Financial Services (Banking Reform) Bill

Viscount Thurso Excerpts

Monday 8th July 2013 Commons Chamber

[Mr McFadden]

I do not propose to follow the hon. Member for Chichester (Mr Tyrie) by making a wide-ranging speech on the recommendations of the banking commission’s final report, as he has set them out perfectly adequately. However, I do want to say that I do not think the Minister has served himself or this discussion well by publishing the Government’s conclusions at lunchtime today, and then coming along and making a de facto statement of new policy, thereby simply compounding the sense of frustration in this House about the adequacy of the procedures for discussing these issues. Instead of going over all of that in great detail, however, I want to concentrate on the amendments before us, and on the discussion of ring-fencing and separation. I specifically want to talk about amendments 17 and 18 in the name of the shadow Chancellor and his shadow Treasury team colleagues; and amendment (a) to Government amendment 6 and amendment 19 in the name of the hon. Member for Chichester.

The banking commission’s first report, issued before Christmas, focused on ring-fencing and separation. It made two principal recommendations in respect of what has become known as electrification of the ring fence, which is the power to go further than the ring fence and enforce full separation between investment and retail banking.

The first of those proposed powers was in respect of individual institutions, and it was accepted by the Government, at least in name. The second power was in relation to the sector as a whole, and it was not accepted by the Government. No convincing reason has been given for accepting one and rejecting the other. The Government have today tried to make a virtue of issuing a response to the banking commission’s final report which says they broadly support its conclusions, yet in terms of the legislation before us the Government are continuing to reject a major recommendation of our first report, and as we have teased out of the Minister, even in the document published at lunchtime, they are rejecting recommendations on UKFI and regional banking. We may learn about others, too.

On the question of backstop powers to enforce separation in respect of either individual groups or the sector as a whole, one of the clearest lessons from the banking crisis of 2007-08 was how interconnected the banking system is. Institutions involved in banking are not islands cut off from one another. They lend money to one another. They engage in the same practices. Their culture is often shared. They place similar bets. When one falls, it often has the capacity to drag others down with it, as we learned to our great cost.

The same is true of the standards and culture questions we examined in such detail after Christmas. The LIBOR fixing was the straw that broke the camel’s back in terms of the establishment of the commission, but that did not just happen within one bank. Groups of traders within banks were co-operating with one another to rig the interest rates, and groups of traders across different banks were co-operating with one another to rig the interest rates. Against that background, it makes no sense at all to restrict the policy armoury that this Bill establishes to respond to the undermining of the system by taking powers that will affect only individual banking groups and not the sector as a whole. As the hon. Member for Chichester said about our recommendation on new criminal offences, some of those powers may never need to be used, but their existence on the statute book should focus the minds of those running these major organisations.

[John Thurso (Caithness, Sutherland and Easter Ross) (LD)]

We also discussed at length the fact that, if we do not have the weapon in the armoury, we cannot use it, and it is usually too late to put it in place once a crisis comes along. Far better to have the gun in the locker, even if we never use it, than not to have it at all.

[Mr McFadden]

I entirely agree.

--- Later in debate ---

In conclusion, we are dealing with a very important part of this discussion; it is stage two of these reforms, if we regard the regulatory changes as stage one. The commission believed that there was a relationship between structure and culture, and that is at the heart of the amendments. The recommendations for electrification aimed to reinforce that relationship to stop the kind of gaming of the system that has happened in that past and to make sure that the intention of the Bill is faithfully reflected in practice. That intention is well worth supporting.

[John Thurso]

May I begin by apologising to you, Mr Deputy Speaker, and to the Minister for the fact that I arrived after the start of the debate? The flight down was fine, but the Gatwick Express was not. Had it not been for that, I would certainly have been here.

May I briefly echo the words of my hon. Friend the Member for Chichester (Mr Tyrie) in praising the staff of the commission, who did a truly outstanding job? One thing we did was to break out into panels—he chaired one, as did I and nearly everyone else at some point—where we had individual staff, and they were very impressive and helpful.

I wish briefly to address a question raised by the hon. Member for Chichester, who chaired the commission, by explaining why I feel it is of the utmost importance that the proposals we made are not only taken seriously but passed into statute, and why we came to some of our conclusions. We deliberated on the issues for hours and hours. As anyone who has read the transcripts of the Treasury Committee’s meetings from years gone by will know, I started out seeing things from a full separation point of view. I am a fairly unreconstructed Glass-Steagall supporter, but I do think that one needs to be guided by the evidence. The commission received a great deal of evidence, and I came to the view that although that principle is still one that I adhere to and think is right, there were greater complications in today’s modern operation of the financial services and markets than perhaps had existed when Glass and Steagall got together and that it was wise, therefore, to listen on that. So what I looked for, as did other colleagues who came at it from different angles, was to give the best effect to what we were seeking to achieve.

