Financial Services (Banking Reform) Bill

Lord Barnett Excerpts

Tuesday 26th November 2013 Lords Chamber

Moved by

[Lord Barnett]

1: Clause 4, page 4, line 37, leave out from “activity” to end of line 38

[Lord Barnett (Lab)]

My Lords, in Committee I promised the House that I would table amendments to debate the question of whether we should have separation rather than the present system. The arrangements under the Bill show that it may not work very well.

The speakers we had on the first day in Committee went to the heart of the issue. The noble Lord, Lord Turnbull, a distinguished former head of the Civil Service, told us that the amendment he moved dealt with the whole issue. In practice, I hope that my amendment deals with what I said it would deal with. However, given the problems with drafting amendments to this complex Bill, I had to use the services of a very excellent person in the Public Bill Office, Simon Blackburn. Between us we drafted the amendments, which I hope work. If they do not, and the House agrees, no doubt the Minister will be able to amend the amendments to make sure that they do what I want them to do—that is, reconstruction, not ring-fencing.

The noble Lord, Lord Turnbull, told us at col. 18 —and of course he knows about these things—that the Government’s response to the problem here, and what they plan to do, is to “change banking for good”. Of course, if that could be done, it would be marvellous. However, the plain fact is, as the noble Lord, Lord Turnbull, pointed out, that the reality is somewhat different. The Government have, of course, embraced some recommendations, but the provisions in the Bill make sure that they are heavily diluted. Speaking as a senior official, the noble Lord knows about dilution. Certainly, if you look through the Bill, there are all kinds of dilutions and provisions that make a nonsense of the original recommendation. However, with this complex new Bill it is good to have a former distinguished leader of officials tell us what it will and will not do.

The noble Lord went on to speak about the vigorous debate the parliamentary commission had on Glass-Steagall, which is the US separation of banking. He said that eventually they came down against it because the United States had abandoned it. He was followed by my noble friend Lord Eatwell, who spoke of the importance of reviews. He said that what is being proposed here is,

“a leap in the dark and we have no idea whether it will work”.

As it is, it is a “novel innovation” and we,

“cannot be sure whether it will … have … unintended consequences”.—[Official Report, 8/10/13; col. 20.]

I do not know what kind of unintended consequences those might be, but clearly all kinds of consequences could arise from not dealing with the real issue here.

We therefore have my new amendments, which I hope that the House will eventually approve. However, we are a long way at the moment from achieving what we all want to see. We started with a Bill of 37 pages; the noble Lord, Lord Deighton, paid a well deserved tribute to his staff, who had converted 37 pages to 170 pages—virtually a new Bill. By the time we finish it is likely to be more than 200 pages long, as he knows from his own amendments that have been tabled. I certainly share his approbation of his officials, who have done an incredible job in the most difficult of circumstances. I have never known a Bill of this kind before in either House of Parliament. However, I assume that the House of Commons, which gave us this 37-page Bill, will now have to have a Second Reading on a new Bill, because it will not be able to cope with it as it is.

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[The Commercial Secretary to the Treasury (Lord Deighton) (Con)]

My Lords, it is a great pleasure for me to resume our debates on the Bill. We do not believe that there is any need to recommit it. These are radical and important reforms—ring-fencing, bail-in, depositor preference, a new senior person’s regime and new criminal sanctions. The Government wish to put them in action, move forward and leave the period of deliberation behind. We wish to end the uncertainty for the economy, consumers and taxpayers that prolonged reviewing can bring. Where the reforms can be improved to increase their effectiveness, the Government have been prepared to listen, and you will see that we have responded. However, where the Government do not believe the proposals are backed by evidence, or are unreasonable, we have respectfully disagreed and set out our reasons. This is the approach that we have taken to all the amendments.

Specifically on Amendment 1, from the noble Lord, Lord Barnett, the ICB recommended that only retail deposits—that is, the deposits of individuals and small businesses—should be ring-fenced. This amendment would require all deposits to be ring-fenced. The ICB recommended that large organisations and wealthy individuals should be able—though, importantly, not obliged—to deposit with non-ring-fenced banks. This was because these depositors are sufficiently financially sophisticated to tolerate an interruption in access to a single bank, for example because they have multiple banking relationships. These sophisticated depositors therefore do not need the protection that is being mandated inside the ring-fence provides. They may choose to deposit in a ring-fenced bank if they wish, of course. It also provides a little bit more competition. It gives wealthy individuals and businesses the opportunity to shop around.

Large corporates and financial institutions also use complex financial products which ring-fenced banks will rightly be prohibited from selling. To obtain these products, such as complex derivatives, large companies or financial institutions will need to go to a non-ring-fenced bank. Given this, it is reasonable that these customers should be permitted also to deposit with non-ring-fenced banks, as the ICB recommended. The Government accepted the ICB’s recommendation. Therefore the Bill allows the Treasury to specify by order that a non-ring-fenced bank can accept deposits in certain circumstances.

