Royal Bank of Scotland
Andrew Love Excerpts(11 years, 5 months ago)
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Sajid Javid
I share the concerns that my hon. Friend has articulated. He will have noticed from my speech that I said RBS under Stephen Hester has made huge progress in becoming focused on lending to British businesses. I am confident that, because of the plans that have been set in place, that will become even more prominent in RBS’s strategy.
Mr Andrew Love (Edmonton) (Lab/Co-op)
The Minister has said quite a bit about the end of the rescue phase, but absolutely nothing about the strategy for selling RBS back into the private sector. I remind him that the Government own 82% of the shares. There have been persistent rumours in the press about the creation of a good bank/bad bank. Will the Minister confirm or deny whether that is actively being considered, and if it is, how in those circumstances will he continue, as he stated in his statement, to protect the taxpayers’ interests?
Sajid Javid
The Chancellor has made it clear in very recent statements that he wants to wait for the report from the Parliamentary Commission on Banking Standards. It is a very important report, and we as a Government want to listen and take it seriously. After the report is completed, we will set out our plans for how we see the state banking sector going forward.
Finance (No. 2) Bill
Andrew Love Excerpts(11 years, 7 months ago)
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Chris Leslie
I do not think it is because the Chancellor does not realise, or is ignorant about the policy options available to him; it is a deliberate choice not to pull those particular levers, and we need to debate that in a wider context.
However, for the purpose of completing some analysis of the Help to Buy scheme, the specific question that we have anxieties about is whether the underwrite scheme will provide unintended support for those wishing to buy second homes—in other words the taxpayer, the hard-pressed taxpayer, subsidising an element of activity that really should not be a priority for the taxpayer at this moment. If people want to take equity out of their property or remortgage, they may do so using traditional solutions provided in the market at large; we have nothing against home owners remortgaging in the traditional way. But the scheme seeks to extend taxpayer guarantees unnecessarily. Effectively, Ministers are saying that if people have a spare room in a social home, they must pay the bedroom tax, but if they want a spare home and can afford it, the Government will help them to buy one. No wonder people are calling this the spare home subsidy.
Mr Andrew Love (Edmonton) (Lab/Co-op)
When the Chancellor was asked to clarify whether help would be available to second home owners, he chose not to do so. Is it not incumbent on Ministers here today to tell the House very clearly whether the scheme can be used for the purchase of second homes?
Chris Leslie
It is absolutely incumbent on Ministers, but this is a Government who just cannot think things through properly. They have set off down the road with a particular design. We have been asking questions for weeks and weeks. My hon. Friends will remember that the Chief Secretary to the Treasury astonished the House when he still could not rule out that the scheme would be used for supporting second home purchase, and there might be a number of reasons for that. For example, if the scheme is supporting remortgages, and a household decides to remortgage, how can the Government have a covenant on how any equity withdrawn from that remortgage process will be used by that home purchaser? That is presumably the obstacle that Ministers are banging their heads against now, and they probably have to look at various covenants and all sorts of legal arrangements for those participating in the schemes.
There are other anomalies in the process. Perhaps the Minister would elaborate on this point: can foreign buyers be subsidised by the UK taxpayer for the purchase of second homes—not just other EU residents, but non-EU residents as well? What is the exclusion in the scheme? Will he clarify that?
Mr Love
Normally, when Ministers are silent, one can trust the Treasury to clarify matters. In this case the Treasury has not clarified matters. I read in the newspapers that buy-to-let investors will be excluded, but in other newspapers there seems to be ambiguity about that. Can we not have a clear statement from Ministers this afternoon about who is in and who is out of the scheme?
Chris Leslie
In, out, in, out, shake it all about—who knows what is going on in the minds of Treasury Ministers? It is impossible to tell, sometimes, just by looking at them.
Alison Seabeck
The hon. Gentleman makes an interesting point, and I will briefly touch on it later. I suspect that it could be possible for parents to buy for children.
People struggling to get a mortgage and those who want to own their first home must be a priority for help, not the small number of people who can afford to buy a second home. What checks will be introduced to prevent abuse of the scheme, so that people are prevented from applying in the names of their sons and daughters, cats and dogs?
The key fact is that not enough homes are being built. The Government must focus on that issue and on listening to the voices of those who understand the market. They should not simply dismiss out of hand the Opposition’s new clause, which would enable the public to have a better understanding of who benefits from the scheme. Is it foreign investors, parents buying second homes for their children or people seeking to rent the property in the long term?
What checks will be put in place if somebody applies to the scheme saying that they are not going to let the property, then sits on it for a time and subsequently opts to rent it out? Perhaps people could use the scheme for a straightforward holiday home purchase, as I mentioned in relation to Plymouth and the South Hams. Where are first-time buyers in the process? For me, they are singularly missing.
Alison Seabeck
My hon. Friend is right. He reinforces a point I made about not only the potential for price volatility but the inability of certain people to access the housing that is so desperately needed, and the clear need to build more homes, which this Government are singularly failing to do.
Finance (No. 2) Bill
Andrew Love Excerpts(11 years, 7 months ago)
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Mr Gauke
We were clear that our objective was that the bank levy would collect £2.5 billion, on a permanent basis, which is more than the bank payroll tax ever collected. When the amount has fallen below our expectations, we have adjusted the levy, and the independent Office for Budget Responsibility anticipates that the bank levy will raise £2.5 billion this year. We have made adjustments largely because the banking sector has continued to be afflicted by economic difficulties throughout the world, as a consequence of the crash, so fragile global conditions have played a part. I am not going to be preached to by the Opposition on the taxation of banks. We have introduced a bank levy; the Opposition had 13 years in which to do something about that, but failed to do so.
Chris Leslie
It is the politics of shooting oneself in the foot. The difficulty is that the Chancellor does not even understand that his strategy is making his task far harder in the long run. It is not just the fact that people on lower and middle incomes are suffering as a result; it is the unfairness when they compare it with what the Government are doing for those parts of the economy and of society that they favour. The banks are still getting away with not paying their fair share. A tiny corner of the country is doing very well out of the Chancellor. The banks, whose actions created the deficit, are not contributing their fair share towards repairing it. In fact, astonishingly, they are benefiting from the Chancellor’s generosity. This Bill fails to get a grip on the contribution the banks ought to be making. It is still too weak on the very institutions that had to be bailed out by the taxpayer because of their perilous self-indulgence. We have debated in the past, and we will do so again, the fact that Ministers have failed lamentably when it comes to tackling bonuses. In opposition, the Prime Minister promised:
“Where the taxpayer owns a large stake in a bank, we are saying that no employee shall be paid a bonus of over £2,000”.
My hon. Friends probably remember that comment. However, when I express my dismay about the Bill’s weakness, I am not just talking about the lack of a bank bonuses tax. The Government said that the bank levy, as a charge on bank balance sheets, was their answer to clawing back some of the costs for the taxpayer.
The Prime Minister said in 2011 that once the levy was “fully up and running” it would raise £2.5 billion each year—in fact, he said that it would raise £9 billion over the spending review period. We now see that the Government have totally failed to live up to their promise and that the banks have swerved to avoid the bank levy; they have not paid anything like the amount mentioned. In fact, the Chancellor has raised nearly £2 billion less from the banks since the Prime Minister made that promise just two years ago. Those are not my figures, but the latest figures from the Office for Budget Responsibility and HMRC.
