Financial Services Bill

David Mowat Excerpts

Tuesday 22nd May 2012 Commons Chamber

[Chris Leslie]

I am grateful to the hon. Gentleman, but no, I do not think that is a risk. Amendment 73 does not propose to outlaw interest rate swap products; indeed, it is not specifically related to those particular products. It is really about the powers of small firms to complain and to take proceedings if they feel that they have been mis-sold a particular product.

On the particular issue in the news about interest-rate swap products, there are some serious questions that the Financial Services Authority and the Minister need to answer. Were those interest-rate hedge products a requirement of loan agreements, or were they optional? Were the minimum and maximum parameters fair and balanced, or was the downside risk always likely to hit the consumer more than the banks? How frequently was there a mismatch between the term of the loan agreement and the term of the hedge product obligation? Sometimes the term of the hedge product obligation continued even though the loan term had concluded. Were there asymmetrical rights to cancel? In other words, could the banks cancel the arrangement for a particular product, with which the consumer or small firm had to continue? Those are some of the key questions.

[David Mowat (Warrington South) (Con)]

The hon. Gentleman is right to raise this serious issue. What I do not understand in his amendment, however, is what additional powers it would effectively give to a small business, given that the Financial Services Authority can already investigate all these things. Am I missing something?

[Chris Leslie]

When it comes to complaints procedures, particularly about market failure, which the Financial Conduct Authority can look at, there is a trigger that small firms could have, but it is not available in the Bill. Just as the Minister has given super-complaint powers to a certain number of consumer bodies, so a case can be made for doing a similar thing for representative bodies of small firms. I am not claiming that the amendment is drafted to the perfection that the Minister’s officials might want, but I hope he gets the gist—that there is a gap here. Small firms might have written to him, expressing the fact that they feel that they have no power. I have certainly had some of them writing to me to say that they feel intimidated about complaining—to the regulator or to their bank—because of the sheer power that the bank has to withdraw lines of credit if it feels that the boat is being rocked.

There is an important underlying issue here, which the business community wants addressed. To what extent were small firms told to seek independent advice before signing up to the swap contracts? How widespread was the take-up of these particular agreements? I know that the Financial Services Authority is beginning to look at these questions, but I want to see more action and a swifter response from both the Government and the regulator.

[David Mowat]

Many of us want to see more action, but what I do not understand is the extent to which the hon. Gentleman believes that the FSA does not have the powers to investigate mis-selling of this type. If mis-selling has occurred—the hon. Gentleman provided some good examples of unfair and asymmetric contracts—surely the FSA is already able to investigate it.

[Chris Leslie]

Indeed it can, but it is the way of triggering an FSA investigation that is the case in point. The FSA can choose not to listen to the voices of dozens or hundreds of small businesses, not necessarily in regard to this product but in regard to other products in the future. It is a question of giving some power to small firms, as consumers, to trigger an investigation by the regulator. This is not just a pro-consumer amendment; it is a pro-business amendment, as I hope can be agreed on all sides.

I have spoken about the amendments tabled in my name; there are others on the list. I shall be interested to hear what the Minister has to say.

--- Later in debate ---

[Chris Leslie]

Let me start by thanking those of my colleagues who served on the Committee that considered the Bill, as well as the trade bodies, consumer groups and others who made representations about it. In particular, I thank members of the Treasury Committee for the time and attention they gave to trying to improve the legislation. I thank also the members of the pre-legislative scrutiny Committee, who did a phenomenal amount of work in the months ahead of the legislative process, albeit to make a series of recommendations that the Government then promptly ignored. However, we will come to that when the Bill goes to the other place. I pay tribute to my hon. Friend the Member for Foyle (Mark Durkan). His contributions were from a different political party but he made a very constructive contribution to the Committee. I also thank the officials and others who work hard behind the scenes on legislation such as this.

