Financial Services (Banking Reform) Bill
(Limited Text - Ministerial Extracts only)
Read Full debate16:16 - The House divided: - Ayes: 230 / Noes: 292 - Question accordingly negatived.
16:29 - The House divided: - Ayes: 228 / Noes: 292 - Question accordingly negatived.
John Thurso
Yes, something like that.
I am very tempted by new clauses 8 and 10, which were tabled by the Opposition. I will not vote against them, but I will not vote for them at this stage. There is an immense amount in them, but I will wait to hear what the Minister says. There is also a great deal of debate to come in the other place. I do not want to say that I am against the new clauses, but I am not sure that the wording is exactly what I would like to have seen. I ask for the forgiveness of the hon. Member for Nottingham East (Chris Leslie) on that.
On new clause 10, there was a lot of debate in the commission about the good bank/bad bank split. We ended up with a central point that we all agreed to, but a number of us wanted to go more in one direction. However, whether a good bank/bad bank split is a good idea is a completely different issue from what should be done afterwards. If one takes the view that a good bank/bad bank split is not needed, one can still consider all the points that have been put forward, including the many things the hon. Member for Brighton, Pavilion (Caroline Lucas) said could be done to enhance regional banking and credit unions. All those things are equally possible whether or not one decides that the bad bank is necessary.
To my mind the good bank/bad bank argument is separate to what one does with a bank going forward. I happen to be somebody who believes that a good bank/bad bank split is right for the simple reason that if we take the flakier assets out of the bank and put them in a run-off bank, therefore liberating the capital being used in the balance sheet to support it, capital is then available in the good bank to be lent to SMEs and individuals. It is a simple mechanism for getting more capital flowing through, but I would make the point that it is not inextricably linked.
Following on from the slightly more partisan comments from the right hon. Member for Wolverhampton South East, one thing that comes out of this process, and which I have observed right the way through it, is that United Kingdom Financial Investments Ltd has not been the most successful of bodies. We have seen that there are politics in such situations, and that trying to put a mechanism in between muddies the water. That is one of the reasons why the commission’s report made its suggestions on UKFI.
Finally, the commission very much supports new clause 8. As I said in my intervention, I do not think this matter needs legislation. What I would be looking for from the Minister is a commitment that does not require me to look carefully between the lines, but is, in fact, a further commitment.
Greg Clark
This has been an interesting debate so far, and it will be a tall order to live up to the great expectations of my hon. Friends the Members for South Northamptonshire (Andrea Leadsom) and for Caithness, Sutherland and Easter Ross (John Thurso).
This set of new clauses has the common denominator of measures that can improve competition in banking. The parliamentary commission has made it clear that competition can, and should, bring about higher standards in the banking sector. It concluded that
“effective market discipline, geared to the needs of consumers, can be a better mechanism for improving standards and preventing consumer detriment than regulation, which risks ever more detailed product prescription.”
The Government completely agree. The British banking industry, at least at the retail level, was too concentrated before the crisis. The forced mergers of the crisis have exacerbated a bad situation. It is imperative that the regulators do not regard themselves simply as regulating incumbents, but act to promote new entry into the industry.
The commission welcomed the prudential reforms contained in the then Financial Services Authority’s barriers to entry review and commented that
“the concerns of challenger banks in this area appear to have largely been addressed”.
We accept the need to go further. Accordingly, we will be adopting the commission’s recommendation that the Prudential Regulation Authority should be given a secondary competition objective, and we will table amendments to the Bill to that effect in the autumn.
Greg Clark
I am grateful for my hon. Friend’s contribution.
Government amendment 5 delivers on a commitment made in Committee to accept one of the commission’s earlier conclusions that when considering an exemption from ring-fencing the Government must have regard to any adverse effect ring-fencing provisions might have on competition in the market. The amendment ensures that ring-fencing should not be a barrier to greater competition in the market. To reassure the hon. Member for Nottingham East (Chris Leslie), it does require them to override any questions on whether the continuity objective should be breached. It is there to enable them to bear that in mind, not least for the reasons that we discussed—that competition can have systemic benefits that address some of the regulator’s objectives.
