Financial Services (Banking Reform) Bill

Lord Mann Excerpts

Monday 11th March 2013 Commons Chamber

[Greg Clark]

The right hon. Gentleman will find that he will be perfectly satisfied with the degree of scrutiny that the recommendations, which have not yet been made, will receive. I have made that commitment and he will see it in time, even if he is not very trusting at this stage. I hope he will change his view.

One of the parliamentary commission’s policy recommendations was for a general reserve power to split up the entire banking system if it were considered to be appropriate in future. The Chancellor, the chairman of the commission—my hon. Friend the Member for Chichester—and, indeed, the Archbishop of Canterbury had a learned and erudite discussion about the origin of the sword of Damocles metaphor. The Government’s view is that such a power would, in effect, introduce a different policy—one that was considered and rejected by the Independent Commission on Banking, which concluded that full separation would have higher costs for a gain

“that might not even be positive”—

without anything like the three-year period of scrutiny and analysis that this policy has enjoyed.

The proposal would, in effect, legislate for two policies at the same time—ring-fencing and full separation. We must legislate for the policy that the Vickers commission proposed. If a future Government were to consider that ring-fencing was no longer the right solution—which they would be perfectly entitled to do—they should conduct a full analysis of the case for alternative reforms and, in the light of that analysis, introduce new legislation to Parliament.

In addition, the parliamentary commission has proposed that the exercise of the reverse power by the Prudential Regulation Authority should include safeguards, including a Treasury veto, to ensure that the regulator behaves in a non-discriminatory way. The Government agree that there should be such a veto and will table an amendment to provide for a firm-specific power to require separation while the Bill is before the House. In addition, a further safeguard is available for any bank that believes it has been treated unfairly—namely, recourse to the courts.

One very important point that both the Vickers commission and the parliamentary commission agreed is that, in addition to the enhanced capital requirements on ring-fenced banks, there should be a minimum leverage ratio and that it should apply to unweighted assets of 4.06%, rather than the Basel III standard of 3%.

Let me be clear: this Government support the introduction of a minimum leverage ratio. It provides a simpler measure than risk-weighted assets, the calculation of which can be complex and disputed. Furthermore, it has been established empirically that a rise in the leverage ratio often preceded credit booms in this country and overseas.

The question remaining is about the precise level of the leverage ratio. I referred earlier to the British dilemma of how to maintain an internationally competitive financial sector without imposing risks on domestic taxpayers. This is a case in which that dilemma is, to be frank, most acute. When it comes to capital requirements, international agreements have already established that different countries will have different requirements. The European Union capital requirements directive, CRD4, provides for member states to have discretion to go beyond agreed capital requirements.

In the case of the leverage ratio, the 3% Basel III recommendation was for the requirement to be binding only from 2018, and it is not clear yet whether there will be the flexibility in European law to increase it as Vickers and the parliamentary commission recommend. The Vickers commission did not recommend that the higher leverage ratio should apply before 2019, in order, for reasons that I think we all understand, to minimise the impact on lending in the short term while the economy is still recovering.

Furthermore, during our repeated consultations, concerns have been raised by institutions such as building societies that they could be caught by a 4% leverage ratio despite having a relatively low-risk portfolio of assets, thereby restricting lending to home owners. Moreover, it would lead to assets in Spanish property, for example, being viewed as equal to US Government bonds for the purposes of the calculation. Our view, therefore, is that at this time we should follow the international approach and press for countries to have power to set a higher ratio from 2018, following a review in 2017.

Having said that, in the interests of transparency, we agree with the recommendation of the Financial Policy Committee that banks should disclose their leverage ratios from 2013. I confirm that they will do so from this year.

[John Mann (Bassetlaw) (Lab)]

Does the Minister perceive there to be a problem for very small building societies, because they are more disadvantaged than large institutions and could be swallowed up, thereby reducing competition in the market rather than increasing it?

[Greg Clark]

I have taken to heart the need to allow into the market smaller players, whether they be building societies or banks. I will say something about that shortly which I hope will satisfy the hon. Gentleman.

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[Greg Clark]

My hon. Friend is a passionate advocate of that, and I think that what I will say about it will please her. I hope that she will be able to contribute to the debates on it in the weeks ahead.

The Government intend to go further on the matter of competition than was suggested in the reports of the two commissions. I strongly believe that the concentrated nature of the UK banking industry is unacceptable. I want to see far greater possibility, and indeed reality, of entry into the market by new banks and building societies. One of the barriers to that has been access to the UK payments system. Potential challengers have to win the permission of incumbents to be able to use the system. The Government will therefore shortly consult on a proposal to make access to the payments system regulated, to ensure that it is available on fair, reasonable and non-discriminatory terms. Subject to the findings of the consultation, the Government will consider tabling amendments to the Bill to give the regulator the necessary powers. I think that would address my hon. Friend’s ambitions.

