Financial Services (Banking Reform) Bill

Alison McGovern Excerpts

Monday 11th March 2013 Commons Chamber

[Greg Clark]

I should have thought it was reasonable for the Financial Secretary to the Treasury to introduce a Bill on financial services.

Let me continue to make my point. The financial services sector is of great importance to Britain, but that importance carries risks for this country. At their peak, the banks’ balance sheets amounted to 500% of UK GDP, compared with 100% in the US and 300% in France and Germany. In 2008, for example, the Royal Bank of Scotland was the biggest bank in the world and, as we all know, Britain also witnessed the first bank run for more than a century, with depositors queuing in the streets to get their savings out of Northern Rock. RBS and HBOS had to be bailed out, with £65 billion of taxpayers’ money needed to shore up the banks.

The system of regulation failed, as did the culture of the banking sector, in not preventing and resolving the crisis without recourse to taxpayers’ money or otherwise putting people’s deposits at risk. That is why fundamental reform was needed, the first pillar of which has been put in place through the passage of the Financial Services Act 2012, which received Royal Assent in December and establishes a clear and distinct role for prudential regulation and conduct regulation, a role that was blurred and ineffective.

The Bill is the second pillar of those reforms and it reflects the considered views of no fewer than two expert commissions. The first, chaired by Sir John Vickers, was the Independent Commission on Banking, whereas the second, chaired by my hon. Friend the Member for Chichester (Mr Tyrie), was the Parliamentary Commission on Banking Standards, on which many Members of the House have served.

Let me say something about the process we followed, briefly summarise how the Bill reflects the recommendations of each commission and then explain in some detail the rationale for the few remaining areas in which the Government’s proposed approach differs.

[Alison McGovern (Wirral South) (Lab)]

In his discussion of the process, will the Financial Secretary explain why, given that the crash in 2008 to which the Bill is a response was one of the most momentous economic events in my lifetime and the lifetimes of many people, and given the importance of its proposals, the Chancellor did not see fit to lead the debate today?

[Greg Clark]

I am disappointed that my presence here does not satisfy the hon. Lady. The Chancellor trusts his Financial Secretary to speak at the Dispatch Box. I do not know how it is in the Opposition.

--- Later in debate ---

[Chris Leslie]

For once, I am grateful to the hon. Gentleman for wanting to focus on the issues; it is important that we have enough time to look at the detail. It is also important to commend the work of the banking standards commission, which has done a phenomenal job so far. I will find today’s report of great use in the short Committee stage, because at least it has taken the rather helpful step of drafting suggested amendments that no doubt the Minister, I and others will be discussing in due course.

The banks have not changed sufficiently. The LIBOR scandal shifted the agenda away from the discussion about excessive risk taking in the financial services sector so that we are now talking almost about anti-corruption measures that need to be put in place. We have had the mis-selling of personal protection insurance and the fleecing of business customers with mis-sold hedging interest rate swap products, while the high-reward bonus season continues to roll on and on, with £600 million of bonuses at RBS sanctioned by the Government, despite a £5 billion loss, to take just one example, so why are they dragging their feet on reform?

[Alison McGovern]

Conservative Members point to times in history when things changed in banking. While my hon. Friend is talking about culture, is it not important to listen to those who were there at the time, such as the former Chancellor, Lord Lawson? He said of financial deregulation:

“When the Thatcher Government first took office in 1979 it inherited an economy beset by all manner of government controls…We judge these…regulations to be amongst the causes of Britain’s economic weakness and we wished to be rid of them.”

Does this story not go back much further? If we want to look at points in history, we might do well to look at the big bang, which changed the culture.

[Chris Leslie]

My hon. Friend is entirely right. Ducks go quack, cows go moo and Conservatives hate regulation of the market. It is part of their ingrained DNA.

