Oral Answers to Questions

Debate between Harriett Baldwin and George Kerevan

Monday 13th March 2017 Commons Chamber

[George Kerevan (East Lothian) (SNP)]

Will the Secretary of State confirm that the deep maintenance and repair of the engines of all British F-35 fighters will be done in Turkey, and what, if any, security issues arise from this rather strange decision?

[Harriett Baldwin]

I will follow this up with the hon. Gentleman, but I can confirm—I am sure he shares my delight—that north Wales has been selected for the global hub outside the US for all the maintenance and repair of the avionics.

Oral Answers to Questions

Debate between Harriett Baldwin and George Kerevan

Monday 12th December 2016 Commons Chamber

[George Kerevan (East Lothian) (SNP)]

The unit cost of the five P-8 Poseidon aircraft that Norway is buying is $300 million, including the data uplink. After the Brexit devaluation, the unit cost of the nine P-8s that the UK is buying is nearer to $400 million dollars. Does the Minister call that value for money?

[Harriett Baldwin]

I am not quite sure of the hon. Gentleman’s exact point, because if it were up to him and his party, we would not be buying P-8s or basing them in Scotland.

Bank of England and Financial Services Bill [Lords]

Debate between Harriett Baldwin and George Kerevan

3rd reading: House of Commons & Report stage: House of Commons
Tuesday 19th April 2016 Commons Chamber

[Harriett Baldwin]

I will make sure that that person makes him or herself known to the hon. Gentleman with the greatest of speed. It is important to point out that the agents do not engage with us as politicians. The agent for the west midlands and Worcestershire is very engaged with my local businesses, but I as a politician have never had a meeting with them. That is how it should work.

[George Kerevan (East Lothian) (SNP)]

I realise that the Economic Secretary is trying to be helpful, but does she not recognise that there is a strategic difference between the process of information-gathering through the agents and that of policy-making through the bodies of the Bank itself? That is where we are asking for representation.

[Harriett Baldwin]

I will get to that point later in my remarks. As always, I seek to be helpful to the hon. Gentleman, so I hope that he will enjoy those remarks when I get to them.

We believe that it is unnecessary to impose the requirement in new clause 2 to have regard to regional representation on the court, which is effectively the board of directors of the Bank of England, because of the comprehensive framework for regional information gathering that already exists. In addition, if we found a candidate with the perfect profile to serve on the court, but we insisted on downgrading them because they lived in an over-represented part of the country, that would not be the best way to produce an effective court.

I have been clear that in setting both monetary and financial stability policy, the Bank must take into account economic conditions in, and the impact of policy decisions on, every part of the UK. Monetary and financial stability policy must be set on a UK-wide basis. None of the 65 million people whom this House represents would be well served if, for example, different capital requirements applied to banks in different parts of the UK. Of course, monetary policy must be consistent. It is completely impossible to set different interest rates in different regions, so monetary and financial stability are, rightly, reserved policy areas.

The men and women who make up the Bank’s policy committees must have their decisions scrutinised, but since policy must be set UK-wide, this Parliament must hold them to account. This Parliament holds power over reserved matters, which these issues rightly are, and the Members of this Parliament represent people from every part of the country on an equal basis. Likewise, Ministers, who are accountable to the House and who hold their positions with the support of a majority of the House of Commons, must be responsible for making the external appointments to the Monetary Policy Committee, each member of which is responsible for considering the impact of their policy decisions on all 65 million people in the UK.

We also return to the question of the Bank’s 300-year-old name. It is important to recognise the reputation associated with a name built up over such a long period. During that time, the Bank has come to be globally renowned as a strong, independent central bank. We should not underestimate the importance of that. International confidence in the Bank of England helps to support international confidence in our economy and currency.

I turn to the monetary framework. The Government amendment in this group is modest. The Bill reduces the minimum frequency of Monetary Policy Committee meetings from monthly to at least eight times in every calendar year, and our amendment adjusts the reporting requirements of the Monetary Policy Committee to match.

--- Later in debate ---

[Harriett Baldwin]

The hon. Gentleman tries to tempt me down the path of comparisons with sports teams, but I decline to be tempted. The Government amendment is modest: the Bill reduces the frequency of MPC meetings from monthly to at least eight times in every calendar year, and the amendment will simply adjust the reporting requirements of the MPC to match.

New clause 6, tabled by the hon. Member for Carmarthen East and Dinefwr, suggests that we give the MPC a second primary objective of maximising employment. We conducted a comprehensive review of the monetary policy framework in 2013 and concluded that a flexible inflation targeting framework offered the best approach. Employment is already explicitly part of the MPC’s objectives. Its secondary objective is

“to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”

The most recent MPC remit letter summarised the Government’s economic policy as being

“to achieve strong, sustainable and balanced growth that is more evenly shared across the country and between industries”.

[George Kerevan]

I thank the Minister for her forbearance in giving way again. She is taking refuge in the Bank of England’s existing mandate, a mandate that all Members, on both sides of the House, know has long since become redundant. The inflation target has been dead in the water for years and years, because inflation is nowhere near 2% and is not likely to be for a long time. Implicit in the new clause is the fact that we are questing about for other policy measures to replace the 2% inflation target. Will the Minister address the question of what future targets the Bank of England should have to address the needs of a deflationary era, rather than the inflationary era of the last 20 years?

[Harriett Baldwin]

The hon. Gentleman asks an important question. There are many opportunities in Parliament, in the scrutiny of the Bank of England by the Committee of which he is a member, to ask those important questions. The Government choose to use the mechanism of the letter process and the remit. The hon. Gentleman and I are both old enough to know how inflation has changed over the years—[Hon. Members: “Surely not!”] I know; surely we are not. We should all welcome the significant lowering of inflation expectations, and we should all remember how important it is that we continue to ask the Bank of England to keep inflation under control, so that we never return to the kinds of impoverishing inflationary policies that so harmed people—particularly the poorest and oldest in society—during the 1970s.

Price stability must have primacy, because we judge that having a single lever aimed primarily at a single objective is the best way to make sure that the inflation target is credible. That, in turn, anchors all-important inflation expectations and helps us to keep inflation under control. Our system has shown that it produces good labour market outcomes. Despite global uncertainty, we have record numbers of people in work, an unemployment rate that is at its lowest in a decade, and a claimant count that has not been lower for more than 40 years. Moreover, targeting low inflation ensures that hard-earned wages are not eroded by inflation.

Bank of England and Financial Services Bill [ Lords ] (Sixth sitting)

Debate between Harriett Baldwin and George Kerevan

Tuesday 23rd February 2016 Public Bill Committees

[Harriett Baldwin]

If I may, I will come back on some of the points made by the hon. Member for Bassetlaw, who seems, I submit, to prefer American democracy to British democracy. I do not know whether this is a preference he has publicly stated, but it certainly seems to be his revealed preference, judging by his comments before lunch on the second Chamber and his comments now. American democracy is very different from ours, it is true, and I am sure that each has different advantages and disadvantages. In America, the judges are elected, for example. That is not something that we have chosen to do in this country. In America, obviously, their second Chamber is directly elected. That is not something that this Parliament has yet chosen to do.

