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Grand Committee

Volume 765: debated on Tuesday 27 October 2015

Grand Committee

Tuesday, 27 October 2015.

Arrangement of Business


Flood Reinsurance (Scheme and Scheme Administrator Designation) Regulations 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Flood Reinsurance (Scheme and Scheme Administrator Designation) Regulations 2015.

Relevant document: 1st Report from the Joint Committee on Statutory Instruments

My Lords, I am pleased to introduce the regulations necessary to implement Flood Re. The increasing sophistication of flood risk modelling employed by insurers, in combination with expected increases in extreme weather events, means that many households in high flood risk areas increasingly struggle to afford insurance. We are seeking to address this: Flood Re will ensure households in high flood risk areas are protected from spiralling insurance premiums and excesses over the next 25 years.

Flood Re is a responsible, proportionate approach to the challenges of flooding, which can be devastating to those affected. However, there are many different aspects to reducing the terrible impacts of flooding on people; Flood Re will form just one piece of the UK’s flood risk management. Many others must play a role in managing flood risk, including householders themselves, local authorities and landowners.

There are two sets of regulations to be debated today—first, the funding and administration regulations, which set out the framework within which Flood Re will operate and how the levy will be calculated. They outline the technical aspects of the scheme. Secondly, the designation regulations, which designate the scheme and administrator and enable the Flood Re scheme to begin operation. These draft regulations were subject to extensive public consultation and were developed by working closely on the detail with specialists from the Association of British Insurers, the Lloyds market and the financial regulators.

It is important that the regulations are debated now in order that Flood Re can sign contracts with individual insurers this autumn in preparation for becoming operational by April 2016. Flood Re will need to be authorised by the Prudential Regulation Authority before it can operate. The financial regulators, and the insurance industry, need certainty about the legislative framework within which Flood Re will work before authorisation as a reinsurer could be given. The financial regulator’s authorisation process is ongoing. We will check with the Prudential Regulation Authority that Flood Re’s application is still being considered as part of that authorisation process before signing the regulations. Although the financial regulators cannot provide a definitive statement on the likelihood of authorisation, this will provide an indication that the application is progressing.

Flood Re will be principally funded by a levy raised from relevant insurers, as defined in these regulations. The amount of each insurer’s levy will be based on its share of the UK home insurance market. The total primary levy to be raised from insurers will be £180 million, which we are assured reflects the level of cross-subsidy currently present in the market. Given the unpredictable nature of flooding and Flood Re’s solvency requirements, we have also provided powers to raise additional levy from insurers if it is needed.

The regulations set out constraints that Flood Re needs to operate within as the levy is expected to be classed as public money by the Office for National Statistics. Flood Re will operate independently as a normal reinsurance company regulated by the financial regulators. Because of its unique position, Flood Re is being set up as a bespoke arm’s-length body.

Flood Re will be directly accountable to Parliament. The regulations stipulate that Flood Re is required to lay its annual accounts before Parliament. Flood Re’s responsible officer will be accountable to Parliament for the financial propriety and regularity of the scheme. While Defra will remain accountable to Parliament for general policy matters relating to flood risk management, there will be no role for Defra’s Ministers or accounting officer in Flood Re’s day-to-day management.

While Flood Re is publicly accountable, it is owned and operated by the insurance industry. Flood Re will be required to manage itself within the normal requirements for regularity, propriety and value for money, and full parliamentary accountability. Flood Re will be audited externally. However, the National Audit Office will also be able to conduct value-for-money reviews of any of its activities, and report on them to Parliament.

The regulations set out that the prices that insurers may pay to cede policies to Flood Re, which we call the premium thresholds, are payable by insurers according to council tax bands. Benefits are targeted at the lower council tax bands and it is hoped that they will be passed to policyholders. The regulations require that Flood Re review the scheme, including the level of the levy and premium thresholds, at least every five years. Any changes to the levy would require amendments to the regulations via the affirmative resolution process. Defra’s Secretary of State may call a review of Flood Re at any point.

Flood Re will publish a transition plan within three months of the regulations coming into force. We expect this plan to indicate how prices may evolve during the life of Flood Re, and the measures that Flood Re may take to incentivise people to do more to manage their own flood risk. However, Flood Re, like all reinsurers, will only be permitted by financial regulation to carry out the business of reinsurance. Flood Re’s directors also have to be able to fulfil their prudential and fiduciary duties according to company law and financial services regulation. UK flood management depends on a complex arrangement of interweaving policies and interested parties, of which the insurance industry and Flood Re form only part.

In conclusion, I remind your Lordships why Flood Re has been established. We all recall the floods which many have experienced in recent years. Flood Re will provide the people of the United Kingdom with available and affordable flood insurance in a way that supports and complements wider efforts to reduce and adapt to flooding. It is expected that between 350,000 and 500,000 households at high risk of flooding will benefit from the Flood Re scheme. Flood Re has made significant progress, appointing its board and senior executive team ready to be considered for designation and authorisation by the financial regulators. These regulations are a significant step in the direction of helping people to manage the impact that flooding can have on their lives. It is for these reasons that I commend these regulations to the Committee.

My Lords, I apologise for being a minute or so late for that very eloquent introduction. Before welcoming these statutory instruments, I declare my interests as set out in the register, in particular the fact that for several years I was head of the division within the Hiscox group which wrote United Kingdom household insurance and for some years the CEO of the reinsurance company at the centre of the Hiscox group, which wrote many reinsurances of the players in the United Kingdom household insurance market.

These regulations are an excellent example of co-operation between the Government and the industry. It is not the first example, of course. There was one in the early 1990s when, following the two dreadful explosions in the City of London which caused immense damage and in which lives were lost, Pool Re was formed. Pool Re has been a success for the UK insurance market and the UK insurance industry.

It is worth pausing for a moment to consider the UK insurance industry. I am afraid that it is not at the glamour end of the financial services of the City, but it is a very strong industry and in a leadership position in the world. The London and international insurance and reinsurance markets alone account for gross written premiums of around £60 billion a year. The industry employs about 50,000 highly specialist staff, and it is this expertise in insurance and reinsurance which has come together with the Government to structure what is today Flood Re. Will the Minister join me in saying that there is much to congratulate the UK insurance industry on, in its world leadership and its strong, centuries-old reputation for consistently paying valid claims?

Flood Re provides the availability and affordability of flood insurance for flood-prone homes. We have at Hiscox lots of computer systems which can cause artificial floods on a computer screen. You can see just how many homes in recent times have become flood-prone. This is due both to planning policy and to geographical and climate changes. Essentially, the bet has become too big to place with the private insurance market. There are many examples of catastrophe insurance around the world which have become too big for the private markets. Flood Re represents a singularly appealing way of getting around the problem.

As we have heard, the scheme is aimed at 500,000 out of the 25 million or so homes in Britain, so quite a large number of homes are involved in it. On review, I feel that it is simple, secure and sensible. Will the Minister confirm something slightly different in terms of the review process, which is that it is the intention of the Government, particularly in the early years, to review progress of Flood Re and, if necessary, tweak matters to optimise the scheme?

My Lords, I am grateful to my noble friend the Minister for explaining the regulations. I welcome the fact that the Government are not only putting in place a system that addresses both the availability and affordability of flood insurance—the statement of principles did not do this—but delivering significant levels of investment in flood defences through their historic six-year capital settlement. They are therefore tackling the problem of flooding at both ends, providing homeowners and communities with greater certainty in the years to come.

Protecting people from the emotional and financial hardship caused by flood damage is extremely important. After years of negotiation and with Flood Re now established, we are moving towards making this a reality and protecting people from spiralling insurance premiums. The benefits will be targeted at lower-income households to promote affordability for those least able to pay. Excesses, which can often be in thousands of pounds, will be limited to £250.

The country is investing in flood protection at record levels, with an unprecedented six-year commitment of £2.3 billion following £3.2 billion of spending during the last Parliament. This will see 1,500 flood defence schemes constructed, improve protection for an additional 300,000 homes and reduce overall flood risk by 5%.

Although I have no doubt that the noble Baroness, Lady Jones, will have some questions, because that is her role, I am pleased that the large number of antagonists who faced me from all sorts of angles during the passage of the Bill are, as evidenced by their absence today, apparently satisfied.

My Lords, I can see that I am going to have to try to make up for them in one go.

I am grateful to the Minister for setting out so clearly the intention of the regulations. In essence, the schemes as outlined in the Water Act have our broad support. Families living in high-risk flood areas have found their lives blighted both by the flood risk and the worry of unaffordable or unobtainable insurance, so we are pleased that the Government have taken steps to work with the industry to find a solution.

However, your Lordships will not be surprised to hear that I have some remaining concerns. First, there is the timing of the regulations. The Bill was passed early in 2014 and the latest consultation on the detailed proposals took place later that year. It is now October 2015, with another winter imminent. It seems that the expected start date has slipped, with Flood Re now saying that it expects to go live next April. Is the Minister happy with this latest timetable? What does that mean for householders facing another winter of threatened floods in the coming months?