--- Later in debate ---

[Alison McGovern (Wirral South) (Lab)]

I congratulate the hon. Member for Eastleigh (Mike Thornton) on his maiden speech, which was a really good first contribution. As a former railway person, I know that the town of Eastleigh is extremely important to that industry, but there is no more important a subject for him to make his maiden speech on than this Bill. I offer him my sincere congratulations.

Let me say why I think this Bill matters. By way of setting the scene, I want to explain something from which I think the financial services industry suffers. There has been a recent influx of Members to the Chamber for this debate, although I fear that it is not entirely due to the subject under discussion. Normally, the financial industry is quite a niche subject, which is partly to do with the fact that people often talk in code about financial services. There is a certain language that people are supposed to use when talking about financial services, and I suspect that those who work in the industry feel a bit as though they are part of a special club. They use words that normal people cannot really understand; they repeat their shibboleths and some of them live in their gated community, quite apart from normal society. Well, hands up, Mr Speaker, it takes one to know one; Parliament is just the same in so many ways. If we make things sound complicated, people will think we are really clever, but I think we should learn that democracy and financial services are too important for that.

Unfortunately, the culture in financial services makes scrutiny much harder than it ought to be. We now know that in the 2008 crash, the real risks taken by the banks were hidden, and that happened because of the insider culture. We are yet to hear from the Parliamentary Commission on Banking Standards about the cultural aspects of the financial services crash, so I repeat to Ministers earlier pleas about the timing of that advice. As I have explained, cultural aspects are important for effective scrutiny and good legislation in the future, so can we not ensure that we proceed with the best possible advice from the parliamentary commission? We in this House would probably all agree that we have been sent here to speak up for ordinary people, but what happens in the City’s square mile matters on every high street in Britain. It is not good enough anymore for financial services to be a niche interest in Parliament.

Growing up in the 1980s and 1990s I often felt that Merseyside was being buffeted and shaken in the interests of the City of London. Given the Chancellor’s words over recent months, it has sometimes felt a little like my teenage years on playback. The Chancellor talks about defending the interests of London as a financial centre—for example on leverage ratios—but how much do financial institutions worry about the average British high street?

[Mark Field]

Will the hon. Lady give way?

[Alison McGovern]

Let me finish the point, and then of course I will give way to the Member who represents the square mile.

Let us be honest: some financial institutions do worry about that, and some are very large employers, and I know that many people in the financial services would agree absolutely with my point. However, wage inequality skews influence to insiders at the top.

[Mark Field]

Does the hon. Lady recognise that as well as the hugely important business, which is perhaps based culturally within the square mile in my constituency, a vast number—indeed, the majority—of jobs in UK banking and financial services are based not just outside the City but outside the capital? She will be aware, for example, that not too far from her constituency in the city of Chester, a huge number of employers employ many thousands of people in the financial services.

[Alison McGovern]

That was the point I was trying to make, and I refer the hon. Gentleman to comments made by my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who said that although that is true, it is not enough to say, “We’re a big employer; leave us alone.” The influence of the financial services in the City is greater than that, and that will not do anymore.

Wage inequality in financial institutions skews influence to insiders at the top. This is a classic insider-outsider problem, and we in Parliament must work out how to scrutinise more what goes on in the City. I believe that the Royal Bank of Scotland’s final report makes great play of how it is finally a living wage employer. Well, good for RBS, but it is perhaps a little too late.

On the bonus culture, the Government have said that there could be a perverse incentive in controlling bonuses and that people might be paid more if their bonuses are reduced. That is true if—and only if—they think the following two things: that it might not be better to have more fixed costs and less turbulence, and that we might want to think about the impact of those highly variable costs on incentives; and, secondly, that the overall remuneration of bankers is just fine and the current inequality in the financial services sector is okay. Well, it is not okay. The hon. Member for Cities of London and Westminster (Mark Field), who represents the City, mentioned the many people all over the country who work in financial services, but when I make the point about inequality in the financial services sector, it is those very people, and the money in their pockets, who I am thinking of.