Obviously, the power of the Executive in the British system of democracy is considerably greater when it comes to Budget matters than in America, where for a long time they were unable actually to pass a Budget. In America, where the Senate must confirm presidential nominations for many public appointments, there have been significant delays in filling vacancies. At the end of 2010, for example, 22%—over one fifth—of Senate-confirmed positions remained unfilled or temporarily filled by acting officials. Introducing scope for delay and public disagreement could impede the recruitment of good candidates to these positions. These are Executive posts and, as I said previously, candidates may not wish to reveal their interest to a current employer in advance of being confirmed in the appointment process.

[George Kerevan (East Lothian) (SNP)]

I remind the Committee that for most of last year the Treasury Committee was in touch with the Chancellor, who was very dilatory in making a fresh appointment to the head of the FCA. Delays can occur even when the Executive are in charge.

[Harriett Baldwin]

Again, I have to disagree with the hon. Gentleman. There has been a very capable and competent acting chief executive at the FCA throughout this time. I submit that the hon. Member for Bassetlaw would rather that Bassetlaw were in America, from what he has said.

--- Later in debate ---

[Harriett Baldwin]

The Minister really is saying that. I am saying that these are Executive roles, which the Executive should continue to be able to appoint, obviously with a pre-commencement hearing by the Treasury Committee. I fear that the hon. Member for Bassetlaw’s ancestor’s ticket for this voyage must have got lost, but it was very interesting to hear about the connection with his constituency. Without more ado, I urge the Committee to reject this amendment.

[George Kerevan]

I normally have a great deal of respect for the Minister’s judgment, but I detected something in her tone which said that even she did not fully agree with her position. On the first point, she argued that statute guarantees the independence of the regulators. If there is anyone is this room, including the Minister, who can put their hand on their heart and truly say that no regulator has ever been leant on by a Minister of any party, then I will accept where the Minister is going. I am a tiny, wee bit cynical that sometimes, despite statute, Ministers of all parties and all jurisdictions tend to lean. We should try to tempt them away from that by giving a parliamentary underpinning to the role and the position of the regulator. That is at the heart of this.

The Minister also cites the problem that might arise from dual accountability to the Executive and to Parliament. If there is conflict, I am always happy for Parliament to triumph over the Executive, but maybe the Minister wants this to be the other way round—indeed, she has said as much. My point is that we already have a degree of dual accountability. The Treasury Committee, standing for Parliament as a whole, questions the regulators on a regular basis to make sure that they are fulfilling their brief. The Committee is not questioning them on policy, but to make sure of their independence. The actual accountability already exists. We are just making it clearer here.

The Minister says that as an alternative there could be a pre-commencement interview. If there is a problem with confusion of lines of responsibility, that is actually a worse way to go than making it clear that the Committee, standing in for Parliament, does have the role of confirming the appointment.

My final point is that this would interfere with the quality of the candidates we might get. I remind the Minister that every single member of this Bill Committee had to stand for election. We put ourselves before the electorate; that is democracy. All we are arguing for is the principle of democratic accountability. If there are candidates for senior Executive positions who are frightened of democracy, they do not deserve the job.

Question put, That the clause be read a Second time.

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[Harriett Baldwin]

Members on the Opposition Benches have highlighted in a nutshell the essence of this debate and made some of the points I was going to make. The Bank of England as an entity predates the United Kingdom itself: it was founded in 1694, before the Union, and in the intervening 322 years it has built a globally prestigious brand, if I dare call it a brand. It is well known around the world and has a worldwide reputation as a strong and independent central bank, although independence obviously came quite a bit later. The hon. Gentleman’s amendment would not change this and it is not something we should dismiss lightly, but I think that people would still carry on referring to it as the Bank of England.

The Bank exists to serve the entire population of the United Kingdom. Its mission statement is:

“to promote the good of the people of the United Kingdom by maintaining monetary and financial stability”,

but I can understand from his political allegiance why the hon. Gentleman did not propose in his amendment that it be renamed the Bank of the United Kingdom, because his party’s aspiration is that we become a disunited kingdom, although we all sincerely hope that that never comes to pass.

I remember that in the referendum campaign there was some talk, not only of whether the euro would become the currency of Scotland, but of the groat becoming the currency of Scotland. I think that not answering that question was one of the real problems that the nationalists encountered in the 2014 referendum. It is worth reminding the Committee that the Bank has a clear framework for ensuring it understands the economic picture across England, Scotland, Northern Ireland and Wales, through 12 agencies located in the regions and countries of the UK. Naturally, Scotland, Northern Ireland and Wales all have their own individual Bank agencies, as do the regions of England, and the agents in these branches and across the rest of the country meet with some 9,000 contacts a year from a range of sectors, which provides a wealth of economic and financial intelligence to the Bank’s policy committees.

That vital source of information helps the Bank’s policy committees to understand both the financial and non-financial conditions for businesses in all four parts of the United Kingdom, whether it is a business’s ability to access credit, the condition of the housing market or the level of output. The Bank actively seeks to understand economic and financial conditions in all corners of the United Kingdom in order to set appropriate monetary policy in the United Kingdom.

It is not only the Bank’s agents who are the external face of the Bank. Members of the MPC, the FPC and the PRA board regularly make speeches and meet with businesses across the United Kingdom. In fact, in 2014-15, members of those three organisations conducted 54 visits in different parts of the UK. Engagement in the different countries and regions of the UK is clearly important at the highest levels of the Bank.

The Bank of England is known as the central bank of the United Kingdom. The hon. Gentleman’s new clause would make no practical difference on the ground. He himself referred to the name being a “minor irritation”. Changing a name steeped in more than 300 years of history, particularly to the name that he suggests, would be to the detriment of the institution. It has become internationally renowned and respected with that name, and the value of that recognition should not be underestimated. International confidence in the Bank of England helps to support international confidence in our economy. Changing the Bank’s name would undermine that international recognition of it as a world-class central bank, and I therefore gently urge the hon. Gentleman to withdraw his new clause.

[George Kerevan]

Any change to the Bank’s name would not affect coins because the Bank’s name does not appear on coinage, as far as I remember. It does, however, appear on notes. If there was ever an agreement to change the name of the Bank of England, that would have a knock-on effect on notes, but a sensible solution would be simply to let the notes wear out, as they do quickly, and then change them. I am certainly not proposing any name change that would have a major cost; I would not want that.

Members on both sides of the Committee raised the issue of what would happen if Scotland were to become independent. If I gather correctly the drift of the contributions, Members are worried that if Scotland becomes independent post Brexit, the name would have to be changed back. I am glad that Members are still alive to the fact that the independence issue is alive and well north of the border. I will not tempt the Chair’s patience by going too far into that; we will cross that road when we come to it, but I am glad Members are aware that the issue has not gone away.

The Minister’s final suggestion was that if there were to be a name change, it would be better to change it to something such as the Bank of the United Kingdom, and that I am being in some way devious by proposing this longer name. There was discussion about what the new name would be. I have tried to alert Members that that debate is going on in other parties within the House. I have heard suggestions such as the Sterling Central Bank. It seems to me that the longer form I propose is the least change and is therefore most able to encompass the Minister’s last point—we want to retain some of the tradition of the Bank, which was founded initially by a Scots person.

