Financial Services Bill

Lord Liddle Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Myners]

My Lords, I take note of my noble friend’s comments, but I feel compelled to say a few words in response. Without drawing the ire of the Minister, I can link it back to the subject of the amendment.

I worked with Mr Tucker, the deputy governor, during the banking crisis. We should wait for the outcome of the Treasury Select Committee’s report and the Joint Committee report. It is wrong to say that if the manipulation of the LIBOR-setting process had not occurred we would not have had the global financial crisis. It was undoubtedly bad and reprehensible, in the words of Mr Diamond, but it did not itself cause the crisis. Listening to Mr Tucker yesterday and reflecting back on the extraordinary circumstances of October 2007, I sympathised with him. The banking system was on the verge of complete collapse. It is still not fully appreciated how close we came to the edge of the cliff. In those circumstances, when one seemed constantly to be in meetings and constantly to be on the telephone, not taking notes of meetings is pretty forgivable. I was delighted that Mr Tucker was able to settle the issues arising from Mr Diamond’s file note about the senior Whitehall figures. I look forward to the Chancellor of the Exchequer responding to the clarity that Mr Tucker has brought there.

Reflecting on my noble friend’s amendment, I ask whether we are creating positions in the Bank of England and in the architecture which are simply beyond the talents of any one person to fulfil? Mr Tucker is one of the outstanding candidates to be the next governor. He is not the only one, but it is not a long list and it has got decidedly shorter in the past seven days. Two people previously spoken about as candidates, Mr Varley and the noble Lord, Lord Green, have probably dropped off in the past few days, so it is not a strong list.

Looking then at the FPC and its oversight, where are we going to find the people with the necessary talents to do this job? We are on the horns of a dilemma. On the one hand, you want knowledgeable people—people who do not have to be taken through everything step by step, but come to the issues with a good and clear knowledge and the ability to spot where the critical questions lie. On the other hand, you do not want to start these committees with people who in some way are conflicted by their current employment, their past employment, their pension arrangements and so forth.

I do not have a view about whether the shadow FPC is doing a good job. I think one or two of its members appear to be. Mr Robert Jenkins, in particular, appears to be an independent spirit who is not in any way caught up in the groupthink and consensus that I associate with much of the heart of the Bank. The simple fact is that most members of the FPC have a career background in investment banking. They have a career background in the very activity which was associated with the global financial crisis. I think we have a problem here. How do we get the right people into the right committees and the right courts and the offices of governor and deputy governor? No architecture makes sense if we are creating it on the presumption that we can find people of integrity, raw talent and understanding to fill the jobs when that is not a realistic assumption. I think the heart of the matter raised by my noble friend in his amendment is: how can we be satisfied that the people sitting on the FPC are appropriately competent and are managing conflicts of interests, as they probably will always have conflicts as a prerequisite for qualification to sit on these various committees?

[Lord Liddle]

My Lords, that was a very interesting exchange between my noble friends Lord Davies and Lord Myners on the crucial question of how these matters should operate. I would like to add a point in favour of my noble friend’s amendment on the basis of work I have done on how the new European system is operating. I had a conversation in Brussels recently with André Sapir, who is on the board of the European Systemic Risk Board, about the role of independent economic expertise in assessing systemic risk. On that board, the independent economists have made a decision that they will not rely on the internal expertise of the European Central Bank, precisely for the reason that the noble Lord, Lord Eatwell, said. We are operating in a very uncertain world and no one really knows what the right road map is. What we need is the maximum amount of well informed, independent expertise on these matters. I feel very strongly that this amendment should be supported.

[Lord De Mauley]

My Lords, before I start on the amendment, I shall say in response to the noble Lord, Lord Davies of Stamford, that the deputy governor for financial stability is a very fine and highly respected deputy governor. As the noble Lord, Lord Myners, said, it is for the Treasury Select Committee to assess what he said yesterday.

Turning to Amendment 89, it would create an advisory panel with a two-fold brief: first, to advise the FPC on systemic risks to financial stability; and, secondly, to assess and report upon the effectiveness of the FPC in assessing systemic risks to financial stability, the macroprudential tools provided by the Treasury to the FPC and the actions taken by the FPC. The membership of the panel would include the deputy governor for financial stability and a number of external members appointed by the Treasury, drawn from a range of relevant professions, including academia.

The Bill already creates, in the FPC, a committee on which the deputy governor for financial stability sits, together with external members, some of whom may indeed be academics. The noble Lord, Lord Eatwell, was good enough to compliment the external members of the interim FPC. Let me give some details of the specific expertise of the current external members to give a flavour. Alastair Clark has, in addition to extensive real-life experience, degrees from Cambridge and the LSE and is an honorary visiting professor at the Cass Business School. Robert Jenkins, who the noble Lord, Lord Myners, referred to, not only has extensive experience of trading and asset management but is also an adjunct professor at the London Business School. Donald Kohn, in addition to extensive experience in financial regulation in the US also has academic experience. Michael Cohrs has experience at senior level in the private sector in investment banking but is also a Harvard MBA and an adjunct professor at Beijing University. We want, and we have, multifaceted people. We agree with the noble Lord regarding the need for extensive broad experience, including academic experience, but we do not think this needs to be set down in legislation.