[John Mann]

I welcome the Minister’s comments. Will he also table an amendment to recreate the Halifax building society out of the state-owned Lloyds-TSB bank? That would immediately create a major competitor on the high street that would be hugely popular, as it was before it was bought out.

[Greg Clark]

We want to see greater competition and more entrants. The hon. Gentleman will know that in the case of the banks in which we were in the unfortunate position of having to take a shareholding, the arrangements that govern that shareholding require us to operate at arm’s length of the interests of other shareholders. No doubt he will be able to make his points throughout the passage of the Bill.

[John Mann]

This is a Bill, and it can become an Act, so the Minister could table a Government amendment to do precisely what I said. Why is he not taking the opportunity to recreate the Halifax building society, which hundreds of thousands—perhaps millions—of consumers across the country would greatly welcome?

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[Chris Leslie]

We have to learn the lessons of that global financial crisis, one of which is that leverage has come to the fore as a way of illustrating the over-extended nature of the banking system. I am glad that consensus is breaking out across the Chamber on this point. As the hon. Gentleman knows, he and I have almost been in concert in voting on a variety of amendments, some of which have been inspired by his very own articles. I therefore look forward to him joining us in the Division Lobby—if it comes to that—on the question of the leverage ratio.

[John Mann]

Before too much consensus breaks out, may I ask my hon. Friend to say a little more about how he envisages the problem of small building societies being addressed? They are saying unambiguously—although privately, of course, for commercial reasons—that their future is imperilled. Is a one-size-fits-all approach the right one? Is that the approach that my hon. Friend would take if he were in power?

[Chris Leslie]

Of course there are ways of ensuring that the building society sector can be accommodated in the leverage ratio framework. Building societies have a totally different equity structure, as my hon. Friend knows; they do not have the same equity as a plc structure. There are therefore important differences in that sector. In my view, however, it is important that all institutions, large and small, should be subject to safety requirements regarding capital loss absorbency and protection against over-extension in certain risk areas. There are ways and means of dealing with that, but I am annoyed that the Government have not seen fit to put any provisions on the leverage ratio in the Bill.

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[John Mann (Bassetlaw) (Lab)]

It is a pleasure to follow the Father of the House and to agree with many of the sentiments he expressed.

I look at the Bill and at the Ministers and my reaction is to ask, “Is this it?” Considering what we have been through and the problems in British and world banking, is this Bill the best that we, as legislators, can do? If that is the case, it is no surprise that we are increasingly derided outside this place.

The Minister should have set the context. I offer him my file detailing the top 50 banks in the world by assets. What unifies those top 50 banks is that every single one, without exception, either has been subject to major convictions for criminal fraud recently or is being investigated for criminal fraud. The Americans have been very good at portraying this as a British problem. They have, perfectly properly, exposed problems and illegalities in British banks. However, their banks are doing the same and worse, as are banks the world over. That sums up the problem. What other industry could have all 50 of its top players committing criminal fraud at the same time while the world’s legislators are happy to do just a bit of poking, a little juggling and a few bits and pieces?

I do not disagree with the bits and pieces, especially if there is strengthening and improvement, but is that all we are going to do? I heard reference to the 1930s and I have heard that time used before as a comparison. We are doing the same thing with the same boldness, but it did not work in the 1930s because 1931 turned into 1933 and into 1939 to 1945. That was the consequence. We therefore need to be significantly bolder in what we are doing. This Parliament, like other legislatures, remains cowed by the bluster and power of investment banking.

There are models that are different from the British model of investment banking. The Chinese have a very different model. We seem to be forgetting how successful that model is. While we are sellotaping our banking system together, they are building a competitive base that will dominate the world economy for generations. It is as if we are the fools at the Chinese emperor’s ball. By using a model of cheap finance, concentrating on raw materials and technological transfer, investing in skills and infrastructure, and planning for the medium term, China is showing how ruthless simplicity creates permanent competitive advantage. That contrasts with the short-term monetary advantage that our investment banking model offers. We play with paper while the Chinese build with concrete. Worse than that, they are developing tomorrow’s building materials, designs and visions.

A simpler, democratic model that similarly contrasts with the British investment banking model is the German model. An example is KfW, which was formed in 1948. Its lending to business in 2011, the last year for which I could find figures, was €70 billion out of a loan portfolio of nearly €500 billion. That is a less risky and less speculative model than our money market, casino model. Just like the Chinese model, which I do not recommend but do admire, the German model is beating ours. The danger is that we are playing yesterday’s games, whereas those countries are playing tomorrow’s games. That is a bit like the 1930s.