This is a live issue. The name will be changed at some point. Once a debate such as this emerges, it can only go in one direction. It would be better to choose a name that we can all agree on in the here and now. If the Minister rejects that on the basis of some grand tradition of the Bank of England, that undermines the essence of the Bill, which is to modernise the Bank and make it one that works for the whole of the nation as it is presently constituted. She and her Government are hiding behind the notion of modernity but they actually want to maintain a Bank which is run by the Executive, and which is not anywhere near as efficient as she thinks it is in terms of managing the prudential aspects of the economy.

Question put, That the clause be read a Second time.

Bank of England and Financial Services Bill [ Lords ] (Fifth sitting)

Debate between Harriett Baldwin and George Kerevan

Tuesday 23rd February 2016 Public Bill Committees

[George Kerevan (East Lothian) (SNP)]

I just want to make some remarks about clause 28, on transformer vehicles, which is one of the most important elements of the Bill, even though it is somewhat technical.

I commend the Minister on her rapid and very clear presentation of the clauses, but she said something about clause 28 that caused me to worry, and I would like to press her on it. She seemed to imply that the clause is being introduced to ensure that the regulation of transformer vehicles will maintain, and in fact increase, the City’s competitive edge. I worry that we are enacting regulatory provisions that could be used to facilitate transformer vehicles, which are rather toxic.

Transformer vehicles have been around for a while—since the start of the millennium—but they began to grow rapidly in the reinsurance market in the past decade. The danger is that they are under-capitalised. The existing reinsurance market is well capitalised, and the risks are well catered for. The existing major insurers traditionally do not reinsure all of their risk. They keep some of it and capitalise for it, which is good, and pass on the bulk, but not all, to separate or wholesale reinsurers, which are heavily capitalised in case anything goes wrong. The companies use actuarial tables to make profit and invest, but if anything goes wrong—if there is a systemic crisis in the market—they are capitalised in both the insurance and the reinsurance parts of the market to cover that risk.

The point about transformer vehicles is that in the past decade we have moved away from a capitalised reinsurance market to one in which the risks are hedged by selling credit default swaps. If used sensibly, that is not a problem, because if an individual insurance policy runs into trouble a credit default swap can be called in. But as we saw with the mortgage-backed securities at the end of the first decade of the millennium, if there is a systemic crisis and the entire mortgage market goes, the credit default swaps cannot be up because everybody loses money. The worry is that if our reinsurance model is based wholly on hedging, individual transformer vehicles can pay up, but if there is a general crisis—if there is a massive weather crisis or a nuclear power station, such as Hinkley Point C, blows up—the credit default market will not be able to repay everybody. That is why we need to regulate it.

If we are introducing these regulations to put in place an easier approach to hedging, rather than a properly capitalised reinsurance market, and to ensure that the hedging is here rather than New York, we are creating a problem. The Minister could become famous. If she ensures that the regulations that are introduced by the Treasury, the PRA and the FCA are used to make the market work sensibly, we will avoid a crisis. But if we introduce regulations that move the market further towards hedging and away from proper capitalisation, her name will be on the crisis when it occurs.

I want to clarify what these regulations are for. Are they for ensuring discipline in the market and the capitalisation of reinsurance, or are they a way of evading capitalisation? That is where the problem would begin.

[Harriett Baldwin]

I will try to keep my response in order, Mr Brady, but forgive me if I occasionally slip out of order. The hon. Member for Wolverhampton South West started by asking about clause 27, which he described as “see no evil”. I want to reassure him that the change addresses an issue that arises as a result of the transfer of the regulation of consumer credit from the Office of Fair Trading to the Financial Conduct Authority and the consequent application of the Financial Services and Markets Act 2000 to the consumer credit market. The issue addressed by the clause, whether relating to a chain or third party, arises particularly in the context of consumer credit and the activity of credit broking.

We are confident that the change to section 27 of the Financial Services and Markets Act addresses the issue with regard to consumer credit, ensuring that the section is more proportionate on consumer credit firms, without unduly affecting the protections available to consumers in the market. That is in line with our broader policy intent for the consumer credit market, where the reforms that the Government have made balance the need to provide strong consumer protections with ensuring that the burdens placed on a diverse market that includes thousands of small businesses is proportionate. I reassure the hon. Member for Wolverhampton South West that firms remain under a regulatory duty, imposed by the FCA, to take reasonable steps to satisfy themselves that the firms that they deal with are authorised, where that is appropriate. The clause strikes the right balance between protecting consumers and placing a proportionate burden on firms that are lending to consumers.

We share with the hon. Gentleman an aspiration to simplify some of the legislation. I very much welcome his words of support for my dream goal in this post, which is to simplify and reduce some of the complexity not only of this regulation but of the FCA’s own rulebook, which has become quite a significant barrier to entry to sensible organisations that may want to move into, for example, the debt advice space. I welcome his support for any progress I am able to make to simplify some of that.

Clause 27 simply narrows the circumstances in which a credit agreement or a consumer hire agreement is unenforceable. I think that the hon. Gentleman will welcome that. Both he and the hon. Member for East Lothian mentioned transformer vehicles, which are not those fun toys that appeal to consumers but something completely different that, I assure Members, are not for the consumer market. Only sophisticated or institutional investors will be permitted to invest in insurance-linked vehicles.

From a policy perspective, it is important that London have the ability to establish insurance special purpose vehicles. London is the largest insurance market in Europe and is a centre for specialist insurance activity. Whether we like it or not, all Members face risks in their lives—indeed, all businesses face a range of risks. Insurance is a way to bring that risk down to a manageable level. London should be able to compete and innovate in new forms of risk mitigation. If London is able to offer a full range of innovative solutions, insurance entities will continue to come to London to meet their risk mitigation needs. I heartily hope that all Committee members support that.

Insurance-linked securities use a range of specialist skills and services to arrange the deals, including underwriting, risk modelling, brokerage, legal and capital market expertise. Nevertheless, Members are right to express concerns about the transparency and manageability of the risks, as well as about the importance of their being arranged by regulated entities, so it is important that I set out that insurance-linked securities business will be prudently regulated in the UK.

All special purpose vehicles will require Prudential Regulation Authority authorisation. All the wording in terms of the contracts must be clear and robust, and importantly risks cannot be bundled together in the way that the hon. Member for East Lothian feared. We require all special purpose vehicles to be fully funded to cover the full extent of the risk they take on, so we are not talking about the kind of very leveraged structures that he rightly said were so instrumental in the last financial crash.

I have said that only sophisticated or institutional investors will be permitted to invest in the vehicles. Of course, if they are arranged prudently—when someone is able to manage their risks prudently—those transactions will contribute to financial stability. They increase the capacity of the reinsurance markets. They provide investments that are not correlated with the economic cycle, and therefore they provide investors with good diversification characteristics. I hope that I have reassured hon. Members of the importance of clarifying the rules on transformer vehicles, but I sense that the hon. Gentleman has a further question on the issue.

--- Later in debate ---

[Harriett Baldwin]

I want to put on record that of course the Chancellor is a listening Chancellor. I am delighted that some of that listening includes listening to the hon. Gentleman, whose views on pasties I remember the Chancellor also listened to at one time. I see why his Whips put him on the Committee—because of his extensive and deep knowledge of so many of these things.

