National Insurance Contributions Bill

David Mowat Excerpts

Thursday 13th January 2011 Commons Chamber

[Mr Gauke]

My hon. Friend is right, and that is why we are acting on a regional basis.

[David Mowat (Warrington South) (Con)]

I want to respond to the point about Tatton. Many of my constituents work in Tatton, yet parts of Warrington are extremely deprived. Perhaps Labour Members will explain how publishing numbers specifically for Tatton would identify the impact on the deprived areas of my constituency next door.

[Mr Gauke]

My hon. Friend is absolutely right. He brings a great deal of business experience to the subject. Trying to pick out individual constituencies in the way in which the right hon. Member for Delyn intends will add little to our understanding of the operation of the scheme, but, as a Government, we are keen to put out more information and to make the scheme transparent.

Banking Reform

David Mowat Excerpts

Monday 29th November 2010 Commons Chamber

[David Mowat (Warrington South) (Con)]

One of the odd things about this debate is that those of us who believe that structural reform of the banking sector is necessary are characterised as being anti-free market, anti-capitalist and anti-banking. I am none of those things. In fact, I believe in the necessity of such structural reform precisely because I am pro-capitalism, pro-banking and pro-free market. The case for some kind of firewall, along the lines of the one introduced by Glass Steagall, is irrefutable. That will be considered by the Vickers commission over the next year but that is no reason not to discuss it here.

[Mel Stride]

Does my hon. Friend accept that the problems in Iceland and Ireland were caused solely by retail banks? The Lehman Brothers collapse presaged the financial crisis, but that was wholly an investment bank that never took a retail deposit.

[David Mowat]

I intended to address that later in my remarks, but I shall take it head on. Lehman Brothers was a bad bank and it rightly went bust. However, that affected a whole lot of other banks, which required massive Government bail-outs, because there was no firewall. Nothing in my remarks will imply that retail banks such as Northern Rock will never go wrong or need to be saved. Frankly, my hon. Friend’s example makes my point rather than contradicts it.

Two or three hundred years ago, capitalism was developed by joint stock companies, which was a clever and wonderful thing. If such companies made the right decisions and were wise, they prospered and grew. The other side of that was that companies failed if they made unwise decisions or mistakes, lost money, or failed to recognise risk—Gaussian distribution or not. In the past 15 to 20 years, unintentionally, a new type of company has emerged. Such companies are not subject to the same penalties for risk as other businesses. That creates moral hazards and poor decisions. In the end, that was a large contributing factor to what happened in this country two years ago.

The arguments in favour of a firewall are overwhelming, but what are the arguments against it? The principal argument against a firewall has been the subject of the most intense banking industry lobbying imaginable, and I hope that when the time comes to legislate, hon. Members and the Government do not bow to it.

The first argument is that such a separation implies that investment banking, derivatives and all that goes with that are casino-type activities and of less value to society. I do not think that at all. I sold my business to investment bankers, I like investment bankers and I understand why we sometimes need derivatives. I have no problem with those instruments, but I do have a problem with the fact that if the people using them mess up, they cannot go bust, because there is not a firewall between their activities and the rest of the banking world. That is the problem.

The second argument was raised just now by my hon. Friend the Member for Central Devon (Mel Stride)—the Northern Rock and Lehman Brothers example. I will not repeat what I said, except to say that Lehman Brothers should have been allowed to go bust, but should not have been able to bring in billions of dollars of taxpayers’ money after it, as it did.

The third argument is that a firewall would be too complicated: banking has now got global and is so mixed up that we cannot separate out investment banking and retail banking. Well, we can. The Basel III agreement contains a requirement that the capital considerations for each part of the banking portfolio be different. That can be done.

The fourth argument is that we can do all this with capital ratios and that if we impose them on banks we will not need this firewall, this separation. That is partly true, but actually they are not mutually exclusive—we need both—and, as was said earlier, capital ratios, unless we are careful, will shrink bank balance sheets and reduce lending at a time when we want more credit. What I am proposing would not do that.

