Banking Reform

Andrea Leadsom Excerpts

Monday 29th November 2010 Commons Chamber

[Andrea Leadsom (South Northamptonshire) (Con)]

It is always a great pleasure to speak after the hon. Member for Leeds East (Mr Mudie), who is a colleague on the Treasury Committee. He always talks a lot of sense and has explained clearly how frustrated people in Britain feel about bankers’ bonuses.

I am amazed at the wording of the motion. To suggest that no action has been taken so far to prevent a recurrence of the financial crash is quite bizarre.

[Andrew Bridgen]

The hon. Member for Leeds East (Mr Mudie) talked about no regrets, no contrition and no admission of guilt for taking bonuses. Does my hon. Friend think he was talking about the bankers or former Labour Front-Bench Members?

[Andrea Leadsom]

To give a cautious answer, I think there was an element of both.

Last week, I had a meeting with senior bankers and the chief counsel of one bank. They certainly have the sense that the world has changed dramatically for them since the financial crash. As we would expect, both internal and external forces have combined to change things significantly. Tier 1 capital ratios are already significantly higher—from the 2% core at the time of the crisis to about 7% now, which is after all what Basel III will require. Leverage is significantly lower, at an average of 20 times, from about 38 times pre-crash—a considerable change. Many banks welcome the existing proposals to establish a clearing house for over-the-counter derivatives.

According to Hector Sants, the Financial Services Authority has quadrupled the extent of its regulatory investigations. He has even made comments about how afraid banks should be of him. The Bank of England special liquidity scheme still provides about £130 billion of liquidity to banks, enabling them to switch illiquid but good assets for Government bills. All those things are important changes, and they are only a few of the steps taken so far.

Still to come, in 2011 and 2012, are the new regulatory structures in the UK and Europe that will radically improve regulatory accountability. Instead of the FSA looking to the Bank of England and the Treasury for solutions—as in the case of Northern Rock—we will in future have a far stronger Bank of England. It will not just have responsibility for monetary policy and as lender of last resort; the Governor will also be ultimately responsible for individual bank supervisions and, critically, through the Financial Policy Committee, for the overall health of the financial system.

To speak of no action is completely wrong, but that is not to say that a lot more could not be done. It certainly could, and especially about two things: accountability and competition. Specifically, the competition issue worries me at all levels of banking. If we go back to Adam Smith and “The Wealth of Nations”, we see that to have successful free enterprise, we must have free entry and free exit for market players, but looking over the past 20 years, we see that consolidation in banking and the increasing costs of regulation have helped to create an industry where there are huge barriers to entry.

[Justin Tomlinson (North Swindon) (Con)]

Does my hon. Friend agree that it is also essential to maintain diversity in the financial services sector to improve competition and drive down consumer costs and charges?

[Andrea Leadsom]

Absolutely. I was about to make exactly that point. Not only have there been far too few new entrants, we have seen only recently that banks are unable to fail; we cannot risk allowing a bank to fail, as the situation in Ireland has highlighted yet again. Regulation has trumped competition for too long.

It is not simply a matter of being too big to fail. Some of the biggest continuing concerns are about the medium-sized banking sector in the States and in Germany. The same mistakes must never happen again. We need to look to where the next crisis will come. It is absolutely key to introduce more competition and more accountability, and I would consider three areas.

I should not look to split retail and investment banking, which are artificial barriers. They may have worked in the 1920s and 1930s, but now they are too big a grey area. We simply could not do it. Bankers would just find clever ways to get round such measures.

I declare an interest. I have been in banking even longer than my hon. Friend the Member for Bromsgrove (Sajid Javid), as I have been in investment banking and funds management for 23 years. I assure the House that I have seen from all ends how clever bankers are when they want to get round something.

To address competition in the retail and mortgage markets, I would consider ways to let account numbers follow the consumer—one of the biggest barriers to moving an account, as we probably all know. I should love to know how many Members in the Chamber have changed their bank account or mortgage account recently. It is a huge headache. If we let the account number follow the consumer, that would immediately create far greater competition and far greater choice and availability of moving. It could also remove barriers to entry.

Secondly, to address competition in wholesale markets, I would consider giving the new Consumer Protection and Markets Authority a specific competition objective, which would mean that one of its roles would be as a specialist competition commission—not just the Office of Fair Trading, but a specialist commission—that would consider whether, in a particular sector or in a particular geographic region, a bank had a monopolistic or oligopolistic market share. It ought to have a statutory ability then to enforce its recommendations.

[Joseph Johnson (Orpington) (Con)]

Does my hon. Friend agree that the role of regulators in promoting and sustaining competition in the UK financial services market has been greatly complicated by the decision of the previous Administration to allow the merger of Lloyds and HBOS, and to waive all competition criteria which would normally have been applied to such a merger?

[Andrea Leadsom]

That is absolutely right. We are certainly in a worse position than we were pre-crisis in terms of a lack of competition and massive market share. The five top players in the UK dominate the mortgage market, the retail market and much of the wholesale market.

The third thing I would do is ensure proper pricing of bank risk. That is where one of the fundamental problems has been. Credit ratings agencies are culpable in their own activities, and banks are culpable in following the lead of credit ratings agencies and not bothering to do their own proper credit analysis. Part of that I put down to the fact that it has been far too easy for professionals and retail investors simply to buy bank debt and equities, without bothering to do their own analysis because there has been an implicit Government guarantee. The credit ratings agencies have automatically made them all double A or triple A, so it seemed like a no-brainer.

Unfortunately, there has been no downside, and something must be done to change that radically to ensure that there is a downside to investing in bank risk. Measures such as living wills, and subordinating bond-holders to depositors and equity owners, are ways to ensure that in future it is not the taxpayer who pays for banks’ mistakes.

Finally, if competition and accountability are to be the revolution in financial services for the future, it is essential—going back to what the hon. Member for Leeds East, my colleague on the Treasury Committee, was saying—that bank directors take some responsibility. Directors who break a bank should be fired, without bonuses, pay or early pension, and if criminal negligence can be shown, the ultimate penalty of prison should not be ruled out. Accountability is key.