Let us face it, the topic of pensions can cause people’s eyes to glaze over—not of course those of hon. Members in Committee, but potentially those of people avidly reading the record in Hansard—so I want to clarify that the pension freedoms apply to defined contribution schemes. Those regulated by the FCA are covered by the new clause. The hon. Member for Wolverhampton South West asked about actuarial reductions, but schemes such as those that most Members of Parliament are members of are in the defined benefit section of the market. That is presumably why he has not found the language clear enough; the new clause does not apply to defined benefit schemes. In cases where actuarial reductions might be applied unfairly, we think it is important for the FCA to be given flexibility in the new clause.

The hon. Gentleman asked about the level of the cap. It is important to emphasise how well and constructively the industry has been working with the new pension freedoms to enable hundreds of thousands of people to take advantage of the freedoms. It is worth citing how excellent, innovative and adaptive many firms have been with the new freedoms, which came in with a degree of rapidity. However, there were some cases—I cited the example of a 10% cap—where charges were clearly egregious. The FCA will do further work in this area, in terms of its cost-benefit analysis process, but there have been efforts to collect evidence of the scale of the charges. In the vast majority of cases—I think that I am right in saying, off the top of my head, more than 90%—the charges have been under 2%. The industry, by and large, has worked very well with the reforms; I do not want people to get the impression that it has not. However, we think that where there are unreasonable barriers, in terms of charges that we would all regard as outrageous, the FCA is right to have these powers.

There will be cases in which, when someone removes their pension, the provider is right to apply a market value reduction, to readjust the value of the fund properly to reflect the performance of the market. Not all funds mark to market on a daily basis. We would not regard that as an early exit charge. It is right that market value reductions are specifically excluded from the new clause.

I hope that by answering all those questions, I have satisfied the Committee that this is another excellent clause from a listening Chancellor, and I commend it to the Committee.

Question put and agreed to.

New clause 7 accordingly read a Second time, and added to the Bill.

New Clause 3

Nomination of the Chief Executive Officer of the Prudential Regulation Authority: parliamentary oversight

“The Chancellor of the Exchequer shall not nominate a person as Chief Executive Officer of the Prudential Regulation Authority without the consent of the Treasury Committee of the House of Commons.”—(George Kerevan.)

Brought up, and read the First time.

[George Kerevan]

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

We on the SNP Benches believe that senior regulators and those charged with supplying independent advice to Government should be independent of the Executive and that the best way of achieving that is to have their appointments confirmed by Parliament. In the case of the PRA, we are suggesting that that should be done through the Treasury Committee. The principle has already been conceded by Government. The head of the Office for Budget Responsibility is confirmed by the Treasury Committee, so in a sense we are simply trying to widen that remit. We have chosen to begin with the head of the PRA, because major changes in the Bill involve the Bank and its relationship to the PRA. Also, Mr Andrew Bailey, the current head of the PRA, is moving on to the FCA, so sometime this year we will indeed be appointing a new head of the PRA.

The principle is simple. This is about the way in which we guarantee the independence of the regulator from the Executive. We accept that the Executive—the Chancellor, in this case—is the correct person to make the nomination, but the way we guarantee the independence of the regulator is to give them a wider base through confirmation by Parliament. Then, if there is ever a conflict between the regulator and the Executive, the regulator can fall back on the fact that they are there, having been confirmed by Parliament. That simple principle is accepted all round the world and, as I said, is already accepted with regard to the OBR.

I hope that the Government will accept this proposal; I hope that the principle is a broad enough one, but I stress that the aim is not to make the regulator in any sense a political figure, but to go in the opposite direction.

We have had some concerns in the last few months regarding the independence of the FCA. We will say no more about that. The point is that the issue of the independence of regulators is in the public arena. The best way for the Government to allay some of those fears is to accept the new clause.

Bank of England and Financial Services Bill [ Lords ] (Third sitting)

Debate between Harriett Baldwin and George Kerevan

Thursday 11th February 2016 Public Bill Committees

[George Kerevan (East Lothian) (SNP)]

Like other Members, I add my delight at serving under your chairmanship on this bright morning, Mr Brady.

There is no best way of constructing the Bank and its regulatory functions. In this instance, however, having set up a structure, I think we should let it work itself out and see what the issues are, rather than tear it up so quickly. From that perspective, I will support the line of argument followed by the hon. Member for Leeds East.

May I remind the Minister and the Committee that we have been here before? There was a long period when the Bank was effectively the prudential authority, and it did not do a good job. One can mention the Bank of Credit and Commerce International. One can mention Barings. The Bank failed at the very simple task of examining the imminent failure of major banking institutions and not ensuring that that did not happen before it became a public catastrophe.

For that reason, in the Bank of England Act 1998, prudential conduct responsibility was taken away from the Bank and invested in the Financial Services Authority. That model, as we saw subsequently, did not work, in the sense that completely separating prudential conduct from the Bank led to a chasm between the two agencies in terms of who was letting whom know and who was responsible for tidying up.

In a sense, the halfway house that we now have, where we have put prudential conduct into the orbit of the Bank but kept it semi-discrete, is better than what we had before. Will it work in the long run? I doubt that any bureaucratic system ever works in all circumstances, but we have set it up; let us test it to destruction before we make another bureaucratic change. From that point of view, we have a model that seems to work.

The issues brought up in the Treasury Committee related particularly to the resources that were deployable to the PRA to conduct its activities and whether the main board of the Bank was providing sufficient financial and staff resources to the PRA to allow it to do its work. My worry is that the change proposed by the Government makes it too easy for the Bank’s main board to ration resources for the soon-to-be PRC. It would be better to leave a degree of independence within the PRC, so that if it comes to a debate over resources, the PRC has some muscle and can go public if it feels that it is not getting the physical and staffing support it needs from the main board.

We may need to come back to the structure of the Bank at some point; the Minister may want to reflect on that. As I said in the previous sitting, we are in danger of creating too many committees of the Bank. We may be in danger of reinforcing a silo mentality, even though the Governor serves on all the different committees. We may have to discuss at some point whether we need to separate the Monetary Policy Committee and the Financial Policy Committee, but we should certainly test the prudential part of the administration in its present form. Changing it now simply because we will get a better and prettier bureaucratic chart is not a sufficient reason.

[Harriett Baldwin]

As I am sure you are aware, Mr Brady, desubsidiarisation of the PRA is not something they talk about very often down at the Dog and Duck, but it is incredibly important. Committee members have raised important issues, to which I would like to respond.

If one were in the pub discussing the Bank of England, the extent of people’s knowledge of what it does probably would stop with the changing of interest rates; the hon. Member for Leeds East made that point clearly. He said that the change represented a downgrade of the incredibly important microprudential responsibilities of the PRA, but I would argue that it is an upgrade, in the sense that it gives the PRA the status of a committee—the Prudential Regulation Committee—that has the same status as the Monetary Policy Committee. That reinforces to not only Bank staff but drinkers in the Dog and Duck and the public at large that it is an incredibly important function. I completely agree with hon. Members who raised that point.

The microprudential responsibilities of the prudential regulator are extremely important. The hon. Member for East Lothian made the important point that, in the 300 years of history of the Bank of England, until its independence under the Bank of England Act 1998, there were obvious failures. Firms did fail, and no one should be under the illusion that we are in a zero-failure regime for banks.

