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Grand Committee

Thursday, 19 March 2015.

Care Act 2014 and Children and Families Act 2014 (Consequential Amendments) Order 2015

Care Act 2014 and Children and Families Act 2014 (Consequential Amendments) Order 20125th Report from the Joint Committee on Statutory Instruments

Motion to Consider

2 pm

Moved by Earl Howe

That the Grand Committee do consider the Care Act 2014 and Children and Families Act 2014 (Consequential Amendments) Order 2015.

Relevant document: 25th Report from the Joint Committee on Statutory Instruments (Special attention drawn to the instrument)

The Parliamentary Under-Secretary of State, Department of Health (Earl Howe) (Con): My Lords, this order, while detailed, has a simple overarching purpose: to make amendments to primary legislation in relation to England consequent to new laws already passed by Parliament, primarily the Care Act 2014, but also to a small extent the Children and Families Act 2014, as I shall explain.

Part 1 of the Care Act 2014 is a crucial step in delivering the commitments in the Government’s White Paper Caring for Our Future: Reforming Care and Support. It takes forward the recommendations of the Law Commission to consolidate 60 years of fragmented law into a single statute, refocusing the law around the person, not the service.

The order before us today is part of the final step in this process, disapplying current legislation for England which is to be replaced by the Care Act, and changing references to that legislation in other Acts to reflect the Care Act. For example, many of the core entitlements to social care services included in the National Assistance Act 1948 are disapplied for England by this order because they are to be replaced by the overarching duty and power to meet care and support needs included in Sections 18 and 19 of the Care Act 2014.

The Department of Health and the Department for Education have worked together to ensure that carer provisions have been extended in key areas. Part 1 of the Care Act introduces improved rights for adult carers caring for adults, including to assessment and support. Sections 96 and 97 of the Children and Families Act 2014 amend the Children Act 1989 to introduce significant new rights for young carers and parent carers respectively. These new provisions will work alongside those in the Care Act 2014 for assessing adults to enable services to co-ordinate their approaches to assessment and support for young carers and the people they care for.

This consequential order therefore makes some amendments which are in consequence of the new provisions introduced by the Children and Families Act 2014. Because the previous legislation relating to

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carers is being replaced by a combination of provisions in these two Acts, it makes sense to deal with the necessary consequential amendments in a single order.

The order also includes some savings provisions which are necessary for the purposes of transition from the old system to the new one. Essentially the amendments in the Schedule to the primary order “turn off” the old law in England but, in respect of those currently in receipt of services, the order enables services to continue under the old law until those people move over to the new system. These savings provisions will work with separate transitional provisions, to be made by another instrument, and will ensure a smooth transition for those currently in receipt of services under the present law.

Lastly, I briefly outline how this order fits into the broader context of statutory instruments under the Care Act. Subject to parliamentary approval of this order, we will, as I have mentioned, be making a further transitional order that will complete the temporary legislative framework for local authorities and partners to move from old legislation to the Care Act. Also subject to approval of this order, we will make a commencement order to formally commence the relevant provisions in the Care Act from 1 April 2015.

We have also laid before Parliament the Care Act 2014 (Consequential Amendments) (Secondary Legislation) Order, which makes similar amendments to secondary legislation as the order before us makes to primary legislation. This is subject to the negative procedure.

I hope that this standard exercise of ensuring legislative coherence will not prove controversial, so I commend this statutory instrument to the Committee.

Baroness Wheeler (Lab): My Lords, I thank the Minister for his comprehensive introduction to the order. As we have heard, it is part of the final steps of implementing the Care Act and related aspects of the Children and Families Act in respect of transition for disabled children into adulthood and on parent and young carers. Contrary to previous form on such Care Act SIs, I do not intend to raise many issues. The SI is very much a technical instrument, potentially complex and involved. However, read in connection with the 2014 statutory guidance to local authorities on implementation and transition to ensure that current services can continue under the old law until the new legal framework applies, it becomes clearer and more intelligible, even to non-lawyers such as myself.

The key imperative, which we strongly support, is for local authorities to be able to manage the transition for existing people receiving care and support services and carers before 1 April 2015 in a practical, case-by-case way. Assessments, care plans and funding arrangements and services agreed under the previous legislation continue unless circumstances have changed, and in accordance with the established review procedures to ensure that arrangements comply with the new Acts.

The Minister knows that we share local authorities’ continuing concerns over capacity and resource issues to ensure effective implementation, and I would be grateful if he could update the House on the latest stock-take survey of local authorities’ readiness and their continuing areas of concern. I understand that

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the joint LGA/Department of Health/ADASS programme office will continue to monitor and evaluate implementation, as well as co-ordinating the consultation on phase 2 of the Care Act implementation on the care costs cap. I hope that regular updates and information on implementation can be provided over the critical April/May period, and I would be grateful for the Minister’s reassurance on that—even if only up until 7 May.

As the Minister said, the separate transitional order setting out the detail of the circumstances in which the new order is to apply is to follow shortly, so this is especially important. The Department of Health has undertaken to circulate the draft next week via its local authority and other networks before it is formally issued, to confirm the approach for both phase 1 and phase 2 of the Care Act implementation so that it can address some of the recent detailed queries and concerns from local authorities. That is to be welcomed, as I am sure that we all agree that the local authorities need all the help and support that they can get on what is a huge and complex implementation programme.

The department has also undertaken to share the draft with us, and I am grateful for that. However, publishing the final transitional order so close to the date on which the Care Act comes into force will cause considerable difficulties to local authorities. The Minister will know that the order cannot be published until after this SI has been passed in the other place, which will take place next Wednesday. Even if it is published immediately after Commons agreement, that is exactly a week before the changes begin to be implemented and there will be no real opportunity for parliamentary comeback on such a detailed and important implementation document. I recognise that much of the order content will have already been discussed with and communicated to local authorities, but receiving the final authorisation so late in the day presents even greater implementation challenges than already faced. What steps are the Government taking to mitigate that very difficult position?

Two other key issues arise from the statutory instrument. The first is that it formally sets out the position in respect of Wales concerning the Social Services and Well-being (Wales) Act 2014 in relation to adult social care law and to children. The enforcement date of that is currently intended to be 1 April 2016, but that is rightly up to Welsh Ministers. The SI provisions underline that any provisions disapplied in England to make way for the Care Act and the Children and Families Act continue to apply in Wales until such time as Wales brings in the Welsh Act. The Explanatory Note has reassured us that full consultation has taken place with the devolved Administrations in both Wales and Scotland. It also underlines that the order does not contain any provision which changes the current law as it applies to Scotland or Wales, and we welcome those assurances.

The second issue in the SI is in the detail of the Schedule setting out the consequential amendments to existing legislation on the provision of care and support to carers in England resulting from the implementation of the Care Act and the Children and Families Act.

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That has obviously been a major exercise in cross-government departmental working, and we fully recognise the scale and extent of the task that the department has had to undertake. It is to be congratulated on this work. It is also timely to remind ourselves of the pioneering work described in the Law Commission’s 2008 report, which set out the agenda for the reform of social care law. We have always strongly supported the need to update, consolidate and modernise social care legislation and the key principles of the Care Act, and have been committed to working closely with Members from across the House to ensure improvements and amendments to the Act.

Can the Minister update the Committee on the issue arising from the recent report from the Joint Committee on Statutory Instruments in respect of the drafting of paragraph 95 of the Schedule? The committee has said that the amendments to the Personal Care at Home Act 2010 made by this paragraph are not comprehensive and that consequential amendments are needed. This is an important issue and the department has undertaken to remedy this omission, so will the Minister ensure that the amendments are communicated to all interested parties and organisations as soon as possible?

Earl Howe: I am grateful to the noble Baroness. She asked about the local authority stock take. The results of the recent stock take in relation to implementation of the Care Act for January and February reported a positive picture overall regarding local authority preparedness. Specifically, the stock take’s headline findings reported that 99% of councils say that are very or fairly confident that they will be able to deliver the Care Act reforms from April 2015, compared to 97% of councils in stock take 2 and 90% in stock take 1. Of the four authorities which reported low confidence in stock take 2, three are now fairly confident and one is very confident; one authority has gone from fairly to not very confident.

Seventy-five per cent of councils say that they are on track in 2015-16 in their preparations for the Care Act, the remainder being slightly behind. Confidence has increased on six out of 10 proxy measures from stock take 2 to stock take 3. The exceptions are self-funders, carers’ assessment costs and information, advice and advocacy.

We have already invested more than £5 million in developing a suite of support materials, learning modules and other tools to help councils implement the Act. This is in addition to £23 million of investment in regional and local support that we have provided this year.

The noble Baroness referred to the transition order and regretted the fact that, in her view, it had been published rather late in the day. We set out the approach to transition in the statutory guidance published last October. The joint implementation programme of the Department of Health, the Local Government Association and ADASS has supported transition conversations with local authorities since that time. We do not think that anything in the transition order will have come as a surprise to local authorities.

The noble Baroness referred to the JCSI report, which pointed out that a particular consequential amendment had been omitted from the order. We accept

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that paragraph 95 of the Schedule to the 2015 order should have amended Section 1(2) to (5) of the Personal Care at Home Act 2010. Failure to do so was an oversight. Those subsections make some prospective amendments to Section 15 of the Community Care (Delayed Discharges etc.) Act 2003. The issue here, however, is that the 2010 Act is not yet in force and there are currently no plans to commence it. The department will ensure that if the provisions of the 2010 Act are commenced, the necessary consequential amendments to Section 1(2) to (5) will be made in the same order using the consequential amendment powers in the Care Act 2014. In summary, while we regret the missed amendment, the omission has no practical effect, and we will have ample opportunity to correct it if the relevant legislation is ever commenced.

Motion agreed.

False or Misleading Information (Specified Care Providers and Specified Information) Regulations 2015

Motion to Consider

2.15 pm

Moved by Earl Howe

That the Grand Committee do consider the False or Misleading Information (Specified Care Providers and Specified Information) Regulations 2015.

Relevant document: 24th Report from the Joint Committee on Statutory Instruments

The Parliamentary Under-Secretary of State, Department of Health (Earl Howe) (Con): My Lords, before I go into the detail of the regulations, I will briefly set out the background for why this offence was set in statute and why the regulations are required.

The report of the Francis inquiry into the events at Mid Staffordshire NHS Foundation Trust made clear the need for clear and reliable information about the quality of care and organisational performance. The inquiry found that inaccurate statistics about mortality rates obscure the true picture of care and can allow poor care to continue unchecked. The creation of a culture of openness and honesty is vital in improving care in the NHS and in empowering staff to challenge poor care where and when it occurs, and this Government have taken great strides to ensure that this is the case.