The fifth argument is that, if we did this in this country, in front of the rest of the world, it would put our banks at a competitive disadvantage. That might be true—it is a reasonable argument—but I would say two things in response: first, the banking sector in this country is about four to five times as significant, as a proportion of GDP, as it is in any other country, so we ought to be leading the world in this regard. It matters more to us. Secondly, even if the argument is right, it is not a reason for us not to try to get the world behind us, create these firewalls and get this under control.

[Steve Baker]

My hon. Friend makes a compelling case. Will he consider the case of fixed-rate products—fixed-rate savings or fixed-rate mortgages—because it seems to me that such products are bound to bring the savings and loans business into contact with the investment business, through interest rate swaps?

[David Mowat]

I thank my hon. Friend for that intervention. My third argument was that these things are all so complicated and mixed that we cannot separate them out in the way I propose. I made the further point, however, that we have to do that, under Basel III. However, as recently as 15 years ago, firewalls were in place, so it is not that difficult and it can be done, if there is the will. The requirement on moral hazard is such an overriding necessity of capitalism that when it goes, it is terribly dangerous. And it has gone now, which is the guts of what we have been talking about for most of this afternoon.

I am not the only one saying that. Paul Volcker, who was previously head of the Federal Reserve, and John Reed—not the John Reid who used to sit on the Labour Benches, but the John Reed who used to run Citigroup—have asked for this firewall to be put back in place. The Governor of the Bank of England, too, said that of all the different ways we could choose to organise a banking system, the way we have chosen to do it in the UK is among the worst imaginable. We have to act on this. It is very important, and I hope that, notwithstanding the Vickers report, the Government will show leadership on this matter.

Rebalancing the UK Economy

David Mowat Excerpts

Wednesday 3rd November 2010 Westminster Hall

[Mr Field]

As someone who is also from the “former lawyer” fraternity—I worked for a City law firm and I know that my hon. Friend worked for another City law firm over the years—I agree. There are elements of the ethics of business that concern me; I have never been a wide-eyed supporter of everything that has been done in the context of the City. Equally, it is important to recognise the City’s importance if this country is to get off its knees.

We witness, to an extent, the public baying for more blood after the banks have posted healthy profits, due, of course, to a combination of low interest rates, a lack of competition and a cut in corporation tax, yet the public are bemused when Government restrictions lead to increased bank charges for consumers.

[David Mowat (Warrington South) (Con)]

The right answer to the question of how to rebalance the economy is not to shrink the financial services sector. However, the fact remains that we have the largest financial services sector in relation to the rest of the economy of any advanced economy; the financial services sector accounts for something like 27% of our economy. The interesting policy question is whether we want that percentage to increase as a percentage of the whole or whether we want everything in the economy to increase together.

I think that you also raised a point about the public relations problems that banks are suffering at the moment. Of course, banks have made a huge contribution to our economy, but during the last two years they have sucked in something like £150 billion-worth of Government money and they are not really answering the question about how they should restructure themselves. That question has been left to the Bank of England and others—whether through the Glass-Steagall Act, or whatever—to answer. Until the banks do that themselves, they will continue to be criticised over bonuses.

[Mr Clive Betts (in the Chair)]

Order. I want to say something to the three hon. Members who have made interventions. It is fine that you made interventions, but on each occasion you have used the word “you” as part of your comments. This is just a small reminder—I did not want to stop you in mid-flow.

--- Later in debate ---

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I congratulate my hon. Friend the Member for Cities of London and Westminster (Mr Field) on securing this debate. He made some important points that I will address. I think that we all recognise that our financial and professional services industry is world-class and that the UK can rightly be proud of it. It affects every constituency in the country. For example, my constituency has more than 2,000 people who work in financial services and related professions—1,600 of them are in financial services—and Fareham is not the centre of the global financial sector. As my hon. Friend mentioned, the sector contributes to employment in regional centres. Belfast, Birmingham and Bournemouth all host processing centres that support the work of international financial businesses based in London and headquartered overseas.

