Financial Services (Banking Reform) Bill

Jim McGovern Excerpts

Monday 11th March 2013 Commons Chamber

[Andrea Leadsom (South Northamptonshire) (Con)]

I am delighted to speak almost last in this debate.

I agree with the hon. Member for Hayes and Harlington (John McDonnell) when he says that many people have suffered terribly as a result of the financial crisis, and when he speaks of the greed and the complete lack of regulation and control over banking over the past decade.

The British people are still furious about the behaviour of bankers, and they have every right to feel that way. Banks were already seen as greedy and arrogant. They have now reached the depths of humiliation in the wake of the LIBOR manipulation, PPI mis-selling and bank swaps mis-selling. Individual bankers are rightly being investigated by the police. I and all colleagues in the Chamber hope that if criminality is proven, they will go to jail and bear the same brunt of punishment as any other criminal.

Nevertheless, we must recognise the vital importance of the financial services sector to the UK economy. It is a huge employer. If all financial services are included, more than 1 million people have jobs in the sector. The vast majority of those people do an honest day’s work for a fairly modest salary and do not receive a large bonus.

We must also remember that we are talking about a globally mobile business. In the investment banking business, someone can pick up the phone in London on a Friday morning, put it down on Friday night and carry on doing the same deal on a Monday morning in Singapore. While reforming the industry to make it safer for people in this country, we must be careful to preserve it so that we can take advantage of the enormous opportunities that it provides, such as the sale of mortgages and health and life insurance policies in developing markets such as China, Brazil and South Korea that do not have developed, simple, basic banking packages. We can make profits for Britain at the same time as helping those developing economies. It is important that we remember to protect this industry at the same time as reforming it.

The Bill offers the opportunity to put right many of the wrongs of the previous Government’s approach to financial services in the UK. It will help to bring back to UK banking what used to be called the balance of fear and greed. For many years, there has been enormous greed with no fear of consequences. We have allowed a small group of vast institutions to grow by consolidations, mergers and takeovers. The culture has been one of, “Heads, I win; tails, the taxpayer loses.” That has proven to be true.

The Bill will address Labour’s failed tripartite system of regulation. It will put accountability for the supervision of the banks and for systemic risk back into the hands of the Bank of England. In 1995 when Barings went bust, before Labour had had the chance to mess up the regulatory system, I was a small cog in the wheel trying to prevent a run on the banks. I remember supporting the then Governor, Eddie George, to ring the various international banks to ensure that there was not a run on the banks on Monday morning. Why did he do that over that fateful weekend? It was because he knew that the buck stopped with him and that it was entirely down to him to ensure that there was not a run on the banks. How different it was under Labour’s tripartite system. When people were queuing down the streets to take their money out of Northern Rock, the Treasury was looking at the Bank of England, which was looking at the FSA, and nobody took any action. That was utterly shameful, and the Bill will ensure that it cannot happen again.

[Jim McGovern (Dundee West) (Lab)]

The hon. Lady said that she was a small cog in the wheel and that Sir Eddie George was the big wheel. Does she think that that was working at that time?

[Andrea Leadsom]

I always think that the proof of the pudding is in the eating, and the fact is that Barings was culpable for a potential massive run on the banks, because of rogue trading. It did not happen, and why? It was because one individual took responsibility, surrounded himself with people who could prevent it and ensured that it did not happen. We do not need to look any further to see that it was working.

There is one area in which the Bill is a lost opportunity. It offers us the chance to address the big elephant in the room, which is the lack of competition in the banking sector. We have the chance to go well above and beyond what John Vickers proposed. Retail banking in this country should be truly competitive. As we all know, one of the biggest problems in our economy right now is the lack of finance for small and medium-sized enterprises, which are the lifeblood of our economy.

--- Later in debate ---

[Stephen Barclay (North East Cambridgeshire) (Con)]

It is always a pleasure to follow my hon. Friend the Member for South Northamptonshire (Andrea Leadsom), and, Mr Deputy Speaker, to be the last speaker to catch your eye before the wind-ups.

The Father of the House spoke about one of his speeches in 1984, so I took the liberty of having a look. If the House will indulge me, I will quote from it:

“There has been a great deal of talk about capital. Of course that is important, but vastly more important than that is expertise, integrity and judgment.”—[Official Report, 16 July 1984; Vol. 64, c. 68.]

Indeed, there was much expertise, integrity and judgment in my right hon. Friend’s remarks, and in essence I want to focus my comments on them. The Bill addresses structure and it is right to learn the lessons. Of course there was too much leverage in the system. No one would think that the level of liquidity available to the banks at a time of crisis was adequate, and there has been much work by regulators and central bankers since the 2008 crisis to address that. What there has been rather less of, however, is a willingness to tackle culture.

While I commend the Government for the Bill’s focus on leverage, and on dealing with the well-measured suggestions of my hon. Friend the Member for Chichester (Mr Tyrie) and his commission, we should be clear on what the Bill is not doing. It will not stop retail bank failures, such as Northern Rock and Bradford & Bingley; it will not stop investment bank failures, such as Lehman’s; and it will not stop the regulatory failures of universal banks, as we have seen with the anti-money laundering and sanctions abuses or the LIBOR abuses by some of our largest banks. The Bill does not address the shadow banking world—the £200 billion of risk that is currently carried in private equity. Most of all, the danger of today’s debate is that we do what is so often the case after a regulatory crisis: we focus on solving the problem we have just had. We are not talking about the impact on banks if we lose control of interest rates, which we all hope will not be the case. The focus is on the structural failures relating to liquidity and capital, and that has been the tenet of the debate.

[Jim McGovern]

Why would it be wrong to focus on our recent problem?