The provision of accurate information is central to the safe functioning of the NHS. It provides the intelligence on which commissioners and regulators form judgments about the quality of care. Where that information is wrong, it can result in delays in taking action to protect patients and service users. Deliberately falsifying such information is a serious matter that can frustrate attempts to provide safe care for patients and service users.

Care providers, which are directly responsible for the standard of services, have a clear responsibility to ensure that the information they supply is accurate and gives a true picture of the standards of care that they provide. The Care Act 2014 put in place a new

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criminal offence that will apply to care providers that supply, publish or otherwise make available false or misleading information. The offence will apply to the misreporting of information that is required to comply with a legal obligation. I wish to emphasise that last point: this offence applies only to providers of care, not regulators or commissioners of care.

Where a provider is found to have committed the offence, which could be as a result of deliberately supplying false or misleading information or as a result of neglect, the provider can be fined by the courts. In addition, the courts can require the provider to take action to address the failings which led to the offence occurring and make publicly known the action it is taking.

The FOMI offence can also apply to senior individuals within a care provider but only when the care provider has been found guilty of the offence. Senior individuals can also be found guilty of the offence where they have consented or connived in the publication or submission of false or misleading information, or have been sufficiently neglectful in their duties to allow false or misleading information to be published. An individual found guilty of the offence could face imprisonment of up to two years, a fine or both.

Of course, misreporting of information can be the result of genuine error and it is essential that such mistakes do not result in a criminal conviction. The Care Act 2014 therefore allows for a defence against the offence where a care provider is able to demonstrate that it took all reasonable steps and exercised due diligence to avoid the misreporting of information.

The primary legislation contains a regulation-making power that allows the types of care providers and the types of information to which the offence applies to be specified in regulations. The regulations before the Committee specify that the offence will apply to NHS trusts in England, NHS foundation trusts and other persons who provide health services from a non-NHS hospital,

“pursuant to arrangements made with a public body”.

For clarification, this means that the offence can apply to independent providers delivering services under an NHS contract, but only if they are also required to submit or publish the information included in the regulations.

The information to which the FOMI offence applies is focused on the issues raised by Robert Francis, such as mortality figures, and is supplied by providers of NHS secondary care. This is a short list, but one that represents a significant quantity of data provided by the NHS and forms the foundation of the information used to assess NHS performance.

The regulations include other key information supplied by providers of NHS secondary care, including cancer waiting times, maternity data sets, many of the core commissioning data sets and NHS quality accounts. The latter is an important inclusion, as Sir Robert Francis specifically recommended that:

“It should be a criminal offence for a director to sign a declaration of belief that the contents of a quality account are true if it contains a misstatement of fact concerning an item of prescribed information which he/she does not have reason to believe is true at the time of making the declaration”.

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All the information listed in the regulations is that which providers are or will be required to publish or submit because of a statutory or other legal obligation. This is a requirement of the primary legislation of the Care Act 2014 and an important part of the legislation for a few reasons.

First, it means that a provider cannot opt out of submitting or publishing information just because it wants to circumvent the false or misleading information offence. Secondly, as this is information that is already required to be published or submitted, we are not requiring providers of NHS secondary care services to undertake any additional work—only that they should ensure the information they provide is accurate and not misleading. Finally, providers of NHS secondary care services publish or submit on a voluntary basis a great deal of information which is incredibly valuable to improving the delivery of services and developing a greater understanding of the nation’s health. We do not want to dissuade providers from submitting or publishing such information, which is why the offence cannot be applied to information of that type.

In summary, the offence will apply only to the providers listed in the regulations and only where the offence occurs in relation to the provision or publication of the information listed. When the Department of Health consulted on the regulations in 2014, it was noted that the application of the offence was quite complicated. We have addressed this concern through guidance on the application of the FOMI offence which sets out how this law works.

The FOMI offence puts in place an important new sanction against providers of NHS-funded secondary care that mislead others about the performance of their services. As this offence is new, the regulations have been developed to focus the application of the offence so that it covers important data sets and data that can be robustly interrogated to determine if a provider has committed the offence. Designing the regulations this way will enable us to better understand how the offence operates in practice and allow us to make changes to the regulations in a targeted way in the future. I hope that noble Lords will support this rationale and will therefore agree to these regulations being commended to the House. I beg to move.

Lord Hunt of Kings Heath (Lab): My Lords, I am very grateful to the noble Earl for introducing these important regulations, which the Opposition are very happy to support. It is clearly unacceptable for anyone or any organisation in the NHS to knowingly publish false or misleading information. We are fully behind the Government on this. The noble Earl will probably remember that during the passage of the Care Act we tried to strengthen the clause that the regulations emanate from by tabling an amendment which would have made it an offence to withhold information with the intention to mislead or misdirect. That was not accepted by the Government.

I come back to the point that the Minister ended with. He emphasised that this applies only to NHS trusts, foundation trusts and those providing services. He will know from our discussions on the Bill that we wanted to expand this to cover other organisations,

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including local authorities and clinical commissioning groups. I would be grateful if he could respond on why the Government still think this should be confined to those who provide services.

I put to him that the Francis report into Mid Staffordshire, and indeed the more recent report by Bill Kirkup looking at the very worrying incidents that happened in Morecambe Bay, do not just put responsibility for what happened at the door of the providers, though I fully accept that in the end the board of the Mid Staffordshire NHS Foundation Trust and the board of the trust that ran Morecambe Bay must take primary responsibility. However, a number of other organisations were listed—organisations that would not be defined as providers. There are circumstances in which clinical commissioning groups, or part of NHS England, ought to be covered by the same rules and law because one depends on honesty and openness throughout the system. I would be interested in the Minister’s comments on that.

This is part of wishing to develop a culture of openness and transparency. People in the health service are very cynical about these proposals because they do not see the same transparency and openness and, to be frank, honesty emanating from the Minister’s own department. If my noble friend Lord Brooke were here, he would remind the Minister about the lack of publication of the interim risk register. I point to the report by the noble Lord, Lord Rose, on management capacity. It is one thing to have a legal provision, but it is another to ensure that everyone in the system actually operates according to the spirit of what the Government intend. I myself believe that that should apply as much to the Minister’s department and NHS England as it does to the providers in the health service.

Earl Howe: My Lords, I am grateful to the noble Lord for his support for these regulations. He returned us to an issue that we debated during the passage of the Care Act: the question of why this offence is restricted to providers and does not extend further to either NHS or local authority commissioners. We took the view that, in determining the scope of the offence, the focus should be on information that is closest to patient care, where inaccurate statements can allow poor and dangerous care to continue. This type of information is required by law from providers of NHS secondary care, such as hospital trusts, and to be frank we have not yet identified information that would warrant extending this offence to commissioners or other providers of information. The scope of the offence is therefore determined by the information to which it applies.

The noble Lord referred to the need for openness throughout and across the system. I agree with him, of course, and I contend that over the past five years this Government have done more than any other to promote transparency in the health service and indeed from the department itself. The particular case of the risk register is one that we have debated on a number of occasions. He may recall that while the decision was taken by the Cabinet not to publish the transition risk register, nevertheless I laid before the House the essential elements contained within the register to enable noble Lords to understand the broad content of the risks that the

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transition addressed. The approach to risk registers in general is one that was taken under the previous Administration in a number of departments.

The report prepared by the noble Lord, Lord Rose, on NHS leadership is being looked at in the light of NHS England’s five-year review. The five-year review was published during the time that the noble Lord, Lord Rose, was preparing his report and the possibility of extending the report to take account of the review is being considered. We look forward to seeing the conclusions of the report once it is ready.

Motion agreed.

Nicotine Inhaling Products (Age of Sale and Proxy Purchasing) Regulations 2015

Nicotine Inhaling Products (Age of Sale and Proxy Purchasing) Regulations 2015

Motion to Consider

2.32 pm

Moved by Earl Howe

That the Grand Committee do consider the Nicotine Inhaling Products (Age of Sale and Proxy Purchasing) Regulations 2015.

Relevant document: 25th Report from the Joint Committee on Statutory Instruments

The Parliamentary Under-Secretary of State, Department of Health (Earl Howe) (Con): My Lords, these regulations restrict children’s access to electronic cigarettes. I am glad that we have the opportunity to debate these regulations, as they are the final element of the package of measures the Government introduced in the Children and Families Act aimed at protecting young people from tobacco and nicotine addiction and the serious health harms of smoked tobacco.

The provisions in the Act give Ministers regulation-making powers to introduce an age of sale requirement for electronic cigarettes and we have taken the decision to do so. The market for electronic cigarettes—which are also known as e-cigarettes—has developed rapidly in recent years. There are many different types and brands now available. Some of them are designed to look and feel like conventional cigarettes; others have a tank or reservoir which is filled and refilled with liquid nicotine. E-cigarettes can be disposable or rechargeable.

Most of the e-cigarettes on the market are flavoured and some of these flavours, such as cherry cola, bubble gum and gummy bear, may be appealing to children. The use of e-cigarettes is also increasing. Action on Smoking and Health estimates that 2.1 million adults in Britain currently use them. This is an increase on the estimated 700,000 users in 2012. Use of e-cigarettes by people under the age of 18 is not currently widespread in this country; however, international evidence suggests that this may increase. The emerging evidence suggests that awareness of e-cigarettes by British children is high. A Public Health England report found that two-thirds—66%—of 11 to 18-year olds had heard of e-cigarettes. Some 7% had tried e-cigarettes at least once and 2% reported using them sometimes or often.

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E-cigarettes are widely promoted through social media. They are sold in a wide range of retail outlets, including supermarkets, newsagents, specialist shops and pharmacies, and are often prominently displayed and promoted in store.

It is clear that more research is needed before we can determine whether e-cigarettes are acting as a gateway into tobacco use. While e-cigarette use by children is currently associated with existing tobacco smoking, research published by the Welsh Government provides tentative evidence that e-cigarette use may represent a new form of childhood experimentation with nicotine. The Chief Medical Officer has raised concern about e-cigarette use by children and the World Health Organization has recommended that they should not be sold to minors.

Nicotine is highly addictive; it is five to 10 times more potent than cocaine or morphine, and young people can rapidly develop nicotine addiction. Research shows that adolescents are more sensitive to the rewarding effects of nicotine and this may be a reason why many people start to smoke during adolescence. We are aware that responsible e-cigarette manufacturers and retailers do not sell e-cigarettes to children at the moment. However, we have decided to introduce an age-of-sale requirement; we consider that concerns about the increased awareness and use of these products by children make this an appropriate step to take. The age of sale requirement will also provide clarity and consistency for retailers and enforcement officers.

Proxy purchasing occurs when a person over 18 buys an age-restricted product on behalf of someone underage. Young people are known to approach strangers outside shops or ask friends, neighbours or, in some cases, parents to buy tobacco for them. That is why we introduced a new offence of proxy purchasing of tobacco in the Children and Families Act. The regulations extend this offence to cover e-cigarettes.

