Professional Standards in the Banking Industry

Bernard Jenkin Excerpts

Thursday 5th July 2012 Commons Chamber

[Ed Balls]

I understand the points made by Members on both sides of the House.

Before I summarise, let me say to the Attorney-General that I have tried to listen very carefully to his contributions. There have been many of them, all have been helpful and constructive and they have helped us to understand the challenges that we face rather better than we had done on the basis of the Chancellor’s contributions in recent days.

Let me say also that, if at any point I misrepresent the right hon. and learned Gentleman, I will always in an honourable way correct the record in this House—not, as we now know, a standard of behaviour that we can expect from the Chancellor in this House.

To summarise, the argument goes as follows. Point one is that the Attorney-General does not believe that it is possible to have a proper, thorough investigation into all the details of the LIBOR market by the end of the year. I understand that; I hear his argument. Our argument is that a judge-led inquiry gives us a better chance of having an investigation into something legally sensitive than a parliamentary inquiry. If one is true and two is true, that means that the Government’s proposal for a parliamentary inquiry by the end of this year is defunct—dead, torpedoed, gone.

That is why, rather than intervening again, the Attorney-General should speak to the Chancellor, call the Prime Minister—wherever he is—and say that they should withdraw these motions, get to the drawing board and come back with a plan that is baked rather than half baked. [Hon. Members: “Plan B!”] Plan B.

[Mr Bernard Jenkin (Harwich and North Essex) (Con)]

A few moments ago, the right hon. Gentleman said that even if the House votes for establishing a Joint Committee, Her Majesty’s official Opposition will continue to press for a judicial inquiry. Will he clarify that? Does that mean that he will be discouraging Members from the Labour party, be they in either House, from co-operating with and taking part in a Joint Committee? Is he going to wreck it?

[Ed Balls]

I was going to come to the votes at this point. I have said that we will vote for our motion. I have said that if that fails, we will continue to press for a full public inquiry because we think that that is the only way to do this properly. The Attorney-General probably agrees with us on that matter now.

Tonight, the Leader of the Opposition and I will vote against the Government’s proposal for a limited parliamentary inquiry, for the reasons I have set out, as currently proposed. On the basis of the contributions we have now heard from the Government Front Bench, the inquiry is not even remotely up to the task ahead.

In answer to the question, put by the hon. Member for Harwich and North Essex (Mr Jenkin), about what we would do if we lost the second motion, on the basis of the debate so far and the Attorney-General’s comments, I say to all Members of the House, including the Liberal Democrats, that they should think hard, do the right thing, ignore the Whips and vote for the inquiry that will work.

[Mr Jenkin]

rose—

[Ed Balls]

I am not going to give way because I have answered the hon. Gentleman’s question. [Hon. Members: “No!”] I have.

We want to win this vote for the British people. Set against the depths of malpractice that have now been revealed and the scale of the challenge that we face, our strong belief is that the Government’s decision to reject our call for an independent and judge-led public inquiry is a grave mistake. Only an independent and open public inquiry—not politicians investigating bankers—can rebuild trust. That is our view, and the view of many Opposition Members. The doubters have been persuaded by the Attorney-General. Members on the Government Benches should change their mind—withdraw the motion, do the right thing and let us sort this out once and for all.

--- Later in debate ---

[Mr Osborne]

I will make further progress in my speech and then give way, but I am not giving way at the moment. If we—[Interruption.]

[Mr Jenkin]

On a point of order, Madam Deputy Speaker. I regret to say that I cannot hear the Chancellor of the Exchequer. Mr Speaker regularly reminds this House that we do not look very good to the public, and I think this might be a prime example.

[Madam Deputy Speaker (Dawn Primarolo)]

I am eternally grateful for the help from the hon. Gentleman in reminding the House of what I have already said to the House, which is that if Members believe that this demonstrates the behaviour of the House at its very best on a serious matter, they are sorely mistaken, regrettably. However, each Member in this House is responsible for their own behaviour, and not me, thank goodness, so perhaps we can continue with the debate.