[Stephen Barclay]

Of course that is not wrong. I said that the Bill is welcome, and that it is a positive response to the commission’s report. The focus on leverage and liquidity is absolutely right, and that is why I pay tribute to the work of central bankers and regulators. I am not sure that the hon. Gentleman was listening to my remarks. The danger is that we focus on the past and do not anticipate the future. There is a need for flexibility, and for that the Bill needs to tackle culture. The paradox is that individuals in banks are motivated by big bonuses, which drive their behaviour, yet when things go wrong, we do not have their corollary, which is big fines against individuals. That might be the sort of thing to grab people’s attention when they become aware of issues.

I am glad that the hon. Member for Nottingham East (Chris Leslie) is back in his place, because he missed addressing that point in his remarks—it is a shame he would not take interventions from me. Under his Government, the Financial Services and Markets Act 2000, probably the most-debated Act for many years, created a rulebook of more than 6,000 pages. He spoke about the need for more regulation and suggested that Conservative Members had failed because of the lack of regulation, yet we had 6,000 pages of it. The issue was that the regulation was not enforced.

It is even worse than that, because the hon. Gentleman actually allowed a regulatory regime that included things such as guaranteed bonuses. Not only would somebody get a bonus if they performed well, but they got a guaranteed bonus even when the bank collapsed. When the financial crisis hit in 2008, contractually the banks were signed up to guaranteed bonuses, so they were still doling out money under the enhanced regulatory regime to which he referred—true socialism in action.

It gets worse. There was a fines system that incentivised banks to profit from the wrongdoing of other banks. When a bank was subject to a regulatory fine, the money went not to the taxpayer in the form of funding good works or to customers of the bank affected, but to the other banks in the form of lower levies to the regulator. When a bank committed a wrongdoing, therefore, other banks in the sector profited. This is the regulatory regime on which we are now being lectured.

Let me give another example on structure: the collapse of RBS. After 10 months of the brightest minds in our Treasury—I am sure they are the brightest minds—looking at this issue, they still could not rely on the books. So untrustworthy was RBS’s auditing that the permanent secretary to the Treasury had to send for a letter of direction from the Chancellor saying, “I can’t rely on the books. It’s such a mess, Chancellor, you’ll have to give me a letter of direction.” We will not take any lectures from the Opposition, therefore, about their regulatory regime or the mess in which it has left our constituents, who are the ones footing the bill.

--- Later in debate ---

[Stephen Barclay]

No. I have taken two interventions from the hon. Gentleman and he did not do well with either. I want to make progress, because I am conscious that time is moving on.

I shall return to the comments made by someone who, unlike the hon. Gentleman, speaks with professional expertise, namely the Father of the House. He was correct—as he is on so many issues, but particularly this one—to talk about the danger of focusing on structure and not rooting out conflicts of interest. That is at the heart of the point I want to make about individual accountability, linked to conflicts of interest—about the awareness, as my hon. Friend the Member for South Norfolk pointed out, of those in institutions who know where the risks are and how they are incentivised to speak up. On Thursday we will have a debate on the NHS and the fear of whistleblowers to speak out. Many of the issues in the NHS are similar to what we have seen in our banks. Let me give the House an example that makes the point highlighted by my hon. Friend. So far, the two biggest fines imposed on any individuals in banking were imposed on two Northern Rock executives. On both occasions they were less than those individuals’ bonuses the preceding year. How are people incentivised to do the right thing in our financial sector when they can see such short-term benefits from wrongdoing and very little downside risk?

I very much endorse what my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) said about empowering consumers by having portability in the system and grass-roots pressure. However, we cannot rely on that alone—I do not think she would suggest for a minute that we could—to address the regulatory failures or the asymmetry of information that customers face.

[Jim McGovern]

I became an MP in 2005, and between then and about 2009, I do not think any business people approached me. Since then, however, a lot of them have approached me to express their grievous concern about keeping their businesses going. I have to say that I am struggling to understand what the hon. Gentleman means, and I think the people in my constituency who have started small businesses as joiners, bricklayers or whatever would also struggle to understand him. Will he please make his point in lay terms?

[Stephen Barclay]

Yes, I can address that question head on. It is logical to have introduced measures to try to manage risk in the financial sector, but we are requiring banks to retain more and more assets at the same time as asking them to lend more. We are therefore asking them to do two conflicting things, as well as introducing a structural fix that innovative people will often be able to find ways around. For example, the shadow banking sector is not affected by this kind of proposal. If we want to address innovation, to be flexible and to move with the market, and retrospectively to impose fines for wrongdoing, we would be far more successful if we changed the culture than if we imposed rigid rules.

In many ways, I agree with the hon. Gentleman, in that we all have constituents who complain that the banks are not lending, but perhaps that is an issue for another day. There are many areas in which the banks’ behaviour is wrong, but we cannot change the culture through rules alone. We had more than 6,000 pages of rules, but that did not achieve the right culture. We can achieve it by having individual accountability, and one of the best ways of doing that is through personal fines.

I am sure that the hon. Gentleman read the Daily Mirror today, as I did; I always try to avail myself of the Daily Mirror. On the front page, there was a story about the “Fat cat in the hat”, who is a former Barclays executive, according to the report, and it must be true because it was in the Daily Mirror. The point is that it is individuals like that, where there is alleged wrongdoing, who are able to keep their bonuses and keep their profits. That does not send the right message on culture. Rules are too blunt a tool.

If we want to change the banks, the Bill is extremely welcome, but I hope that the very constructive proposals put forward by my hon. Friend the Member for Chichester will be given further consideration. There is much to support in the Bill, however.