I shall briefly set out what the regulations will do. The first set of regulations defines a “nicotine inhaling product” as any device which is intended to enable nicotine to be inhaled through a mouthpiece. The definition encompasses e-cigarettes, including disposable and rechargeable types, and certain component parts such as nicotine refill cartridges and nicotine refill substances, often called “e-liquids”. It does not cover component parts such as batteries or charging devices. The regulations do not apply to tobacco products, because we already have age of sale laws for tobacco. The regulations include exemptions for products that are licensed as medicines and so are subject to separate regulatory rules. There are exemptions for nicotine inhaling products that are a medicine or medical device made available in accordance with a valid prescription by a pharmacist. The regulations also exempt the sale of any nicotine inhaling product licensed as a non-prescription medicine—that is to say, available for general sale—and which the licensing authority has determined is indicated for use by children under 18. In such cases, the seller need not be a pharmacist, as such medicines can be sold in other types of shops including newsagents. This means that those under 18 years trying to quit smoking would still be able to access e-cigarettes as well as products such as nicotine patches or gum.

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The regulations also extend the proxy purchasing provision in the Act to make it an offence for an adult to buy, or attempt to buy, a nicotine inhaling product on behalf of a child aged under 18 years. The penalties for these offences are set out in the Act: a person making a proxy purchase may be issued with a fixed penalty notice or could be referred to court; and the adult making the purchase would be committing the offence, not the retailer. A retailer guilty of selling nicotine inhaling products to someone under the age of 18 could be fined up to £2,500 on conviction. Local authority trading standards officers would be responsible for enforcing the regulations, as they enforce much of the tobacco control laws.

The regulations bring the age of sale offence for nicotine inhaling products within the scope of primary authority. This arrangement allows businesses to form a statutory partnership with one local authority, which then provides advice for other local regulators to take into account when carrying out inspections or addressing non-compliance.

We are also debating a second set of regulations, which set the amount of the fixed penalty notice for the proxy purchase provisions at £90; this is reduced to £60 if it is paid within 15 days. This provides consistency for retailers and enforcement officers as it will bring the proxy purchase of tobacco and nicotine inhaling products in line with the equivalent offence for alcohol.

The regulations will apply to England and Wales and have been agreed by the Welsh Government. They would come into force on 1 October 2015. We have decided to use the October—rather than April—common commencement date to allow time for the training of enforcement officers and to raise retailer and public awareness.

There will also be further negative statutory instruments to complete the enforcement regime. One will set out the fixed penalty notice form for the proxy purchase of tobacco and nicotine inhaling products in England, and one will add age of sale and proxy purchasing to the list of offences for which enforcement officers can carry out directed surveillance, subject to existing safeguards; for example, to allow test purchasing operations.

The Department of Health held a six-week public consultation on the draft regulations and received 81 responses. The consultation responses confirmed that many responsible manufacturers recommend that their products are for use by adults only and responsible retailers already voluntarily restrict children from accessing e-cigarettes. Almost all respondents supported the policy aims and the specific proposals set out in the regulations. Retailers, e-cigarette manufacturers, local authorities, enforcement officers and the public health community have all been absolutely clear that they want these regulations in place.

The regulations are business-friendly and a number of retail organisations have told us that putting the age of sale in law will help those responsible retailers that already refuse to sell e-cigarettes to children, by ensuring that they are not at a competitive disadvantage by doing so. The cost of the regulations is estimated to

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be very small indeed and will be mainly on businesses that currently profit from selling e-cigarettes to children and young people.

Many consultation respondents emphasised that this is a fast-moving market in terms of product development as well as patterns of consumer use, and that research evidence into the effectiveness of e-cigarettes in smoking cessation and potential long-term health harms is still emerging. I agree that these are all important aspects of this policy area and we have therefore included a duty to review the regulations within five years of them coming into force.

As I said earlier, I am very pleased to be able to present these regulations to the Committee. They represent the final stage in the implementation of the important public health measures in the Children and Families Act. In recent weeks, we have also introduced legislation to end smoking in private cars carrying children, and earlier this week noble Lords debated the regulations that will introduce standardised packaging for tobacco products. They are all part of our comprehensive approach to tobacco control and make an important contribution to our vision of a tobacco-free generation in the future. I commend the regulations to the Committee.

Baroness Finlay of Llandaff (CB): My Lords, I thank the noble Earl for introducing these regulations and welcome the way in which they have been drafted. Clearly, a great deal of care was taken in the drafting, and they seem eminently sensible.

It is most reassuring to know that the Association of Convenience Stores welcomes these regulations and the clarity that they provide. It says:

“We support strong enforcement against proxy purchasing of tobacco. We need to see these properly enforced, something that is lacking with the same powers that are in place for alcohol proxy purchasing”,

and that the penalty for proxy purchasing on e-cigarettes puts everything consistently in line. Indeed, it has welcomed the age restriction.

I was glad, too, to hear the reference to the Welsh study because it was the data from Wales that really began to make me personally concerned about these products. There is evidence of increased use among under-18s. I know some people will say that data from ASH are biased, but ASH has been fairly neutral in its view on electronic cigarettes because of the way that they have helped people quit ordinary tobacco cigarettes. It has found that the number of 11 to 18 year-olds who have tried an electronic cigarette increased from 5% in 2013 to 8% in 2014, although it did put the caveat around those figures that the use is closely linked with smoking behaviour.

One piece of research which is really important to have on the record is the work from Counotte and colleagues, published in Developmental Cognitive Neuroscience in 2011, which found that,

“nicotine exposure during adolescence can disrupt brain development bearing long-term consequences on executive cognitive function in adulthood”.

These are new products, with high levels of nicotine in them. We know that the propensity for the developing brain in the age group up until 25 years to develop

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addictions of all sorts, right across the board, and addictive behaviour is greater than in the older brain. There is a concern that exposure in the young leads to a much greater propensity to develop nicotine addiction.

I have been concerned at the way that these products are marketed, especially to the young, and about their appeal almost as a fashion accessory. When I have looked at those shops which specialise in selling these products, they have made me feel as if I was probably a bit too old to go and buy one. They seem to be marketed very much to a young, vibrant population, which I find alarming. If they are shown to be as addictive as they might be, this will create a long-term market for them in the future.

I have been to several meetings about electronic cigarettes, including one held here in your Lordships’ House at which I was concerned at the almost aggressive way in which vaping was being pursued by some people present, which set alarm bells ringing a bit in my head over the process. These regulations are proportionate, timely and welcomed by those who have the responsibility for selling these products. I am glad that they appear to have universal support.

Lord Hunt of Kings Heath (Lab): My Lords, I welcome both sets of regulations. The Opposition fully support them. Like the noble Baroness, Lady Finlay, I was very impressed by the evidence from the Association of Convenience Stores and its support for the regulations. It is very persuasive in relation to the introduction of a minimum age of sale and I commend the ACS for the responsible briefing that we were sent ahead of these regulations.

The noble Earl referred to the research, such as the Welsh data and the evidence we have received from ASH, and mentioned the CMO’s concerns. Essentially, although one can certainly see that these products can have a beneficial health impact for many adult smokers, there is this issue about whether children go to smoking through these e-products. Is the noble Earl satisfied that enough research is being undertaken at the moment, either through the traditional research areas such as the MRC and Wellcome or perhaps through Public Health England? I do not know if he has information about this, but clearly it would be good to know that his department is keeping a continuing watchful eye to ensure that enough research is being done. Particularly relating to children, there is enough uncertainty around to make us want to ensure that there is ongoing research on this.

I have another question for the Minister, raised by the evidence that ASH submitted to his department when it was consulting on the regulations. ASH says that there is real confusion about the relative risks of electronic cigarettes compared to smoking, not just among the general public but among health professionals. It quotes from newspaper articles saying that smokers have been given advice by medical people and have had the impression that it is nicotine rather than tobacco smoke that is harmful. ASH quotes a study presented at the UK National Smoking Cessation Conference; it was some years ago so the profession may be more up to date now, but in one study presented

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at the conference a substantial proportion of GPs incorrectly asserted that nicotine in cigarettes caused CVD, strokes and lung cancer.

The point that ASH makes is that at the same time as regulations are introduced, the Department of Health should promote better understanding of the relative harm of electronic cigarettes and other nicotine products, including those authorised as medicine and their potential benefit to smokers. I understand that with regard to children there are areas where we are uncertain, but there are areas where we are more certain as well. I would be interested to know whether any advice or guidance accompanying the regulations is to be given to medical practitioners in particular.

I welcome the proxy purchasing offence, which is something that we very much support. The Minister quoted cases of young smokers having their cigarettes bought for them by another person, and outlawing this will help to crack down on it and send a wider public message that this is wrong. The other point comes back to the issue raised by the ACS regarding the e-cigarette issue: introducing the offence will give greater power to responsible shopkeepers not to serve people who they know, or strongly suspect, are going to pass cigarettes on to children. Overall, we are glad to see these regulations and to support them.

Earl Howe: My Lords, I welcome the support that the noble Baroness, Lady Finlay, and the noble Lord, Lord Hunt, have given to these regulations. I shall respond to the questions and points that they have raised. The study mentioned by the noble Baroness, Lady Finlay, was referenced in our consultation document. It was an important study, showing the impact of nicotine on the adolescent brain, and it influenced us considerably in informing the policy.

E-cigarettes are not risk-free. We do not know enough about the long-term health effects of adults using them, let alone children. There have as yet been no long-term studies to examine whether e-cigarettes serve as a gateway to tobacco use. Therefore, we cannot be certain at this stage whether there is a gateway effect from the use of e-cigarettes into tobacco smoking. Further research is needed to answer the question definitively. However, we know that nicotine is highly addictive, and we wish to protect children from the risk of nicotine addiction and the impact that nicotine can have on the developing adolescent brain.

The noble Baroness expressed a fear, which I share, about the aggressive marketing of these products. It is worth noting that the revised European tobacco products directive, which will apply from 20 May next year, includes a ban on advertising e-cigarettes, with a cross-border dimension—that is, advertising through television, radio, newspapers, magazines and sponsorship of sports events.

On the point made by the noble Lord, Lord Hunt, about what are sometimes seen as mixed messages around e-cigarettes, there is no doubt that, looked at in a certain context, e-cigarettes could be seen to have a role in enabling smokers to quit where they have tried other methods and not succeeded. We recognise that e-cigarettes are used by some smokers in that way. That is why the Government are working towards a

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regulatory framework that ensures that these devices meet basic standards of safety, quality and efficacy. We are clear that e-cigarettes must be accompanied by sufficient information to enable users to make informed choices.