However, it is clear that the decision to separate that microprudential function and move it to the FSA created a system that was tested to destruction. That separation under the failed regulatory regime of tripartite arrangements meant there was insufficient communication between the microprudential regulation at the FSA and the day-to-day liquidity challenges that banks were experiencing in the markets in the run-up to the crash. That seems to me the strongest possible argument for having moved the microprudential function back to the Bank of England. I am glad that Committee Members have supported that important change. By following the logic of that argument, one is compelled to see that it makes sense to go one step one further, and change the PRA from being a subsidiary into being at the heart of the Bank with the same status as the Monetary Policy Committee.

By making the points he did, the hon. Member for East Lothian has made my argument for me—for having that much closer feeling of all staff being part of one Bank, which is the agenda that the Governor has set out. That not only gives a much higher status within the organisation to the incredibly important function of microprudential regulation but it reinforces the ability of the organisation to communicate with the important other parts of the organisation, and gives them more time to do it. They will not have to worry about all of the responsibilities of being a separate company.

[George Kerevan]

indicated assent.

[Harriett Baldwin]

I am glad to see that the hon. Gentleman, a thoughtful and intelligent man, is nodding vigorously as I make my argument.

The hon. Member for Leeds East asked what prompted the decision. It was very much the one-Bank agenda that the Governor has followed. He argues that it makes sense to have different points of view and not be captured by groupthink. Although I agree with the importance of having a range of views on these committees, I would counter that argument by saying that the tripartite arrangements were so clearly inadequate that that difference meant that no one spoke to each other about what they were seeing.

I hope that the Treasury Committee returns to evaluate how the transition has worked. I want to reassure hon. Members on resources, because they are incredibly important. We want to ensure that the microprudential function does not have to compete for resources or find itself starved of them. It is important to note that the levy will continue to provide those resources. No changes are being made under this legislation to the available resources for microprudential regulation.

The hon. Member for Leeds East mentioned the importance of the role of the Governor. Of course, the Governor is an incredibly important person who sits on all the committees. That is an important function of having a one-Bank organisation. He is obviously a very responsible person. With those responsibilities comes accountability, not only through the Chancellor but to Parliament through the Treasury Committee. I emphasise that that arrangement does not change as a result of these clauses.

Having reviewed all the questions raised against making the changes, I insist that the changes will improve the Bank of England’s governance.

Bank of England and Financial Services Bill [ Lords ] (First sitting)

Debate between Harriett Baldwin and George Kerevan

Tuesday 9th February 2016 Public Bill Committees

[Harriett Baldwin]

With great respect to the hon. Gentleman, I do understand that. Perhaps he would like some further examples. The court plays an important role in relation to emergency liquidity assistance at the time of a financial crisis. We have to agree as a Committee that there will be times when the court is discussing something that we do not want to have transcribed and put into the public domain. Personally, I thought that Governor Warsh was very convincing in comparing what happens on day one of the Monetary Policy Committee and what can happen at other times—not necessarily all the time—and how a record will be published. The hon. Gentleman will vote one way and I will vote another. I do not agree with the amendment.

Amendment 9 would require representation on the court of particular sectors, and require the Chancellor to have regard for balanced regional and national representation on the court. Obviously, the Bank of England plays a central role in the UK economy, and its policy decisions are vital to everyone in the United Kingdom. I therefore entirely agree with hon. Members about the importance of the Bank of England giving careful consideration to how its policy decisions affect people throughout the country. This is at the heart of the Bank’s mission of promoting the good of the people of the United Kingdom by maintaining monetary and financial stability—indeed, that is precisely what the Bank does.

I will give a few examples. The Bank has representatives around the country; those agents work from 12 agencies, in Scotland, Wales, Northern Ireland and the regions of England, to gather information from businesses operating across many different sectors, including financial and non-financial firms. The regional agents, often joined by the Bank’s governors and members of the policy committees, regularly meet and hold panel discussions with companies of a range of sizes across the UK to gauge economic conditions and inform the Bank’s monetary policy and financial stability work. I trust that all members of the Committee have had an opportunity to observe that activity in their constituencies. If they have not, I strongly recommend that they do so, because those Bank activities are extensive. To give hon. Members an idea of how extensive they are: in 2014-15 the agents visited some 5,200 companies drawn from firms in all sectors and in all corners of the country; also, panel discussions were held with 3,700 businesses. Undoubtedly, the Bank goes to great lengths to ensure that it develops a detailed understanding of the conditions for businesses in all sectors across the whole United Kingdom.

In addition, the Prudential Regulation Authority’s practitioner panel ensures that the interests of those who must put the PRA’s rules into practice are communicated to the regulator. The panel includes representatives of banks, insurers, building societies and credit unions. The Financial Conduct Authority’s consumer panel has a statutory right to make representations to the PRA, and the FCA chief executive sits on the Financial Policy Committee and the PRA board, and will sit on the new Prudential Regulation Committee.

Through this Bill we are going further in ensuring that the regulators take into account the diversity of business models operating in the financial sector. Specifically, we are making it clear that both the PRA and the FCA must take account of the differences between different types of firm, including mutuals, whenever they are discharging their general objectives. We argue that these amendments are unnecessary and, indeed, unhelpful. They would cloud the appointments process.

[George Kerevan]

Does the Minister not accept that there is a difference between being consulted and having a right to be consulted and having a right to feel that one is represented on a deliberative body?

[Harriett Baldwin]

There is, but the purpose of the deliberative body, as we have heard, is effectively to act as the board of the Bank of England, supervising the different committees. Prior to the financial crisis, members of the court were often selected specifically to represent a range of sectoral interests, including many of those proposed in the amendments. The first problem with the amendments is that requiring representatives of different sectors and regard to regional representation will entail a much larger and therefore oversized and dysfunctional court. Before the financial crisis, when the court had non-executives specifically to represent different interests—why stop at the four listed in the amendment?—the court had an incredible 16 non-executives, rendering it far too large to operate effectively and unable to hold the executive properly to account.

[Harriett Baldwin]

The hon. Gentleman is right to highlight that difference. Of course, what the Chancellor of the Exchequer would have regard to is the quality and ability of those individuals to perform the function they are asked to perform. The Banking Act 2009 sensibly limited the court to nine non-executives, and in practice we have now reduced the number of non-executives to seven while keeping that non-executive majority, which means that the court is now sufficiently small to form an effective body that can challenge the executive. The amendments before the Committee would inevitably mean a return to a large, inefficient and ineffective court.

A second problem with amendment 9, which would require sectoral representation on the court, is that it would give rise to conflicts of interest. The amendment calls for several practitioner representatives on the court. We have tried that in the past, too. During the crisis, the conflicts of interest meant that some of those on the court who could have been of most assistance to the Bank had to leave the room for the most important decisions, such as on liquidity provision to the markets and on individual firms. That hampered the court’s ability to respond effectively.

[George Kerevan]

Does the Minister agree that her statement about the ineffectiveness of the board, because of its narrow composition during the crisis, makes our point that we need wider representation across the country, across areas and across industrial sectors?

