My thoughts on the 2014 Scottish Independence Referendum

The Aunt Sally question is best disposed of straight away. Can Scotland, with its own distinct culture and history, be an independent state separate from the rest of the UK? Yes is the unequivocal answer.

But there are critical questions. Why should Scotland tear up a 300 year partnership which appears to have worked in the collective best interests of the four Home nations? Would our economic, cultural and social relationships be enhanced or diminished as a result of separation? Would Scotland be a more economically prosperous nation, with independence unleashing a wave of innovation, entrepreneurialism and increased confidence in our own abilities? Would it be advantageous to be a smaller nation in an increasingly globalised economic world? Would we be more respectful and tolerant of others, both within and outwith our borders?

The twin themes of economics and identity are likely to dominate the next 12 months.

Only a small minority will fall into the category of feeling totally and exclusively Scottish. For them voting Yes is, as they say, a no-brainer. In a recent interview with the New Statesman, Alex Salmond stated that he has a British aspect to his identity in addition to his affinity for Scotland and Europe. If this is the case for the First Minister, it is likely to be so for the vast majority of Scots. This is illuminating in light of Professor John Curtice’s Scottish Social Attitudes Survey research which showed that, paradoxically, it is not how Scottish one feels but how British people in Scotland still regard themselves that will be a determining factor. It is the degree to which people in Scotland still share some sense of fellow-feeling with those living elsewhere in the UK which is likely to be key to the referendum result.

Michael Ignatieff, former UK journalist and Canadian Liberal Party leader, provides a revealing insight. Following the Quebec referendum, it was found that the strongest argument for leaving countries intact turns out to be that when confronted with a stark choice of separation, people do not want to choose between different parts of their identity. In Canada post-referendum, the joke was that what Quebeckers really wanted was an independent Quebec inside a united Canada. It appears that the SNP has this in mind when promising that in an independent Scotland everything will change, but actually nothing will change. Witness the pledges to preserve the monarchy, sterling, NATO, pensions and most recently a benefit cap on welfare reforms.

Unlike campaigns for independence in other countries – for instance the break-up of the Soviet Union, the collapse of Yugoslavia and the drive for an Irish republic, where historic reasons were at the fore, Nationalists cite the economy as their main driver for change, with an independent Scotland becoming wealthier and more prosperous as a result of the dissolution of the fiscal union with the rest of the UK.

Conscious of the paucity of information and debate on the economic implications for the UK of Scottish independence, the House of Lords Economic Committee launched a short inquiry last year. We received oral evidence in Scotland from the leaders of all the main parties in the Scottish parliament, along with business and local authority leaders. The only relevant politician absent was the First Minister, who refused invitations to address the committee. Further, we were denied the use of Holyrood (as had other Westminster committees) in which to hold any evidence sessions.

This struck me as an ominous sign for the tone of the coming debate. Whatever the outcome in September 2014, we will have to live with each other as harmoniously as possible. Michael Ignatieff reveals that the Quebec referendum brought both fracture and division. So, aware that maintaining harmony and civility in Scotland will not be an easy task, we have to be alert and ready to challenge these negative factors. Already there are some dark clouds on the horizon.

At the Edinburgh International Book Festival in August, Andrew Marr noted that the deepening debate has become very aggressive and risks unleashing a toxic brand of anti-English feeling. This from an individual who, whilst he has lived for decades in London, reaffirmed his loyalty to Scotland by saying that he would choose a Scottish passport over an English one should the Union be dissolved. Unsurprisingly, Marr is alive to the fact that a Yes vote would entail damaging consequences for the rest of the UK, resulting in it being a smaller figure on the world stage, with implications for its permanent seat in the UN Security Council and reduced voting power in the EU. Both sides in this referendum may turn out to be losers.

Size matters
For Scotland and the rest of the UK, global considerations are critical. John Kay, a Scot who is one of the UK’s leading economists and former adviser to the First Minister, wrote recently that the degree of economic independence available to a small country in a global market for goods, services and capital, is inevitably limited. Having had practical experience in the Northern Ireland Office, which entailed regular contact with the Republic of Ireland, this strikes a chord. For both parts of the island, an intimate relationship with a larger entity, whether with the UK for the North or the EU for the South, has been fundamental in their economic (and social) progress. The UK single market has allowed Scotland to flourish. Scottish exports twice as much to the rest of the UK as it does to the rest of the world combined.

Increasingly, in the global economy, the size of a nation’s economy is becoming aligned with the size of its population. Witness the present slow but inevitable transfer of economic, and in the process political, power to countries such as China and India, each with approximately double the population of Europe. Indonesia, Mexico and the Philippines are making huge developmental strides. Africa, with powerful assistance from Chinese inward investment, is developing apace. With money and technology increasingly mobile in the global economy, size matters.

Professor Gavin McCrone makes clear in an excellent new book (Scottish Independence: Weighing up the Economics) that it would be a huge mistake to think that in an interdependent world, Scotland could pursue policies without regard to how other states might respond. Earlier this year Alex Salmond was unequivocal regarding Scotland’s membership of the EU. It would be automatic given the supporting legal advice received by the Scottish government, he declared. There was only one problem – the supporting legal advice, which bizarrely the Scottish government fought in the courts not to disclose, never existed in the first place.

In a letter to the House of Lords Economic Committee on 10 December 201. EU Commission President Barroso made clear that if parts of a territory of a Member state would cease to be part of that state because it were to become a new independent state, the treaties would no longer apply to that territory – in other words, a new independent state would, by the fact of its independence, become a third country with respect to the EU and the treaties would no longer apply on its territory. Regarding applicant states, Barroso cited Article 49: ‘If the application is accepted by the Council acting unanimously, an agreement is then negotiated between the applicant state’. It is not my intention to argue that Scotland would be refused admission into the EU. But undoubtedly difficult negotiations will ensue.

