Banking: Accounting Standards

Monday 19th March 2012 Lords Chamber

Question

14:45

Asked by

[Lord Flight]

To ask Her Majesty’s Government whether they have any plans to review the application of international financial reporting standards accounting standards to the banking sector.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, following the financial crisis, the International Accounting Standards Board has taken steps to revise international valuation standards for complex financial instruments. The question of whether there should be a distinct accounting regime for banks was raised in the preliminary report of the Financial Reporting Council inquiry into going concern, chaired by my noble friend Lord Sharman. The panel is considering the response to this report at present. We await its final report with interest.

[Lord Flight]

My Lords, in reply to a question on 19 December the Chancellor of the Exchequer advised that there needed to be a debate about the role of IFRS in the banking crisis. On 19 January, the head of financial stability at the Bank of England commented in a speech that banks needed accounting standards other than IFRS. Does the Minister agree that IFRS contributed to the banking crisis, as it served both to exaggerate profits and capital in good times and vice versa in bad times, and is in need of review?

[Lord Sassoon]

My Lords, having a look at accounting standards in relation to banks is certainly significant. I would not go as far as saying that IFRS had a fundamental role in relation to the financial crisis. There is not significant evidence of that although, as I have had it rather neatly described, you could perhaps describe accounting standards as an accomplice after the fact rather than as being responsible. There are issues that very much need to be looked at. The review that the IASB is doing, very much with the encouragement of the G20, of the financial instruments standard known as IFRS 9, the work that the Financial Reporting Council is doing, which I have referred to, the inquiries coming out of your Lordships’ committee and the most recent hearing last week will all contribute to an important ongoing debate.

[Lord Lawson of Blaby]

My Lords, is my noble friend the Minister aware that my noble friend Lord Flight is on to a very important point? It is quite clear that accounting standards have created a major reduction in stability in the banking sector. They had a major part to play, and IFRS has simply made this worse. Has my noble friend the Minister read the Hansard report of the debate in the Grand Committee of Wednesday last week, in which these matters were among those discussed? If not, will he please do so and will he also listen to what Mr Andy Haldane, the director of banking stability at the Bank of England, which is responsible for these matters, has had to say on them?

[Lord Sassoon]

My Lords, I have not read every word that was said in the Committee last week, but I have certainly read the very interesting remarks of my noble friend Lord Lawson of Blaby and the very challenging seven proposals that he made, many of which the Government are already acting on in the structure of banking and regulation. I do not dismiss this issue at all, but there is a tension between the transparency and other requirements of investors on the one hand and the requirements of prudential regulators on the other. There are very difficult issues of conflicting objectives here, which it may be impossible for one set of figures fully to reconcile. However, I take my noble friend’s suggestions very much to heart.

[Lord Eatwell]

My Lords, as the noble Lord pointed out, the Financial Reporting Council is playing an important role in reviewing the IFRS proposals. However, the FRC also seems to be contemplating the abolition of the UK Accounting Standards Board. Do the Government agree with this, and will it not leave the UK without the expertise and credibility necessary to make an effective contribution to the international debate?

[Lord Sassoon]

My Lords, the structure of the various bodies that fall under the Financial Reporting Council is a matter for the Financial Reporting Council. I do not believe for one minute that anything it does to the structure of the number of bodies under the FRC will weaken the very distinguished and important contribution which the UK makes to international standard-setting.

[Lord McFall of Alcluith]

My Lords, has the fatal flaw not been the ability of banks and other financial institutions to book future projected income as profits—profits which did not materialise and on which bonuses were paid, thereby skewing the incentives of the whole financial sector industry? There is a time here for reassessment, and that is a black hole at the centre of these proposals.

[Lord Sassoon]

Again, this is an important issue. The Government have taken significant steps to increase both the transparency and the FSA rules around the payment of bonuses. However, we should be careful about this. First, it is worth noting that under UK GAAP, before IFRS was introduced, banks were required to account at fair value for their trading portfolios. Of course, accounting at fair value requires assets to be marked both up and down. It is certainly the case that under IFRS there were certain portfolios that previously would not have been counted as trading portfolios, which now are. However, we have to be very careful about attributing all that went on with banking bonuses to the accounting requirements. If I may suggest so, that was a small part of what was undoubtedly a series of inappropriate behaviours at the heart of the industry.

[Lord Phillips of Sudbury]

My Lords, given the importance of the matters to which my noble friend has alluded in answering this Question, might he put a plain Peers’ guide to the intricacies of the various bodies he has enumerated in the Library?

[Lord Sassoon]

My Lords, I will see what I can do. I have mentioned everything this afternoon from the G20 through to the Bank of England, the FSB and the FRC. I will see what I can do, but it is a big ask.