[Harriett Baldwin]

I do not think anyone disagrees with the idea that we would want to have a range of different abilities and skills on the court of directors. What we are fighting against in opposing the amendments is the propensity of such amendments to lead to a larger and larger group of individuals on the court. Importantly, in relation to highlighting the potential for conflicts of interest, the conflicts policy now makes it clear that, among other restrictions, members of the court should not accept or retain any interest that is in conflict with membership and should not normally be associated with a PRA or Bank-regulated firm, whether as a director, employee or adviser. That ensures that the wide-ranging expertise—we all agree that that is necessary—appointed to the court can be deployed without obstacles, and leaves the court better equipped to respond to a crisis. The amendment would unravel those arrangements, and I argue that we should oppose it; we should not allow it to take us backwards.

The third and most important concern about the amendments is that they would impose unnecessary and undesirable constraints on appointments to the court. In the past three years, the court has been transformed. The Chancellor has appointed the highest-quality team, with significant experience of running large organisations and deep expertise in matters relevant to the Bank. The Government look far and wide for the best candidates, with roles advertised in the international press. Let me be clear: obviously, there are highly competent and highly qualified individuals who work in the sectors proposed and from all the regions across the UK. The amendments would constrain the appointments process utterly unnecessarily, potentially preventing us from forming the highest-quality, most experienced board for one of the most important institutions in the country.

--- Later in debate ---

[George Kerevan]

The Minister is being very sporting in giving way this morning. Can I take it from the tenor of everything she has said that the place for the trade union representative on the court, which we have had since world war two, is now in jeopardy?

[Harriett Baldwin]

I do not know where the hon. Gentleman would get that impression from. It is important that we have a chief executive of a major telecoms provider, a chief executive of a major power utility, a private equity specialist, a leader of a global information services group and a leader of a major public sector trade union. The chair, Mr Anthony Habgood, is one of the most experienced and respected company chairmen in the country.

[George Kerevan]

There has always been, since world war two, a place reserved on the court for a leading trade union figure. That is not written down anywhere, but it has always been accepted. Will it continue?

[Harriett Baldwin]

Nothing in my remarks this morning has suggested any change whatsoever in that policy, but it is important that the best people are selected for the roles and we do not accept the Opposition amendments, which would further constrain the selection process. I hope we can all agree that every member of the court, wherever they are from, should consider in their decision making the Bank’s impact on everyone in the UK, across the UK, not just in one region or one individual sector.

The amendments call for a different kind of court, made up of representatives from UK regions and representatives of narrow interests, and that would result in a court riven by conflicts of interest. We have tried that kind of court before and we know how the story ends. I hope that members of the Committee agree that we should not allow the amendment to take us back there.

--- Later in debate ---

[George Kerevan]

In itself, the clause is innocuous. It is a tidying-up operation, but lurking beneath it is a danger. Standing back from the restructuring of the policy committees of the Bank, we appear to be ending up with an exercise in bureaucratic symmetry—a committee to do this and a committee to do that, micro, macro, prudential or supervision, and the Monetary Policy Committee. The different committees are not supposed to talk to each other, doing discrete policy. That looks all right—someone is doing it—but what we are in fact ending up with is what I want to underline to the Minister and, through her, to the Treasury team.

The danger is that in creating bureaucratic symmetry, we have not got very far in creating a workable regulatory regime that is robust enough to meet the next crisis. One of the problems is that we are creating a silo for fiscal stability—basically, checking when a bubble arises and stopping it—and a silo for monetary policy, but the two are not talking to each other, so we are in danger of creating conflicts between the two main policy committees.

It is perfectly possible for the Monetary Policy Committee to go in a separate direction. At the moment it is refusing to raise interest rates, but that is leading to the committee in charge of fiscal policy and financial stability starting to discuss whether it should use its financial buffers to slow down a bubble in the housing market. It is possible, but a bit crazy, for the two different committees to take two different stances when the whole point of putting financial stability and monetary policy under the same roof—the Bank—was meant to be a co-ordinated policy.

Assigning responsibility for financial stability to the Financial Policy Committee does not get us off the hook of someone somewhere laying down broad policy objectives. The MPC has broad monetary policy objectives—I think that in the present climate of deflation, they are probably the wrong ones—but the FPC has very vague guidelines as to what it should be doing, and so suddenly we discover, in default, that the only person in the land who is actually overseeing all the different policy options is the Governor himself, and he is not even getting clear enough direction from the Treasury. By all means support clause 5 as a tidying-up operation, but it still leaves big holes in terms of who is actually laying down the major policy directions for the committee.

[Harriett Baldwin]

Opposition Members have suggested that the Bill, in and of itself, makes a change to the power and importance of the role of the Governor of the Bank of England. I would submit that the Governor of the Bank of England is an incredibly powerful and important appointment, but I would not say that the statutory powers of the Governor are increased from their already elevated level by the Bill. Obviously, he is the one who has a role across all the different committees, but he has always had a very important role.

The hon. Member for Leeds East is absolutely right to highlight the fact that in the other place there was extensive debate on the precise wording of the clause. Convincing arguments were made to change it and the Government tabled amendments to provide the court with an express power to delegate determination of the strategy. That is a change from the original intention after the consultation undertaken in the summer. To be clear, it will be for the court, as the governing body of the Bank, to decide who is best placed to set and review the strategy.

The hon. Member for Bassetlaw asked specifically about the role of the Treasury Committee in continuing to scrutinise the role played by the Bank of England, the Governor and the court. I see nothing before us today that would change the current arrangements whereby the Committee has an important role in taking evidence.

Hon. Members asked about the co-ordination between the Monetary Policy Committee and the Financial Policy Committee. They are independent committees with separate objectives. It is important that the Governor sits on both committees and is able to see what is going on in both committees, but we think it right to strike a balance to ensure that each of the committees remains focused on its individual remit while fostering interaction between monetary and macroprudential policy.

There has been a good debate in both Houses, illustrating the value of line-by-line scrutiny. I think that we have landed in the right place and I commend clause 5 to the Committee.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.

Clause 6

Monetary Policy Committee: membership

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Harriett Baldwin]

I would certainly be very concerned if the hon. Member for Leeds East were developing a reputation as a moderate, not least because that might cause him not to be put forward as a Labour candidate at any future election. That would be a very worrying development. My analysis of his political point of view is that no one in this country could describe him as a moderate. This may be the first occasion on which he has been described as such. “Trot” might have been a more appropriate description of some of his political views, but I digress in an entirely inappropriate way.

I want to respond to some of the points raised and indeed to the important speech made by the hon. Member for Bassetlaw about the fact that the UK is an open economy. Therefore, by its very nature, it is open to economic developments in the rest of the world. He highlighted three topics with which the Financial Policy Committee should rightly be concerned. The first was the importance to financial stability in this country of the UK Government being able to receive tax revenues in order to pay for public services. He will know that it is incredibly important in this regard that we work with other countries and, notably, the OECD on the base erosion and profit shifting work, which is an important matter, perhaps not so much for this Committee but for other Committees in this House. That is an incredibly important issue on which we work internationally.

I reassure the Committee that, in terms of the overall resilience of the UK banking sector today, compared with the resilience at the time of the last shock, it does appear to be increasingly resilient. We would like to put that on record. The aggregate capital ratio, the common equity tier 1 ratio, is currently 12% for the banking system as a whole, which is a full 3.7% higher just since the end of 2013. The major UK banks all came through their stress test with the FPC at the end of last year without being asked to raise more capital. The FPC concluded that the UK banking system would have the capacity to support lending to the real economy even in the context of a severe global economic slowdown triggered by a downturn in the emerging economies.