The noble Lord asked about research. I agree that these matters must be kept under the policy spotlight going forward. The National Institute for Health Research recently commissioned a large, randomised control trial to examine the efficacy of e-cigarettes compared with conventional nicotine replacement therapy when used within UK stop smoking services. That research study is inevitably quite long-term. It is envisaged that the project will end in 2018, but the NIHR is confident that it will improve our current understanding considerably.

Motion agreed.

Proxy Purchasing of Tobacco, Nicotine Products etc. (Fixed Penalty Amount) Regulations 2015

Proxy Purchasing of Tobacco, Nicotine Products etc. (Fixed Penalty Amount) Regulations 201525th Report from the Joint Committee on Statutory Instruments

Motion to Consider

2.57 pm

Moved by Earl Howe

That the Grand Committee do consider the Proxy Purchasing of Tobacco, Nicotine Products etc. (Fixed Penalty Amount) Regulations 2015.

Relevant document: 25th Report from the Joint Committee on Statutory Instruments

Motion agreed.

Energy Efficiency (Domestic Private Rented Property) Order 2015

Energy Efficiency (Domestic Private Rented Property) Order 2015 Consideration in Grand Committee [Baroness Verma] 23rd Report from the Joint Committee on Statutory Instruments, 27th Report from the Secondary Legislation Scrutiny Committee23rd Report from the Joint Committee on Statutory Instruments, 27th Report from the Secondary Legislation Scrutiny Committee

Motion to Consider

2.58 pm

Moved by Baroness Verma

That the Grand Committee do consider the Energy Efficiency (Domestic Private Rented Property) Order 2015.

Relevant documents: 23rd Report from the Joint Committee on Statutory Instruments, 27th Report from the Secondary Legislation Scrutiny Committee

The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con): My Lords, I am pleased to open the debate on the order and the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.

The energy-efficiency regulations will drive improvements in the least energy-efficient privately rented properties in both the domestic and the non-domestic sector, and provide domestic tenants with a right to ask for consent to cost-effective energy-efficiency improvements to their property. The energy-efficiency order is designed to

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ensure that those tenants living in the majority of domestic agricultural properties can benefit from the energy-efficiency regulations, in addition to those tenants already defined under the Energy Act 2011. As the order is relatively straightforward, I propose to focus my introduction on the regulations themselves.

I will first give some background on the private rented sector to provide context to these regulations. There are around 1.2 million non-domestic rental properties that make up approximately two-thirds of the non-domestic property market. Around one in five of the non-domestic private rented stock falls within the lowest two energy-efficiency bands, which have an F and G energy performance certificate rating. In the domestic sector there are around 4.6 million private rented sector properties in England and Wales, making it the second largest tenure after owner-occupation at around one-fifth of the total domestic housing stock. Around 6% of all domestic properties have an F or G EPC rating, but the percentage of F and G-rated properties in the privately rented sector is almost double this at around 10%.

Although newly built properties in the domestic privately rented sector tend to have higher energy-efficiency ratings, there remains a stock of older properties, many of which have poor energy efficiency and are difficult and costly to heat. The high proportion of older, untreated properties results in lower energy efficiency. This means higher tenant energy bills, and, for domestic tenants, the likelihood of living in fuel poverty. Living in private rented accommodation is an independent risk factor that significantly increases the likelihood of a household being fuel poor, so much so that around a third of all fuel-poor households in England live in the private rented sector, despite the sector accounting for only around a fifth of all households in England and a seventh of the households in Wales. Put simply, the PRS has a disproportionate share of the UK’s least energy-efficient properties and fuel-poor households. That nearly one in five non-domestic properties falls below an E EPC rating also shows the huge potential for energy and carbon savings that remain untapped in our country’s non-domestic stock.

Much of the reason for the slower change and poor energy efficiency in the private rented sector is the split incentive, where the costs of installing energy-efficiency measures traditionally fell to landlords while the benefits of lower energy bills and a warmer property usually fell to tenants. Various approaches have been tried in the past to improve the energy efficiency of the private rented sector. These include voluntary approaches, information services, tax breaks for landlords and subsidies for the installation of energy-efficiency measures. The success of these actions has been limited. The Government have therefore concluded that well designed regulations targeted at the very worst properties, and signalled to the market well in advance of coming into effect, will help drive action to improve the building stock and benefit the wider UK.

The regulations are game-changing and have been hailed by the UK Green Building Council as,

“the single most important piece of green legislation to affect our homes and buildings that has been introduced in the whole of this Parliament”.

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This is the first time the Government are directly targeting energy efficiency in the existing private rented sector building stock.

I turn to the key aspects of the energy-efficiency regulations. The regulations fulfil a duty in the Energy Act 2011 to implement regulations so that by 1 April 2016 private domestic tenants have a right to request consent for energy-efficiency improvements where that consent may not be unreasonably refused by the landlord. By 1 April 2018, privately rented domestic and non-domestic property which falls below a minimum energy-efficiency standard, based on the energy performance certificate rating, cannot be let.

The regulations will reduce the UK’s carbon emissions, which is essential to meet the UK’s statutory domestic carbon budgets and the long-term 2050 goal set by the Climate Change Act 2008. By targeting the worst properties, they will improve the state of some of UK’s least energy-efficient building stock. By reducing the winter peak demand, the regulations will also improve the UK’s energy security, but not at any cost. The regulations have been shaped with significant input from the sector to work with the grain of existing practice. They will encourage cost-effective investment in energy efficiency. But the regulations will not demand landlords reach an E EPC at any price. In the domestic sector, a landlord will not be required to reach an E EPC by installing measures which are not cost-effective. Provided that a landlord has carried out all the energy-efficiency improvements to the property that could be funded through a Green Deal, under the energy company obligation and any available grant funding they may continue to let their property. My department’s analysis suggests that 73% of domestic F and G EPC-rated properties will be able to reach an E EPC using measures that meet the Green Deal’s golden rule, and another 10% can make some improvement, even if they cannot reach an E.

Non-domestic landlords are provided with similar protections; they will be required to carry out all the energy-efficiency improvements that can be funded through a Green Deal if it becomes available, or that cost the same or less than their expected energy savings over a seven-year period. My department’s analysis suggests that 85% of non-domestic properties can be brought up to an E EPC using measures that meet the Green Deal’s golden rule.

We are also taking care that the regulations do not drive inappropriate interventions, or force landlords or tenants to take decisions that are not in their best interests. The regulations set out specific exemptions for not installing improvements in listed buildings, where they will negatively impact on the value of the property by more than 5%, and where a landlord cannot get third-party consents, such as planning consent. Landlords will also be able to claim an exemption from installing wall insulation where it could negatively impact the fabric of the building.

We have made the regulations fair and the key message simple to understand: landlords will need to get their properties to an E energy performance certificate rating where they can do this cost-effectively, safely and in accordance with existing legal obligations. Tenants have the right to ask for consent for energy-efficiency

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works, and for that consent to be not unreasonably refused. Clear regulations, signposted in advance, mean higher compliance rates, and less need for enforcement. We will work with tenant groups, landlord groups, local authorities, local weights and measures authorities, and estate agents to ensure that all parties are aware of their rights and responsibilities, and we will endeavour to use innovative channels to warn tenants and landlords. However, where landlords choose to ignore their responsibilities, we have designed an enforcement regime that we believe will be clear, simple and effective. Landlords will either need to reach the minimum standard, or register an exemption on the central PRS exemptions register—a database to be set up and maintained by my department. Local authorities and local weights and measures authorities can choose to take action to enforce compliance.

The economic case for these regulations is also clear. They will provide overall benefit to the UK of £2 billion in net present value terms over the life of the policy. By encouraging co-investment, and decreasing search costs to install ECO measures to eligible householders, the minimum standards will also reduce the cost of delivering the energy company obligation. They will facilitate the delivery of the third and fourth carbon budgets at lower cost, and with greater certainty by providing over 1 million tonnes of carbon dioxide savings between 2018 and 2022 and nearly 2 million tonnes of carbon dioxide savings between 2023 and 2027.

Furthermore, compliance with the minimum level of energy-efficiency provisions of the regulations will provide significant benefits to non-domestic SMEs, providing them with over £2 billion net bill savings, and over £3 billion net bill savings to the non-domestic privately rented sector overall.

In conclusion, these regulations will drive significant change to the energy efficiency of the worst properties in the private rented sector, improve the lives of tenants living within them, reduce the UK’s carbon emissions, and provide a net benefit to the UK economy by around £2 billion in present value terms. I commend the order and regulations to the Committee.

Baroness Worthington (Lab): My Lords, I am grateful to the Minister for introducing these regulations. Here we are, one week before the end of this Government’s term in office and here we find, finally, the one piece of energy legislation that they can be proud of. All I can say is: what has taken so long?

This is a very sensible piece of policy. It is a crying shame that so many people still live in very poorly insulated, unhealthy homes—those F and G properties—with such poor energy-efficiency ratings. It is high time that we took action to address this and I am therefore very pleased to see these regulations being brought forward. I particularly welcome the fact that tenants will now have some legal back-up when they enter into negotiations with their landlords so that they will not be able to turn down measures. For a long time this split incentive has been a real barrier to change and it has trapped people in a cycle of fuel poverty where they do not have the means to improve their own situations. This is a very serious and welcome intervention.

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Of course, as was outlined, the measure has not just fuel poverty benefits but economic benefits for the country, and indeed carbon benefits in terms of us meeting our climate change objectives. Perhaps the only point on which we differ is that we think we could go further and we would like to see a commitment from the Government to further increase the requirements on landlords to move properties out of the E category into the C category. In the document that we published at the party conference last year, Caroline Flint launched a comprehensive set of policies to wage war on cold homes. Within that, we committed to phasing in a much higher standard for properties by 2027. We think that that is what the industry needs. We need to send a long-term signal that this is not just a stop-start process; this is going to be an ongoing process of improvement, and we will force those people currently profiting from the rent of substandard properties to keep improving those properties so that everybody can benefit from the measures available.

The one thing we will need to keep under careful review, as we always do with these policies, is the extent to which the exemptions that are provided are tied to the Green Deal. We have had discussions about the success or otherwise of the Green Deal. We hope that more and more people are taking measures to improve their homes but we are not convinced that that policy is completely fit for purpose. We would like to explore the rationale for allowing exemptions based on Green Deal availability. There may be some things that fall outside the Green Deal’s current offer that landlords and tenants may wish to pursue and we would not want to limit unnecessarily the efficacy of these regulations by tying them to another policy too strictly.

However, that is a small point compared to the bigger point, which is that finally we have a very good piece of regulation coming forward from the Government, which addresses a critical issue. We support these regulations.

