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What happened instead was the Government’s hurried announcement that unclaimed assets should be spent on youth centres, and that our policy was an unfunded spending commitment. The Lords amendment was duly rejected by another place on the grounds of financial privilege, and we in this House could not push the issue further.
It has taken nearly a year to happen, but once again the Government have adopted a Conservative policy to repair the disastrous consequences of Labour financial mismanagement. It has taken constant pressure from my party, and even more from dedicated lobby groups, before the Government have finally realised the scale of the problem. They have still not accepted their own part in its creation. The Prime Minister’s tax rise on pension funds, the department’s misleading leaflets, the Government’s refusal to accept the independent ombudsman’s report—they have denied it all, delaying and quibbling over every solution that has eventually been forced on them. They have had to accept that they grossly underestimated the number of people affected by the crisis that they have created. They had to commit to funding the FAS properly, and now,
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It is imperative that there are no more delays. Prior to last year’s election that never was, my party promised that, if we won, we would ensure within three months of taking office that payments reached those who were waiting. Will the Minister give us a clear idea of when the Government will implement this U-turn and when the pensioners will finally get what is due to them?
During the consultation on the regulations, questions were asked as to whether the Government would continue to hold the view that the FAS payments relate only to periods after the date on which the FAS was first announced. Although it has previously been made clear that enhanced payments would be made only for the period from 14 May 2004, the consultation document disclosed that the Government would continue to consider this point. Will the Minister expand on the department’s current thinking?
A number of respondents were also concerned about the implications of maintaining the existing definition of the normal retirement age in the draft regulations. It is possible that doing so will enable the enhanced payments to be delivered more quickly, easing the administrative burden. However, does the department have plans to alter the definition of the normal retirement age? If so, will the Minister elaborate on the process?
It is also worth taking a moment to consider the wider pensions picture. Although today’s measures repair the damage caused to individual families, the lasting impact of this sorry story on confidence in the pensions system still remains unknown. Years of headlines detailing pensioners battling with the Government to receive compensation will undoubtedly have influence on a younger generation’s investment habits. I fear that the consequences of the Government’s resistance to compensate these victims of the pensions crisis are far from over. It is therefore essential that we rebuild confidence in our pensions system and restore the prospect of security in retirement to millions of people.
Finally, I once more pay my respects to all the campaigners who have spent their time and money trying to get this Government to right their pension wrongs. For most, there will be few victory celebrations, but there will at least be the welcome satisfaction of at last receiving the compensation that they deserve.
Lord Newby: I am grateful to the Minister for his clear and comprehensive introduction to these extremely technical but very important regulations, and indeed to the noble Lord, Lord Taylor of Holbeach, for reminding us of the long and tortuous history that has led to them being prepared.
I think I can say that I feel fortunate not to have had to take part in all the debates in the past five years that finally led to the Statement on 17 December 2007. We on these Benches felt, as did the noble Lord, Lord Taylor, that the Government took a very long time to reach a sensible position. They have finally done so. The regulations and their provisions are long overdue, so we welcome them.
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4.30 pm
Lord McKenzie of Luton: I thank the Members who have welcomed the order, although that was wrapped around by some criticism and a review of the history as the noble Lord, Lord Taylor, saw it. I, too, acknowledge the effort that campaigners have put into what has been a very solid campaign, and I hope that, however we see the history of this matter, we agree that we have ended up in a good place. One of the challenges of government is dealing with public finances. The cash cost of where we ended up is some £12.5 billion and the net present value is around £2.9 billion, so this is a significant use of public resources.
The noble Lord, Lord Taylor, referred to financial mismanagement and economic incompetence. I reject those charges, of course. We have had debates in the past, particularly around these regulations, against the pensions backdrop. A good starting point for an objective and proper analysis of that are the reports of the noble Lord, Lord Turner, and his commission, which set out the real reasoning behind the challenges that the pensions industry has faced and faces in the future, such as issues of longevity and overestimating the long-term financial returns from investments. Those are the root causes of the situation we face.
