Financial Services (Banking Reform) Bill

Chris Leslie Excerpts

Monday 8th July 2013 Commons Chamber

[Greg Clark]

Of course, and today and tomorrow we will go into some further detail on that point. Let me mention one such finding, however: the Government do not agree with the proposal to abolish UK Financial Investments. I will mention various others later. We brought forward the publication of the response, which, just before the report was published, was intended to take place just before the summer recess, because I thought it was germane to the discussions in the House and I encouraged my officials to work their best to try to make it available for today and tomorrow. It has been sent to Members.

Giving a Government response to an 11-month long, 571-page commission report in just 13 working days is, I think, quite an achievement and I thank my officials for losing a nice weekend watching the tennis to do that. I had hoped that it would help the debate.

[Chris Leslie (Nottingham East) (Lab/Co-op)]

This is a very interesting situation. The Minister talks about the 13-day deadline and said that we had to get this done. Correct me if I am wrong, Mr Speaker, but I thought that the Government decided when the Report stage of a Bill was to be held, so the deadline was rather self-imposed. Why on earth are we wasting this Commons consideration of the Bill in Committee and on Report when he could not get his act together either to table amendments or to get a response together in time for us to properly use our time on Report?

[Greg Clark]

The hon. Gentleman is perfectly aware that the standard response time for a Command Paper responding to a report is two calendar months. That would have taken us into the recess, which clearly is not possible, so we would have had to respond after the recess. I think he is being churlish when I have asked my officials to move at great speed to respond in a very short space of time—13 working days—to make the response available. I thought it was better for us to have it for these debates than to have it next week or in September. I am grateful to my officials for their alacrity, even if he is not.

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[Greg Clark]

My hon. Friend’s ingenious intervention allows me to pay tribute to the excellent event he hosted in Gateshead at which there was palpable enthusiasm for challenger banks entering the market, especially ones with a regional focus. He and I share an ambition that the north-east should be the home of such a bank, which would do wonders for the region’s economy, with its strong, vibrant business culture. The area would benefit from the local knowledge of such an institution. The PRA and the FCA were represented at the discussion, and he is right to reflect that everyone who was present on that Friday was enthusiastic about the steps the PRA is taking to make it easier for challenger banks to come forward.

[Chris Leslie]

If the Government are so enthusiastic about the concept of regional banking, will the Minister explain to the hon. Member for Hexham (Guy Opperman) why their report, which came out at lunchtime, explicitly rules out any review of a structural arrangement involving regional banking for the Royal Bank of Scotland?

[Guy Opperman]

You voted against it.

[Chris Leslie]

Perhaps the hon. Gentleman did not hear me first time round. I am tempted to repeat myself, but it is important that he realises that his right hon. Friend the Minister has ruled out such an arrangement for RBS.

[Greg Clark]

The right way to approach this is to make it possible for regional banks to enter the market across the board, which is precisely what the PRA is doing. It has reduced the demands that entrant banks must satisfy to establish themselves as a business and speeded up the authorisation process, which is all to the good.

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[Greg Clark]

As I have said, I shall hear from my hon. Friend. I do not think there is any difference of intent between us; we have accepted the commission’s recommendation. We have taken the period of five years because that is the standard time for the disposal of assets when they are required through competition law proceedings.

I am certainly concerned, however, that the banks should be given a chance to address the concerns, and that chance would be lost if amendment (k) were followed. If amendment (p) were followed, we would deny banks the five-year period for divestments to be made that is typical under competition law. But as I have said, I remain open to considering these matters further during the Bill’s passage. I am confident that it can be improved to meet the concern, as I know that there is no disagreement in principle between me and my hon. Friend on the issue.

The requirement for Treasury consent follows from the commission’s own recommendation, without which the regulator could, on its own initiative, instigate radical structural reforms.

Amendment 19 is retabled as an alternative to Government amendment 6, providing for the specific full separation power. As I explained in Committee when the amendment was previously debated—when the hon. Member for Nottingham East was channelling my hon. Friend the Member for Chichester, as he frequently did—it suffers from technical flaws. That is why I committed to introducing a Government amendment to deliver its objectives.

Specifically, amendment 19 is rather vague, giving the regulator power to require a group to take steps to separate without specifying what those steps are. It also lacks provision for a minimum period over which groups must execute a separation, leaving the risk of the regulator’s ordering a rushed disposal that could be destabilising to the system.

The Government amendment is intended to address those technical problems, although I have signalled our willingness to make any further improvements that may be necessary as the Bill progresses. I hope that my hon. Friend the Member for Chichester will be able to withdraw his amendment at this stage, pending further consideration.

[Chris Leslie]

It is characteristic of the Minister, with his emollient tones, sometimes to give the impression of smoothing over all these issues. He is ever the swan on the surface, yet beneath the water line the chaotic paddling is evident from the Government’s response to the work of the parliamentary commission. That response was rushed out today, in accordance with the Government’s own artificial deadline of a debate on Report, which they could have scheduled so that we had time to consider where the Government stood on some of these issues.

