Financial Services (Banking Reform) Bill
Lord Tyrie Excerpts(12 years, 6 months ago)
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Greg Clark
This has been an interesting debate so far, and it will be a tall order to live up to the great expectations of my hon. Friends the Members for South Northamptonshire (Andrea Leadsom) and for Caithness, Sutherland and Easter Ross (John Thurso).
This set of new clauses has the common denominator of measures that can improve competition in banking. The parliamentary commission has made it clear that competition can, and should, bring about higher standards in the banking sector. It concluded that
“effective market discipline, geared to the needs of consumers, can be a better mechanism for improving standards and preventing consumer detriment than regulation, which risks ever more detailed product prescription.”
The Government completely agree. The British banking industry, at least at the retail level, was too concentrated before the crisis. The forced mergers of the crisis have exacerbated a bad situation. It is imperative that the regulators do not regard themselves simply as regulating incumbents, but act to promote new entry into the industry.
The commission welcomed the prudential reforms contained in the then Financial Services Authority’s barriers to entry review and commented that
“the concerns of challenger banks in this area appear to have largely been addressed”.
We accept the need to go further. Accordingly, we will be adopting the commission’s recommendation that the Prudential Regulation Authority should be given a secondary competition objective, and we will table amendments to the Bill to that effect in the autumn.
Greg Clark
I am grateful for my hon. Friend’s contribution.
Government amendment 5 delivers on a commitment made in Committee to accept one of the commission’s earlier conclusions that when considering an exemption from ring-fencing the Government must have regard to any adverse effect ring-fencing provisions might have on competition in the market. The amendment ensures that ring-fencing should not be a barrier to greater competition in the market. To reassure the hon. Member for Nottingham East (Chris Leslie), it does require them to override any questions on whether the continuity objective should be breached. It is there to enable them to bear that in mind, not least for the reasons that we discussed—that competition can have systemic benefits that address some of the regulator’s objectives.
Another recommendation of the commission that we accept is the suggestion that there should be a rigorous study conducted on the benefits to consumers, and competition, of account portability. The House will know that from September the seven-day switching service operated by banks covering 99% of personal current accounts in the UK will come into operation. I do not whether hon. Members have noticed, but there is an excellent exhibition to promote the new changes to the service from September in the Upper Waiting Hall next to the Committee Corridor. It should make it easier, quicker and more secure to change bank account, helping competition, but, as my hon. Friends the Members for South Northamptonshire, for Wyre Forest (Mark Garnier) and for Caithness, Sutherland and Easter Ross said, that might not go far enough. In particular, I congratulate my hon. Friend the Member for South Northamptonshire on the consistent and forensic campaign she has waged on this issue through the Treasury Select Committee and beyond. We will therefore ask the new payments systems regulator to conduct a comprehensive review of account portability, including a cost-benefit analysis, as an immediate priority.
Greg Clark
I certainly will keep a close eye on that, as too, I am absolutely certain, will my hon. Friend the Member for South Northamptonshire. The arrangement is that the fees should be shared between the bank of departure and the bank of arrival, which I dare say reflects the different costs. However, we need to keep an eye on its effect on competition.
In response to the parliamentary commission’s report, the Office of Fair Trading has announced that it will bring forward its investigation into small and medium-sized enterprise banking as part of an ongoing programme of work to investigate concerns about competition in banking. The hon. Member for Nottingham East rightly wants this to go further. The OFT is engaged in a programme of work looking at all sections of the banking sector. As I think Members know, it has recently completed an investigation into the personal current account market, and on that narrow point has argued that there should not be an immediate referral pending some of the changes taking place or in the pipeline.
We have asked that that work considers the impact on the new challenger banks created by the divestments from Lloyds and RBS. The hon. Gentleman asked where they stand. My understanding is that in both cases the parent banks are looking to move forward with initial public offerings of the challenger banks and that they intend them to form part of the competitive environment. The OFT aims to conclude its programme of work next year. It will then decide whether a market referral to the Competition Commission is needed. I can tell my hon. Friend the Member for Caithness, Sutherland and Easter Ross that such a referral would not require legislation; the OFT could make one under its existing powers.
Given that commitment, which is more or less of the same time frame as that envisaged in new clause 8, and given the significant measures being implemented to enhance competition, I hope that hon. Members will agree that the new clause, which calls for such a referral in 2014, following Royal Assent, should not be adopted. It is important that the OFT completes its review in 2014, so that it can build up a file of evidence to be submitted to the Competition Commission. That would be consistent with what both the independent commission and the parliamentary commission called for: that the OFT be in a position to make a referral in 2015. The OFT’s work is absolutely in line with that.
Greg Clark
I beg to move, That the Bill be now read the Third time.
It is good to start the debate with good news. When one is considering a Bill, one is cut off from the outside world, so that is good to hear.
I said on Second Reading that this is a historic Bill that resets the banking system in this country, so that it can once again enjoy the reputation that it had, and its worldwide renown, not just for technical excellence but for high standards of confidence, built on probity.
The Bill is historic in another important respect. It reflects the extensive deliberations and contributions of not one but two bodies of eminent experts: the Independent Commission on Banking, chaired by Sir John Vickers, and the Parliamentary Commission on Banking Standards, chaired by my hon. Friend the Member for Chichester (Mr Tyrie). Both undertook extensive work, and I am grateful to their members, and to the staff who supported them in their work.
Sir John Vickers’s commission was established immediately after the general election, in June 2010. It took extensive evidence before publishing an issues paper in September 2010; an interim report, on which it consulted in April 2011; and a final report in September 2011. The Government gave, and consulted on, an initial response in December 2011, before issuing a White Paper for consultation in June 2012. In the light of that consultation, a draft Bill was published last October, and the Parliamentary Commission was asked to give it pre-legislative scrutiny, which it did, and it concluded its report on 21 December last year.
Following Second Reading, the Committee scrutinised the Bill for more than 40 hours. The process has been characterised by an unusually determined effort to build consensus. Having considered all the options, the Vickers commission made a compelling case for a ring fence separating the riskier investment banking side of banks from personal and business lending. Ring-fencing, an ICB argument, will better insulate retail banks against global shocks and make banks easier to resolve in a crisis. It will thus create a more stable banking system, protecting the economy and the taxpayer against future crisis.
The parliamentary commission, in its first report, recommended some changes to the Bill, which we have been able to make, such as emphasising the importance of competition, as we have just debated, in applying the ring-fencing rules. The commission noted that in putting the so-called Haldane principles on the face of the Bill, the Government went further than its own recommendations. The parliamentary commission, in its December report, also called for the power to be available to force the separation of a ring-fenced bank into its component parts if that bank attempted to game the system or to undermine the ring fence. The so-called electrification of the ring fence is designed to ensure that it is respected in practice.
We debated yesterday the Government’s amendment to implement this power. There was some discussion about whether the power to require separation was too cumbersome to be used effectively in practice. As I said yesterday, there is no difference between the Government’s intentions and those of the parliamentary commission. We agree with the specific reserve power and it has to be usable. We included a time limit by which full separation had to be executed. The PCBS did not specify this, but my hon. Friend the Member for Chichester said that it should be informed by the regulator. That seems right to me and I have no difficulty in expecting to be able to arrive at a formulation that meets all the Chairman’s objectives during the further scrutiny of the Bill in this place.
Mr Tyrie
I am very reassured by what I have heard from the Minister. It seems from what he said that it remains the Government’s firm intention to implement the spirit and the letter of electrification for individual banks. It also gives me some reassurance that the commitments that appear to have been made in the paper published yesterday on the recommendations in the fifth report will also be implemented. Can the Minister give some indication when he will produce amendments, so that we have enough time to think about them before they are examined in another place and so that their lordships also have enough time to consider them carefully?