Also, from my reading of the regulations, even if we pass them today, the FR scheme administrator will need to be regulated by the relevant financial regulators, which I think that the noble Lord confirmed. This will take time to set up. Then of course Flood Re is saying that it needs to carry out extensive testing. Can the Minister guarantee that householders will be able to have the additional peace of mind that this scheme aims to offer by the April 2016 deadline? From what he was saying I understood that it was not possible to give that guarantee until the regulators have had time to scrutinise the scheme in detail.

While on the subject of timing can I raise with the noble Lord the question asked by my colleague, Barry Gardiner, in the other place, which did not seem to get a satisfactory answer. His concerns were about the absence of a transition plan to risk reflective pricing at the outset of the scheme, with the worry that this will compromise the availability and affordability of flood insurance in the interim. I realise that it is the intention of Flood Re to produce a transitional plan after three months, but will this be too late and might we find the scheme collapsing before it has begun?

Secondly, the scheme is based on an assumption of known high flood risk areas. However, the Minister knows that this is not as straightforward as it first appears. The Environment Agency does a fantastic job in difficult circumstances, but the designation of high-risk areas is constantly on the move. As the Commons Public Accounts Committee pointed out earlier this year, the effectiveness of the Environment Agency flood defence strategy is hampered by the fact that its maintenance funding, as opposed to capital funding, is settled only annually, preventing longer-term planning. This means that areas previously designated as low risk could move up the risk scale as existing defences deteriorate. Can the noble Lord indicate whether any further thought is being given to providing longer-term funding for Environment Agency maintenance work to complement its capital spending allocation that is done on a six-year cycle?

In addition, it is not always clear which flood maps are being used by insurance providers, and whether they are up to date and what presumptions lie behind their calculations. Does the Minister see the benefit of having a standard flood-mapping system that should be used by the Environment Agency and Flood Re to underpin this new scheme?

Thirdly, I do not have a problem with the late inclusion of the higher-valuation band properties in this scheme—it seemed rather churlish to exclude them. We are reconsidering the designation of domestic properties to be included. Perhaps the Minister could explain why those in the poorest and most vulnerable properties—tenanted and rented properties—

Can I make a point about something that the noble Baroness has just said? This was that modern British insurers might in some way not be using up-to-date flood maps. That is certainly not the case. We have some strict regulators in a pile of quite aggressive rating agencies to make sure that the systems that we use are robust. Our peers are pretty interested, because in the way that the mutualisation of the insurance sector works, if the next-door man goes bust, as, say, the independent insurance company does, others will end up picking up the bill. The noble Baroness’s other points are very interesting, but that point is a weak one.

I am very pleased to hear that, but I noted that some of the evidence I looked through, which was received during the consultation period, raised that as a concern. If we can clarify that there is a standard flood map system I am more than happy to hear that. I am sure it will be of some relief. I am sure that the Minister will also clarify that.

I was talking about who was included and excluded and the designation of domestic properties. The Minister will know that there was some concern, during the course of the Water Bill, about those who were excluded from this provision, in particular the poorest and most vulnerable—those in tenanted and rented properties, which are currently excluded from the scheme. It does not seem right that the same property or adjoining properties could have access to different standards of flood insurance purely on the basis of the status of those who live in the property. Will the Minister clarify whether that is his understanding? Will he also clarify whether farmhouses are to be excluded from the scheme? As he will know, this is of some concern to the National Farmers’ Union. They are, after all, primarily residential properties, even if the farmhouse acts as a business address for the farm. I would be grateful to hear his comments on that.

Finally, we all have sympathy with the householders caught up in the major floods of recent years, but it is important that this scheme does not reinforce complacency in the sector. There is a real risk of increased flooding from the effects of climate change. This scheme needs to be combined with drivers of behaviour change among consumers, businesses and government. The Minister referred to that. It is crucial that future flood management policies take a stronger line against building homes in high-risk areas, while developing sustainable land use plans and restoring flood plains. I hope that the Minister can reassure me that Flood Re will take these responsibilities seriously as part of its brief, and that the Environment Agency will receive sufficient funding to oversee those objectives effectively. I look forward to his response.

Before my noble friend the Minister responds, I rise as one of the gently scrutinising antagonists in Committee and further stages on the original Bill. We are now reviewing the regulations that derive from it. I really do congratulate the Minister, his predecessor and Defra officials on the remarkable work undertaken on this. I hear what the noble Baroness says about timing, but this is a very short timescale to have made the progress that we have—to move from Royal Assent to today. We should place on record our thanks to all those who worked exceptionally hard to achieve that objective.

I simply want to echo a point the noble Baroness raised. When it comes to the first review it is very important that the scope of application of these regulations and the Flood Re scheme should be fully considered. During our earlier debates there were concerns. The noble Baroness alluded to one, about people living in similar buildings, or, indeed, the same building in different circumstances, being in different receipt of the Flood Re provisions. When it comes to the review we need to assess the impact of that on local communities and on those affected. I hope that the Minister will echo that that will be possible.

Finally, on flood maps, given the important work done by the Environment Agency and the insurance industry on those maps, it is vital that the water companies are also party to those discussions. I understand that government is already actively engaged, for the first time, with water companies on potential contributions to coastal flooding schemes and to the impact of flooding in their designated areas. It is important that the water companies are party to those discussions.

I conclude by thanking the Minister and the team again. I congratulate him on bringing forward these regulations in a timely fashion, and on the work that has been done to ensure that what looks like an outstandingly good scheme is now being implemented—but which will always be, I hope, subject to review and improvement in future.

My Lords, as is traditional, I thank all noble Lords for taking part in this debate, but what is perhaps exceptional is that we all wish these regulations success in a very genuine sense because many of your Lordships have been through all the machinations of getting to this point. One of the points that I would like to play back is that I am the Johnny-come-lately in arriving at Defra, and it is very much to the credit of my noble friend Lord De Mauley and all the colleagues who worked with him that we are now where we are. Perhaps I may also acknowledge what the noble Earl, Lord Kinnoull, said about the co-operation and work of the insurance industry. I would like to place on record our thanks to the industry for the hard work and commitment that has gone into progressing Flood Re. Indeed, it is a great example of how the Government and the insurance sector have worked and are still working closely together, in this case to ensure resilience to floods, and in fact making a real and positive difference to many people’s lives. I think it is fair to say that we can all be proud that the UK has in its insurance sector a world-leading brand.

A number of questions have been asked, and it was absolutely right of my noble friend Lord De Mauley to mention flood defences. The Government have been tackling flooding from both ends, and obviously the capital investment has been very considerable, as my noble friend said. We hope and expect these flood works to reduce the risk for more than 300,000 households on top of the 250,000 homes which have already been protected by work undertaken during the last Parliament. It is probably also worth saying that the programme is forecast to reduce the flood risk for up to 420,000 acres of agricultural land, which will avoid more than £1.5 billion-worth of direct economic damage to farmland. Some 205 miles of railway are protected, along with 340 miles of road. With good reason, this is public investment that I hope we will see bearing fruit, and it is very important indeed.

The noble Baroness, Lady Jones of Whitchurch, asked a number of questions, the first of which was about the timing of regulations. It will be a matter for Flood Re itself, once it is authorised by the Prudential Regulation Authority, to determine when it will be in a position to offer cover, but the fund has assured Ministers that April 2016 is a realistic date to become operational. Indeed, when I met the chief executive officer, Brendan McCafferty, only yesterday, I was impressed by the work that has been done and he was similarly of the view that it is an entirely realistic date.

However, this rather plays into what the noble Baroness, Lady Jones, wanted to tease out as well, which is that insurers have agreed to continue to abide by their commitments in the statement of principles, ensuring that householders have access to flood insurance until Flood Re is fully operational. Obviously I take the strictures that the noble Baroness has put to the Government, but I think what my noble friend Lord Moynihan said is relevant. I come to this afresh, and it is clear that an enormous amount of intricate work has had to take place with the insurance sector, the department and with many interested groups. I think that we have made extraordinary progress, given all the complexity.

The noble Baroness also asked about the transition plan. One of the fundamental purposes established in primary legislation for Flood Re is that it is responsible for managing the transition to risk-reflective pricing of flood insurance for households. The transition plan will cover a multi-year period, and it is right and proper that adequate time is given to develop it. But the transition plan will be a public document and Flood Re is accountable to Parliament for it. The plan will be reviewed at least every five years, in line with the review of the levy and the premium thresholds. The noble Earl, Lord Kinnoull, and my noble friend Lord Moynihan asked about the review. As I said in my opening remarks, reviewing as and when necessary will clearly be important. This is a new body and we wish it well but it is important that these matters are kept under review and that there is this accountability to Parliament.

As for Environment Agency maintenance spending, we have covered so much of the capital spending but I hope that the noble Baroness, Lady Jones of Whitchurch, will forgive me as we are currently in the midst of the spending review. I hope that your Lordships will understand that I am limited in what I can say at this juncture—but it is fair and important to say that flooding is a critical matter for the Government and that we want to ensure a high standard of flood protection over this Parliament. We need only see the impact that the floods have had on families and communities across the land to see its importance to us all.