It is a shame that we have had such woefully insufficient time to debate this massive piece of legislation, which consists of more than 300 pages and hundreds of clauses. We tabled more than 200 amendments but the best we could get from the Government, even though they have nothing else going on in the Chamber—they are padding out the legislative process—is one and a half days, with three hours for the second day on Report. We ran out of time to debate some of the key, critical issues concerning how the Governor of the Bank of England and the Chancellor of the Exchequer would manage in a crisis, and we did not even get an opportunity to debate those crisis-management arrangements. However, I am glad that we extracted one major achievement from the Government and No. 10: when it comes to public funds, when there is a direction to the Bank of England from the Treasury, the Government will now require the Bank to report back on its progress on that direction. That is a positive change, which we did not get a chance to debate in discussions on the previous section of the Bill. I am grateful for the change.

When it comes to some of the other problems to do with crisis management, the Government are relying on a non-statutory memorandum of understanding between the Bank of England and the Treasury, which leaves gaping holes in knowing how things would work in a crisis. They say that there will be a temporary standing committee or an ad hoc committee but there is no sense of who will be on it or how it will be constructed. No advance thought is going into that and I worry that if we get into a crisis we might waste hours or even days figuring out how on earth to convene this ad hoc committee.

Similarly, there are serious difficulties to do with whether the heads of the new regulators and bodies that the Bill creates will have a direct line of communication with the Treasury or whether everything will have to be filtered through the Governor of the Bank of England, in whom enormous new powers will be vested under this legislation. There is an irony in that yesterday or the day before the Bank conceded—this was dragged out of it—that it ought perhaps to have minor reviews and partial inquiries into what went on in parts of the financial crisis. We still have not had a fundamental review by the Bank of England about its role in the crisis, and that is a great shame. It should be big enough and have the humility to undertake the review that the Treasury and even the FSA have undertaken. It is time that the Bank also opened up and looked inwardly and seriously at its own capabilities.

There are positive aspects to this legislation. We agree with the concept of prudential regulation and we wait to see the detail. The Minister said that he is going to consult on some of the macro-prudential tools. It is very important that we get right the concept of the greater systemic overview of the system—the eagle-eye view that needs to be taken rather than getting too bogged down in the detail of firm by firm, company by company regulation—but the theory needs to be translated properly into practice. That is where the devil is in the detail. In a number of respects, the Bill falls short and could have done with massive improvement. The Opposition tried their best to make recommendations, including many of those made by the pre-legislative scrutiny Committee and the Treasury Committee. I sometimes see the Minister as—I will not call him an irresistible force—an immovable object resisting time and again attempts to improve the Bill.

We need more transparency and accountability for the regulators that the Minister is creating. The degree to which the new Financial Conduct Authority will publish its minutes is still unclear—we need a firmer commitment from the Government on that—and as I have said, the crisis management memorandum of understanding is still insufficient. There is a severe risk that costs that firms pay in their levies to the new regulators will be duplicated and that there will be inefficiency in the expense of splitting the regulator and having two new regulators. We know that the PRA is already in aggrandising mode, securing beautiful new offices in Moorgate right next door to Threadneedle street because, apparently, Canary Wharf is far too far away. It is about 12 or 13 minutes on the tube, but apparently that is a major problem. So millions more pounds are to be spent on those offices in Moorgate, and the Government have resisted attempts to bring about greater efficiencies by means of the Bill.

The key aspect that is missing is proper attention to the necessary parliamentary scrutiny of those macro-prudential tools. Many of our constituents would baulk at that phrase and ask what on earth it means. It is about the regulator and the Bank of England deciding, for example, that the minimum repayments on their credit card may need to change at a moment’s notice. The Governor of the Bank of England will have the power to say, “I’m sorry, we’ve got a particular issue coming on, so instead of paying back 2% a month, you’ve got to pay back 10% a month on your credit card.” The Governor of the Bank of England will have the power to intervene on business lending, on the terms and duration of loans, and possibly even on the cost of those loans, and will be able to do that at a moment’s notice.