Greg Clark
I am grateful to my hon. Friend for his remarks. He is right that we are of one mind on the need to implement faithfully the commitments that we have given. The amendments need to be drafted in a way that is legally watertight, which takes some time. They will be prepared during the summer—the summer holiday will be out of bounds for the officials on the Bill team, sad to say—and they will be introduced in the autumn in the House of Lords.
As well as pre-legislative scrutiny of the Bill, the parliamentary commission’s final report made a series of recommendations concerning standards and culture in banking. As I indicated on Second Reading, in Committee and yesterday, the Government will make use of the Bill and the amendments to give expression to many of the recommendations that require legislation. I gave a commitment to work with the usual channels to ensure that this House has ample opportunity to debate the amendments when they come back for further scrutiny by this House.
Greg Clark
My hon. Friend is nothing if not tenacious as well as ingenious, and his hearing is acute. He will have heard me say that I will work with the usual channels, so the time for consideration will depend on the outcome of those discussions.
The implementation of the commission’s recommendations on culture and standards represents the third pillar of the reforms being made to the banking system. The first pillar was the institutional changes brought about by the Financial Services Act 2012, which received Royal Assent last December. That Act scrapped the failed tripartite system of regulation which, in the words of the parliamentary commission,
“created a largely illusory impression of regulatory control”.
In its place, that Act restored the Bank of England to its rightful place by ensuring, through the Financial Policy Committee and the Prudential Regulation Authority, the stability of the financial system. It established new forward-looking, rather than box-ticking, conduct regulation in the Financial Conduct Authority.
The second pillar of reform is embodied in the ring-fencing provisions advanced by Sir John Vickers and his committee, which are the main focus of the Bill under consideration. The reforms by the Parliamentary Commission on Banking Standards that deal with culture and standards represent the third pillar, and will play a major part in the passage of the Bill.
Having thanked members and staff of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards for their hard work and the exacting standards they set for themselves, I extend my thanks to all those who have participated in the drafting and scrutiny of the Bill so far. First, I thank my Parliamentary Private Secretary, my hon. Friend the Member for Warrington South (David Mowat). Not only has he been assiduous in his more mundane duties of passing notes to and fro, but he has been an invaluable source of wise advice, drawing on a successful career in business. I discovered that he has an ability to see quickly through complexity and get to the heart of the matter—something much needed in matters of financial regulation.
I thank my officials for their efforts and the long hours spent drafting the Bill and Government amendments, as well as briefings for the many clauses we have debated. I hope that the seriousness of this legislation will assuage the loss of weekends and evenings spent with their nearest and dearest, although I hope they were at least able to see Andy Murray play—and indeed win—on Sunday, notwithstanding the timetabling of Report and Third Reading.
I thank those in my private office for their patience and cheerfulness in marshalling the many demands on their skills and expertise, and I am grateful to members of the Bill Committee, and its Chair and Clerks, for the hours we spent in each other’s company during spring. At one point I worked out that I had spent more time that month with the hon. Member for Nottingham East (Chris Leslie) than with my wife, although I hope he will agree that it was not an altogether unpleasant experience.
We had a lively and unusual Bill Committee in which my hon. Friend the Member for Amber Valley (Nigel Mills) went further than the electrification proposed by the Parliamentary Commission on Banking Standards, and demanded the “electrocution” of miscreant bankers. My hon. Friend the Member for North East Somerset (Jacob Rees-Mogg), whom I am delighted to see in his place, was revealed to have a secret life on Twitter, which I hope continues to flourish. I was also able to concede an historic Opposition amendment, given the charming entreaties from the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), even if it was only a single word. All that was done under the beady eye of the Treasury Whip, my hon. Friend the Member for Chelsea and Fulham (Greg Hands), who kept us rigorously to time—indeed, I think we finished a day earlier than was allowed for in the programme motion. Given that the Bill will return and we will have much to discuss, it is not so much goodbye to the Bill on Third Reading as au revoir—or, as I am sure my hon. Friend the Member for North East Somerset would put it, “Hasta la vista, baby.”
Ours is not the only country in which trust in banking collapsed during the financial crisis, but the fact that scandals and bail-outs happened elsewhere is of no comfort. In a world where trust is in retreat, this country must be a beacon of confidence, security and stability, but that will not happen unless we insist on higher standards than apply elsewhere. The overwhelming and urgent imperative is to rebuild that trust. The reforms enacted so far take us a long way, and further than our competitors. The Bill will take us further forward and make the reform necessary to restore the reputation—and with it the prosperity—of banking in the United Kingdom. I commend the Bill to the House.
Financial Services (Banking Reform) Bill
Lord Tyrie Excerpts(12 years, 6 months ago)
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Chris Leslie
Those issues were covered pretty substantially by the commission in its first and second reports, and this was the conclusion it reached. Nobody wanted to go for full separation if it could be avoided; we wanted to ensure that ring-fencing arrangements could be upheld and made to work. There are some arguments in favour of that universal model, and therefore it was felt preferable to have such a power in reserve, but in the Bill. It is no wonder that the banking sector breathed a heavy sigh of relief today, when it saw the Government’s response on this and other issues. The markets judged that the banking sector got off lightly, and that there was nothing tough or difficult for the sector. That is why we have seen the market reaction today. The notion of business as usual seems to be back on the table.
I want the House to recognise that this is not an amendment that Labour has come up with in a partisan way. We are simply tabling an amendment that was drafted by the commission after days, weeks and months of deliberation and careful cross-party thought by Members of both Houses, but thrown back in the face of the commission by the Government today. It is important to have this on the statute book. A back-stop power will incentivise the banks to comply with ring-fencing. If the Government are correct in believing that ring-fencing will be adequate, the amendment will do no harm to the policy. It will sit dormant on the statute book. But if the Government are wrong, and this backstop power is not in place when it is needed, serious consequences could arise. It is nonsense for the Minister to ignore this risk, especially as the other place will want to come back to this issue. He may be forced to concede if we get into parliamentary ping-pong at some point.
I do not want to take up too much more time because many other hon. Members have spent a lot more time on this issue than I have, but I wish that the Government would listen to them and to the commission.
Mr Andrew Tyrie (Chichester) (Con)
I shall say a little more than I usually say in the House because these arrangements are quite central to the work of the banking commission and give me an opportunity— my first—to explain some of the reasoning behind that work. The two key amendments that I have tabled would empower the regulator to split up a banking group if there were serious failures in the culture and standards of the ring-fenced body or another member of its group. In deciding whether these serious failures have occurred, the regulator would be required to take account of the recommendations contained in the reports of the Parliamentary Commission on Banking Standards, which I chaired.
We produced five reports about a vitally important industry, one that has become embroiled in very serious scandals that have cost the consumer, taxpayers and the whole country a fortune. The parliamentary commission was the first of its kind for a century. The last, exactly a hundred years ago, collapsed in a heap of partisan acrimony.
We have produced five reports in under a year, all of which were agreed unanimously. We also put in an unprecedented amount of detailed work, taking evidence for 171 hours in no fewer than 76 evidence sessions, in addition to deliberating in private for a further 74 hours. I would like to thank my colleagues on the commission in both Houses for their huge contributions, injections of energy and endurance. I would also like to express my thanks for the equally impressive commitment of the commission staff and specialist advisers, led by Colin Lee and his two deputies, Adam Mellows-Facer and Lydia Menzies. Only the very limited time available prevents me from listing many more of the staff who put in so much work. I would also particularly like to thank the Front Benchers of all parties, who have offered a great deal of support.
The task now is to get the report implemented, primarily by regulators and banks, and, where necessary, supported by statute. The Government have today responded to the commission’s most recent report—our fifth. I have had a chance to flip through the response, but there has been no time to digest it fully—it is about 80 pages—and, of course, no time for anyone to table amendments as a result. In view of the extent to which it looks as if the Bill has been changed, I would be grateful if the usual channels could consider recommitting this Bill to Committee. Failing that, at the very least—as the my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) has said—an extra day should be provided for consideration of what will inevitably be a mass of Lords amendments. Bearing in mind the struggle that we had to get the half-day tomorrow, I hope that the Government will show more flexibility about this extra time.