Can I push the Minister a little more on that? If it is of critical importance, as I am sure everyone around the Room would agree, surely it is within the department’s powers to ring-fence the maintenance element of the Environment Agency’s budget. That would be the sensible thing to do, regardless of whether or not a spending review is taking place, to give that security and guarantee.

The noble Baroness puts this matter in an extremely tempting way but I am afraid that I am not in a position to talk about ring-fencing today. That is why I emphasised that we all agree that, wherever we can, we would wish to deal with flooding at both ends.

The noble Earl, Lord Kinnoull, helped me enormously on the issue of mapping because the Environment Agency has published a set of national maps so that people can now check for their flood risks from rivers, sea, reservoirs and surface water. Insurance companies have access to the Environment Agency’s mapping but it is of course for each insurer to determine the flood-risk element of the premiums that it charges. Flood Re and the Environment Agency will certainly be working together, so I am confident that in this area we are seeing the sort of co-operation that I think is extremely important and desirable.

On the exclusion of leaseholders and tenants—an entirely legitimate issue to ask about—from the briefings I have had, first, Flood Re is designed to cover only domestic properties. Secondly, policies for landlords who own leasehold properties and some farmhouses will be considered as commercial. The insurance companies will be determining this but we have been assured by the industry—and I hope that this will also be of interest to the noble Baroness—that there is no evidence of a problem with commercial insurance. If evidence did emerge, we would of course consider it.

Another point which may be of interest to the noble Baroness is that contents insurance, which obviously affects everyone including leaseholders and tenants, will be available through Flood Re for tenants of rented properties. However, landlords will not be able to purchase landlord insurance for the building through Flood Re because that comes through the commercial sector of the insurance industry.

Another important point to make, one which was referred to by noble Lords, is that the arrival of Flood Re, as I said in my opening remarks, is not seen as the only tool in the box. It is important that Flood Re should develop plans to incentivise the take-up of resilience measures. As Flood Re’s experience of the market develops over time, the transition plan will include more detail of how the scheme will support the transition towards risk-reflective pricing over its 25-year life. Indeed, Flood Re has a duty to pass on information to insurers about the withdrawal of the subsidy over time, and how householders can access information about their flood risk and then manage it. Insurers have agreed with Flood Re that they will pass that information on to their customers, who will benefit from the Flood Re scheme.

Another issue arises on planning, where I think some advances have been made in terms of much smaller percentages of housebuilding in areas of risk. The National Planning Policy Framework local plans are designed to develop policies to manage flood risk from all sources and seek to use opportunities offered by new development to reduce the causes and impacts of flooding. In terms of where we need to go from here, it is important that planning for new developments is much more conscious than perhaps it was in previous times of this aspect, particularly as we see the effects of potential climate change and all that goes with “adverse weather events”—which I am told is the jargon for what I call bad weather.

I thank all noble Lords and I want to reiterate what was said by my noble friend Lord Moynihan. We are here today because a great deal of work has been done and there has been a lot of good will. It is important that I should place on record my thanks not only to the insurance sector but to everyone involved, in particular the Defra officials who have been dealing with this knotty problem. I am grateful for the opportunity to set out the Government’s approach and I commend the regulations.

Motion agreed.

Flood Reinsurance (Scheme Funding and Administration) Regulations 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Flood Reinsurance (Scheme Funding and Administration) Regulations 2015.

Relevant document: 1st Report from the Joint Committee on Statutory Instruments

Motion agreed.

Byelaws (Alternative Procedure) (England) Regulations 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Byelaws (Alternative Procedure) (England) Regulations 2015.

Relevant document: 3rd Report from the Joint Committee on Statutory Instruments

My Lords, I beg to move consideration of these regulations, which were laid before the House on 27 July. These regulations would put in place new localist arrangements for revoking by-laws, and a new decentralised process under a largely local process for making certain by-laws. This is part of the Government’s commitment to driving deregulation. The regulations reinforce and reflect the principles of localism, and that local authorities are best placed to determine by-laws for their community, in close engagement with interested and affected parties to help shape and inform the by-laws made.

It is worth summarising the key features of the new arrangements, if only to confirm the significant changes these new arrangements will put in place. The arrangements will involve the following: the local authority preparing a draft of the proposed by-law in consultation with affected and interested parties; the local authority undertaking a deregulatory assessment of the impact of the proposed by-law on businesses and citizens; the local authority preparing and publishing a deregulatory statement and submitting it to the Secretary of State; the Secretary of State having regard to the deregulatory statement and to any burdens resulting from increased regulation as part of giving consideration on giving leave to make the by-law; the local authority advertising and consulting on the proposed by-law; the local authority considering any representations received; the local authority deciding whether to make the by-law; and then, finally, making and publicising the by-law which would come into force one month after being made by the local authority.

Where a local authority wishes simply to revoke a by-law, it will be able to do so under an entirely local process, involving: making an assessment of the need for the by-law, on the basis of which it resolves to make the necessary by-law; preparing a draft of the proposed revoking by-law; advertising and consulting on the draft revoking by-law, including advertising in a local paper operating in the vicinity; considering any representations received; and then deciding within six months of the end of the consultation period whether to make the revoking by-law. Finally, it will then revoke the by-law.

By-laws are one way in which a local authority can address the concerns of local people and tackle problems in its area. These new arrangements will allow local authorities to take a more local approach to the process of making and revoking by-laws.

These regulations include safeguards against councils imposing unnecessary, excessive or burdensome by-laws. The safeguards also ensure that once local authorities have decided to make by-laws they implement them within six months of the end of the consultation. This will ensure that local authority by-laws are informed by up-to-date consultation and engagement with the public.

Part 6 of the Local Government and Public Involvement in Health Act 2007 gave the Secretary of State power to make regulations to put in place alternative arrangements for making by-laws. These provisions, inserted into the Local Government Act 1972, make provision about the procedure for the making, coming into force and revocation of certain by-laws. A by-law is a law made by a body, such as a local authority, under an enabling power established by an Act of Parliament and which has been confirmed by the Secretary of State. If validly made, by-laws have the force of law in the areas to which they apply.

I now turn to two points raised by the Secondary Legislation Scrutiny Committee: the delay in making these regulations, and that the Explanatory Memorandum makes no reference to these regulations having been withdrawn and subsequently relaid. We withdrew and relaid the regulations because we considered that they could be improved and refined, including making changes such as removing a requirement for a local authority to advertise the by-law after it had been made, which, on reflection, we considered burdensome.

On the delay in making the regulations, by-laws are important. On that basis it is important that any new arrangements are considered carefully. It was right that we took time to consider carefully the arrangements for making certain by-laws—by-laws that have a real, lasting and, we hope, positive impact on people.

I also take this opportunity to address concerns raised regarding the continued role of the Secretary of State in the new arrangements. The checks and balances in the new framework are there to ensure that by-laws do not create unnecessary or excessive burdens on the citizen, the community or local businesses. This will safeguard local authorities making by-laws that could be challenged in the courts on the basis that they are unreasonable. This is particularly important for those smaller town and parish councils that may not necessarily have access to legal resources that larger local authorities would have access to when drafting their by-laws.

If local authorities make by-laws that are proportionate and reasonable, this role will be a very light-touch one. The new framework contains the right arrangements to make proportionate by-laws for the benefit of the community. But let me be clear: the new arrangements that place the decision for making the by-laws with the local authority will allow the local authority, which knows its local area, to determine the significance of objections from people affected by the proposed by-law.

The new arrangements recognise that it will be local authorities, not the Secretary of State, that confirm new by-laws, recognising that local authorities are best placed to determine by-laws for their local community. The new arrangements no longer require a rubber stamp from central government to scrap outdated by-laws, reducing the current bureaucracy associated with a local authority wishing to revoke out-of-date by-laws. The new arrangements ensure that proportionate and robust by-laws are shaped and informed by engagement and consultation with the local community, recognising that where there are objections the local authority is best placed to consider representations from its community. I commend the regulations to the Committee.

I am grateful to the Minister, who must have laboured long and hard, burning the midnight oil to prepare the speech with which she launched this momentous set of regulations.

The Explanatory Memorandum deals with the impact of the regulations on business, charities and voluntary bodies and describes the impact as “negligible”. That is the judgment that I would make on the impact of the regulations on local government and communities: it is negligible. The noble Baroness rightly said that matters were set on foot in 2008. I have a vision of armies of civil servants in the Department for Communities and Local Government labouring over seven years to produce this momentous change in practice and in law, and I am tempted to echo the sentiments of Winston Churchill in remarking on the fact that probably never in the history of secondary legislative endeavour has so much labour been employed for so long and to such little effect—for very little changes under these regulations.

It is particularly important that the Government continue to reserve a role for the Secretary of State. My honourable friend Steven Reed in the debates in the Commons pointed out that the Welsh Assembly Government have dispensed with the role of the Minister and the Secretary of State in Wales. Curiously, Her Majesty’s Government went to court over these matters; they are usually critical of those who seek to take the decisions of Governments to court, but they took the Welsh Government to court and I am pleased to say that they lost over that decision to leave the Minister out of the picture altogether. True localism, I suggest, would make that course much the more desirable.

