have been amended. Can the noble Baroness confirm whether the £1,000 maximum level referred to has indeed been lifted and that, with a budget of £125 million, it really is the early-bird scheme? Will Liverpool be excluded from this?

A third element in the opening remarks of the Minister in the other place and of the noble Baroness concerned the £2.9 million budget for a communication campaign about public relations. The Minister in the other place admitted that it was not a huge amount in

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the scheme of things as it would be used in a focused way. Can the Minister clarify what will be its focus?

The Minister in the other place mentioned that the firm Freud had been retained. Does this mean that the Government did not go out to open tender for this contract?

In previous debates we have all acknowledged the ambitious plan and the huge difficulties that the Green Deal faces. Unlike a commercial operation, the Government have to do their thinking aloud as they make the regulations to set out the parameters on which commercial companies must make this a success. However, this allows the Government to hear when we offer advice and give warnings. I am not sure that they are listening well enough when it comes to the influence of certain aspects of the take-up of the Green Deal plans on consumers. We have debated previously the influence of the interest rate on whether consumers assess the Green Deal as a good deal. Against a bank rate of only 0.5%, 7%, or even 6.9%, does not seem a good deal, especially when it will, in effect, double the amount of repayment over a 25-year period. This is a completely different circumstance to a short-term payday loan and, like a mortgage, there is the security of the loan being advanced to improve property on a state-sponsored scheme.

In a debate on Monday, the Minister acknowledged that my honourable friend Luciana Berger was right: we need a competitive interest rate. Today the Sun has badged the scheme “Green plight—Flagship eco loans a ‘rip off’”. The Minister said that DECC and the Green Investment Bank are putting money into the Green Deal Finance Company. Can the noble Baroness tell the House how much the department is putting in and what this amount is being spent on? Can she confirm that the Green Deal Finance Company is a not-for-profit body in response to government encouragement, and that the interest rate is subject to government approval and will not be available elsewhere on the high street? Am I correct to expect confirmation of the interest rate tonight?

I have taken up a great deal of the House’s time but, just prior to the launch of the Green Deal, perhaps I may mention that there are further features still causing anxiety, such as the interplay between the Green Deal and the ECO, whereby any lack of uptake in the Green Deal could become compulsory under the ECO. There are still also questions over the golden rule and possible mis-selling fears.

I would like the Minister to answer as many as possible of the questions raised and not be sidetracked instead into further reflections if her time is pressing. Can she commit that her department will look at these issues and place any missing answers in the Library of the House? If she has further time, it would be a useful moment just before launch to get the Minister’s future expectations on her department’s figures for take-up over the coming years, the number of future job creations and what will constitute success in her eyes for the Green Deal.

I am sure we will return again to these points and others, such as the role smart meters could play, but I wish the Minister a successful launch next Monday.

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7.08 pm

Baroness Verma: My Lords, I thank the noble Lord for his very warm welcome of the Green Deal. I expect he will be by my side when the launch goes ahead next Monday. The invitation is there for the noble Lord to join me, as it is for the noble Baroness.

The noble Lord has posed a huge number of questions and I have tried to note down as many as possible. However, the likelihood is that I may have to write to him on some of them.

I shall start by responding to the noble Lord’s point about high interest rates. As he will be aware, the rate is to be set by the Green Deal Finance Company and no doubt will reflect a safe and competitive level. The rate has not yet been confirmed, but I expect that to be done in the next day or so. The noble Lord will have to wait just a little longer for a response to that question. However, I take on board his point that the rate has to be competitive. That fits in with our wish to try to ensure that we meet the golden rule, which he rightly raised—namely, that no bill payer should pay more than what he or she is currently paying. That is absolutely the right way to look at this.

The noble Lord asked about early repayment penalties. Perhaps I can reassure him that we have also looked closely at these. I can tell him that the repayment formula and the penalty compensation payback are based on the consumer credit legislation that is in place, and we are not doing anything different from what is already in the marketplace.