--- Later in debate ---

[Mr Bernard Jenkin (Harwich and North Essex) (Con)]

The hon. Member for Birmingham, Hall Green (Mr Godsiff) has underlined the importance of having a banking system that commands public confidence. I do not know how serious the LIBOR scandal is in relation to the ability of the banks to support jobs and growth, which we so desperately need at the moment, but it is clearly a mortal blow to the reputation of the City so we need to deal with it effectively and quickly.

I say to Front Benchers on both sides in this debate that this has not been the finest hour of the House of Commons. We have not seen the finest, highest and most principled leadership from Front Benchers of either side. Many among the public will look at the debate and scoff at our self-importance and arrogance. The City itself will be in utter despair that Front Benchers should have chosen to use this opportunity to tear chunks out of each other instead of co-operating to find a solution on which they can agree.

No solution will work unless there is consensus. I say that with a very heavy heart, having great respect for the prodigious abilities of both my right hon. Friend the Chancellor and the shadow Chancellor, as well as for their public service in the House. But I really think that we have to do better. Anybody could have seen over the past few days that the debate would be a complete car crash, and so it has been. We must seek to extract something positive from it at the end of the day.

My hon. Friend the Member for Chichester (Mr Tyrie) raised the tone of the debate in a laudable manner. He referred to the Marconi scandal of 1912; this is its 100th anniversary, and I will say a few words about it soon if I have time. The parallels are chilling.

First, I shall say a brief word about the powers of Select Committees. The shadow Chancellor is completely wrong—we have the powers. There is some doubt about the manner of their exercise and how we might deal with contempt, but there is no doubt that we have the powers. As Chairman of a Select Committee, I have exercised them. People are in fear of them. It does the House no service for the shadow Chancellor to go around saying that we do not have powers. That undermines the authority of the House and it is not in the interests of the House.

[Damian Collins]

I am closely following my hon. Friend’s argument. Is not the Standards and Privileges Committee currently looking at the sanction for contempt of Parliament?

[Mr Jenkin]

Actually, it is the Liaison Committee on which I serve as a Select Committee Chairman. I am personally looking into the matter and will report to the Liaison Committee next week; that will be part of our report on the powers and effectiveness of Select Committees, which we hope to produce before the end of this term. It greatly ill serves the House to denigrate the powers of Select Committees.

I am going to support the Government motion. I am not in favour of a judicial inquiry; I think it would be completely dotty to plunge us into such a lengthy procedure. However, I want to sound some warnings about the dangers that might befall a parliamentary Select Committee inquiry as proposed in the Government motion. We must be mindful, not least, that if Ministers or ex-Ministers were to be called to give evidence to try to sort out the absurd row that we have seen this afternoon, the Committee could not possibly function. Indeed, it could not possibly function if Opposition Front Benchers were determined to undermine its authority and operation.

It was highly irresponsible of the shadow Chancellor to fail to answer my question or that of my right hon. Friend the Chancellor about whether the Opposition will go on non-speaks if the motion is carried. I commend the hon. Member for Dundee East (Stewart Hosie), who said that even if the Opposition lose the vote, Scottish National party Members will co-operate with the inquiry. How is the House meant to make a judgment about whether to vote for the motion unless we have a clear view from the shadow Chancellor?

My hon. Friend the Member for Chichester mentioned the Marconi scandal. That occurred when Ministers—Liberal Democrat Ministers, I hasten to add, just for fun—were accused of buying and selling shares for profit—

[John Thurso]

I want my hon. Friend to tell us all about the Marconi scandal, but we were Liberals then.

[Mr Jenkin]

I beg my hon. Friend’s pardon. Of course—rebranded to cleanse the history.

Lloyd George’s Government were deeply embroiled in what we would call an insider dealing scandal. A Select Committee was very contentiously set up. It divided on party lines, it divided on whether to call Ministers as witnesses, it divided into party groups during the questioning of witnesses, and it divided along party lines in the writing of the report. In fact, it produced three reports—the official report, the Chairman’s report, and a minority report. Interestingly, the introduction to the 23rd edition of “Erskine May” says:

“Such highly visible failure condemned their successors”—

Select Committees—

“to a very limited role for almost half a century.”

