Financial Services (Banking Reform) Bill

Lord Lawson of Blaby Excerpts

Tuesday 8th October 2013 Lords Chamber

[Lord Lawson of Blaby (Con)]

My Lords, I listened very carefully to what my noble friend the Minister said. I am extremely grateful to him for the extent to which he has accommodated the points made by the Parliamentary Commission on Banking Standards, of which I had the honour to be a member and to which the noble Lord, Lord Turnbull, referred—and I entirely endorse his remarks. However, the remarks that the Minister has just made simply do not stack up. Before going into why that is so, let me put a little perspective on what we are doing today. It sounds very dry, arid, tedious and tiresome in many ways. Indeed, it is not a model of how to construct legislation, as my noble friend Lord Higgins pointed out. Nevertheless, it is testimony to the fact that the Government have listened attentively to what the parliamentary commission had to say, and what was said in the other place in response to it.

My noble friend the Minister has already raised matters wider than the amendment that we are discussing. He started to talk about the industry-wide separation power, which we were concerned about but which was not part of this group of amendments. We will come on to that later. In this country, we are suffering, as part of the wider world’s suffering, the after-effect of a most appalling global recession. There were a number of causes of that problem, but it is generally agreed that right at the heart of it was a banking meltdown. Nothing is more important, therefore, than to do whatever we can to ensure that a further banking meltdown in future is unlikely to occur and to ensure that, if it does occur, the damage will be much less than that caused in 2008 and thereabouts.

There are few pieces of legislation going through Parliament that are more important than this Bill. I am not saying that you can do everything with legislation—there are a number of wider issues. But you have to do whatever you can. It is a long time since this House has had such an important role in trying to ensure that it is put right. It is clear that the legislation that was introduced in the Commons and went through the other place was wholly inadequate, and as a testimony to that are all the amendments that we are discussing today and all the amendments that the Government have moved. It is up to this House to get the legislation right; that imposes a very great responsibility on us and we should look at the legislation in a non-partisan fashion.

The Minister rested his argument on the fact that the Vickers commission came up with this wheeze of ring-fencing. It was a compromise between full separation of commercial and retail banking and investment banking and just leaving it as universal banking. There are a number of problems with the idea of the ring-fence. As the noble Lord, Lord Eatwell, and others have pointed out, this is new territory and has never been done before. We do not know whether or not it will work. We know that separation can work. There was separation in the United States under the Glass-Steagall legislation from 1933 to 1999 when it was repealed and for most of that time it worked very satisfactorily. It was weakened as time went on as a result of the success of the American banks in lobbying various authorities in the United States to make exceptions here and amendments and changes there. We need to watch out for that. It was also weakened to some extent by the ingenuity of investment bankers in finding ways round it, to which the noble Lord, Lord Turnbull, referred. Nevertheless, separation worked pretty well in the United States and in the United Kingdom.

I speak with some experience. It is now more than half a century since I was the principal writer of the Lex column in the Financial Times and I have been a close observer of the banking scene throughout that period. I recall that for most of that period we had a separation between what were called the joint stock banks, which engaged in retail and commercial banking for small businesses and so on, and the investment banks, which were not called that in those days—they were called merchant banks. They were completely separate and it worked very well, so we know that separation can work, and has worked, in the two major banking centres in the world.

It is true that the continent of Europe has always gone in for universal banking. That is so in Germany in particular but is generally the pattern in continental Europe. However, it is no accident that the two major banking centres of the world, London and New York, had separation. That worked. Whether this halfway house can work or not is very uncertain. Although the remarks of my noble friend Lord Blackwell on this amendment showed that he got completely the wrong end of the stick on it, as the noble Lord, Lord Turnbull, pointed out, he was absolutely right to point to one of the problems, although not the only one, with the governance structure. It is a very curious governance structure in which the two subsidiaries of the holding company are together but separate. They are meant to be completely separate even though they both, as boards of directors, have responsibilities to exactly the same group of shareholders. It is a very odd system and we do not know the workings of it.

I say that my noble friend the Minister is unconvincing because his whole point rested on the fact that Vickers said the ring-fence is the right answer and that because Vickers said that we must stick with it and not change it. What we are saying, which is surely much more reasonable, is that we will, of course, give Vickers a chance. Indeed, we will try to reinforce his proposal by means of the so-called “electrification” procedures. However, if it is seen not to be working, we will have to go to separation. One member of the Vickers commission is already convinced that we should go to separation without any intermediate step but I am quite sure that nobody on the Vickers commission wishes to see a failure. Let us give Vickers a chance and see how it works but if it does not work—it has to be kept under review—we should go to full separation. That must be sensible. The fact that the Vickers commission said what it did is really no argument at all.