Baroness Verma: My Lords, I thank the noble Baroness, Lady Worthington, for her full support for these regulations. Of course, I do not agree that this is the only piece of legislative work that has gone through this House in the past four and a half years that the coalition Government can be proud of. Much of the legislation that I have delivered has been to ensure that we have more efficient homes, lower energy costs and energy security, as well as looking very much at reducing carbon emissions. So I think she was being slightly disingenuous about the progress we have made. Given that we have spent many, many hours during the past four years or so, particularly in this Room, discussing the work that this Government have undertaken, we dispute that we have not achieved a great deal.

Of course, as with all things, we want to make sure that those who need more efficient homes, particularly vulnerable people in the private rented sector, are able to enjoy a much better living environment. The noble Baroness referred to a C rating. Of course everyone is ambitious, and we are equally ambitious to get the properties to be far more efficient than they are today. We have achieved a lot but there is a lot more to do. My consistent line to the noble Baroness has always

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been that we must not do this at any cost; there has to be a cost-effective way of being able to deliver what I think, and the noble Baroness has agreed, is the key policy of being able to help to improve our homes. There is a lot of work to be done and I look forward to debating for many more hours, particularly in this Committee.

Motion agreed.

Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015

Energy Efficiency (Private Rented Property) (England and Wales) Regulations 201523rd Report from the Joint Committee on Statutory Instruments, 27th Report from the Secondary Legislation Scrutiny Committee

Motion to Consider

3.15 pm

Moved by Baroness Verma

That the Grand Committee do consider the Energy Efficiency (Private Rented Property) Regulations 2015.

Relevant document: 25th Report from the Joint Committee on Statutory Instruments

Motion agreed.

Contracts for Difference (Allocation) (Amendment) Regulations 2015

Contracts for Difference (Allocation) (Amendment) Regulations 2015 25th Report from the Joint Committee on Statutory Instruments

Motion to Consider

3.16 pm

Moved by Baroness Verma

That the Grand Committee do consider the Contracts for Difference (Allocation) (Amendment) Regulations 2015.

Relevant document: 25th Report from the Joint Committee on Statutory Instruments

The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con): My Lords, we are today considering an instrument which amends the Contracts for Difference (Allocation) Regulations 2014, which came into force last summer, implementing electricity market reform. The powers to make this secondary legislation are found in the Energy Act 2013.

This reform, as noble Lords will be aware, is designed to encourage the necessary investment in secure low-carbon electricity generation through contracts for difference, or CFDs, which provide long-term price stabilisation to low-carbon plant, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. In brief, a contract for difference is a private law contract between a low-carbon electricity generator and a Government-owned company that provides the generator with greater certainty and stability of revenues, resulting in lower borrowing costs. This saving is passed on to consumers in the form of lower support costs to low-carbon generators.

19 Mar 2015 : Column GC289

As the Committee may be aware, the result of the first CFD allocation round was announced on 26 February. Twenty-seven contracts were offered to projects aiming to deliver 2 gigawatts of low-carbon energy capacity across England, Scotland and Wales. Together, these projects have the ability to power 1.4 million homes. The competitive CFD auction has successfully driven down the costs to consumers, resulting in the capacity costing up to £110 million per year less than it would have in the absence of competition.

Before we commence the debate, I will briefly describe the amending instrument. The draft Contracts for Difference (Allocation) (Amendment) Regulations 2015 amend the instrument that came into force last summer which governs the way in which applicants to the CFD are treated for the purposes of contract allocation. These amendment regulations, which the industry has been consulted on, implement a non-delivery disincentive to the CFD scheme. The amending provisions are aimed at preventing gaming and speculative bidding behaviour in CFD allocation, ensuring that only projects that intend to deliver and are capable of it participate in CFD allocation rounds.

The amending instrument sets out a consequence in relation to the site of the main generating structures of a generating station where either an applicant has been offered a CFD and fails to sign or a CFD was entered into but was terminated on a date less than 13 months from the date when the CFD notification in respect of that CFD was given. Applications in respect of such a site will be temporarily excluded for a period of 13 months from the date on which the relevant CFD notification was given. Unless an exemption applies, an applicant will not be able to make a CFD application in respect of the same site during that temporary exclusion period. This will help to ensure that only legitimate projects which are able to deliver low-carbon energy capacity participate in a CFD allocation round.

The amending regulations also set out a process for granting exemptions. This process is to be administered by the Secretary of State in accordance with the time periods set out in the regulations. The amending regulations also set out the grounds on which an exemption to the temporary site exclusion may be available. These are as follows—first, when an applicant can demonstrate that an application is in respect of a site that is not materially the same as the site to which a temporary site exclusion applies. Materiality limits are specified in the amending legislation. Secondly, it is when an applicant can demonstrate that it held a relevant property interest in the site prior to 14 October 2014, the date when stakeholders should have been aware of the detail of the NDD policy. This ground also requires that the applicant is not, and is not corporately associated with, the person who caused the temporary exclusion to apply by not signing or having their CFD terminated. Thirdly, it is when an applicant can demonstrate that it agreed a relevant property interest with a landowner prior to 14 October 2014. This ground also requires that the applicant is not, and is not corporately associated with, the person who caused the temporary exclusion to apply by not signing or having their CFD terminated. Fourthly, in relation to a non-signature case only, an exemption

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may apply when an applicant can demonstrate that relevant court proceedings, as defined in the instrument, are ongoing at the time of signature and the applicant’s ability to comply with the terms of the CFD would have been materially adversely affected. Relevant court proceedings include a judicial or statutory review of a planning consent applicable to the relevant project. The final ground on which an exemption may apply, which applies only to a non-delivery case, is when an generator’s CFD contract is terminated as a consequence of a qualifying change in law or relevant construction event, as defined in the CFD itself.

When the Secretary of State is satisfied that an exemption applies, an exemption certificate may be issued by them to a prospective applicant, allowing a CFD application in relation to that site to be made by that prospective applicant in the next allocation round. Once these amending regulations are in force, the Low Carbon Contracts Company will maintain and update a publicly available list of any excluded sites setting out the site, the name of the person who caused the temporary exclusion to apply by not signing or having their CFD terminated, and the period for which a temporary exclusion applies to each site. Implementation of the non-delivery disincentive into legislation will inspire further confidence in the robust CFD allocation process, which has already demonstrated an ability to drive down prices and deliver value for money for consumers. I commend the regulations to the Committee.

Baroness Worthington (Lab): My Lords, I am grateful to the Minister for presenting these regulations. Given that this might be the last time we meet over the Dispatch Box after what has been an interesting four and a half years of energy policy development, these regulations give us an opportunity to take a step back and reflect on how things are going with the energy market reforms introduced in the Energy Bill.

Here we have what seems to be quite a technical, small regulation that is being implemented, but at the heart of it is something quite significant; that is, that we have moved into a world where, rather than the private sector having overall responsibility for the delivery of projects and the decision-making processes, as you would have in an open and liberal market, by and large it falls on the Secretary of State to cause investment to happen in low-carbon energy.

That is quite a fundamental shift and one that has quite a few challenges attached to it, one of which is that, in the interests of containing price rises, we have introduced a levy control framework that sets a nominal budget for how many low-carbon projects will be signed and then, I hope, delivered. This is not an easy task, and these regulations hint at some of the complexities. It might well be that in the nice confines of Whitehall we are able to sit down with a plan and try to estimate how much low-carbon energy we need, which projects are the best and how we go forward with those that we deem to be cost-efficient, but out in the real world there can be unforeseen circumstances that cause things to change. The difficulty will be having all that responsibility resting on the shoulders of the Secretary of State and the Civil Service. Are we confident that we have the right information and skill sets and a sufficient degree of detailed understanding of the

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energy system to ensure that we do not pursue projects, or seek to have projects come forward, that ultimately are not delivered?

I suspect it is clear what I am hinting at here: the ongoing concern over the Hinkley Point nuclear power station. If the Minister will forgive me, I have a series of questions relating to that contract. Part of the impetus for introducing energy market reform in the first place was a desire to see nuclear power stations once again being built in the UK. The decision was taken by the Secretary of State that we would pursue contracts for difference as the means to make that happen. That is what lay behind the entire Energy Bill: a desire for the confidence for investors to make a large-scale capital-intensive project like Hinkley possible in the UK. We heard an awful lot about it and discussed it at length, and yet in the Chancellor’s Budget yesterday there was not one mention of the project. Why is that? Why is such a huge project—let us be honest about this, it is massive; it is a huge infrastructure project with a huge budget attached—not something that the Chancellor felt it wise to mention, and indeed simply glossed over? He referred instead to a tidal lagoon project in Swansea Bay that does not have a CFD and is only just entering into negotiations. The one project that has been central to all government thinking on energy policy has been Hinkley, yet it gets scarcely a mention. I worry about why that is. It concerns me that we have a system set up that is now not sufficiently subject to market forces, and we might find ourselves taking decisions and picking apparent winners that turn out not to be the winners that we thought. That is at the heart of this new system.

On a positive note, one of the side-effects of the intervention to make Hinkley happen has been the introduction of competitive auctions for renewables. The department should be commended for bringing forward the timetable for those competitive auctions, and we have seen those auctions deliver cost savings in the strike prices that we were anticipating for established renewables. So there is some good news, but almost as a by-product of what the original intention was. I am concerned about the silence, and I have questions. How are we doing regarding the timetable that the department expected the Hinkley project to follow? When do we now expect to see a contract signed, and when will it ultimately deliver low-carbon electricity, which of course is the end that we want to achieve? Will that be in time for the closing down of some of our older capacity in the early 2020s? The concern was always that we were going to lose some thermal capacity as a result of tightening air quality standards, and we needed new, clean, large-scale nuclear to bridge that gap. Indeed, some of the nuclear will be going off in that timescale too. Where are we at? When will we know whether that contract will be pursued? It was my understanding throughout our debates that it would be a fairly quick decision and that we would see EDF go ahead with the build and the signing of the contract early this year, with the NAO poised to scrutinise the contract, yet we have seen nothing.

Why is all this relevant to the regulations? It is because here we have regulations designed to prevent companies gaming or occupying the space under the

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LRF that would then preclude others from bidding in. I am not accusing EDF of gaming—far from it; I do not think that this is a premeditated attempt to pretend that it can do something that it cannot—but it is subject to circumstances outside of its control. It represents a huge chunk of that LRF and the signs are that it is not now on track for the delivery schedule that it anticipated. It is a significant issue, not just because of the need for capacity but because of the scale of this one project. If it were not to go ahead, we would have to rethink our strategies for other technology groups and projects and hope to bring those forward to replace the gap that would be created. That is why I am interested in what the non-delivery disincentive is for those big projects.