The Government repeatedly claim—the Minister did it again today—that the bank levy will raise £2.5 billion a year and that the cuts in corporation tax will not benefit the banks; the Minister said that those corporation tax cuts would be offset by increases in the levy. However, the OBR figures, published alongside the Budget, estimate that in the financial year that has just ended, 2012-13, the bank levy will raise just £1.6 billion—a massive shortfall. We have then to deduct a further £200 million because of the generous corporation tax cut. All in all, the banks have paid £1.1 billion less than Ministers promised. That is even worse than in the previous financial year of 2011-12, when the combined shortfall was £800 million less than the Minister promised.
What on earth is going on? Why cannot the Minister get a grip of the issue? The bank levy strategy is haemorrhaging money when it should be boosting the Exchequer far more significantly. I ask my hon. Friends to think of what that nearly £2 billion could have achieved in the past two years. This is the third or fourth attempt by the Government to get the issue right, but each time they have failed to raise what they promised. The Minister has to go back to the drawing board now and come up with a policy that will actually work, rather than something designed to pass a press release test.
The Chancellor is making bad decisions because he is getting deeper into difficulty, proving time and again that saving his own skin comes before getting the judgment right. It did not take long for the world to see, for example, that the Government had not properly thought through their flagship Help to Buy scheme after it was announced in the Budget. That was hailed as the boost that we needed for housing, but focusing only on demand without any corresponding action to supply more affordable homes is only a half-policy partially thought through.
I hope that the scheme succeeds, but why on earth cannot the Government ensure that funds are not siphoned off for second-home purchases? By contorting the scheme so that it does not count against the deficit figures, do they not realise that they have added complexity that might hinder take-up? After all, the Government promised that 100,000 people would have used last year’s NewBuy scheme by now, but only 1,500 people have become involved so far.
Chris Leslie
We will undoubtedly be able to judge the success of these issues, but there are some deeper flaws in the design of the Help to Buy scheme; we will debate that issue in more detail this week. It all reeks of a policy that has not been thought through properly—designed in haste and yet again not having the intended effect.
Understanding what the Government have put into the Finance Bill requires an understanding of what they have not put in. This was the Budget and the Finance Bill that were supposed to learn the lessons of the 2012 omnishambles Budget and Finance Bill—the pasty tax, the granny tax and the caravan tax. Here is the product of all the Government’s care and vigilance this year; I am sure that the Minister’s officials will be proud of him. The Government have painstakingly avoided anything that will have a positive and significant impact on growth, meticulously evaded any measures that might stimulate job creation and sidestepped anything that might repair the mess that they are making of the public finances.
In fact, the only real aspiration in the Bill is to get through it without any more U-turns. But by avoiding the bold action that we need to stimulate the economy, the Government have created a Bill bereft of the major reforms we need. So many measures are conspicuous by their absence. The Government have cut public investment, and now they are cutting back on policies, too.
I had hoped that the Chief Secretary to the Treasury would be here today; normally, he would open the debate on the Finance Bill. I do not know whether his not being here is a deliberate strategy or whether he has a decent reason; the shadow Chief Secretary has a decent reason for not being here, but that could not apply to the Chief Secretary.
We had hoped, before the Budget, that the Liberal Democrats would stick to one pledge—their pledge to support a mansion tax. We even tabled a one-line motion for Lib Dems to vote for, but they did not want to offend the Conservatives. But they should not worry because we will give them another chance to support their own policy later in the week—a mansion tax on properties worth over £2 million to deliver a tax cut for lower and middle-income households. We favour a 10p starting rate of income tax as the best way to do that and we think that should be in the Bill.
Why have the Government not legislated for their child care voucher extension, which has been pencilled in vaguely for some time after the general election? Where is the national insurance help for small businesses that we have been calling for and which the Chancellor should be acting on sooner? Why is that not in the Bill? It is not good enough for such provisions to be in black and white in a Budget book; it needs to be in the Bill. There have been so many promises in the media, but they have not been seen through in the Finance Bill.
The Finance Bill could be the moment when the Government change their mind on the bedroom tax, and it should be the legislation that repeals their lovely gift of an average £100,000 tax cut for Britain’s lucky millionaires through the cut to the 50p tax rate. As I have said before, it seems that with this Government there is one rule for the rich, but only one room for the poor.
Where do the Government get such a gratuitously unfair sense of priorities? The language used to validate a cruel, harsh, selfish approach is breathtaking—they insist on the caricature of the “spare room subsidy” and bristle at the term “bedroom tax” because they know that the public can see the policy for the disaster it is proving to be. The Chief Secretary to the Treasury, who is not here, wrote in The Sun on Easter weekend that he wanted to tackle the “bedroom blockers”—that from a Liberal Democrat Chief Secretary who could and should have blocked the bedroom tax in the first place.
Budget Resolutions and Economic Situation
Andrew Love Excerpts(11 years, 8 months ago)
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Mr Andrew Love (Edmonton) (Lab/Co-op)
I accept what the hon. Gentleman says about those schemes, but the main funnel for credit provision to small businesses is the funding for lending scheme. That scheme is not working as effectively as we would want. Is he disappointed that there were no initiatives in the Budget to improve funding for lending to address the small business problem?
Damian Collins
We should look at the series of schemes and initiatives that have been put in place and accept that it sometimes takes time from the moment of their creation for the money to come through. Funding is now coming through for the regional growth fund for east Kent. A high-end engineering business in my constituency, HV Wooding, which supplies parts for the CERN hadron collider and grand prix engines, has received a grant of more than £1 million from the regional growth fund, which could create up to 50 sustainable, high-skilled engineering jobs at its factory in Hythe. Those are exactly the type of businesses we want to support. Money is also coming through the seed enterprise investment scheme to support creative businesses, and digital businesses in particular.
People can see the benefits that those schemes are creating in the economy. That is one reason why we see job creation in the economy and new business start-ups performing strongly. The measures put in place in the past four Budgets are starting to bear fruit, which we should appreciate and accept.
The help to buy scheme, launched by the Chancellor yesterday, is a bold and imaginative measure that could help to stimulate the housing market and construction sector. I have been in many debates in the past year in which people have said that the problem with the construction industry and the housing market is that builders are reluctant to commit to starting projects because they do not think that they will be able to sell the properties. The scheme put in place by the Chancellor will give them the confidence to start building, and will give people the confidence to start buying. That can have a dramatic impact on our housing sector.
As in the measure to support small and start-up businesses, the Chancellor is working with the grain of the aspirations of the British people to give them the opportunity to start a business or buy their own home, with the backing of the Government to do so. The hon. Member for Worsley and Eccles South (Barbara Keeley) said that the cap on the cost of residential care—the implementation of the Dilnot measures—was still quite high, but at least it is there now, and we are saying for the first time that people who work and save all their lives, who set up a business or buy their own home, will not have all that taken away late in life. There will be a cap on their contributions so that they do not pay through the nose for something that other people get for free. That is part of supporting the aspirations of the British people, and I welcome the Budget.
Bob Blackman (Harrow East) (Con)
It is a pleasure to follow the hon. Member for Birmingham, Selly Oak (Steve McCabe), who grudgingly accepted that there are good things in the Budget as well as things to condemn. A Budget is a snapshot in time that builds on previous Budgets. Good things have come out of previous Budgets and there are great things in this Budget.
One performance measure of an economy is the level of unemployment. In my constituency, in April 2005, the level of unemployment was 1,402. By the time the Labour Government left office in April 2010, it was 1,901. That is an increase of 36%, but then we all know that Labour Governments always leave office with higher unemployment than when they arrive. Now, however, unemployment is down to 1,632—a fall of 14% in three years—showing that despite the recession and the difficulties, the Government have got it right on encouraging and promoting employment.