There is another issue that arises from the Explanatory Memorandum, which is that by-laws are not only made under the auspices of this department: there are other government departments which have responsibilities for by-laws. One might have thought that across government there would be some discussion about having a uniform system for by-laws. No attempt appears to have been made to do that. So we have at least a binary system, where one or more other government departments will still require the procedure for by-laws made under the local government legislation which these regulations are changing. Has it never occurred to Ministers that they should look across government and provide a uniform system? I have already indicated that this change does not amount to much, but it is surely better to have a uniform system, whatever its character, than to have two apparently parallel systems running side by side. Perhaps the noble Baroness would agree to take back this aspect at least, and try to ensure that there is a common approach across government.

Of course the Opposition are not opposed to this very modest change. In fairness, I do not think that it was envisaged to be all that ambitious when it was initiated by the original legislation, so I am not claiming this as a party point. It does seem sad, however, that it has taken this long to produce such a feeble change in the system, and perhaps we can have assurance that any further change will be made with a great deal more expedition.

I thank the noble Lord for his comments. I thought that he was going to say at the beginning of his speech that he congratulated me for saying “by-laws” so many times in one speech, because it seemed like I was saying it constantly.

One of the questions that he asked, quite reasonably, was why it has taken so long for the regulations to come into force, given that this was first discussed in 2007 and 2008. I understand that we have been refining the new by-law arrangements, including the deregulatory framework, to ensure that the by-laws made by local authorities do not curtail civil liberties or increase regulation disproportionately. Of course they are local laws and can result in a criminal offence.

He also makes the pertinent point about other government departments. What other government departments do is a matter for them, but hopefully where CLG starts, others may follow, so that we may see a flood of by-laws from other government departments in due course. But I will certainly take back the comment about other government departments.

He talked about Wales. The Local Government Byelaws (Wales) Act 2012 required that local authorities have regard to any guidance issued by the Welsh Government, and that guidance has been issued. In short, local authorities in Wales are very much required to make their by-laws in a prescribed manner.

The noble Baroness referred to the possibility of other regulations coming back. Would it not be possible for a single regulation to apply across the whole of government rather than individual departments drafting their own regulations, presumably on similar lines and submitting them to this process?

Perhaps I did not articulate that correctly, but as I have said I will take back the comment about a common framework for government. With that, I commend the regulations.

Motion agreed.

Maximum Number of Judges Order 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Maximum Number of Judges Order 2015.

Relevant document: 4th Report from the Joint Committee on Statutory Instruments

My Lords, the effect of the draft order is simply to increase the number of Court of Appeal judges by one. That number is set by statute under Section 2 of the Senior Courts Act 1981, which currently provides for a maximum of 38 Court of Appeal judges.

In March 2015 Lord Justice Pitchford, an existing Court of Appeal judge, was appointed by the Home Secretary to lead the inquiry into undercover policing and the operation of the Metropolitan Police’s Special Demonstration Squad. The inquiry, which began on 17 July 2015, was established under the Inquiries Act 2005 and is anticipated to conclude at around the end of 2018. Having been appointed as such, Lord Justice Pitchford remains a Court of Appeal judge and is counted in the current complement of 38. However, he is unable to fulfil any duties in the Court of Appeal while he leads the inquiry.

In order to ensure that the total number of Court of Appeal judges available for deployment remains at current levels, it is necessary to increase their number by one. There is no other method for revising the number of Court of Appeal Judges other than by an order such as this. I therefore commend this draft order to your Lordships and beg to move.

Could the Minister indicate whether it is intended to retain the maximum number at 39? Is it a permanent provision? It would be perfectly sensible if it were, but it is not quite clear to me whether that is the case. Secondly, while he cannot commit himself or those appointing a member of the Court of Appeal, I would hope that whoever makes the decision does not follow the line laid down by Lord Sumption recently about appointing women to the Supreme Court. We could do with more women in the upper and indeed the lower branches of the judiciary, and I hope that this will be an opportunity for those making the appointment to take with as good a grace as possible.

On the noble Lord’s first question, the position is that Lord Justice Pitchford turns 70 in March 2017 and must at that point retire as a Court of Appeal judge. It is anticipated that on his retirement, or at the end of the inquiry, if that is sooner, a similar order to this one will be made, returning the number of judges to the Court of Appeal back to 38.

I turn to the second point made by the noble Lord. He referred to the issue of diversity, which is of course important to the public’s confidence in justice. It is harder to boost diversity in the Court of Appeal in the short term, as the majority of eligible candidates come from the ranks of High Court or deputy High Court judges of at least seven years’ qualifying experience, but the Lord Chief Justice and Lady Justice Hallett are leading work to increase the diversity of applicants at key feeder grades for the higher judiciary—namely, recorders and deputy High Court judges. I am sure that he will welcome the appointment on 22 October, last Thursday, of two female High Court judges, one of whom will be the first Asian woman to sit at this level. When sworn in, they will take the number of women High Court judges to 23 out of 108, which is 21%. The Government are absolutely committed to increasing diversity, and whatever Lord Sumption may or may not have said about the reality, the Government are acutely conscious of the need to do that and are taking steps to ensure that we can realise that ambition.

This is a reasonable amendment, which maintains the complement of Court of Appeal judges when one of their members is engaged, as is Lord Justice Pitchford, in important work elsewhere. I hope that noble Lords will agree the proposed amendment and I beg to move.

Motion agreed.

English Apprenticeships (Consequential Amendments to Primary Legislation) Order 2015

Motion to Consider

Moved by

That the Grand Committee do consider the English Apprenticeships (Consequential Amendments to Primary Legislation) Order 2015.

Relevant document: 3rd Report from the Joint Committee on Statutory Instruments

My Lords, this draft order is technical and makes relatively minor amendments as a consequence of the insertion of Chapter A1, relating to apprenticeships, into Part 1 of the Apprenticeships, Skills, Children and Learning Act 2009 by the Deregulation Act 2015. Chapter A1, among other things, defines an “approved English apprenticeship”, provides for approved apprenticeship standards which will set out the outcomes that those seeking to complete an approved English apprenticeship will be expected to achieve, and confirms that an approved English apprenticeship agreement is to be treated as a contract of service.

I shall explain the amendments this draft order makes to two pieces of legislation. The amendments are required as a consequence of the changes that I have just set out. It is important that these changes are made so that, where necessary, references within other primary legislation refer to the newly introduced “approved English apprenticeships”, “approved English apprenticeship agreements” and/or “alternative English apprenticeships”. First, the draft order makes two amendments to the Education Act 1996, in respect of provisions which set out certain duties of English local authorities relating to the education and training of persons over compulsory school age, so that apprenticeships under the new statutory apprenticeship scheme are treated in the same way as those under the previous statutory apprenticeship scheme.

Specifically, this means that when a local authority in England is making a determination in relation to the apprenticeship training needed to meet its obligation to provide suitable education and training to meet the reasonable needs of those over compulsory school age and under 19, and those over 19 for whom an education, health and care plan is maintained, it will be able to take into account the provision of approved English apprenticeships. In addition, when a local authority encourages employers within its area to participate in the provision of training to young people, that encouragement can include reference to an “approved English apprenticeship agreement”.

Secondly, the draft order amends the Education and Skills Act 2008 in respect of a duty on certain young people in England to participate in education or training in England, so that apprenticeships under the new statutory apprenticeship scheme are treated in the same way as those under the previous statutory apprenticeship scheme. Specifically, this means that a young person can discharge their duty to participate in education or training by participating in training in accordance with an approved English apprenticeship agreement.

Taken together, these measures will update the primary legislation in question to reflect reforms already made to the Government’s apprenticeships scheme. I commend this draft order to the Committee.

My Lords, I have nothing to complain about in the substance of what the Minister has just indicated. Raising the participation age makes sense. However, I have recently expressed my concern in at least one debate about the recent Ofsted report which said that a number of apprenticeships were failing to meet standards. That should be of real concern to a Government who I know are committed to apprenticeships and to raising their quality. The problem is that this is the old story about checking against delivery. There has never been a perfect situation where all apprenticeships were right, but the report from Ofsted is worrying. It distinguished between the kind of apprenticeships that you get in retail and social care, and those in engineering and other types of apprenticeships. It said that most problems were in those to which I referred first—in retail and social care.

I was discussing this issue recently with someone who has experience in this field. They told me that, for instance, in some cases the amount of time that training providers have for each apprenticeship is pitifully low. I cannot remember whether they were saying that it was an hour a week or an hour a month, but it was very low. If we are serious about improving the standards of apprenticeships and the perception that people have of them—that they are just as good a route as an academic one—we really cannot afford to be complacent.

I also raised on a previous occasion what was perhaps an even more worrying occurrence, where an apprentice was sent out one day to work in a factory and never returned home, as a result of an appalling industrial accident. I had an exchange of correspondence with the Minister but I cannot say that it made me feel any more sanguine about the treatment of young apprentices. He said that there is a duty on the employer: well, we know that. But surely there is also a duty on us all, and on the training provider, to ensure that if they send a young person to a particular location, they will have checked out whether the employer is reliable and responsible. I do not expect the Minister to give me all the answers today because this is not an easy problem to solve.

