Financial Services Bill

Lord McFall of Alcluith Excerpts

Monday 11th June 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I am delighted to participate in this debate and to welcome the noble Lord, Lord O’Donnell, to this Chamber. He is an individual with whom I have had many formal and informal dealings. He is a person of the highest integrity, respectful of every individual he meets, irrespective of status, and an exemplary model of a civil servant. It is a model that the Government should ensure they get more of in the years to come as the complexity of the financial services dawns on us. So I welcome the noble Lord, Lord O’Donnell, to this Chamber.

I bring to your Lordships’ attention my entry in the Register of Members’ Interests. Like the noble Baroness, Lady Wheatcroft, I was delighted to be a member of the Joint Committee on the draft Financial Services Bill. A number of areas arose during that committee: first, architecture; secondly, complexity; thirdly, accountability; fourthly, ring-fencing; and, fifthly, and most importantly—a phrase to which we all signed up—that to be successful the reforms will have to change the regulatory culture and philosophy. Those should be the guiding principles.

We all agreed that architecture is of secondary importance. The issues that matter are culture, conduct and communication. These issues were key to what went wrong with the tripartite authority. Alastair Darling’s devastating evidence to the Joint Committee brought that out.

On the issue of complexity, we should note that we are moving from a tripartite to a quadripartite system involving Her Majesty’s Treasury, the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority, not to mention the Financial Conduct Authority. We have more interfaces, and therefore a higher degree of complexity. It was the interfaces and the information that fell down between them on the last occasion that caused the problem.

The question that bedevilled the tripartite authority when it came before the then Treasury Committee in the House of Commons was very simple: who is in charge? Everyone said that they did their job properly. However, we had to face one of our biggest crises with a vacuum in the making and no clarity for the Chancellor. The Minister rather boldly said at the Dispatch Box that never again would we ask who was in charge. I suggest that those words could come back to haunt him in years to come if the Government do not get the correct legislation.

As other noble Lords have said, at present we have opaque decision-making structures and still require clarity and explicit guidance and information, either through memorandums of understanding or whatever, on the view of the governor and his key deputies. We should remember that on many occasions the governor and his deputies will have contradictory views as a result of the responsibilities they are given and that the Chancellor must have clarity from them. There has to be no hiding place so that we can answer the question about who is in charge, but at present we cannot do that.

I mentioned the issue of regulated culture and philosophy. Business models are the key to understanding the issues within a company, from the policies followed to the individual behaviour of the executives. Auditors are the key to this. A number of years ago I asked auditors what the point of an audit was. It is presently a backward look at accounts. Auditors are doing everything that is required but not much of what is expected. This was illustrated by Northern Rock. In the first six months of 2007, this small building society was responsible for 20 per cent of all new mortgages in the United Kingdom. The chair of the Audit Committee, and not least the auditors, should have asked why the company was doing so well compared to others. However, that question was not asked.

Auditors therefore need to give a realistic view of the state of a company, taking into consideration the present and the possible future risks. I suggest that auditors should report to the Financial Policy Committee so that it understands both the microeconomic and the company landscape environments in an area of no more sensitivity than risk.

At the moment, risk is a black box. This was illustrated in the comments made by Professor John Kay and Professor Charles Goodhart to the Treasury Committee a number of years ago. When asked whether we could evaluate risk, Professor Goodhart said very clearly, “No”. Professor John Kay said, “I have been teaching at Oxford University for 25 years and I have ripped up my notes on risk”. So risk is a black box, and more regulations and rules alone are not the way forward.

We have to recognise that no regulator in the world spotted the problem. The Governor of the Bank of England said that the regulators were like locusts in Citibank. JPMorgan Chase is the latest example in the City, with the “London Whale” and a loss of £2 billion. Ten regulators were sitting in JPMorgan Chase when it happened. The question that arises out of that is: why did Jamie Dimon, someone supposedly alert and cute, need a call from Bloomberg to tell him that there was a £2 billion loss to his company? Jamie Dimon retorted by saying that it was a “tempest in a tea pot”, but if you put your arm right next to a tea pot, you can get a really bad burn. Maybe he did not realise that.

