Financial Services (Banking Reform) Bill

Debate between Lord Deighton and Lord Barnett

Tuesday 26th November 2013 Lords Chamber

[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.

--- Later in debate ---

[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.

Economy: Infrastructure

Debate between Lord Deighton and Lord Barnett

Tuesday 23rd July 2013 Lords Chamber

[Lord Deighton]

I thank my noble friend for those observations about the signs of good news that are beginning to be seen in the economy. Based on my discussions with small businesses, they are most concerned about access to finance, improved broadband and better roads. The Government are addressing all of those through the Funding for Lending scheme to get cheaper financing and through the business bank to get about £1 billion of capital committed in non-bank funding. We are rolling out broadband as fast as possible both privately and through government intervention and we have committed a record amount not only to building new roads but to improving and repairing existing roads so that small businesses can get around. As for the participation of small businesses themselves in these large infrastructure projects, those businesses operate down the supply chain, and giving them a long-term warning that these projects are coming is extremely helpful. By way of example, I think that about 58% of the businesses which benefit from Crossrail spend would be classified as small and medium-sized.

[Lord Barnett]

The noble Lord will know that I strongly welcome the news of the amounts being spent. However, as he has now taken direct responsibility in this area, can he answer the vital question of how much will be spent in the next two years?

[Lord Deighton]

The actual expenditure on infrastructure is difficult to predict because, of course, the predominant portion of infrastructure is financed by the private sector. That is why we focused on developing our energy policy, so that we can trigger investments with offshore wind, with nuclear and with various gas developments. We have laid out our expenditure plans and the proportion of investment that is capital investment is laid out in the spending round for this year and for future years. We have shifted, I believe, £9.3 billion from current spending to capital spending during the time of this Government. We have put an extra £18 billion into capital investment in Budget 2013. As a result of those changes, public investment as a share of GDP will be higher on average between 2010-11 and 2020-21 than it was under the previous Government. We are trying to shift it into the more productive areas. Transport investment in 2013-14 will be higher than at any point under the previous Government despite the fact that we were in something of a boom time there, and it will rise every year until 2020.

Spending Review

Debate between Lord Deighton and Lord Barnett

Wednesday 26th June 2013 Lords Chamber

[Lord Deighton]

We are going to do it simply by implementing it in 2015-16. As I understand it, many of the structural changes to Civil Service pay have already been made in many departments. This is just equalising the system right across the service.

[Lord Barnett]

My Lords, I start by acknowledging the very difficult economic situation that every Government are going to face. People are living longer and I am the last person in the world to complain about that.

Given that every forecast made by the Chancellor since 2010 has had to be adjusted, how do we know that we need exactly £11.5 billion of cuts in 2015? What was his economic forecast for that year? We now know that no economic forecast by anybody can be expected to be accurate, even if it is based on next year. Perhaps the Minister will tell us why we should assume, when every forecast that the Chancellor has previously made has been wrong, that a forecast based the economy in two years’ time will do precisely what he said. In one line, he says:

“We commit now to £50 billion of capital investment in 2015”.

That is rather a lot of money for one year. How long a period is that planned to be spent over? The cuts are going to take place after 2015. When will that £50 billion of capital expenditure be spent: this year, next year or only after 2015? We all know that we need it now. Why is he delaying it?

Infrastructure: Expenditure

Debate between Lord Deighton and Lord Barnett

Monday 25th March 2013 Lords Chamber

[Lord Deighton]

If I may say, my Lords, those are two quite separate questions. I am very enthusiastic about private sector investment. Infrastructure investments lend themselves to financing in the private markets because they generate a cash flow that can repay those investments. The question about Heathrow Airport is an entirely separate one, although I accept that airports are a particularly attractive investment proposition for the private markets.

[Lord Barnett]

My Lords, is not the difference between the figures that he quoted and those quoted by my noble friend Lord Hollick that the previous figures were allocated but not actually spent?

[Lord Deighton]

I bow to the noble Lord’s extensive experience in managing public expenditure. There is absolutely a distinction between what is allocated and what is spent. There is a small additional amount this year that is underspent, but it is in the region of £2 billion, which is consistent with previous years. I agree that that is part of the difference.

Inequality: Income and Wealth

Debate between Lord Deighton and Lord Barnett

Monday 11th March 2013 Lords Chamber

[Lord Deighton]

My Lords, I absolutely agree—I am sure everybody does—with the sentiment that it is much easier to argue over the slices of an increasing cake than to divide one up that is static or shrinking.

[Lord Barnett]

My Lords, on the noble Lord’s major point about increasing personal allowances as a factor, does the greater relief go to somebody on £50,000 a year or somebody on £15,000?

