Banking Reform

Gareth Thomas Excerpts

Thursday 17th June 2010 Commons Chamber

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

With permission, Mr Speaker, I shall make a statement about the Government’s plans to reform the institutional framework for financial regulation.

The tripartite system of financial regulation failed spectacularly in its mission to ensure financial stability, and that failure cost the economy billions. The British people rightly ask how this Government will stop it happening again. That is why our coalition agreement committed us to reforming the regulatory system for financial services in order to avoid a repeat of the financial crisis. Let me now set out in detail the changes to the regulatory architecture that will make that possible.

At the heart of the banking crisis was a rapid and unsustainable increase in debt. Our macro-economic and regulatory system utterly failed to identify correctly the risk that that posed, let alone prevent it. No one was controlling levels of debt, and when the crunch came, no one knew who was in charge. For that reason, we need a macro-prudential regulator with a more systematic and detailed knowledge of what is happening not only in individual firms, but across the financial system as a whole.

Only central banks have the broad macro-economic understanding and understanding of markets, the authority and the knowledge required to make macro-prudential judgments. We will therefore place the Bank of England in charge of macro-prudential regulation by establishing within the Bank a Financial Policy Committee. We will also create two new, focused regulators: a new prudential regulator under the Bank of England, headed by a new deputy governor, and a new Consumer Protection and Markets Authority. All the new bodies will be accountable to Parliament, and their remit will be clear so that never again can someone ask who is in charge and get no answer.

First, we will legislate to create the Financial Policy Committee in the Bank of England. It will have the responsibility to look across the economy at the macro-economic and financial issues that may threaten stability, and it will be given the tools to address the risks it identifies. It will have the power to require the new Prudential Regulation Authority to implement its directions by taking regulatory action with respect to all firms.

The FPC will be accountable to Parliament in two ways: directly, as is the case with the Monetary Policy Committee; and indirectly, through its accountability to the Bank’s court of directors. The Governor will chair the new committee. Its membership will include the deputy governors for monetary policy and financial stability, the new deputy governor for prudential regulation and the chair of the new Consumer Protection and Markets Authority, as well as external representatives and a Treasury representative. An interim FPC will be set up by the autumn, in advance of this legislation.

Secondly, we will create a Prudential Regulation Authority as a subsidiary of the Bank of England. It will conduct prudential regulation of sectors such as deposit-takers, insurers and investment banks. The PRA will be chaired by the Governor of the Bank of England, and the new deputy governor for prudential regulation will be the chief executive. The deputy governor for financial stability will also sit on the PRA board.

Thirdly, a new Consumer Protection and Markets Authority will take on the Financial Services Authority’s responsibility for consumer protection and conduct regulation. The CPMA will regulate the conduct of all firms, both retail and wholesale, including those prudentially regulated by the PRA, and will take a strong proactive role as a consumer champion. It will have a strong mandate for ensuring that financial services and markets are transparent in their operation, so that everyone—from someone buying car insurance to a trader at a large bank—can have confidence in their dealings and know that they will get the protection they need if something goes wrong.

The CPMA will regulate the conduct of every financial services business, whether they trade on the high street or trade in high finance. We need to ensure that this body has a tougher, more proactive approach to regulating conduct, and its primary objective will be promoting confidence in financial services and markets. The CPMA will maintain the FSA’s existing responsibility for the Financial Ombudsman Service and oversee the newly created Consumer Financial Education Body, which will play a key role in improving financial capability. The CPMA will also have responsibility for the Financial Services Compensation Scheme, but given the important role the scheme plays in crises, it will work closely with the FPC and PRA. We will also fulfil the commitment in the coalition agreement to create a single agency to take on the work of tackling serious economic crime, which is currently dispersed across a number of Government Departments and agencies. Before we set up these new bodies in their permanent form, we will conduct a full and comprehensive consultation, and we will publish a detailed policy document for public consultation before the summer recess.

Our goal is radically to improve financial regulation in the UK, strengthening the prudential regime by placing it in the Bank of England and delivering the best possible protection for consumers. During the period of transition to the new regime, the Government will also be guided by the following four principles: minimising uncertainty and transitional costs for firms; maintaining high-quality, focused regulation during the transition; balancing swift implementation with proper scrutiny and consultation; and providing as much clarity and certainty as possible for the FSA, Bank and other staff affected during the transition. In order to do that, we will ensure the passage of the necessary primary legislation within two years.

I am delighted that Hector Sants, the current chief executive officer of the FSA, has agreed to stay on to lead transition and become the chief executive of the PRA. He will be supported in his work by Andrew Bailey from the Bank of England, who will become the deputy in the new PRA. This is a strong team to ensure a smooth transition.

We all know that the financial crisis has cost taxpayers dearly. The regulatory system needs radical reform to make the sector more stable and stronger. The last Government could not do that because they were caught up in a structure designed by the former Chancellor and Prime Minister. The fundamental flaws in that architecture contributed to the failure in the banking sector and ultimately undermined economic stability. The continuing financial and economic uncertainty across the eurozone strengthens the urgency with which we must equip ourselves with better tools and arrangements to tackle any future financial instability.