The deposits of individuals—other than very wealthy and sophisticated ones—and small businesses will have to be within the ring-fence. There is no compulsion for large organisations or wealthy individuals to deposit outside the ring-fence, only the option for them to do so if they so choose. This option is provided for in secondary legislation. The Government published a draft of the relevant order for consultation in July this year. It is appropriate that detailed provisions such as this should be made in secondary rather than primary legislation to allow the legislation to keep pace with future developments in the market and to keep it fit for purpose. This approach was endorsed by the PCBS in its first report.

It is also important to highlight that under the Bill the Treasury does not have unlimited power to determine which deposits do not have to be ring-fenced. The Treasury may only allow deposits outside the ring-fence if it is convinced that doing so does not undermine the ring-fence and that the depositors concerned do not need the protection of the ring-fence. This is therefore a constrained power that is needed to implement the recommendations of the ICB. I therefore urge the noble Lord to withdraw his amendment.

[Lord Barnett]

My Lords, I do not think that the Minister has dealt with the central arguments about separation; he dealt mainly with something quite different and did not reply to my questions. Whether or not he has the information to hand, perhaps he could think about whether the staff of the FSA received millions of pounds in compensation for redundancy before they were reappointed to the FCA. Can he at least tell us that?

[Lord Deighton]

The central question of full separation is in Amendment 2, which we will address next, and we can go on to discuss it. With respect to the FSA redundancy arrangements, I would be delighted to write to the noble Lord with that information when I have it at my fingertips.

[Lord Deighton]

The clarification is that the ring-fence effectively operates on the liabilities side, so we are dealing with core deposits. Just to correct the point and make it clear, the most sophisticated investors can be either inside or outside the ring-fence, and they have the choice. However, the asset side of the bank’s balance sheet is unconstrained in the rules.

[Lord Barnett]

My Lords, I will withdraw Amendment 1 and then move Amendment 2, although I spoke to it generally in my first speech and I do not wish to detain the House for too much longer. But as the noble Lord, Lord Lawson, said at the time, these are two totally different cultures and it is going to be virtually impossible to put the two together—those were his words. I therefore suggest to the Minister that Glass-Steagall, which worked for 60 years in the United States, could be made effective here if we had stronger regulations to make sure that those banking lobbyists could not succeed in stopping the separation. That was the major point that I made, and will continue to make. That is also where I would like to leave it so that the Minister can reply to Amendment 2. I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

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Moved by

[Lord Barnett]

2: Clause 4, page 7, line 22, leave out from beginning to end of line 42 on page 10 and insert—
“Group restructuring powers142K Group restructuring of ring-fenced bodies
(1) A ring-fenced body may not be part of a group which—
(a) carries on an excluded activity or purports to do so, or (b) contravenes any provision of an order under section 142E.(2) The appropriate regulator must exercise the group restructuring powers if it is satisfied that a ring-fenced body is operating in contravention of subsection (1).”

[Lord Barnett]

My Lords, I beg to move.

[Lord Deighton]

My Lords, this Bill legislates for ring-fencing. That is the Government’s policy, not Glass-Steagall-style full separation. The Government support ring-fencing, but not as a compromise option or a lukewarm version of separation, and not as a watered-down policy. Rather, the Government have adopted the ring-fence after careful consideration of the recommendations of the Independent Commission on Banking. As noble Lords will recall, the ICB was established in June 2010. It deliberated for 15 months before making its recommendations in September 2011. As part of its deliberations, the ICB considered full separation as an alternative to ring-fencing, but it rejected that alternative and instead recommended ring-fencing. The Government have accepted the ICB’s recommendation, and the commission set out its rationale for rejecting full separation in its final report.

Let me remind the House of the ICB’s line of reasoning. The ICB argued that an effective, robust ring-fence would deliver the same benefits to financial stability as full separation, on the model of Glass-Steagall. A robust ring-fence will insulate vital retail banking services from shocks to global financial markets—for example, reducing the risk that British high-street banks will be brought down by swings in the prices of complex securities. Let us recall, too, that retail banking has its risks and that market discipline demands that badly run banks must be allowed to fail. If a retail bank fails, a robust ring-fence will enable the authorities to manage that failure in a controlled way, with essential services kept running with the core deposits we were talking about, but without any injection of taxpayers’ money. So, a strong ring-fence will minimise the chance that a future Government will ever be forced to bail out a failing bank. The moral hazard that encouraged excessive risk-taking before the recent crisis would be removed.

The ICB argued that a robust ring-fence would deliver the same benefits as full separation, and would avoid some of full separation’s main disadvantages. In particular, a ring-fenced bank that found itself in financial difficulties could be supported by other group members, such as a healthy sister investment bank. Full separation would not allow this. Essentially the ring-fence is a valve; it does not let any of the bad stuff get into the ring-fence but allows support to come in if it needs it.