The currency issue will be the most problematic. Over the past 25 years, the SNP have adopted at different times the stance of supporting an independent Scottish pound, the Euro, and now, despite the First Minister describing it as a millstone around the Scottish neck, the pound sterling. They are adamant that their principal objective – to break up the fiscal union with the UK – will ensure complete control over the monetary and fiscal levers in an independent Scotland. But by willingly entering a monetary union with the rest of the UK, representing 91.5% of the monetary union population, there is no way that the borrowing and expenditure levels of an independent Scotland, at 8.5% of the entity, would not be subject to oversight and considerable control by the rest of the UK. This is clear to those in the SNP like former leader Gordon Wilson and deputy leader Jim Sillars, who describes the proposed currency union as ‘a policy waiting to be torn apart’. The SNP would be well advised to negotiate with the UK government on the basis that they will fail and will have to adopt their own Independent currency.

It is insane to contemplate any monetary union other than on terms agreed by the UK The first question any UK government will ask is: who will provide Lender of Last Resort to a foreign country, where in 2008 two of its banks were bailed out to the tune of 211% of the Scottish GDP, if there is little control over the tax and spending to which the larger (UK) entity is exposed? It is this very issue which has paralysed the Eurozone since the global financial crisis in 2008, with Germany consistently refusing to bail out what they view as other profligate countries. The House of Lords Economic Committee pithily states that ‘the proposals for the Scottish government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful’.

The SNP government seeks to convince people that the transition to an independent Scotland will be seamless. They have announced that in the event of a Yes vote, Scottish independence will be declared in March 2016, sixteen months after the referendum, in a midnight flag-swapping ceremony at Edinburgh Castle. It is fanciful to imagine that our ties can be severed and an independent country established in a timescale shorter than that taken to re-organise the Scottish Police forces. The reality will be years of negotiation and accompanying uncertainty. As Professor John Kay has stated, no one knows what an independent Scotland would actually be like since protracted negotiations between a putatively independent Scotland, the rest of the UK and other international bodies is inevitable. Negotiations with bodies such as Bank of England on currency, EU on membership application, NATO, where it has already been made clear that Scotland could not join if it was engaged in a territorial dispute with the rest of the UK over Trident, and now the Commonwealth, where the Secretary General has stated that Scotland will have to reapply if it was independent. So whilst it is far from clear what is really meant by an Independent Scotland as presently advocated by the SNP, it is clear that the vision as presently articulated provides no comfort to the electorate that ripping apart the economic cohesion we presently enjoy will yield a wealthier and mode prosperous Scotland.

The referendum will be one of the most important democratic decisions we will be required to exercise. Opinion polls show that those advocating independence are lagging behind considerably. But much can change in 12 months. In 1995 Quebec voted No to separation from Canada by the slenderest of margins – 50.58% – despite polls showing margins of 60:40 against just 12 months earlier. So it is wise to guard against delusion. Self-delusion, as witnessed in the recent global financial crisis and in the ill-fated Darien scheme, which precipitated the 1707 Act of Union, is the first step to disaster.

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Diversify the sources of lending for our small businesses

Here is my article with David Davis in today’s FT

I would rather see finance less proud and industry more content”. Those words were spoken by Winston Churchill almost 90 years ago, but should serve as a mission statement for our financial industry and parliamentarians today. From money laundering to mis-selling, Britain’s banking industry has failed its customers. The Parliamentary Banking Standards Commission, set up to examine how the industry behaved, found that standards were low and the culture was rotten. This reinforced the comments of Adair Turner, former FSA chairman, who branded much City activities as “socially useless”. With assets worth 492 per cent of Britain’s annual gross domestic product, the banking sector is still too large to be stable. Worse still, its failure to lend threatens economic recovery. We need innovative ideas to get businesses moving without having to rely on the banks. Over the past four years we have seen a series of futile attempts to increase lending to business and stimulate the economy. Project Merlin and Funding for Lending schemes have had limited impact. These failures are costly. British businesses currently get 80 per cent of their finance from banks; their US counterparts raise 80 per cent of their finance through capital markets. It is no coincidence that the US economy is growing and creating new jobs while the UK lags behind. For British business to catch up we need a growth agenda that creates jobs and a diverse financing system that breaks the banks’ stranglehold on lending. Research out today shows how to so so. A recent survey by The New City Network, a think tank, revealed that, of the companies refused loans, 93 per cent only approached banks in their search for funding. In contrast, those that sought more diverse financing – from invoice discounting and mezzanine loans to venture capital and private equity – were more successful. The lesson is clear; when it comes to borrowing, British business needs more options. Diversifying the financing of small and medium-sized businesses is not just a job for experienced venture capitalists. The first and most obvious opportunity to do so lies in the £750bn of deposits idling on balance sheets of big UK businesses. If these companies took even a fraction of this money and invested it in partnerships with SMEs and start-ups, the benefits for both sides – and the economy – could be huge. For the large companies, it would bring new ideas and products to their business. For the small companies, it would provide the funds required for them to grow rapidly and create jobs. There are 4.8m SMEs in the UK, employing 60 per cent of the workforce and representing 50 per cent of our GDP. It is these companies, not the FTSE 100 giants, that create the most new jobs. With better access to finance they could create another two million jobs across the UK. For small businesses, the financial crisis has made access to bank finance much more difficult. With banks facing consolidation and deleveraging, there is simply not enough money available to allow SMEs to fulfil their potential. One government review estimated that, in the next three years alone, there will be a funding shortfall of between £84bn and £191bn. This is a massive wasted opportunity. Reliance on bank finance also creates a mismatch between the risk that entrepreneurs take and that shouldered by the banks, whose incentive is not growth, but a fixed return. Small, high growth firms often need loans before they start generating revenue, and may not be able to make regular loan repayments straight away. Partnerships between large companies and SMEs could provide the flexible funding they need. Debt can be used very successfully, and access to the bond market for more mature SMEs should not be overlooked, but we have become too focused on one type of funding, and we are, as a result, in danger of failing our entrepreneurs. We urgently need to develop and encourage new, sustainable and secure sources of finance. It is time to make financial industry less proud and our SMEs more content. Our message to policy makers is simple: diversify lending or be damned.

