Banking Reform

Lord Davies of Oldham Excerpts

Monday 4th February 2013 Lords Chamber

[Lord Newby]

My Lords, the Government have today laid before the House the Financial Services (Banking Reform) Bill, and their response to the report of the Parliamentary Commission on Banking Standards that was published on 21 December last year, following the commission’s pre-legislative scrutiny of the Bill. I thank and pay tribute to the members of both the Independent Commission on Banking and the Parliamentary Commission on Banking Standards. The two commissions, whose membership comprises some of the most distinguished policymakers and formidable intellects in the world, have between them shaped a set of reforms to British banking that will lead the world and set an example to other countries in the seriousness, radicalism and meticulousness of the changes that are proposed. The Bill that is published today reflects their painstaking work, and the Government have accepted almost all their recommendations.

The reforms address what the Chancellor has called the British dilemma: how Britain can be a leading global financial centre, with more than its share of international trade in financial services, while at the same time not exposing the ordinary working people of this country to the catastrophic risks of banks failing. These reforms were, and are, necessary. The previous regime was tested and failed. UK taxpayers had to bail out the banks with £65 billion of the hard-earned money of ordinary working people, while those who had taken a one-way bet with their money slunk away, losing nothing more than their job—and sometimes not even that.

The anger that the country feels about what happened must be channelled into change, to reset Britain’s banking system. The objective of the Bill proposed by Vickers and endorsed by the commission is that any failure of any bank in future should not impose a cost on the taxpayer, and not interrupt for a second vital banking services. That is a high ambition, but one that is appropriate for a country with a reputation for financial stability and confidence that has for centuries been one of Britain’s chief assets in the world.

As is well known, the Bill will erect a ring-fence around the core operations of banks headquartered and regulated in the UK. Within that ring-fence, banks must be completely insulated from activities such as using depositors’ funds to speculate for the banks’ own benefit in capital markets. In the event of failure, depositors will be given preference in liquidation. As a result of the commission’s recommendations, the Government are making a number of further changes to the Bill. First, in the honourable Member for Chichester’s acute phrase, which will permanently enter the lexicon of banking, the ring-fence will be electrified. The regulator will be given the power to order the full separation of any bank that attempts to undermine the ring-fence. The directors of the banks will be personally responsible for ensuring that their banks comply with the ring-fencing rules, and the Prudential Regulation Authority will conduct an annual review of the operation and adequacy of the ring-fence rules.

Secondly, there are explicit provisions in the Bill for the principal aspects of ring-fencing, including that there should be separate boards of directors, remuneration arrangements and human resource management, for ring-fenced banks. Thirdly, the Bill gives us an opportunity to make an historic change in the competitive environment of UK banking. Competition is essential to ensure that customers benefit from innovation, extracting customer service and efficiency from their banks. That has not always been the experience of customers in the past. As well as bringing in a seven-day automatic account-switching service from September this year, the Government will take steps to tackle the cosy arrangement whereby the biggest banks determine how payment systems will be run. Why should it be necessary in 2013 for a cheque to take six days to clear, with banks and not customers scooping up the interest on balances during this delay? Why should a new bank have to beg an incumbent bank for permission to use the payments system? We will require access arrangements to payments systems that are fair, reasonable and transparent. The commission has, rightly, emphasised the importance of competition. I am grateful to it for propelling this drive further, as I am to my honourable friend the Member for South Northamptonshire, for whom greater competition in banking has been a personal crusade.

The fourth change is that more parliamentary scrutiny will be built into the secondary legislation that implements this high-level Bill. Drafts of the principal statutory instruments to be made will be available to the House before Second Reading. The Government accept the recommendation of the Delegated Powers and Regulatory Reform Committee on the type of scrutiny each should receive.

These are historic reforms, but they are appropriate for our country, and for an industry in which, directly and indirectly, 2 million people work. It is our biggest export earner and contributes £1 in every £8 of our tax revenue. We should take the steps necessary to restore confidence in and to an industry in which it has fallen so far. There is much scrutiny of the Bill before us, both here and in the other place. I look forward very much to our discussions in the weeks and months ahead.

[Lord Davies of Oldham]

My Lords, I am grateful to the noble Lord for repeating the response to the Urgent Question but I am appalled that this issue is being tackled as an Urgent Question. It means that this House has merely 10 minutes to consider the matter. Surely on this issue—the most significant piece of legislation that will go before the two Houses relating to an industry that has been at the centre of the greatest crisis in many years—there should have been a Statement in the other place. Why was it a junior Treasury Minister who made the Statement and not the Chancellor?

This is indicative that the Government would like to water things down. They have done that from the beginning. When the Vickers commission reported, the Government’s first reaction was to set about watering down its recommendations, by allowing, for instance, the reduction of the advised leverage ratio. When the Joint Committee of the two Houses proposed to electrify the ring-fence, the Government’s first reaction was to refuse to commit to it. As we see today, they have significant reservations about it. They have produced only a partial climbdown.

Does the Minister agree with the noble Baroness, Lady Kramer, who is in her place? I apologise if am pre-empting what she might say but I will have no other opportunity in this debate. She is the economics spokesperson for the Minister’s party. She believes that attempting to limit the procedure to individual banks will effectively tie up the sanction in years of complex litigation. That is why we endorse her viewpoint; it is ours, too, that this should be legislation. The back-stop power should apply to all banks.

Is it not vital that the Government make up their mind shortly and include a reserve power in this Bill for full separation of retail and investment banking, in case ring-fencing does not work,? That is what the Opposition have asked for. I believe that is what the noble Baroness, Lady Kramer, is asking for. It is certainly what the parliamentary commission indicated in its report and I fail to see why the Government are not more responsive in an area that they must know causes the greatest anxiety to the British people. The Government must look closely at this, and be determined, clear and effective, and not wishy-washy.

[Lord Newby]

My Lords, I smile with amusement when the noble Lord accuses the Government of not taking this issue seriously. When his party was in his power, and we and I suggested to it and him that they do exactly that, we were told that it was irrelevant to the problems that we were facing and that we should definitely not do it. I will certainly not take any lessons from him about the importance of this issue.

As for whether the legislation should include reserve powers to implement full separation across the sector, this was put to the Governor of the Bank of England, who said that he did not want such reserve powers. More importantly, general reserve powers would give huge power outwith Parliament to tear up the provisions of the Bill as we envisage it, and fundamentally change some of the ways that we see it working. The Government think that if you got to the point where that was a possibility, or you wanted those powers, the appropriate way to do it would be to come back to Parliament, rather than leaving it to the regulator to exercise what would be very sweeping powers indeed.