Another recommendation of the commission that we accept is the suggestion that there should be a rigorous study conducted on the benefits to consumers, and competition, of account portability. The House will know that from September the seven-day switching service operated by banks covering 99% of personal current accounts in the UK will come into operation. I do not whether hon. Members have noticed, but there is an excellent exhibition to promote the new changes to the service from September in the Upper Waiting Hall next to the Committee Corridor. It should make it easier, quicker and more secure to change bank account, helping competition, but, as my hon. Friends the Members for South Northamptonshire, for Wyre Forest (Mark Garnier) and for Caithness, Sutherland and Easter Ross said, that might not go far enough. In particular, I congratulate my hon. Friend the Member for South Northamptonshire on the consistent and forensic campaign she has waged on this issue through the Treasury Select Committee and beyond. We will therefore ask the new payments systems regulator to conduct a comprehensive review of account portability, including a cost-benefit analysis, as an immediate priority.
Mr Love
Given that the new payments regulator will take some time to set up, I hope that the Minister will keep a watching brief on seven-day portability, because there is still some controversy over the proportion of fees for the receiving bank as opposed to the bank losing the customer. This was brought to the commission’s attention; we commented on it, and I hope that he will keep it under review.
Greg Clark
I certainly will keep a close eye on that, as too, I am absolutely certain, will my hon. Friend the Member for South Northamptonshire. The arrangement is that the fees should be shared between the bank of departure and the bank of arrival, which I dare say reflects the different costs. However, we need to keep an eye on its effect on competition.
In response to the parliamentary commission’s report, the Office of Fair Trading has announced that it will bring forward its investigation into small and medium-sized enterprise banking as part of an ongoing programme of work to investigate concerns about competition in banking. The hon. Member for Nottingham East rightly wants this to go further. The OFT is engaged in a programme of work looking at all sections of the banking sector. As I think Members know, it has recently completed an investigation into the personal current account market, and on that narrow point has argued that there should not be an immediate referral pending some of the changes taking place or in the pipeline.
We have asked that that work considers the impact on the new challenger banks created by the divestments from Lloyds and RBS. The hon. Gentleman asked where they stand. My understanding is that in both cases the parent banks are looking to move forward with initial public offerings of the challenger banks and that they intend them to form part of the competitive environment. The OFT aims to conclude its programme of work next year. It will then decide whether a market referral to the Competition Commission is needed. I can tell my hon. Friend the Member for Caithness, Sutherland and Easter Ross that such a referral would not require legislation; the OFT could make one under its existing powers.
Given that commitment, which is more or less of the same time frame as that envisaged in new clause 8, and given the significant measures being implemented to enhance competition, I hope that hon. Members will agree that the new clause, which calls for such a referral in 2014, following Royal Assent, should not be adopted. It is important that the OFT completes its review in 2014, so that it can build up a file of evidence to be submitted to the Competition Commission. That would be consistent with what both the independent commission and the parliamentary commission called for: that the OFT be in a position to make a referral in 2015. The OFT’s work is absolutely in line with that.
Greg Clark
That is happening. The review that the OFT is carrying out is comprehensive—it will keep us informed in that process—and is about building up the evidence to make that judgment in accordance with exactly the time frame that my hon. Friend has set out.
New clause 15, standing in the name of the hon. Member for Brighton, Pavilion (Caroline Lucas), would require the Government to consult formally on the creation of a network of regional banks. I strongly agree that a revival of regional banking in this country is a very good thing. Yesterday in the Chamber my hon. Friend the Member for Hexham (Guy Opperman) reported on a meeting that he organised in Gateshead. I am pleased to tell the hon. Lady that a senior director of the Sparkassen, Dr Thomas Keidel, was at that meeting. He very much commended the Sparkassen model in Germany as something that could be emulated in this country. In fact, when one of the delegates objected that it was very much part of the German system and culture, which might be difficult to transplant to this country, Dr Keidel immediately pointed out that the German system was explicitly modelled on the UK system before it was abandoned in this country. I am therefore optimistic that what is proposed should be possible.