For centuries, the UK has been at the heart of international finance. Our openness is an asset to our economy that we are keen to maintain. The recent global financial centres index once again ranked London as the most competitive financial capital in the world. We should seek to preserve and enhance that competitiveness, but it is also important that we do not lose sight of the other areas of our economy that make the UK an excellent place to do business.

It is right that we should support investment in areas of our country where it has been absent during the past decade. That is why, as part of the spending review, my right hon. Friend the Chancellor introduced the £1.4 billion regional growth fund to tackle the gap that opened during the last Government between the south-east and the rest of the country. The money is designed to lever in long-term investment in the capacity of our transport system, science and green energy across all parts of the UK.

I share the sentiment expressed in an intervention by my hon. Friend the Member for Stroud (Neil Carmichael). Many people, including me, have called for a rebalancing of the economy, but we will not achieve that by cutting down the tallest flowers; we need to make others grow taller and faster. I believe that we can have a more diverse economy and be home to the world’s leading financial centre. Indeed, the fact that the UK is home to a global financial centre can help us develop that more diverse economy.

Going back to the roots of the City and its success, the City flourished because it supported trade through insurance of trade finance. It found capital to invest in new enterprise and developed new and innovative ideas to provide security and certainty for businesses and households. It is an important part of the process of restoring confidence in financial services for the City to reconnect with commerce. We need banks to lend to businesses if they are to take advantage of new investment and trading opportunities, but it is not only banks that need to do so. That is an important priority for this Government.

We welcome the work done by the British Bankers Association on that issue, involving commitments to improved data, greater transparency and an army of business mentors to get businesses ready for finance. However, we also need to broaden the sources of finance available beyond banks. We need sources of new equity. Banks will be contributing to a £1.5 billion equity fund to support growth, but we know that there are other sources of capital from equity, such as business angels. Insurers have raised funds to invest in debt for businesses. We need to lever the skills, enterprise and success of London’s global financial centre to help businesses grow.

My hon. Friend the Member for Cities of London and Westminster referred to the opportunities emerging in the far east and South America. Again, the City has an important role to play, not only by exporting its own services to emerging and growing economies but by supporting other businesses in their attempt to exploit those markets.

However, support for the financial sector cannot be uncritical. As my hon. Friend recognised, there were flaws in City practices in the run-up to the financial crisis, as well as a failure of the regulatory architecture. We need to resolve those issues if we are to provide a stable foundation for the financial services sector to grow. That is why the reforms that we have set out since the formation of the coalition Government in May are rooted in economic and financial stability, not the size of the financial services sector. That is an important distinction to draw. We want a stronger, more stable structure. That will require a reform of regulation, but it is not about the size of the sector.

We have been clear in the reforms that we have introduced that we want more effective supervision and a new structure to tackle emerging threats to financial stability. That is why we are setting up a Financial Policy Committee as part of the Bank of England to consider emerging threats to our financial stability and determine what response is needed to enhance the stability and resilience of the UK financial sector.

[David Mowat]

Does the Minister agree with the comments made last week by the Governor of the Bank of England vis-à-vis the current structure of the banking sector in the UK?

[Mr Hoban]

It is an important debate, and there is no clear consensus on what structure the banking sector in the UK should have. That is why we decided to set up the Independent Commission on Banking, under the chairmanship of Sir John Vickers, to consider structure as well as competition in financial services. Over the course of the financial crisis, we have seen a significant concentration of financial services and the banking sector—there are fewer banks from overseas operating in the small and medium-sized enterprises sector, and Lloyds has taken control of HBOS—and we want the independent commission to consider that and decide whether structural changes are needed to improve the resilience and strength of the banking sector, and whether we can introduce measures to improve the competitive landscape and provide greater choice for businesses and consumers looking for financial services products, whether they are loans, current accounts, business accounts or other products. We need to consider the structure carefully, which is why we set up the Independent Commission on Banking.

