Spending Review

Lord Tyrie Excerpts

Wednesday 26th June 2013 Commons Chamber

[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

Tuesday 25th June 2013 Commons Chamber

[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

Lord Tyrie Excerpts

Thursday 13th June 2013 Commons Chamber

[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

Monday 18th March 2013 Commons Chamber

[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

Tuesday 12th March 2013 Commons Chamber

[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

Monday 11th March 2013 Commons Chamber

[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.

--- Later in debate ---

[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.

[Mr Tyrie]

I apologise for interrupting the Minister a second time. Just to be clear, will it be the regulator or the Treasury that will ultimately decide what constitutes adequate PLAC? A moment ago he referred to the regulator and the Treasury. Which will it be?

--- Later in debate ---

[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.

--- Later in debate ---

[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 Love]

The Chancellor also said to the commission, in response to the second reserve power, that it would be rather undemocratic. How does the chairman of the commission respond to that?

[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

Lord Tyrie Excerpts

Wednesday 27th February 2013 Commons Chamber

[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.

[Mr Tyrie]

Will the Minister explain what possible logic there is to maintaining the leverage ratio at exactly the same level as a back-stop for risk weights of more than 10% as when the risk weights were set at only 8%?

[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

Monday 25th February 2013 Commons Chamber

[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.

Financial Services

Lord Tyrie Excerpts

Wednesday 6th February 2013 Commons Chamber

[Greg Clark]

It is, of course, right that we do that. I have been very clear that we are taking the steps that we are taking to restore the international reputation of the City and to make it pre-eminent in the world as a place in which people have confidence.

I would have thought that the hon. Gentleman would have taken this opportunity to reflect on the contribution that the previous Government made to the decline in the reputation of the City. It is not as if the chaotic regulatory regime was not foreseen. In November 1997, during the passage of the legislation that set up the flawed Financial Services Authority, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) said:

“The coverage of the FSA will be huge; its objectives will be many, and potentially in conflict with one another. The range of its activities will be so diverse that no one person in it will understand them all.”

He went on to say that the Government of the day

“may, almost casually, have bitten off more than they can chew. The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”—[Official Report, 11 November 1997; Vol. 300, c. 732.]

That was the warning that the Conservative party gave the Government at that time, but it was ignored comprehensively for their 13 years in office.

We have moved quickly, as most reasonable people would concede. We already have a Financial Services Act on the statute book and we have set up an eminent commission chaired by Sir John Vickers to recommend far-reaching changes to the financial services system. The previous Government’s contribution to the eminence of the City was to knight Fred Goodwin, for heaven’s sake. The Opposition spokesman brags about the reforms to the regulatory system that he recommended in a Public Bill Committee, but it was the shadow Chancellor, when he had my job, who said that

“nothing should be done to put at risk a light touch, risk-based regulatory regime.”

We are making the reforms that it falls to us to make.

I will answer some of the specific points that the hon. Gentleman made. We will have discussions about the Financial Services (Banking Reform) Bill. Most reasonable people would conclude that the reforms that we are making, with the advice of the Vickers commission and the Parliamentary Commission on Banking Standards, lead the world in this area. The Liikanen report, which is being recommended at a European level, explicitly refers to the reforms that we are contemplating. It is right that we should be ahead on this.

The hon. Gentleman is right that the Financial Services Authority must investigate whether any individuals or firms lost out as a result of the attempted manipulation. I call it attempted manipulation because we are talking about the rates that were submitted and it is not necessarily the case that the LIBOR reference rate changed in response. However, it is right that the FSA should make that assessment.

The process that Martin Wheatley recommended to replace the BBA is under way. It will become a regulated activity as soon as the statutory instruments are passed. Baroness Hogg and her committee are setting up a process to invite tenders, which will not include the BBA, to administer that process. As Martin Wheatley said, it is necessary that that is done in a way that does not undermine confidence in the rate-setting process during the transition, because it is fundamental to many contracts, as the hon. Gentleman implied, including people’s mortgages.

The hon. Gentleman mentioned other benchmarks. The powers that we took in the amendments that we made to the Financial Services Act 2012 before Christmas allow us quickly to specify any other benchmarks that might be subject to such abuse. Our response has been co-ordinated with the international authorities and nobody regards the powers that we have as inadequate to the task of dealing with other abuses.