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The Economic Implications for the United Kingdom of Scottish Independence – my speech

: My Lords, it is a pleasure to follow the noble Lord, Lord MacGregor, in this debate. I am open to intervention if need be on that issue. I thank him for his chairmanship. Allied to the question asked by the noble Lord, Lord Steel, the committee deliberately visited both Edinburgh and Glasgow, and spoke to the leaders of every party, including the former Chancellor, to the leader of Glasgow City Council and to business people. The only person missing was the First Minister. He would not come along to engage in the debate. That was an omission from the Scottish Government on this very important issue.

The debate in Scotland will centre around two themes: identity and economics. On the issue of identity, there is an assumption that if one feels intensely Scottish one will vote for independence. The paradox is that the debate in Scotland will not be about how Scottish one feels but how British the people of Scotland still regard themselves. That is according to the Scottish Social Attitudes survey. So it is about the degree to which people in Scotland still share some sense of fellow-feeling with those living elsewhere in the United Kingdom. That will be central to the choice that is made. It is important that we highlight that in the debate in this Chamber today. It will come down to whether Scots feel that they can assert their Scottishness by parting with the unionist part of their soul.

Michael Ignatieff, the UK journalist and leader of the Liberal Party in Canada, has a number of cautionary words for us in that area, because he took part in a referendum in Quebec. He said:

“We learnt the strongest argument for leaving countries as they are turns out to be that most people don’t want to choose between different parts of their identity”.

He added that post-referendum in Canada,

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“Canadians were able to joke that what Quebeckers really wanted was an independent Quebec inside a united Canada. I suspect a majority of Scots want something similar”.

I was interested to see the Early Day Motion put down in the House of Commons on Dundee’s bid to become the UK City of Culture in 2017. It stated:

“That this House welcomes the decision of Dundee City Council to bid to become UK City of Culture in 2017… and wishes the city of Dundee every success in its bid to become UK City of Culture in 2017”.

It was signed by two prominent SNP Members of the House of Commons. Maybe there was an element of identity confusion there, along with the rest of the Scots.

The conclusion on identity is that both sides need to engage. If this is about a sense of Britishness, we cannot stand back; there has to be full engagement. The letter to which the noble Lord referred was from the Chief Secretary to the Treasury on 10 June. I commend every noble Lord to read paragraph 9 of that letter, because more pressure needs to be put on the British Government. Otherwise they will seem to be complacent, since the evidence shows that we must demonstrate that sense of Britishness.

What has characterised the debate in Scotland and elsewhere to date is the lack of good information. That is why it was wise of the Economic Affairs Committee, under the chairmanship of the noble Lord, Lord MacGregor, to start this debate. At the beginning, there was a sparsity of information, indeed a reluctance to talk, on the part of business. Rupert Soames, the chief executive of Aggreko, which was based in my former constituency and started life as a very small company—a two-man business—and is now a FTSE 100 company, built his new headquarters in Dumbarton. It was the last thing he did before I stood down from the House of Commons. He told the Committee that if business opens its mouth, “bile and ire” rains down on people, the language is intemperate and business people feel that there are better things to do than be hauled over the coals.

The situation is now changing, and one thing that we have to remember is that the tone of the debate will matter greatly. Michael Ignatieff said that the referendum in Quebec produced fracture and division. We want to minimise that, because we have to live with each other after this referendum. That tone is still very important, but the uncertainty remains and I am glad to see that the CBI, the Scottish Council for Development and Industry and universities have been participating in this debate in asking the question.

Along with lots of others, I have no doubt that if Scotland decides to become a politically independent nation, it can do that, but the crucial question is how much economic independence Scotland will achieve. Jim Sillars, a former leader of the SNP, says, “Not very much”. That is why he rejects the proposals by the present SNP Government. Professor Gavin McCrone, a most esteemed economist for the Scottish Government over the years, has said that currency choice is the most important economic decision that Scotland will make.

Over the past 25 years, the Scottish National Party has adopted the stance of supporting an independent Scottish pound, then the euro and now the pound

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sterling, but the First Minister is on record as saying that the pound is a millstone around the Scottish neck. That is a most inauspicious start to a monetary union between Scotland and the rest of the United Kingdom. If we go ahead with this, it will raise the most complex problems of cross-border monetary policy, taxpayer exposure and multiple financial regulators. We have only to remember the crisis in the financial services in Scotland in 2009, when both our major banks, RBS and the Bank of Scotland, were bailed out to the tune of 211% of the GDP of Scotland. That is the extent of the issue if problems arise as a result.

Any monetary union can come about only on terms agreed by the UK Government. The question then will be: who will provide the lender of last resort facilities to an independent country if there is little control over the tax and spending risk to which the larger entity is exposed? The committee put it in very straight language—language with which I agreed—when we said that,

“the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful”.

We have to go back to square one in how we approach monetary union. It is for the Scottish Government to come up with proposals, vague as they are at the moment.

Another area that affects us is the issue of the single market in both domestic and European terms. If the integrity of the domestic single market has to be maintained, a lot of thought must go into the relationship between manufacturing and the financial sector on both sides of the border. I mentioned Aggreko. The chairman of Aggreko said that for his FTSE 100 company, it would impose a permanent layer of additional complexity, with headquarters and manufacturing in Scotland and listing elsewhere. We received a lot of evidence from the financial services community, particularly in Edinburgh, on that point, because 96% of its financial products are sold elsewhere in the United Kingdom, with 4% being sold in Scotland.