To sum up, we must ensure the quality of apprenticeships; not just talking about it, but ensuring that we have a system and a process in place so that we can say with confidence to young people and their parents that when they embark on an apprenticeship, not only will the quality of the training be first class but the safety of the young person will be assured. I think that we have a lot to do in this area. If we are serious about pushing the target up to 3 million—I assume that the Government are serious—which is very ambitious, we should note that a number of people have expressed their concerns by saying: never mind the quantity, it is the quality that we have to ensure. I am just as keen as the Government to increase the number of apprenticeships, but I would like an assurance that the Minister will check that we have put the right procedures in place to ensure both the quality and the safety of apprenticeships.

My Lords, the noble Lord, Lord Young of Norwood Green, is of course second to none in his support for and encouragement of apprenticeships. Next week, we will come to a very substantial discussion of apprenticeships during our consideration in Committee of the Enterprise Bill, of which this order may be an hors d’oeuvre, and maybe not even that. All I would like to be certain of, and I am sure that my noble friend will be able to give me this assurance, is that what we are doing in this piece of legislation will not inhibit or restrict our debates on the clauses that relate to apprenticeships in the Enterprise Bill, which I suspect we will get to on either Monday or Wednesday of next week in Committee.

My Lords, the noble Lord who has just spoken paid tribute to my noble friend Lord Young’s continuing interest in and support for the apprenticeship movement. His words carry much weight in these areas. I have only four small questions for the noble Earl in what I take to be more of an amuse bouche than a first course, because we will be returning to these matters in the Enterprise Bill next Wednesday—if we make a little more progress than we did yesterday.

The first question is on almost the same point that has just been raised, which is that in this statutory instrument we are closer to finding an approved English apprenticeship only to see it removed and replaced by the statutory English apprenticeship in the Enterprise Bill, although obviously the dates will vary. When he comes to respond, perhaps the noble Earl could give us a sense of how this is going to segue from one to the other and what changes there will be in practice in terms of what the Bill says and what is currently meant by this statutory instrument. I suspect that that is a slightly longer piece than will be possible in this discussion, so I am happy for him to write to me.

My second point is that in paragraph 10 of the Explanatory Memorandum on the impact, the statement is made that:

“A separate full regulatory impact assessment has not been prepared for this consequential instrument because no impact on the private, public or voluntary sectors is foreseen separate to that already covered by the substantive provisions in the Act”.

That is fine, but unfortunately I am not very good at keeping my files and I could not find the impact assessment for the original Act, and clearly there is a hint here that there were some costs as a result of this change. Perhaps the noble Earl could dig it out—I see a little bit of panic behind him, so perhaps it will take a few days. However, if at some point I could have some indication of what the costs would be, I would be grateful for that.

My third question reinforces the point about quality that was made by my noble friend Lord Young. The Ofsted report on apprenticeships is extremely damning in many ways. It would be interesting to hear the reflections of the noble Earl on what lies behind the points made by my noble friend, which is that we can change the title all we want, but if we do not raise standards or change the nature of what is happening, we will be in trouble. I would like some assurances that the simple change in nomenclature, which is what appears to be happening here, is in fact covered by more action on the part of his department in terms of trying to ensure that standards in apprenticeship training rise and will indeed, it is hoped, eventually get to the point where we are talking about parity of esteem between the academic and the non-academic or vocational routes so that we can in truth have a fully integrated system of further education, complementing those who choose the academic route, but also open to those who wish to switch between the two strains.

The final point is my familiar trope on implementation dates. I appreciate that we are talking about a minor change that is consequent on a piece of legislation which is soon to be overtaken, but the Government have signed up to common commencement dates for the implementation of activities that will put a burden on business. This statutory instrument appears to come in 21 days after the order is made, which presumably will be tomorrow or the day after, and therefore will come in in late October, which is not one of the two commencement dates, which are, as I am sure the noble Earl will be aware, 1 October and 6 April. Why was this not brought forward only a matter of days to 1 October? Given its simplicity and apparently innocuousness in terms of changing things, why on earth did the department not get its act together for 1 October? Given that it is inconsequential and will shortly be overtaken by another Act, why did the noble Earl not wait until 6 April?

My Lords, I thank all noble Lords for their contributions to this short debate.

I should probably refer at first to the mention by the noble Lord, Lord Young, of the Ofsted report. This does apply, as the noble Lord is aware, to old frameworks. We are addressing these issues now as part of the reform programme in the Enterprise Bill, among other legislation. The Ofsted report criticises the quality of the existing provisions, and not those that have been designed and put in place by employers through our reforms. We are committed to creating the 3 million apprenticeships by the end of the Parliament, but this will not be at the expense of quality.

We are ensuring that each apprenticeship is a paid job with substantial and sustained on and off-the-job training, lasting a minimum of 12 months. As we have said before, we will legislate to provide protection for the term “apprenticeship”. Under the new trailblazers scheme, employers are designing new, high-quality apprenticeships that address the specific skills requirements of their sectors. We are putting purchasing power in the hands of businesses and allowing employers to choose from which provider they buy training.

The noble Lord, Lord Stevenson, mentioned statutory apprenticeships. What he said is not the case. Statutory apprenticeships include the existing apprenticeship programmes, which are included in the standards and frameworks. The noble Lord also asked about costs. These are consequential amendments and so no costs are associated.

My Lords, that is an immensely cheering thought, but it is not what I said. I said that the impact assessment has not been provided for this statutory instrument because it has been said that the calculations were done in respect of the original Bill. Since I have lost my impact statement for the original Bill, I would be grateful if the noble Earl could confirm what those costs were, so that I am reassured on that point.

If that is not available by the end of this debate, I will write to the noble Lord.

There was also concern over the quality of apprenticeships, raised by the noble Lord, Lord Young. We are improving quality. This is central to our reforms. Employers are developing new standards to ensure that apprenticeships meet the skills needed by their sectors. The published trailblazer quality statement sets out a range of measures to retain and improve quality, including the requirement for all apprenticeships to last at least 12 months. The new standards will replace existing complex frameworks, with short, simple, accessible standards written by employers in a language they understand. Quality and safety, the two underlying points raised by the noble Lord, Lord Young, must be at the front of these reforms.

My noble friend Lord Hodgson asked whether the order had any effect on the Enterprise Bill going through the House. It does not.

I welcome this debate on the issues that have been raised and I thank noble Lords for their contributions.

I heard what the Minister said—that the Ofsted inspection related to previous frameworks—but that still does not reassure me that we have got a grip. Just because employers write a short, simple description of training does not give me any reassurance that we really have a handle on quality.

The noble Lord is right in saying that this is an hors d’oeuvre—although I would not like to refer to it in that way, because it sounds a bit flippant. I was giving the Minister the opportunity to go away and have a look at this matter, because I intend to raise it again on the Enterprise Bill. I urge him to have a careful, close look—never mind that we have “new frameworks” or that the employer is writing these new, simple standards. I do not quarrel with that, provided that there is a genuine programme. My concern is that here we have training providers, who go and find an employer, and the supervision after that is pretty minimal, as I have been told. We need to ensure that there is a process whereby we can guarantee every single employer has been fully investigated, has a track record in applying a proper training programme and is not just exploiting young people for cheap labour—and also that there is a safe working environment.

I am not asking the Minister for a response here today, as that would be unreasonable, but I am trying to provide him with an opportunity to go away and have a look at the process. If he can come back to me between now and that part of the Enterprise Bill with some written information, it would further the debate.

I thank the noble Lord, Lord Young, for that point. Yes, this matter will be looked at very carefully before the next stage of the Enterprise Bill, and I shall discuss it with the Minister taking it through this House.

I do not think that the Minister has responded to me about the commencement dates issue. If he cannot do so today, can he please confirm it in writing to me?

Motion agreed.

Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order 2015.

Relevant document: 3rd Report from the Joint Committee on Statutory Instruments

My Lords, I beg to move that the Committee considers the draft Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order 2015, the draft Financial Services and Markets Act 2000 (Misconduct and Appropriate Regulator) Order 2015, and the draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 3) Order 2015. For the sake of brevity, I shall refer to these as the relevant authorised persons order, the misconduct and appropriate regulator order and the regulated activities amendment order.

The first two orders under consideration today are related, and it may be helpful if I start by outlining the background to this legislation. In December 2013, Parliament passed the Financial Services (Banking Reform) Act 2013, which, for convenience, I shall refer to as the banking reform Act. Among other things, this Act provided the legislative framework for implementing the recommendations of the Parliamentary Commission on Banking Standards, on which several Members of your Lordships’ House served with distinction. This included making provision for introducing the senior managers and certification regime for the banking sector—banks, building societies, credit unions and certain systemically important investment firms. The Government have now included provision in the Bank of England and Financial Services Bill to extend this regime to all other types of financial services firms, but these two orders are part of the original work programme to apply this new regime to banking.