The situation of JPMorgan Chase and others reflects a systemic breakdown in management and risk control systems. Incidentally, the chief risk officer receives $14 million a year before foreign excises, so I would have thought that the risk officer could take quite a bit of a risk if $14 million is going into a current account as a result. I suggest that the Treasury Committee or other committees of the House should invite Jamie Dimon to explore the concept of risk and ask this question: are the largest banks still too big and complex to be managed safely? Are we now seeing “too big to fail” being followed by “too big to behave” in companies such as this one?

The way forward lies in good corporate governance to tackle these deep-seated problems, not only changing the way people behave but the way they think. We need to promote values and a culture that drives people to do the right thing even when no one—that is, the regulator—is looking. Culture is behaviour and ethics is resolving conflicts of interest. That is what the Government should be promoting. The motto of the City of London is, “My word is my bond”. In a recent survey, over 80% of people working in the City did not realise that. In other words, there is a big repair job to be done in order to restore trust.

I am delighted to see that the departing chief executive of the Financial Services Authority devoted his last speech to culture. That is a small but positive step. If we focus more on these issues, we can hope eventually to realise a market system that is fair to both consumers and businesses, where risk is rewarded, failure punished, and growth and employment are paramount.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Lucas]

My Lords, we have to face the fact that we do not do as good a job in Grand Committee as we do in a Committee of the Whole House. There is no opportunity for Peers widely to participate in Grand Committee in the way that there is in the Chamber. Given the importance of the Bill and the depth of interest in it, I hope very much that the Government will listen to what has been said.

[Lord McFall of Alcluith]

My Lords, perhaps I may remind the House that Finance Bills in the other place are accorded the greatest status by being debated on the Floor of the House. If we are going to have equal status in terms of the scrutiny and examination of this Bill, the least we can do is send a message to the other place that we take this seriously, and that it has to be done on the Floor of the House.

[Baroness Liddell of Coatdyke]

My Lords, this should not go into Grand Committee, not least because of the historic significance of the past four years and what has happened to financial services—against the background of financial services as a major industry for this country—but also because this is a classic opportunity to showcase the wide range of expertise that is available in your Lordships’ House. This is not a Bill to be put into a corner and forgotten about. It deserves—and the public deserve to see us give—the kind of detailed scrutiny that legislation of this importance merits.

Scotland Bill

Lord McFall of Alcluith Excerpts

Wednesday 28th March 2012 Lords Chamber

[Lord Browne of Ladyton]

My Lords, I welcome the amendment. It is entirely consistent with a request that I have made repeatedly for reports on current progress in relation to the transfer of these powers. I hope that in anticipation of Third Reading, Ministers will take some time over the Recess to prepare at least an outline of a report on progress for the transfer of these powers to the Scottish Parliament. I say that for the reasons that I have articulated. I have a belief, based on information that I have received, that the Scottish Government and their Civil Service are ill prepared for the transfer of these powers. I should like to be reassured that we are transferring powers to people who are building the competence to use them appropriately.

In response to the point made and repeated by the noble Earl, Lord Caithness, about the buy-in of Scottish Ministers, there is a reference in subsection (2) of the proposed new clause to an obligation on Scottish Ministers to report in a similar way to the Secretary of State. However, it is deficient in the sense that it does not satisfy the desire on these Benches, which is apparently shared across the House, that the Scottish Government and the Scottish Parliament should buy in more fully to the whole package of transferring taxation powers for the reason that I gave before. I repeat that some time in the future they may be tested against that package and they should own it. That can be done only if they agree. If they do not agree, it will be interesting to hear their explanation, but I suspect that if it is put to them they will find it so impossible to agree that they will agree.

The reports, which we understand from the Government will be used to answer some of the points that I made earlier, do not in their present form answer those points, although I accept entirely what the Minister said about the Government’s intention to augment the reports in the way he suggested. I do not doubt that for a moment, so he should be clear that I accept entirely that that undertaking can be guaranteed to be delivered. I sense that it will not be enough but I do not want to go back to Amendment 16. I welcome the proposed new clause as it stands and as far as it goes, but it does not go far enough.