Having said that, I warmly welcome the supportive tone of the pre-briefing given to the Financial Times about the publication that we have had today. Still, I would rather have heard about it here first. I am also very pleased that so many of the proposals and also the argumentation for them appear to have been accepted in full. But I am not fully reassured. The Government appeared to have accepted the commission’s proposal on a specific power to force the separation of an individual bank, but here we are, at the eleventh hour, trying to prevent the proposal from being severely weakened by the Government. In fact, as I will explain, the Government’s amendments would render the specific power of electrification virtually useless.
Some of the commission’s important proposals have not been accepted at all, for example on leverage, on which we support the recommendations of the Vickers commission, and on reform of the Bank of England’s antiquated governance structure, on which the commission supports the recommendations of the Treasury Committee.
Other ideas that the Government have rejected include the need to wind up United Kingdom Financial Investments Ltd and the regulatory reforms to provide statutory autonomy for the regulatory decisions committee. I find that especially regrettable. The Government have also rejected the proposal to remove the FCA’s strategic objective. No one can see much purpose to this except the Government. It can be used to trump the operational objectives of the FCA, including that of competition, and can thus serve only to weaken those operational objectives. On all those issues, I hope that their lordships will repair some of the damage that we have been left with no time to attend to here.
Mr Love
I agree with the hon. Gentleman that it is an offence to Parliament to read about the Government’s response first in the Financial Times. Give the mixed reception from the Government to our fifth report, we should have adequate time to discuss all the very important issues about which we deliberated for many days and which appeared in our recommendations.
Mr Tyrie
I strongly agree with the hon. Gentleman and I have already made both those points, which he just reinforced. All the amendments that I have tabled on behalf of the commission are about standards. Banking continues to suffer from the effects of poor standards. Even in the seven months that we took oral evidence, we had two more major LIBOR scandals, the interest rate swap scandal, a major bank found to be involved in money laundering in Latin America, and another fined $670 million for sanctions busting in Iran.
It is sometimes suggested that trying to do much about this will drive banks overseas. But all of the evidence we took pointed to exactly the opposite conclusion. Far from imperilling the UK’s global competitiveness, high standards will make the UK a more attractive place to locate. Many good things can flow from higher standards in banking, among them a restoration of trust. Trust is an essential buttress to the UK’s reputation as a global financial centre. It is also vital for the British economy. While banks are not trusted by their clients and particularly by SMEs, there will be less lending and less economic activity.
The crisis of standards and trust in banking—and it is a crisis—is multi-faceted, and so are the necessary remedies. None the less, the nub of the problem can be characterised as twofold. First, there has been a lack of individual responsibility at the top of banks. Collective decision making has diffused responsibility and a sense of duty to be vigilant. Secondly, there has been colossal failure of judgment by regulators, with an approach based on pointless data collection on a huge scale and needless box ticking.
In a nutshell, boards were negligent and the system of regulation was found seriously wanting the first time it was tested. Both boards and regulators were motivated by an understandable desire to cover their backs, but their lapses were inexcusable. The lack of personal responsibility in banks has been aggravated by misaligned incentives. By that I mean bonus and remuneration structures. They encouraged bankers to make short-term gains while the full risks and costs became evident only later. The taxpayer ended up picking up much of the tab.
Mark Field
My hon. Friend talks about the idea of incentives to find holes in the ring fence. Surely it is in the nature of the way in which one looks at regulation to try to find holes in the ring fence. There is nothing untoward about the idea of looking at a regulation or law and trying to find a way around it. Obviously, one should try to do so without breaking the spirit of the rule or regulation, but if we live in a highly regulated society it is surely inevitable that those who are regulated will look to try to find ways of avoiding them. Surely that is a fault of having over-regulated societies, whether in banking or in other fields of commerce.
Mr Tyrie
I am not going to delay the House by disagreeing for too long. It is rare that I disagree with my hon. Friend, but I wonder whether we would like surgeons to test all the time the regulations that encourage them to do a good job as they pull out their scalpels and wonder if they can get away with just one incision here or there.
Mark Field
I think my hon. Friend makes my point for me. The medical profession is a profession and relies on such things as the Hippocratic oath, and it has a centuries-old approach to how they go about their day-to-day business. An over-regulated industry is one that encourages the avoidance of regulation. Genuine professionals look on their professional responsibilities in a very different light.
Mr Tyrie
There is a heap of regulation surrounding the wielding of those scalpels. The common feature of the two industries is not the professionalisation or non-professionalisation of the industry; it is that both owe a duty beyond bettering themselves. In the case of the banks, they owe a duty because of the implicit guarantee; in the surgeons’ case, they owe a duty to the patient. I will not prolong this discussion any further, but I think most people accept that we do not want banks constantly trying to find a way around or through the ring fence.
Sir Peter Tapsell (Louth and Horncastle) (Con)
Will my hon. Friend give way?
Sir Peter Tapsell
How can anyone read the evidence that Mr Paul Volcker gave to my hon. Friend’s commission and come away with any other conclusion than that ring-fencing, whether electrified or not, simply will not work when we get the next major banking crisis?
Mr Tyrie
There is considerable force in what my right hon. Friend says. We considered the issue in great depth and published a report—the third report—on exactly that. We discussed the case for full separation, but concluded that although the ring-fence proposals had merit, they should not be reconsidered until we have given the Vickers ring-fence approach a try. We also examined the merits of a closely related proposal for the separation of proprietary trading—exactly what is being suggested—from the rest of banking activity. We concluded that further statutory support was not needed for that approach now, because the Prudential Regulation Authority might already have the powers to implement an effective separation of prop trading. We asked the PRA to present a report to the Treasury and to Parliament on its use of a range of monitoring and corrective actions, which could serve as the subsequent basis for a full and independent review of the case for full separation of prop trading. Unfortunately, as far as I can tell—I have had very little time to absorb this publication, which came out only at 12.30 pm—the Government have rejected even examining the proposal for prop trading. That is a mistake. I regret that, but I hope it will be put right in the other place.
Returning to amendment (a), the Government accepted the case for ring-fencing, arguing that banks that test the ring fence should be strongly deterred and, if necessary, prevented from doing so. However, I am afraid that that will not be the effect of the Government’s amendments. On the contrary, the Government amendments almost guarantee that banks will not get a shock, and will not be discouraged from testing or gaming the ring fence. The regulator needs a useable and credible deterrent. This proposal creates too many obstacles and delays to the sanction of full separation.
Frankly, it is inadequate for three main reasons. First, it requires the regulator to issue—we have already heard a little about this—no fewer than three preliminary notices and a warning notice before it can act. Secondly, it then requires the regulator to obtain permission from the Treasury no fewer than three times while the process is in train. Putting that requirement on the statute book would transfer most of the effective regulatory decision-making power away from the PRA and the Bank of England to the Treasury. It cannot be appropriate for the Treasury to be the regulator. The commission argued for a Treasury override at the end of the process, not at the beginning or in the middle, but the Government’s amendment requires the regulator to secure the consent of the Treasury on three occasions prior to that point. Even so-called preliminary notices—in effect, expressions of concern by the regulator—will require Treasury consent. That is absurd and compromises the regulator’s independence.
The third objection has also been alluded to. The Government’s amendments allow at least five years for the completion of the separation after a decision has been made. That would create enormous scope—indeed, it would make it ideal—for lobbying for a change of heart in the interim. It would create far too much room for that and we can do without it. It also flies in the face of what the Minister said in Committee, where he alerted Parliament to the risk of what he described as an “inordinately long” delay in implementation. A tool that is so difficult and slow to use is likely to deter no one and that is why I have proposed a number of amendments that would remove some of the obstacles erected by the Government to taking action to separate banks.