We have a bit of a debate about whether loan-to-value ratios and loan-to-income ratios on mortgages will also be in the hands of the Governor. Interestingly, one of the deputy governors has said, “This is a bit too hot to handle. Maybe this is for the Treasury, which is accountable to do that.” The point is that there are phenomenal powers invested in the Bank of England, and we need that thread of accountability to come back to Parliament at some point. This is why we have suggested that there should be a super-affirmative process, rather than a rubber-stamping statutory instrument Committee which many Members have attended and where they know orders go through on the nod with a formal vote.

I detect some cynicism on the part of the Government Whips, but of course they want to nod these things through. We should give Parliament a proper opportunity to consider the impact of those phenomenal powers on our constituents and on the economy. I hope that in the other place the Government will think again about the need to improve the parliamentary scrutiny of the new powers.

When it comes to consumers, the Bill has not properly addressed what we wanted to see, particularly the powers of the Financial Conduct Authority. There has been no movement on compulsory financial education. The Money Advice Service, which is the body tasked with trying to improve the financial literacy of the population, will not be adequately focused in statute on the most deprived in society and those who are most financially excluded. We saw the Government rebut attempts today to give the FCA a proper mandate on the regulation of high cost credit. The Government refused to give the FCA a proper role to take account of social investment, charity finance and other needs. We know they have a chip on their shoulder about charities and philanthropy generally, but it is a shame that they did not recognise those needs in the Bill.

There are a number of consumer aspects, whether debt management plans, helping customers plan ahead for their mortgage finances, or giving firms a fiduciary duty to have regard to the best interests of consumers, on which the Bill should have been improved. We have spoken separately about how the corporate culture in the financial services sector could have been improved. Today we tried to press the Government on improving the stewardship, the corporate governance arrangements and the actions of remuneration committees in reining in some of the excessive bonuses and pay packets.

It is with particular reference to the impact on the economy that I close my remarks on Third Reading. A powerful new committee is created in the Bill—the Financial Policy Committee, which will make the decisions about macro-prudential tools. It will be under no proactive obligation to have regard to growth and employment in this country. We may well see a mismatch between the obligations under which the Monetary Policy Committee remains: it must have regard to the growth and employment objectives of the Government, but the FPC does not mirror that obligation on the MPC. It is told, “Don’t do anything to harm growth”, but it is not given an obligation to have regard to the Government’s proactive—we hope—strategy on growth. Maybe that is because they do not quite understand what the growth agenda ought to be, or they do not know how to get there. They cannot see why that is important. In addition to that general obligation, it is also important that there should be an assessment of the impact of each of the macro-prudential tools on the economy—on growth and employment—but the Government have neglected to do that. Also, there was not a sufficient duty placed on the Bank of England to take care of public funds. Those are some of our concerns.

The Bill does not properly fit with the European level of supervision for financial services. There is the sense that it was dreamt up on the back of a cigarette packet by the Chancellor in opposition, when he wondered how the previous administration, the FSA, could be blamed for all the ills of the global financial crisis. But he forgot to recognise that most of the financial regulations in this country come from Brussels, the EU and Commissioner Barnier, on that conveyor belt as it throws out all the directives and regulations. The regulators that we are creating in this legislation are merely there to transpose a lot of the decisions taken in Brussels. That is essentially their function. The Bill does not properly recognise how our regulators should fit with the European decisions and those realities. We should be framing legislation not just to influence those European decisions, but to steer those decisions. The Government still have not addressed that point properly.

[David Mowat]

The hon. Gentleman makes the point that the twin peaks structure that we are implementing here does not fit with the European sectoral structure. Is it the Opposition’s position that we should have had a sectoral rather than a twin peaks Bill?