I place great faith in my hon. Friend the Member for Chichester that he will draw stumps on the exercise if there is any danger that the Joint Committee is going to collapse in such a welter of recrimination. First, it could not produce a decent report under such circumstances; and secondly, it would damage this House in a very serious manner.

I do not wish to give succour to Her Majesty’s Official Opposition, but I note that the consequence of the Marconi scandal was the passing of the Tribunals of Inquiry (Evidence) Act 1921 when, following a subsequent scandal that engulfed the Government, it was decided that there had to be an alternative means of conducting a judicial inquiry outside Parliament with a judge, and that is how that format came into being.

The report by the Salmon royal commission on tribunals and inquiries, which was produced in the 1960s and is still the bible of how tribunals and inquiries are conducted, said that it would be “a retrograde step” to resurrect the format of a judicial inquiry within Parliament. Among the drawbacks listed by Lord Salmon were that Committees were composed of Members representing the relative strength of parties in the House, that parliamentary Committees do not hear counsel—something that has been suggested today—that some of, if not all, their members will have no experience of taking evidence or cross-examining witnesses, and that witnesses might not enjoy the same absolute privilege as in a tribunal set up under the Act. Those are the dangers that we have to guard against when we vote for the motion.

As I say, I am going to support the motion, but I add one other caveat. I would be grateful if the Minister will confirm that the Government will not present any objection to providing the resources—the money—that the Joint Committee will need to carry out its functions. We cannot have this new Committee raiding the staff and resources of other Committees. I think that if the inquiry is confined to matters of policy and recommendations for legislation rather than trying to settle the internecine disputes that we have seen on the Floor of the House this afternoon, then it can function with the support of the Opposition, but if the Government want it to happen it must have the necessary resources, which may be substantial. I would also recommend recalling a senior Clerk who has recently retired instead of raiding a Clerk from another Committee, because otherwise all our work will be disrupted.

--- Later in debate ---

[Mark Reckless (Rochester and Strood) (Con)]

In 1993, I joined Warburg’s as UK economist. One of the first things I recall is visiting the chairman of the bank, Sir David Scholey, in his office with my entry cohort. He said to us that what the bank had that mattered most was its reputation, that capital would always flow to good ideas and that if we did not have great amounts of capital, that was not a problem because we had our client relationships. He said that we must always remember to put our clients’ interests first, never our own.

My first boss was George Magnus, the chief economist at Warburg’s, who is still active. I remember him saying to me that we should never talk our book, and that we were there to be objective. He said that we should never be particularly proud if we got something right or concerned if we got something wrong, but that we should be proud of the integrity of our way of thinking. When I was given a bonus, I expressed gratitude. The culture had not yet become that we should look upset in the hope of more next time.

Only when I went to do an MBA at Columbia university in New York did I realise that the fact that I had become a rated analyst was of personal value to me and that I could perhaps have gone to another bank and got more money. When I came back from America, the position here had changed. We had the regulatory system of the FSA, and I was more involved in advising retail banks.

One case that I worked on for a substantial time was that of a retail bank merging with an insurance firm. It was clear to me that to treat customers fairly in merging the compliance function, as I was tasked to do, we had to focus on how that insurer might sell products to the bank’s customers. There was nothing wrong with that per se—that, along with stripping out cost, was the rationale for the merger—but it clearly brought risks, and we needed a function that would stop inappropriate sales to customers for whom they were not correct. Yet the main issues in dealing with the FSA were a turf war between the bank and the insurance regulator and a vast amount of time spent on box-ticking compliance. The question is not just whether the system is over-regulated or under-regulated, it is about the quality of the regulation.

I then became a lawyer—I am both a qualified barrister and a solicitor—when I worked on bank recapitalisations and FSA litigation. I served as a judicial assistant to the vice-president of the Court of Appeal. The motion asks for a judge-led inquiry. I have enormous respect for our senior judiciary, but they have almost entirely been judges and lawyers—they have not worked in financial services industries and are not, as hon. Members are, representative of wider society.