Mr McFadden
I want to ask the hon. Gentleman the same question that I asked the Minister about the difference in time scales between his amendments (a) and 19 combined, and the five to six-year timetable in total that the Government have set out. Were we to go down the road recommended in the hon. Gentleman’s amendments, how long does he think it would take between a decision on separation of an individual group being taken and that eventually happening?
Mr Tyrie
That is something on which we can usefully take advice from the regulator, but I would have thought that two years would be a reasonable maximum. Five years is ridiculous. It might take less than two years, but we have people down the road who can give us a clear view and the Government should ask them, if necessary publicly.
I have also tabled an amendment that would give effect to the Banking Commission’s proposal for allowing for full separation, as well as trying to improve the Government’s faulty amendment a bit. I recognise that the amendment has been debated in Committee and that the Government said they did not like it, but their reasons for not liking it were frankly not strong. I still find it curious that the amendment was rejected as a starting point for putting in ring-fencing. When the Bill goes to the other place, I hope that that amendment might be seen to be a better starting point than the Government’s. The Government have had several months to get this right. It is regrettable that they have made so little progress on it, but we are where we are. In any case, even ring-fencing with electrification is no cure-all for the standards problems in banks. To improve them, we all have to move forward on many other fronts.
I would like briefly to refer to the main other areas that are needed. To improve competition, we recommended a range of measures. We asked the Competition and Markets Authority to initiate a market study of the retail and SME banking sectors. I noticed that the Government were so enthusiastic about that recommendation that they announced it as soon as they received the embargoed copy of our report. We asked the Government immediately to establish an independent panel of experts to assess ways of enabling much greater personal bank account portability. The Government appear to have ridden back a little from that in the proposals they published today, although I cannot be sure.
We also took a good deal of evidence on RBS. Competition is weak partly because RBS is weak. Further restructuring may well be needed. In our view, the Government will need to be bold. We recommended that they undertake a detailed analysis of a good bank/bad bank split as part of an examination of the options for the future of RBS. That is vital work. In the field of banking reform, a healthy RBS, with the restoration of normal lending to the SME sector, is probably the biggest tonic that could be given to the British economy.
The way in which banks run themselves also needs reform. An accountability firewall had grown up that allowed senior bankers to deny responsibility for their failings. That wall has to be taken down. To give effect to that, we proposed the introduction of a senior persons regime. This would ensure that the direct personal responsibilities of board members, particularly the chairman, reflected the importance of their roles, so that it was clear to bankers and regulators who should reasonably be accountable when things went wrong, and for what. Our study of HBOS—our fourth report—provided a clear example of exactly the opposite. It guided our thinking on this and a number of other areas. Senior board members at HBOS did not take responsibility for what went wrong.
The crisis of standards was partly caused, and considerably inflamed, by the fact that bankers were rewarded for doing the wrong thing. Bonuses were often paid out well before the risks of the actions that they ostensibly rewarded became apparent. Bankers took huge rewards and when the risks turned sour, taxpayers picked up the tab. That has to stop. The Government and regulators should not set levels of remuneration. However, much more radical steps are needed to incentivise better behaviour among all staff whose actions or behaviour could seriously harm a bank, its reputation or its customers. Deferred remuneration for executives should not be viewed as an entitlement. People should keep their deferred bonuses only when it is clear that they have really been earned. That will mean long deferral, in some cases up to 10 years.
Greg Clark
We have had a fascinating, high-quality debate. I am grateful for the contributions of all hon. Members, but especially for those of the Members who served with such distinction on the Parliamentary Commission on Banking Standards: my hon. Friend the Member for Wyre Forest (Mark Garnier); the right hon. Member for Wolverhampton South East (Mr McFadden); the hon. Member for Edmonton (Mr Love), who is no longer in the Chamber; the Chair of the commission, my hon. Friend the Member for Chichester (Mr Tyrie); and the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso). With the help of Members of the other place, they laboured hard to produce a report that not only will stand the test of time, but will be a reference document for many generations in this country and throughout the world. The report will be seen as a major contribution to addressing the less tangible aspects of culture and standards, which is something that has eluded regulators throughout the world. I am sure that the report will be read with a great deal of interest.
The report’s central judgment includes the acute point that for too long questions of standards and culture have been contracted out to regulators, rather than being an intrinsic part of the institutions themselves. That aspect of the report stood out as the essence of the required change, because it should no longer be simply for the regulators to decide on such questions, as the culture throughout the institutions should reflect the correct standards that we expect.
I spoke at length at the beginning of the debate, so I shall deal briefly with several of the points that hon. Members raised. I was asked about timetabling. On Second Reading, I made two commitments, the first of which was that the House would have adequate time to consider all provisions, including amendments proposed by the parliamentary commission. I hope that hon. Members will concede that I have been true to that in Committee and throughout our two days on Report, and I repeat that that commitment remains as the Bill goes to the other place. I also said explicitly on Second Reading that the recommendations of the commission’s final report on standards and culture would be reflected in amendments to be made in the House of Lords. Of course, those measures will subsequently be considered by this House, so our intention has not changed. It was right to expedite the response to the report so that it was available much more quickly than usual. It has been useful in informing today’s discussions, as will be the case tomorrow, and it will be available to their lordships during their consideration of the Bill.
The hon. Member for Nottingham East (Chris Leslie) asked several specific questions, including about whether Government amendment 8 contained a typo. It does not, but it would require more than the four minutes remaining for me to explain why, so I hope that he will trust me on that at least. The upper tribunal is not a new invention; it is the court that considers all references made under FSMA for adjudication.
The hon. Gentleman made a substantive point about the notice period, as did my hon. Friend the Member for Chichester and the right hon. Member for Wolverhampton South East. I was asked whether an elongated process in some way diminishes the effectiveness of the ring fence. Our intention was—and is—to implement faithfully the parliamentary commission’s recommendation on the institution-specific ring-fencing rule. As I assured my hon. Friend the Member for Chichester, I am confident that if the Government’s proposals can be improved during the Bill’s passage, all his concerns about the use of the power can be addressed. In fact, the procedure under consideration has been described as pressing the nuclear button.
Mr Tyrie
I think that was a concession, so I am extremely grateful to the Minister. I am also grateful that the response was published at the earliest opportunity—it could have been delayed, so at least we have had a chance to look at it. That shows us that the Government are listening, and the response will be helpful in the other place. Above all, it gives us more confidence that there will be full implementation of the proposals. The Government have indicated their general support for them, so I hope that we will not have to go through a rigmarole to get the necessary provisions on the statute book.
Greg Clark
I am grateful for my hon. Friend’s intervention. I always take praise when it comes—especially from him, as he is often very flinty in issuing it. I do not think that what I said amounts to a concession, because it has always been our intention to reflect the spirit of his suggestion.
Let me make an important point on the process that my hon. Friend describes. In his amendments, he does not have a time period in mind for the exercise of the power.
Spending Review
Lord Tyrie Excerpts(12 years, 6 months ago)
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Mr Osborne
I will leave it to the country to ask these questions. I make this point. In this spending plan I have set out total managed expenditure of £745 billion, and it is up to all Members of this House to decide whether they support that. We do not know the position of the Opposition, because on Saturday the Labour leader said there would be no more borrowing, but on Sunday the shadow Chancellor said “yes, of course” there would be, so we will see what the position of the Opposition is on this.
The shadow Chancellor mentions what has been said in this House before. Well, let us be clear about what he said in this House before, and how we have responded to it in this spending plan. On 6 June 2011 he said there would be a return to mass unemployment. We have set out welfare plans that help people get back into work. Does he support those or not? That is the question the public will ask of him. He said in October 2010 that we were taking a huge risk with crime. Crime is down 10% or more. He said in July that year that the university reforms would shut out those from disadvantaged backgrounds from university, but actually a record proportion of pupils from disadvantaged backgrounds applied to go to university. He said, in his own words, that the cuts to the border agency would mean we would be unable to enforce our immigration policy. That was wrong, too. Every prediction he has made, including the prediction that there would be no more boom and bust, has proved to be completely wrong, so why would anyone believe a word he has got to say about this?
