Financial Services Bill

Baroness Kramer Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Baroness Kramer]

My Lords, I appreciate the introduction to the topic from the noble Lord, Lord Eatwell, and I hesitate to speak on behalf of all of my noble friends but I think we have become aware in this country and across the globe that shifting the balance of policy in favour of economic growth is a desirable target. Therefore, to use language, as he has, which downgrades that role in the way that it is approached by the Financial Policy Committee frankly strikes me as unfortunate. We are talking to some degree about semantics but we have learnt the hard lesson that promoting is more important than simply paying regard. He could argue that when his own party was in government it chose the wrong policy path and was pushing on a boom. But had it really examined that boom, it would have recognised that underneath it the fundamental necessary structures for economic growth were not being achieved.

We have all heard in a variety of other debates that manufacturing was declining steadily, certainly as a percentage of this country’s GDP and in comparison to competitive economies such as Germany. We know that there was an incredible overreliance on a banking sector that was reporting forced profits because we were hearing an inflated set of reports from the banks that were not based on a genuine economic boom. We know that underlying that whole period, youth unemployment was steadily growing even though it was masked by overall employment figures. We know that that particular boom was being fuelled by consumer debt that led to both intensive borrowing by individuals and therefore a lot of purchasing, which in a sense was a false contribution to the underlying economic growth, and also inflated house prices creating a house-price bubble. Requiring the new FPC to dig beneath what is actually happening in the economy, to recognise what is happening with the fundamentals of economic growth and then to give that a great deal of importance in the way that it shapes its policy is essential.

I am glad in many ways that the whole issue of economic growth does not have much in the way of party characteristics. I hesitate to quote from the BBA at this point but, like a curate’s egg, everybody has good stuff in parts and this is one of the good parts. It talks about the Chancellor’s commitment to an economic growth objective to stand beside the financial stability objective and says:

“This is to be welcomed as we have said on many occasions that there is a risk that insufficient weight will be placed upon the achievement of economic growth and jobs which must be the overarching objective. This we believe feeds through to ensuring that the FPC be set the symmetrical task of using its tools and powers not only to subdue demand at the top of the economic cycle”,

which is the issue of sustainable growth,

“but also to ensure that reserves are used in support of lending capacity at the bottom”.

That strikes me as very important. Mr Sants, before he stepped down from his role at the FSA, said:

“Changing the FPC’s remit is really important. The interaction between regulation and economic growth should be debated at the FPC”.

It seems to me that the language we have used frames that debate.

I wanted to take this opportunity to comment on part of the amendment in my name and those of the noble Lord, Lord Sharkey, and the right reverend prelate the Bishop of Durham, because it contains within it one further element that the noble Lord, Lord Eatwell, at this particular point in time, has not addressed. That is the language that includes within the objective the promotion of,

“a stable and sustainable supply of finance to the economy”.

We see that as important enough to be worth integrating and highlighting. We should not simply assume that it will be part of an economic growth objective without a specific mention.

The reason we have done that is probably evident to many in your Lordships’ House. We have all shared frustrations over Project Merlin, quantitative easing and credit easing, and I fear we may have the same problem as we look at the consequences of the Government’s new “funding for lending” scheme. The Government, or the Bank, effectively push money into the system, which gets as far as the banks but does not emerge the other end. The second quarter report from the Federation of Small Businesses shows that demand for credit among its members was stable but that more small firms than ever were being rejected, with the rejection rate now reaching 41%.

The Bank of England’s credit conditions survey, for that same second quarter, shows that for small businesses, interest rate spreads actually widened, despite the Government’s loan guarantee scheme, which is meant to bring down interest rates for small businesses, and despite a sharp drop in default levels among them. Small businesses are demonstrating that they are less risky than they might have seemed historically, but are being rejected at a greater rate and also found that they were facing wider spreads on interest rates. We have to acknowledge at present that high street banks are the only distribution network of any size to get credit to those who need it on a small scale, but looking at the overall situation, we can easily recognise that the high street banks have many easier ways to generate a higher level of return than lending to small business.

There is a reason why, in our language, we have used the word funding and not just credit. The supply of finance is not just a debt issue but one of equity capital. Capital willing to take risks is hard to find. Angels are fewer than ever and venture capitalists are finding funds harder to raise. Indeed, long-term money of any kind is difficult to find at the moment, as I suspect the Government are finding as they try to look at ways to develop infrastructure projects. Some disintermediation of the banks is, if anything, aggravating the problem.

The UK differs from many other countries because it has very low retail investment in bonds and equities. Retail money is less volatile and tends to stick through the good times and the bad times. Germany is a good example, although there are many others, of a country where businesses, particularly small businesses, have been far less impacted because that retail sector, investing in both bonds and equities, is available to them.

