Financial Services (Banking Reform) Bill

Jonathan Edwards Excerpts

Monday 8th July 2013 Commons Chamber

Clause 1 amends the Financial Services and Markets Act 2000 to require the PRA to seek to ensure that a ring-fenced bank’s business is carried out prudently and protected against risks that might threaten the continuous provision of core services. FSMA is also amended to require the PRA to seek to ensure that the failure of a ring-fenced bank will not interrupt the provision of core retail banking services in the UK. Like any other bank that is poorly managed, a ring-fenced bank will be allowed to fail, but to avoid serious harm to the wider economy essential core services must be kept running, which requires the PRA to ensure that the business of a ring-fenced bank is structured in a way that allows it to be resolved in an orderly fashion, if that bank fails. Questions were raised in Committee about whether the resolvability element fully captured all circumstances in which the regulators might need to ensure that a ring-fenced bank could fail safely, so the amendments clarify the fact that the PRA must seek to minimise damage to the continuity of core services caused by not only the failure of a ring-fenced bank, but the failure of any other member of its corporate group.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

The new structure that the Minister is outlining looks good on paper, but the key to its success is the role of the PRA. How will he stop the problem of the revolving door that arose with the Financial Services Authority afflicting the PRA, because that would completely undermine the ring fence he intends to put in place?

[Greg Clark]

The hon. Gentleman makes a good point. He will know from our proceedings during the passage of the Financial Services Act 2012 that we needed to reverse the catastrophic decision to take supervision of the banking system away from the Bank of England, which had always exercised that role with authority and commanded respect not only in this country but throughout the world. That Act corrected the situation, and the PRA is part of the Bank of England, as he knows, so we have restored that authority.

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[Chris Leslie]

We have tabled an amendment, which I shall discuss shortly, suggesting a clear back-stop power for the full separation of retail and investment banking across the board, in case ring-fencing does not work. We believe that we should give ring-fencing a chance, but it is important to note that the jury is still out on whether it will work. We just do not know. The Bill gives us the opportunity to ensure, as the commission recommended, that nobody has any truck with breaches of the ring fence. That must be the case both on a firm-by-firm basis for specific institutions and banks and for the sector as a whole.

[Jonathan Edwards]

Given what the hon. Gentleman has just said, are not the titles of the proposed new section in his amendments 18 and 19, which refer to “full separation”, slightly misleading? I will support those amendments, because they would be a step forward from what the Treasury recommends, but the Labour party is arguing for electrifying the ring fence, not for full separation.

[Chris Leslie]

It is true that we want to give ring-fencing a chance. That seems to be the broad consensus among those who have seriously considered the issue, either on the commission or elsewhere. However, it is important that we keep in our pocket the chance to do something serious and rigorous in case that plan does not work. I suppose we might call it a plan B, although I know the Government have an aversion to ever considering anything outside the narrow tram lines down which they career. It is important that we take this opportunity to put that plan in place.

That brings me to the Government’s rather pathetic, lettuce leaf-like attempt to claim that they are adopting a back-stop electrification power. I am not sure what voltage the Minister has opted for, but for the Government to claim the provision as a firm-by-firm back-stop power is an insult to back-stop powers. As my right hon. Friend the Member for Wolverhampton South East (Mr McFadden) said, the process in Government amendment 6 will take six years should ring-fencing fail, which is a snail’s pace. I urge hon. Members to look at the various stages involved in that amendment. First, the Treasury will look to the regulator to issue not just one preliminary notice but three—the idea of three preliminary notices seems like an impossibility—all of which will have different timetables. I do not know whether three preliminaries means, “We’re coming to get you, but not quite yet.” It is like the Education Secretary, with his firm, disciplinarian hand, saying to children, “We’re going to come and get you, but we’ll give you three preliminary notices before we do so.” The kids would be crawling all over the ring fence for months and years.

After those preliminary notices, a warning notice will be issued, followed very swiftly—not—by a decision notice. There will be at least five steps over a six-year period. “Five strikes and you might be out in six years’ time” does not strike me as an effective back-stop power for galvanising and electrifying the ring fence. If the Government recognised for six years that there was a flaw with ring-fencing but did nothing, their culpability would be almost equal to that of the banking sector. Amendment 6 could be an amendment to a misrepresentation of the people Act, and the Financial Secretary needs to take it off the table and instead consider the amendments that the Chairman of the Parliamentary Commission on Banking Standards has tabled.

This is a back-stop power in name only, and just because the Government say it is a back-stop power does not make it so. We need the ability, on a firm-by-firm basis at the very least, to take firm action to a timetable that shows flexibility and can be enacted swiftly if need be. I am afraid I tend to agree with the amendments tabled by the hon. Member for Chichester. The provision needs to be truncated and the Government must withdraw amendment 6 as it is wholly inadequate. It would have been more effective to go with amendment 19 as drafted by the commission, which was a far more effective truncated version of a back-stop power on a firm-by-firm basis. That was far clearer, the drafting was improved, and it is a mystery to me why the Government have resisted it at every stage of the process. Whether that was due to lobbying from the banks, or because they do not believe in standing up to the sector and taking on this tough issue, the weakness of the Government on this matter surprises many people.

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[Richard Fuller]

I am appreciative of that intervention, which adds not only to my body of knowledge, but to the commonly held disgust that, following all these efforts involving the best minds we can put in place, no one is going to jail. In the absence of anyone going to jail, we have gone through all the fraud, all the mis-structured, light-touch regulation and all the mis-positioning of responsibilities without a single person being truly accountable. If there is a point on which I disagree with my hon. Friend, which I rarely do, it is that he said in his speech that financial penalties are likely to be more successful. He might have a point in saying that there will be more successful prosecutions, but the loss of one’s liberty cannot be put in a discounted cash flow—there cannot be a beta high enough. If we want to change behaviour, we have to show that people will go to jail and lose their liberty. If, having gone through the worst financial recession that we have experienced in our lifetimes, not a single person goes to jail as a result of all our work, I do not care that there is a cross-party consensus because, in my view, this is failing the people.

[Jonathan Edwards]

To what extent has the hon. Gentleman been influenced by events in Iceland, where the bankers were all purged? They were jailed, as were some very senior politicians, including the then Prime Minister.