Next month, 4,035 of my constituents will be taken out of tax completely by the Government’s increases in the personal allowance. More importantly, 40,101 working people in my constituency will get a tax reduction, which means they will have more money in their bank accounts to spend as they choose. One of the great measures is the new employment allowance, from which 145,000 businesses across London will gain. They will be able to employ people without having to pay national insurance contributions. Furthermore, 75,000 of those businesses will pay nothing at all for the people they recruit, which has got to be great news. Combined with the abolition of the fuel and beer duty escalators, that means that the Government have got it right on taxation.
I want to dedicate most of my speech to the treatment of Equitable Life policyholders. For 13 years, when Labour ran the country, it refused to do anything about the 1 million people who suffered as a result of this scandal. I am proud to belong to a party and a Government who have taken steps to assist the victims. In 2010, the coalition Government honoured our election pledges to compensate the victims of that fiasco. The claimants asserted that £5.2 billion-worth of compensation would be needed, if full compensation was to be paid. Clearly, given the economic position, we could not afford that, so £1.5 billion was set aside to ensure that the victims received due recompense.
The victims split into three groups. The first group comprised the 37,000 with-profit annuity policyholders, who have received full compensation for the losses that resulted from the scandal for which the then Government, the regulator and Equitable Life were responsible. The nearly 900,000 people who took out pension plans have also been compensated, but at a much lower level, because they had the alternative of transferring their pension plans elsewhere. Unfortunately, however, owing to how the scheme was implemented, the people who were most vulnerable and most desperately in need of assistance—those whose money was trapped in their pension plans because they took them out before 1 September 1992—received no compensation at all.
Bob Blackman
I shall come to that when I conclude my remarks.
Some 10,000 of the most vulnerable people received no compensation at all. The all-party group on justice for Equitable Life policyholders put forward clear evidence that they suffered as much as the people being compensated. We pointed out that they could not have known before 1 September 1992 that this scandal was going on, and that they had suffered and lost money like all the others. It has taken a long time and a lot of persuasion, and my hon. Friend the Economic Secretary to the Treasury listened with great patience, weighed the evidence and proposed to the Chancellor that the pre-1992 trapped annuitants receive compensation. I am delighted to congratulate the Chancellor and his team on listening to the evidence, weighing it up and saying, “Yes, we got it slightly wrong.” All the people I have mentioned will now get £5,000 in compensation automatically, as an ex gratia payment without taxation, while those on pension credit will get an additional £5,000. It is not the full compensation that we would like to see, but it is a recognition of the fact that every policyholder suffered as a result of the scandal and will be repaid.
Let me turn to the intervention by the hon. Member for Edmonton (Mr Love). The campaign continues. The policyholders have not received the full compensation that they are due or the compensation that has been promised—it is still being paid. My clarion call to my colleagues on the Front Bench is this. Let us ensure that they receive the money—particularly the trapped annuitants —as fast as possible, because since we started the campaign in 2010, 1,000 of the trapped annuitants have sadly died, and they are dying each day. We want to see people compensated and receiving their money as fast as possible, so that they can enjoy their retirement in a reasonable way. I say thank you to my colleagues on the Front Bench, but with this word of warning: we will carry on campaigning and ensuring that the compensation is paid as it should be.
Finally, I want to refer to housing. Currently, banks and financial institutions are demanding a 25% deposit before they will allow people to get a loan for a mortgage. In my constituency, prices start at £300,000 for a two-bedroom flat. A detached house can be up to £1 million or more. A reasonable three-bedroom property is of the order of £500,000. Imagine trying to find £125,000 as a deposit to buy a family home. It is almost impossible and beyond the reach of ordinary working people. I therefore welcome what the Government are doing to support them. We want to get the housing market moving, with new properties being built and existing properties passed on, so that the starter homes can be used by new people.
Cyprus
Andrew Love Excerpts(11 years, 8 months ago)
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Greg Clark
It is open to British pensioners to have their pension paid into another account. They can nominate that account from now on through the Department for Work and Pensions’ website. Their pensions are safe; we will make sure of that. The Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb), will update the House. Once the details of the final package become known, in so far as they have implications for the payment of pensions, we will update the House.
Mr Andrew Love (Edmonton) (Lab/Co-op)
My Cypriot constituents are shocked and angered that the much-publicised deposit guarantee scheme appears to be worthless. They are further outraged that the reason given for that is that the banks have not gone bankrupt, therefore the deposit guarantee does not apply. What action will the Minister take to speak to his EU colleagues to see what can be done, even at this late stage, to repair the damage to trust and confidence in our banking system?
Greg Clark
The hon. Gentleman and I had a conversation this morning. I know that he has many constituents who are very worried at this time, and I have said that I am happy to meet them so that we can understand their particular situation. It is clearly an unsatisfactory situation in which the Government of Cyprus, as I understand it, faced a choice between a measure such as this and contemplating the collapse of the banking system. That is a choice that no one would want to make. It is a choice that they made and that they are putting to the Cypriot Parliament, but just as this Parliament is sovereign, so that is true in Cyprus, and the debates that they will be having during the next two days will determine whether what has been proposed over the weekend is what pertains.
Oral Answers to Questions
Andrew Love Excerpts(11 years, 8 months ago)
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Mr Andrew Love (Edmonton) (Lab/Co-op)
Although I wish the Minister success in achieving the international objectives, does he agree that dismantling the ability of the UK tax authorities to deliver on that international agenda is not the way to go about it, and with 2,000 staff at Her Majesty’s Revenue and Customs already having been sacked, does he not worry that we will be unable to deliver on it?
Financial Services (Banking Reform) Bill
Andrew Love Excerpts(11 years, 8 months ago)
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The Financial Secretary to the Treasury (Greg Clark)
I beg to move, That the Bill be now read a Second time.
The Bill has a simple objective at its heart, which is to answer what the Chancellor has called the British dilemma: how can Britain be one of the world’s leading financial centres without exposing ordinary working people in this country to the terrible costs of banks failing?
Let me illustrate both sides of the dilemma. The financial services sector is one of our most important industries. Together with related services, it employs around 2 million people in this country, two thirds of whom work outside London. Even in the recession, financial services contribute about £1 in every £8 of government revenue to pay for public services. The industry is by far our biggest exporter, generating last year a £47 billion surplus from overseas trade and providing us with vital foreign exchange earnings.
Mr Andrew Love (Edmonton) (Lab/Co-op)
The Chancellor is on record as saying that this is a critical piece of legislation if we are to get the banking system right, yet he chooses not to appear before us today. There has been no explanation of why the Chancellor is not in the Chamber. Could the right hon. Gentleman give us one?
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.
Greg Clark
The hon. Gentleman makes an important point, which we considered in drafting the Bill. We would expect all of these activities and institutions to be regulated by the PRA. The FCA was included in the Bill as a means of ensuring that if some other activities were to take place in the future—although we do not envisage that happening—it would not be necessary to come back to the House. That is our clear intention.
Let me summarise what the Bill does include before I go on to talk about what it does not. As proposed by the independent commission, the Bill provides that deposits protected by the Financial Services Compensation Scheme—the deposits of individuals and small businesses up to £85,000—will be preferential debts in insolvency. The Bill provides the regulator with the power to require ring-fenced banks to maintain a buffer of at least 17% of what is referred to as the primary loss absorbing capacity—that is, equity, other non-equity capital instruments, and debt that can be written down or converted into equity in the event that a bank fails. This allows losses to fall on the bank’s wholesale creditors—sophisticated financial investors—rather than on ordinary taxpayers, as was the case with RBS.