The right hon. Member for Wolverhampton South East (Mr McFadden) rightly said that the commission linked structure and culture, and I was struck by the way in which the different cultures in banking are competing. One of the easiest ways to look at this, whether we are considering the Volcker rule, prop trading or whatever, is that there are two distinct cultures in every large banking organisation. The first of those is the professional culture of the people seeking to work with and to help individual clients, who are involved in investing or looking after depositors. I do not deny that the vast majority of people operating in the world of banking are professional, wish to be professional and wish to have high standards. The second is the completely separate trading culture, where there is no client at the end of the day; it is a zero-sum game where two people, or two sets of people, are trading specifically to make money and to beat the guy on the other side of the trade.

The problem so often was that although trading was necessary to give effect to that desired on the investment side, when the trading side took over in terms of profit and culture it infected the other side. The whole thing is about seeking to keep the cultures apart. People have talked about high-street commercial banking as being good and investment merchant banking as being a casino and being bad, but I do not take that view. I would split the types into three, because there is retail and commercial banking, investment banking and trading. All three have their uses, and how they relate and how they are governed is the important thing.

The universal bank clearly works, but if all the banks are universal banks, it does not, and that is the problem with it. If everybody is pursuing the same model, there is a real danger that the riskier side infects the more prudent side.

[Kelvin Hopkins (Luton North) (Lab)]

The ordinary depositor—the ordinary working person who puts their money in their bank and wants to use it—would be deeply worried if they felt, and if it were the case, that their money was being gambled with by these risk-taking buccaneers in the City. Is there not a very strong case for making sure that ordinary people, such as me, who do not gamble in that way can have their banking protected from such gambling?

[John Thurso]

The hon. Gentleman makes exactly the point I am in the process of making, but he does it more simply, and I thank him for that. That is the key point about the ring fence. The utility aspects of banking, which are operating the payment system and taking deposits, should be so constructed within an entity that when a bank fails—I say when, not if, because there will be another bank failure and our purpose is to try to make it easier for banks to be resolved so there is less likelihood of taxpayer intervention, meaning that the bank will be more likely to be allowed to go under and that bankers will be likely to be more prudent—the ring fence enables that while protecting the ordinary depositor and the payment systems.

This is a long and complicated subject, as I learned over many hours, and the flow of capital from the lady who puts some money into the bank to the company that needs it to expand and grow the economy is necessarily complex. One must therefore be careful—[Interruption.] I know that other hon. Members want to speak and I promised that my remarks would be brief, so before I get a beady eye from you, Mr Deputy Speaker, I ask the hon. Member for Luton North (Kelvin Hopkins) to let me move on.

The critical point, which I completely accept, is that the compromise we came to is the ring fence. The compromise holds good, however, only if the ring fence works properly. Our conclusion was that it would not work if it were not reinforced, and the term “electrified” was coined. The point made by the right hon. Member for Wolverhampton South East was that if one has at one’s disposal the ability to do something—the armoury, call it what you will—those who are engaged in the activity will check whether they are being looked at before they engage in it. It is the modern equivalent of the Governor’s eyebrow. If we do not have that, we will simply have a lot of regulation that might lead not to a successful conclusion but to a long dialogue that leads nowhere between the regulator, the Treasury and the institution. People must believe that when the weapon, whatever it is, is deployed, it will have a consequence. That is the essential point.

In conclusion, I think all members of the parliamentary commission came to a unanimous view. We started from different viewpoints and with different concepts, but we agreed—all five from this House, all five from the other place: all 10 of us together—that to give effect to the ring fence it needed to be reinforced. We thought it could be done in this way and my hon. Friend the Member for Chichester has laid out the arguments perfectly.

[Mark Durkan (Foyle) (SDLP)]

In following the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), I apologise for the fact that transit issues meant that I, too, missed the start of the debate. I will take up only a little time in the Chamber today, but, following the comments made by the hon. Gentleman and by the right hon. Member for Wolverhampton South East(Mr McFadden), it is important to make the point that it is not just those who have served the House well on the Parliamentary Commission for Banking Standards who have concerns about such issues and can see the difference between the Government’s offer and the amendments tabled by Opposition Front Benchers and by the hon. Member for Chichester (Mr Tyrie).

We talk about the electrified ring fence and, essentially, the Government are offering us a Fisher-Price electrified ring fence—a VTech model. They have looked up ring fence in the index of the Argos catalogue and gone for the one in the toy pages. There is not much point the Government’s saying they have taken everything into account, that this is the best model and that it will give everybody reliable assurances. Frankly, that is like trying to pretend that a tyre is flat only at the bottom and that this is just a minor stylistic difference about perception. The difference is about substance and reliability.

I encourage the Minister to listen to what right hon. and hon. Members on both sides of the House have said, and particularly to those who have had the best insight into these issues through the parliamentary commission and who have changed and modified their views, like the hon. Member for Caithness, Sutherland and Easter Ross. They have been able to give it more consideration than someone such as me, who comes to the question on a reflex reaction of full separation.

I recognise that the ring fence is the only show in town, but it must be reliable and meaningful. The Government’s proposed procedure in amendment 6 could take longer than the life of a Parliament to have an effect. There will be not just the preliminary decisions but the Treasury consents required for those decisions, and tribunals after the warnings and the decisions, then variations and consultation between the regulators—the whole thing will go on.