There is another area where it is crucial that we have the attention of the FPC because the regulator can make a difference. We have a system now where the small end of the spectrum is very ill served—the small stockbroker, who often followed the small company, has largely gone. Most of the funding we have is simply fairweather funding. To change this, we have to develop a reliable funding supply. I understand that that is not for the regulator alone, but the regulator has a huge role to play if we are ever going to close those kinds of yawning gaps. This amendment puts it in a position to act. Some will say that there is already a competition objective in this Bill. There is a competition objective for the FCA, but it is very much designed to encourage a multiplicity of products—not to bring in new players or expand the scope of existing players, but to cover access to funding right across the business spectrum. Those are two very different things and we believe that we must capture that second aspect in the language that we use.

The FPC has to be engaged and to be part of making sure that there is capacity for funding the system across the whole spectrum, whether it be small, medium or large businesses. I would argue it also covers disadvantaged individuals and social enterprises, charities and other bodies which play a crucial role in our society today and will play bigger roles in the future. I suspect that other people will have much more to say about that, perhaps around this amendment and others. It is to push those underlying principles that we have put down Amendment 35.

[Baroness Valentine]

I am grateful to the Government for tabling Amendment 35A. This is a very important and conceptually challenging issue. I hope noble Lords will excuse me if I talk around the subject a little because, while it is certainly a step in the right direction, it is not at the moment clear to me whether, in legal terms, this amendment sets the right framework.

We should, perhaps, first consider that whatever framework we adopt must be flexible enough to operate effectively in three primary sets of economic conditions: first, the healthy state when one would expect the Financial Policy Committee to be scanning the horizon for future shocks at the same time as being conscious of any impact its actions might have on economic growth; secondly, crisis, where stability must be paramount; and, thirdly, the current state where uncertainty, principally from the eurozone, must be expected to continue for some time. This is, of course, a situation over which we have little control.

In the first and third of these scenarios, the issue at stake is the interplay between economic health and financial stability and the difficulty of balancing the two. There is a well-known saying:

“A ship in port is safe, but that’s not what ships are built for”.

In this instance we can see absolute financial stability as a safe port but it would be ironic, given our island’s history as a trading nation, if the port were so secure that our businesses could not put to sea.

At a simple level, this is seen in the tension between capital ratios set by regulators and the demand that the banks increase lending, variously voiced by parts of the Government, some parts of the business lobby and the media. It is sometimes forgotten that the collective interests of the banks are, in fact, aligned with those of the Government in seeking economic health and financial stability, but both sides of the lending equation have curbed their appetite for risk. Just as banks are mindful of their own exposures, small businesses, because of economic conditions, will be both less robust to lend to and less keen to take on debt.

On this point, it is essential to have a common understanding between the Bank of England, BIS and the Treasury, and for the banks and the real economy to have the same understanding of where we sit on the risk spectrum. We also need the Government to be clear whether, and to what extent, they can or want to influence lending in the marketplace through initiatives such as the Business Growth Fund, the green investment bank or, indeed, their shareholdings in certain banks.

The amendment, as proposed, makes it clear that financial stability retains primacy. Some have argued that there is a logic to this because it mirrors the hierarchy of the Monitory Policy Committee’s objectives. The flaw in this argument is that the primary objective of the MPC is clear and measurable. Inflation is X%. Conversely, I know of no indicator as simple as inflation that would provide a proxy for financial stability. The primary objective of the FPC therefore requires judgment. We cannot state that financial stability is 23 whereas last month it was 27. So the point at which the secondary objective comes into play can remain for ever opaque.

I think this argues for one of two approaches: either tightening up the FPC objective to one which is measurable or leaving it as it is but then recognising that the interplay between the primary and secondary objective is necessarily different and therefore that the current drafting may not in fact be fit for purpose.

The challenge for the FPC is that it is unlikely that any Government will be prepared to state explicitly where the axis between stability and growth should sit. As we saw under the previous regulatory culture, the Government’s desire for risk-based regulation, under which banks could and would be allowed to fail, lasted only as long as it took for a bank actually to find itself on the brink of failure. Under the new regime, I suspect that Governments of all political persuasions will wish to champion both goals, leaving it to the FPC to judge how to offset the two. I believe, therefore, that we need a clear mechanism under which the FPC can demonstrate how it has achieved its primary objective while complying with the requirements placed on it by its second one and not hindering the Government’s economic strategy.

--- Later in debate ---

[Lord Kerr of Kinlochard]

My Lords, like the noble Lord, Lord Neill, I hope that the noble Lord, Lord Eatwell, will withdraw his amendment. His three-dimensional answer to my question made it impossible for me to support it, because I fear that he is taking a hostage. The most important thing that must be done is to establish quickly how we can ensure that the fixing of LIBOR cannot happen again. That is the crucial operational thing to do. I agree with those who say that this is an international scandal. I agree that around the world, people know about this. There are plenty of other scandals in the banking system that must be addressed, such as the mis-selling scandal and questions of remuneration and bonuses. There is plenty of time for a study of the culture of the banking and financial services industry. That is important but not urgent. What is urgent is to do something operational now.

