Financial Services (Banking Reform) Bill

Earl of Caithness Excerpts

Wednesday 24th July 2013 Lords Chamber

[The Earl of Caithness]

My Lords, this is indeed a hugely important Bill. It is one to which everyone looks to correct the position in which we found ourselves in 2008, when people genuinely feared that they were going to lose their deposits. They hope that at the end of this Bill they will be in the position that the right reverend Prelate quoted: that the banks in the UK will keep us up there as the world’s financial centre, while protecting the ordinary working person. I fear that the Bill as presented to us will not take us to that situation.

There are two main reasons for that. One has to look at the reasons for the 2008 crisis. The bulk of that crisis was due to a structural banking problem. It was not so much the bankers’ fault; you cannot blame the bankers for doing what legislation or law allows them to do. However, we were all surprised and even glad that the report on HBOS showed that the incompetence of bankers within a structural banking system was also a major problem. We can tackle one of the major structural problems of banks, and not by changing them too dramatically, because they have two main functions. One is the storage and distribution of depositors’ money and the other is the investment of money seeking investment.

The huge figures that the noble Lord, Lord Brennan, gave to us a moment ago underline the problem, which is that the deposit belongs to the bank the moment that you make it. The moment the money is paid into the bank it is no longer yours. Most people in the country believe that when they make a deposit to a bank it is still theirs. Two judicial decisions in 1811 and 1848 changed that, and banking became legalised theft, as I call it. It was a move to take away people’s money. The noble Lord, Lord Hollick, put it well when he said that it is getting other people’s money to work for you. It requires more than a change of culture to change that in banks; to allow people to retain control of their deposits requires a change in the law. If that happens, the banks will, quite rightly, charge for the storage and distribution of that deposit, but it will allow you, as the depositor, to say, “I want that amount on deposit, which will be guaranteed by the bank, and that amount can be used for investment”. If the investment arm fails, that is fine—it will not involve the taxpayer and your deposit is secure.

The way we need to go forward is by changing the structure that banks have used or adopted themselves to use in the past. We seek to change the removal of title from their own money for the depositors; we must get ownership of the deposit back to the depositor. If you merely ring-fence a bank, the money can be moved within the bank because all the money belongs to the bank. We do not know the rules for the ring-fencing, but it will not solve the fundamental problem that the bank owns all the money. Banks should also be allowed to offer equity investments. One of the major problems we face is debt. If all the banks are allowed to do is to make more loans, all you will do is create more debt. As Stephen Cecchetti at the Bank for International Settlements recently said:

“Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be disaster”.

There is no doubt in my mind that we are heading for another banking disaster. This forthcoming banking disaster will be bigger than the one that I tried to stop in 2008 with my Safety Deposit Current Accounts Bill, which tried to do what I have just explained—namely, to retain ownership of a deposit placed with a banker. However, another, bigger banking crisis is undoubtedly coming.

We have talked a lot about competition, and a number of your Lordships have mentioned it, but what is the right amount of competition? Clearly, we would like more competition than the big four banks that we have here, but there are some 6,000 banks in the eurozone, which is part of its problem. There are too many banks; some have had to close as part of restructuring and no doubt a lot more will do so as the eurozone tries to sort out its problems. I do not know how we, as politicians, decide what the right amount of competition is, but clearly there ought to be more here and less on the continent.

Finally, I turn to regulations. As a number of noble Lords have pointed out, a huge amount of regulations are to be brought forward under the Bill; until we see those we will not know how it is going to work. I therefore ask my noble friend when these orders and regulations will be made available. We have a problem with the Energy Bill at the moment, because now almost at the end of Committee we do not have the regulations and draft statutory instruments before us so that we can look at the meat of what we are discussing in that Bill. There has been an outcry among all Members, from all sides of the Committee, that this is unacceptable. If we go into Committee on this Bill without getting the draft statutory instruments, we will face exactly the same problems in Committee as we currently face in Committee on the Energy Bill.

When I looked at Clause 17 of the Bill I was slightly confused as to exactly what statutory instruments we will look at. The noble Lord, Lord Barnett, talked about orders that may be part of the Bill but which do not seem to be statutory instruments that will come before the House. I hope that my noble friend will be able to clarify exactly what we will be allowed to discuss, whether they will be affirmative or negative resolutions, and when they will be presented.