I am very glad to see the most reverend Primate the Archbishop of Canterbury in his place. He was a most distinguished member of our Parliamentary Commission on Banking Standards and I hope that he will contribute to our debates. One of the things that he has emphasised strongly—I have tried to explain the importance of this—is the problem around the culture of banking. This was accepted by Parliament when it set up the commission and, indeed, my right honourable friend the Prime Minister explicitly said that it was to deal with the culture.

One of the key problems is that retail and high-street banking—commercial banking—and investment banking are two completely separate cultures. It is very difficult, with the best will in the world. I am not against investment bankers, but I do not think they should be bailed out by the taxpayer. We may, from time to time, need to bail out the commercial banks, with their retail depositors and their responsibility for the payment system. They may need that, even though they have enhanced capital funds, but it is wrong, I think, ever to bail out investment banks; they should be like hedge funds, with a fear of failure restraining what they do. They will be imaginative, they will be adventurous, they will be creative, they will be exciting for those who are excited by this kind of thing, and they will have a totally different culture. To assume that you can get two quite separate cultures in the same entity is stretching it a bit. Therefore, we have to see how this will work. It may not work. If we are going to address this cultural problem we have to make sure we address it effectively.

We shall come on to the other amendments in the name of the noble Lord, Lord Turnbull, to which I have added my name, but on this major issue we have to strengthen the Bill in the way that the noble Lord highlighted, endorsed by the noble Lord, Lord Eatwell, for the Official Opposition. We have certainly not heard any good reason from the Minister why we should not do that.

[Lord Barnett (Lab)]

My Lords, I have enormous sympathy with the noble Lord, Lord Turnbull, who said in his introduction that he has never seen such a shambles presented to any House. As Chief Secretary to the Treasury, I had the misfortune for five years, as the noble Lord will know, to take two Finance Bills a year through, mainly because the first Bill had to be amended because it had not been properly scrutinised; it had been guillotined by all successive Governments. Yet I have never seen anything remotely like this Bill and I am grateful to the noble Lord, Lord Deighton, and his staff, who have done a tremendous job in trying to present to us what exactly is going on here. It is very difficult when one is working without a group of secretaries, let alone one, to understand what the devil is going on.

It seems to me that every speaker we have heard so far, apart from the noble Lord, Lord Lawson, is stumbling towards the only real solution. We will have to debate fairly soon to settle whether the House agrees to separation—call it Glass-Steagall, call it what you like. However, while we are stumbling in this direction—I am not sure from what my noble friend on the Front Bench was saying whether our Front Bench is stumbling towards it as well—it seems inevitable to me that we have to decide this one, major issue. However many times this is reviewed, ring-fencing can never be the solution to the different cultures that the noble Lord, Lord Lawson, referred to. It is quite impossible.

I do not want to take too much of the Committee’s time on this occasion, but we have to settle, once and for all, whether we agree with this ring-fencing idea. It is so complex that it makes the situation even worse, as we have heard in a number of debates. Until we settle this matter, we will go from amendment to amendment for years on end, and have reviews for years on end, getting nowhere at the end of it. I hope that we can have the major debate as soon as possible so that the House can decide.

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[Lord Deighton]

My Lords, these amendments streamline the procedure for the group restructuring powers—the so-called electrification powers. In another place, following the recommendations of the PCBS, the Government introduced amendments adding new Sections 142K to 142V. These sections give the regulator the power to require a banking group to restructure if the regulator believes this necessary to ensure the objectives of the ring-fence. As the PCBS recommended, the regulator will have the power to require the group to divest completely either its ring-fenced bank or its non-ring-fenced bank, or transfer specific business units out of the group. These extensive powers may be exercised if the regulator believes that the group’s ring-fenced bank is insufficiently independent or if the group’s conduct is such as to threaten the regulator’s ability to meet its statutory objectives. The amendments made in the Commons thus provide for the power to require the separation of an individual banking group that the PCBS recommended.

However, some concerns were expressed both in the other place and in this House that the procedure for the regulator to exercise its group restructuring powers was too complicated and drawn out. It was argued that the number of steps involved and the length of time required from start to finish created a process that was so cumbersome as to be difficult for the regulator to use in practice, and that this risked undermining the group restructuring powers as a deterrent against attempts by banks to subvert or game the ring-fence.

The Government took these concerns very seriously. As noble Lords will recall, I committed at Second Reading to bringing forward amendments to simplify and streamline the process for exercising the group restructuring powers. These amendments do exactly that. Amendments 7, 9, 11 and 12 replace the requirements for three preliminary notices with just one so that if the regulator is considering exercising its powers it need notify the target group only once, stating its reasons for considering requiring restructuring and the action it is proposing to take.

Amendment 8 removes the requirement for the Treasury to consent to a preliminary notice. Previously, Treasury consent was required for each of the original three preliminary notices. Under this amendment, the regulator need give the Treasury only a copy of a preliminary notice. Treasury consent will be required only later in the process for the issue of a warning notice.

Amendment 15 clarifies that any notice of a decision by the regulator not to exercise its powers must be given in writing. Amendment 16 provides that a copy of such a notice be given to the Treasury.