[Lord McFall of Alcluith]

Under the proposed new clause as far as it goes, I was taken with the Minister’s comment about taxation being an instrument of redistribution, as Calman noted. If that is the case, we need a deeper appreciation of the transfer of these powers. It is not just about money but how that money is spent. There is no association between tax levels and growth. As a Scottish citizen, I want to ensure that money from income tax in Scotland is spent properly and that I will benefit as a result.

As far as concerns subsection (5)(d) of the proposed new clause, it is important that the issue is looked at. As was suggested, Scottish public services are inefficient even by miserable UK standards. The Scottish health service, for example, spends 19 per cent more per person, and we have 30 per cent more doctors, yet in many cases—such as cancer survival levels for women—there are worse outcomes. This is a very important issue. If we are going to look at income tax levels, we should have reports from the Scottish and UK Parliaments to ensure that we spend our money in the proper way—as an instrument of redistribution, as Calman suggested.

[Lord Sassoon]

My Lords, I will respond briefly to the points raised. The noble Lord, Lord McFall of Alcluith, articulated what goes to the heart of the Bill. It was a bit away from the limited but important role of the new reports that we are suggesting, which will deal with implementation and cover important things such as the criteria in the Command Paper that we discussed. I completely agree with him about the need for broader accountability. That will be precisely what the Bill takes to the Scottish people and to the Scottish Parliament.

In answer to my noble friend Lord Caithness, I say that the noble Lord, Lord Browne of Ladyton, has already drawn attention to the obligation, in subsection (2) of the proposed new clause, on Scottish Ministers to submit a report. My noble friend shakes his head. Perhaps he would like to see one report agreed between the two Parliaments. I am not sure what further step he would like to see, but it was felt appropriate, since there are two Governments representing separately the people and interests of Scotland and the UK, to have two reports with slightly different perspectives.

The Scottish Parliament will have access to both reports. In the working up to the reports, the Joint Exchequer Committee and the other fora for joint working will be engaged in all the work. Any difference in the reports on the progress that is being made on implementation will be wholly transparent, but I do not anticipate that there will be any such difference. There will be a report by Scottish Ministers, it will be clear to everybody how the reports link to each other, and I fully expect them to present a consistent picture of the progress that is being made.

I appreciate what the noble Lord, Lord Browne of Ladyton, said in welcoming the reports. I fully understand, in the context of our earlier discussion, that the proposal does not go as far as he would like, but it is appreciated that he understands that this is a step forward which will help with reassurance on implementation.

The final point that the noble Lord made, which we discussed in Committee, was on the question of how well prepared or otherwise the Scottish Government are to take on the challenge. There are three further years to go. I appreciate that it is a big challenge. The UK Government are sharing all relevant expertise. Ministers from both the UK and Scottish Governments are overseeing progress. Now that the substance of the Bill has been agreed, we hope that the emphasis and focus will move to implementation, which I accept is an important challenge.

Economy: Budget Statement

Lord McFall of Alcluith Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I am delighted to participate in this debate and particularly to follow the noble Lord, Lord Heseltine, whose civic award this week from Liverpool was richly deserved.

The power and influence of the social media in the form of Twitter were in evidence immediately after the Budget. Within minutes of the Chancellor sitting down after a carefully crafted and supposedly voter-friendly speech, it was labelled a “granny tax” Budget. The Chancellor’s tactical nous, for which he is supposedly famous, has let him down, and I suggest that there is a reason for that; every dot and comma of this Budget was publicly debated with his coalition partners. There were no surprises, save one.

As a keen observer of Chancellors and Budgets, I saw the Chancellor lose eye contact with his audience, bow his head to the Dispatch Box and say sotto voce that he was simplifying the system for age-related allowances for pensioners on the basis that they did not understand it. I along with others said, “Wow”. I suggest to your Lordships that pensioners certainly do understand the system now. Incidentally, the NAO last examined it on behalf of the Government in 2009, so the Government did not base their calculations on real-time information. This is a Budget that raises £4 billion, with £1.5 billion coming from pensioners. Almost half the revenue is coming from pensioners. I suggest that the “granny tax” storm will take some time to abate.