The simple point is this: we have set out our plans—we have set out our economic strategy, we have set out our spending plans—and those who disagree with them should advance an alternative or retreat from the battlefield, because the shadow Chancellor finds himself in no man’s land. He has abandoned his economic argument but stuck with a disastrous economic policy of borrowing more, and in the end, if we want to know why, we only need to hear what he said this month:
“Do I think the last Labour government was profligate, spent too much, had too much national debt? No, I don’t think there’s any evidence for that.”
All people want Labour to say is, “We’re sorry, we got it wrong, we borrowed too much and we spent too much, and we won’t do it again.”
To answer the specific question that the shadow Chancellor asked me, yes we will have free museum charges—so that people can go to our museums and see the antiquated economic policy advanced by the Opposition, which brought this country to its knees and gave us the worst economic crisis for a generation, and they can learn how this Government cleared up that mess.
These reductions and the control of public expenditure are absolutely essential. That will bolster the credibility of fiscal policy in the markets and it creates room for the private sector to lead the recovery and create the jobs we need, particularly in small businesses in our constituencies, which are desperately trying to find the funding to expand.
Mr Andrew Tyrie (Chichester) (Con)
Behind all the noise, most Members actually do agree that both the deficit and public spending are much too high and have to come down, and we should be under no illusions among ourselves just how tough and remorseless a task that is. Those reductions and that control of public expenditure are absolutely essential. They will bolster the credibility of fiscal policy in the markets and create room for the private sector to lead the recovery and create the jobs we need, particularly in small businesses in our constituencies, some of which are desperately trying to find the funding to expand. Sustaining public expenditure control over this period, and now being able to set out plans for the years ahead, is a great achievement by the Chancellor, the Chief Secretary to the Treasury and the coalition.
I want to draw attention to and ask a question about a particular proposal. The cap on nominal welfare spending will need careful scrutiny; it may well be an essential measure to give teeth to controlling annually managed expenditure, which frankly has not been well managed and is threatening to get out of control. Will the Chancellor publish today all the necessary detail to enable Parliament and the Treasury Committee to examine this extremely important proposal?
Mr Osborne
I thank my hon. Friend for his support for the difficult steps we needed to take. Our trying to set out these spending plans further in advance, so that Departments have time to make the necessary adjustments, is a good innovation in fiscal policy. The certainty we now have for 2015 will, I think, mean better public policy.
We have set out some of the details of the welfare cap in my speech today, but in the document we publish, we have set its parameters, how it will be set in cash terms, the period over which it will be set and when it will be set—at the Budget. However, it is absolutely my intention to listen to the Treasury Committee, which I hope will take an interest in this issue, and to examine best practice and make sure we get the final details absolutely right. If we want to change the Office for Budget Responsibility charter, we will have to legislate, but that is something we need to examine. We absolutely should work on the details, but the principles and the principal components of the cap have been established.
Oral Answers to Questions
Lord Tyrie Excerpts(12 years, 6 months ago)
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Mr Osborne
Of course, I respect my right hon. Friend’s experience. A powerful argument has been made that we should completely separate and split up retail banks from investment banks. We asked John Vickers to convene a commission to look at this specific subject, and he came forward with proposals to ring-fence retail banking, as he thought that that would be a better approach. We also set up a cross-party parliamentary commission to consider the ring fence, and it thinks that the ring fence is the best approach. It made a specific recommendation that we should give the regulator the power to split up a bank that had refused to comply with the ring fence, and we are giving the regulator—[Interruption.] The shadow Chancellor shakes his head, but again not one of these things was done when he was City Minister. Let me say to him again, because he obviously does not understand, that we are giving the regulator a specific power to split retail from investment banking in a bank that is ignoring the ring fence. I think that that is the right way forward.
Mr Andrew Tyrie (Chichester) (Con)
In the Treasury Committee this morning, the Governor of the Bank of England expressed considerable concern that unacceptable pressure had been brought to bear on the Prudential Regulation Authority from within Government, both from No. 10 and from No. 11, at the behest of the banks, putting at risk the regulator’s independence. Will the Chancellor reassure the House that he knew nothing about this, that he was not personally involved, that he will investigate the allegation that others did bring unacceptable pressure to bear, and that he will report to Parliament?
Mr Osborne
Of course, if there is unacceptable pressure, I absolutely say that that is not acceptable—if that is the right way to put it. The PRA, which we created, is completely independent and it has made its independent decisions on capital in our banks. We also have the Financial Policy Committee, which again is completely independent and able to make these recommendations. We empower our regulators to do their job. Of course, banks, consumer groups and anyone else can make their case, but this is ultimately an independent body, an independent regulator, that makes the judgment. That is the system we have created.
Royal Bank of Scotland
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Sajid Javid
I thank the hon. Gentleman for his comments. I will start with his final question, if I may. He asked why the Chancellor is not here. That is because I am here; I thought the hon. Gentleman would be pleased to see me. I could well ask him where his boss, the shadow Chancellor, is. If this is such an important issue for the Opposition, the shadow Chancellor might have turned up.
I was also hoping that I might get an apology from the hon. Gentleman and some recognition that the only reason we are here discussing this topic today is the previous Government’s failure to regulate our banking system, which led to more than £45 billion of taxpayers’ money being injected into bailing out a bank—the world’s largest banking bail-out.
Let me turn to the hon. Gentleman’s four questions. First, he asked about the sequence or the terms of Stephen Hester’s departure. I am pleased to confirm to him that the Chancellor has not been directly involved in meeting with Stephen Hester prior to the announcement —[Interruption.] He has not met with Stephen Hester prior to the announcement of his departure on this issue. This is a decision for RBS and its board. They have made the decision jointly with Stephen Hester and come to a voluntary agreement. The chairman of RBS, Sir Philip Hampton, asked to meet the Chancellor last week—at Philip Hampton’s request—to inform the Chancellor of the board’s decision, and that is what I would expect, given that the shareholder is the majority owner of the bank.
The hon. Gentleman also referred to the succession plans and asked whether it would have been better to find a successor in the first place. If he has looked carefully at the plans, he will note that Stephen Hester has agreed to stay on until a successor has been found or, at the very latest, until the end of this year. RBS has already begun its search process. I am confident that it will find a successor in time, but it is reassuring, as I said in my statement, that Stephen Hester is staying on in the meantime to help to smooth the process of finding his successor.
The hon. Gentleman also referred to the share price of RBS this morning. He will note that—I think I am right in saying—almost every major bank’s share price is down this morning. The stock market is down in general this morning. I suggest that the change in the RBS share price might also be a reflection of global stock markets, particularly Asian stock markets and markets in Tokyo, which, as it happens, also fell by 6% overnight.
Next the hon. Gentleman asked about the eventual sale of the bank and RBS’s comments about preparing the bank for its future return to the private sector. There should be nothing surprising about RBS having an ambition that the bank should be returned to the private sector. That is perfectly reasonable and perfectly normal. As for the Government’s plans, we have always made it absolutely clear that we have no target price when we are thinking about the return of RBS. We have no fixed timetable, and that includes the general election. Our major concern is to ensure, as the hon. Gentleman said himself, that when RBS is returned to the private sector, that is done with due regard to getting the best value possible for the taxpayer.
The hon. Gentleman also asked whether the value of the shares had been destroyed. I thought that was a bit rich, coming from him. He forces me to remind the House that when the previous Government carried out their bail-out following their failed policies and paid more than £45 billion for a stake in RBS, they overpaid by £12 billion above the share price. That amount was written off by the taxpayer at that moment, but that is something else for which we have not had an apology.