The noble Lord asked about the forecast for take-up rates of the Green Deal. I would say to him that it has been very promising and there is a great deal of interest in it. However, as he recognises, we are proceeding with a soft launch because we want to ensure that people understand what the Green Deal is and that all the systems needed to deliver it are fully tested and in place. The noble Lord is right to say that when the Green Deal is taken up, many households will see a great difference in their energy consumption and it will impact on their energy bills—something which I know, like me, he is keen to see come down.

The noble Lord asked about monthly reporting, and we agree that this is an important element. The industry and providers have also welcomed it. He listed a number of other things that he would like to see included on the monitoring list. I may have to take those queries away simply because I was not able to write down all his points quickly enough. I shall read the report and come back to him with details of what is already part of the monitoring that has been put in place.

On the point about whether a householder who takes up a case will have their costs attached, I can assure the noble Lord that that will not be the case. If a complaint is lodged, it will be dealt with by the providers, and through DECC we will find ways of ensuring that a householder is not penalised.

The noble Lord mentioned the £125 million provision for early take-up; the cashback facility. We are expecting keen interest and we think that the £125 million for early take-up is a good way of encouraging people to take advantage of the scheme very early on. Perhaps I

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can link the rest of the work that we have been doing with our core cities to the £22 million referred to by the noble Lord. He referred to the fact that a newspaper had reported that it was £12 million. We have given out £12 million to seven core cities; we expect Liverpool to be added to the list of core cities. That is the £12 million, but another £10 million was also provided to local authorities outside the core cities to promote demand—hence the £22 million.

The noble Lord spoke about the expectation of job creation. We are very positive that this will generate up to 60,000 jobs in this sector, up from the 26,000 that are in place at the moment. We see this as a very positive scheme. I have listened very carefully to the noble Lord, who has, by and large, welcomed what we are doing with the Green Deal.

The noble Lord asked about the assessment costs. This is a market-based mechanism and we expect a range of models to develop. Some providers may offer assessments that have no upfront costs; others may charge, but it will be up to individuals whether to go with the first assessment or to shop around. This is something that all consumers do anyway. We encourage shopping around so that the consumer gets the best deal possible.

The noble Lord asked about the sanctions that the Secretary of State could impose. Of course, this very much depends on the circumstances. There could be a financial penalty on the provider, a compliance notice, or the withdrawal or suspension of authorisations for providers, assessors or installers. There are a number of safeguards that the Secretary of State has the power to use.

The noble Lord also asked whether Freud Communications was appointed through competition. The simple answer is yes, there was a competition. Freud was the preferred bidder.

The noble Lord asked a number of other questions that I physically was not able to note down. I am sure that the officials in the Box will have taken note of them. On those, I ask the noble Lord to allow me to write to him and put a copy in the Library. Overall, going through my own list of what I was able to note down, many of the points the noble Lord raised have been answered. I thank the noble Lord for his warm welcome of this SI and I commend—

Lord Grantchester: I thank the noble Baroness for attempting to answer so many quite detailed questions at very short notice. While we have this opportunity before the Green Deal is launched, perhaps I can tempt her to reflect and share with us how her department views success—what does success of the Green Deal look like? That would be really interesting to understand before it starts on Monday.

Baroness Verma: My Lords, if I had a crystal ball I would be able to tell the noble Lord lots of things. My own view is that, having talked to consumer groups and the industries within the sector, this is going to revolutionise the way in which people think about how to make their homes much more energy-efficient. It is about raising awareness. While we are rolling this out, we are very keen to ensure that consumers take control

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and have responsibility over what happens in their own properties. This approach is much more holistic. It is not just about short-term planning on, say, loft insulation; it is about looking at the whole property. I think consumers will be quite encouraged that this will be a long-term gain for them and their properties, and of course on their bills.

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On that note, if I have satisfied the noble Lord, I commend these regulations to the House.

Motion agreed.

House adjourned at 7.19 pm.