Financial Services Bill

Andrea Leadsom Excerpts

Tuesday 22nd May 2012 Commons Chamber

[Mr Hoban]

I beg to move, That the Bill be now read the Third time.

It is worth stepping back at this point to look at why this is such a crucial Bill and why we must get it right. The UK banking system is emerging from the most serious financial crisis in over 100 years. It was a global crisis, but in the UK it highlighted fundamental dangerous flaws in the existing tripartite system of regulation. That system was put in place by the previous Government and designed by the shadow Chancellor—a system that, because of its flaws, failed its first major test.

The Bill addresses the most serious weaknesses in the system. Currently, all responsibility for financial regulation rests with the Financial Services Authority, resulting in an unwieldy remit across prudential and conduct-of-business regulation. The conflicts and challenges involved in that dual mandate were highlighted in the recent FSA report on the failure of RBS. The Bank of England is responsible for financial stability, but it did not have the tools with which to effect change, and the Treasury has no clear remit in a crisis, in spite of the immense threat to public funds in such scenarios. The confusion and lack of clarity in respect of roles and responsibilities triggered the asking of this question: who is in charge? The system’s structural flaws were compounded by flaws in approach. The FSA’s focus on tick-box compliance in the run-up to the financial crisis meant that insufficient time and resource was dedicated to thoughtful and challenging analysis of risk.

The Bill gives a clearer mandate to the regulatory structure and ensures that the regulators are equipped with the powers they need to tackle the problems both of today and, crucially, of the future. The Bill gives the Bank, through the new Financial Policy Committee, a much clearer mandate to protect financial stability and the ability to develop and use levers to fulfil that role. In Committee, we discussed at length the remit of the FPC and the tools that would be required, and I reconfirm what I said then: we will consult on the macro-prudential tools later this year, to ensure that there is full public discussion of them and their effects both in the outside world and here in Parliament.

In response to questions about who should be the prudential regulator, and recognising the close synergy between macro-prudential regulation—the task of the new FPC—and micro-prudential regulation, we have established a new subsidiary of the Bank of England: the Prudential Regulatory Authority. The PRA will have a new emphasis on a judgment-led approach to regulation. We will ask it to act proactively and to look ahead at problems that may emerge. The PRA will be empowered to act to tackle problems before they emerge, rather than waiting to clean up afterwards.

[Andrea Leadsom (South Northamptonshire) (Con)]

Does my hon. Friend agree that it is important that the PRA and the FPC consider the need for greater bank competition in the UK? Does he also agree that it is important that when the Bill moves into the other place consideration is given to any changes that might encourage greater competition through the new PRA?

[Mr Hoban]

The FPC’s remit does not cover the consideration of competition in the system. Its role is to consider stability and the threats to it. On the question of the Prudential Regulatory Authority, one of the challenges we need to accept is that, for a host of reasons, the failure of a bank is costly and expensive. We saw that in the UK with the response to the banking problems during the crisis, when a huge amount of public money was pumped into banks to prevent some of the problems that bank failure would create. Part of the responsibility for tackling the problem lies with the previous Government, who introduced living wills through recovery and resolution plans in the Banking Act 2009, work which is now being taken forward.

Of course, the Vickers report includes in its recommendations ways in which it will be easier to allow the orderly failure of a bank. Helping a bank to have an orderly failure where there is a problem will help to tackle the problem with barriers to entry. At the moment, the cost of failure is so high that the barriers to entry are proportionately higher. The regulators want to know that a bank is safe and to have huge confidence in that bank and they will require it to have high levels of capital because the cost of failure is so high. If we can tackle the barriers to exit from the banking sector, it will be easier to tackle the barriers to entry. That will help enormously in improving competition.

We have also given the Financial Conduct Authority an explicit objective of improving competition in markets. We have strengthened that objective, taking into account the work of the Treasury Committee and the representations of others, and I believe, as I think my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) does, that competition plays an important role in improving outcomes for consumers. That is why we see competition as one of the key new roles for the FCA, which will be a specialist regulator of conduct and will have strategic objectives not just to promote competition but to focus on consumer protection and to ensure that markets function well and have integrity.

We have also listened to the widespread concerns about the regulation of consumer credit. The Bill gives us powers to transfer the responsibility for regulating consumer credit from the Office of Fair Trading to the FCA. That will bring significant benefits and will ensure that consumer credit is well regulated. The FCA has a wider range of penalties than the OFT and can take a wider range of enforcement action, which will help to reassure our constituents that we are tackling the issue of consumer credit properly and sensibly.