The hon. Member for Bassetlaw also mentioned the housing market. Again, I think that it would be really valuable for the Committee to put on the record that the Government have granted the FPC powers of direction regarding residential mortgages and are also consulting—I hope that Opposition Members will support this—on extending its remit to cover powers regarding buy-to-let mortgages as well. Those are important points.

The hon. Gentleman also mentioned the rise of private sector borrowing. On that point, we argue that progress has been made to improve the personal financial position of households in the UK. Household debt relative to income has fallen from 168% in 2008 to 142% at the last reading. That includes both mortgage and unsecured debt. The FPC does study these numbers very closely. It stated, the last time that it looked through them, that given the actions that it has taken household indebtedness currently does not pose an imminent threat to financial stability, not least because underwriting standards are currently more prudent than in the past. Of course, however, the FPC must and will continue to monitor the household sector and will take further action if necessary.

[George Kerevan]

I appreciate the Minister’s overview of the financial markets and how stable they are. Obviously, she has not read the financial press this morning. The whole basis of the international bank resolution regime that we have brought in since 2008 is based on convertible bonds. The convertible bond market has gone berserk in the past two days. Constant default rates on commercial paper covering bonds have spiked by a whole number of points. Let me assure the Minister that the markets are not anywhere near as quiescent as she tells us.

[Harriett Baldwin]

Again, the hon. Gentleman puts words into my mouth that I did not utter. However, I did want to point out that the FPC looks at the financial sector’s resilience. No one would deny that the markets are going through rough and troubled times, but the FPC’s role is important and I hope he will agree that its powers to look at different aspects of the economy have improved the architecture of financial regulation since the last crisis. I highlight the way in which the Bank of England, as part of its monetary policy remit, has kept inflation as low as it has.

The hon. Member for Leeds East pointed to the “spaghetti” of the Bank’s organisation. I agree that we need clarity to be able to tell our constituents about how the architecture works. I share that objective. The Bill improves the pasta-related shapes of financial architecture. I would argue that the current situation, with a subsidiary and so on, is more like spaghetti. When I was trying to think of an appropriate pasta-related analogy for what the Bill does in establishing new architecture that we can explain to our constituents in simple terms, I came up with the idea of three ravioli—independent, but, importantly, in the same bowl.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7

Monetary Policy Committee: membership

Question proposed, That the clause stand part of the Bill.

Bank of England and Financial Services Bill [Lords]

Debate between Harriett Baldwin and George Kerevan

Monday 1st February 2016 Commons Chamber

[Harriett Baldwin]

My hon. Friend, who was a distinguished member of the Parliamentary Commission on Banking Standards, is right to say that the commission highlighted the fact that the approved persons regime made it very difficult to pin down responsibility. The new regime, with its duty of responsibility clearly articulated —every organisation will have that set out when managers are first appointed and on an annual basis thereafter—is a much stronger regime. It also delivers more flexibility in the regulators’ enforcement powers, enabling them to impose high standards of conduct through rules applying to individuals, including those whom they have not approved. The expansion of the new regime to all authorised financial services firms will enhance personal responsibility for senior managers, as well as providing a more effective and proportionate means of raising the standards of conduct of key staff more broadly.

Given the improvements that the senior managers and certification regime with the statutory duty of responsibility delivers in terms of senior accountability, the reverse burden of proof is simply not necessary. In extending the new regime to all authorised financial services firms, it is important to consider whether, under these new circumstances, the application of the reverse burden of proof to any or all firms is appropriate. Most of the firms to which the regime will now apply are small, and it simply would not be proportionate to apply it to those firms. By retaining it for the banking sector alone, we would raise serious questions of fairness and competition.

[George Kerevan (East Lothian) (SNP)]

Can the Minister explain what has happened in the two and a half years since the 2013 Act was passed—essentially, by a Conservative Government—to change the reverse burden of proof?

[Harriett Baldwin]

As the hon. Gentleman knows, the measures in the 2013 Act are due to come into force on 7 March this year. The position in relation to the reverse burden of proof is becoming increasingly clear. Andrew Bailey said in his evidence to the Treasury Committee, of which the hon. Gentleman is a member:

“I support the change, because what the change does is it turns the process round and puts the judgment back on to us”

—that is, the regulator.

“I would rather it does that than have us heading down this tick-box regime with legal questions around it over human rights.

I do not want to come back or have one of my successors come back to you in the future and have to say, ‘I am sorry; we could not use this regime in the way that was intended, because it was always a bit doubtful that we could make it stick’. It is far better we come at this point to you and say, ‘I do not think this has a sufficient probability of being effective’.”

I could supply further quotations, from members of the Parliamentary Commission on Banking Standards in the other place, but I must make fairly rapid progress now.

The Economy

Debate between Harriett Baldwin and George Kerevan

Wednesday 18th November 2015 Commons Chamber

[The Economic Secretary to the Treasury (Harriett Baldwin)]

I start by associating myself with the sentiments expressed by the hon. Member for Hayes and Harlington (John McDonnell) about the French atrocities and the importance of our security forces. I and other Treasury Ministers yesterday signed the book of condolence at the French embassy.

The economic policy of Her Majesty’s Opposition is now represented by a man who wants to overthrow capitalism, nationalise businesses without compensation, and who answers to Len McCluskey. He is a man who thinks that printing money, and triggering the inflation that hurts the poor and the elderly the most, is a good thing. He thinks that a budget surplus is “barmy”, and that we can balance the books by avoiding “any cuts whatsoever”. He is a high-tax, high-inflation, high-unemployment socialist who draws his economic inspiration from the Venezuelan economy and Syriza in Greece. The Government will not take economic lectures from him on how to run our policies, and we will do everything in our power to keep him in opposition.

[George Kerevan (East Lothian) (SNP)]

Will the Minister remind the House how many pound notes the Bank of England has printed through quantitative easing?

[Harriett Baldwin]

Monetary policy has been run by the Bank of England independently, and I am sure that the Scottish National party will continue to support the Bank’s independence against the inflationary tendencies of the hon. Member for Hayes and Harlington. I am pleased to have the opportunity to remind the House once again of how this Government’s long-term economic plan is delivering for the working people of the United Kingdom.

Finance Bill

Debate between Harriett Baldwin and George Kerevan

Tuesday 8th September 2015 Commons Chamber

[George Kerevan (East Lothian) (SNP)]

I will be brief, Mr Howarth. I just wanted to respond to some of the points made by my colleague the hon. Member for Wyre Forest (Mark Garnier). Nobody from my side of the House disputes that the bank levy was in need of reform. Indeed, he made it sound far too well organised and manufactured; it was ad hoc, arbitrary and unpredictable, and it definitely needed to be replaced by something more predictable. Therefore, we are in no way rejecting the notion of moving to a surcharge on profits, which could be an effective way of raising the funds from the banks and, in a sense, of surcharging them for the social service that we provide through the Treasury in protecting them.

I do not go as far as the hon. Gentleman in relation to what I would describe as the gentle blackmail from HSBC and Standard Chartered Bank. If anyone looks at the turmoil in the Asian markets and in China at the moment, they will not think that it was a good moment for a bank to shift their headquarters from London to Hong Kong.