We must not be fearful of investment bankers. We should not just create an electric ring fence between retail and investment banking, but should consider whether the model that we have is fit for purpose. One thing that it certainly is not is competitive. We have allowed a model that does not create competition, and the Bill does nothing about that. There is the hope of the challenger banks, but they have not been very successful and there is more that we could do to help them. Over the past 20 years in this country, we have stripped out competition.

I would like to be able to follow the advice that I was given when I first got a bank account: “Put your money somewhere safe. You won’t get a great deal of interest on it compared with other places, but it’ll be reliable and it’ll help you get a mortgage and buy a house in the future.” It was called a building society. That was only one part of the model, but there were a lot of them all over the country not many years ago. The problem with the Bill is that there could end up being even fewer of them and a greater concentration of the tiny number that there are. Building societies are only one part of the financial services market that I want to see, but they should be a significant part—at least 30%, if that is what consumers want, but consumers have not been given the choice.

There is no real competition. Where is the national interest test for takeovers and mergers? The vast majority of investment banking’s speculative profits over the past 20 years have come from the mania for takeovers and mergers. Germany has such a test, and would anyone try to merge or take over a major conglomerate in China? I do not think so. A national interest test should be in place.

The two state banks should be broken up, and the Halifax building society should be recreated out of them, but we need far more than that. Competition should be created in the marketplace and enforced. If that were to happen, consumers would flock to that model in large numbers. I would like to see a model of tiered risk. I do not believe the idea that we can guarantee every type of saving for ever up to a certain limit—£85,000, or whatever it ends up being in the future—is rational. I would like a real choice between low interest rates and total security for my money, and medium or higher risk. We should give the consumer the choice rather than have the pretence that the state will always be able to provide a bail-out. From the moment such a pretence is created—we have essentially had it since the war in this country—there will by definition always be banks that are too big to fail. The fundamental logic of that cannot be broken.

There are many other bits and pieces that I would like to see. One of the Treasury Ministers ought to be in Europe full time. Whether or not I agree with what the coalition argues, one Minister ought to be negotiating, pre-warning and advising on and helping to create what comes out of Europe. I would like to have the bonus cap and the Government disagree, but the point is that we have not been there at the table, which is where we need to be. That is a fundamental weakness, as it was under the last Government. It would be wise politics to make that change.

Auditing has been mentioned, and another minor point that ought to be in the Bill, on the micro level, concerns compliance officers in banks. They are the office boys—there is no qualification for them and no basis of standards. It would be pretty easy to sort that out and ensure that there is a qualification to be a compliance officer. We should raise their grade and standard. We should not make a fetish of degrees, but it ought to be a graduate-quality job, which it has not been. That is a fundamental weakness in how banks see themselves and compliance.

A major change that I would like to see concerns tax loopholes. There has been a lot of talk about them, but when it comes to banking the biggest loophole involves the UK Crown dependencies. We have a significant degree of influence over them and they rely on us for their legal system and their defence, but we allow them opaqueness in finance, whether banking, commercial, personal or a combination. No wonder my file is full of cases of money laundering and other criminal corruption that have been found out, and those are only the ones that people have been able to see. That opaqueness should go, and we have the power to do it. Those are the big issues that have not been addressed in the Bill. I implore my party to get on the case and get it amended.

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[The Economic Secretary to the Treasury (Sajid Javid)]

This has been a thoughtful and considered debate, led by my hon. Friend the Member for Chichester (Mr Tyrie) and his colleagues on the Parliamentary Commission on Banking Standards. I take this opportunity to thank my hon. Friend for his leadership of the parliamentary commission and to thank all the Members of the House and in the other place who have made contributions to that commission.

I congratulate the hon. Member for Eastleigh (Mike Thornton) on an excellent maiden speech, and I welcome him to the House. I, too, spent quite a bit of time in Eastleigh over the past few weeks. I do not think I helped him get to the House, but now that he is here I congratulate him and wish him the very best. From what I heard today, I think he will make a fantastic contribution. Thank you.

We heard a number of pertinent and considered contributions from both sides of the Chamber, and I am pleased to see widespread support throughout the House for the measures that the Government have put forward in the Bill. The support from the Opposition Benches for so many measures is an admission, at least from some Opposition Members, that they got it wrong during their time in office, and that, as my right hon. Friend the Chancellor has said, when the fire alarm was ringing, nobody was listening. That was a point well made by my hon. Friends the Members for Carlisle (John Stevenson) and for North East Cambridgeshire (Stephen Barclay).