A legitimate question arises as to whether additional loss absorbency requirements should apply, in an international financial centre such as the United Kingdom, to the overseas operations of UK-based global banks. This has been much debated in the House, both before the parliamentary commission and elsewhere. It is obviously right that where the overseas businesses of a UK-based bank could pose a threat to UK financial stability, or to the British taxpayer, that bank should issue loss-absorbing debt against the entirety of its group operations. Equally, where overseas units do not pose such a threat they should be exempt from loss-absorbing debt requirements, not least to avoid creating a false impression that the UK somehow stands behind those overseas businesses.
The question that has exercised the commission is this: who should decide? The Government have listened to the Financial Services Authority and the parliamentary commission on how that should work. We agree that the requirement should follow the strategy for managing the failure of each group, known as the resolution strategy. Where a UK parent company will provide support to resolve failing overseas operations, the regulator must ensure that the parent company issues loss-absorbing debt against the entire group. However, where a bank’s overseas subsidiaries would be resolved locally by overseas regulators without reliance on the UK parent, the parent company should not be required to issue loss-absorbing debt against those overseas subsidiaries. Crucially, it will not be the bank’s call but the decision of the regulator and the Treasury as to whether group primary loss-absorbing capacity—PLAC—should be held.
Mr Love
Of course, the UK regulator will have to know whether the third-country regulator will accept responsibility for the subsidiary. How does the Minister intend to ensure that the UK regulator can be reassured that the third-country regulator will accept responsibility for the subsidiary should it get into trouble?
Greg Clark
The hon. Gentleman is absolutely right. That will be one of the requirements—the regulator, and indeed the Treasury, will need to be satisfied by the bank that the overseas regulator has accepted, and credible arrangements are in place, to ensure that no liabilities will fall on the UK taxpayer.
Greg Clark
The reason for arranging this through the resolution plans is that they should be agreed in advance and everyone should be clear who will be responsible. It is no good the Treasury or the regulator in this country thinking that an overseas jurisdiction will pick up the bill if they were actually blissfully ignorant of it, so the hon. Gentleman is absolutely right that there has to be that clarity.
As I promised on 4 February, I have provided Parliament with drafts of the principal statutory instruments so that the House, while scrutinising the Bill in detail, can understand more clearly how the powers that the Bill grants are intended to be used. As a further aid to scrutiny, I will also make available to the House, in advance of consideration in Committee, a so-called Keeling schedule giving a consolidated text of those parts of the Financial Services and Markets Act 2000 that will be amended by the Bill, including the amendments the Bill will make.
Let me turn to some of the relatively few recommendations of either the Independent Commission on Banking or the parliamentary commission on which the Government have not been persuaded. There are four main areas to consider. The first is the timing of scrutiny, which the hon. Member for Nottingham East (Chris Leslie) mentioned. I hope that hon. Members will accept, from the process I described earlier, that these proposals have already benefitted from an exceptional degree of consideration, both in the amount and, if I may say so, in the august quality of its scrutineers. It will soon be three years since the Vickers commission began its work, and it is less than two years until all the secondary legislation must be enacted if this work is to be completed in this Parliament, as I think we all hope it will be. The Bill is comparatively short—20 clauses— and the time envisaged for its Committee stage is not unreasonable for consideration of all the amendments proposed by the parliamentary commission in its report published today.
However, I know that the parliamentary commission has other advice to give, and I welcome its commitment to produce its final report by the middle of May. Once we have received the commission’s advice, we will of course want the chance to be able to take it. I therefore give this commitment: subject to the usual channels, I will make sure that this House has enough opportunity to consider and debate whatever further recommendations the commission makes in its final report.
Mr Love
I thank the right hon. Gentleman for that commitment. Another issue that made life more difficult for the parliamentary commission was the lack of any knowledge of the delegated legislation that he has said will go through the House. Will he give some indication as to when that will be published so that although the parliamentary commission might not have that information available to it, the Public Bill Committee may?
Greg Clark
I am grateful for the hon. Gentleman’s point. As I said, I have published some of the principal statutory instruments and more will be available before the Bill goes into Committee. I will make sure that the House has access to the principal measures; as he knows, minor measures will sometimes follow. I repeat that it is absolutely my intention that the Bill should be properly considered and scrutinised by this House. The strength of these arrangements will benefit from their being exhaustively considered and enjoying the full confidence of the House.
Greg Clark
I think that the right hon. Gentleman would concede that what Vickers recommended will advantage us and protect the British taxpayer in a number of respects, including through ring-fencing and higher capital requirements. We are already doing those things. He will know that Vickers did not recommend an early increase in the leverage ratio. I have been candid with the House that we would like to see one. However, in line with what Vickers advised and given the discussions that are taking place in other jurisdictions, we think that it is right to have the consideration in 2017, with a view to introducing the higher leverage ratio later.
Mr Love
The Minister said earlier that capital requirements and the leverage ratio were protections for the UK banking sector. However, capital is based on risk-weighted assets, which, as he has accepted, are controversial and, to many people’s minds, do not provide the level of protection that is required. It therefore becomes acutely important that the leverage ratio provides that protection. As has been said, given the size of the UK banking industry, it is critical to prioritise safety and soundness. Those things will be delivered by a higher leverage ratio.
Greg Clark
I do not disagree with the hon. Gentleman’s analysis. A higher leverage ratio is important. However, we have reflected the view of the Vickers commission that a higher leverage ratio is not necessarily required immediately. It is our intention to bring it in following the review in 2017. That is a reasonable time frame. I repeat that it is our intention that there should be a backstop ratio.
The final major difference between the Bill and what was recommended by the parliamentary commission is that it does not include proposals on how creditors, rather than taxpayers, will be expected to bear the costs in the event of a bank failure. We are working with other European countries to develop a credible and effective bail-in tool as part of the European recovery and resolution directive, reflecting the recommendations of the global Financial Stability Board.
The Irish presidency of the EU has set out plans to make rapid progress towards concluding the recovery and resolution directive. The RRD is due to come into force in 2015 and the bail-in tool by 2018. Given that progress, we have not included clauses on the matter in the Bill, but if agreement cannot be reached, which we do not expect to happen, we will consider tabling amendments later in the Bill’s passage to allow the UK to act alone.
Chris Leslie
I will make a bit of progress and give way in a minute.
There is not enough in the proposed legislation on the safety of the banking system, not enough to rebuild consumer confidence, not enough to reform the high-risk banking culture and not enough to support growth and create a banking system that serves the needs of our economy. Too often, Ministers sound as though they are acting like shop stewards for banking executives desperate to retain bonuses that are many multiples of their salaries. Instead, Ministers should roll up their sleeves and put the taxpayer, the consumer and the UK economy first.
I want to address some of the issues the Minister raised about the detail of the Bill. First, on banking safety and protections for the taxpayer, Labour believes that a reserve power for full separation is needed, not just the firm-by-firm approach that the Government have conceded. Stopping short on backstop powers will reduce the chances that ring-fencing will succeed. Ministers are ignoring the commission’s conclusions, claiming that it would be wrong to give the regulators full separation powers, but the commission is scathing in its report today, saying:
“The Government has erected a straw man which it has then successfully demolished, because we made no such recommendation”
in the first place.