The issue of the single market in Europe will also matter. I know that the noble Lord, Lord Kerr, has written extensively on the subject and made very wise comments on it. We have to assume that there will be a smooth entry, but there are big question marks over whether there will be. That smooth entry might provide some reassurance, but it will not provide much if the EU imposes tougher membership conditions relative to those of the rest of the United Kingdom in, say, financial regulation and employment law. The question that that sparks is: will that weaken Scottish competitiveness with the rest of the United Kingdom?

One could say that that being the case, the Scottish Government might soft-pedal the negotiations on EU entry to delay such problems, but that would be a mistake. It would also be a mistake for the British Government not to come out with further information, as we have required. Professor John Kay, in giving evidence, said that post the referendum, that will entail years of complex negotiations. We must face up to that. We should not minimise the complexity of the negotiations but start to understand what the issues and problems are.

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Is there a climate of fear and uncertainty in Scotland today? Yes, there is an element of that. That was articulated by the leader of Glasgow City Council. It is for us to reduce that climate of fear and uncertainty and speak to one another in a civilised tone in this debate.

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Parliamentary Commission on Banking Standards Report

Today is the publication of the PCBS report. Here is my opinion.

Money laundering, forgery, fraud, corruption – if you do the crime, you do the time. It seems that’s the case everywhere but banking. This is one conclusion arrived at after a year on the Parliamentary Banking Standards Commission (PBSC) examining the standards and culture of the industry. Why is it an off-shore island, seemingly not subject to the normal rules of society? 

There are three main reasons.

Firstly, these behemoths are too big to fail. They can maximise risk in order to boost their profits and bonuses in the safe knowledge that the poor old taxpayer is there to pick up the tab and save their institution for another rainy day.

Secondly, unlike any other business the first question they ask is ‘What level of short term profit can be made?’ Not, ‘What can we devise to serve the interests of our customers?’ but ‘What can we sell, irrespective of suitability to customers’ needs?’ A sales-based culture has pervaded the banks.

Thirdly, there is no individual accountability at the helm. All sorts of murky, on occasion illegal, activities such as Libor rigging can be taking place, but when it comes to the top echelons there often exists a “no see, no tell” policy. In fact, when these ‘masters of the universe’ were giving evidence they appeared content to come across as uninformed and ignorant of events than knowledgeable. Otherwise they would be admitting responsibility.

All the scandals of banking – and there seems to be a fresh one with every new page we turned – can be reduced to one, namely that of the customer coming last. So how can we ensure the transformation of an industry crucial to the economic well-being of citizens and communities?

The PBSC report has no magic prescription – it will take many years to change banking culture, since it requires individual buy-in. But responsibility of those at the top for a ‘duty of care’ to customers is essential if a proper ethos is to permeate the organisations.

Take Payment Protection Insurance (PPI) – a product which can benefit those who find themselves financially covered if they become unemployed, after taking out a loan. But it was expensive and intentionally sold to the mass market from the mid-1990s, despite warnings from consumer groups and politicians. It became the corner stone of the profits and bonuses of the main banks until 2009.

The banks ignored the public outcry and with their muscle scared the regulator into submission. The result is all too evident today: a mis-selling bill of £15bn that could more than double – the equivalent of over £500 for every individual in the UK. Incredibly, one bank Chief Executive told us that on PPI they were “on the side of the angels”. 

An instant demonstration of a change of behaviour and culture would be for them to own up to this deceit, apologise by writing out to their customers and settling the claims quickly and efficiently. Instead we have seen delay, denial and lobbying for stricter limits on complaints.

Individual accountability of Chairmen, Chief Executives and Boards is essential. This is where the Financial Conduct Authority has to toughen up and ensure a named Board/Senior Executive is responsible for each line of activity. Never again should we hear the refrain from the regulator that when transgressions occurred and they tried to pinpoint responsibility “the trail went cold”. We cannot help but conclude the regulator was captured, cowed and conned by the industry they were charged with supervising.

As far as pay and rewards are concerned, there is a delusional element to those who thinking they are special and worth it. Whilst the norm for society is remuneration and increments of hundreds and thousands, it is multiple of millions of pounds for senior bankers. Only by tackling the ‘too big to fail’ – and dealing with the implicit subsidy from the taxpayer – can this be brought down to more sensible levels.

In retail banking, staff need to be rewarded for the right things – delivering high levels of customer service rather than simply selling products. And this must involve removing the pressure on the front-line to sell at all costs – something that often stems from performance management schemes.

The day when a Chair or Chief Executive of a bank receives a “Thanks, I trust you” letter from a customer will be the day when the industry has turned the corner.

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Queen’s Speech Debate (3rd Day)

Here is what I had to say about the Queen’s Speech:

My Lords, today UK businesses have about £700 billion in cash on their balance sheets-money that is looking for places to invest but companies are lacking the confidence to do so. In addressing the growth strategy-which currently seems to be absent-the biggest task facing the Government is to instil confidence in people and companies. We have to recognise that there is a demand problem facing the country. That is why the austerity approach taken by the Government in the past few years has been wrong.

However, we need to ensure that confidence is based on reality. As a member of the Parliamentary Commission on Banking Standards, I am very much aware of the reality that in banking and finance the architecture has crumbled. We need not just to reform but to rebuild that from the floor up. We cannot afford to apply a sticking plaster to a system. Just how much the system has disintegrated was admitted by Adair Turner, the former chairman of the Financial Services Authority, in a remarkable interview a few weeks ago in the Sunday Telegraph. He said:

“I think we-as the authorities, central banks, regulators, those involved today-are the inheritors of a 50-year-long, large intellectual and policy mistake. We allowed the banking system to run with much too high levels of leverage, inadequate levels of capital, and we ignored the development of leverage in the financial system and in the real economy. And not only did we ignore it but we had a pretty overt intellectual philosophy that we could ignore it, because we knew the financial system was just a market like any other and whatever it did was bound to be for the good because that’s what markets are … I was surprised at the supervisory approach. I’d been on the board of a bank, I’d been involved in banks, I’d dealt with banks back in the 1980s and 1990s, and I, throughout that, had accepted the existing capital regime as a given, right? I had never gone back to basics and said, ‘Why do we allow banks to run with 30, 40, 50 times leverage?’. And neither had anybody else, funnily”.