When the parliamentary commission reported in June 2013, it made a number of recommendations for reforming the way in which individuals who work in banks are regulated. These formed the basis for what is now the senior managers and certification regime and include: a tougher regulatory approval regime for a smaller number of the most senior individuals in a bank; annual certification by banks themselves that other key individuals are “fit and proper”; and rules of conduct covering a wider range of bank employees, not just those subject to regulatory pre-approval.

The relevant authorised persons order will extend the scope of the senior managers and certification regime to include UK branches of foreign banks. It was initially decided to confine the senior managers and certification regime to UK institutions: that is, businesses incorporated in the UK. This includes those global financial institutions that operate here through a UK subsidiary company. The subsidiary company is incorporated here and so counts as a UK institution in its own right.

However, it does not include global banks which operate here through a branch in the UK. A branch is not a separate legal entity from its parent and so is not incorporated here. Nevertheless, a branch can have senior managers and staff who could be subject to annual certification or required to comply with rules of conduct. But, of course, the fact that a branch is not separate from its parent was bound to raise a number of issues which could not be fully considered at the time.

A power was therefore included in the Banking Reform Act enabling the Treasury to bring branches of foreign banks into the senior managers and certification regime after appropriate consultation. The consultation document was published last November and the Government announced in March this year that they would make the necessary order. Subject to your Lordships’ approval, all parts of the senior managers and certification regime will from 7 March 2016 apply to foreign banks that operate in the UK through branches here: that is, the same date as that on which the senior managers and certification regime comes into force for UK banks.

There are two points that it might be helpful to be clear about at this stage. First, the Banking Reform Act also included a new criminal offence relating to decisions which cause a bank to fail—sometimes called the “reckless mismanagement” offence. This offence was also recommended by the parliamentary commission and was included in the Banking Reform Act at the same time as the senior managers and certification regime provisions. However, it can be committed only by persons who are senior managers in banks, building societies and systemic investment banks.

This criminal offence is not part of this regime. I want to make it clear that the order does not extend the new offence to UK branches of foreign banks. There is no power in the Banking Reform Act to do that, nor would it be appropriate. The offence is concerned with decisions that cause a bank to fail. As a branch is not a separate legal entity from its parent, it can fail only if the parent fails. The failure of a branch, and any action arising from that, could be taken only by the authorities in the parent’s home state.

Secondly, I want to assure the Committee that the UK regulators have the powers to ensure that the regime can be applied flexibly and appropriately to different types of branch. They can also differentiate where appropriate between “passporting” branches from other EEA states, non-passporting branches from countries outside the EEA, subsidiaries and UK-owned banks.

The misconduct and appropriate regulator order makes some technical changes to the legislation that are needed before the senior managers and certification regime comes into operation in the banking sector next March. The first of these simply ensures that the revised provisions relating to enforcement action by the FCA will cover cases where an approved person has been knowingly concerned in a breach of regulatory requirements imposed by the Alternative Investment Fund Managers Regulations 2013. Those regulations implement the EU alternative investment fund managers directive in the UK.

The second group of technical amendments makes some consequential changes to Section 204A of the Financial Services and Markets Act 2000. Section 204A sets out which of the FCA and PRA is responsible for enforcing certain requirements in that Act. The misconduct and appropriate regulator order makes changes to Section 204A to ensure that the PRA can enforce new requirements where it is the lead regulator for the senior managers and certification regime. If this order were not made, the FCA would have to enforce obligations that should, in effect, be owed to the PRA.

I move now to the draft regulated activities amendment order. In March, Parliament approved the Mortgage Credit Directive Order, which ensures that the UK implements the EU mortgage credit directive, or MCD, on time and with a limited impact on the UK mortgage market. The Mortgage Credit Directive Order 2015 was due to come into effect in March 2016. Since this point, the Government have been actively monitoring the progress of the mortgage industry towards implementation to ensure a smooth transition so that consumers do not see any disruption.

During the course of this routine monitoring, it came to light that, due to the complexity of superimposing a new wave of legislation on top of existing legislation, there were some areas where the Mortgage Credit Directive Order did not achieve what it was intended to. The Government therefore decided to act by making a small number of amendments to the scope of the regulation to ensure that the regulatory framework continued to operate as intended.

The draft regulated activities amendment order under consideration makes a number of changes, all of which aim to ensure that the existing legislation delivers on previously agreed policy. The most significant of these is to ensure that mortgages dating from before 31 October 2004 that are currently regulated as credit agreements will move across to be regulated as mortgages from 31 March 2016. This is part of the Government’s widely supported aim to consolidate the regulation of mortgages within a single framework, reducing the burden on firms and ensuring that customers get a consistent experience.

Taken together, the changes made by the statutory instruments under consideration are another important step to ensure that the UK’s financial system is resilient and works for the good of the nation. I hope that noble Lords will therefore support the Motion to consider these instruments. I beg to move.

My Lords, I am grateful to my noble friend for his explanation of what are quite technical orders. Before I go any further, I declare an interest as an authorised approved person under the Financial Services and Markets Act. I am therefore accountable to the Financial Conduct Authority. I will focus on the practical implications of what we are discussing, in particular the misconduct and appropriate regulator order, which is one of the three orders we are considering; how these tie in with the Bank of England and Financial Services Bill, which had its Second Reading yesterday evening; and how the regulatory footprint will come to be felt by companies, banks and individuals.

As I understand it—I am sure my noble friend will put me right if I am wrong—we essentially have a structure of two pillars. The Prudential Regulation Authority is concerned with the strategic aspects—corporate discussions, decisions and difficulties—and the Financial Conduct Authority is concerned more with the behaviour of individuals. It therefore operates at a slightly lower level. I will quote from the Minister’s letter to my noble friend Lord Trefgarne, in his role as chairman of the Secondary Legislation Scrutiny Committee. Harriett Baldwin wrote:

“Both Orders relate to the government’s implementation of the Senior Managers & Certification Regime (SM&CR), which is designed to manage individual conduct and standards in the banking sector”.

As my noble friend said in his opening remarks, one of the key requirements is the issue of fitness and propriety—that is, of a person’s integrity, competence, relevant experience in an area and so forth. What I have some difficulty in understanding is how the PRA, or indeed the SM&CR, will enter into cases where the fitness and propriety of the individuals would not be called into question. There would therefore be a basis for the FCA proceeding by itself, rather than having proceedings by either or both. Does this matter? Maybe not, but maybe it will. I remind my noble friend of Clausewitz’s saying: “Better a bad general than a divided command”. Individuals will not always be clear which of the two regulators is the more important: are they dancing to the tune of the PRA or the FCA? Within the City, there is evidence of a certain amount of turf warfare between the two organisations. I think that the PRA, with its strategic view, considers itself superior to the FCA, which deals with individuals. I think that Mr Martin Wheatley said that his organisation was considered to be down among the weeds—a rather unfortunate way of describing his flock, but never mind.

While what we are putting in place here may seem very clear from the Olympian heights of Her Majesty’s Treasury, in this case I am a worm. I have a worm’s-eye view of what is being proposed and there are questions that I would like my noble friend to answer. He may wish to write rather than doing so on the hoof this afternoon, as I understand that we have to get on with this. We need to maintain standards in our financial services industry and there is a degree of public mistrust in what has been going on in that sector. The first question is: how will co-ordination be effected between the FCA and the PRA so that individuals are not caught up in trench warfare between those two organisations? Secondly, which of the two authorities will take priority when cases come before them? If both authorities get involved, will one be able to issue a cease and desist order so that the unfortunate individual does not find him or herself facing in two directions? Answering that would, at any rate, give me a degree of clarity about how this is to work on the ground as opposed to what is expressed clearly and succinctly, but in a quite dry and academic way, in this order.

Finally, as my noble friend said, one of these orders introduces a new regime: the senior managers and certification regime. Under whose bailiwick does that fall? Is it the PRA or the FCA, or will yet another regulator be involved? I would like to see how that fits together in terms of the organisation which many thousands of people will have to comply with, in a field where the compliance costs and the difficulties of meeting the regulators’ requirements have become a lot more difficult. Of course I understand the importance of our financial services regime being kept up to date. We live in an era of rapid change, so we have to change our structures to keep up to date with evolving practices, but I am anxious that we should always think about the practical implications of what we are proposing for those working in the industry. I hope that my noble friend will be able to give me some reassurance on these points when he comes to wind up.

My Lords, as the Minister has outlined, the three statutory instruments before us make a number of technical changes to the Financial Services and Markets Act 2000, as amended, which relate specifically to the expansion of the senior management and certification regime—or SM&CR—mortgage regulation and the extension of powers to the Prudential Regulation Authority. As my honourable friend Richard Burgon MP said in the other place, we will not oppose the orders—I want to place that on record again today. My party is committed to ensuring that we have a financial services sector that works in the interests of the public and we want to work with the Government to ensure that.

Banking regulation seems—in this House at the least—to be the flavour of the month, what with these orders today and the Second Reading of the Bank of England and Financial Services Bill only yesterday. Last night, we had a constructive and wide-ranging debate on what a modern and effective banking sector should look like. It was encouraging that we should have such passionate, experienced and committed colleagues engaging with this issue.