It is clear that the commission wants a full separation power only after a full review and decision by Government and Parliament—perhaps it was being inadvertently misrepresented by the Treasury—so it would be far more sensible to legislate now, not just if one or two individual banks misbehave, but in case ring-fencing as a whole fails across the sector. Indeed, we see cross-sector failings, as LIBOR illustrates, so it is not enough to have a half-done backstop. Stopping short will deliver only half the backstop measures that we need and will have corporate lawyers across the City rubbing their hands with glee at the prospect of litigation against regulators who might want to intervene on a case-by-case basis. However, given the possible views of the other place, I suspect that the Government will eventually be forced to change their mind.
Let me turn to leverage and the risk-weighting of assets, which has been introduced as an antidote by regulators to the high-risk, high-reward culture that was pervasive in banks before the crisis. However, the risk-weighting process has been partial and, in some cases, self-defining by the banks, and in the EU the zero risk-weighting attributed to some palpably risky sovereign debts has brought the system into some disrepute. The Basel committee published new evidence in January highlighting the major variants between jurisdictions and banks on this issue. Regulators and the Bank of England need to get a grip of this, but as a counter-balance we also need protections against the over-extended vulnerability of bank balance sheets. That is why the leverage ratio powers need to be clearly set out in the Bill and phased in ahead of the European Union plans for the end of this decade, which is one of the main recommendations and conclusions of the Vickers report.
Mr Love
Vickers was absolutely clear in his evidence to the commission about the need for a higher leverage ratio, as were the current Governor of the Bank of England and the forthcoming Governor. With such evidence presented to the commission, we wonder why the Government simply refuse to listen.
Chris Leslie
My hon. Friend is spot on. A bank’s leverage is the ratio of its assets to its equity capital. Its equity is equal to the value of its assets minus the value of its liabilities. A higher leverage ratio magnifies returns because any growth in the assets will be proportionally greater if equity is thin. The corollary, however, is that any losses are also magnified if leverage is greater. Such a bank’s equity can be wiped out by a smaller shock than would wipe out the equity of a less leveraged institution.
Vickers recommended a 25:1 leverage ratio for systemically important banks—in other words, 4% of equity capital—but the Chancellor has dismissed that proposal. The parliamentary commission says that it is “not convinced” by the Government’s decision to reject Vickers’ recommendation to limit leverage in that way, and that it
“considers it essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3% minimum required under Basel III.”
Mr Andrew Tyrie (Chichester) (Con)
Last July, immediately after its creation, the Parliamentary Commission on Banking Standards was asked by the House to undertake pre-legislative scrutiny of this Bill. In other words, in addition to fulfilling its terms of reference it was asked to examine the Government’s proposals for the implementation of large parts of the Vickers review. We have worked very hard to do what the House has asked of us, and I particularly wish to thank all my colleagues on the commission; all the commoners are in the Chamber today and although I cannot see any of the five peers up in the Gallery, their work has been not inconsiderable—as has been pointed out, they are a formidable bunch. I also wish to thank the Treasury Committee, which has continued to participate in aspects of this debate in our inquiries and the vast majority of whose members—nine, I believe—are also in the Chamber.
The first report from the Parliamentary Commission on Banking Standards, published in December, welcomed the Government’s decision to implement the Vickers ring fence, but we also argued that the ring fence had to be made much more robust if it was to have a good chance of enduring. We suggested that the level of innovation in financial services, the lobbying power of the banks, and the short memories of regulators and politicians all pointed to the need to reinforce the ring fence. That is why the commission recommended that the ring fence be supported by a reserve power, subject to final Treasury approval, to enable the regulator to impose full separation on a bank that attempted to game the ring fence. The Government have now accepted the merits of that recommendation and the Bill will be amended to provide for the reserve power, which is very welcome news.
In their response to our report, however, the Government did not accept a number of other proposals, so we produced a second report. It was published today and it seeks to do three simple things. First, for the convenience of the House, especially those Members who will serve on the Committee, it provides draft amendments to support all our proposals that might need statutory backing. As far as I know, that is an innovation for a Select Committee or Joint Committee and I hope that it will be of some use and perhaps set a precedent for how such Committees operate. The amendments have been prepared with the help of a former senior parliamentary counsel.
Secondly, an annex juxtaposes our recommendations against the Government’s response to enable the House to see clearly what has been accepted and what has been rejected.
Thirdly, the report examines the arguments made by the Government for rejecting a number of our recommendations. We were able do that on the basis of further evidence gathered from, among others, Sir John Vickers, the Governor of the Bank of England, the deputy governors and the chief executives and chairmen of most of the major banks. We have concluded that much more work is needed to improve the Bill and I shall linger briefly on only two areas. Much of what needs to be said is in the report and I hope that colleagues will find time to read it.
The first area is leverage. The parliamentary commission has not heard a convincing argument for blocking, as the Government seem determined to, the Financial Policy Committee of the Bank of England from setting the leverage ratio. We have concluded that the ratio is likely to be too low—that is, that banks are likely to remain overleveraged—but we also think that that judgment should rest with the financial stability regulator, the Financial Policy Committee, and not with the Chancellor. We argue that the regulator will want to consider long transitional arrangements, particularly for building societies—the Minister mentioned his concerns about this—as some problems particularly apply to those with large mortgage books. In our first report, paragraph 295 and the paragraphs preceding it go into the issue in some detail.
We also argue that the Bank of England should provide an annual assessment to Parliament on risk-weighting. It is clear to anybody who has considered the composition of risk-weightings and how they are derived, including the fact that they are based on modelling by the banks themselves, that to rely on risk-weighting alone would be a perilous task. It is vital that that should be supported by a robust leverage ratio, as risk-weightings are not a good measure, on their own, of overall balance sheet risk.
The Government have rejected all those suggestions and, frankly, I find it surprising that they cling to the line, which we heard again today, that we should wait for Basel—that is, that we should wait for other countries to decide. As many witnesses have said, it is for us to sort out what is best for Britain. We need to work out what is right for our industry, rather than waiting for a lowest common denominator decision from the Basel group. I was a little disappointed to hear more in that tone from the Government today.
From time to time, the Government even remind us, as they did today, that the transfer of the power to the Financial Policy Committee, if and when it happens in 2018, should occur only after it has been reviewed. In other words, it is possible that the Government might conclude that it should not be transferred at all. I think that would be a grave mistake. Getting leverage right is crucial to the future of the banking industry. With twin peaks in place and the financial policy up and running, it must be right to give that power to the FPC.
A second major outstanding area of disagreement is the Government’s rejection of a second reserve power for industry-wide separation. Our first report made it clear that this should be exercisable only after a fully independent review, after a recommendation from the regulator, and with Treasury approval. Not only did the Government reject the second reserve power, but in their first published response they even rejected the case for an independent review after a few years to assess the effectiveness of the ring fence.
On that last point—the need for a review—when the Chancellor came before the Committee about a fortnight ago, he appeared to be a little more flexible and he said he would consider it, and I noted the more emollient tone that we heard from the Minister today. I very much hope this presages some action on that point. I hope the Chancellor will give very careful consideration to the two points that I have raised here and that we raised in the report, both on leverage and on general separation.
Mr Tyrie
I do not think it is particularly democratic to give the authority directly to the Chancellor of the Exchequer, but I understand what he means if he thinks that Parliament should be given some opportunity to debate the issue. It is possible that some scope for flexibility could be built in to reconcile the point that he is making and the point that the commission is making. What would be unacceptable would be for the legislation to reach the statute book without a power of general separation and without there having been a thoroughgoing independent review. If those are in place, the extent to which Parliament can be involved a second time, and the extent to which the Chancellor himself should trigger that involvement, is something on which we could show flexibility.