Even the Minister’s hon. Friends did not seem to realise what he was recommending today on RBS—ruling out a review that might consider a regional banking network, for example. The message did not get through to the Government’s own Back Benchers. I do not know whether that is a whipping issue or whether other channels need to be reviewed, but something is not quite right. It would be remiss of me to pass over the fact that we are debating this Bill on Report having had in Committee no consideration of all the hard effort undertaken by the poor souls who had to serve on the Parliamentary Commission on Banking Standards. Hours, days, weeks and months of their lives went by, never necessarily to be regained. There was no response to that in Committee and there has been barely a nod in its direction on Report.

[Greg Clark]

This is uncharacteristically ungenerous of the hon. Gentleman, as in Committee he tabled a whole set of amendments drafted by the parliamentary commission, saving him, I dare say, a lot of weekend drafting work. I think he might want to thank members of the commission and note that the recommendations from its first report were exhaustively considered in Committee.

[Chris Leslie]

The right hon. Gentleman is right. Of course I thank them, but it is my sympathy for them that now requires us to speak in their favour. The Government ignored all those amendments. It is true: I have been channelling the wishes of the hon. Member for Chichester (Mr Tyrie) and, indeed, the rest of the commission. They dutifully drafted all those amendments and they were then totally ignored by the Government. The Government set up the parliamentary commission. They did not want to go for a broader independent inquiry; they wanted to take this route. They set up all the members to do all the work and have all the hearings. Their final report was more than a ream of paper— 570 pages. Not a jot of those amendments was accepted by the Government in Committee, and, significantly, the same applies on Report.

Let us be clear about this. House of Commons consideration of this Bill is not worth anything; all the business is to be done in the other place by members of the commission who are there. It will go to them in October, presumably they will consider it in October and November, and then we will get a little chunk of time at the end of the process for Commons consideration of Lords amendments. I hope that the Minister will allow us a little more latitude to have a look at what is put into the Bill at that time.

[Greg Clark]

I think the hon. Gentleman is labouring under a misapprehension. The amendments in this group are a response to the commission’s first report. The essence of this Bill is the ring-fencing of the banking system. This is a response to the independent commission to which the parliamentary commission responded. The amendments implement these changes. The Government always made it clear that the final report on standards and culture would be taken on board during the Bill’s passage through the House of Lords. The situation is exactly as envisaged and perfectly orderly. He is not seeing the wood for the trees. This is about the ring-fencing of banks.

[Chris Leslie]

Well, pardon me for daring to suggest that the Government have got this totally upside down and the wrong way round. They set up the commission and asked its members to come forward with recommendations, as they dutifully did, for which I thank them, and then ignored them in the Commons Committee and Report stages. That means that it is all to be debated in the detail that is required when the Bill reaches the House of Lords.

[Mark Field (Cities of London and Westminster) (Con)]

Given that on Second Reading I suggested that much of the real deliberation would take place in the other place, it would be churlish of me to disagree entirely with the sentiments expressed by the hon. Gentleman. The situation was ever thus, given the parliamentary majorities. This has not been a chaotic process but, understandably, a holding response by the Treasury. It is a fast-moving situation. I suspect that a further banking reform Bill will be debated in the next two or three years.

[Chris Leslie]

It probably will, particularly if there is a change of Administration, but we will come to that in a couple of years’ time.

[Mr Love]

Some very eminent members of the commission are in the House of Lords, and I have absolutely no doubt that they will do a magnificent job of scrutinising the Bill. However, this is the democratically elected Chamber where most of the debate should take place, and it is incumbent on the Government to make time available for those at this end of Parliament to scrutinise it.

[Chris Leslie]

My hon. Friend is 100% correct, and we have made our point; I now want to move on to issues of substance. There is a lack of time and we have to finish debating this group of amendments by 7 o’clock. It is ridiculous that the commission spent hours on these matters but only a tiny amount of time has been allocated to debating them today.

Government amendments 1 to 4 seem to be generally welcome with regard to the extension of the regulatory perimeter and the definitions of the Financial Conduct Authority and the Prudential Regulation Authority. It is intriguing that amendment 4 centres on clarifying the definition of “failure”. It is very tempting to ask if they know what failure is, especially given their weak response to the parliamentary commission today, but I will move swiftly on.

Government amendments 7 to 10 also seem to be fairly unobjectionable, although there appears to be a drafting error in amendment 8. Why has the Minister decided that the proposed subsection (3) should be inserted ahead of subsection (2) of FSMA? Something seems to be amiss, but that is only a minor point.

More importantly, will the Minister talk about the tribunal to which a lot of the issues will be referred? What sort of tribunal will it be and where will it be situated? Will its work add to the functions of an existing tribunal? That is a small point, but I would be grateful if the Minister would address it.

Government amendments 11 to 13 seem to focus on drafting issues. I cannot really see what will be achieved by changing “subsidiary” to “body”, but I do not have anything to say about those smaller, drafting amendments.

The first main issue of substance relates to our amendment 17 on the need for a thorough review process of the ring-fencing of retail banks, such that it augments what ought to be the electrification of the ring fence. We suggested this in Committee and it was a clear recommendation of the commission. It would be better to have a proper and independent review of the adequacy of ring-fencing every two years. We think that a more robust review process would be better than the Government’s PRA-led approach. It would be inadequate for the regulators to lead the process. We need a broader and more substantial review process to ensure successive ring-fencing.