Nearly six years ago, we experienced the first run on a high street bank in over 100 years. Five years ago, the previous Government were forced to bail out both RBS and Lloyds, as well as to provide billions in support to the financial system. It was the worst financial crisis in a generation. It happened on their watch and it left this Government with a huge mess to clear up and with the task of restoring trust in the banking system and ensuring that taxpayers are unlikely ever again to have to step in to bail out banks. That is exactly what the Bill is designed to achieve. Ring-fencing will ensure that core services continue to be provided if a bank gets into trouble, and it will ensure that it is those who lend to banks and benefit in the good times who take losses when there are bad times.

This is a crucial Bill for the future of banking in this country, and its seriousness has been reflected today by the Members who contributed—15 right hon. and hon. Members, and the Father of the House, my right hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell), who made a superb contribution. I will attempt to respond to as many of the issues they raised as possible.

As my right hon. Friend the Chancellor has stated before, we have built a strong consensus around ring-fencing as the right structural reform, and others are following our lead. The proposals of Governor Liikanen and the high-level expert group draw heavily on this Government’s proposals and are entirely compatible with the Bill put forward by this Government. A number of Members, including my hon. Friends the Members for Chichester and for Caithness, Sutherland and Easter Ross (John Thurso), and the right hon. Members for Wolverhampton South East (Mr McFadden) and for Oldham West and Royton (Mr Meacher), raised the issue of the “electrification” of the ring-fence, as proposed by the parliamentary commission and accepted by the Government.

It seems clear that the House is in broad agreement with this important addition to the Bill. The Government agree that a power to require an individual group to separate could be a powerful deterrent against attempts to game the ring fence. This power would strengthen the ring fence. The Government will therefore table an amendment while the Bill is before this House to provide for the regulator to have the power, subject to Treasury approval, to require a group to separate.

On a related issue, several hon. Members have raised the proposal of the parliamentary commission that the Bill provide for sector-wide separation to be triggered at some, as yet undetermined, point in the future. The Government do not accept that proposal. The parliamentary commission is, in effect, asking the House to legislate two parallel policies: ring-fencing and full separation. That is despite the conclusion of the ICB, which rejected full separation in favour of ring-fencing, and despite the parliamentary commission producing no evidence in favour of sector-wide separation as an alternative. Indeed, the parliamentary commission accepts that there is no compelling case at present for full separation. That is why it recommends an independent review at some point in the future to consider whether full separation should be implemented.

However, ring-fencing has already been endorsed by a thorough independent review, which undertook public consultation, extensive scrutiny and cost-benefit analysis lasting nearly three years before rejecting full separation. The parliamentary commission’s proposal to legislate for an alternative policy in case we change our view would, in the Government’s opinion, be bad law-making. If in the future a Government were to believe that ring-fencing was no longer appropriate, which they would be perfectly entitled to do, they should conduct a thorough analysis of the evidence, consider the arguments for and against, including perhaps by commissioning an independent review. If they concluded that a different approach was necessary, they should bring forward legislation for Parliament to consider in the light of all the facts.

Several Members referred to the Volcker rule, including my hon. Friend the Member for Wyre Forest (Mark Garnier). While some may support such a measure, after 18 months of consideration, Sir John Vickers did not recommend that the ring fence be supplemented by a ban on proprietary trading. When the parliamentary commission asked him whether a Volcker rule should be introduced on top of his ring fence, he warned that the complexity of such a rule could, by distracting regulators’ focus, actually undermine the ring fence. On top of that, in Europe, Governor Liikanen and his high- level expert group noted how difficult it could be to distinguish between market making and proprietary trading. They also worried about pushing proprietary trading into the shadow banking sector, instead choosing to keep it within the regulated banking sphere. This Government are minded to agree with such an appraisal, and do not therefore see the benefit of a Volcker rule on top of ring-fencing.

We have heard some interesting views on the leverage ratio. Let me be clear. The Government strongly support a robust leverage ratio and are pushing hard for full implementation of the Basel III leverage ratio in the EU via the capital requirements directive. The ICB and the parliamentary commission have both proposed that we increase the minimum leverage ratio above the 3% international standard set out in Basel III. The Government strongly support the idea of a minimum leverage ratio as a backstop to risk-weighted capital requirements. But a higher leverage ratio would become a front-stop, the primary capital constraint on low-risk institutions, including building societies—a point made by the hon. Member for Bassetlaw (John Mann)—and one that could reduce essential lending to households. A front-stop leverage ratio would also create perverse incentives for these institutions to risk-up, because a leverage ratio does not distinguish between the safest assets, such as UK gilts, and the most risky assets. I do not think any hon. Member would like to see policies encouraging our safest banks and building societies, including those that weathered the last crisis quite well, to become more risky. So the Government are not persuaded by the arguments for a higher leverage ratio.

