Financial Services (Banking Reform) Bill

Andrew Bridgen Excerpts

Monday 11th March 2013 Commons Chamber

[Chris Leslie]

I do not want any of our banks to be in a position of over-extending themselves, putting at risk either their customers or the taxpayer. It is very simple. We need to listen to the carefully thought through advice of the banking standards commission, the Vickers report and others, including the incoming Governor of the Bank of England, on these particular issues. The Government may call it the British dilemma, but it is astonishing that they always seem to be asking the European Union to come to their rescue at some point with some reform to deal with bail-in or whatever other problems happen to be around later on down the track. That is not adequate.

Let me deal with the issue of derivatives inside the ring fence, as I know that the parliamentary commission has been concerned about it. The Vickers report said that derivatives trading should not be allowed—full stop. The parliamentary commission recognised, however, that there were services on the margins where some simple derivative products might be permitted, but it added that

“allowing ring-fenced banks to sell derivatives other than as an agent creates additional prudential and conduct risks.”

I agree with the commission on that issue. We need clearer protections to prevent abuses within the ring-fenced retail banks where derivatives are sold. That was illustrated, of course, by the mis-selling of some interest rate hedging products to small and medium-sized enterprises. The danger is one of information asymmetry between customer and vendor and the fact that the trade became exceptionally lucrative for the banks. We have to move away from this era of the exploitation of the customer’s lack of knowledge, and the commission was clear about that in the three tests it set.

We have seen one of the drafts of the secondary orders, subsequent to the commission’s recommendations. It is therefore worth comparing that order with the tests that the commission has set. The commission said that there should be adequate safeguards against mis-selling, but as far as I can see, the draft order does not go into any detail about how the Prudential Regulation Authority or the Financial Conduct Authority will enforce anything new. The commission said that there should be a clear definition of simple derivatives, which will be allowed, versus complex derivatives, which will be disallowed, but the draft order seems to define simple derivatives quite widely—in other words, as instruments designed to tackle interest rate risk, exchange rate risk, default risk, liquidity risk or for dealing in assets included in the liquid assets buffer. It would be easier if the Minister set out what would not be allowed rather than what would be allowed in the ring fence.

The third test relates to limits on the proportion of a bank’s balance sheet. The commission thought that was necessary, but the draft order so far leaves out what that percentage should be. There is a space left for a figure before the percentage sign, so perhaps the Minister can give us a sense of what that proportion of the bank’s balance sheet should be. That was one of the commission’s tests, as I said, so we need to secure assurances from the Minister about the Government’s intentions. As Martin Taylor said in his evidence to the commission:

“I can’t see the point of having a fence round the chicken coop, electrifying it to keep the foxes out, and then inviting a family of tame foxes to live inside it.”

That sums up the problem quite neatly. I have already alluded to the bail-in powers. Again, it is disappointing that the Government are relying on future European directives as the means to achieve bail-in rather than building it into the Bill before us. I do not think that the frequent excuse of “We’re waiting for the European Union” will do any longer.

We need also to focus on some of the other issues that should be in the Bill today, particularly rebuilding consumer choice, financial inclusion and a diverse market. The Bill is silent on all those areas. There is nothing about challenger or new entrant banks; nothing to ensure a universal obligation on banks for basic bank account services. There is also pussyfooting around on switching of bank accounts, about which I know some Government Members are concerned. There is nothing on mutuality, despite the pledge in the coalition agreement to

“foster diversity in financial services, promote mutuals and create a more competitive banking industry”;

and nothing about a fiduciary duty of care for clients and customers. We will table amendments to ensure that high street lenders offer a basic bank account, which is particularly necessary because of the onset of universal credit. We want a report within six months addressing obstacles to new-entrant challenger banks and current account provision. We also want Parliament to have an opportunity, soon after Royal Assent, to examine the adequacy of customer switching arrangements, and we want the publication of bank data on “lending deserts”, the postcode areas where—as we are finding in our constituencies—some small and medium-sized enterprises and customers find it difficult to gain access to credit. Other tests need to be included in the Bill to fulfil the coalition’s mutuality pledge. We also want a duty to be imposed on directors of ring-fenced banks to operate prudently and to safeguard deposits, and we want them to have a fiduciary duty of care to customers throughout the financial services.