Ultimately, as the commission itself has said, the jury is out on whether ring-fencing will work. It is fine in theory, but in order to keep a close eye on things—especially as these issues fall out of the media spotlight, as they inevitably will in the years to come—we must have a process in place that makes sure that we test, watch and scrutinise what happens.

The commission was right to be disappointed with the Government’s response. It noted that

“the Government did not accept our recommendation on potential ‘electrification’ with respect to the sector as a whole. As our First Report noted, crucial doubts remain about whether all the intended reforms can be put in place and, even if they are, whether this will be enough to prevent the Government from having to step in next time a crisis hits. In particular, we identified the possibility that the partial separation of a ring-fence may prove insufficient.”

That is why we feel that a more rigorous and thorough review process that involves the commissioning of independent members to produce, together with the Chair of the Treasury Committee, a report for Parliament would be far more effective. I do not want to take words out of the mouth of the hon. Member for Chichester, but he is right to say that if we leave it to the PRA to do this job and do not have a proper and more thorough process, there is a danger that the regulators will simply end up marking their own exam paper.

[Caroline Lucas]

Following the logic of what the hon. Gentleman is saying, does he not agree that a better way of restoring public faith in banks and, indeed, in politicians would be to legislate firmly now for the full legal separation of retail and investment banking? Even if that is not what a large number of financial institutions want, would it not be better for the taxpayer and the public?

[Chris Leslie]

We have tabled an amendment, which I shall discuss shortly, suggesting a clear back-stop power for the full separation of retail and investment banking across the board, in case ring-fencing does not work. We believe that we should give ring-fencing a chance, but it is important to note that the jury is still out on whether it will work. We just do not know. The Bill gives us the opportunity to ensure, as the commission recommended, that nobody has any truck with breaches of the ring fence. That must be the case both on a firm-by-firm basis for specific institutions and banks and for the sector as a whole.

[Jonathan Edwards]

Given what the hon. Gentleman has just said, are not the titles of the proposed new section in his amendments 18 and 19, which refer to “full separation”, slightly misleading? I will support those amendments, because they would be a step forward from what the Treasury recommends, but the Labour party is arguing for electrifying the ring fence, not for full separation.

[Chris Leslie]

It is true that we want to give ring-fencing a chance. That seems to be the broad consensus among those who have seriously considered the issue, either on the commission or elsewhere. However, it is important that we keep in our pocket the chance to do something serious and rigorous in case that plan does not work. I suppose we might call it a plan B, although I know the Government have an aversion to ever considering anything outside the narrow tram lines down which they career. It is important that we take this opportunity to put that plan in place.

That brings me to the Government’s rather pathetic, lettuce leaf-like attempt to claim that they are adopting a back-stop electrification power. I am not sure what voltage the Minister has opted for, but for the Government to claim the provision as a firm-by-firm back-stop power is an insult to back-stop powers. As my right hon. Friend the Member for Wolverhampton South East (Mr McFadden) said, the process in Government amendment 6 will take six years should ring-fencing fail, which is a snail’s pace. I urge hon. Members to look at the various stages involved in that amendment. First, the Treasury will look to the regulator to issue not just one preliminary notice but three—the idea of three preliminary notices seems like an impossibility—all of which will have different timetables. I do not know whether three preliminaries means, “We’re coming to get you, but not quite yet.” It is like the Education Secretary, with his firm, disciplinarian hand, saying to children, “We’re going to come and get you, but we’ll give you three preliminary notices before we do so.” The kids would be crawling all over the ring fence for months and years.

After those preliminary notices, a warning notice will be issued, followed very swiftly—not—by a decision notice. There will be at least five steps over a six-year period. “Five strikes and you might be out in six years’ time” does not strike me as an effective back-stop power for galvanising and electrifying the ring fence. If the Government recognised for six years that there was a flaw with ring-fencing but did nothing, their culpability would be almost equal to that of the banking sector. Amendment 6 could be an amendment to a misrepresentation of the people Act, and the Financial Secretary needs to take it off the table and instead consider the amendments that the Chairman of the Parliamentary Commission on Banking Standards has tabled.

This is a back-stop power in name only, and just because the Government say it is a back-stop power does not make it so. We need the ability, on a firm-by-firm basis at the very least, to take firm action to a timetable that shows flexibility and can be enacted swiftly if need be. I am afraid I tend to agree with the amendments tabled by the hon. Member for Chichester. The provision needs to be truncated and the Government must withdraw amendment 6 as it is wholly inadequate. It would have been more effective to go with amendment 19 as drafted by the commission, which was a far more effective truncated version of a back-stop power on a firm-by-firm basis. That was far clearer, the drafting was improved, and it is a mystery to me why the Government have resisted it at every stage of the process. Whether that was due to lobbying from the banks, or because they do not believe in standing up to the sector and taking on this tough issue, the weakness of the Government on this matter surprises many people.