If I understood the hon. Gentleman’s last question correctly, he asked whether the Government had intervened in the decision-making process of the executive management. As I have said, those decisions are rightly made by RBS’s board. The Government’s shareholding is held through UKFI on an arm’s length basis. UKFI represents the interests of the taxpayer on RBS’s board. I remind the House that that arm’s length arrangement was deliberately set up by the previous Government; we have rightly kept it in place. UKFI reports periodically to the Treasury and provides advice, and we always take that into account when making our own decisions.
Mr Andrew Tyrie (Chichester) (Con)
The early work on RBS’s recovery needed an investment banker, and Stephen Hester has done a difficult job extremely well. He deserves all our thanks, and I hope that the whole House agrees with that. Does the Minister agree that, whatever further reforms of RBS are now implemented, arguing about the past—about the past price or about party politics—is not what the country wants to hear or what the economy needs in the months ahead? What we now need, as soon as possible, is an RBS that can fully support the hundreds of thousands of people who are trying to make a living in small businesses up and down the country but who cannot get the support that they need. They need an RBS that is fully functioning for the first time in many years.
Sajid Javid
I thank my hon. Friend, the Chairman of the Treasury Select Committee and of the Parliamentary Commission on Banking Standards, for his comments. He is absolutely right to praise the work of Stephen Hester and I agree wholeheartedly with his views on what Stephen Hester has achieved in his five years at the bank. Perhaps my hon. Friend had his work with the Parliamentary Commission in mind when he asked his second question. The approach must be bipartisan and we must keep the interests of RBS and the economy as a whole uppermost in our minds.
Cyprus
Lord Tyrie Excerpts(12 years, 9 months ago)
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Greg Clark
I am grateful for the hon. Gentleman’s points and questions. Let me say at the outset that we will have the chance to discuss these things in more detail, but the situation is very fluid; we understand that tonight there will be a meeting of the Eurogroup members—a video conference—to discuss some aspects of it, and the Cypriot Parliament is meeting tomorrow, so I think it would be unwise to assume that the information that has come out over the weekend will necessarily represent the shape of things to come. However, I will make sure that the hon. Gentleman and, indeed, all hon. Members are kept abreast of things.
The hon. Gentleman’s point about fundamental trust needing to be established in the banking system goes to the heart of the matter. It is crucial that that applies not just in this country, but across the eurozone. It is one of the reasons why we have been supportive of the efforts being made by the eurozone to stabilise the financial system there, including by the introduction of a single supervisory mechanism. Cyprus, as I think he would acknowledge, is in a particularly acute situation, as a very large proportion of its GDP is exposed to international financial transactions and its domestic fiscal situation also leaves a lot to be desired. I think all hon. Members would recognise that the importance of maintaining fiscal discipline as well as adequate supervision of the banking system is exemplified by what has happened.
In terms of the negotiations so far and the parties to them, the hon. Gentleman should know and is, I think, aware that the discussions are among the members of the eurozone, who bear financial responsibility for bailing out Cyprus, and the Cypriot Government. They have negotiated with each other and the plan can be approved only if the Cypriot Parliament endorses it. The UK understands and has intelligence about what went on in those discussions, but was not part of them and had no influence and no votes. Ultimately, this is a matter for the Cypriots and the eurozone.
The cost of the protection that my right hon. Friends have offered to UK serving servicemen and women will depend on the final state of the arrangements, which, as I say, are not certain at this stage. I mentioned in my statement that about 3,000 UK military personnel and their support staff are employed, which gives us a limited ability to estimate the context.
On the question of the supervision of UK banks and any potential exposure, the Bank of England, as the hon. Gentleman would expect, maintains close involvement and is supervising all the banks that might have any exposure to the Cypriot authorities. The hon. Gentleman is quite right that it is necessary at both a European and domestic level to agree a means of bailing in the contributions of holders of capital so that the banks can be resolved without the types of problems we are seeing in Cyprus. We have been very clear that we want to see that and the Irish presidency is making good progress with the recovery and resolution directive. We have said that if that progress does not proceed at the pace we hope and expect to see, we can use the banking Bill to make the necessary amendments.
Mr Andrew Tyrie (Chichester) (Con)
This looks to be very poorly thought through, possibly dangerously so, not least because it risks triggering a run on the banks of other indebted countries. Is it not also the case that this could be a breach of EU deposit regulation, which requires a full guarantee of up to €100,000? It is not supported entirely by a tax but by shares—which clearly and demonstrably are not a tax. A minute ago, the Minister described the situation as fluid, but a fluid bail-out does not sound like a very robust policy to me. Does that not illustrate the gulf between the rhetoric and reality of the so-called banking union? Does it not illustrate that the eurozone’s problems are unresolved and blighting the UK economy?
Greg Clark
I agree with my hon. Friend to the extent that I think that it underlines the importance of having arrangements across the eurozone to anticipate and provide robust measures to ensure that resolution plans for such problems are agreed in advance so that there will not be this fluidity of negotiation. I completely agree with that. The measures that are being taken for banking union are designed to resolve precisely that set of circumstances. As for the legality of the situation, we will need to be assured that the arrangements proceed in accordance with the treaty.
Oral Answers to Questions
Lord Tyrie Excerpts(12 years, 10 months ago)
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Mr Osborne
To get a lecture from the Labour party on demand! The economy shrank by 6% when the shadow Chancellor was in the Cabinet, and we are picking up the pieces of the mess he and his party left behind. One of those pieces was the deeply uncompetitive business tax system which meant that companies were moving their headquarters out of the United Kingdom. Companies are now moving into the UK because of the changes we have made.
Mr Andrew Tyrie (Chichester) (Con)
It is small businesses in our constituencies that will hold the key to Britain’s economic revival. Does the Chancellor agree that they are simply not getting the support they need from the banks at the moment and that although the funding for lending scheme is good, most of the money is currently going into mortgages rather than businesses? I realise that he will not want to say much now, just before the Budget, but can he at least reassure the House that the needs of small businesses are right at the top of his agenda for this Budget?
Mr Osborne
My hon. Friend has that assurance. The funding for lending scheme, joint with the Bank of England, is now supporting the small and medium-sized business sector as well as the mortgage market, and is repairing the damage to the financial system caused by the financial crisis. He is also right to say that small businesses are the bedrock of our economic revival, which is why we have cut the small companies tax rate, which before the general election the Labour party wanted to put up. We have also carried on the relief for small businesses from business rates, and in the autumn statement we increased tenfold the annual investment allowance, so that small businesses can invest for the future and create jobs. The Government understand that there needs to be a private sector recovery in order not to repeat the mistakes of the past.
Financial Services (Banking Reform) Bill
Lord Tyrie Excerpts(12 years, 10 months ago)
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Greg Clark
That is a principal source of concern. Sir John Vickers, the author of the report, has given evidence in public that he is confident that the arrangements are robust, but we reflected on one of the recommendations of the parliamentary commission to provide this electrification so that there are consequences for a bank that tries to game the system. That is right and it is a valuable contribution from the commission.
Mr Andrew Tyrie (Chichester) (Con)
Sir John Vickers has in evidence to us also endorsed in full our proposals for electrification, part of which the Government are rejecting.
Greg Clark
I will deal with the important recommendation made by my hon. Friend’s commission very shortly.
For the sake of completeness, let me summarise the Bill’s other main provisions.
Greg Clark
The hon. Gentleman is absolutely right. That will be one of the requirements—the regulator, and indeed the Treasury, will need to be satisfied by the bank that the overseas regulator has accepted, and credible arrangements are in place, to ensure that no liabilities will fall on the UK taxpayer.
Greg Clark
I am grateful for the hon. Gentleman’s point. As I said, I have published some of the principal statutory instruments and more will be available before the Bill goes into Committee. I will make sure that the House has access to the principal measures; as he knows, minor measures will sometimes follow. I repeat that it is absolutely my intention that the Bill should be properly considered and scrutinised by this House. The strength of these arrangements will benefit from their being exhaustively considered and enjoying the full confidence of the House.