Under ring-fencing, a banking group could offer a one-stop-shop service to customers, especially business customers, so there is a strong marketing advantage to the group. Deposits or simple loans could be arranged with the group’s ring-fenced bank, while more complex products are supplied by the group’s investment bank. Full separation would not allow this. Finally, the ICB estimated that by denying banks the legitimate benefits of diversification, full separation would impose higher costs—costs that would likely be passed on to banks’ customers and to lending.

In summary, ring-fencing will bring the same benefits as full separation, but with fewer disadvantages. A rational, sober evaluation of the two thus brought the ICB to identify ring-fencing as the superior policy. I would like to use this opportunity to put paid to some myths around ring-fencing versus full separation. First, some claim that full separation is simpler to legislate for, and there is no complexity. Any separation of banks’ business will inevitably involve detailed rules to specify where the line, whether it is a ring-fence or a complete separation, is to be drawn, and prescribe which activities must take place either side of that line. As banks’ business is complex and involves a wide range of different products and services, so drawing that line will inevitably be complex. But a line will have to be drawn and someone will have to decide what is in each separated type of bank. It is the same problem for ring-fencing and full separation.

Secondly, either form of separation will, unless vigilantly maintained, be vulnerable to erosion or bank lobbying. There are plenty of examples of that through history. I do not, therefore, accept that full separation is either more simple or more robust than ring-fencing. As I have already said, the ICB conducted an exhaustive and detailed investigation of the case for different types of structural reform before coming to its recommendation in favour of ring-fencing. That recommendation commanded a wide consensus—including regulators, industry and the Opposition. Let me quote the shadow Chancellor speaking in the Commons when the Government first responded to the ICB in December 2011. He said that,

“we, too, support the commission’s radical reforms on ring-fencing”.—[Official Report, Commons, 19/12/11; col. 1074.]

Of course, no matter what the weight of evidence, there will always be some who disagree with the consensus. But to those who advocate full separation as an alternative, we need to ask: what is the evidence that supports this alternative policy? Throughout this process so far, the Government have openly invited others to give their views and present new evidence. We consulted widely, and submitted this Bill to pre-legislative scrutiny by the PCBS to seek its input. I do not think that the PCBS produced hard evidence in favour of full separation. It presented nothing that compared the two proposals, although it elicited some strong expressions of scepticism on whether it would work. Those are valid. It is certainly a new way of doing things.

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[Baroness Cohen of Pimlico (Lab)]

My Lords, I have spoken before against ring-fencing and for full separation. We may not be in any kind of agreement on that, but what we ought to be in agreement on is that ring-fencing will require particularly scrupulous and detailed regulation. It will require more of our regulators than full separation, because institutional separation to some extent requires less regulation.

I wonder whether we are quite sane in putting so much faith in our regulators. The people who gave us Mr Flowers as chairman of the Co-operative are hardly those I feel very confident about exercising the very complex regulation that ring-fencing will require. It is complex and it is difficult. It is more difficult than it needs to be than with the policy of full separation. I therefore continue to support my noble friend Lord Barnett in his amendment.

[Lord Barnett]

My Lords, the Minister has told us that the Government consulted widely and got agreement. Well, more recently, there were 300 professionals who were consulted in a survey and only 35 of them thought it would work. I do not know who he consulted. He also talked about the robust regulations. Who is going to supervise these robust regulations—the old FSA, now called the FCA? Is he confident that it can? I am certainly not clear myself, nor do many people have a lot of confidence that the old FSA, now the FCA, can do that job. He is confident, however, that it can.

My noble friend Lord McFall pointed out what Volcker said to that committee: the chairman of a holding company, of which some part got into trouble because of the lack of regulation or whatever—what would he do? I know what he would do. He would seek to save it. These merchant banks may lose money at times—indeed they have done—but most of the time they make a lot of money and do not want to lose it. They want it separated, but under the same roof, with one holding company. That is what they have got and are going to get under the new administration.

I cannot see this regulation working and would like to hear the views of any other Member of the House who has an interest in this.

[Lord Flight]

My Lords, can I ask the Minister whether I am right in thinking that the PRA would be the main regulator of the balance sheets of the two entities under ring-fencing, and not the FCA, which is about protecting customers? Secondly, if there were a Glass-Steagall separation, is the job not exactly the same, in that you would need to look carefully at a separate investment bank and a separate banking bank to make sure that one did not have things in it which ought to be in the other? I would have thought that the job of regulating would be exactly the same as under a ring-fenced structure.

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[The Lord Speaker (Baroness D'Souza)]

Does the noble Lord wish to withdraw his amendment?

[Lord Barnett]

If the House is no longer interested in the matter, I beg leave to withdraw.

Amendment 2 withdrawn.