The Budget was big on politics but small on economics, being fiscally neutral. According to the Government, the extra £150 million of borrowing incurred on their watch left them with no room for manoeuvre: hence the Budget’s political emphasis, with the Chancellor eyeing the leadership and being the darling of the right wing of the Tory party at the expense of Nick Clegg—goodness knows why he went along with it.

Lords spiritual in this House regularly emphasise the concepts of faith, hope and charity. Let us look at those concepts in the context of the Budget. On faith, for all the emphasis on business innovation and investment, the OBR has drastically pruned its forecast for growth for 2012 following very weak figures for the last quarter of 2011. With recovery predicted at 0.8 per cent, the economy is not far from stagnation, so the Chancellor really is left on the sidelines, fingers crossed, and praying for sunny uplands in 2017. He has reduced corporation tax, which on the surface is a good initiative, but as Martin Wolf and others have described it in today’s Financial Times, this could be a zero-sum game, with global competition ensuring a race to the bottom. The interaction with personal income tax would encourage corporate retentions. We might therefore be exacerbating an investment black hole, with corporations hanging on to their money. The big issue is how we ensure confidence among those corporations to invest.

On hope, the issue of jobs and growth has been mentioned, but the Chancellor barely used the word “growth”, which I think was banned in his coverage of the Budget yesterday. However, what are we doing about the 1 million young people who are unemployed to give them any hope for the future? What are we doing about the north-south divide? I applaud the noble Lord, Lord Heseltine, for engaging in that, because instead of coherence between north and south, there is a divergence that will be to the detriment of the country. The prospects for the country will be diminished.

There is stronger case for fiscal stimulus this year than there was last year. Two members of the MPC, David Miles and Adam Posen, are calling for that—indeed, Adam Posen has long been on record as saying that the country needs a spare tyre for lending to small and medium-sized enterprises. I would have liked to see the Government ask in the Budget, “How can we create our own Mittelstand in this country, where we can support small businesses, rebalance our economy and take a renewed, fresh approach to manufacturing?”. I suggest to the Minister that it is not too late to consider the concept of a British investment bank, espoused by the noble Lord, Lord Skidelsky, and others, because banks do not lend to small and medium-sized enterprises because there is not much money in it for them. That is the basic issue that we must face. Therefore, the Government have a job to do to stimulate the economy in that area. We also have the tyranny of the PSBR, which I have cried out for Chancellors to sort out in the past. Why do we not do that, so that we could look at our economy afresh and ensure that it had a social dimension as well as a strict economic one?

On charity, the Budget will be judged on the fairness agenda. The esteemed philosopher, Amartya Sen, came to a Treasury Committee hearing quite a number of years ago and made the point that there is a connection between effort and reward, and that people judge fairness on the basis of that connection. I put it to this House that, while 14,000 people earning £1 million per annum will receive a tax cut of more than £40,000 each year, a family with children earning £20,000 will lose around £700 when the cuts and the VAT increase are taken into consideration. Undoubtedly, the winners from the Budget include the rich people, who can save lots of money, while the vast majority of taxpayers are given £14 a month as a result of the Liberal Democrat-inspired tax threshold initiative. The leader of the Liberal Democrats, Nick Clegg, has called this a Robin Hood Budget. However, far from the poor benefiting, the rich will benefit; it is the opposite way round. I suggest to noble Lords that we look at it as a Robbing Who? Budget. That will be the question reverberating around the country over the coming months.

Aspiring citizens have been hit as well. At a stroke, the Chancellor has just created an extra 300,000 new 40p higher-rate taxpayers, which has gone unnoticed, because he has reduced the tax threshold to £41,450. A family with a few children, having an income at that level, are now in the higher tax band. That will have a very serious effect on family finances. It will be the less well off, the middle-income and the aspiring and upwardly mobile citizens who in this Budget will be well and truly mugged.

There was reference in the past to Mondeo man and woman. What price Mondeo man and woman now? I suggest that with every passing day, the chances of Mondeo man and woman thumbing a lift rather than owning the vehicle will increase.