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That includes Larry Summers, former Treasury Secretary of the United States, adviser to President Clinton and president of Harvard University-he is presently the Charles Eliot professor of economics at Harvard-who has said that everything that he has taught in economics has been called into question by the crisis. When the respected John Kay and Professor Charles Goodhart came to the Treasury Select Committee a few years ago, I asked them whether they understood risk, to which Charles Goodhart succinctly answered no. John Kay said, “I’ve been teaching risk for the past 25 years at Oxford University and what I did was throw my notes away, because nobody understands risk at the present time”.

Therefore, the situation in which we find ourselves is fragile. I suggest that if we do not go back to basics we will not solve the long-term problems that affect the financial services industry. The Prime Minister last week admitted in response to a question from the chief executive of Santander that the Government were confused and had mixed messages for the sector. As for briefings from the Treasury and the Chancellor, I have been taken aback to read in newspapers over the past few weeks that the Treasury is paving the way to sell the Government’s bailed-out bank stakes at a loss. The Times commentators, Sam Coates and Patrick Hosking, both of whom I know and are very respected, wrote recently that the Treasury wants to,

“lower public expectations over the amount that will be recovered from the sale”.
It hopes that the Parliamentary Commission on Banking Standards will conclude that the Labour Government paid too much for Royal Bank of Scotland and Lloyds in 2008.

From my point of view, there is not a chance of that happening, and it is simply not true. Alistair Darling made it clear in an article in the Financial Times last week that, on the eve the general election in 2010, the economy was growing and the Royal Bank of Scotland’s share price was 504p, which meant that the taxpayer was up £500 million on the deal. Three years later, with no growth, the taxpayer is down almost £20 billion. It is vital that we do not turn a paper loss into a real one with a hasty sell-off. The Business Secretary, Vince Cable, agrees with us on that very point. He said:

“I don’t see the need for any haste”,

as he called for the break-up of the Royal Bank of Scotland to boost competition. That is perhaps as a result of his membership of the Future of Banking Commission-on which he sat along with me and David Davis MP, who chaired it excellently-when we called for increased competition, maximum transparency and a new culture and ethos in the system where customers’ interests come first.

Three years into the life of this coalition, meaningful competition is a more distant prospect than it was in 2010. The events at Lloyds with Project Verde and the RBS sell-off to Santander, which has hit the dust, illustrate that the Government have neither leadership nor control of this situation despite being the dominant shareholder in these entities. We cannot leave the structure of the banking system to the vagaries of the market. Perhaps the time has come for us to abandon the pretence that UKFI is in control of events, in a

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situation where Lloyds has already spent more than £1 billion on Project Verde and Santander has withdrawn from the agreement with Royal Bank of Scotland after years of negotiation. We have seen everything turn to dust.

The Government need to demonstrate leadership by producing a blueprint of their own for a changed financial service. Perhaps, as the noble Baroness, Lady Kramer, who is an excellent member of the Parliamentary Commission on Banking Standards, mentioned earlier, that could be in conjunction with the regional partnership initiative of the noble Lord, Lord Heseltine. We have heard calls today for decentralisation from Westminster, for a rebalancing of the economy and for other parts of the country to share in prosperity.

However, if we do it in a hurry, it will be messed up. I suggest that the date of the next general election should not be the deciding factor in reforming the architecture of the banking system. This is a one-off opportunity. Mention has been made of the situation in Germany, where the privately owned Mittlestand companies are thriving because of their close regional relationship with the 3,000-plus independent banks, whose managers understand their businesses. Handelsbanken in the UK had a favourable press because of the same style of engagement at local level.

If we are serious about rebalancing the economy, developing SMEs and revitalising manufacture, this is the time. There has never been a better opportunity to use the leverage that we have. The politically myopic reactions to the situation from the spinners at the Treasury do no service whatever. Although the Parliamentary Commission on Banking Standards is doing excellent work, it is not the forum to produce a blueprint for the Royal Bank of Scotland and Lloyds. It can point the way forward, but the blueprint is for the Government. That is not our main focus. Our focus when we were established was clearly to look at culture and standards in the banking and financial services industry. RBS should not be a big element of our report, but we should recognise that there is an opportunity to do something there for the manufacturing and regional banking sector.

Also, we do not at present know what is on the banks’ balance sheets. Less than two weeks ago, the Financial Policy Committee said that British banks have a £25 billion shortfall in capital overall. The other day, the Local Authority Pension Fund Forum, representing 55 public pension funds, stated that the Royal Bank of Scotland has £10 billion of undisclosed loan losses on its balance sheet because it is using accounting standards that allow loss to be booked only after it is incurred, however likely a default may be, thereby underplaying the likely losses. We have been here before with accounting standards, when the banks, in their heyday, booked options and their own bonuses and expenses based on expected profits. A year of two later, however, the profits did not materialise. It is a sensitive and shaky situation.

Only the other week, I had discussions with HMRC after the noble Lord, Lord Lawson, and I, in a sub-committee of the Parliamentary Commission on Banking Standards, examined Barclays and the structured capital management vehicle, which the noble Lord accurately

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referred to as tax avoidance on an industrial scale. It is a black box. Following my discussions with HMRC, the head of the business unit wrote to me to say that HMRC has 92 issues with the big banks at the moment and £3.2 billion is under consideration in relation to tax avoidance schemes. Those matters have still to be determined. They will not be determined tomorrow or next month; it could take between seven and 10 years. The sum of £3.2 billion could have considerable impact on the prudential stability and health of banks. The banks have set aside £16 billion already for PPI mis-selling-perhaps that is a euphemism for fraud-and that figure is not final. The situation is fragile and illustrates the folly of making definitive judgment calls before a general election. We are presently clawing our way in the dark. Incentives are at the heart of the matter in banking.