[Mark Field]

Two things come to mind. First, there should be a sense of due process, which I think is present in the Government amendment. Secondly, there is genuine concern about uncertainty and the notion of an electrified ring fence. As the hon. Gentleman will know, I have questioned the whole issue of ring-fencing and the potential uncertainty it provides in this business, particularly in the fast-changing world we have seen over recent years. This is therefore a sensible response from the Treasury to the whole concern, which goes well beyond special pleading from the banking fraternity.

[Chris Leslie]

Most of the debate we have had in the short time available has pressed for firm action to be taken towards a sector that—let us not forget—brought down the economy, created massive deficits in our public finances, and required rescue by the taxpayer because of a blurring of the lines between issues that affected ordinary households up and down the country and high-risk investment banking activities that needed strong safeguards. Simply saying that we will have ring- fencing with no means to enforce or police that—no “electrification”, as it has been termed—would make that concept totally redundant. That is why members of the Parliamentary Commission on Banking Standards were surprised that the Government always seemed to take the path of least resistance—“Let’s not upset the banks too much; let’s try and go back to business as usual”—and are not learning the lessons of history.

We have re-tabled amendment 18 not just to have a specific firm-by-firm back-stop power for separation in case ring-fencing fails, but to have sector-wide powers as a back-stop in reserve should ring-fencing not work. We have the capability for full separation, but the Government have stubbornly refused to put that on the statute book—“Oh well, if we have such circumstances we can always legislate further down the line”—as if passing a Bill on such matters can be done quickly or effectively in any way.

[Stewart Hosie (Dundee East) (SNP)]

I thank the hon. Gentleman for the tone he is using on giving ring-fencing a chance and full separation being a back-stop power, or plan B, to be used only in certain circumstances. Amendment 18—the general requirement of separation and industry-wide potential for that—would clearly mean an end to universal banking, ring-fenced or otherwise. What consideration have he and his hon. Friends given to that issue, and particularly the transfer of cash between the two and the impact that might have on lending to the now retail sector, or lending for investment in business?

[Chris Leslie]

Those issues were covered pretty substantially by the commission in its first and second reports, and this was the conclusion it reached. Nobody wanted to go for full separation if it could be avoided; we wanted to ensure that ring-fencing arrangements could be upheld and made to work. There are some arguments in favour of that universal model, and therefore it was felt preferable to have such a power in reserve, but in the Bill. It is no wonder that the banking sector breathed a heavy sigh of relief today, when it saw the Government’s response on this and other issues. The markets judged that the banking sector got off lightly, and that there was nothing tough or difficult for the sector. That is why we have seen the market reaction today. The notion of business as usual seems to be back on the table.

I want the House to recognise that this is not an amendment that Labour has come up with in a partisan way. We are simply tabling an amendment that was drafted by the commission after days, weeks and months of deliberation and careful cross-party thought by Members of both Houses, but thrown back in the face of the commission by the Government today. It is important to have this on the statute book. A back-stop power will incentivise the banks to comply with ring-fencing. If the Government are correct in believing that ring-fencing will be adequate, the amendment will do no harm to the policy. It will sit dormant on the statute book. But if the Government are wrong, and this backstop power is not in place when it is needed, serious consequences could arise. It is nonsense for the Minister to ignore this risk, especially as the other place will want to come back to this issue. He may be forced to concede if we get into parliamentary ping-pong at some point.

I do not want to take up too much more time because many other hon. Members have spent a lot more time on this issue than I have, but I wish that the Government would listen to them and to the commission.

[Mr Andrew Tyrie (Chichester) (Con)]

I shall say a little more than I usually say in the House because these arrangements are quite central to the work of the banking commission and give me an opportunity— my first—to explain some of the reasoning behind that work. The two key amendments that I have tabled would empower the regulator to split up a banking group if there were serious failures in the culture and standards of the ring-fenced body or another member of its group. In deciding whether these serious failures have occurred, the regulator would be required to take account of the recommendations contained in the reports of the Parliamentary Commission on Banking Standards, which I chaired.

We produced five reports about a vitally important industry, one that has become embroiled in very serious scandals that have cost the consumer, taxpayers and the whole country a fortune. The parliamentary commission was the first of its kind for a century. The last, exactly a hundred years ago, collapsed in a heap of partisan acrimony.

We have produced five reports in under a year, all of which were agreed unanimously. We also put in an unprecedented amount of detailed work, taking evidence for 171 hours in no fewer than 76 evidence sessions, in addition to deliberating in private for a further 74 hours. I would like to thank my colleagues on the commission in both Houses for their huge contributions, injections of energy and endurance. I would also like to express my thanks for the equally impressive commitment of the commission staff and specialist advisers, led by Colin Lee and his two deputies, Adam Mellows-Facer and Lydia Menzies. Only the very limited time available prevents me from listing many more of the staff who put in so much work. I would also particularly like to thank the Front Benchers of all parties, who have offered a great deal of support.