There is a statistic, and if I can remember it rightly I will bore the Committee with it. I think it comes from Department for Work and Pensions statisticians, who estimated a possibility, or maybe a probability, that there is a person alive today aged 59, likely to be a woman, who could live to be 120.
Lord McKenzie of Luton: I hope the noble Baroness will live well beyond 120. Next year, that person would be entitled to their old-age pension halfway through their life. That starkly illustrates the challenges that not only state pension provision but private sector provision faces. Broadly, on the legislation that we debated last year, and we will shortly be debating the second Pensions Bill, there is a broad consensus underlying where we are heading on these matters.
The noble Lord, Lord Taylor, referred to the lifeboat fund. We do not resile from the criticism that we made at the time that, due to a technical matter, it was a rather leaky lifeboat. We went the right way to seeing how we could make better use of the assets in those schemes, and Andy Young’s report was helpful in enabling us to improve the package that we have reflected in part in these regulations.
The noble Lord asked about the timetable. I can best illustrate it as follows. In June this year, we hope to have these first regulations in force and the first payments at 90 per cent, and first payments from NRA or 60 rather than 65, will start to flow. By the end of July we expect the second regulations package to come into force, which will cover ill-health payments, certain solvent schemes being included in FAS and the groundwork for greater PPF involvement and speeding up payments. In August,
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Lord Taylor of Holbeach: Is the Minister happy that that is the tightest possible timetable for implementation? It means, effectively, that there will be a 12-month delay before many people are fully in the scheme.
Lord McKenzie of Luton: As I indicated earlier, there is the prospect of several thousand people coming into the scheme much more quickly than that, because the 90 per cent payment and the NRA change will be important. This is a realistic and effective way to proceed. I stress that there are quite a lot of technical and operational issues here, and we need to make sure that we get it right. That is why it is right that we invested in setting up the FAS effectively right from the start. We were criticised at one stage about the funding that had gone in, in relation to the payments that were then flowing. Our point then—which is valid and important now—was that if we had not put that infrastructure in place, it would be even more challenging to get some of the subsequent improvements to the scheme properly in place. That is an effective timetable, and we are working to it.
The noble Lord asked about the May 2004 cut-off point. I touched on that in my opening remarks. It is right to retain it, because it is the date that the FAS was announced, but we will continue to consult. As I outlined, we have a number of consultations lined up for the future, and we will keep that under review. At the moment, we are sticking to that date. Similarly, in relation to the NRA, it is right to keep the definition that we have but to keep it under review to make sure that we have effectively covered all the reasonable and appropriate circumstances that exist. The challenges around those two areas emphasise how complex some of this is and why we need to take the appropriate time to make sure that it is absolutely right. I hope that I have dealt with the questions that have been raised. I am grateful for the support that the two opposition parties have given to the regulations.
On Question, Motion agreed to.
Building Societies (Financial Assistance) Order 2008
4.37 pm
Lord Davies of Oldham rose to move, That the Grand Committee do report to the House that it has considered the Building Societies (Financial Assistance) Order 2008.
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The noble Lord said: The order derives from the Banking (Special Provisions) Act 2008 which contains powers that enable the Government, by way of an order, to remove existing statutory barriers that may prevent building societies from accessing emergency financial assistance from the Bank of England.
The building society sector continues to provide highly regarded services to members and customers throughout the United Kingdom. During the passage of the Bill, the Government promised, as a precaution, to put such an order before Parliament as soon as possible. I am pleased that we are fulfilling that promise and that Members of the Committee have an opportunity to debate the order. I remind the Committee that the Government are fully committed to legislative reforms that will improve financial stability and depositor protection generally. Global financial markets remain turbulent, and it is important that we have a strengthened framework in place both for now and for the future. The order forms a part of that programme of reform.