Let us accept that there will be a change. Our view is that we need a mechanism that allows the Treasury to use statutory instruments to vary the rate and the application of the surcharge as it evolves and as we learn whether it is impacting adversely on some banks, building societies and mutuals. That is all we are saying. We are trying to find common ground with the Chancellor. We are moving in the same direction, but the Government are rushing the application. They are making it too uniform and are choosing arbitrarily a rate of surcharge that is simply designed to reproduce the current level of tax yield. That is a bad way of approaching how we manage the surcharge on the banks.

I suppose the essence of the argument—this is really where I want to go—is that there are differences between the challenger banks and the larger banks. Those differences are not just based on their level of profit. It is quite clear that it is proportionately more expensive for the smaller banks to provide the capital to support the credit risk in their loans once it is weighted against their risky assets. We know that from the work that has been done by the Competition and Markets Authority, and I would prefer to take its view rather than the special pleading from the banks—even the special pleading from the challenger banks.

The Competition and Markets Authority has looked at the expense to the different scale of banks in providing the capital to support their credit risk. It has come up with figures that say that on a typical £100,000 loan to a small business, a challenger bank, or a bank of that scale, has to put aside roughly £8,000 per £100,000 loan, compared with about £6,000 from one of the very large banks. The mathematical reason for that is quite simple; it is not rocket science. The smaller bank with the smaller balance sheet is carrying proportionately more systemic risk on each loan. When a small bank loses a customer or has a non-performing loan, it is quite costly to it given the scale of its balance sheet. Therefore, when we start doing the risk-weighted analysis, it will have to put more capital by; it will cost it more. It is economies of scale. Big banks have economies of scale. A specific non-performing loan to a small business is a relatively small risk to the larger bank, so the cost to it will be small. It follows on from the matters of big and small economies of scale. Nevertheless, they act as a barrier to the smaller banks being able to grow.

If we impose a uniform profits surcharge on all the banks, there is a higher real burden on the smaller banks. I would like the Treasury to take that into account as we move along, and have the powers to be able swiftly to shift the rates. I was trying not to be prescriptive in laying down how we would set different levels for different kinds of banks; I wanted a system to evolve. I want the Treasury to have the powers to do that so that if it does prove to be more costly for the challenger banks and to be taking more from their profits and their ability to raise capital, we might think about different kinds of banding, and that would be up to the Treasury to consider. We are simply saying that the smaller banks have different cost structures and therefore different risk elements, which means that imposing a single levy on profits across all the banks, big and small, is a bit too arbitrary and a bit too ad hoc. In other words, it brings us back to the sort of problems that we had with the original bank levy.

[Harriett Baldwin]

It has been a great pleasure to have my Opposition shadow, the hon. Member for Wirral South (Alison McGovern), in the Chamber today making the points that she has. I sincerely hope that next week she will continue to be my Opposition shadow, because it is clear that she takes her role very seriously. I know that she supported the hon. Member for Leicester South when it came to nominating the leader of her party, so I hope that her point of view prevails when it comes to the announcement on Saturday.

Royal Bank of Scotland

Debate between Harriett Baldwin and George Kerevan

Thursday 11th June 2015 Commons Chamber

[Harriett Baldwin]

I welcome my hon. Friend to his place, and also welcome his wealth of experience and knowledge in this matter, which he ably demonstrates in his question. The sale will bring wider benefits to the overall economy. It will help us to continue to make progress in making the banking sector more competitive, and may result in a more competitive financial services sector and mortgage sector. That position is echoed not only in the Rothschild report, but in the Governor of the Bank of England’s letter.

[George Kerevan (East Lothian) (SNP)]

May I take the Minister back to page 11, table 2 and the footnote, because we did not get an answer when this was first asked? The table lays out not the forecast recoveries but just a statement of where we are at the moment, which could change. It does not include the cost of the funding of the interventions; in other words, the cost of the Treasury paper that was created to buy the assets in the first place and on which interest is being paid. Will the Minister please answer the question—what was the cost of funding the interventions?—so that we know the true cost, not the £14.3 billion?

[Harriett Baldwin]

The hon. Gentleman is absolutely right that the table is a snapshot of a moment in time. As time progresses, we will no doubt be able to pin down exactly the overall costs of clearing up the mess that Labour left behind.

European Union (Finance) Bill

Debate between Harriett Baldwin and George Kerevan

Thursday 11th June 2015 Commons Chamber

[Harriett Baldwin]

As I said, I welcome the hon. Lady’s European colleagues’ new-found enthusiasm for rigour and reform in the European Union, and I look forward to working closely with them to ensure that happens.

My hon. Friend the Member for Daventry (Chris Heaton-Harris) made an excellent speech that revealed his deep knowledge of the subject. As a former MEP who sat on the Committee that scrutinised the European budget, he has been assiduous in his scrutiny of this legislation—no doubt the Whips will have noted his enthusiasm to take part when the Bill goes to Committee. He asked a range of questions about the ESA reporting and the accuracy of the EU budget. The UK agrees that more can be done to improve compliance, including simplifying the rules that member states have to comply with to release their funds. We believe that the Prime Minister’s deal on the multi-annual financial framework shows that EU spending can be improved, but that will require a strong UK voice to be heard.

[George Kerevan]

Again, does the Minister understand that the OBR analysis shows that in 2020 the net contributions in cash terms from the UK will be similar to what they are now? When the Prime Minister negotiated a reduction in the EU budget, it was a reduction in the global budget, not in the British contribution in cash terms.

[Harriett Baldwin]

I accept that the OBR has published figures that clearly show that there is a real-terms reduction in the overall envelope for the settlement period.

My hon. Friend the Member for Daventry also asked about the additional costs compared with the existing decision and any offsetting benefits. He raised a number of technical points about the VAT-based contributions, which are calculated by applying a call rate to a hypothetical harmonised VAT base—are not we glad we have him in this House, knowing all the information and all the right questions to ask on the details of the financial settlement? He also asked about the impact of the switch from ESA 95 to ESA 2010. It was taken into account in the own resources decision, but it does affect all countries’ GNI, so the effect on the contribution depends on how all countries’ GNI is revised. For the UK the key determinant of contributions is, in fact, the VAT base, thanks to our rebate, which the Labour party did not succeed in giving away fully in the early 2000s. Changes in the UK’s GNI are corrected in the rebate calculation.

The hon. Member for Luton North (Kelvin Hopkins) mentioned a number of negotiating red lines that he has, although he is in a slightly different position. He asked what are the Prime Minister’s red lines. The Prime Minister has clearly set out areas where he wants change, including reforming welfare to reduce the incentives that have encouraged such mass migration from Europe; increasing economic competitiveness to create jobs and growth for hard-working families; and protecting Britain’s interests outside the euro. They also include halting the constant flow of powers to Brussels, including by ensuring a stronger role for national Parliaments, and dealing with the concept of ever-closer union. That may be what some others want, but it is not for us.

In 2010, this Government took the tough decisions that were needed to pull this country back from the brink. We can have a stable, prosperous society only if a Government spend their citizens’ money carefully, and it is right that we took that approach to the European level of government as well.