The task now is to get the report implemented, primarily by regulators and banks, and, where necessary, supported by statute. The Government have today responded to the commission’s most recent report—our fifth. I have had a chance to flip through the response, but there has been no time to digest it fully—it is about 80 pages—and, of course, no time for anyone to table amendments as a result. In view of the extent to which it looks as if the Bill has been changed, I would be grateful if the usual channels could consider recommitting this Bill to Committee. Failing that, at the very least—as the my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) has said—an extra day should be provided for consideration of what will inevitably be a mass of Lords amendments. Bearing in mind the struggle that we had to get the half-day tomorrow, I hope that the Government will show more flexibility about this extra time.

Having said that, I warmly welcome the supportive tone of the pre-briefing given to the Financial Times about the publication that we have had today. Still, I would rather have heard about it here first. I am also very pleased that so many of the proposals and also the argumentation for them appear to have been accepted in full. But I am not fully reassured. The Government appeared to have accepted the commission’s proposal on a specific power to force the separation of an individual bank, but here we are, at the eleventh hour, trying to prevent the proposal from being severely weakened by the Government. In fact, as I will explain, the Government’s amendments would render the specific power of electrification virtually useless.

Some of the commission’s important proposals have not been accepted at all, for example on leverage, on which we support the recommendations of the Vickers commission, and on reform of the Bank of England’s antiquated governance structure, on which the commission supports the recommendations of the Treasury Committee.

Other ideas that the Government have rejected include the need to wind up United Kingdom Financial Investments Ltd and the regulatory reforms to provide statutory autonomy for the regulatory decisions committee. I find that especially regrettable. The Government have also rejected the proposal to remove the FCA’s strategic objective. No one can see much purpose to this except the Government. It can be used to trump the operational objectives of the FCA, including that of competition, and can thus serve only to weaken those operational objectives. On all those issues, I hope that their lordships will repair some of the damage that we have been left with no time to attend to here.

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Brought up, and read the First time.

[Chris Leslie]

I beg to move, That the clause be read a Second time.

It is a delight to see the Leader of the House on the Front Bench to debate with me the question of the leverage ratio—I favour the pronunciation “leaverage”—and I am happy to give way to him if he has any concerns about it. As the Leader of the House—[Interruption]—and, indeed, the Minister will know, a bank’s leverage is the ratio of its assets to equity capital. Its equity capital is equal to the value of its assets, minus the value of its liabilities. Higher leverage rates magnify returns, because any growth in assets will be proportionately greater if equity is thin, but—and this is why it matters—the corollary is that any losses are magnified if leverage is greater. Its equity can be wiped out by a smaller shock than would wipe out the equity of a less leveraged institution.

The Government said that they intended to provide the Financial Policy Committee of the Bank of England with a time-varying leverage ratio tool, but not before 2018, and that that would be subject to a review in 2017 to assess progress internationally. The design of the tool would depend, hon. Members will be glad to hear, on European Union legislation, and will be set out in Britain in due course in secondary legislation. I know that they are keen on that particular process.

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[Stewart Hosie]

I am very supportive of the notion of legislating now for the leverage provision, but in his new clause, the hon. Gentleman discusses

“a target for the overall leverage of the…system, to encompass…the activities of foreign financial institutions and non-bank originators of credit”—

or shadow banking. Although that might be taken into consideration in the calculation, the FPC would have no power to implement a leverage ratio in the shadow banking sector, so is there not an unintended consequence that leverage ratios may be too high in the formal banking sector to compensate for what the report found?

[Chris Leslie]

I am delighted that the hon. Gentleman has taken the trouble to look at the new clause, because it is our second attempt to cajole or persuade the Government to look at this issue. In Committee, we took a different approach to the question of leverage, and tried to clarify that there was a clear power for the Government to act. I hope in the spirit of consensus and trying to move the arguments forward, the Minister and the House will accept that we have taken a new approach, thinking about leverage as it affects the UK economy as a whole. Leverage—and I shall come on to make this argument—is part and parcel of the way in which an economy works, and in the new clause we have looked at a particular design that would encompass other institutions. I do not want to be misinterpreted: we mention foreign banks, for example, but I do not intend any extra-territorial reference in the new clause. It simply makes it clear that the provision has to encompass effective leverage on the UK financial services sector as a whole.

I have referred to the Vickers commission, and it is important that we do not forget the work that it did, and that we pay tribute to it. It said that

“a leverage cap of thirty-three is too lax for systemically important banks, since it means that a loss of only 3% of such banks’ assets would wipe out their capital.”

The commission recommended a 25:1 ratio—a 4% ratio—but the Chancellor dismissed that concern. It is essential that the ring fence is supported by tougher capital requirements, as well as by a leverage ratio.

The parliamentary commission said that it was not convinced by the Government’s decision to reject the Vickers recommendation to limit leverage in this way. The parliamentary commission said 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 per cent minimum required under Basel III. Not to do so would reduce the effectiveness of the leverage ratio as a counter-weight to the weaknesses of risk weighting.”

Sir Mervyn King, the former Governor of the Bank of England, said that the leverage ratio turned out to be

“a far better predictor of the institutions that failed in the crisis”

than measures of risk-weighted assets. I could go on; a great deal of debate has taken place on this issue.

Our new clause seeks a way of ensuring clarity on the powers and what sort of process would take place. We suggest that the powers of the Financial Policy Committee in the Financial Services Act 2012 should be amended to make it clear that a target should be set by the Treasury for the overall leverage of the United Kingdom’s financial system to encompass all the activities of those institutions that are originators of credit.