[Chris Leslie]

I am pointing out that there is a fundamental mismatch. We know that the supervisory authorities have gone for a thematic approach and the Government have gone for a twin peaks approach. Then there is this bizarre committee or secretariat in between to try and be an interlocutor. It is a tremendous spaghetti, diluting our influence on those supervisory decisions. We can already see that the Government have had to cave in on a number of ways in which the European Banking Authority can overrule many of the capital requirement arrangements. Perhaps that is the result of a deeper weakness in the Government’s diplomatic stance.

I am not saying that the Bill cannot be salvaged. There are ways in which it falls short, but there is still time for the Government to listen. The Bill is deficient, but it can be improved, and I hope that the noble lords in the other place will take the opportunity to do so. We agree with the concept of prudential regulation. There is virtue in some of the theory in the legislation. But it is because of the way in which the Government are yet again incompetently putting that theory into practice that we have our doubts. We will not oppose Third Reading, but I hope that the other place, perhaps with the more time that they have under the rules, will do a serious job and pick up on some of the issues that the Government, by timetabling the Bill in such a draconian way, failed to give the House of Commons the proper opportunity to do.

--- Later in debate ---

[David Mowat]

The Whips have asked me to be brief, and I will.

The Chairman of the Treasury Committee, my hon. Friend the Member for Chichester (Mr Tyrie), listed eight issues. I am pleased to say that he did not get to the one that I wish to raise, which is the area in which the Bill could be improved. That is international regulation.

The Bill is very strong on the national position. There are bail-ins, capital buffers and ring fences—the whole macro-prudential suite. In fact, there is a whiff of over-regulation in the ring fence. There is not such a whiff, however, in how we are going to deal with the international issues that confront us. If there is another crisis, it will not occur in a national bank, and I say that to whoever is in charge when the next crisis arrives.

I was on the Joint Committee on the draft Bill and listened to the risk managers from Barclays Capital, Goldman Sachs and J. P. Morgan, and it struck me that their outlook was entirely global. They have global IT systems and global profit and loss accounts, and they manage risk and divvy up bonuses globally. To the extent that the national position matters to them at all, it is because they have to produce accounts, often three, four, five or six months later, so that they can pay taxes and satisfy statutory requirements.

We must consider the issue of risk arbitrage, but what we need to do is not just about that. The regulatory structure must follow the structure of entities such as those that I mentioned. The Bill is national in its outlook, which was why I probed the hon. Member for Nottingham East (Chris Leslie) on his point about Europe. Perhaps it has to have such an outlook, but that leaves us a big issue to consider.

It is instructive to consider the two big things that have gone wrong in the past year, while the Bill has been going through the House. They have been at MF Global and, more recently, J. P. Morgan. I do not believe that much of what is in the Bill would have had any effect on either situation. MF Global had a £40 billion balance sheet, and it would not have been regulated by the FPC. The case of J. P. Morgan is even more interesting. It lost £2 billion—in fact, yesterday it was suggested that it may have been £4 billion. Even if there were another nought on the end of that, I am not sure the situation would have been picked up under the Bill, but it would have started to get serious. That loss occurred in London, but only because that happened to be where J. P. Morgan put its risk management function. It could have been anywhere.

When we design a regulatory structure, it has to mirror the organisation of the bodies that it is regulating, or it is just irrelevant. I am concerned that too much of what is in the Bill is irrelevant to where the risks will emerge in the next decade or two. I want to give three examples of potential problems. The first is one of co-ordination. We have heard the point about twin-peaks regulation versus sector-based structures. The situation is not brilliant, but there is a committee to fix it and we will do our best.

The second potential problem is ambiguity. We talk about judgment-based regulation in the UK, whereas the Europeans talk about rule-based regulation. Those two methods will be regulating the same entities, and possibly the same departments of those entities. How will that be sorted out? Where ambiguity exists risk exists, because things always go wrong on the boundaries.

The third potential problem is one of international risk management. In my judgment, there is nothing more important than how the college of regulators works.