Banking: Accounting Standards

Lord McFall of Alcluith Excerpts

Monday 19th March 2012 Lords Chamber

[Lord Sassoon]

My Lords, the structure of the various bodies that fall under the Financial Reporting Council is a matter for the Financial Reporting Council. I do not believe for one minute that anything it does to the structure of the number of bodies under the FRC will weaken the very distinguished and important contribution which the UK makes to international standard-setting.

[Lord McFall of Alcluith]

My Lords, has the fatal flaw not been the ability of banks and other financial institutions to book future projected income as profits—profits which did not materialise and on which bonuses were paid, thereby skewing the incentives of the whole financial sector industry? There is a time here for reassessment, and that is a black hole at the centre of these proposals.

[Lord Sassoon]

Again, this is an important issue. The Government have taken significant steps to increase both the transparency and the FSA rules around the payment of bonuses. However, we should be careful about this. First, it is worth noting that under UK GAAP, before IFRS was introduced, banks were required to account at fair value for their trading portfolios. Of course, accounting at fair value requires assets to be marked both up and down. It is certainly the case that under IFRS there were certain portfolios that previously would not have been counted as trading portfolios, which now are. However, we have to be very careful about attributing all that went on with banking bonuses to the accounting requirements. If I may suggest so, that was a small part of what was undoubtedly a series of inappropriate behaviours at the heart of the industry.

Finance: Credit Rating Agencies

Lord McFall of Alcluith Excerpts

Wednesday 14th March 2012 Lords Chamber

[Lord Sassoon]

My Lords, my noble friend conflates a number of interesting questions. The key point is that the UK is in a very strong position to look at ultra-long or perpetual bonds. We have historically very low rates of interest and significant investor demand, particularly from the domestic funds, for very long-dated gilts. In response to that situation, we think that it is right to consult the market, as my right honourable friend the Chancellor of the Exchequer has indicated we will do, and to see what it has to say, but we will not make any issue unless it represents good value for the taxpayer.

[Lord McFall of Alcluith]

My Lords, given that the credit rating agencies have demonstrated a consistent lack of accuracy, have failed in their governance, are flawed in that the person paying for the rating has to ask for it, and competition is non-existent, will the Minister encourage investors in the City to establish their own credit rating agencies on a not-for-profit basis? At a stroke, they would remove conflicts of interest, introduce healthy competition and establish accurate credit rating figures. Let us remember that all the credit rating agencies gave Northern Rock a AAA rating immediately before its demise.

[Lord Sassoon]

My Lords, while we should not underestimate the difficulties with the credit rating agencies historically, equally we do not want to make the situation sound more dramatic than it is. On sovereign ratings, the IMF’s analysis in the autumn of 2010 indicated that the rating agencies had performed relatively well and that, in all cases of sovereign default since 1975, they had had those sovereigns on speculative grade ratings at least one year ahead. I have already given some answers as to how we should introduce competition. If one of the vehicles that comes in is of the sort which the noble Lord, Lord McFall, mentioned, that would be up to the market and it should not be prevented from using it.

EU: Fiscal Compact Treaty

Lord McFall of Alcluith Excerpts

Tuesday 7th February 2012 Lords Chamber

[Lord Sassoon]

My Lords, now that there is a realistic assessment of what capital is required, there is a clear agreement on the timetables and methods for doing that and it is well within the capacity of the eurozone to do it. I do not think we should speculate on what happens if they fail to do it. The eurozone, its Governments and the European Central Bank have all the firepower necessary.

[Lord McFall of Alcluith]

My Lords, Europe and the UK will be going nowhere unless competitiveness is restored to individual countries. Does the noble Lord agree that at the heart of any fiscal compact should be a policy of growth and investment? Even from our position in the wings of Europe, will the Government agree to ensure that such a policy is implemented, not least to help the many millions of young people who are now unemployed all over Europe?

[Lord Sassoon]

I very much agree with the sentiments of the noble Lord. The one part of them that I disagree with is that we are not sitting on the sidelines but are very much at the heart of the discussions about pro-growth policies and the completion of the single market.