I said that I hoped the Chancellor would think carefully about leverage and general separation, but there are a good number of other issues to which I hope he will give some thought, most of which have, at least briefly, been mentioned so I will not linger on them. I know that other Members want to speak, so I shall cite just three or four.
On derivatives, the Government appear completely at odds with the Vickers review and somewhat at odds with a slightly modified version of the same point that has been put forward by the commission which I chair. I will not delay the House now by going into the detail.
I hope the Chancellor will also consider a point that has scarcely been raised so far today—the need for the imposition of the so-called sibling relationship between the two parts of the ring-fenced bank under a single holding company, rather than the parent-child relationship, which was originally proposed in the Vickers report and which the Government still support. There are good corporate governance grounds and other grounds for supporting that proposal, which won widespread support in evidence that we took on it.
I hope the Chancellor will also think carefully about the way in which individual banks demonstrate whether they should benefit from a PLAC exemption—an exemption from the requirements of primary loss-absorbing capacity. This is a complex area which mainly affects banks headquartered in the UK with large overseas subsidiaries and branches. It is an issue that needs to be approached with considerable care. We thought very carefully about it and came forward with a balanced recommendation. On that, too, so far I have not seen enough flexibility from the Government.
The issues in the Bill are crucial for Britain. The industry is a great one, but it has serious problems. The Bill will address only some of the sector’s structural problems, and there is a lot more to be done. The parliamentary commission expects to produce its final report in May and that will seek to address some of the wider issues, the problems of standards and the culture in banking. We have just had a shocking LIBOR scandal and the wholesale rigging of crucial wholesale markets, and we have seen the equally shocking rip-off of consumers in the payment protection insurance scandal and of small businesses in the interest rate swap scandal. Those and other revelations, which have included sanctions busting and money laundering, reflect deep-seated problems of standards in banking.
Neither the Bill nor our proposals in May, nor for that matter any global initiatives under way, will solve all those problems. In fact, many of them will perhaps take many years—decades—to address. But something can and should be done, and that is why the Government are right to have made a start with this Bill. I very much hope that they listen to what the commission has said about it, because if they improve it further, along the lines that we have proposed, it can make a substantial contribution to a much stronger banking industry in Britain.
Mark Garnier
Yes, it does, absolutely. I am going to develop that point in a second, if my hon. Friend will bear with me. We need to get rid of this implicit guarantee for exactly that reason and in order to encourage competition, because competition requires a guarantee for all banks, not just the big banks.
If we combined a transparent legal system with a robust and secure regulatory regime, international capital would come to this country—because of that security—and because capital would trust the UK’s legal and regulatory system, it would be prepared to take a slightly lower return. London would provide an environment in which the cost of funding for banks would be lower. That cheaper funding, as a result of regulatory security, should replace the banks’ implicit guarantee and thus result in a lower cost of capital. As a result of that cheaper funding cost, which is reliant on good regulation, we should not fear banks relocating when we introduce regulatory reform. They might complain, but they will ultimately thank us for the strongest regulatory regime in the world.
That also depends, however, on how the Government take forward the Bill. The Banking Commission has made its early recommendations, and the Government have responded. As we heard from my hon. Friend the Member for Chichester, we are grateful to the Government for listening to some of our recommendations, but they could pay more attention to certain other areas. We want a leverage ratio set at 4% by the Financial Policy Committee, a full reserve power for full industry-wide separation and regular reviews of the effectiveness of the ring fence in order to ensure the most effective and secure regulatory regime in the world. By winning the race to the top, we will ensure cheaper capital funding for our banks and help to preserve our country’s lead position in the financial world.
I turn to the thorny issue of proprietary trading. The term “casino banks” was coined by someone at a time when I suspect they were keener to play to the gallery than necessarily to address the serious issue of what investment banks actually do. It is important to remember that investment banks raise huge amounts of debt and equity capital, generating thousands, if not millions, of jobs in the UK and around the world in commerce and industry—jobs that create wealth and tax receipts for this country—but there is an element within investment banks of proprietary trading. The important thing is to define proprietary trading. Every bank that makes a loan makes it on a proprietary basis, but no one would want to prevent banks from doing that—it is the key to what they do. Pure proprietary trading, however, for the sole purpose of enhancing shareholder returns—with no benefit to the customer or society—has no place in our banks. It fails the balance of interest test and is incredibly difficult to define.
We can recognise the evil type of proprietary trading when we see it, but let us take market marking, for example. It provides a service to customers and liquidity to the markets, and so passes the balance of interest test, but at what point does a residual position on a trading book stop being that which is left over from normal market making activities and start being deliberate directional betting? That inability easily to distinguish between one and the other leads me to believe that, although a Volcker rule would probably be desirable, it would be too difficult to impose in a meaningful way. That is why, reluctantly, I come down on the side of not banning pure proprietary trading. If the Vickers proposals that the Bill implements seek to put a ring fence around the deer park, does it matter what type of predator is kept outside? The consumer will be protected from both the wolves of market makers and the tigers of proprietary trading.
Much of the commission’s work has looked at competition. With a handful of super-huge banks dominating the market, competition is tricky. Long before the commission was set up, however, I spent much time meeting smaller banks, including challenger banks, and those seeking to win new banking licences. It was clear that there was a huge problem with banks being too small to start—the regulatory hurdles facing small banks, such as licence applications and ongoing supervision, distorted the market in favour of the big banks—but the FSA has responded to pressure and had a change of heart. The regulator is moving in the right direction, and I am grateful to the FSA for taking heed of our warnings about new banking application processes and the treatment of asset risk weightings on the balance sheet. The regulator is moving towards greater opportunity for small banks in terms of regulation, which is very important.
There is also the thorny issue of account switching. Later this year, the seven-day switching programme, which is a significant step forward, will be put in place. I strongly believe, however, that the ultimate goal has to be full account number portability. VocaLink, which provides the payment system services, is considering doing for banks what the telecoms regulator did for mobile phones, and it is making good progress. My hon. Friend the Member for South Northamptonshire (Andrea Leadsom) has done a lot of work on this subject, and for four reasons her proposals for full portability are right: first, it will ensure greater competition, as I am sure we will hear later; secondly, the financial system will be more transparent and so provide greater oversight for the FPC, which is charged with ensuring stability in the financial system; thirdly, in the event of a collapsing bank, full portability will make bank resolution far easier and cheaper; and finally, the legacy IT systems in many banks have their foundations in the ’50s and ’60s, with the punch-card system. At some point, the banks will have to massively update their systems, and combining everything makes huge economic sense.
What is the point of banks? Why are we so keen to reform them? Those questions are crucial to the whole debate. Clearly, people need a safe place to deposit their money, to manage their finances and to plan for the future, but banks also provide an incredibly important social and economic function. There has yet to be devised a better way of taking money from where it has accumulated and distributing it to where it is needed. Successful investors and business men need a way to get their money to where it will work for them, and those with an idea but no cash need to be introduced to investors with surplus funds. So far, banks have done that job better than anyone else. No matter what we say, they have a fantastic distribution network, which we must utilise to the fullest extent.
Mr Love
Unfortunately, the banks are not doing a good job of providing loans to small businesses. In particular, those banks in partial public ownership seem to be struggling to do so. Is there any way—a funding for lending scheme, for instance—of encouraging more lending from banks to small businesses?