There was certainly great enthusiasm on Tyneside—indeed, momentum was being established—for launching a regional bank for the north-east. The hon. Lady might also be aware that the Cambridge and Counties bank—a joint venture between Cambridge county council and Trinity Hall, the Cambridge college—is already active and is providing lending to local small and medium-sized enterprises. The steps that the Prudential Regulation Authority has taken to license new entrants—
Mr Love
I apologise to the right hon. Gentleman for jumping in rather late, but before he leaves the issue of regional banks I want to mention one of the most promising areas, which is community development institutions. They are working at the regional and local level; however, their sources of funding could be enhanced immeasurably if community interest tax relief was set at a proper rate. I recognise that the Treasury has carried out a consultation. I am not asking the Minister to respond now, but perhaps he will at some stage inform Members of where the Treasury has got with that consultation and whether it will review the incidence of community interest tax relief.
Greg Clark
I do not know whether the hon. Gentleman will be reassured or alarmed to learn that I had not left the subject of regional banking just yet. Indeed, I want to come to the precise subject he has just raised.
The Prudential Regulation Authority’s changed procedures were referred to—by, I think, my hon. Friend the Member for Wyre Forest. It is now possible to license new entrants, who could require up to 80% less capital up front than previously. That means that the time is now ripe for new banks in the regions to be established. The hon. Member for Brighton, Pavilion, in her new clause 15, and the hon. Member for Edmonton (Mr Love) refer to CDFIs—community development finance institutions. Some £60 million of wholesale funding for CDFIs is available through the regional growth fund. Tax relief up to 25% is already available on investments made by individuals and companies into CDFIs. Of course I will talk to my hon. Friend the Exchequer Secretary and carry forward the hon. Gentleman’s representation for further changes, but a significant set of advantages is available. Similarly, the more flexible rules for credit unions that have been introduced and the £38 million of funding for this movement have also created greater opportunities.
Caroline Lucas
Does the Minister accept that constraints on the amounts that larger credit unions—such as the East Sussex Credit Union, which I know well—are allowed to accept in deposits or are allowed to lend are stopping them fulfilling their potential? Will he look at that again?
Greg Clark
I am happy to take that forward. The hon. Lady will be aware that we have liberalised the rules for credit unions, but if problems are being caused, not least in East Sussex, I would be happy if she dropped me a line or came to see me.
We have great enthusiasm for the proposals that the hon. Lady makes, but what is required is not a study, but action. I make this commitment to her, and to any hon. Member who is interested in helping to establish a new regional bank in their area, that I will help them to do so. I hope that they will allow me to do that.
New clause 10 would require the Government to lay a report before Parliament before selling any banking assets. All hon. Members are aware of what the Chancellor said in his Mansion House speech about the next steps for Lloyds and RBS. For Lloyds, the Government are actively considering the options for how its shareholding can be returned to the private sector. Value for money for the taxpayer will be the overriding consideration, and there is no pre-determined time scale. Indeed, the disposal process may involve multiple stages over time, rather than a single moment.
For RBS, share sales are some way off. In line with the recommendation of the Parliamentary Commission on Banking Standards, the Chancellor has announced a review, to conclude in the autumn, into whether a bad bank should be set up for risky assets from RBS. Following the criteria suggested in the commission’s report, the review will assess whether creating a bad bank would accelerate the path back to private ownership, deliver benefits for the wider economy and be in the interest of taxpayers.
As I have mentioned, the OFT is looking specifically at the impact that new challenger banks created by the Lloyds and RBS divestments will have on competition in small business banking. UK Financial Investments has a remit to provide value for money in executing its requirement to devise the means of selling the Government’s shareholdings in the banks, and, in doing so, to pay due regard to maintaining financial stability and to act in a way that promotes competition. In doing so, UKFI and the Treasury must follow the value-for-money principles set out in the Green Book, and they will be accountable, through the Accounting Officer, to the National Audit Office and the Public Accounts Committee, as well as to the House and the Treasury Select Committee.
Chris Leslie
The Minister is talking about the edifice of propriety, in relation to UKFI and so forth, but it is as plain as day that the Chancellor made the decision that he did not want that particular chief executive of RBS, so out went Stephen Hester. Will the Minister at least put on record what the plan is for settling the future leadership of RBS? When will the new chief executive be appointed?
Greg Clark
The hon. Gentleman knows full well that that is a matter for the board of RBS, not for the Government.