I understand from the Prime Minister’s Statement that the Wheatley report will be published this summer. That fits very well with the Tyrie exercise, which will finish this autumn and can establish what happened. It should not go into areas of criminality. What was said by the noble Lord, Lord Carlile of Berriew, was fully justified; I would not go down the special prosecutor route but would follow the advice of the noble Lord, Lord Howard. We need a quick operational inquiry to establish how to make sure that this shocking thing—this poisoning of the water supply that is a scandal around the world—is put right and cannot damage London, and borrowers and lenders, any more.

I will say one further thing to remedy an omission in our discussions, and those of the other place, yesterday. I am confident that Mr Agius is an honourable man. It is a pity that no tribute was paid yesterday to the way in which he immediately accepted responsibility and felt that the buck must stop with him.

I was reminded of the noble Lord, Lord Carrington. Nobody thought he was responsible directly, hands on, and involved in the loss of the Falklands. I do not believe for a moment, and I do not believe that anybody in this Chamber believes, that Marcus Agius was in any way involved in fixing the LIBOR rate, yet he undoubtedly did the right thing, and it is important that that should be put on the record. It makes a striking contrast to the behaviour of some others in public life these days. I advise anyone intrigued by this reference to read a remarkable speech made on Friday on the Steel Bill by the noble Lord, Lord Fowler, referring to another Member of the present Government.

[Baroness Kramer]

My Lords, I want to associate myself with the words we have just heard from the noble Lord, Lord Kerr, on the importance of acting quickly. I speak as someone who has spent most of her career in banking, working with clients on transactions that involve the LIBOR rate and I understand the significance of the issues we have discussed in this House.

As others have said, this is not just a UK issue. The earliest that any inquiry, as proposed by the noble Lord, Lord Eatwell, could begin would be the autumn, so we are looking at something like a two-year inquiry. I am not sure that he understands—

[Lord Eatwell]

If the noble Baroness would allow me, perhaps it would be for the benefit of the Committee if I said that I certainly did not rule out the Wheatley or Tyrie inquiries: I argued that both have something to contribute. I say that to the noble Lord, Lord Kerr, as well. Therefore, I accept the whole notion of acting quickly—it can be handled—but we then have to ask: what next?

[Baroness Kramer]

When the noble Lord, Lord Eatwell, talks about the Tyrie inquiry, I am still not clear whether he is talking about the Joint Committee of both Houses, in which the Lords are as involved as the Commons, or whether he is simply talking about the Treasury Select Committee acting, if you like, in its normal way. I think that he has avoided giving us clarity around that issue.

The critical thing here is that other jurisdictions will act. The United States will not sit around while a committee lasting one or two years talks about the fundamental issues of banking, so the actions that we are going to take have to be decided in a far more immediate way. We have great opportunity with this Bill and with the forthcoming banking reform Bill. The changes will have to be embedded in those Bills at the latest if we are to stem the tide of real disadvantage.

If anyone doubts that work is afoot elsewhere to deal with the problems that we have been so slow to pick up and deal with, I suggest they take a look at today’s Wall Street Journal. There is an article in there called “Lining Up Potential Successors to Libor”. It is very clear that we in the UK are on the back foot and we need right now to get on to the front foot and not start playing for the long grass, however worthy that is. It is that sense of urgency that I want to convey. If we hear that the answer for the British Government is going to be a commission, there will be a very cynical reaction in the United States that once again the Brits are going for another long-term committee with navel-gazing and endless discussion, rather than immediate action. Perhaps someone can tell me what the value is of a commission that reports after all the changes have taken place. That sounds to me like a method for closing a stable door long after the horse has bolted. It is crucial to get that horse moving now, without delay.





I also have to say that I regard a Committee of both Houses as an extraordinarily effective way of getting to the root of a problem. Think of the expertise we have in this House. Surely that is exactly what we should be using. The breadth of the experience we can bring is important. Moreover, it is very different from Leveson because at the heart of that inquiry is the reality that it is investigating a relationship between politicians and the media, one in which there is a high suspicion—outside here I would probably go further, but that would not be tactful—of collusion and corruption. Politicians cannot investigate themselves under those circumstances, but I do not think anyone is suggesting that that is the situation in the banking industry. We are not talking about political collusion or corruption here.

Indeed, if we doubt the effectiveness of the political system in handling this, let us look at Bob Diamond’s resignation this morning. It is easy to see what happened. He knew he would face the Treasury Select Committee on Wednesday, so he sat down with his lawyers—I am guessing that, but I suspect I am right—and started to role-play how he would behave in the meeting. Soon he realised that his position was totally untenable. That is effective action, and it is what we should be building on, not going back to some sort of long-term commission. The additional benefit is that if there is leadership from Parliament, it will continue to observe and supervise the banking industry for many years. It will not pack up and go away after 18 or 24 months. We should build on that, not lose it.

Perhaps I can make a last comment. We seem to be going through an extraordinary trend, if you like, of subcontracting out our responsibilities. As politicians with the privilege of being part of this Parliament, surely we ought to be taking the tough decisions. We should not be trying to find someone else to contract out to every time there is something tough to do, otherwise we might as well just become a commissioning body. I would argue that we should look at our strengths and skills and take this opportunity to act. That would show the banking industry and the wider world what we can do. The longer term is too late, and we have to be aware of that.