To return to the point about regulation, we recognise that there were flaws in the structure of regulation; that is one reason why we set up the Financial Policy Committee. We also want to examine how the Financial Services Authority operated under its dual mandate to consider prudential supervision and consumer protection. We decided to create two new regulatory bodies to replace the FSA. One is the Prudential Regulation Authority, which will be a subsidiary of the Bank of England and will focus on the strength and resilience of banks and insurance companies particularly; the other is the Consumer Protection and Markets Authority, which will ensure that consumer markets in the UK work effectively to support the long-term aspirations of consumers as well as considering how wholesale markets in the UK work. That is an important aspect of the financial services sector; a great deal of work on that issue is going on at an international or regional level through the EU, and it is important that the UK takes a strong lead in ensuring that those markets are regulated effectively. If we get the regulation of the financial services sector right—if we take steps to improve markets’ transparency, resilience and strength—I believe that it will provide a firm foundation for the continued growth of the sector in the years to come.

On the diversity of the economy, we must recognise that there is more to our economy than financial services. We have strengths in other areas, partly as a consequence of language, time zone and other aspects of the UK. My hon. Friend the Member for Newton Abbot (Anne Marie Morris) referred to the legal system, which is a huge asset for businesses seeking to work here due to the legal certainty that comes from our world-class legal framework. We have a deep and highly skilled talent pool and strengths in pharmaceuticals, construction and business services.

We need all those sectors to grow, but their growth does not mean that we should diminish the size of the financial services sector. A strong financial services sector can help develop the diversity the UK economy needs to demonstrate that we have learned the lessons from the financial crisis. We cannot have an unreformed financial sector, given the scale of the crisis that we have been through. Reform has been introduced to help the sector’s stability and resilience and produce a better outcome for businesses and households.

Banking in Scotland

David Mowat Excerpts

Thursday 14th October 2010 Westminster Hall

[Mr Hoban]

I want to respond to the comment made by my hon. Friend the Member for Argyll and Bute about the Post Office bank. Part of the coalition agreement was that we would consider the case for a Post Office bank. He will know that the Under-Secretary of State for Business, Innovation and Skills, my hon. Friend the Member for Kingston and Surbiton (Mr Davey), has responsibility for the Post Office. We are looking through the options at the moment and thinking about how the Post Office can expand the scope of the financial services that it offers across the counter. That would be of benefit to many—particularly those in rural areas, where the nearest post office may be closer than the nearest bank.

I shall move on to address the issue of lending to small and medium-sized businesses, which has cropped up in a number of contributions. Banks can and do play a critical role in providing finance for new start-ups, growing enterprises and our largest corporations. A thriving banking sector is therefore critical for our economic recovery. Ensuring the flow of credit to small and medium-sized enterprises is particularly essential to supporting growth. In Scotland alone, SMEs account for more than 1 million jobs, so they are an important part of the economy in not just Scotland, but every constituency and part of the nation.

The importance of getting credit flowing to SMEs meant that the Chancellor made a series of announcements in the June Budget. There was the extension of £200 million to the enterprise finance guarantee scheme, which will benefit 2,000 additional small businesses across the UK and bring the lending covered by the EFG up to £700 million. In addition, an enterprise capital fund to support small businesses with high growth potential was announced, combining both Government and private sector funding. In July, we also published a Green Paper on financing a private sector recovery—consultation on that has closed—which considered a broad range of finance options for businesses of different sizes, including bank lending. We will respond formally to that in the next few weeks.

The Select Committee’s report expressed concern about the availability of lending and whether Scottish banks are truly open for business. Again, those concerns have been mentioned in the debate. Today the banks have published, through the British Bankers Association taskforce, a series of measures to help improve customer relationships, promote better access to finance and, crucially, provide better information on the availability of and demand for credit. That point was raised by the Chair of the Select Committee and by my hon. Friend the Member for Argyll and Bute.

One of the things that prompted the proposal to bring together better information is this debate. When I talk to banks’ chief executive officers, as I do regularly, they say that they have enough capacity to lend to small businesses, but that the demand is not there. When we talk to small businesses—hon. Members have raised various examples from their own constituencies—they say that they do not believe the banks are interested in listening. Part of that might be a pricing issue. The survey, which will be based on information supplied by the banks but prepared independently of the banks, will address those issues and raise the quality of information. It will enable us to scrutinise the banks more closely about their lending practices, including the rate at which they are lending.