Returning to new clause 10, it is not clear that a new mandatory reporting requirement would add anything to the arrangements that are already in place. In the previous regulatory regime, promoting competition did not play a prominent enough role in ensuring that the banking industry operated in the interests of consumers. The strengthening of the role of competition through the reforms in the Bill will go a long way towards correcting that. The further recommendations of the PCBS underline the role of competition more prominently still, and I thank the commission for its contribution in that regard.
I should also mention new clause 1, which introduces a new schedule of amendments to correct a series of minor and technical points in connection with the Financial Services Act 2012. I was asked some questions about this earlier. It refers to the complaints scheme covering the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England. The scope of the complaints scheme in relation to the PRA and the FCA was widened to cover all their functions under any legislation, and the current scope includes functions such as those relating to the Data Protection Act and the Freedom of Information Act, which already have their own complaints mechanisms. The new clause will correct that.
I hope that the House will accept that the Parliamentary Commission on Banking Standards and the Government are as one in their intention of promoting competition. We totally agree that placing a high value on competition in pursuing all our objectives for the banking sector in order to make it more competitive, more responsive to the needs of consumers and more resilient is very much in the interests of the country.
Chris Leslie
We have had a long, well-informed debate, and I pay tribute to Members on both sides of the House, particularly the members of the Parliamentary Commission on Banking Standards, for their contributions. I am disappointed, however, that the Government are still saying simply that they will think about these things and look into them. The Bill will leave this House in the same thin state in which it arrived. In protecting taxpayers’ best interests, it should not be viewed as asking for the moon on a stick to request a proper report and an options appraisal of what to do with state-owned assets. It is very important that, at the very least, we have a thorough appraisal.
Greg Clark
I beg to move, That the Bill be now read the Third time.
It is good to start the debate with good news. When one is considering a Bill, one is cut off from the outside world, so that is good to hear.
I said on Second Reading that this is a historic Bill that resets the banking system in this country, so that it can once again enjoy the reputation that it had, and its worldwide renown, not just for technical excellence but for high standards of confidence, built on probity.
The Bill is historic in another important respect. It reflects the extensive deliberations and contributions of not one but two bodies of eminent experts: the Independent Commission on Banking, chaired by Sir John Vickers, and the Parliamentary Commission on Banking Standards, chaired by my hon. Friend the Member for Chichester (Mr Tyrie). Both undertook extensive work, and I am grateful to their members, and to the staff who supported them in their work.
Sir John Vickers’s commission was established immediately after the general election, in June 2010. It took extensive evidence before publishing an issues paper in September 2010; an interim report, on which it consulted in April 2011; and a final report in September 2011. The Government gave, and consulted on, an initial response in December 2011, before issuing a White Paper for consultation in June 2012. In the light of that consultation, a draft Bill was published last October, and the Parliamentary Commission was asked to give it pre-legislative scrutiny, which it did, and it concluded its report on 21 December last year.
Following Second Reading, the Committee scrutinised the Bill for more than 40 hours. The process has been characterised by an unusually determined effort to build consensus. Having considered all the options, the Vickers commission made a compelling case for a ring fence separating the riskier investment banking side of banks from personal and business lending. Ring-fencing, an ICB argument, will better insulate retail banks against global shocks and make banks easier to resolve in a crisis. It will thus create a more stable banking system, protecting the economy and the taxpayer against future crisis.
The parliamentary commission, in its first report, recommended some changes to the Bill, which we have been able to make, such as emphasising the importance of competition, as we have just debated, in applying the ring-fencing rules. The commission noted that in putting the so-called Haldane principles on the face of the Bill, the Government went further than its own recommendations. The parliamentary commission, in its December report, also called for the power to be available to force the separation of a ring-fenced bank into its component parts if that bank attempted to game the system or to undermine the ring fence. The so-called electrification of the ring fence is designed to ensure that it is respected in practice.
We debated yesterday the Government’s amendment to implement this power. There was some discussion about whether the power to require separation was too cumbersome to be used effectively in practice. As I said yesterday, there is no difference between the Government’s intentions and those of the parliamentary commission. We agree with the specific reserve power and it has to be usable. We included a time limit by which full separation had to be executed. The PCBS did not specify this, but my hon. Friend the Member for Chichester said that it should be informed by the regulator. That seems right to me and I have no difficulty in expecting to be able to arrive at a formulation that meets all the Chairman’s objectives during the further scrutiny of the Bill in this place.