In January, the Government’s proposals were published. They included measures to improve building societies’ access to emergency financial assistance from the Bank of England, both in the range of methods that the Bank can use and the amount of assistance that building societies can potentially draw on. I should make it clear that in this regard the proposals are purely precautionary. They are intended to place building societies on a similar footing to banks, not single them out for special treatment. We regard the order before the Committee as sensible and prudent contingency planning on the part of the authorities, and it would be relied on only where there was a serious threat to the financial stability of the United Kingdom.
The Committee will also be interested to know that in response to consultation on the policy that this order will enact, the overwhelming majority was supportive. The Building Societies Association has made it clear that it welcomes steps to put building societies in the same position as banks. Improving building societies’ access to emergency funding from the Bank of England strengthens the resilience of an institution against failure, and thus protects against the consequent distress and hardship that this might bring to depositors and members.
The key elements of the order are as follows: under the Building Societies Act 1986, at least 75 per cent of the business assets of a building society must be residential mortgage loans. The order, if passed, will suspend this lending limit where the consequences of financial assistance from the Bank of England would cause the building society to be in breach of this requirement. The lending limit is restored after one year or, if later, once the financial assistance from the Bank of England has ended. Every building society is currently required by the Building Societies Act 1986 to ensure that at least 50 per cent of its funding is from its own members’ deposits. This is referred to as the “funding limit”. Certain items may be disregarded from the funding limit and the order will add financial assistance provided by the Bank of England to that list. Of course, building societies can and do take part in the Bank of England’s lending facilities
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Suspending the lending limit and excluding financial assistance from the Bank of England from the funding limit apply only in the case where there is a threat to financial stability. In these circumstances, the nature and extent of the financial assistance will differ from that of the usual money market operations that the Bank of England conducts. As I have said, suspending the lending limit and adding to the items that are excluded from the funding limit will allow building societies to be placed on a similar footing to that of banks.
The Bank of England, like a commercial bank, has a responsibility to ensure that its lending is prudent, especially where there is a risk to financial stability. Accordingly, in order for the Bank of England to provide emergency financial assistance to either a bank or a building society, it needs to ensure that its position as a creditor is not jeopardised. It does this by taking effective security. The order will remove statutory barriers that could jeopardise the Bank’s position as a creditor of a building society and therefore constrain speedy action in a crisis. I will explain a little more about these barriers. They include Section 9B of the Building Societies Act 1986, under which a building society may not create a floating charge, and Schedule 15A to that Act, which effectively prevents the appointment of an administrative receiver under a floating charge.
When providing financial assistance, the Bank of England needs to be able to secure its lending against the assets and undertakings of the bank or building society. This is wholly consistent with the Bank’s policy for lending in circumstances where there may be a threat to financial stability. This order will modify the restriction in Section 9B to allow a building society to grant a floating charge to the Bank of England over its assets. Again, I stress that a building society would be able to do this only where the Bank had provided financial assistance in extreme circumstances. There is no change to the restrictions on the normal business of a building society. It will remain impossible for a building society to create a floating charge in favour of other creditors.
The order applies the law on administrative receivers to building societies so that, should a building society to which the Bank of England has provided emergency financial assistance secured by a floating charge default, the Bank could appoint an administrative receiver. I should stress that in the circumstances we are debating, it is highly unlikely that the Bank would need to appoint an administrative receiver, but the Government believe it is sensible that the Bank, which would become a major creditor of a troubled building society for reasons of maintaining financial stability, should have the additional safeguards provided by this right.
Finally, a number of technical and consequential provisions will ensure that various other provisions of the Building Societies Act 1986 are consistent with this order. The Government believe that the order represents sensible contingency planning by the authorities, improves the position of building
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Moved, That the Grand Committee do report to the House that it has considered the Building Societies (Financial Assistance) Order 2008. 17th report from the Joint Committee on Statutory Instruments.—(Lord Davies of Oldham.)