[David Mowat (Warrington South) (Con)]

This discussion has always struck me as a bit odd, because banks need to lend to make money. I understand the things that the Government are doing—the two things that the Minister mentioned—but are there not two real issues here? First, it is not that UK banks are lending less; it is simply that a lot of foreign banks have left the market and UK banks have not filled that gap.

Secondly, the banks’ real issue is the requirement that has been placed on them to rebuild their balance sheets and to change their credit ratios in the run-up to Basel 3. They have less money because the Government are effectively telling them to do two contradictory things: to lend more; and to rebuild their balance sheets and have better capital ratios.

Equitable Life (Payments) Bill

David Mowat Excerpts

Tuesday 14th September 2010 Commons Chamber

[David Mowat (Warrington South) (Con)]

Let me add my congratulations to my neighbour in Cheshire and in London, my hon. Friend the Member for Congleton (Fiona Bruce), on her excellent maiden speech.

Like everybody else, I support the Bill and I applaud our Front Benchers for moving so quickly to get this sorted out. I am disappointed, however, that we appear to be nailing our colours fairly firmly to the mast of Chadwick. The report is discredited, and in the course of my speech I shall try to explain why I see a difference between the £4.5 billion referred to by the ombudsman and the amount of about a tenth of that talked about by Chadwick, as well as why Chadwick is wrong.

It is central to our understanding of this issue that we know why Chadwick was wrong and where the methodology was flawed. The sum of £4.5 billion is a lot of money. Roughly speaking, it is the cost of two aircraft carriers. Just because it is a lot of money, however, does not mean that we should not do the right thing in sorting out this matter. In particular, we should honour the commitments—both implied and explicit—that we made in the run-up to the election in respect of those people who have invested in Equitable Life.

I want to make three points over and above my point about methodology and Chadwick. First, there is a group of people who have been particularly ill served by what has happened: the with-profit annuitants. I urge Ministers to consider making interim payments to them, because they have been severely hit. I do not accept the argument that doing so would affect the time scale of the rest of the payments. I do not think that that is true.

Secondly, I urge Ministers to make the process simple when the payments are coming out. Let us not allow civil servants to convince us to build computer systems that would apply tens of thousands of transactions to tens of thousands of policies, ending up with the complexity that we saw in the Department for Environment, Food and Rural Affairs and the delay in farming payments. This can be simple, because we are making broad-brush assumptions about the amount that we pay out in the first place. To go into spurious accuracy in how we allocate that among different fundholders is just wrong.

Thirdly, we should honour the commitment by next summer. It is quite important in the context of the Bill that we know when payments will be finished and not just when they will start.

Fourthly, we should look again at the adjustment that Chadwick has made. The reason that £4.5 billion became a tenth of that was that Chadwick said that in his view 80% of the policyholders who were informed—had regulation been done adequately—that this was a basket-case company would continue to invest in Equitable Life and that as a consequence, there was no regulatory failure in respect of those people. By applying that figure of 80%, £4.5 billion becomes pretty close to the sorts of amounts that we appear to be talking about. He said 80%; I say 50%. Somebody else says 30%. That figure is a question of judgment; there is no methodology. However, when we consider other financial crises, other runs on banks and other countries, the figure of 80% does not appear to stack up.

I have had a go at applying a more reasonable number to the ombudsman’s figure. It is reasonable that, having done all that, we should make an allowance for the spending position in which we find ourselves. I do not think that EMAG has a problem with that. However, when reasonable assumptions are applied to the ombudsman’s starting point, it is very hard not to come up with a number that is a considerable multiple of the number that Chadwick talked about. I cannot get one that is much lower than about £2 billion, which, as those of us who are doing our arithmetic will know, still lets us have one aircraft carrier.

May I make one final plea to those on the Front Bench? Can we stop benchmarking ourselves against the Opposition? That is a very low bar indeed. We must benchmark ourselves against what is right and against the expectations we raised when we were fighting the last election. It is not enough simply to do more than the Opposition.