Mr Tyrie
I am very reassured by what I have heard from the Minister. It seems from what he said that it remains the Government’s firm intention to implement the spirit and the letter of electrification for individual banks. It also gives me some reassurance that the commitments that appear to have been made in the paper published yesterday on the recommendations in the fifth report will also be implemented. Can the Minister give some indication when he will produce amendments, so that we have enough time to think about them before they are examined in another place and so that their lordships also have enough time to consider them carefully?
Greg Clark
I am grateful to my hon. Friend for his remarks. He is right that we are of one mind on the need to implement faithfully the commitments that we have given. The amendments need to be drafted in a way that is legally watertight, which takes some time. They will be prepared during the summer—the summer holiday will be out of bounds for the officials on the Bill team, sad to say—and they will be introduced in the autumn in the House of Lords.
As well as pre-legislative scrutiny of the Bill, the parliamentary commission’s final report made a series of recommendations concerning standards and culture in banking. As I indicated on Second Reading, in Committee and yesterday, the Government will make use of the Bill and the amendments to give expression to many of the recommendations that require legislation. I gave a commitment to work with the usual channels to ensure that this House has ample opportunity to debate the amendments when they come back for further scrutiny by this House.
Greg Clark
My hon. Friend is nothing if not tenacious as well as ingenious, and his hearing is acute. He will have heard me say that I will work with the usual channels, so the time for consideration will depend on the outcome of those discussions.
The implementation of the commission’s recommendations on culture and standards represents the third pillar of the reforms being made to the banking system. The first pillar was the institutional changes brought about by the Financial Services Act 2012, which received Royal Assent last December. That Act scrapped the failed tripartite system of regulation which, in the words of the parliamentary commission,
“created a largely illusory impression of regulatory control”.
In its place, that Act restored the Bank of England to its rightful place by ensuring, through the Financial Policy Committee and the Prudential Regulation Authority, the stability of the financial system. It established new forward-looking, rather than box-ticking, conduct regulation in the Financial Conduct Authority.
The second pillar of reform is embodied in the ring-fencing provisions advanced by Sir John Vickers and his committee, which are the main focus of the Bill under consideration. The reforms by the Parliamentary Commission on Banking Standards that deal with culture and standards represent the third pillar, and will play a major part in the passage of the Bill.
Having thanked members and staff of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards for their hard work and the exacting standards they set for themselves, I extend my thanks to all those who have participated in the drafting and scrutiny of the Bill so far. First, I thank my Parliamentary Private Secretary, my hon. Friend the Member for Warrington South (David Mowat). Not only has he been assiduous in his more mundane duties of passing notes to and fro, but he has been an invaluable source of wise advice, drawing on a successful career in business. I discovered that he has an ability to see quickly through complexity and get to the heart of the matter—something much needed in matters of financial regulation.
I thank my officials for their efforts and the long hours spent drafting the Bill and Government amendments, as well as briefings for the many clauses we have debated. I hope that the seriousness of this legislation will assuage the loss of weekends and evenings spent with their nearest and dearest, although I hope they were at least able to see Andy Murray play—and indeed win—on Sunday, notwithstanding the timetabling of Report and Third Reading.
I thank those in my private office for their patience and cheerfulness in marshalling the many demands on their skills and expertise, and I am grateful to members of the Bill Committee, and its Chair and Clerks, for the hours we spent in each other’s company during spring. At one point I worked out that I had spent more time that month with the hon. Member for Nottingham East (Chris Leslie) than with my wife, although I hope he will agree that it was not an altogether unpleasant experience.