[Lord Deighton]

What I can tell the noble Lord about the increase in personal allowances is that it is a highly progressive change in the tax system. It applies to about 24.5 million or 25 million taxpayers, who will enjoy a benefit of about £400 from it in 2013-14, and it takes just over 2 million people out of the tax system.

Economy: Rating Agencies

Debate between Lord Deighton and Lord Barnett

Wednesday 27th February 2013 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government what is their assessment of the role of rating agencies and the impact of any downgrade of the United Kingdom’s rating.

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

My Lords, last Friday Moody’s downgraded the UK rating to AA1, with a stable outlook. It says that the UK’s credit-worthiness remains extremely high but warns that it could downgrade the UK rating further in the event of,

“reduced political commitment to fiscal consolidation”.

The credit rating is one of the important benchmarks for any country but near-historic low gilt yields continue to reflect the credibility earned by the Government’s economic strategy.

[Lord Barnett]

I think I thank the Minister for that Answer. If it is all so good now, why did he covet the AAA rating so strongly? Is it not true that the United States had a downgrading, and that it was not a problem and interest rates remain low? Another risk is that the pound will drop further. If it does, there is a real risk to lenders, who could lose a lot of money as it is repaid in downgraded pounds. In those circumstances, would the Chancellor be minded to do anything at all?

[Lord Deighton]

I thank the noble Lord for those observations, which contain several of different questions. If you review Moody’s analysis of the UK economy you could not see a stronger recommendation of the Government’s policy of fiscal consolidation. I commend it to everybody as background to policy and why it is the appropriate one in these circumstances.

On the specific question about the impact of currency movements on the exposure of various lenders, my experience in those markets tells me that lenders manage their currency exposures very effectively and that the currency devaluation should not increase those particular exposures.

Monetary Policy Committee: Inflation

Debate between Lord Deighton and Lord Barnett

Wednesday 13th February 2013 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government what is their response to the proposal by Mark Carney that the Monetary Policy Committee’s inflation target should be flexible.

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

My Lords, the Chancellor set the remit for the Monetary Policy Committee at Budget 2012 to target inflation of 2% as measured by the 12-month increase in the consumer prices index. Inflation targeting has served the UK economy very well.

[Lord Barnett]

The Minister did not quite answer my Question, my Lords. He will know that Mark Carney, the new governor, has said that,

“flexible inflation targeting offered the best chance of boosting growth while maintaining price stability”.

Does the Chancellor agree with his new governor, who he has said is the best in the world?

[Lord Deighton]

My Lords, if I did not quite answer the Question directly it was because the Question implies that we currently do not have flexible inflation targeting, but I believe that that is precisely what we have already. The remit given to the MPC actually lays out the conditions which provide for adjustments, given what may happen with shocks and disturbances, so that we can take a longer time to reach the inflation target. To my mind, that is a definition of flexibility.

Banking: LIBOR and EURIBOR

Debate between Lord Deighton and Lord Barnett

Tuesday 12th February 2013 Lords Chamber

[Lord Deighton]

My Lords, my noble friend makes an important point about the seriousness with which we are addressing this attempted manipulation of LIBOR rates. On the specific question of the penalties, the Financial Services Authority is the independent regulator. It is mandated to set all the rules on regulatory matters. That includes decisions about using early-settlement discounts as a way of managing the process. It considers it in the public interest to settle matters in cases involving financial penalties as early as possible and to provide incentives. There are many advantages in early settlement. It helps consumers to get compensation earlier than would otherwise be the case and prevents cases being contested at the regulatory decisions committee, which could cost a lot of time and money.

[Lord Barnett]

My Lords, does the noble Lord find it as astonishing as I do that, on an issue such as interest rates, which is obviously of great concern both nationally and internationally, nobody in the Bank of England or the Treasury had the faintest idea about what was going on with LIBOR?

Government: Economic Policies

Debate between Lord Deighton and Lord Barnett

Wednesday 30th January 2013 Lords Chamber

[Lord Deighton]

I welcome my noble friend’s encouragement to delve a little deeper into the figures. Certainly, with respect to employment, we are seeing a switch from an overinflated public sector to a much more dynamic private sector, which will stand us in very good stead in the longer term. If one looks at the specific factors relating to the output figures, there are some very interesting facts; for example, the majority of the decline in the fourth quarter relates to maintenance in the North Sea, and coping with the long-term decline of that source of revenue to the United Kingdom is a structural problem to which we must adjust.

[Lord Barnett]

Can the noble Lord tell us, if the economy is going so well, why the deficit is rising?

[Lord Deighton]

My comments were not intended to imply that the economy was going so well. My comments were intended to imply that the economy is facing extraordinarily difficult circumstances that were a function of the historical debt we accumulated, and a very difficult global situation in terms of demand. With respect to the deficit, I confirm that it has been reduced by a quarter.