--- Later in debate ---

[Lord Flight]

My Lords, it strikes me that this amendment points an important finger at a number of territories. In some ways the mismatch concerns me less; there are always likely to be mismatch problems. For starters, I was disappointed that the previous Government, as it were, gave away power in the territory of financial regulation to Europe. Substantial things are happening: we have MiFID 2; the banking supervision proposals; and, following on from those, the recent proposals arising from greater European economic and financial union. First, I would like to know that the UK parties batting for the UK are doing a good job and have raised all the issues. Secondly, I agree with the noble Baroness, Lady Noakes. I am not certain whether this is a Treasury or a PRA matter but the PRA at least has the lead for the regulators in negotiating with the EU bodies. I should like to know how the Bank of England thinks it has done in dealing with the issues and protecting British interests.

The MiFID 2 proposals are coming up and I think that they could be extremely damaging to the UK if they went through as presently proposed. A lot of work needs to be done for them to be workable. If there were no public review or airing of what has been going on and the issues, it would perhaps be—in a fast-changing territory—somewhat undesirable. However, I am not quite sure what the right mechanism is for achieving what I seek to achieve.

[Lord Liddle]

My Lords, I rise briefly to support my noble friend Lady Hayter’s amendment. She has drawn attention to a crucial issue for the United Kingdom. The fact is that we benefit greatly from the existence of the European single financial market. I believe that one of the reasons why so many overseas banks base themselves in London is that we are part of a single regulated market. There are grave dangers for us in going down the road of separating ourselves from that single market.

It is important that we keep very closely in touch with European developments at all times. It is a very fast-moving scene. As we understand the results of the last European Council, banking supervision within the eurozone will be put under the European Central Bank by the end of this year. I noted with interest the Governor’s comment, as reported in the Financial Times at any rate, that this would make it easier for the Bank of England to deal with regulatory issues because there would be, as it were, a single telephone number to ring in the European Central Bank. It is also the case that the UK has a critically important influence in the European Systemic Risk Board. It is vital that we play a crucial role in that board, of which the Governor of the Bank of England is the deputy chair.

[Lord Sassoon]

I think that he is the first deputy chair.

[Lord Liddle]

Britain’s position is given a special status given that we are the financial centre of the European single market. The governors of the central banks who make up that body are alive to London’s concerns at all times. It is very important that we play a major role there. It is therefore crucial that we keep these issues under review. I do not think that the way in which the Government have handled the proposals for a banking union is in the UK national interest. It is a bit rich to say, “It is none of our business because this is to do with the eurozone”, but then to complain that the creation of this thing might mean that there was an inbuilt majority against Britain on all financial regulatory decision-making. It is rather contradictory.

The position we have to adopt is that although we are not in the eurozone and will not be in the eurozone, we have to sustain the single financial market. That involves us having the closest possible relationship with the relevant European bodies and keeping abreast, in terms of our own arrangements, with developments there. For those reasons, I strongly support my noble friend’s amendment.

[Lord Davies of Stamford]

I also strongly support my noble friend’s amendment, which was very well conceived and—if I may say so—very persuasively moved. I also agree very much with my noble friend Lord Liddle in the way that he approaches this problem. I think that there are four major issues on which the House needs to ponder carefully. The first is the emerging mismatch between the evolving structures in financial regulation on both sides of the channel. Something has already been said about that so I will not go into it any further.

The second issue is subjective, but I fear that it is very difficult to deny. It is our declining influence in matters of financial regulation and supervision around the world. Many of us can remember a time when the British were regarded as great experts in these things. We obviously were brilliant because we had such a successful financial services industry. Therefore, when we said something about financial regulation, supervision or the right way of creating a framework for a thriving financial services industry, whether it was said in Washington, New York, Brussels or Frankfurt, it was listened to with great attention. We naturally had a very strong influence. I am sorry to say that a combination of the Euroscepticism of this new coalition Government and our recent failings in financial regulation and supervision—one thinks of the failings of the FSA in matters of RBS and so forth, and now the terrible and very upsetting scandal of LIBOR fixing, which I will not go into any further—inevitably will, and is, undermining the influence that we used to have. That is a very worrying situation.

There is, thirdly, the competitive issue, which we will come on to in later amendments. It is quite clear that as the framework for financial regulation diverges between this country and the continent, there is always a danger of competitive advantages changing, and possibly not in our favour. One of the obvious examples of which people are well aware is the possibility of lower capital-adequacy ratios on the continent. Presumably, particularly in the light of the crisis that we have all been through, they will always be set at a fairly sensible prudential level. However, there may be significant differences—for example, in retail deposit insurance schemes—which would lead people to want to hold their accounts on the continent rather than here. All kinds of things could emerge from regulatory and supervisory initiatives that would change the competitive balance. We need to be very alert to that.

Finally, the jury is out on whether or not it is in the national interest for us to be part of the emerging European banking union. I can see a great many theoretical reasons why it might be very strongly in our interest to join, but I do not have the slightest hope of persuading colleagues in the House today of that. Indeed, I am happy to wait and see, but we need to keep the matter under review. The regular review which my noble friend proposes in this amendment is exactly the kind of procedure and discipline that we want.

All British institutions involved should be aware that they are being reviewed in this matter; that their collaboration and effective participation in European structures is being watched; that they are expected to use their influence as effectively as they can on our behalf; and that they should be very conscious of the role they are playing. All that is very important and we need to monitor the results. We need, a few years after it comes, to be able to look back over the record as revealed by these reviews and otherwise—quite pragmatically and open-mindedly, without dogmatism or emotionalism—and to take a rational decision on the best way of achieving the national interest going forward.