At the end of the day, we need that leadership from the Government. A quick disposal of shares on political grounds will negate the golden opportunity for the Government to effect real change. I submit that the customers’ interest, both personal and economic, requires a responsible, mature approach to the disposal. When I was chairman, the Treasury Select Committee was clear that we wanted the taxpayers’ interest to be paramount. The Public Accounts Committee has followed that up and said in its report of 2012:

“The taxpayer has invested £66 billion in RBS and Lloyds shares and it seems that their ‘temporary public ownership’ will last for some time if getting value for our investment remains the most important objective for Government … We are concerned that a short-term decision to sell might undermine long-term realisation of value for the taxpayer. The Treasury, with UK Financial Investments Ltd, should set out a strategy for its share sales, and how it will prioritise the government’s various objectives so that the taxpayer’s interests are protected in any eventual sale”.

Hope and confidence are at the centre of that. If we expect to take taxpayers along with us, we need to have that mature and fundamental look at the system.

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The debate that still needs to be had.

Here is an article I wrote for the Huffington Post:

It is now six months since the LIBOR scandal erupted – and we are still trying to assess how much damage that and other scandals have done to public trust in the banks. There is a widespread belief that the passing of the Banking Reform Bill and the report of the Parliamentary Committee on Banking Standards will draw a line under LIBOR and other problems, a belief compounded by the fact that our national debate about the banks has to date been limited to a highly technical discussion of how to create a banking resolution system that protects the public purse from a systemic collapse.

But banking professionals know that trust is not so easily restored. I was recently at a meeting of bank board chairs where a general consensus was expressed that it would take twenty years for the public to regain confidence in the integrity of our system. They recognise that the social contract with finance has broken down. Those same chair people added that they cannot restore trust and confidence alone. Even after the memory of the crash and the scandals has faded, and the banks have proved they can respect regulation, these institutions will need help to earn back the faith and goodwill they have squandered. It will be a long time before we feel as a nation that we can bank on the banks.

Yet we should be under no illusions that public confidence in the banking system is integral to our economic success and security. Depositors need to feel certain about the integrity of our financial institutions. So do investors and markets. Furthermore, our ambition to “re-balance” the UK economy requires us to have a healthy and vibrant finance sector, trusted by business and consumers. We have to debate finance because finance is pivotal to our future as a nation.

It is also pivotal to our success as a global player, however. The change in the world economy over the next decade will be enormous. But British businesses will only be able to grasp the opportunities presented by an unprecedented growth in the world economy – the likely doubling of the world economy predicted by Jim O Neill of Goldman Sachs, and others – if British finance is there to sustain the efforts of British companies. We need a financial sector that works in partnership with British businesses to help them take advantage of growing global markets.

Trust in Britain’s financial institutions must be restored for the sake of the investors, corporations and countries that are the clients of Britain’s broad business services, not just banking, but everything from consultancy to insurance, legal services and audit, reflecting the fact that both British firms and international firms base themselves here. At present, the service sector is one of the UK’s greatest assets. It is hugely competitive on the international stage. In 2010 it generated a trade surplus of £40billion – much more than any other sector. Such success is unique amongst our international peers, where the contribution of financial services to net exports is negligible. As the ‘growth – 8′ markets expand, we will continue to attract their business services only if Britain is seen as the safest and most trusted global financial centre.

Debate is the key to regaining trust: informed discussion by the banking industry, financial professionals at all levels, Parliament, the media and others. This is why an all party group of parliamentarians has taken the step of setting up a think-tank which can begin this necessary process. And we will be starting this debate by asking: what is finance for? We must uncover the mistakes that led to finance flowing in the wrong direction in the last decade. We can expect to uncover some difficult answers. Looking forward, we need to establish what role we want finance to play in our economic life in the 21st century. Restoring the social contract between finance and the nation requires that financial institutions return to providing both the lending and the investment capital essential for economic growth. They must fulfil their social obligation to society and the wider economy. Everyone is clear what the balanced economy which we are trying to achieve looks like: housing that is affordable; more ‘gazelle’-like SMEs financed by more venture capital funds; up to date infrastructure; and an international financial and professional services sector that is both world class, and the correct size versus the rest of the UK economy.

There are hard questions to be answered before we can achieve that vision: we must work to restore the reputation of our banks around the world, decide how much power we give them, establish what their primary functions are in respect of rebalancing our economy, in relation to British businesses and consumers and their role in world markets. The questions are hard but the debate is absolutely essential to our future.

To read the original article, please follow this link:

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Financial Services Bill – Amendment number 116ZB

Wednesday 28th November 2012

Amendment number 116ZB – Continuous Payment Authority

116ZB: After Clause 99, insert the following new Clause-

“Continuous Payment Authorities: debtor’s rights

(1) This section applies where a debtor has granted to a creditor a continuous payment authority for payment of any debt arising under a regulated agreement.

(2) Prior to the debtor granting the continuous payment authority, a creditor must give the debtor a statement of the debtor’s rights in relation to the continuous payment authority.

(3) A debtor may at any time cancel or vary a continuous payment authority.

(4) A cancellation or variation of a continuous payment authority must be signed by the debtor and bear the date of the signature.

(5) A bank is obliged to comply with immediate effect to a cancellation or variation of a continuous payment authority signed by the debtor.

(6) A debtor must inform the creditor within 24 hours of signing the cancellation or variation that the continuous payment authority has been cancelled or varied.

(7) In this section “continuous payment authority” means an instruction or mandate given by a debtor to a bank to pay a fixed or variable sum to a creditor.”