[Mr David Ruffley (Bury St Edmunds) (Con)]

May I unpick what the hon. Gentleman is saying? Does he mean a minimum leverage ratio or a target? There is a difference. Perhaps he could clarify that.

[Chris Leslie]

That is a very good question and I am open to debate on that. I believe that looking at that minimum leverage ratio as a target to be set for the leverage of the system as a whole in the UK would be the point of public policy, which is why it needs to be dealt with in a policy-making context by the Treasury, with reference to Parliament if need be. The key point is that it should then be for the regulators to look at the detailed implementation of that on a firm-by-firm basis.

Essentially, there is a parallel to be drawn between the way that the Chancellor of the Exchequer sets an inflation target for the Bank of England and the Monetary Policy Committee is given operational independence to find ways of meeting that target. The purpose of the debate today is to look at the potential parallel to be drawn there, with a target being set and operational independence for the implementation of that target being given to the Financial Policy Committee and the Bank of England. Over every three-month period the FPC should respond by notifying any changes and any actions that it has taken in order to regulate leverage, so that there is a dialogue and a process that is fairly self-explanatory.

[Mr Ruffley]

The hon. Gentleman is being very generous in giving way, but I want to be clear about his proposition. A target would imply that a bank that was just 10 times leverage would have to raise its leverage ratio to 25 times if it was a 4% target, whereas if it was a 4% minimum leverage ratio, that would be totally different. The bank that leveraged 10 times would not be in breach of that.

[Chris Leslie]

I understand the hon. Gentleman’s point. Let me be clear. The target that should be set would be for the financial system as a whole. It would be for the regulators to make judgments about firm-by-firm leverage arrangements, so it would be on a more sophisticated basis. There is a case to be made for a regulator to look at each individual institution. Some institutions are significantly different from one another. Some of the building societies, for example, have recently been making the point that they have different asset structures and so on, and that exactly the same leverage arrangement across the board for all firms simultaneously would not necessarily be appropriate. In an effort to work towards some way of dealing with the issue, this design is one that I have suggested.

[Mr John Redwood (Wokingham) (Con)]

In the proposal, the hon. Gentleman suggests that the committee has to take into account

“adequate credit availability and growth in the economy”

and report to the Treasury. Would the Chancellor and the Treasury have any right of veto or influence over that, or would they have to put up with the Bank’s judgment of what is adequate credit growth? That could be rather important if the problem were one of insufficient growth in the economy.

[Chris Leslie]

That raises the question of the operation of the inflation target. If I draw a parallel between a leverage target and an inflation target, clearly the Chancellor has been setting out his inflation target. It has been missed on a number of occasions—quite a few months and quarters have gone by—so the interplay between the Chancellor and the Bank of England is critical here. I am more than happy to come back to the issue. My point in the new clause today is that we need to start seriously discussing how, from a UK perspective, we are going to deal with the issue of leverage from a home-grown point of view, rather than waiting for the European Union to come along with a set of arrangements which may or may not fit our circumstances.

[Jacob Rees-Mogg]

There are two points that occur on the hon. Gentleman’s target weighting. One is that it is very arbitrary. If the regulator could set it for each individual bank, that would give a very strong arbitrary power to the bank to meet that overall target. The second is that although people say that their assets are particularly good ones and better than others, that is exactly what they said in the crisis and it turned out not to be reliable.

[Chris Leslie]

I agree with the hon. Gentleman, but it would be invidious for us as politicians to try to delve into the specific analysis of bank-by-bank asset or liability, quality and the risk weighting of assets. That is why we have regulators and what their job should be, but it is important that as a body politic, so to speak, we make a judgment about the level of leverage that we should have in the economy as a whole. That is why I raise the issue today.

For us, tackling the leverage question is incredibly important. We should not wait for the European Union to decide these things for us. We sought in Committee to clarify this in part. Rather than put it in the “too difficult to handle” box, as the Government seem to be doing, we should try to move forward constructively. The approach that we have taken is on the amendment paper. First, it is necessary to prevent the banks from over-extending themselves beyond the point of safety. Ring-fencing does not do that. We think ring-fencing changes should go alongside capital requirements and leverage regulation.

Secondly, we have been hearing arguments recently about the leverage ratio as anathema to bank lending into the real economy. Sometimes it is characterised as one or the other. I do not necessarily agree that there is a seesaw trade-off between the two. Andrew Bailey at the Prudential Regulation Authority has recently made the particularly pertinent argument that capital can be lent onwards in any case, so it should not be a case of one or the other.

For the sake of clarity, in new clause 9 we looked to address this explicitly by framing a leverage target strategy for the system as a whole, which must be constructed in such a manner so as to maintain adequate credit availability to support a growing economy. It is important to recognise that we will always operate with a degree of leverage. That is part and parcel of the way our banking system works, and our constituents rightly want us to focus on getting the economy moving, while preventing excessive risk-taking. In the spirit of constructive engagement, we hope the amendment strikes the right balance.