We have already paid a high price for the previous Government’s failings. We must do all we can to prevent this from happening again, and I commend this statement to the House.

[Mr Gareth Thomas (Harrow West) (Lab/Co-op)]

May I thank the Financial Secretary for advance sight of his statement, and as this is, I think, his first outing in his new role, may I congratulate him and welcome him to his post—and, indeed, wish him well?

While no one can dispute that a failure to regulate effectively was at the heart of the global financial crisis, the key failure by regulators in monitoring agencies and central banks across the globe was in understanding the growing systemic risks in financial services. We also should not overlook the failure in bank boardrooms to understand what was going on. This was not just an issue in the UK. Does the Financial Secretary accept that in some countries the central bank had prime responsibility for regulation, whereas in others, including ours, responsibility has been shared, and in our case between the Bank, the FSA and the Treasury, and that the Bank has always had responsibilities for financial stability?

Specifically, who will appoint the new Financial Policy Committee? Will individual members have their own vote, or will that be merely advisory to the Governor? Will FPC minutes be published, and will the Governor or the chief executive of the PRA ultimately be responsible for the decision on whether to act? Does the Financial Secretary also accept that there will be concern—not least among those who were victims of the Bank of Credit and Commerce International, of which my right hon. Friend the Member for Leicester East (Keith Vaz) has consistently reminded the House—about the record of the Bank of England in financial services supervision, and will he now consider publishing part two of the Bingham Report?

Will the Financial Secretary not acknowledge too that the Financial Services Authority today is a vastly different regulator from the FSA of 2007—as, indeed, the Treasury Committee has acknowledged? Will he acknowledge that a significant level of better trained new staff and the new activism of the FSA in its supervisory role has led to a bolder, more vigorous approach to financial services regulation in recent times?

How, in practice, will the Financial Secretary avoid the very real risk of a loss of energy as regulators now focus on their own future, given that there continues to be considerable uncertainty and instability in global financial markets? Specifically, can he clarify who will be responsible for supervision and regulation before 2012, and will he acknowledge the profound risk, given the proliferation of new bodies he has announced, of ongoing regulatory confusion—of issues falling between the cracks? Indeed, is it not right that there will now be effectively two different regulators for many financial firms?

I was surprised by the absence of any reference to the Banking Commission in the statement. Does the Financial Secretary not accept that proposals to break up banks would not have made any difference to Northern Rock, a retail bank, or Lehman Brothers, an investment bank, and that what is needed is increased capital held by banks and living wills to manage the possibility of future banking problems? Will he explain how the deliberations of this commission on a possible break-up of British banks, such as Barclays or HSBC, can be conducted in a way that reassures the markets and does not exacerbate financial instability?

Does the Financial Secretary recognise that the financial services industry employs over 1 million people and remains crucial to our economic future? Will he ensure that, whatever proposals he accepts—if, indeed, he does accept any from the commission—we do not put ourselves at a commercial disadvantage compared with other countries? Specifically, how will the proposals announced today impact on remuneration, and what ongoing effort is there to secure international agreement on banking levies again, so that Britain is not at a competitive disadvantage?

Is it not the case that while the work of each of the new bodies and the commission will be worthy of serious scrutiny on their own merits, as the shadow Chancellor, my right hon. Friend the Member for Edinburgh South West (Mr Darling), said yesterday, the Government risk creating a system that injects more, not less, uncertainty into the City? While the architecture of the regulatory system is clearly important, is it not the skills and judgment of individual regulators that matter most at the moment? Surely, it is not where they sit; it is what they do.

[Mr Hoban]

I welcome the hon. Gentleman to his new role and I am grateful to him for his welcome to me. Although I listened very carefully to his remarks, I am not quite sure whether the Opposition accept our proposals or whether they are stuck in the past defending to the last the former Government’s regulatory architecture, which they put in place in 1997. It is time that the Opposition faced up to this problem: do they accept that the system put in place by the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) was flawed and needs reform, or are they the last people to defend the status quo in this country?

The hon. Gentleman asked a number of detailed questions. Let me address them. He recognised the build-up of systemic risk in the economy over the course of the past 13 years, but he must acknowledge that the reforms introduced by his right hon. Friend in 1997 took away from the Bank of England the power to monitor and respond to those risks.

The hon. Gentleman asked about the appointments to the Financial Policy Committee, and they will be consistent with the approach currently adopted towards the Monetary Policy Committee. He referred to the Bingham report and the collapse of BCCI and, as he will remember from the exchange between the right hon. Member for Edinburgh South West (Mr Darling) and my right hon. Friend the Chancellor yesterday, the Chancellor is going to look into that matter.

The hon. Gentleman is right to say that the FSA has made progress, and that is one reason why we are delighted that Hector Sants has agreed to lead the FSA through the transition period and then to become the chief executive of the PRA. No matter how far the FSA improves in the execution of its role, the reality is that the flawed architecture that the hon. Gentleman’s Government put in place undermines all that it does. This package of reforms ensures that we have the right regulatory architecture in place to identify and tackle the systemic risks to which he referred and ensures proper protection for consumers so that they will never again be let down.