On whistleblowers, the hon. Gentleman is right that it is important that people within banks and financial services should have the confidence to report abuse. A very small number of people are responsible for something that is besmirching the reputation of many millions of people up and down the country who work hard, day and night, for banks. Those people have had reason, over the years, to be proud of their career. It is important, not least for those people, that the institutions for which they work recover their reputations.

On the shareholding in RBS, it is of course the Government’s intention to return it, at the appropriate time, to private ownership. It is not right that we should own such a significant stake of a high street bank. It was necessary for us to do so because of the crisis that the hon. Gentleman and his colleagues know all about. As soon as it can be returned to independence, the better.

[Mr Andrew Tyrie (Chichester) (Con)]

I am sure that the whole House welcomes the fact that the US fines will be clawed back from bonuses. LIBOR, serious though it is, is just the tip of a large iceberg of banking malpractice that is now being exposed to view. The Minister ended his statement by pointing out that we should not shrink from imposing higher standards than other countries. Does he agree that if we impose high-quality regulation, it will not only be morally right, but may attract good business to the UK and be in the UK’s economic interests overall?

[Greg Clark]

I do agree with that. The work that my hon. Friend’s commission is continuing to do on the culture of banking is important and will inform the further reforms that we need to make. I do not think that we should be shy of setting high standards in this country; in fact, it is necessary to do so. At a time when trust is in flight across the world, there is an opportunity for the City of London to establish itself as a haven of probity and safety in a volatile world. High standards, far from being a threat or a danger to our financial institutions, are necessary for their continued prosperity, which I and the whole House want to see flourish.

Banking Reform

Lord Tyrie Excerpts

Monday 4th February 2013 Commons Chamber

[Greg Clark]

I had rather hoped for a serious response to a serious matter. When the Bill has its Committee stage, I hope the hon. Gentleman, with whom I am happy to work on the details, will be able to make some more substantial reflections than those he has offered the House today. Frankly, the idea that the Opposition should have the brass neck to table an urgent question on banking reform is almost unbelievable. At no point in 13 years of power did they show a scintilla of urgency in facing up to, never mind solving, the catastrophic absence of banking reform that led to the financial crisis being particularly damaging to this country. The failure of the botched regulatory system they introduced in 1997 has played a large part in the burden that the ordinary working people of this country are still having to shoulder today to bail out the banks. They were in office after the crisis, too. Even then they did nothing urgent apart from hurriedly plunge their heads in the sand to hope that the nightmare would pass.

It has fallen to this Government—as it regularly does, I am afraid—urgently to clear up the chaos in which Labour left the country. It should not have taken so long, but since the Government have been elected—from the beginning of our tenure in 2010—we have set up the Independent Commission on Banking, which has done a superb job, and we have created a separate conduct regulator and a prudential regulator that are now on the statute book. Why did we need to wait for this Government to be elected to do that? Why did Labour not set up a parliamentary commission on banking standards? [Interruption.] Of course, I will answer the pitifully few points that the hon. Gentleman made.

The hon. Gentleman asked, perfectly reasonably, why we had not given the Bank of England the power to split up the whole banking system. One of the principal reasons for not doing so was that the Governor of the Bank of England, in evidence to the commission, said that he did not want that power. It would seem odd to foist on the Governor a power that he does not want. The hon. Gentleman also asked why we did not adopt the higher backstop ratio. One concern expressed was by building societies worried about being disadvantaged by that. That was a concern we had.

The hon. Gentleman asked about a full review. If he had read closely the statement we published in response to the commission’s report, he would have known that the PRA would conduct a full annual review of the ring-fencing rules, and we will obviously act on any recommendations that it makes. He also asked about further recommendations that might come from the commission, which is chaired by my hon. Friend the Member for Chichester. The hon. Gentleman seems surprised that, having set up the commission, we might be interested in taking seriously its recommendations. I hope it is apparent from our response today that we take its recommendations very seriously, and I look forward to its further recommendations, particularly on competition, which have a great deal to offer. I greatly respect the commission’s work and look forward to making time available when the next report is published to make the necessary changes to the Bill to accommodate the recommendations.

[Mr Andrew Tyrie (Chichester) (Con)]

The commission will look carefully at the detail that the Government have published today, but in the meantime I warmly welcome the Government’s acceptance of several of our key proposals, including on electrification of the ring fence.

Last night, journalists were briefed by the Treasury that the Government had also accepted our proposal that an external assessment should be made before the PRA could exercise its reserve power, but there is no mention of that in the Government’s response. Will the Minister confirm that such an assessment will be provided for in the Bill?