We had a lively and unusual Bill Committee in which my hon. Friend the Member for Amber Valley (Nigel Mills) went further than the electrification proposed by the Parliamentary Commission on Banking Standards, and demanded the “electrocution” of miscreant bankers. My hon. Friend the Member for North East Somerset (Jacob Rees-Mogg), whom I am delighted to see in his place, was revealed to have a secret life on Twitter, which I hope continues to flourish. I was also able to concede an historic Opposition amendment, given the charming entreaties from the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), even if it was only a single word. All that was done under the beady eye of the Treasury Whip, my hon. Friend the Member for Chelsea and Fulham (Greg Hands), who kept us rigorously to time—indeed, I think we finished a day earlier than was allowed for in the programme motion. Given that the Bill will return and we will have much to discuss, it is not so much goodbye to the Bill on Third Reading as au revoir—or, as I am sure my hon. Friend the Member for North East Somerset would put it, “Hasta la vista, baby.”
Ours is not the only country in which trust in banking collapsed during the financial crisis, but the fact that scandals and bail-outs happened elsewhere is of no comfort. In a world where trust is in retreat, this country must be a beacon of confidence, security and stability, but that will not happen unless we insist on higher standards than apply elsewhere. The overwhelming and urgent imperative is to rebuild that trust. The reforms enacted so far take us a long way, and further than our competitors. The Bill will take us further forward and make the reform necessary to restore the reputation—and with it the prosperity—of banking in the United Kingdom. I commend the Bill to the House.
Mr McFadden
This is an unusual Bill, in that at the same time that it has sought to implement a reform recommended by the Vickers commission two years ago, it has run in parallel with the Parliamentary Commission on Banking Standards, which periodically has produced reports and asked the Government to use the Bill to implement their findings.
I place on record my thanks to colleagues who served on the commission and all its staff. It was an intense effort and I do not think we could have produced our reports without the able efforts of the many staff who worked for us, led by Colin Lee, who is a great servant of this House.
I want to draw the Minister’s attention back to yesterday’s official response from the Government to the commission’s report of a few weeks ago. We read in yesterday’s newspapers that the Government were going to accept the vast bulk of the recommendations and the Minister opened the debate by saying something very similar. However, I have looked through the Government document in detail and wonder whether the Minister could confirm that the position is not that simple.
Paragraphs 2.32 and 2.33 reject part of our recommendations on pay. Paragraph 4.5 makes no commitment to legislation on access to basic bank accounts. Paragraph 3.24 passes to the regulator only consideration of the changes that we recommended on the corporate governance responsibilities of executives and bank chairmen. Paragraphs 3.34 and 3.35 in effect reject our recommendation for gender reports on operations on the trading floor. Paragraph 5.11 rejects our recommendation to consider splitting RBS into regional banks as part of the Government’s study on RBS. Paragraph 5.28 rejects our recommendations on the governance of the Bank of England. Paragraph 5.31 rejects our recommendations on the chairmanship of the Prudential Regulation Authority.
As my hon. Friend the Member for Nottingham East (Chris Leslie) said, the Government have also rejected recommendations on leveraging and ring-fencing, in particular ring-fencing in respect of the sector as a whole. When it comes to the implementation of recommendations, the chairman of the parliamentary commission yesterday described the attempt to ring-fence one particular group as “virtually useless”.
I stress to the Minister that it is not accurate to say that the Government have accepted the vast majority of the parliamentary commission’s recommendations. The document that was published yesterday is full of excuses and sleights of hand that pass on to the regulator for consideration firm recommendations that we made. I stress to those in another place, who may have a greater opportunity to amend the Bill, that they should read the document that was published yesterday with a careful eye to see what has been accepted and what has not.
Greg Clark
The right hon. Gentleman is not giving the response a fair reading. First, not all of the recommendations were addressed to the Government. Some of them were addressed to the regulators. Secondly, some of the recommendations that were made to the Government have been taken forward through actions that can be taken by the regulators. When colleagues look at the response, they will see that it is a broad endorsement of what was an excellent report.
Mr McFadden
Perhaps the Minister and I have different interpretations of the word “broad”. He may be able to persuade the hon. Member for Chichester (Mr Tyrie), on the basis of some warm words, that these are great concessions, but I remain to be convinced.
The Government have a great deal more to do to convince Parliament—this House and the other House—that they endorse the vast majority of the recommendations. The more one reads the report that was published yesterday, the less one comes to that conclusion. I hope that those who are in a position to amend the Bill in future take heed of that and press with greater determination than Members of this House the amendments that would fully and faithfully implement the recommendations of the Parliamentary Commission on Banking Standards.