Some of the observations made last night have relevance today. Without wishing to detain your Lordships for very long, I want to ask the Minister a number of questions about how these small but nevertheless important changes fit into the Government’s broader proposals.

The Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order extends the regulation governing individuals working in the UK banking sector to cover UK branches of foreign banks and investment firms. I note that the Economic Secretary to the Treasury said on Thursday that these changes would come into effect in March 2016, the same time as changes for senior managers in UK institutions. Can the Minister say today, or perhaps in writing at a later date, how many non-UK institutions which have a branch in the UK this will affect?

As the Minister will know, one of the changes made in the Bank of England and Financial Services Bill is the extension of the SM&CR to the entire financial services industry—not just senior managers in banks but to credit unions and investment firms from 2017. Once the expansion comes into effect, does the Minister expect non-UK institutions which have a branch in the UK to be included?

The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 3) Order 2015 will mean that from 31 March 2016 mortgages dating from before 31 October 2004, which are currently regulated as credit agreements, are regulated instead as mortgages. The Government claim that the proposed changes are necessary for the EU mortgage credit directive to work as intended. The Economic Secretary to the Treasury stated:

“During the course of that routine monitoring it came to light that, owing to the complexity of layering a new wave of legislation on top of existing legislation, in some areas the order did not achieve what was intended”.—[Official Report, Commons, Sixth Delegated Legislation Committee, 22/10/15; col. 5.]

For clarification, can the Minister confirm that these are just credit agreements which relate to property? Can he also indicate the scope of the aforementioned monitoring and the precise issues covered to bring about such change? I also understand that my honourable friend in the other place asked why pre-March 2004 mortgages were being regulated and not those after March 2004.

Finally, the Financial Services and Markets Act 2000 (Misconduct and Appropriate Regulator) Order 2015 confers powers to the PRA over individuals working in financial services, specifically in cases relating to the alternative investment management regulations. It also extends to the PRA the ability to take disciplinary action. We understand that the order is required so as to ensure that the appropriate regulators have sufficient powers to carry out their functions. However, I have a number of points on which I seek clarification.

Will the changes in the role and structure of the FPC as a full committee of the Bank and the desubservisation—if there is such a word—of the PRA alongside the creation of the new Prudential Regulation Committee require that these orders be amended again? Paragraph 5(1) of the aforementioned order states that:

“The Treasury must from time to time—

(a) carry out a review of the relevant provisions of the 2000 Act;

(b) set out the conclusions of the review in a report, and

(c) publish the report”.

I would be grateful if the Minister could go into more detail about the process and practice of this, in particular the timing. Does “from time to time” mean once a Parliament, once a Session or once a decade? I understand that the Minister may need to write in order to set this out in more detail.

Throughout the creation of this new regime, the noble Lord, Lord Hodgson of Astley Abbotts, has brought us the worm’s-eye view of the situation. I am not privileged to be a worm in the City, merely a worm at Westminster, but I recall that we spent many an hour layering clause on clause into the various Bills to define the difference between the PRA and the FCA. I am pleased to hear from the noble Lord, Lord Hodgson, that it is as clear as ever. I will be fascinated to hear the Minister’s reply, but I recognise that he may not be able to finesse it too accurately today, so perhaps I may be copied in to any letter he promises to his noble friend Lord Hodgson.

My Lords, we have had a brief but productive debate today and I am grateful to noble Lords for their constructive contributions. I am particularly grateful for allowing me to write if necessary to provide comprehensive answers. However, I will try to respond to some of the points, and I will make sure that I write on anything that I leave out. I will also certainly write to the noble Lord, Lord Tunnicliffe, with any answers that I give to my noble friend Lord Hodgson, who is, as always, too modest. As was said before somewhere else, my noble friend may be a worm, but he is certainly a glow worm.

My noble friend started off by asking me about the relationship between these orders and the Bill referred to by the noble Lord, Lord Tunnicliffe, the Bank of England and Financial Services Bill, which received its Second Reading last night. These orders largely complete the banking reform Act work programme, applying the senior managers and certification regime to banks, building societies, credit unions and PRA-regulated firms. The Bill will extend the regime to all other authorised persons under the Financial Services and Markets Act 2000—that is, to the rest of the financial services industry. So the proposed changes in the Bank of England and Financial Services Bill will not change any of those relationships.

My noble friend mentioned the question of duplication of effort when both regulators have enforcement powers, and of course that situation applies now. Nothing that we are doing today will change that. In answering the point, I can tell my noble friend that each regulator will enforce its own rules or directions to ensure compliance with or obligations owed to it. Further, it will usually be clear which rule or other requirement has been broken and therefore which regulator needs to enforce it, but the PRA and the FCA have a statutory duty to co-ordinate the exercise of all their functions, including enforcement. That applies today and will not change.

The question is why they both need enforcement powers, and the reason is that they both make rules or are the lead regulator for other requirements, which means that they must have such powers. Each regulator has a different statutory remit, so that they can simultaneously have an interest in different aspects of the same situation. However, I take the point made by the noble Lord; it is something that I was aware of when I worked in the City. If you are an institution that is fortunate enough to be under the regulation of both of those regulators, it is obviously important. However, they do co-ordinate and will continue to do so because they have, as I say, a statutory obligation in that regard.

I am able to give that assurance.

Both regulators look at fitness and propriety. Both the PRA and the FCA are concerned with whether an individual is fit and proper. This is the position now; the senior managers and certification regime does not change that. That is why, as I said before, both regulators may need enforcement powers.

To answer my noble friend’s question, there will not be another regulator. The PRA and FCA will run the senior managers and certification regime in the same way that they are involved in the approved persons regime, so there is no change in that. To follow on from the point raised by the noble Lord, Lord Tunnicliffe, there will not be another regulator. The PRA will have an enforcement role only when obligations are owed to it. As I said, normally which regulator matters is clear from primary legislation because they have different remits and focus.

The noble Lord, Lord Tunnicliffe, asked for some sense of the numbers. I will give him some today, but if I have not given him all the numbers he wants I am happy to write later. Obviously I will copy in my noble friend Lord Hodgson. There are currently about 155 banks and nine PRA-regulated investment firms. Those are investment banks that do not have a deposit-taking commission. These 164 firms will be within the senior managers and certification regime from next March as a result of the changes made by the banking reform Act. This order will add between 155 and 175 foreign banks, split approximately 50:50 between EEA and non-EEA firms.

The banking reform Act also brings approximately 45 building societies and approximately 550 credit unions into the senior managers and certification regime. Any foreign equivalents of these firms would be included as banks. Less than 10% of those banks would be considered large. The Bank of England and Financial Services Bill will not add any banks or other deposit-takers to the SM&CR. The Bill will add only insurers, investment firms and consumer credit firms, assuming that it is passed.

The Minister has dealt with all the questions with great courtesy and care. As we get to a situation where the SM&CR is covered by both the FCA and the PRA and they deal with everything, why would we need to have the two organisations? It seems to me that we are getting closer and closer to a situation where one organisation could do it. We then get away from all this trouble of possible regulatory overlap and people being pulled in different directions. That is not a question to be answered today, but it is a question that the Government should think about if we are to follow up the issue of deregulation and try to avoid multiple masters, with the inevitable problems that arise. I am sure that the Government, the Treasury and the authorities will assure us that there is no way that those two will ever get out of step, but from the point of view of the regulated individuals and entities, you can be certain that they will be out of step before too long.

I will not try to give a comprehensive answer today, but I will make the point that that was the position with the Financial Services Authority, which both Houses of Parliament decided was not an effective regulator. Everyone accepts that there were problems with having one regulator and that tripartite system. I will not go beyond that, but I take the point; I have noted it.

The noble Lord, Lord Tunnicliffe, asked whether the changes to the PRA required changes to these orders; they are not required. He also asked whether the regulated activities amendment order only affects credit agreements relating to property—I refer here to equitable loans that are normally used in Scotland—and the answer to that is that it does. If there are other points, I will take advantage of both noble Lords’ suggestions and write when we have reviewed what I have said today.

Can I make a couple of final points about the orders under consideration? First, the relevant authorised persons order is not about placing a more onerous regime on UK branches of foreign banks or for that matter letting them off the hook. We aim to ensure a proportionate and appropriate regime that reflects the status of branches and the nature of the business that they do.

The misconduct and appropriate regulator order makes some necessary technical changes arising from the introduction of the senior managers and certification regime. Finally—

Before the Minister sits down, does he have any initial reaction to my question about what “from time to time” means? It is quite difficult to get a more vague description of an interval.

Luckily, I do have an answer to that. “Time to time” leaves scope to have a practical approach and the Treasury will keep under review how often it will consider the orders. The first review must be within five years. Each review must be at least every five years after that. At the moment that is where we are. I will consider the points that the noble Lord made in more detail and if I have anything more to add I will write to him.

The regulated activities amendment order will ensure that the PRA and the FCA have the right powers to regulate the mortgage market effectively, ensuring that both new and existing customers are protected from bad practice. I therefore ask the Committee to join me in supporting these statutory instruments today.