4.45 pm
Baroness Noakes: I thank the Minister for introducing the order. Given the sweeping powers that the Government took in the Banking (Special Provisions) Act earlier this year, the activation of the building society powers in this order, under Section 11 of that Act, should not delay us long. However the Minister would not expect me to let anything connected with the Northern Rock debacle pass through this Grand Committee without some further comment.
I start with the timing of the order. When the Banking (Special Provisions) Bill was considered by your Lordships’ House, the Treasury submitted a memorandum to the Delegated Powers and Regulatory Reform Committee in relation to Clause 11. The Treasury stated that it intended to make an order under this power “as soon as possible” after the passing of the Bill. It received Royal Assent on 21 February—some three months ago. Can the Minister explain why the Treasury has taken so long to do something that it asserted it would do as soon as possible? We are all accustomed to the peculiar use that the Government put to words such as “shortly” or “very soon”. I venture to suggest that no ordinary person, let alone an ordinary parliamentarian, would think that three months to produce an order that was to be made “as soon as possible” was reasonable. That is especially the case in the context of a Bill that was passed through both Houses of Parliament using the urgent and accelerated procedure. Can the Minister explain the reason for the delay?
Why has the order been produced without consultation? Once the heat of Northern Rock had passed in February, it seemed that the sense of urgency dissipated. I can understand why the Treasury would want to draw up a draft order for building societies, but I cannot understand how, given that the urgency has passed, it thought it appropriate to dispense with consultation. The Minister referred to consultation in his opening remarks, and I may have got this wrong, but paragraph 7.5 of the Explanatory Memorandum to the order states:
Why have the Government bypassed the normal processes of consultation? That leads me to suppose that there may be something specific—perhaps a specific building society—behind this order. Is this order being rushed through because the Treasury thinks that one or more building societies may need to rely on the provisions of the order? If that is not the case, it is clear that the Treasury should follow the normal consultation provisions. Either way, we should be told.
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Can the Minister comment on the contents of the banking reform Bill announced last week in the draft Queen’s Speech? The commentary on the Ministry of Justice’s website refers to that Bill as covering only banks. The Treasury’s website, as far as I could see, contained absolutely nothing about the Bill. Will it apply to building societies as well or do the Government intend for all time to rely on secondary legislation powers in the Banking (Special Provisions) Act or perhaps the banking reform Bill? It will take a lot to persuade us that relying on secondary legislation as the long-term way of legislating for building societies is the correct way to proceed.
Finally, will the Minister update noble Lords on the implementation of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007? It allows, inter alia, for the proportion of wholesale finance that building societies can accept on a routine basis—not the Bank of England facilities but ordinary facilities— to rise from 50 per cent to 75 per cent. In a sense, this is intimately related to the order.
I am sure that the Minister will recall the passage of that Act. It originated as a Private Member’s Bill introduced in another place by my honourable friend Sir John Butterfill and was passed at a time of turmoil in the credit markets, so much so that the Minister made a quite extraordinary statement from the Dispatch Box on the debate on Bill do now Pass on 12 October 2007. Perhaps I may remind him that he said:
“The Bill allows flexibility for the future in relation to wholesale funding as the Treasury would be able to use the power in Clause 1 to increase by order the maximum level which building societies can borrow from wholesale markets to 75 per cent. Clearly, in the light of recent events in the wider financial markets, we will want to consider carefully whether such a power should be used”.—[Official Report, 12/10/07; col. 457.]
As I understand it, there has been no implementation yet of that Act. It remains in limbo waiting to be brought to life by the Government. What is the Government’s thinking on this? Will the Act be activated, and if not, why not?
Lord Newby: My questions on the order which—as both the noble Baroness and the noble Lord said—was predicted, again largely relate to timing. Indeed, the noble Baroness has asked most of the questions, so I will not repeat them. The phrasing of the Explanatory Memorandum is slightly alarming in that it states that the order has to be introduced as soon as possible as an important contingency measure, so there has been no time for consultation. As the noble Baroness said, it should, first, have been possible to start a consultation considerably sooner than today, because it is not a particularly long order.
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