Mr Tyrie
I apologise for interrupting for a third time, but I want to clarify the scrutiny question. The Government intend to get the Bill out of Committee before the date that the Banking Commission had proposed that it should go into Committee. Therefore, this all boils down to how much time we are going to get on Report. Will the Minister now, at the Dispatch Box, give a commitment to two days on Report?
Greg Clark
I cannot do that, but I repeat my commitment that this House will have the opportunity fully to consider the amendments proposed by my hon. Friend’s commission. He has not yet produced his report, so we do not know what he has in mind, but I have been as clear as I can at the Dispatch Box that there is no intent to avoid scrutiny; quite the opposite.
Mr Andrew Tyrie (Chichester) (Con)
Last July, immediately after its creation, the Parliamentary Commission on Banking Standards was asked by the House to undertake pre-legislative scrutiny of this Bill. In other words, in addition to fulfilling its terms of reference it was asked to examine the Government’s proposals for the implementation of large parts of the Vickers review. We have worked very hard to do what the House has asked of us, and I particularly wish to thank all my colleagues on the commission; all the commoners are in the Chamber today and although I cannot see any of the five peers up in the Gallery, their work has been not inconsiderable—as has been pointed out, they are a formidable bunch. I also wish to thank the Treasury Committee, which has continued to participate in aspects of this debate in our inquiries and the vast majority of whose members—nine, I believe—are also in the Chamber.
The first report from the Parliamentary Commission on Banking Standards, published in December, welcomed the Government’s decision to implement the Vickers ring fence, but we also argued that the ring fence had to be made much more robust if it was to have a good chance of enduring. We suggested that the level of innovation in financial services, the lobbying power of the banks, and the short memories of regulators and politicians all pointed to the need to reinforce the ring fence. That is why the commission recommended that the ring fence be supported by a reserve power, subject to final Treasury approval, to enable the regulator to impose full separation on a bank that attempted to game the ring fence. The Government have now accepted the merits of that recommendation and the Bill will be amended to provide for the reserve power, which is very welcome news.
In their response to our report, however, the Government did not accept a number of other proposals, so we produced a second report. It was published today and it seeks to do three simple things. First, for the convenience of the House, especially those Members who will serve on the Committee, it provides draft amendments to support all our proposals that might need statutory backing. As far as I know, that is an innovation for a Select Committee or Joint Committee and I hope that it will be of some use and perhaps set a precedent for how such Committees operate. The amendments have been prepared with the help of a former senior parliamentary counsel.
Secondly, an annex juxtaposes our recommendations against the Government’s response to enable the House to see clearly what has been accepted and what has been rejected.
Thirdly, the report examines the arguments made by the Government for rejecting a number of our recommendations. We were able do that on the basis of further evidence gathered from, among others, Sir John Vickers, the Governor of the Bank of England, the deputy governors and the chief executives and chairmen of most of the major banks. We have concluded that much more work is needed to improve the Bill and I shall linger briefly on only two areas. Much of what needs to be said is in the report and I hope that colleagues will find time to read it.
The first area is leverage. The parliamentary commission has not heard a convincing argument for blocking, as the Government seem determined to, the Financial Policy Committee of the Bank of England from setting the leverage ratio. We have concluded that the ratio is likely to be too low—that is, that banks are likely to remain overleveraged—but we also think that that judgment should rest with the financial stability regulator, the Financial Policy Committee, and not with the Chancellor. We argue that the regulator will want to consider long transitional arrangements, particularly for building societies—the Minister mentioned his concerns about this—as some problems particularly apply to those with large mortgage books. In our first report, paragraph 295 and the paragraphs preceding it go into the issue in some detail.
We also argue that the Bank of England should provide an annual assessment to Parliament on risk-weighting. It is clear to anybody who has considered the composition of risk-weightings and how they are derived, including the fact that they are based on modelling by the banks themselves, that to rely on risk-weighting alone would be a perilous task. It is vital that that should be supported by a robust leverage ratio, as risk-weightings are not a good measure, on their own, of overall balance sheet risk.
The Government have rejected all those suggestions and, frankly, I find it surprising that they cling to the line, which we heard again today, that we should wait for Basel—that is, that we should wait for other countries to decide. As many witnesses have said, it is for us to sort out what is best for Britain. We need to work out what is right for our industry, rather than waiting for a lowest common denominator decision from the Basel group. I was a little disappointed to hear more in that tone from the Government today.
From time to time, the Government even remind us, as they did today, that the transfer of the power to the Financial Policy Committee, if and when it happens in 2018, should occur only after it has been reviewed. In other words, it is possible that the Government might conclude that it should not be transferred at all. I think that would be a grave mistake. Getting leverage right is crucial to the future of the banking industry. With twin peaks in place and the financial policy up and running, it must be right to give that power to the FPC.
A second major outstanding area of disagreement is the Government’s rejection of a second reserve power for industry-wide separation. Our first report made it clear that this should be exercisable only after a fully independent review, after a recommendation from the regulator, and with Treasury approval. Not only did the Government reject the second reserve power, but in their first published response they even rejected the case for an independent review after a few years to assess the effectiveness of the ring fence.
On that last point—the need for a review—when the Chancellor came before the Committee about a fortnight ago, he appeared to be a little more flexible and he said he would consider it, and I noted the more emollient tone that we heard from the Minister today. I very much hope this presages some action on that point. I hope the Chancellor will give very careful consideration to the two points that I have raised here and that we raised in the report, both on leverage and on general separation.
Mr Tyrie
I do not think it is particularly democratic to give the authority directly to the Chancellor of the Exchequer, but I understand what he means if he thinks that Parliament should be given some opportunity to debate the issue. It is possible that some scope for flexibility could be built in to reconcile the point that he is making and the point that the commission is making. What would be unacceptable would be for the legislation to reach the statute book without a power of general separation and without there having been a thoroughgoing independent review. If those are in place, the extent to which Parliament can be involved a second time, and the extent to which the Chancellor himself should trigger that involvement, is something on which we could show flexibility.
I said that I hoped the Chancellor would think carefully about leverage and general separation, but there are a good number of other issues to which I hope he will give some thought, most of which have, at least briefly, been mentioned so I will not linger on them. I know that other Members want to speak, so I shall cite just three or four.
On derivatives, the Government appear completely at odds with the Vickers review and somewhat at odds with a slightly modified version of the same point that has been put forward by the commission which I chair. I will not delay the House now by going into the detail.
I hope the Chancellor will also consider a point that has scarcely been raised so far today—the need for the imposition of the so-called sibling relationship between the two parts of the ring-fenced bank under a single holding company, rather than the parent-child relationship, which was originally proposed in the Vickers report and which the Government still support. There are good corporate governance grounds and other grounds for supporting that proposal, which won widespread support in evidence that we took on it.
I hope the Chancellor will also think carefully about the way in which individual banks demonstrate whether they should benefit from a PLAC exemption—an exemption from the requirements of primary loss-absorbing capacity. This is a complex area which mainly affects banks headquartered in the UK with large overseas subsidiaries and branches. It is an issue that needs to be approached with considerable care. We thought very carefully about it and came forward with a balanced recommendation. On that, too, so far I have not seen enough flexibility from the Government.
The issues in the Bill are crucial for Britain. The industry is a great one, but it has serious problems. The Bill will address only some of the sector’s structural problems, and there is a lot more to be done. The parliamentary commission expects to produce its final report in May and that will seek to address some of the wider issues, the problems of standards and the culture in banking. We have just had a shocking LIBOR scandal and the wholesale rigging of crucial wholesale markets, and we have seen the equally shocking rip-off of consumers in the payment protection insurance scandal and of small businesses in the interest rate swap scandal. Those and other revelations, which have included sanctions busting and money laundering, reflect deep-seated problems of standards in banking.