Lord McFall of Alcluith: This proposed new clause seeks to make the law on continuous payment authorities, sometimes referred to as CPAs, clearer and more weighted in favour of the debtor. As noble Lords know, these are harsh times for many working families
under pressure from rising food and fuel costs and living in fear at the prospect of job loss and insecurity. They know only too well how difficult it is to stretch a wage from month to month, week to week, and even day to day. It is no wonder, then, that frequently these hard-pressed families and wage earners find that their money is simply not enough to stretch to all their needs from payday to payday, and that many of them have recourse to what are euphemistically called short-term lenders, more popularly known as payday lenders.

Consumer Focus research published in May this year showed that many banks’ customer service advisers were unclear about the rules concerning continuous payment authorities and could be giving customers incorrect advice as a result. A continuous payment authority is a type of regular, automatic payment arrangement set up by using a debit or credit card. It is like a direct debit. Under a CPA, consumers give a supplier or retailer permission to take payments on their cards. However, unlike direct debit, there is no written communication between the individual and the bank. Although CPAs are used by many businesses, including insurance companies, magazine companies and gyms, my concern is about how they are used by payday lenders. CPAs are sometimes known as recurring payments and are often used in the short term or payday loan market. Many payday loan companies use CPAs to retrieve loan payments from customers. This involves the debtor giving the company his or her card details and authorising the lender to take regular payments from the account.


Various reports suggest that customers are generally not aware of the right to withdraw from CPA schemes. For example, a report in the Guardian of 2 May this year stated:

“Consumer Focus raised particular concerns about continuous payments to payday lenders set up on the accounts of people with debt problems … cash-strapped consumers are having an even tougher time paying priority bills such as their rent, mortgage or heating costs due to some payday lenders ‘dipping’ into their account”.

The Consumer Focus research raised particular concerns about continuous payments to payday lenders set up on accounts of people who already have debt problems and recommended that clear and accurate information be provided to these customers from banks and loan companies, particularly regarding the right to cancel.

All that is fair enough and I know that the Department for Business, Innovation and Skills and the OFT have been doing work on this. Indeed, the Office of Fair Trading issued a warning to payday lenders on 20 November by opening formal investigations into several payday lenders over aggressive debt collection practices. It published a progress report last week as part of its compliance review of the payday lending sector and highlighted concerns about the adequacy of checks made by some lenders as to whether loans will be affordable for borrowers, the proportion of loans which are not repaid in time, the frequency with which some lenders roll over or refinance loans, the lack of forbearance shown by some lenders when borrowers get into financial difficulty, and debt collection practices. It also published revised debt collection guidance last week, focusing on continuous payment authorities. Under the heading “Deceptive and/or unfair methods”, paragraph 3.7 of the guidance states:

“Dealings with debtors and others are not to be deceitful and/or unfair”.

The OFT then gives examples of unfair or improper practices. I realised that the concept of misusing a continuous payment authority covers no fewer than five pages in the OFT report. Some of the examples made me fearful for the people who enter into these loans and give a CPA authority to their lender.


I shall give the House a number of examples of bad practice to be avoided, as mentioned in the OFT report. The report states:

“Using the CPA other than as set out in the credit agreement or without the informed consent of the debtor”.

It also refers to debiting a higher or lesser amount than agreed and debiting an account before or after the due date. The report also states:

“Using the CPA in a manner which is unreasonable or disproportionate or excessive in failing to have proper regard to the possibility that a debtor is in financial difficulties”.

The last example includes seeking payment before income or other funds may be reasonably expected to have reached an account, seeking payment where there is reason to believe that there are insufficient funds, or using the CPA after the debtor has informed the creditor that he or she is in financial difficulties and cannot afford to repay.

Further, the OFT identifies as a problem:

“Failing to document the CPA appropriately or to explain it adequately before entering into the credit agreement”.

Sometimes a credit agreement is not complete because relevant terms are missing; or it is written in unclear, unintelligible language; or it is confusing, unfair and misleading. The OFT guidance expects the agreement to identify that the CPA can be cancelled by the debtor or that alternative repayment options may be available.


It is all very well to issue guidance and I sincerely hope that guidance will be followed. However, my reading of this report convinces me that much more than guidance is required in this case. Such blatantly unfair treatment of consumers should not be restricted to a matter of guidance. This proposed new clause ensures that debtors are informed about their rights and that only the debtor may cancel or vary a CPA. Furthermore, the debtor’s bank is obliged to comply with the debtor’s instructions. We ought to legislate to protect debtors in straitened times.


We abolished imprisonment for debt in the Debtors Act 1860. However, debt itself can create a prison and the misuse of power by creditors can be as hard a punishment as being jailed for debt. I hope the Government will accept this amendment, realising that the balance of power between debtor and creditor must be redressed in favour of the customer. I beg to move.”

The rest of the Amendment discussed yesterday can be found here:

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Payday Loans – another problem to sort out

Today I am promoting a new clause in the Financial Services Bill to protect borrowers from the misuse of Continuous Payment Authorities by pay day lenders. These are harsh times for many working families. They are under pressure from rising fuel and food costs and are living in fear at the prospect of job loss and insecurity. They know how hard it is to stretch a wage from payday to payday. Many of them use payday lenders to bridge the gap in their finances.


Continuous payment authorities are set up by using a debit or credit card which allows lenders to withdraw funds from a debtor’s bank account. Various reports suggest that customers are not aware of their right to withdraw from CPA schemes and Consumer Focus and the OFT have done good work in highlighting the problems.


Last week the OFT issued guidance to payday lenders about how CPAs are used. The OFT report contains a catalogue of potential misuse as examples of ‘what not to do’. These include debiting a higher or lower amount than agreed, using the CPA without informed consent from the debtor and using it in an unreasonable or excessive manner.


Guidance is all very well but the law needs to send a clear message to those who abuse their powers as creditors. My new clause is designed to ensure that debtors are informed about their rights and that only the debtor can vary or cancel a CPA. We ought to legislate to redress the balance in the debtor/creditor relationship and my new clause is designed to do that. We ought to legislate to protector debtors in straightened times. We abolished imprisonment for debt by the Debtors Act of 1860. However, debt itself can create a prison and the misue of power by creditors can be as hard a punishment as being jailed for debt.