It is sometimes argued that leverage should be a back-stop rather than a front stop. The argument about what is a back-stop and what is a front-stop can get rather theological. Andy Haldane makes the point in his famous “The Dog and the Frisbee” speech that leverage needs to be brought much further forward as a primary tool for the regulators, and that other capital and risk-weighting issues should be subordinated. The main point is that leverage should be recognised as a key dynamic in our economy and needs to be regulated in a way not dissimilar to the regulation of inflation.

For us, there are three essential elements: set a leverage target for the system as a whole, which is a task for the Government; measure that risk—the threats to whether loans are going to be repaid—more accurately by sector, to determine which sector needs more capital to make it safe if leverage is rising and which could be dealt with in a normal way; stress-test to back-test the pressures in those particular institutions to be clear that the choice of the leverage target is correct. The regulator should do that.

New clause 9 would also augment Bank of England independence in relation to operational decisions on monetary policy and take into account the need to supply credit to the wider economy. I am glad that the Building Societies Association and others support it.

--- Later in debate ---

[Greg Clark]

It is a pleasure to respond to this important debate. First, I should like to correct a grievous omission in my previous remarks. During my paean to the members of the parliamentary commission, I neglected to include my hon. Friend the Member for Wyre Forest (Mark Garnier), who was behind me and therefore was invisible to me. He has been in the Chamber throughout this debate and his contribution is no less sterling and distinguished than those of the other parliamentary commission members whom I did mention. I apologise.

The new clause requires the Treasury to set a leverage target for the

“overall leverage of the…financial system”.

I welcome what I think is the spirit of the new clause. Problems with risk weights clearly contributed to the financial crisis; the right hon. Member for Wolverhampton South East (Mr McFadden) made that point. Those problems must be addressed if risk weights are to have a place in the regulatory regime of the future.

I also share the concerns raised by the parliamentary commission about the importance of having a robust minimum leverage ratio required by the regulator. As my right hon. Friend the Member for Wokingham (Mr Redwood) said, there is clearly support among Members on both sides of the House for that notion. We have consistently argued for a binding minimum leverage ratio to be implemented internationally, to supplement the risk-weighting requirements.

As has been said, the Basel III standard of 3% will come into force in 2018, following an observation period beforehand and a final calibration of the leverage ratio in 2017. Of course, national supervisors must be equipped to respond to new risks as they emerge in banks and financial markets. The PRA, in this country, is empowered to ensure that banks’ risk models are appropriately conservative and, where necessary, to set higher capital requirements.

As every hon. Member will be aware, the PRA has recently announced that major UK banks need to set out and implement plans to improve their leverage ratios and so to migrate further towards the new Basel III standard even now. The FPC has already been given a number of directive powers, including a counter-cyclical capital buffer and the power to set time-varying sectoral capital requirements. The Government have also made clear their intention to give the FPC the power to vary through time the baseline leverage ratio requirement, always subject to its never being below the requirement determined by Basel III.

Let me address the new clause, in whose support the hon. Member for Nottingham East (Chris Leslie) spoke. The first thing to say is that it requires the Treasury to give the Bank of England a target for the overall leverage of the UK’s financial system; I think I understand the hon. Gentleman correctly when I see an allusion to the inflation target perhaps given to the Bank of England. I have to say, though, that that pulls in the opposite direction to the parliamentary commission’s recommendation, which calls for the FPC—in other words, the Bank of England—to be given the power to determine leverage ratios. In its first and final reports, it noted that

“the leverage ratio is a complex and technical decision best made by the regulator and it certainly should not be made by politicians.”

The new clause cuts across the views of the parliamentary commission, if delivering that recommendation were its intention.

Moreover, the new clause would require a target for the overall leverage of the UK’s financial system. Again, this is not quite the right approach. Banks should certainly be subject to individual leverage requirements to ensure that they have sufficient capital to absorb losses, but an average leverage ratio for the entire financial sector could serve to conceal the risks in particular institutions. It would seem perverse to require the Treasury to set a target for overall leverage and so create an onus on the FPC to allow some banks to remain highly leveraged as long as this is offset by smaller or more conservative institutions running with less leverage. A system-wide average, or net, leverage ratio might be of little value in tackling excesses of leverage, and it could be positively counter-productive.

Another feature of the new clause would be dangerous. The proposal for a target requires the FPC to pursue action to meet the target. It is suggested that the FPC take action to increase leverage in the system when it is less than the target level that the Government are required to set. I am not clear how or why the FPC would want to do that. The target approach seems to me to be wrong. Financial stability is not like price stability; it cannot be boiled down to a single, symmetrical target. As a recent Bank of England paper concluded:

“No single set of indicators can ever provide a perfect guide to systemic risks, or to the appropriate policy responses…Judgement will, therefore, play a material role in all FPC decisions and policy will not be mechanically tied to any specific set of indicators.”

We need to apply caution in any consideration of enshrining in law a system that focuses on one target for systematic financial stability. Goodhart’s law is relevant in these circumstances:

“When a measure becomes a target, it ceases to be a good measure.”

I therefore hope that on reflection the hon. Gentleman will withdraw his new clause.

