Financial Services (Banking Reform) Bill

Debate between Andrew Love and Mark Garnier

Wednesday 11th December 2013 Commons Chamber

[Mark Garnier]

I intend to talk principally about Lords amendment 41, but before I do so let me echo the comments made by the Chairman of the Parliamentary Commission on Banking Standards, my hon. Friend the Member for Chichester (Mr Tyrie), at the beginning of the debate. He said that he was grateful to the Government for moving such a long way along the road towards the commission’s recommendations. That is a tribute to the organisation that he chaired extraordinarily well for about 18 months and that came up with such sound proposals. It was a great honour for me to be part of that process. It also says a huge amount for the Government that they have taken great heed of what the commission said and have moved a great deal further towards implementing the proposals.

On Lords amendment 41, I suspect that there is not too much of a difference of opinion in the House about what we are trying to achieve through the Bill—that is, a change in the culture of banks. I take slight issue with the hon. Member for Islington South and Finsbury (Emily Thornberry), because it is not just about preventing banks from collapsing. It is about getting better standards and better service for consumers. Many constituents will complain about their treatment by banks and that has nothing to do with criminal matters; it is simply about the culture and how certain people address other people in their everyday lives. We want to drive that out and to ensure that the banking culture is one of which we can be proud and which consumers can trust enormously.

[Mr Love]

Is the hon. Gentleman not disappointed that, since 2007, when there has been such a focus on the problems and difficulties of banking, no greater progress has been made in creating the type of culture we all want to see?

[Mark Garnier]

I do not necessarily agree. I speak not only as a Member of Parliament, a member of the Parliamentary Commission on Banking Standards and a member of the Treasury Committee but as a former investment banker and investment manager. My hon. Friend the Financial Secretary is also a former banker, so to a certain extent we have a private interest in ensuring that banking standards are greater than they have been. There has, however, been an enormous amount of progress. We have a new regulatory regime, there have been a number of changes in the banks and we have seen a complete change of culture at the top of many of the banks. Things are moving in the right direction but it will take a long time and this Bill is part of that process.

Although we are all trying to achieve the same thing, the important question is how we will achieve it and who, ultimately, we should ask to ensure that the licensing regime is upheld and looked after. The Parliamentary Commission on Banking Standards was perfectly clear that we felt that the approved person regime was complete and utter nonsense. One of the Bank of England’s greatest thinkers, Andy Haldane, highlighted why that was the case: if regulation is devolved to a regulator, all that happens is that the individuals at the head of the banks think that they have nothing to worry about. It becomes the regulator’s problem to worry about such things, and not that of those individuals.

When we met a number of the banks—particularly UBS, the Union Bank of Switzerland, the senior directors of which appeared in front of us just after it had been fingered for its share in the LIBOR scandal—we discovered that there was an incentive to be ignorant of what was going on within them. The senior managers of UBS who were running the bank when the LIBOR scandal happened within their organisation knew nothing about it until they read about it in the Financial Times three or four weeks before our hearing. That gave rise to the accusation that there was an accountability firewall between the management of the banks and the individuals working on the front line—that is, those at the coal face on the dealing room floors and servicing our consumers.

We were trying to work out how on earth we could reach a system in which those at the top of the bank took accountability for the work and standards of the individuals in the lower part of the bank. That is crucial in leading me to support the Government in rejecting amendment 41: it does not deal with that accountability but rather gets around the problem. That is why it fails to hit the nail on the head.

Financial Services (Banking Reform) Bill

Debate between Andrew Love and Mark Garnier

Monday 11th March 2013 Commons Chamber

[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.