We have also had a number of interesting interventions on primary loss absorbing capacity requirements, not least from the Chairman of the parliamentary commission. The Government are committed to ensuring that banks have the means to absorb losses should they get into trouble, and that those losses fall on those best able to assess the risk that they are taking. The Government agree that the ICB recommendation that ring-fenced banks, and UK-headquartered globally systemically important banks, should be subject to new PLAC standards. That will be 17% of risk-weighted assets for the largest banks. That extra capacity to absorb losses will improve resilience against shocks and mean that, if a bank does fail, it can be resolved without recourse to bank bail-outs.

Some Members questioned who would decide whether banks should issue primary loss absorbing capacity against their overseas activities. The parliamentary commission recognised that the Treasury should have a role in shaping how the regulator applies primary loss absorbing requirements. That is because such decisions will be inextricably bound to the key Treasury objectives of protecting public finances and supporting long-term growth. The Government therefore believe that there is strong merit in the FSA’s suggestion that PLAC instruments and decisions should be made in the context of a firm’s resolution strategy. We will therefore make provision during the passage of the Bill to give effect to that.

Members have also mentioned bail-ins, which were discussed at some length by the right hon. Member for Wolverhampton South East. Bail-in is an important statutory tool that helps to ensure that creditors, rather than taxpayers, expect to bear the costs in the event of bank failure. It is a particularly important tool for systemically important banks, where the impact of insolvency on the wider economy is large.

To ensure that UK banks are not disadvantaged relative to international competitors, and because the task of resolving large cross-border banks is complex and requires close co-operation, it is important that the UK works with other countries to design a consistent bank bail-in tool that can work in relation to the resolution of cross-border institutions. We are therefore working closely with our European partners to develop a credible and effective bail-in tool as part of the European recovery and resolution directive. We are pleased that the Irish presidency has set out its intention to make rapid progress towards conclusion of the RRD. However, if agreement cannot be reached—we expect that it can—we will consider tabling amendments at a later stage in the Bill’s passage to allow the UK to act alone.

We heard many thoughtful interventions on competition matters. We heard from my hon. Friends the Members for Wyre Forest, for Cities of London and Westminster (Mark Field), for Wycombe (Steve Baker) and for South Northamptonshire (Andrea Leadsom). The Government are committed to making changes to encourage greater competition in the banking sector. Many of those do not require legislation to take effect, and we have already acted in a number of ways. The FCA is now tasked, through the Financial Services Act 2012, with a competition objective, as Sir John Vickers, the former head of the Office of Fair Trading, recommended.

While discussing competition, we also heard from a number of Members on what might be called alternative structures for banking. The hon. Member for Bassetlaw suggested that we move to the Chinese model, and the hon. Member for Hayes and Harlington (John McDonnell) suggested that we nationalise the entire banking sector. However well intentioned those proposals, I think that they are wholly misguided.

[John Mann]

It ill befits the Minister, when an hon. Member makes a point on three occasions, not to manage to listen to it. Perhaps he would care to consider the point I made: I dismissed the Chinese model and recommended the German model.

[Sajid Javid]

Well, let us talk about the German model. As someone who worked for a German bank for 10 years, I think I might know a little more about the German model than the hon. Gentleman does. The German model was the one that had to nationalise Commerzbank and other banks in the regional sector, and the largest bank in Germany was not without its own problems, such as the LIBOR scandal. He suggests the German model, but I do not really understand what the difference is.

[John Mann]

The difference between the German model and the model the Minister has at the moment is that the German model is lending to business.

[Sajid Javid]

I think that the hon. Gentleman needs to do some homework on the German model.

Let me turn to switching. The Vickers commission made a number of recommendations on competition, one of which was for a seven-day switching service. That will go live in September this year. It will be free to use and will come with a guarantee to protect customers against financial loss in the event of any errors occurring during the switching process. A number of Members, not least my hon. Friend the Member for South Northamptonshire, made interesting points on full account number portability. The Government have always kept an open mind in that debate, arguing that the seven-day switching service should be allowed a good run. If it does not deliver the expected consumer benefits, more radical options will of course be looked at, including full account number portability.

The structural reforms proposed in the Bill will of course aid competition. As the Bank of England’s executive director for financial stability, Anthony Haldane, said to the parliamentary commission, one of the biggest challenges we face on competition concerns is that banks are perceived as being too big to fail. The banking sector reforms made through the measures in this Bill are designed to address precisely that issue.