Do the regulations apply to Hinkley? I suspect, on some of the grounds outlined by the Minister, that they do not. There is a reference under ground 4 to “relevant court proceedings”. Austria is pursuing a court case, which I understand Luxembourg has now joined, in which it is challenging the state aid rulings for the Hinkley Point decision in the EU. Does that count as “court proceedings”? Does it mean that the Hinkley project would be exempt from the disincentives? The Minister referred to those projects bidding in to the auction rounds, but the Hinkley project was a bilaterally negotiated contract. Do the regulations cover bilaterally negotiated contracts? If they do not, what measures is the department considering to avoid this cuckoo-in-the-nest problem whereby the expectation is that the arrangement will deliver, yet circumstances beyond the control of government mean that it ultimately will not, putting significant pressure on departmental structures and the energy system?

Perhaps we should have considered these instruments in the opposite order because then we could have ended on a high. Throughout our debates, we have raised our concerns about the degree to which interventions change the balance between government control and the market’s ability to find the right solutions. We obviously want new nuclear power stations to be built in Great Britain but we need some early clarity from government on the status of the project, and a definitive answer on whether it is going ahead and when it is likely to start delivering us the low-carbon energy that we will need to keep the lights on. I look forward to the Minister’s response to those questions.

Baroness Verma: My Lords, I hope that we end on a happy note. The noble Baroness and I have had wonderful discussions at the Dispatch Box, which have ended with us agreeing that the interest of the country is more important than our political spats.

I will first give a general overview, because the noble Baroness took the discussion slightly away from the regulations in front us, and then draw her neatly back to her question. On coming into office in 2010, it was obvious that 20% of our energy would be going offline by 2020 and that we needed to take certain measures to fill that gap. We also knew that we were being dictated to by a very small group of operators, so that choice and competition were lacking. That needed to be realigned and redressed. Since 2010, with the measures and the legislation that we have introduced, we have seen greater competition. We now have not

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just six generators, but a great number of smaller, independent generators that have driven competition into the marketplace, which is a uniquely good point for the UK consumer.

The second thing we needed to ensure was energy security. That is crucial if we do not want the lights to go off: we have to make sure that we take all the various measures and meet our emissions obligations, which are very important to all of us. We all signed up to the Climate Change 2008 and the principle that we should have a wide range of energy sources. Nuclear energy at Hinkley Point C of course plays a part in that.

On the noble Baroness’s question about Hinkley Point C, the non-delivery disincentive measure will prevent speculative bidding. That is what we are trying to ensure here. However, it will not apply to CFDs that are bilaterally negotiated with the Secretary of State. Neither of these requirements of a non-signature case—the requirement for an offer to lapse in relation to a successful application or, in a non-delivery case, a requirement linked to a CFD notification being given—relates to a bilaterally negotiated offer. Hinkley Point C is, uniquely, a bilaterally negotiated CFD. The noble Baroness talked about the uncertainty of the response. The Commission has given state aid approval, but as the noble Baroness is fully aware, the processes at Commission level take time. They are not driven by one country but by a great range of 27 other countries. We are waiting for responses on that.

Let us look at the wider picture. The noble Baroness mentioned Austria, but we have not yet received a legal challenge from Austria. All the information and detail that the Commission wanted was provided and the case was therefore approved. Now we just have to wait, as always with these processes, which take a little time. However, the fact that we have investors wanting to come to Moorside and to Wylfa, that we have seen over £45 billion of investment in the energy sector, particularly around renewables, and that we have seen an increase in the jobs in the sector gives us reasonable confidence that our measures have resulted in the energy sector being in a much better place than it was when we came into office in 2010. That is my starting point in rebutting some of the noble Baroness’s commentary.

Going forward, we have to take into account that we cannot be held to ransom by external forces. It is crucial that we focus on ensuring that our own home-grown supplies are supported but that we are mindful that the huge impact this may have on the consumer is not at any cost. This is the argument that I have led through the House throughout my time in this role. This is about the important balance of making sure that we have a fair, competitive marketplace, which is not open to gaming or speculation, and a firm response to give certainty to investors on one side while justifying our commitment to the consumer on the other. The noble Baroness obviously wants to raise another point.

Baroness Worthington: Maybe the noble Baroness cannot answer this directly, but my main concern is that we are given information as early as we can about when we can expect Hinkley Point C to be signed or not signed, so that if we get a no, or decide not to

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pursue it, we can pursue other alternatives. The noble Baroness is completely right that there are other nuclear projects that are more developed now than they were when we started this process and which might be able to replace the capacity almost as quickly. We cannot just let this drift. My reference to the budget was to make the point that we cannot just keep chasing these shiny new projects, such as the lagoons. Last year it was fracking; the year before that it was Hinkley. We have to see some of these things be grounded in reality. It worries me when we do not talk about these projects. We need to get a yes or no, and then we can move on.

Baroness Verma: I wish the noble Baroness could see how much determination there is in the department to speed up processes in relation to Hinkley Point C. However, certain processes have to be followed. As soon as we know the outcomes, I will make sure that the noble Baroness is the first to get that information. However, she also has to agree that we have been consistent in this regard by looking at fracking as another potential source of energy for the country. It is not that we keep finding shiny new energy sources, but we have to look at different sources in the round so that we do not become dependent on any one of them. During the passage of the Infrastructure Bill, the noble Baroness took us through a gruelling procedure with regard to fracking. If we are to have a reasoned, sensible debate on these things, we have to be responsible for making sure that the legislation passes smoothly through both Houses of Parliament when it comes before us. I agree with the noble Baroness that sometimes we want to respond more quickly. The Government work incredibly hard to respond in a timely fashion, but ultimately the response has to go through the proper processes and channels.

Motion agreed.

Bank of England Act 1998 (Macro-prudential Measures) Order 2015

Bank of England Act 1998 (Macro-prudential Measures) Order 201523rd Report from the Joint Committee on Statutory Instruments

Motion to Consider

3.42 pm

Moved by Lord Newby

That the Grand Committee do consider the Bank of England Act 1998 (Macro-prudential Measures) Order 2015.

Relevant document: 23rd Report from the Joint Committee on Statutory Instruments

Lord Newby (LD): My Lords, this Government have undertaken the most fundamental programme of financial reform this country has ever seen. The Bank of England sits at the heart of this new system, with clear responsibility for maintaining financial stability. The Bank is supported by the firm-level supervisors: the Prudential Regulation Authority and the Financial Conduct Authority.

A key element of the new system is the Financial Policy Committee. The FPC is responsible for identifying, monitoring and addressing risks to the system as a whole. This macroprudential regulation was entirely absent from the system we inherited.

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The FPC works to improve financial stability in two ways: first, through recommendations, which can be made to the regulators, industry, the Treasury, within the Bank and to other persons; and, secondly, through directions that can be given to the PRA and FCA. The FPC’s direction power is limited to macroprudential measures set out in orders like those currently before the House. The regulators must comply with a direction, but they will have discretion over its timing and implementation method.

The FPC has recommended that its powers of direction be expanded so that it may effectively tackle systemic risks within the financial sector. The Government agree with those recommendations and have brought forward the instruments that we are discussing today. These instruments will provide the FPC with powers of direction with regard to the UK housing market and a leverage ratio framework. I will discuss these powers in turn.

Owning a property is an aspiration for many people in the UK, and one which this Government support. However, we cannot be blind to the risks that can emerge from the housing market. More than two-thirds of previous systemic banking crises were preceded by boom-bust housing cycles, and recessions following property booms have been two to three times deeper on average than those without.

To solve this issue, we need to be clear about where the risks arise. They arise when people borrow too much and leave themselves vulnerable to changes in circumstances. Excessive debt can create serious difficulties for households and, given that mortgages are the single largest asset on bank balance sheets, it can result in significant vulnerabilities in the banking system. We all know from the experience of the financial crisis how important it is for the banking system to be resilient to all shocks, including those from the housing market. Excess debt can also force households to cut back on spending which can, in aggregate, create difficulties for the economy as a whole.

Let me be clear, there is no immediate cause for alarm. The FPC has itself stated that since taking action in June, there has been no increase in financial stability risk from the housing market. However, not to prepare for such events would be dangerously complacent. So we need to ensure the FPC has the tools at its disposal to deal with these risks should they arise, which is why we are giving the FPC far-reaching new powers over owner-occupied mortgages. Specifically, if the FPC judges that some borrowers are being offered excessive amounts of debt, they can limit the proportion of high debt-to-income—DTI—mortgages each bank can lend or, in extremis, simply ban all new lending above a specific ratio. Similarly, if the FPC is concerned by the risks posed by a housing bubble, it could impose caps on loan-to-value ratios. These additional powers over the housing market are commonly held by central banks in other countries, and the experiences of Korea, Singapore and Hong Kong confirm that DTI and LTV limits are efficient tools to address risks in the housing sector.

I now turn to the other instrument that we are considering today. The recent financial crisis revealed serious weaknesses in the existing framework of

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internationally agreed standards of capital adequacy. Banks in most jurisdictions were only required to meet risk-weighted capital requirements and were not subject to leverage requirements. In the lead-up to the crisis, some banks’ balance sheets expanded significantly while average risk weights declined. Firms’ leverage ratios were a useful indicator of failure during the last crisis, and the period immediately preceding the crisis was characterised by sharp increases in leverage. Firms with high leverage ratios have greater amounts of capital to absorb losses which materialise and have less reliance on debt financing.

There is international agreement that the leverage ratio is a crucial complement to risk-based capital requirements. The usefulness of the leverage ratio as a regulatory requirement has been recognised by the Basel Committee on Banking Supervision, which has included proposals for a 3% minimum leverage ratio in the Basel III agreement. Countries such as Canada and the US already impose leverage ratio requirements and have also committed to going beyond the Basel III requirements.

In the UK, both the Independent Commission on Banking and the Parliamentary Commission on Banking Standards have recommended that banks should be subject to minimum leverage ratio requirements. On 26 November 2013, the Chancellor requested that the FPC undertake a review of the leverage ratio and its role in the regulatory framework. In light of international developments, the Chancellor judged that it was an appropriate time for the FPC to consider all outstanding issues relating to the leverage ratio, including whether and when the FPC needed any additional powers of direction over the leverage ratio, and whether and how leverage requirements should be scaled up for ring-fenced banks and in other circumstances where risk-based capital ratios are raised.

On 31 October last year, following almost a year of work and extensive consultation with stakeholders, the FPC published its response, The Financial Policy Committee’s Review of the Leverage Ratio. The review recommended that the FPC be given new powers of direction over the leverage ratio framework for the UK banking sector. The Chancellor agreed with these recommendations and, following a consultation on the implementation of the proposals, brought forward the instrument that we are considering today.