On LIBOR, two separate things happened with Barclays. First, there was market abuse—we will see what happens in respect of other banks. Because the two mid-quartiles of LIBOR were measured, it was thought there could be no gain by giving a low or high response, but there was collusion by so many players that there was market abuse, and the FSA was asleep on the job.

I would encourage hon. Members to think about the second Barclays aspect in terms of the perspective of the time. The British Bankers Association says that LIBOR

“is not necessarily based on actual transactions”.

Banks are asked a question:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size”?

We should note that the question refers to “offers” rather than “an offer”, but the BBA goes on to say:

“Therefore, submissions are based upon the lowest perceived rate at which a bank could”

borrow. It also says that “reasonable market size” is not defined and that

“it would have to be constantly monitored and in the current conditions would have to be changed very frequently.”

Whitehall was therefore using Barclays reports for a purpose for which they were not designed. It was looking not at LIBOR, but at one particular bank’s reports, which were quite possibly compiled by a junior person, in an incredibly difficult market position. Therefore, if Barclays reported a higher rate than other banks, it might be that it had different perceptions of “reasonable market size”, or it might not ask the offered rates because the market had frozen. Which banks were asked and how are those considerations to be reported? The banks are not being asked: “What are your bid and offer rates?” They are being asked: “What do you perceive one of your competitors might offer you were you to ask?” In the context of the financial crisis, that is potentially different from the market abuse I have described.

We should also consider the UK in the international context. We have a huge banking industry in this country. If a regulator says that much of it is socially useless, people might reply, “Yes, but the employment and prosperity of many people in the country depend on it.” How do we clear it up so we can offer a market and export our financial services to the world sustainably and in a way that will keep our reputation? Hon. Members can rail and bash the bankers for the bust we are suffering—that is quite fair and proper—but we must accept that the bankers also gave us our boom. Our borrowing and extra spending was based on candyfloss, and on a boom that the bankers created. They are as responsible for what we enjoyed in the boom as they are for the bust.

[Mr Jenkin]

Is my hon. Friend saying that wrong regulation rather than under-regulation robs the system of discipline, and that we want a more capitalist, self-disciplined system rather than more bad regulation?

[Mark Reckless]

Elements of such regulation have been backed, but we must look at the quality of regulation. We can have a market system in which people are clear what the regulation is, or a system in which the Government run regulation and bail everyone out, making the taxpayer responsible. We were betwixt those two separate models. Some parts of the market but not others were regulated, and people put stress and reliance on LIBOR that it was never designed for, which led to much of the problem.

We cannot take what the regulators say as Gospel. Many say that Barclays accepted that the Bank of England and Paul Tucker had not told it to lower the rate. Barclays was let off tens of millions in fines because the regulators agreed that, but the regulators have a vested interest—people might ask why they were asleep on the job in the earlier phase, and what LIBOR was doing in 2008-09. Hon. Members should consider what reliance Ministers or officials at that time put on LIBOR—we should ask what LIBOR said about Barclays, why the Government were trying to push Barclays into a bail-out it was trying to resist, and why there was such reliance on that rate.

[Mr Jenkin]

My hon. Friend is making a very interesting speech. Is he saying that because it was widely known that the Government were prepared to rescue the banks, the self-discipline that liability for bankruptcy provides in a banking system was abandoned and the whole market was distorted?

[Mark Reckless]

For the calculation of LIBOR, I wonder whether it had been abandoned for RBS and Lloyds HBOS—as it became—while Barclays continued operating in a market context. The BBA now says that banks have to quote on the basis of an unsecured, unregulated, non-Government-supported rate, but I do not know whether that was the definition it gave at the time. That would have been a concern.

In conclusion, Members of Parliament, representing their constituents, have the necessary range of experience to have a reckoning, as a society and a nation, with what has happened with our banks, to assess the costs, as well as the benefits that we enjoyed, and to consider how to move on and put the matter behind us. I know, from my experience on the Home Affairs Committee, that we can have a non-partisan Committee that can reach across. We have people with the necessary experience and independence of mind. We can get together a group of people to come up with a report that downplays partisanship, to find out what went wrong and to learn the lessons for the future.