Financial Services Bill

Claire Perry Excerpts

Monday 6th February 2012 Commons Chamber

[The Chancellor of the Exchequer (Mr George Osborne)]

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

It is a pleasure to move Second Reading of the Bill. It is the product of many years of thinking, policy work in opposition, extensive consultation in government and impressive pre-legislative scrutiny in Parliament. I want to thank at the start the Joint Committee on the draft Financial Services Bill, which has made it a better piece of legislation, the Treasury Committee for challenging us to develop clearer lines of accountability in the Bill and the Treasury’s own Bill team, who have worked so hard for the past 20 months to produce the Bill before us.

The genesis of the Bill is obvious—the biggest failure of economic management and banking regulation in our country’s history. Its purpose is clear as well—to dismantle the disastrous tripartite system created 14 years ago and replace it with a structure of financial oversight that supports successful, competitive financial services while protecting the British taxpayer from the risk that those services run.

Of course, the Bill is not the complete answer to what went so spectacularly wrong. It should be seen alongside the Basel reforms to capital and liquidity, the living wills and resolution regimes that have been developed and the reforms to the structure of banking proposed by the Vickers commission. It is not by itself a sufficient response to the mistakes of the past, but it is absolutely necessary.

Let us remember what happened. Over the last decade before the crash, Britain experienced the biggest increase in debt of any major economy in the world. The total of household, corporate, financial and public sector debt in the UK reached a staggering 500% of gross domestic product. Our banks became the most leveraged in the world, and whether it was Northern Rock’s 120% mortgages secured on wholesale funding, Halifax Bank of Scotland’s catastrophic commercial property deals or the Royal Bank of Scotland’s reckless decision to buy ABN AMRO after the markets had frozen, such things did not attract the intervention or, it seemed, the concern of Britain’s tripartite regulatory system.

That system had been established as a by-product of the decision by the new Labour Government to give the Bank of England independent control of monetary policy. Without warning to the Bank, or anyone else, that institution was stripped of its historic responsibility for regulating the banking system, which was given to a new Financial Services Authority. It was a fateful decision, and one that we now know very nearly prompted the resignation of the then Governor of the Bank, the late Eddie George.

The comment 14 years ago by the Conservatives’ then shadow Chancellor, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), during the passage of the Bank of England Bill, which created the tripartite system, was remarkably prescient. If he does not remember it, I will remind him of what he told the House. He warned that

“with the removal of banking control to the Financial Services Authority…it is difficult to see how and whether the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.”—[Official Report, 11 November 1997; Vol. 300, c. 731.]

He was spot on. However, at the time he and the Opposition whom he led through the Division Lobby were lone voices.

Fourteen years later, the general consensus is clear. There were fundamental flaws in the tripartite system right from the start, which are today painfully apparent to the whole world. The first and most serious flaw was that no one in the tripartite system saw it as their job to monitor risks across the whole financial system. The Bank of England focused increasingly on its monetary policy responsibilities; the FSA looked at individual firms, but was more focused on tick-box regulation of individual products than on the prudential health of whole businesses, let alone the financial system; and the Treasury took the fatal decision to run down its financial services division, turning the whole area into an under-resourced backwater in the Department.

The tripartite committee did not meet once in an entire decade, so no one was looking at the whole system or at the staggering build-up of debt in the economy and leverage in the banking system. As Lord Turner said in his review of the regulatory response to the banking crisis:

“The failure to do this analysis and to take action on it was one of the crucial failures of the years running up to the financial crisis.”

[Claire Perry (Devizes) (Con)]

As my right hon. Friend is setting out what is essentially a political failure, will he enlighten the House on whether the report on one of the great victims of that failure—RBS—names any Members of Parliament as being specifically involved in the problem?

[Mr Osborne]

As my hon. Friend is aware—

--- Later in debate ---

[Mr Osborne]

The right hon. Gentleman is perfectly entitled to that view, but it is not shared by the Select Committees that have considered the matter, including during the previous Parliament; it is not a view shared in the work by the FSA on what went wrong and the failure to conduct macro-prudential analysis; and it is not a view shared by almost everyone who has looked at the failures of the British regulatory system during the period in question. He is perfectly entitled to his view—I am not surprised that he holds it, given that he was responsible for creating the system—but if it is his view, he should have the courage to vote against our proposals to dismantle it.

[Claire Perry]

Nor was the view of the right hon. Member for Morley and Outwood (Ed Balls) that of the Governor of the Bank of England, who said:

“All we can do at present…is to write our Financial Stability Report and give speeches.”

The Bank was completely emasculated by the right hon. Gentleman's reforms.

[Mr Osborne]

My hon. Friend reminds me that in the Mansion House speech in 2009, I think, the Governor, appointed by the previous Government, said that the Bank was being asked to do things that it had not been given the powers and tools to do. It was a striking speech—I cannot remember whether the right hon. Gentleman was there—but the difference between the views expressed by the Chancellor and the Bank Governor in the space of one evening was striking.

I will now go through the details of the Bill and see whether it commands all-party support. I shall go through what we are doing to address the flaws that I have identified in the existing system. First, we are going to establish a new macro-prudential authority in the Bank of England to monitor overall risk and levels of debt in the financial system. Secondly, we are making the Bank of England the single point of accountability for financial stability, ensuring that there is a decisive answer to the question, “Who is in charge?” Thirdly, the Bill ensures that in a crisis, when taxpayers’ money is at stake, the power to act sits with the Chancellor of the day, accountable to Parliament. Fourthly, the legislation creates a strong conduct regulator that is able to give its undivided attention to promoting competition and protecting consumers. Let me take each in turn, and in some detail.

First, the responsibility to monitor risks across the system falls to the new Financial Policy Committee in the Bank of England, established by clause 3 and entrusted with responsibility for the stability of the whole system. Its job will be to identify bubbles as they develop, spot dangerous interconnections, warn about poorly understood financial instruments and take action to stop excessive levels of debt building up before it is too late.