The instrument will grant the FPC powers to set: a minimum leverage ratio that all firms must meet; additional leverage ratio buffers for systemic firms, linked to their systemic risk-weighted capital requirements; and a countercyclical leverage ratio buffer for all firms, linked to the countercyclical capital buffer that is also set by the FPC. These powers will allow the FPC to ensure that firms are not allowed to take on excessive levels of leverage, that the most systemically important firms are more resilient than other firms and that resilience is built up for all firms when times are good. I beg to move.

Lord Tunnicliffe (Lab): My Lords, I thank the Minister for introducing these two orders. The Minister and I meet like this quite regularly, just the two of us. I thank the noble Lord, Lord Ashton of Hyde, for

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making the government side look a bit more multiple, but only two of us are going to speak. Often we discuss rather minor orders, but I do not think that these are minor; they are absolutely fundamental to the work that we have done in the Chamber with the various financial reform Acts and in the creation and designing of powers of the FPC. These are probably the key ones that have come before us. I thought that they were the first, and possibly I am wrong about that, but I certainly do not remember any as important as this. I do not want in any way to suggest that we are other than supportive of the orders, but I have a few queries and the odd complaint.

The Lords Secondary Legislation Scrutiny Committee commented on what it saw as the inadequacies of the Explanatory Memorandum. It particularly pointed out the very trivial summary of the consultation. I agree with the committee in the sense that the explanation of these orders needs quite a narrative. I would have appreciated it if that narrative was in the EM, but in fact one has to go into the impact assessment—and then, really to understand, I found that I had to go back into the minutes of the Financial Policy Committee and its interesting review of the leverage ratio. As a Committee, our considerations would have been enhanced if we had been led down that path rather than having to discover it. In the middle of this process, I realised what a different world it is, because 10 years ago without the internet I would not have had the faintest idea what we were talking about. It is really very complicated to get at if you cannot get back to those source documents.

The one thing that I did find in the Explanatory Memorandums from the Treasury was a name and telephone number. I have to say that my experience of ringing those numbers has been very impressive under previous orders. This time, because his name came up first, because it is attached to the second order, I publicly thank Christopher Woodspeed for spending 40 minutes taking this amateur politician through the intricacies and giving some signposts as where to go.

I shall be slightly repetitive for the Minister, to set the scene. In creating the FPC and the other institutions, we said to the FPC that it could have two toolkits—a recommended and a directional toolkit. The recommended toolkit is a “comply or explain” toolkit, while the directional toolkit is a “do it” toolkit. As I understand it from going back into the minutes of the Financial Policy Committee of 17 and 25 June, written up as one, the committee discussed the world and particularly alighted on the UK housing market. I do not suppose anybody reads what we say, so it does not matter, but I commend whoever produced the minutes of that meeting, because I found them very readable. They are a good read; they fit together and are pleasantly discursive.

When discussing the housing market, in paragraph 11 of the minutes, the FPC reminds itself what its job is—which I thought was quite clever to put into its minutes. It states:

“Under its primary objective, the FPC was required to ‘remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system’; legislation defined one source of systemic risk as ‘unsustainable levels of leverage, debt or credit growth’”.

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Then the minutes describe a debate, which seems to have been a proper and interesting one. The paragraph that sums up where the committee got to says:

“Taking this evidence together, the Committee assessed that there was the potential for a large and diverse impact on aggregate demand from household indebtedness, with this risk more marked in relation to borrowers with higher levels of indebtedness. The Committee judged that the size of that impact on aggregate demand was sufficient to warrant intervening now”—

that is, in June—

“in the mortgage market, given current conditions and the potential upside risks to the FPC’s central view of the possible future path of the share of mortgages extended at high LTI multiples and hence to overall indebtedness”.

So the MPC had this conversation and produced a couple of recommendations. One was a stress test—about 3% over a period of years, and so on, which all makes sense—and the other is that:

“The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5”.

Then there is a de minimis bit of it, and so on. As I understand what the Minister has said, those recommendations did their work. My understanding from reading the various documents and from what he said is that there is not a concern with the housing market at this moment, and I do not think it is seen as a concern in the future. I do not know whether I can confess this, but I actually read the Daily Telegraph this morning—it happens. In an article, Roger Bootle, chief executive of Capital Economics and, as far as I know, pretty politically neutral, says:

“Time and again governments take measures that boost the demand for housing without doing anything to increase supply. The result is higher house prices without accommodating a single extra family—hard-working or otherwise”.

I would like the Minister to confirm that the increased demand that the Budget put into the housing market is not expected to create any destabilising effect.

So we think that the FPC has stabilised the market. However, in October 2014—no, sorry, that was the other stuff; perhaps it was September 2014—the committee determined that it wanted to move its powers from the recommendation toolkit to the direction toolkit. Does the Minister feel that that is because the FPC envisaged instability; is it just going to take the directional power and put in the same figures as in the recommendation, to tidy things up; or is it going to do neither of those things but simply put it in a drawer, with the marketplace knowing it is in a drawer and that it can be drawn out at any time to direct the marketplace away from an unstable path? I would be interested in which of those three options the Government envisage the FPC using these powers for.

I turn to the other order. I read lots of stuff on this but found one document particularly useful. The Minister has the advantage of me as he works in the Treasury; for my part, I end up understanding a bit of this legislation for about a day and a half before we discuss it and then it goes out of one’s mind. The nice thing about the Financial Policy Committee’s review of the leverage ratio is that it takes you through all the background so you can see how all the bits fit together.

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As I understand it, the second order, which creates the leverage ratio concept, rules and “calibration”—the word that the FPC used—will not bite with most firms because the capital buffer, if that is the right term, derived from the risk-weighted analysis is in most cases greater than the leverage ratio buffer that will be recommended. In that sense, the new leverage ratio sits there as a floor rather than something that is biting and acting on firms. But I understand, or at least I hope I do—this will be a confirmation of whether or not I have understood it; please forgive me, but I think it is quite important—that some firms, particularly ones that have high-quality assets with low risk, may in fact be caught by the leverage ratio, and that particularly includes building societies.

My next question is: are any problems envisaged from the tightening of the market, for want of a better way of putting it, that the biting of this leverage ratio on those particular institutions is going to lead to? Will there be any adverse effects on housing finance as a result of these ratios being introduced? Finally, as I understand it, a firm could respond to the leverage ratio constraint by changing its asset mix; by moving between different levels of risk, it would change its risk-weighted buffer and come down to this buffer. It is an invitation for firms to look at their asset portfolios.

What I did not understand is the impact that this is going to have on lending to SMEs. I think there is a political consensus that SMEs need to be encouraged and funded in this country. I am curious about the extent to which it is envisaged—I got mixed messages when trying to understand it from the documentation—that this will impact on SME borrowing.

The two orders have the potential to have an impact on growth. The impact assessment has some worked-out examples. They are not forecasts, I accept that, but they illustrate scenarios where there may be some impact on growth through the use of the ratios. The leverage ratio could have a similar effect—a reduction in lending and hence some impact on growth.

It was a particular joy to read the Daily Telegraph this morning. I rather assumed it would be wall-to-wall praise. I take the Guardian to think but I take the Telegraph for therapy—that is one way of looking at it—and it is free at the club. The front page of the business section reads: “Osborne’s bank raid” and concludes that he has done a bank raid of £9.28 billion. The article refers to the OBR report. I have not a chance to read the OBR report—I am saving that for my holiday; I am covering everything in sight today, am I not? But I think it is an incredibly well constructed document which has developed well over the years, and I now find that it is genuinely worthwhile reading as one of the best documents to give you a feel for the economy as a whole. The article says:

“The OBR said in its review of the Budget that the higher levy could ‘affect banks’ ability to meet capital requirements … the measures could affect the supply of credit and therefore GDP growth’”.

So you have on the one hand the Budget with the high levy and on the other these leverage ratios, which if they bite could have an adverse effect. Given the central scenario—by that I mean the scenario that the OBR uses for its next five-year plan—are these orders

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expected to have any adverse effect on growth? You can read stuff that suggests they do not but it does not definitely say that they do not. Given the central scenario that the Government are using—that is, the OBR scenario for the next five years—are these orders expected to have an adverse effect on growth and, if they do, did the OBR take account of that adverse effect in its documentation or would that need to be added?

This is the end of the Parliament. I am not going to say much about the next order because it is so reasonable I cannot find anything to say about it. We have had a lot of encounters and we are in a situation which I do not know how to remedy but I somehow feel is wrong. We have here some incredibly important orders but I am not sure that we are using the correct mechanism to do them justice. There are just the two of us discussing them. The noble Lord will have studied these orders carefully and been fully briefed and no doubt will hopefully have put his staff under some pressure in this respect, and I have put quite a lot of effort into it. However, I worry about the value of these encounters. I have been trying to think through the value of this encounter. One of the things you can do with an affirmative order is to resist it by voting against it. Realistically, that happens two or three times a Parliament. Very occasionally, you vote it down. In my recollection, that occurs once or twice a decade, so it is hardly our central business. You can seek clarification which sometimes tends to verge on a bit of a blood sport where you are trying to catch the Minister out. I would not try to do that because I know the Minister is so well briefed.

The real issue is scrutiny. One of the problems with scrutiny is that it is so difficult for the opposition to evidence the fact that they have put effort into scrutinising the legislation and making sure that it does not contain any faults. The value of scrutiny lies usually not so much in scrutinising the order but creating an atmosphere so that back at the ranch—back in the Treasury—people know that the orders that they bring forward are going to be carefully examined, and therefore they are encouraged to be that much more careful and thoughtful. In a sense, all one can do is stand up and say, “We have scrutinised the order”. These orders are particularly unhelpful in that regard, as I cannot find anything wrong with them. As far as I can see, they are well crafted. They sensibly add to the FPC’s powers. As I say, I am disappointed that I cannot find anything wrong with them.

I then glanced down at the first page of the report, which happens to list the membership of the FPC as being the Governor, four deputy-governors—for reasons I do not understand, three were there because they should be there and one was there because she was there; that is roughly what it says on the front page—the chief executive of the FCA, a man from the Treasury and four non-executives. They spent a year doing this work and, if they cannot get it right, we are in trouble. I think that they have got it right.

In summary, I thank the FPC for its efforts and commend it on the results.

Lord Newby: My Lords, I am extremely grateful to the noble Lord for taking such trouble over these orders. He raised a number of points. He asked whether

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it was the first time that we had used the macroprudential powers. We previously legislated to grant the FPC a power of direction with regard to sectoral capital requirements. This was done through a similar order in 2013. The debate in your Lordships’ House was on 26 February 2013. The FPC was also granted the power to set the UK rate of the countercyclical capital buffer under the CRD IV in the normal way.