[Chris Leslie]

I am grateful for the quality of the debate that has taken place in the short time we have had.

I am glad that we tabled this new clause on leverage, because otherwise we would not have had the opportunity to start to focus on the issue. I understand what the right hon. Member for Wokingham (Mr Redwood) said about getting the balance right and the care and caution that are needed as we move towards what we want, which is a better, safer level of leverage within the overall system. It is worth reiterating that we want to do this only to make sure that banks do not over-extend themselves and become so lopsided that when they topple over they are not able to absorb the losses should things take a turn for the worse.

I am particularly grateful for the contribution from my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who rightly pointed out that saying that we need action either on leverage or on getting lending going into the real economy does not represent opposite poles of the argument. It is not as clear as that. Some are arguing not only that the extra capital could be lent out but, as he said, that compensation ratios, as they are sometimes known—the remuneration levels within banks—could also be tackled. Given that we are the major financial centre worldwide, we should not just be leaving this to international regulators. We certainly should not be leaving it to the European Union completely to decide these things for us. We have a duty in the UK to make sure that we think these things through properly and spend much more time on them.

[Mark Garnier]

The hon. Gentleman proposes that the individual leverage ratios of the banks be published, but if that information were in the public domain it could have implications for a bank’s funding costs. If the regulator deems that a particular institution has a greater risk, and therefore looks at a lower leverage, that will clearly have implications for the business.

[Chris Leslie]

I would tend to err on the side of publication and transparency. It is long overdue that we have better insight into banks’ balance sheets and the quality of their assets generally.

If we are to have this architecture, it could be a useful dynamic to have a leverage target set by policy makers—by Government. I slightly take issue with the parliamentary commission on this. There is a systemic aspect that ought to rest in the hands of politicians. Ultimately, the buck stops with us and Parliament is sovereign; the arguments about that are well known. However, as the commission said, the operational decisions taken institution by institution have to be left to the regulator. It would be invidious for that to be in the hands of the Treasury.

[Mr Redwood]

RBS, against the wishes of some of us, had been allowed to grow to a colossal size and to gear excessively. At the point when it got into trouble, it had a balance sheet of £2.2 trillion —almost four times the tax revenue of the state—and if it lost 2% of its asset value it lost the equivalent of the defence budget for a whole year. Is not that of interest to those conducting government?

[Chris Leslie]

There is a rare consensus across the Chamber in some respects. We have to agree that the UK economy, whether it is mid-sized or not, is potentially adversely affected by our vast financial sector.

I offered new clause 9 in the spirit of consensus to try to get some engagement from the Government. I am disappointed by the Minister’s attitude of saying, “We’ll just leave this and do it internationally. We’ll come to it in 2018 through the normal conveyor belt.” The Government must address this issue far more constructively and engage with it far more seriously, because it really does matter. We need action on leverage and it is important that we put on record the essential characteristics that it could and should have within our economy as a whole. I am afraid that I therefore wish to test the view of the House.

Question put, That the clause be read a Second time.

--- Later in debate ---

The Department for Business, Innovation and Skills will shortly launch a call for evidence on whistleblowing generally. This will help the Government to establish the evidence base in looking at whistleblowing protections and considering whether further changes are required. The commission’s recommendations on whistleblowing will be considered in that context.

[Chris Leslie]

When?

[Greg Clark]

This summer.

New clause 11 concerns the new criminal offence of reckless misconduct recommended by the parliamentary commissioner. As we have already announced, we agree with the commission’s recommendations and will over the summer draft amendments to create such a legally watertight criminal offence, including compliance with the European convention on human rights. As my hon. Friend the Member for Bedford suggested, the commission did not recommend retrospectivity, and these provisions are intended to enact its recommendations. I hope that he will understand that.

My hon. Friend the Member for Bury St Edmunds (Mr Ruffley) was absolutely right to point out that it was of course this Government who first raised the possibility of criminal sanctions for managerial misconduct in July last year. We are grateful to the commission for its extensive work. We will follow its advice on misconduct committed by persons covered by the regime that is being set up. The commission noted the legal challenges involved in mounting a successful prosecution, but we absolutely agree that the creation of this offence should be justified by the signal that it sends and the potential deterrent effects it can have. We have to make it clear that reckless behaviour by those in charge of our banks cannot be tolerated.

New clause 13 proposes to create a new financial services crime unit. A similar amendment was discussed at some length in Committee. I can assure hon. Members that the Government fully recognise the importance of tackling financial crime. There is to be a dedicated command within the new National Crime Agency responsible for directing the national response to economic and financial crimes. The economic crime command will have a clear remit to reduce the threat from economic and financial crimes, working collaboratively across the different sectors. Substantial progress has already been made in establishing the National Crime Agency and driving early operational success against criminals who seek to engage in economic and financial crimes.

The Government accept the broad recommendations of the parliamentary commission on each of these matters. We will be acting quickly to take the opportunity afforded by this Bill to make amendments that are legally watertight and likely to pass into law in the early part of next year, just six months after the parliamentary commission’s extensive report. In acting in this way, we are keeping faith not only with the recommendations of the parliamentary commission but with the urgency of the need to enact these reforms, which I commend to the House.