[Mr McFadden]

On pay and reward, does my hon. Friend agree that it is unfair that the vast majority of financial services workers, who are in ordinary branches of banks and so on and paid normal, average salaries, get tarred with the brush of excess and of salaries way out of kilter with what normal people earn, when in fact that is taking place at the very top of banking and not in the local branch?

[Alison McGovern]

I could not agree more. It is also not okay that people in regular branches were pressured to sell all kinds of products, which we know happened.

I was very much taken by the contribution made by the Father of the House, the right hon. Member for Louth and Horncastle (Sir Peter Tapsell). Unfortunately, he has left his place. I was going comment on the deregulation of building societies and the big bang back in 1986, but as he has already covered that very well, I will not do so except to say this. On reading Lord Lawson’s account of the impact of the 1980s boom on the real economy, I think he is clear that he thinks he made a mistake. We should listen to the lessons of history. We should also congratulate the right hon. Member for Haltemprice and Howden (Mr Davis), Lord McFall and Baroness Kramer on establishing the New City Network, which is trying to find ways to answer some of the questions I have raised.

To turn to my second point, which is more specific to the Bill, we need to ask ourselves what kind of economy we want. My constituents, unsurprisingly, are interested in having a job to go to, and in having enough money in their pockets to feed their family and have a roof over their heads. They want a Government who do not tell them that they will cut debt to solve the problem, only to see debt rising. Notwithstanding that, the Bill ought to help finance to underpin a growing economy. Will the ringfence help us do that? That is determined by what we think banks are for. We should say that banks are not just like any other industry: cavalier risks are totally unacceptable, and that is why the ringfence matters. We need to assure ourselves that we have done enough to provide for business continuity in a real, productive economy.

I am not sure that the ringfence is necessarily enough to do that, however. What about the examples of straightforward bad lending? What about investment banks with no retail operation, such as Lehman’s in the US? What about retail banks that went under in this country? How does the ringfence de-risk in those cases? Then there are the comments from the hon. Member for Chichester (Mr Tyrie) about the industry marking its own exam. That gives rise to the need for reserve powers, which other hon. Members have described well.

We need to be clear that some in financial services argue against separation at all—they worry about the cost to the bank. I am afraid that that sounds a little too much like special pleading. Saying that this will hurt lending to the real economy because it passes costs on just sounds like tit-for-tat: “Block our preferred business model and we will punish small and medium-sized enterprises, small business and the average small lender.” Why do they have to do that? I am not sure that one necessarily leads to the other—it is about their business model. How does the Bill help with protection from banking failure in other European countries?

We have heard other hon. Members talk about competition, so I will not dwell on that for too long, but the Government must be clear and Ministers must say exactly what kind of competition they want. Any economics textbook will tell us that three firms are enough for competition, but I think we all think that common sense dictates otherwise. How many new entrants to the market are sufficient? More importantly, what kind of competition do we want?

There is nothing in the Bill about ownership, but perhaps there should be. What are the Government doing to open up banking to more mutuals? Could we look back over our history at what happened to building societies, as my hon. Friend the Member for Bassetlaw (John Mann) mentioned, and see whether there is room for change in that sphere? I have raised before the Financial Services Compensation Scheme and pre-funded deposit insurance. If we compare the EU’s position on making sure that banks commit properly to the UK’s position, I wonder whether Ministers have got that one right.

In conclusion, this is a shell of a Bill and we can do much better. To paraphrase John Donne, financial services is not an industry entire of itself; it is a piece of the continent, a part of the main. We therefore need a greater commitment from the industry that it is prepared to change, and from the Government that they are prepared to legislate to help it do so. The impact of the financial crash on people in my constituency was huge, be that from the threat of losing their house, or losing their job. That is too important for this subject to remain a matter of technical, niche interest. The Government must be much stronger and listen to the voices calling for change.