Neither the Bill nor our proposals in May, nor for that matter any global initiatives under way, will solve all those problems. In fact, many of them will perhaps take many years—decades—to address. But something can and should be done, and that is why the Government are right to have made a start with this Bill. I very much hope that they listen to what the commission has said about it, because if they improve it further, along the lines that we have proposed, it can make a substantial contribution to a much stronger banking industry in Britain.
Financial Services and Markets
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Mr Andrew Tyrie (Chichester) (Con)
The Minister has just mentioned the leverage ratio. There are two crucial issues: first, the leverage ratio should be firmly in the hands of the FPC, not the Government; and, secondly, the UK should be able to act unilaterally, rather than necessarily having to wait indefinitely for international agreement—we should not move at the speed of the slowest. Indeed, the United States demonstrates how necessary that is. Does the Minister agree with that sentiment and, if so, why is that not reflected in what he is announcing today?
Greg Clark
As my hon. Friend knows, that has been a matter of much debate in the Treasury Committee and the Banking Commission, both of which he chairs. It is appropriate to have regard to the international debate on this. There is a difference between the debate on the leverage ratio and the two other tools that we will move on to talk about, the sectoral capital requirements and the counter-cyclical buffer, over which, it has been established internationally, there should be domestic discretion. We are not at that stage with the leverage ratio, as he will know, but I can certainly confirm to the House that the Government’s intention is to provide the FPC with a time-varying leverage ratio by 2018, subject to a review by the European Banking Authority, which is planned for 2017.
Greg Clark
We do not expect such a delay. The discussions are continuing and are live, as we know, so we do not expect to need that, but of course it is open to the House as it debates the Bill, presumably at some length, to keep that under review as the discussions progress.
The statutory instrument we are debating today relates specifically to the ability to set sectoral capital requirements. I will deal with that tool first before briefly covering the others. The interim FPC recommended that the statutory FPC should have a power of direction to vary financial institutions’ capital requirements against exposures to specific sectors over time. It argued that the over-exuberance that precedes crises often begins in specific sectors before spreading further. The Government agree that this targeted approach would allow these risks to be managed more effectively and proportionately than raising capital requirements more generally. The FPC has stated that it would wish to avoid what it terms an
“overly activist, fine-tuning approach”,
which should limit this risk. However, there may be times when using the tools in a granular way may be necessary, so the Government will keep the use of this tool under review to ensure that it is being used effectively and proportionately. There is also a risk that imposing sector-specific requirements could displace excessive risk into other sectors, so the FPC will need to monitor carefully the impact of any policy interventions using this tool and perhaps consider adjusting more general capital requirements if displacement turns out to be a significant problem.
I should take this opportunity to bring to the House’s attention the one change that the Government have made to the order following the consultation that we undertook on the draft version that was made available for that purpose. The current order excludes investment firms that are not regulated by the PRA from the FPC’s power. This will ensure that systemically important firms are captured while smaller firms that are not systemically important will not be subject to additional requirements.
Let me discuss briefly the other macro-prudential tools that the Government intend to give the FPC: the role of setting the UK’s counter-cyclical capital buffer; and, as we have briefly discussed, the power to intervene to limit leverage ratios. These are not covered by the draft order, but it might be useful if I provide a bit of context to the debate. The counter-cyclical capital buffer is part of the Basel III agreement, and it will be implemented in Europe by the capital requirements directive, commonly known as CRD 4. The directive aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate. It will be deployed by national jurisdictions when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure that the banking system has a buffer of capital to protect it against future losses. Banks, building societies and larger investment firms will be required to build up capital during upturns. This will help to increase the resilience of the financial system and might also dampen the credit cycle. Unwinding these requirements in the downturn once the threat has passed might help to mitigate contractions in the supply of lending.
It is clear that with its macro-prudential focus, the FPC will be the body best placed to determine the level of the counter-cyclical capital buffer. This was supported by the results of the Government’s consultation. As the counter-cyclical capital buffer is expected to be provided for in CRD 4, on which discussions are continuing, the simplest way to incorporate it into UK law is via regulations made under section 2(2) of the European Communities Act 1972 to transpose into UK law the provisions of CRD 4 which relate to the counter-cyclical capital buffer.
It is vital that the FPC’s decisions in relation to the counter-cyclical capital buffer should be subject to comparable procedural and reporting requirements to the FPC’s other tools. Therefore, in addition to the requirements imposed by the EU legislation, the Government intend to ensure that the counter-cyclical capital buffer will be subject to the same transparency requirements as other FPC decisions, with a summary of the FPC’s discussions when taking decisions on the buffer set out in the FPC’s meeting records, and the FPC’s use of the buffer covered in the biannual financial stability report. The Government will make any necessary changes to achieve this in the regulations that incorporate CRD 4 into UK law.
The interim FPC recommended that the statutory FPC should have a power of direction to set and vary a minimum leverage ratio. The Government think that a leverage ratio could indeed be a useful macro-prudential tool for the FPC. The unweighted nature of the measure would guard against risk weights underestimating the true riskiness of assets and provide a directly comparable figure across firms. Firms’ leverage ratios were a useful indicator of failure during the last crisis, and the period immediately preceding the crisis was characterised by sharp increases in leverage. The Government strongly support the inclusion of a backstop leverage ratio in the EU prudential toolkit and consider it an essential measure to ensure that leverage remains at sustainable levels. It is clear that there is some way to go, but the review in 2017 will address that, and it will not be implemented across the EU until 2018, so we have some time to consider it.
Greg Clark
The discussions on those need to proceed separately—I think that the Financial Services (Banking Reform) Bill Committee will have some vigorous discussions—but the order relates solely to the sectoral requirements.
The Government will, of course, be able to add to the suite of macro-prudential tools in the future by further order, subject to the approval of this House and the other place. At the moment, we believe that the measures I have described are appropriate and sufficient starting points for the FPC. The Government expect the tool kit to adapt and evolve as the international debate and academic literature on the subject develops and empirical experience becomes more widely available. We expect the FPC to make recommendations to the Treasury if its macro-prudential measures require amendments or the addition of new measures is required. I hope that my explanation has been helpful.
Economic Policy
Lord Tyrie Excerpts(12 years, 10 months ago)
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Mr Osborne
Government Back Benchers are as baffled as I am by the shadow Chancellor’s economic policy, which he has just had a few minutes to explain and still there is no explanation. His answer to a debt crisis is to borrow more. His answer to too much borrowing is to add to it. That is the problem he has, ultimately—that he is responsible for the mistakes that got Britain into this economic mess. This is the verdict from the leading Citi economist, Michael Saunders, today:
“In our view, the underlying causes of the UK economy’s weakness—and hence the rating downgrade—stem from the surge in private credit and public spending during 2000-2007.”
Who was in charge of economic policy during that period? The right hon. Gentleman is the architect of the mistakes that gave Britain its debt problem. He ignores the solution to that debt problem. He is condemned to repeat those mistakes and, as a result, his party is condemned never to be trusted with the public finances again.
Mr Andrew Tyrie (Chichester) (Con)
The truth is that any Government would need a credible deficit reduction plan, and the plain fact is that the markets are telling us we have one. Does the Chancellor agree with the shadow Chancellor, though, as he pointed out only the day before yesterday, that what the rating agencies have to tell us, given their dismal forecasting record, is of very limited value?
Mr Osborne
I would say that the credit rating agencies are important, but they are one test—[Interruption.] It is the shadow Chancellor who wants to say that the rating agency’s decision is not important, but we should still have a debate on it in Parliament. It is a completely contradictory position. It is important, but it is just one test of the Government’s economic credibility in the markets, and that is tested by the gilt yields, by the value of sterling, by the rates of the stock market and all sorts of other things, and as I say, today we have not seen excessive volatility. I say to the shadow Chancellor and to my hon. Friend and the Treasury Committee that we have to convince the world that we can pay our way in the world, and that is what this Government are going to do.