[Andrew Bridgen (North West Leicestershire) (Con)]

The hon. Gentleman has rightly described consumer choice as the main driver of any market. Does he believe that encouraging Lloyds Banking Group to buy HBOS, or intimidating it into doing so, increased or decreased consumer choice in this country?

[Chris Leslie]

The hon. Gentleman may not have noticed it, but there was a bit of a financial storm going on in the financial services sector at the time. He may think that his constituents who had deposits in Lloyds would have been better off had the bank not been saved in the way that it was, but I do not think that they would have enjoyed the experience of turning up at the cash machines and not being able to get their money out. I think that rescuing the banks was a necessary step at the time, but now we must learn from that crisis, which occurred not just in the United Kingdom but in the United States and throughout the developed world. If Government Members think that they can get away with rewriting history, and that the former Prime Minister uniquely got on a plane, caused the collapse of Lehman Brothers, and then went off to Greece and Spain, they must be living on a different planet.

[Andrew Bridgen]

Does the hon. Gentleman not remember that Lloyds Banking Group needed to be bailed out only because it was intimidated into taking over HBOS by the last Government?

[Chris Leslie]

I disagree. I think that there was a high-risk, high-return culture in the banking sector—we saw it in the United States, and we saw it here—which Government Members fuelled through their deregulatory philosophical approach.

--- Later in debate ---

[Sir Peter Tapsell (Louth and Horncastle) (Con)]

I asked Harold Macmillan what the secret was of making a good speech in the House of Commons and he said, “I once asked David Lloyd George that very question and the answer I got was, ‘Don’t say anything interesting or important in the first five minutes of your speech—just wait for the Chamber to fill.” I am not sure that that will happen this afternoon, which is a pity because I believe that if this Bill finishes up as the Act I hope it will be, it will be the most important Bill of the whole of this Parliament. It may stop the second shoe falling, as it did in 1931, to use the phrase of the time. After the stock market crash of 1929 came the slump and the 1931 crisis.

In 2007-08—but in 2008 in particular—we saw the greatest financial crisis since the 1930s, which resulted in almost a decade of slump that was only solved by Adolf Hitler. If we can get this Bill right and make sure that 2008 is not repeated, it will be an enormous achievement.

Hank Paulson is the former head of Goldman Sachs and was US Treasury Secretary at the time of the 2008 crisis. If hon. Members read his book, they will see that the critical day was 15 September 2008. He says that everybody who mattered in finance was in his room and that, although he is a big man who was a famous university footballer in his youth, the stress and strain was so great that during the course of the conference he had to leave the room twice to vomit. He writes that on that day capitalism was on the verge of total collapse. I think that people have forgotten the seriousness of that crisis.

I believe that crisis was more important than 9/11. As it happens, I woke up in my club in New York on the morning of 9/11, so taking part in this Second Reading debate means that, during the course of my life, I have been present at two very important events. The fact is that the 2008 crisis ruined the lives of millions of people all over the country. Many of my constituents are suffering real hardship as a result of the measures that had to be taken to deal with the effects of the crisis, and the same is true right across the world. We really must prevent it from ever happening again, but I fear that there is a real danger that it could happen again.

The high spirits—to put it at its most polite—of investment bankers do not seem to be unabated. Many banks are in a weak state, including, as we heard only three or four days ago, Goldman Sachs itself. Some major European banks are close to bankruptcy. This Bill is a belated but welcome attempt to prevent the banking crisis of 2008 from happening again.