It’s time for the balance of power between customer and company to change – and that must be done by placing power and firmly in the customer’s favour.

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Labour can no longer duck tough choices on spending

John McFall, Lord McFall of Alcluith

This article was written by John McFall and Andrew Harrop in the New Statesman. To see the original article, click the link below:

Within weeks, George Osborne will use the Autumn Statement to announce his spending plans for the early years of the next parliament. He is expected to set out further cuts and in doing so hopes to lay political traps for the opposition, especially on welfare cuts.

Political gamesmanship is trumping compassionate politics. Spending choices should be about how to minimise the pain and suffering families must endure as a result of today’s savage economic forces. Instead, the government is intent on targeting the least popular groups and protecting those who are most likely to vote.

The Labour Party can no longer duck questions about what it would do differently with power. It needs to start developing an alternative so that before the next election it has a clear direction on spending to show it is a credible and caring contender for government. And if the Liberal Democrats want to keep open the option of working with Labour after 2015, they too need to say what they would do differently without their Tory partners.

Labour, in particular, will have to find a formula that proves the party can be responsible with the public finances, whilst avoiding being locked into Conservative spending limits. The Tory policy of eliminating the structural deficit by 2017-18 will come at a cost of perhaps £50bn in further cuts or tax rises. By contrast, Barack Obama’s re-election shows the political and economic dividends of an offer of intelligent spending in place of grinding austerity.

Much will depend on the state of the economy by 2015, but if growth returns there is scope for cautious optimism. For example, a government can close the deficit over time if it is prepared to freeze public spending while the economy expands. However, the starting point for spending decisions should be the end-point: what do politicians on the left want the public finances to look like by 2020? Of course, the deficit needs to brought under control, but we also need to ask what proportion of the economy should be devoted to public spending. Today, spending remains well above the post-war average of 42 per cent of GDP but Osborne has deliberately planned to overshoot this number in a bid to permanently shrink the size of the state.

Labour could offer a distinctive but mainstream alternative by simply pledging a return to trend. This would mean taking a little longer to close the deficit than the Conservatives plan and substituting tax rises for some of the planned cuts. The result would be more flexibility to address the huge social pressures the economic crisis has caused.

But the need for painful decisions will not disappear if a 2015 government signs up to spending limits which are less severe than Osborne’s. Even if spending remains flat overall it will feel like another parliament of austerity, and some budgets will need to shrink to pay for others to grow. Embracing this mathematical inevitability should not be the preserve of the left’s self-styled fiscal hawks, who wear a spending hair-shirt as a badge of honour. It’s time for an open, frank and respectful conversation, which draws in the full range of opinion on the centre-left.

This week, that process begins with the launch of the Commission on Future Spending Choices. It is a year-long inquiry hosted by the Fabian Society, whose associations with the British welfare state date back more than a century. For we think it is the cheerleaders, not the adversaries of government, who are best placed to consider how the state can live within its means.

The commission will look at where to spend and how to cut. We will explore whether economic reforms can reduce demand for social security or whether cuts to entitlements are needed. We will consider how public service budgets should be shared and question where provision will need to change in the face of perhaps ten years of flat or falling budgets. Lastly, we will consider how public spending can do more to boost growth, employment and earnings.

The left faces hard choices if it is to earn economic credibility but stay true to its values. But the choices are not as bad as the Conservatives would have us believe. Labour can reject Osborne’s doom-laden plans and offer an optimistic alternative. But to return to power the alternative must be clearly specified, including the painful decisions. The UK will be far less wealthy in 2020 than anyone would have predicted in 2005 and public spending has to adjust to this reality. But as long as the economy returns to decent growth, Britain can afford a strong and compassionate welfare state.

John McFall is a Labour peer and the former chair of the House of Commons Treasury select committee.

Andrew Harrop is the general secretary of the Fabian Society.

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Lord McFall slams Govt over impact of RPI change on pensions

This is an article which has appeared on Money Marketing. See the page here:

Former Treasury select committee chair Lord John McFall has attacked the Government over proposed changes to the calculation of the retail prices index and its impact on pensions.

McFall was responding to a question tabled by Lord Naseby on the Office for National Statistics’ consultation to change how RPI is calculated.

The ONS is consulting on whether to calculate RPI in the same way as the consumer prices index, which is usually lower.

The moves could see the RPI drop by up to 1 per cent, hitting index-linked pension funds and pensioners. The National Association of Pension Funds warns it could have “huge implications” for pension investments.

McFall said: “The Government knows that pensions funds are major investors in Government debt and any change to index-linked bonds will have far reaching implications.

How will the growth agenda, which is non-existent right now, prosper without pension funds that the Government wants to get involved in infrastructure?”

“And with pensioners taking even less from their pension with the CPI, why are we disproportionately paying for the Government’s deficit reduction programme?”

Lord Naseby hit out at the “quiet as a mouse” ONS consultation, claiming the only beneficiary from the changes is the chancellor.

Speaking for the Government, whip Lord John Gardiner said it is an independent, technical consultation.

He said: “It is a consultation and it is only at a later stage in special circumstances that ministers would become involved.

“If a recommendation was made by the ONS, then the Bank of England would be consulted on whether any proposal would be a fundamental change to the calculation of the RPI that would be materially detrimental to the interest of holders of relevant index-linked gilts.

“It is only at that stage if the Bank considered a change to the RPI to be fundamental and materially detrimental that the agreement of the chancellor is required. None of us should prejudge an independent consultation.”

The ONS consultation began on 8 October and closes on 30 November. Any changes will be announced in January and implemented in March.

Royal London head of corporate affairs Gareth Evans says: “Fiddling around with RPI just gives people another reason not to take out a pension if they don’t don’t what they are going to get in return.”

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