Motion agreed.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 3) Order 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 3) Order 2015.

Relevant document: 3rd Report from the Joint Committee on Statutory Instruments

Motion agreed.

Financial Services and Markets Act 2000 (Misconduct and Appropriate Regulator) Order 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Misconduct and Appropriate Regulator) Order 2015.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments

Motion agreed.

Asian Infrastructure Investment Bank (Immunities and Privileges) Order 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Asian Infrastructure Investment Bank (Immunities and Privileges) Order 2015.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments

My Lords, I beg to move that the Committee consider the Asian Infrastructure Investment Bank (Immunities and Privileges) Order 2015. The order was laid before the House on 12 October, and it gives authority for immunities, privileges, reliefs and exemptions to this new international organisation, also known as the AIIB, under the International Organisations Act 1968.

Before going into the details of the order, I would like to set the context by saying a few words about the bank and its link with our prosperity objectives. These recognise that, as we continue our business-led recovery, one of our greatest strengths is our openness to global markets. The fast-growing markets of the emerging economies are becoming ever more important to global trade, British business and our values. The United Kingdom must continue to play a significant role in developing these markets, as well as the global economy. Equally, we must expand into areas where we are economically under represented.

China is at the heart of this. Last week’s state visit by the President of China demonstrated the scale of the opportunities that lie in deeper co-operation between our two nations. A key component of opportunity and growth in Asia is and will continue to be infrastructure. Requirements for infrastructure in Asia are estimated to expand substantially over the next 10 years: the Asian Development Bank estimates the value of these at $8 trillion. Satisfying this need is not only vital for driving growth and increasing living standards in the region, but will benefit the whole global economy, creating new opportunities for British business.

The UK has expertise in areas ranging from green investment, infrastructure and engineering to accountancy and project management. Add to that our world-leading position in finance and we see that a host of businesses around the country and across a variety of sectors are well-placed to take advantage of the opportunities offered by the world’s fastest-growing economies. There are also significant opportunities for the financial sector in London. This order ensures that London is in a strong position to take advantage of opportunities that arise from the AIIB.

Key to enabling effective support for infrastructure development in the region is ensuring that the AIIB is well-established as a high-quality and well-functioning international organisation. That is why the United Kingdom has taken such a strong role in supporting the AIIB. Our announcement in March this year of our desire to become a prospective founding member was the first by any major western country. Germany, France and many others have now followed. There is significant advantage in being involved from the beginning. Working to shape the bank in the British interest and ensuring that it follows the model and learning of other established institutions will help the new bank to meet the highest governance standards for an international institution.

I turn now to the details of the order. The formal laying of the treaty in Parliament under the Constitutional Reform and Governance Act 2010 was undertaken on 4 September. This order is part of the UK’s ratification and provides the privileges and immunities to enable the bank to function as an international organisation in the United Kingdom. This is part of the requirements laid out in the articles of agreement signed in June for the UK by the Commercial Secretary to the Treasury, and is in line with requirements in other international organisations of which the UK is a member.

The order applies to the whole of the United Kingdom. However, some provisions of the instrument do not extend to, or apply in, Scotland. A separate Scottish Order in Council has been prepared to deal with those provisions within the legislative competence of the Scottish Parliament and has been laid before it. We will of course take a significant interest in the bank’s operations. We have been and will continue to be active players. I beg to move.

My Lords, as the Minister highlighted, UK involvement and investment in this Chinese-led AIIB was first proposed in March. We then became the first major western country to apply to be a founding member—followed quickly, as he said, by Germany, France, Italy, Switzerland and Luxembourg. I also note what the noble Earl said about joining the AIIB being a further step in the Government’s plan to build a closer political and economic relationship with China and the Asia region. But as we heard in debates last week during the state visit, our involvement is not simply a neutral business matter. In that developing relationship, there are issues of human rights and other concerns that we do not wish to ignore, particularly given the debate we had on religious freedom.

As the order—and the news—has said, the UK will make a capital contribution of £2 billion to the AIIB. However, at the time we made our announcement in March, the White House, on behalf of the US Government, issued a statement.

My Lords, I hesitate to interrupt the noble Lord but there is a Division called. The Committee will adjourn for 10 minutes and resume not earlier than 5.40 pm. If the Divisions are held one after the other, the Committee will adjourn until both votes have been completed.

Sitting suspended for a Division in the House.

My Lords, when I was so rudely interrupted, I was in the middle of a sentence. I began to quote the White House statement at the time of our announcement that we were joining the AIIB. The statement said that the White House had concerns about whether the AIIB would meet high standards,

“particularly related to governance, and environmental and social safeguards … The international community has a stake in seeing the AIIB complement the existing architecture, and to work effectively alongside the World Bank and Asian Development Bank”.

I understand that the United States has revised its opinions and that the concerns that it previously expressed have been addressed. In particular, AIIB president designate Jin Liqun, in an FT article that I read on 25 October, vowed to run a “clean, lean and green” institution, operating to the highest international standards, but with greater speed than its rivals. Liqun said that the AIIB,

“would abide by the toughest environmental and social standards in its lending and model itself in many ways on existing multilateral development banks”.

The thing is, China will hold 26% voting shares, which is almost double the proportion of United States voting shares in the World Bank, which is dominated by and hosted in Washington. As the articles of association stipulate, China will have veto power on issues that require a supermajority vote, such as the board, the president and the capital, as well as the major operational and financial policies. Retention of a veto no doubt reflects China’s determination to retain control of key aspects of the bank. I am certainly aware that the Philippines is very concerned by the potential veto power that China will hold.

Given the original concerns raised by the White House and the White House National Security Council, what reassurances have the Government received that the AIIB will retain strong environmental, social and governance standards? Despite the good words of the bank’s president designate, what steps have the Government taken to ensure that standards are upheld and kept under appropriate scrutiny and review?

What assessment have the Government made of how the new investment bank will sit alongside and work effectively with the IMF, the World Bank and other global institutions? How do we ensure that it behaves in a complementary and co-ordinated fashion rather than becoming duplicative and suboptimal in its effectiveness?

Finally, just under a week ago the Minister addressed in the Chamber the question of unpaid parking fines and London congestion charge payments by diplomatic missions and international organisations. It appears that this order may add to the number of inviolable organisations—I hope the Minister appreciates how I pronounced that word because I am expecting a reciprocal arrangement in terms of pronunciation—so what steps have the Government taken to ensure that, in the event of unpaid tickets arising from this new bank, it pays up?

My Lords, I thank the noble Lord for his contribution to our debate on the AIIB. The raison d’être of this is to continue building a strong economy in an increasingly globalised world which requires good partnerships, deep co-operation and strong economic links. The noble Lord raised a number of issues, beginning primarily with human rights. I will use that general heading if the noble Lord will allow me. As part of our co-operation with China we discuss our values. We believe that human rights, prosperity and security are mutually reinforcing. The free flow of ideas and innovation is a driver of economic growth and a key element of democracy. We continue to discuss all aspects of human rights at the highest level.

The noble Lord also drew attention to US relations in respect of this agreement. As he will be aware, the UK remains a close ally of the United States. Where the United Kingdom led on the bank, others have followed. As the noble Lord said, they include Germany, France, Brazil and Australia. The recent Chinese state visit to the United States saw the US Government recognise what role the bank would play in the international financial architecture. During that state visit by the Chinese President, the Obama Administration reiterated their pleasure in backing China’s bid for inclusion of its currency, the renminbi, in an elite International Monetary Fund basket of reserve currencies as long as Beijing is declared worthy by the IMF.

A joint statement that was issued after the state visit to the United States and before the Chinese President came to the United Kingdom said that China intends to meaningfully increase its role as a donor in all these institutions. Both sides acknowledge that for new and future institutions to be significant contributors to the international financial architecture, these institutions, like the existing international financial institutions, are to be operated with the existing high environmental and governance standards. Both sides were keen to put any form of unpleasantness over the AIIB and any conflict over the governance of the existing regime behind them, as set out in President Xi’s public statements during his visit.

The noble Lord also raised a couple of issues relating to the bank. As I said earlier, the AIIB is committed to meeting the highest international standards and the UK has pushed hard for those environmental standards by ensuring that there is public consultation. The noble Lord also mentioned the minority holding of the Chinese in the bank—26% is still a minority. The veto stops action. It does not force action.

The noble Lord also mentioned unpaid parking fines. The AIIB will receive the same immunities and privileges to enable it to function. With regard to parking fines, privileges and immunities are granted on a functional need basis. Careful consideration is given by Her Majesty’s Government to what organisations or their staff need. The number of immunities is thus tailored to need and we work with organisations to ensure that only what is needed is granted. The noble Lord will remember from that interesting exchange at Questions last week that at the highest level, when new heads of mission come to London, we express at all times the importance of payment of the congestion charge and parking fines.

I think that I have covered most of the points raised by the noble Lord. Should there be any that I have not as yet covered I will write to him. I thank noble Lords for their contributions.

Motion agreed.

Committee adjourned at 6.01 pm.