The Opposition spokesman is the hon. Member for Nottingham East (Chris Leslie) and in far-off days I was the hon. Member for Nottingham West, so we have a certain amount in common. Our views on regulation also have a great deal more in common than he has indicated. There is no reason why he should know what my views are on anything—nobody really does and I only do on a day-to-day basis. He should look up a speech that I made on 16 July 1984. I spoke for 40 minutes—in those days, Back Benchers were allowed to make proper speeches—and strongly opposed the deregulation of that time, which, in those days, was called big bang. Deregulation had suddenly became tremendously fashionable. Lady Thatcher, Keith Joseph and all the monetarists were terribly keen on it, but one of the reasons why I resigned from the Opposition Front Bench on which the hon. Gentleman now sits and why I refused to serve in Margaret Thatcher’s Government is that I disagreed with it.

I reread my speech last night and if the hon. Gentleman reads it, he will see that I predicted, very clearly and unbelievably presciently—I was much younger and more alert then, and knew how to put points so much better than I do now—exactly what would happen and the reasons why. I also predicted the tremendous decline in the moral standards of the financial world that would result from the internationalisation and Americanisation of the City of London. That, of course, is what, unfortunately, happened.

In that speech against big bang, I opposed the absorption of high street banks, merchant banks and stockbroker firms—I was a partner in one—into universal banks, free to speculate, on their own account, with the money of depositors and large sums of borrowed money in what is now called leverage, which we and America pronounce differently. I will not go into the arguments about ratios, except to point out that, even as respectable a hedge fund as Carlyle was dealing on a ratio of 30:1. The leverage situation was one of the causes of this disaster.

At the beginning of this Parliament I described the banks as today’s over-mighty subjects and that is what they are. They have been strongly lobbying the Vickers commission and the Treasury not to deal effectively with the bank that is too big to fail. I take the view that if a bank is too big to fail because of the systemic effect that would have, it is too big to exist at all and should be broken up now. As a start, I strongly support the recent recommendation of the Governor of the Bank of England to break up the Royal Bank of Scotland.

Glass-Steagall imposed an absolute separation between commercial banking and investment banking. It also banned proprietary trading in commercial banking. The essence of Glass-Steagall in 1933, by which Roosevelt managed to save the American banking system, was to root out conflicts of interest, which are the evil at the heart of universal banking. Banks were told that they had to choose between servicing a client and promoting their own short-term interests. Combining the two inevitably creates conflicts of interest that lead to many other problems. That is what Mr Paul Volcker, unquestionably the most distinguished and experienced banker in the world, urged on America in what became known as the Volcker rule and on our Parliamentary Commission on Banking Standards, which has been chaired so ably and brilliantly by my hon. Friend the Member for Chichester (Mr Tyrie).

I read the accounts of what is being said and the questions that are being put at the parliamentary commission with great jealousy, although I do not want to be co-opted on to it. Its second report reached me just before lunch, and I chose lunch. However, I will read the report and all the subsequent reports with the greatest possible interest. I find it difficult to understand how anyone who has read the complete account of Mr Volcker’s evidence to my hon. Friend’s commission, as I did at the time that it was published, could fail to be persuaded that we need, in effect, a complete return to Glass-Steagall.

What I mean by a complete return to Glass-Steagall is that we should have none of this nonsense of ring-fencing, which used to be called Chinese walls. It never works. Chinese walls turned out to be papier-mâché. I worked in the City for 40 years and I promise Members that it is impossible to make that work.

[Andrew Bridgen]

Does the Father of the House remember that it was President Bill Clinton who relaxed the Glass-Steagall rules in return for the American banks lending to sub-prime borrowers? Were not the seeds of the financial crisis sown at that point?

[Sir Peter Tapsell]

Yes, they were. The American banks turned mortgages for people who could not afford to pay the interest into derivatives disguised as bonds and then sold packets of them—500 or so—all over the world. They could not have done that under Glass-Steagall. That really makes the point, so perhaps I ought to sit down now.