Mark Garnier
The hon. Gentleman is absolutely right. The two of us have spent much time together wrestling with this thorny issue over the past nine months—and before that on the Treasury Committee. Part of the problem is that, with the risk weighting of assets, a loan to a small business carries the least weighting, because it is deemed to be one of the greatest risks. The world is putting pressure on banks to reduce their balance sheets and become less risky institutions, and the simplest way to do that is to withdraw lending to small and medium-sized enterprises. That is the natural outcome, if we ask them quickly to reduce their balance sheets. Funding for lending schemes seek to bypass the risk-weighting element, but none the less it is incredibly difficult to encourage more of what the regulatory regime sees as the riskiest type of lending. It is a problem we have to resolve, however, because, as I said, there is no alternative way of getting money to businesses.
It is incredibly important that the Government never again have to bail out banks when things go wrong. Broadly speaking, the Bill is an enabling Bill. There is much more detail about the nuts and bolts to be introduced in secondary legislation, but it is important that it achieves what it is trying to achieve, which is to ensure that banks can go bust without bringing the system down with them. For a functioning financial market to work properly, it is important that poorly run banks be allowed to fail—but elegantly and non-destructively. The Bill will ensure that, in a crisis, the vital parts of a bank can be resolved in a dignified and stable way and that the British taxpayer will never again be left on the hook to bail out bankers for their foolhardy recklessness. That is why the Government are right to introduce it. They were right not to rush into anything, but to have spent a great deal of time listening to Vickers, Erkki Liikanen in Europe and others, including of course the Banking Commission. For those reasons, I have no hesitation in supporting the Government fully and look forward to working with them as part of my work on the Banking Commission.
Mark Field (Cities of London and Westminster) (Con)
I shall endeavour not to stray quite so far from the Financial Services (Banking Reform) Bill as the right hon. Member for Holborn and St Pancras (Frank Dobson) has just done.
No one could accuse the Treasury or the coalition of rushing into banking reform; nor, to their credit, has there been anything other than the most comprehensive consultation with—and without—the banking industry here in the UK. I shall not repeat the timeline that other hon. Members have referred to, save to say that I accept the concern expressed by my hon. Friend the Member for Chichester (Mr Tyrie) that the Bill will not be considered directly in tandem with the report of the Parliamentary Commission on Banking Standards.
Above all, we all need to face up to our complacency. The conventional wisdom of the day, to which I fully signed up in the first half of the last decade, was that financial services would thrive best with light-touch regulation. What a difference half a decade makes! It was also during that period that the present Chancellor fatefully nailed his colours to the mast. Despite clear evidence that we were collectively living well beyond our means during the previous Administration, and amidst growing public and private debt, he decided to stick to the outgoing Labour Government’s spending plans and characterise our fiscal aspiration as “sharing the proceeds of growth.” I regret the fact that as a result, when the crisis hit home, my party was unable to make the orthodox Conservative case that the seeds of that financial destruction had been profligacy and the leverage that was referred to earlier. Instead, the established view was, and continues to be, that regulatory failings—of which there were undisputedly many—and reckless actions by the bankers were the primary, if not the sole, cause of the financial calamity. Hence the persistent demand for more extensive and punitive regulation of the banks, and the constant chatter of hostility towards bankers and all that they do.
My contention remains that the core issue that we need to tackle is global imbalances, many of which are still worryingly in place after a half decade of near stagnation economically. Alongside this, a generation of Britons—as well as Americans and continental Europeans—have lived and continue to live miles beyond their individual and collective means. We are still mortgaging the future of our children and grandchildren.
The Chancellor’s recent declaration that any UK bank failing to adhere to the Vickers safety regime would run the risk of being broken up was an understandably uncompromising response to the Treasury Committee’s demand for an electrified ring fence. Similarly, few could criticise the populist insistence that RBS would have to fund LIBOR—and, presumably, other future mis-selling—penalties from senior executive bonus pools. At a stroke, however, the Treasury has inadvertently imposed a permanent impairment on the value of the UK Government’s still huge stakes in the banking business. Our £66 billion investment in RBS and Lloyds is currently worth two thirds of what we paid for it. Nothing in the Bill will bring forward the date on which we, as taxpayers, will be compensated.
It is often claimed that the banking lobby, here and on Wall street, has used its considerable muscle to water down, undermine or even cast aside moves by politicians and public interest groups to rein in the banking system. Several Members have mentioned that tonight. Ironically, much of the criticism comes from the self-same media outlets that have placed intense pressure on elite politicians to dismantle the proposals for their own industry, as set out in the Leveson report. As a matter of fact, the banks have taken much of what has been proposed on the chin. Many have privately expressed great concern to me about the wisdom and practical application of ring-fencing, but they feel that they have no choice but to accept Vickers virtually in its entirety.
Ironically, existing financial services players could reap the unanticipated benefit that comes from erecting ever more onerous barriers to entry for potential new banks. Sadly, as the hon. Member for Wirral South (Alison McGovern) suggested, the zest of competition has been largely ignored in an effort to make banking safe and to punish banks for their past wrongdoing.
The City of London’s size and global reach continues to make the UK economy especially vulnerable to turbulence in the financial markets. The centrepiece of the Bill’s reforms—the plan to ring-fence domiciled banks’ retail arms from their investment ones—is based on the notion that the less risky retail operations require protection from the so-called casino excesses of investment banking. The aim to reduce the burden on the British taxpayer in the event of banking failure is, of course, a laudable one. Many in the financial fraternity are simply glad that the reforms fell short of a return to a full-blown plan along the lines of Glass-Steagall, to which my right hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell) referred. That was the US legislation that separated commercial and investment banking for almost seven decades until 1999. In addition, the big banks will now need to raise capital and loans equivalent to 20% of the part of their balance sheet for which UK taxpayers would be liable in a crisis.
The coalition Government were swift to accept the Vickers recommendations almost without reservation, giving British banks until 2019 to install their ring fence. However, I fear that the question of the separation of banks’ retail and investment arms has still not been successfully settled here in the UK. Fears have been raised that the Vickers reforms will tie up billions of pounds in additional capital and impose on banks a requirement to overhaul compliance and corporate affairs—a burden that will, I am afraid, have to be met by our constituents, the general public, in higher interest rates and in the sharply reduced amounts that banks are willing to lend.
One of the causes of this paralysing uncertainty that has enveloped the UK’s big banks is the mixed messages coming from the Treasury on the one hand and the central bank on the other over the dual requirements to recapitalise, and thus reduce the risks of future taxpayer bail-outs, while also being ready to lend to credit-starved UK plc as if it were 2006 or 2007 all over again.
Meanwhile, at EU level, the Liikanen report has recommended to the European Commission a similar, Vickers-style ring-fencing of retail banking from investment banking. This has given a small crumb of comfort that the UK might not be going down this path alone. However, I fear that the Liikanen proposals are sufficiently different from the Vickers proposals to heap further uncertainty on financial services here in the City.
Since there is likely to be precious little consensus between the EU, the UK and the US authorities any time soon as to whether the structure of banking is best under Liikanen, Vickers or indeed Volcker, how should banks realistically now prepare? Once again, I fear that the cost of all that uncertainty will be borne by the consumer and the wider economy, not to mention heavy job losses throughout the financial services industry. In this regard, it is important to nail the understandable public misconception, also heard here tonight, that it has been “business as usual” in the City since 2008. It would be fair to say that particularly over the past two years, volumes of business have collapsed, state financial support has been largely withdrawn and there has been and will continue to be a huge jobs cull. If we couple that with falling salaries and bonuses for the vast majority of workers, it means bad news all round, as Treasury receipts from financial services have plunged to what I suspect will be a new norm for the future.