The noble Lord was concerned about the lack of detail in the Explanatory Memorandum. The full consultation response document was published on the government website, but I take his point. Those of us who sat through the many weeks and months of consideration of the background policy to these orders when we were putting the Financial Services Bill through your Lordships’ House, had it in our water almost that this was going on. For people who did not do that, which of course is the vast majority of people, it is very important that the accompanying documentation is as comprehensive as possible. I am sure that my colleagues in the Treasury will have noted that, although I am of course very pleased that the noble Lord found the experience of seeking advice from the Treasury so positive.

The noble Lord asked about the extent to which there was concern at the moment about housing and whether this was a precautionary measure or the powers were going to be used immediately. The FPC is clear that these instruments are necessary to tackle financial stability risks that could emerge in the future rather than any risks that we are facing at the moment. As it said in its 2 October statement, the recommendation in relation to these powers,

“relates to the FPC’s general ability to tackle risks that could emerge from the housing market in the future. The Recommendation does not reflect any FPC decision about the current state of the housing market”.

This is recognition of the importance of the housing market in relation to financial stability, but there is no concern at the moment that the housing market is in such a position that these powers are needed immediately.

The noble Lord asked whether, as a result of the Budget, there was likely to be a further problem with house prices and these powers might be needed sooner rather than later. The key thing here is that we are not just introducing new measures for first-time buyers, for example, but are taking, and have taken, significant steps to boost housing supply, including the new planning policy framework and the most ambitious affordable housing programme for 30 years. Everybody accepts that we need to do more on housing, but when the FPC looked at the Help to Buy scheme in October last year, which people are questioning as a potential problem in terms of financial stability, it came to the conclusion that it did not represent a material risk to financial stability, that it had not been a material driver of recent house price growth and that its key parameters remained appropriate.

The noble Lord asked about the SME lending proposals. The Government and the FPC do not expect leverage requirements to have a material impact on lending to the real economy. At the margins, firms that are bound by leverage ratio requirements may be incentivised to increase SME lending relative to other types of lending, as SME lending often attracts a

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higher return than other assets that have lower risk weights, as the leverage ration is not risk-weighted. However, we do not expect this effect to be significant.

The noble Lord asked how the leverage tool would affect companies with low-risk assets, particularly building societies. As he pointed out, the key capital constraint for banks and building societies is the risk-weighted capital requirements rather than the leverage ratio. The FPC’s impact assessment suggests that only two of the seven building societies in its sample would need to raise capital to meet leverage ratio requirements. The majority of building societies in the UK use standardised risk models, which means that their average risk weights are above 35%. An average risk weight above 35% means that risk-weighted capital requirements will bind—take effect—before the FPC’s proposed leverage requirements.

The noble Lord referred to the Daily Telegraph, and I commend him on his eclectic reading. He asked whether the Budget changes and the increase in the bank levy would have a deleterious impact on growth. The Treasury’s impact assessment shows that the leverage framework itself is expected to have a positive impact on GDP. As far as the banking levy is concerned, we do not believe that it will have an impact of any significance on growth. The OBR has not yet factored in the impact of these orders simply because they are not through Parliament, so it would not take account of them. However, we do not believe that they will have any significant impact on growth.

I have complete sympathy with the noble Lord’s final point about the importance of these orders and the way in which we debate them. He has taken a very hard-working approach to looking at the orders. Even though they are very important, hardly any noble Lords, with the exception of the noble Lord, Lord Tunnicliffe, have intervened in debates on Treasury orders this Session. The noble Lord, Lord Sharkey, did so in respect of one order, talking about an issue that he had raised at an earlier stage.

We have had some very significant orders. We had an order that had the details of the ring-fence for retail banks. When the primary legislation was going through, we spent hours debating whether it was possible to produce such an order that would work; many noble Lords waxed lyrical about it and said that it was impossible. When the order actually appeared, no one came and spoke to it, apart from the noble Lord, Lord Tunnicliffe, who has been here for all such orders. Other than him, it is fair to say that that order had no debate, although it was very significant and contained a number of issues that were certainly worth spending a bit more time on.

To my mind, there is an issue about the role of secondary legislation. The purpose it serves in terms of affirmative resolution instruments that we are required to debate means that, at the very least, the noble Lord and I have to spend some time looking at them. Despite the noble Lord’s forensic mind, that is not always the most comprehensive scrutiny that I think was in people’s minds when they said that such instruments should be affirmative resolution. There is a big issue

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there which, fortunately, goes beyond the scope of today’s orders, and we certainly cannot deal with it today.

I take the noble Lord’s point that if the members of the FPC cannot get it right, who can? With the establishment of the FPC, and indeed the whole of the new regulatory framework for the financial services sector, we have tried to make it as foolproof as possible and to make the risk of the kind of collapse that we saw in 2008 as small as possible. I do not think that anyone believes that you can get rid of risk altogether, but I hope that we have gone a long way towards mitigating that risk by putting in place structures that are resilient and effective.

Motion agreed.

Bank of England Act 1998 (Macro-prudential Measures) (No. 2) Order 2015

Bank of England Act 1998 (Macro-prudential Measures) (No. 2) Order 2015 23rd Report from the Joint Committee on Statutory Instruments

Motion to Consider

4.19 pm

Moved by Lord Newby

That the Grand Committee do consider the Bank of England Act 1998 (Macro-prudential Measures) (No. 2) Order 2015.

Relevant document: 23rd Report from the Joint Committee on Statutory Instruments

Motion agreed.

Mortgage Credit Directive Order 2015

Mortgage Credit Directive Order 2015 Consideration in Grand Committee [Lord Newby] 24th Report from the Joint Committee on Statutory Instruments24th Report from the Joint Committee on Statutory Instruments

Motion to Consider

4.20 pm

Moved by Lord Newby

That the Grand Committee do consider the Mortgage Credit Directive Order 2015.

Relevant document: 24th Report from the Joint Committee on Statutory Instruments

Lord Newby (LD): Noble Lords might find it helpful if I start by outlining the background to the legislation. In February 2014 the mortgage credit directive—MCD—was agreed, giving member states until 21 March 2016 to ensure that it is implemented. The MCD has two broad aims: to protect consumers by setting minimum regulatory requirements that member states must meet and to promote the creation of a more harmonised European mortgage market.

However, the UK already has a strong regulatory framework in place to protect consumers in the residential mortgage market. Under this framework, the independent regulator, the FCA, has the authority to put in place, supervise and enforce a range of rules to ensure that firms act responsibly when conducting residential mortgage business. Since this framework was put in place in 2004, the FCA has been able to make incremental changes and develop a regime with strong consumer protections, tailored to the specifics of the UK market.

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The MCD does not offer many additional benefits to UK consumers beyond those already provided. However, it does have the potential to increase the burden on business. In recognition of this, the UK’s approach throughout the negotiations on the MCD was to try and align the directive’s requirements with the existing UK regulations, in order to minimise the impact on UK industry and consumers. This strategy proved highly successful and the Government were able to secure a good outcome for the UK.

Once the directive was agreed, the Government set out an approach to implementation that was an extension of the earlier negotiation strategy. We decided to build on the existing UK regulatory regime, minimising the impact on the UK market, avoiding disruption and ensuring that the gains made from improvements in regulation over the past 10 years were not squandered unnecessarily. This approach means that implementation of the MCD will be achieved primarily through adjustments to existing FCA rules. However, there are areas where UK legislation has to be changed, and that is the purpose of the draft order under consideration today.

There are two main areas where the draft order makes a significant change. The first is to the regulatory framework for second charge mortgages. These are loans secured on property that is already acting as security for a first charge mortgage. The terms first charge and second charge refer to the priority of securities held by the lenders, where the second charge is subordinate to the first. Typical uses for this type of loan include debt consolidation and home improvements. Currently, the scope of FCA mortgage regulation is limited to first charge mortgage lending, with second charge lending regulated as part of the FCA’s consumer credit regime.

The Government previously committed to move second charge mortgage lending into the regulatory regime for mortgage lending on the basis that it is more appropriate to regulate lending secured on the borrower’s home consistently. This proposal was welcomed by the industry. However, it was decided that this move would be postponed to coincide with the implementation of the MCD and reduce the number of regulatory changes that firms would have to ensure compliance with. As a result, this draft order will ensure that, as of 21 March 2016, the FCA will be able to regulate the vast majority of secured lending under one regulatory regime.

The second area where this order will make a significant change is with respect to buy-to-let mortgages. Existing UK legislation excludes buy-to-let mortgages from the scope of FCA regulation. This approach is driven by two key considerations. The first is that, unlike lending to an owner-occupier, the borrower’s home is not at risk. Second is the acknowledgement that buy-to-let borrowers tend to be acting as a business.

The Government are committed to introducing FCA regulation only where there is a clear case for doing so in order to avoid putting additional costs on firms that would ultimately lead to higher costs for borrowers. However, while the MCD allows member states to exempt buy-to-let from the detailed requirements of

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the directive, it requires that member states using this option put in place an appropriate framework at a national level for buy-to-let lending to consumers. The Government have decided to use this option to put in place the minimum requirements needed to meet the UK’s legal obligations, as they are not persuaded of the case for the full conduct regulation of buy-to-let mortgages.

The order under consideration today sets out these rules and gives the FCA the power to register, supervise and enforce them in line with its existing statutory duties. This draft order has been prepared in close co-ordination with the FCA, industry and consumer groups. The overall approach we have taken has had broad-based support from all these groups and it has been extremely pleasing to see how we could work together to achieve a positive outcome for the UK. By delivering on our key objective and putting this legislation in place well in advance of the transposition date, we will give the mortgage industry the certainty it desires and the best chance possible of a smooth transition to the new regulatory framework.

The net cost of this draft order is expected to be £11 million in total over a 10-year period. However, it is also worth noting that the cost of taking a copy-out approach in this instance was estimated to cost £48.7 million more per year over the same period.

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I hope I have persuaded the noble Lord that this statutory instrument will ensure compliance with the EU mortgage credit directive in a manner that minimises the impact on industry, retains the strengths of our regulatory framework for mortgages and ensures that consumers experience limited change as a result.

Lord Tunnicliffe (Lab): My Lords, I thank the noble Lord for introducing this order. He has persuaded me that it is perfectly sensible and that it achieves the objectives.

My sole comment relates to the tone of the description of our relationship with the EU in this matter. I would love to have heard a tone that said we were concerned about the health of the EU in these markets—because, in all probability, this is a good EU directive, taking the EU as a whole—and that we had secured appropriate freedoms to build on our own well developed market regulation. It is just a matter of tone, but one has to remember that the idea of having these unified directives is to clean up—though that is too hard a term—or to codify European markets as a whole; and, in general, that is a good thing. As far as the order itself goes, how it was created and how it has been evaluated, I am content.

Motion agreed.

Committee adjourned at 4.28 pm.