Independent Commission on Banking

Lord McFall of Alcluith Excerpts

Monday 19th December 2011 Lords Chamber

[Lord Sassoon]

My Lords, I well recognise the consistency, firmness and clarity with which my noble friend has held his views on separation from very early on in this debate; we discussed it three years ago. However, the Government agree with the ICB that full separation is not the route to go down. I say to him that having independent directors on the boards of the ring-fenced banks will go a long way towards making up for, as he puts it, possible deficiencies of top management and their ability to get around these things. Having independent directors of ring-fenced subsidiaries is a model that has worked well in utility companies. As he says, it is right that the Bank of England will be watching this in its new role of supervising the system.

[Lord McFall of Alcluith]

My Lords, when Sir John Vickers appeared before the Draft Financial Services Bill Joint Committee, it was clear that his report would not solve the “too big to fail” issue. What was required was a good regulatory structure, and no regulator globally succeeded in that.

In the draft Financial Services Bill report there were a number of issues relating to the governance of the Bank of England, and I should like an assurance from the Minister that the Government will take these all-party proposals very seriously. As a previous speaker said, culture is more important than architecture. I think that will be one of the main recommendations of our report.

The Minister mentioned the issue of switching current accounts. Will he accept that the portability of current account numbers is the key? That revolutionised the mobile phone industry. Only with the portability of current account numbers will we see a revolution in switching accounts in the banking industry.

[Lord Sassoon]

My Lords, I can confirm to the noble Lord, Lord McFall of Alcluith, that the Joint Committee’s report, which was published only today, will be taken very seriously on governance and all the other matters that are contained in it. As to switching accounts, I hear what he says about number portability, which is not at all an easy issue, as he well knows. All I would say is that the ability for seven-day switching, including all direct debits, credits and standing orders—which we now have the banks’ agreement will be implemented by September 2013—is a significant advance that will help millions of consumers.

Economy: Deficit Reduction

Lord McFall of Alcluith Excerpts

Thursday 15th December 2011 Lords Chamber

[Lord Sassoon]

My Lords, it is very important that credit flows to SMEs, which is why we announced a package of £21 billion at the autumn Statement, and it could go higher if the demand is there. I take my noble friend’s point about the importance of diversity and new entrants into our banking system. That is something that both the FSA and the Government keep under review.

[Lord McFall of Alcluith]

My Lords, given that the stability message has failed, is it not time now for a growth strategy? Given the appalling figures on unemployment for both young people and others in the country, is there not hope to be given to people? Given that the Government can borrow, with the low interest rates, at a rate less than the private sector, is it not time to invest in infrastructure projects so that we come out of this recession and not make it a depression?

[Lord Sassoon]

My Lords, that is exactly what we are doing: we are investing in infrastructure projects. Indeed, as was announced at the autumn Statement, we are targeting an additional £20 billion of private sector money coming into infrastructure from long-term UK investors. As to the policy mix, I can only refer back to the IMF’s latest assessment which said that the case for relatively tight fiscal and relatively loose monetary policy is strong.

International Monetary Fund

Lord McFall of Alcluith Excerpts

Thursday 24th November 2011 Lords Chamber

[Lord Sassoon]

My Lords, we are at risk of straying a bit far from the question about the IMF, but there are a number of serious points here. First, with respect to Germany or any other countries, one should not read too much into one particular bond sale that does not meet its target. That has happened to a number of countries over the years, including the UK. As for what the arrangements will be for the eurozone, we continue to wish that the eurozone makes as much progress as it can, as urgently as possible, to put the arrangements in place.

[Lord McFall of Alcluith]

My Lords, given that the eurozone crisis is potentially more damaging than the one of 2008, is the Minister aware of the IMF statistics that show that over 50 per cent of the Italian, German and French debt is held by non-residents, thereby ensuring that if there is a crisis it will not be confined to the European continent? Is there not a case for more urgent consideration with the IMF to ensure that it and the UK play their part in this global crisis to ensure a better and more stable economic future for the citizens of this country?