Aside from the issue of commercial uncertainty, there are, I believe, question marks over whether the ring fence will actually work. The Bill’s template is based on a somewhat simplistic and outdated division between what amounts to wholesale and retail banking. There are numerous transmission mechanisms between the two that make a hard-and-fast split between high street and casino investment banking very difficult to achieve.
Historically, the City of London has repeatedly benefited from arbitrage with Wall street, from the withholding tax under President Kennedy over 50 years ago, which precipitated the creation of the eurodollar and eurobond markets, right through to the “big bang” in the mid-1980s and the effects of Sarbanes-Oxley in 2002 in the aftermath of the Enron and WorldCom collapses. If the UK is to prevent its competitors from benefiting from unilateral action along the lines set out by Vickers, it must continue to press for international agreement on the future landscape of the financial services world.
There is, in my view, a danger that the UK and EU regulators will somehow look at the Bill’s ring-fencing as a panacea, and will sell it as such to the general public. Instead, in the light of the pitfalls of the ring-fence options, it might prove more effective to look at an alternative dual system when it comes to ordinary deposit accounts. This would allow those who desire a risk-free place to store their money to place it in savings banks, while those happier to take a risk—unprotected, of course, by any Government guarantee—could have an account with a fractional reserve bank, as used to be the case in the UK until the mid-1980s.
Tighter regulation, newfangled restrictions and imploring banks to behave ethically as set out in this Bill and future legislation will no doubt do little to restore the City’s reputation for integrity. I fear that the spate of mis-selling scandals still has a hell of a long way to run, especially as, in fairness, 20:20 hindsight now deems that almost any novel financial product created and marketed by our banks since 2000 will be regarded as having been mis-sold against consumers’ interests.
Mr Love
If I may characterise the hon. Gentleman’s argument, it seems to be that a race to the bottom in terms of regulatory cover will be to the advantage of the City of London. Many, however, including the witnesses who gave evidence to the parliamentary commission, have said that there should be a race to the top to provide safety and security, which will attract investors to London. Why does he not accept that argument?
Mark Field
I am afraid that the hon. Gentleman has mischaracterised what I was trying to say. What I would say is this: we do not know—we cannot be sure, so it is better to approach the problem by trying to organise international agreements rather than by “a race to the bottom”, as he puts it. I do not believe that either. Much of the evidence taken by the parliamentary commission has played an important part in ongoing thoughts about the whole landscape of international financial services for the future. It is wrong to mischaracterise what I said, but there are risks and, given the importance of the financial services industry, whether we like it or not, we need to ensure that we go into this with our eyes fully open.
If Governments of any political colour continue to take ultimate responsibility when consumers purchase products from our banks, a whole set of unhealthy and perverse incentives will continue to plague our financial services industry. It is imperative to remember that regulation is often the sworn enemy of competition—one of the other avowed goals in the Bill. Public confidence and ethical foundations will slowly and surely be restored in financial services only when the landscape becomes far more competitive. That means, in my view—whether we like it or not—that consumers of financial products need to take a far greater level of responsibility. No amount of banking reform or new regulation will otherwise create the conditions for free-flowing capital to build the successful businesses of the future, let alone restore the reputation of our nation’s most important invisible export, which is and remains financial and business services.
Economic Policy
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Mr Osborne
My hon. Friend is absolutely right. Germany and Canada went into the financial crisis with the two lowest structural deficits of the G7, and the United Kingdom went into the financial crisis with the highest structural deficit in the G7—5%. That was confirmed recently by the International Monetary Fund. I think that, quite extraordinarily, the only person in Britain who still denies that we had a structural deficit is the shadow Chancellor. The former Chancellor accepts it and the former Prime Minister, Tony Blair, accepts it; only the shadow Chancellor does not accept it. He cannot accept it because that would mean admitting he got it wrong, and if he admitted he got it wrong, people would not put him in charge again.
Mr Andrew Love (Edmonton) (Lab/Co-op)
It is suggested that to establish economic credibility we need more growth in the economy, yet—since the Chancellor seems to be quoting former Chancellors—a former Conservative Chancellor said that it will be years before we re-establish proper growth in the economy. How is the Chancellor going to re-establish his credibility?
Financial Services
Andrew Love Excerpts(11 years, 9 months ago)
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Greg Clark
My hon. Friend is right. The constituents of my right hon. Friend the Member for Tonbridge and Malling (Sir John Stanley) might be concerned if I sought to represent them, but my constituents in Tunbridge Wells do, I think, share the fury that has been described. For a bank that has caused the taxpayer to bail it out to such an extent to then engage in practices that could—had we not taken action to require clawback—have resulted in further cost to the taxpayer, is outrageous. I agree with my hon. Friend the Member for Bristol West (Stephen Williams) that the individuals implicated in such practices should leave the financial services and find a better living, rather than working in an industry in which trust and confidence is required.
Mr Andrew Love (Edmonton) (Lab/Co-op)
I hear what the Minister says about the highest standards of regulation for the City of London, but how does he explain the fact that once again, American regulators have imposed fines that are three times higher than those from the FSA, thereby appearing much more robust in their investigation of LIBOR and other issues? Now that we are having a “twin peaks” model, what discussions is the Minister having with the regulator to ensure that it imposes appropriate fines and undertakes proper investigations to ensure that we root out the difficulties of the past?
Greg Clark
The hon. Gentleman makes a good point. He will know that there is a long-established culture of very high fines in the US. Fines in this country have increased markedly in recent years, although none of the institutions subject to FSA fines in recent months would regard them as anything other than exacting. It is right for us to follow the practice of other jurisdictions, including the US, in having a more explicit criminal code. Our amendments to the Financial Services Act 2012 mean that criminal sanctions explicitly for the manipulation of benchmarks are available that were not there in the past. It is right to take what the hon. Gentleman says seriously and strengthen our enforcement powers, and we are doing that through the legislation that has been passed.
Banking Reform
Andrew Love Excerpts(11 years, 9 months ago)
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Greg Clark
My right hon. Friend is right when he talks about our most important industry—certainly in terms of exports and what it contributes to the taxes that pay for public services. It is significant that more euros are traded in this country than across the entire eurozone. For that reason, we need to continue to have access to the single market and to argue—as I and the Chancellor do in ECOFIN after ECOFIN—to ensure that we secure our interests there. That is a constant fight, but I know that I and my right hon. Friend the Chancellor will always take that view when we are in Brussels.
Mr Andrew Love (Edmonton) (Lab/Co-op)
I am a member of the commission, and we will of course examine the detail included in the Bill. The right hon. Gentleman’s reasons for not including a reserve power require further explanation. The Chancellor said that our commission ought not to unpick the consensus. We have taken evidence from a wide range of people—academics, bankers and others—who have all supported our recommendations on electrifying the ring fence. Will the Minister again give serious consideration to the recommendations that we have made?
Greg Clark
I do take seriously those recommendations, but this is not a difference between just the Government and the commission. The shadow Chancellor himself said only a little while ago that
“there is no need to break up institutions but there has got to be clear separation.”
I think people across all parts of the House have come to the same view on this, but I am respectful of the conclusions that the hon. Gentleman has reached.