Amendment 17 shortens the warning notice period from 12 to 18 months to three to six months. This period is intended to give a bank about which the regulator has concerns, and to which it has issued a preliminary notice, an opportunity to address the problems identified by the regulator of its own accord. The Government still believe that it is right to give a bank the chance to tackle any problems, but agree that the period originally provided for was too long.

Amendments 13, 18 to 20 and 38 are consequential on the other amendments being made to these sections. Amendments 21 and 22 remove the requirement that the regulator must allow at least five years for any restructuring or divestment to be completed. Now it will be up to the regulator to set whatever deadline it considers appropriate.

These changes will bring the procedure for using the group restructuring powers into line with that proposed by the PCBS. One point on which we continue to differ from the PCBS is the inclusion in the procedure for requiring the restructuring of an external review, which Amendments 10, 14 and 116 would have inserted, and which we have already debated.

As for the total time involved to require the separation of a group, following the Government’s amendments, the minimum total time will be slightly shorter under the Government’s provisions than under the PCBS’s. Under the Government’s amendments, the minimum time from the regulator’s first notice of its intention to require restructuring to the actual imposition of a requirement to separate will be approximately four months, compared to approximately five months under the PCBS’s amendment. These amendments will therefore make the group restructuring powers—the “electrification” powers—an effective reinforcement to the ring-fence.

Some will argue that the Government should have gone further and should also legislate for the option of full separation across the entire UK banking industry. The Government do not agree with this suggestion. To provide for a targeted deterrent against members of an individual banking group that seeks to game or evade the ring-fence is a sensible reinforcement for the ring-fence. To legislate for industry-wide separation, however, would not be a sanction; it would be to abandon that policy. The logic of requiring all banks to separate would have to be that the ring-fence had failed to achieve its objectives of delivering greater financial stability while preserving the legitimate economic benefits of universal banking. It could in no way be described as a deterrent.

[Lord Lawson of Blaby]

My noble friend has talked about the great advantages of universal banking that need to be preserved. Will he explain to the House what these unique advantages are?

[Lord Deighton]

The first point that I would make in response is that it was the position of the ICB, which did an enormous amount of work on this, that the ring-fence was not in any sense a compromise but was in fact superior to full separation because of some of the synergies available in the universal bank. The essence of the argument is that the other parts of the bank that may not get into financial trouble actually provide benefits of diversification and scale that can protect the ring-fenced entity from any of the problems that they may have. It is essentially the diversification and scale advantages that universal banking may bring.

I have some sympathy with my noble friend’s underlying suggestion; in much of the discussion so far we have talked about how ingenious bankers are but, given what they have done to their organisations and the industry over the past five years, you have to question exactly how ingenious they are on a consistent basis.

To come back to the point, others are of course perfectly entitled to the view that the ring-fence will fail—we have heard that point of view from many Members here—and a future Government would be entirely within their rights to propose an alternative policy to ring-fencing. However, the only proper way to legislate would be for the Government to conduct research and analysis to match the calibre of the Vickers commission in support of full separation. I note that the PCBS produced no such evidence. Let it build a consensus around its conclusions, and let it come to Parliament with new legislation to be subjected to the full scrutiny and debate that such a step would require.

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[Lord Turnbull]

If the drafting does not say that, we will have to amend it. The clear intention is for this to be a power and not a requirement. I beg to move.

[Lord Lawson of Blaby]

Perhaps I may say something about this. As the noble Lord, Lord Turnbull, mentioned, we retrenched on this in discussions on earlier groups. This is something to which I attach great importance. The noble Baroness, Lady Cohen, said that the commission had got it all wrong, that ring-fencing could not possibly work and that there would have to be complete separation. I agree with her—and this is no surprise. I was speaking out for complete separation long before almost anybody else I can think of, certainly in this country. For five years I have been writing and speaking on this: before the parliamentary commission and before the Vickers report. It remains my view that this is most unlikely to work, partly for reasons that the noble Baroness gave and partly for others.

Of course, as the noble Lord, Lord McFall, pointed out, we on the commission decided that it would be sensible to have a unanimous report. There was no majority on the commission—and certainly not unanimity—for complete separation. Therefore, we proposed what we proposed. One thing we proposed, which is what this group of amendments is about, was a route to complete separation. This is what the amendment is about: a process by which, if it is seen, and events prove, that the noble Baroness and I are correct, along with many others who think the same, this procedure, which the Government at the present time refuse to accept—something I regret—is a way in which we might get there.

When I asked the Minister what the great advantages were of universal banking, from which we should in no way depart, his main argument was that diversity was a form of strength. I am old enough to remember when industrial conglomerates were extremely popular. In the late Lord Hanson’s group, and others, there were a whole lot of disparate industries in the same holding company, and the argument was that this diversity was a form of strength. In fact, of course, it was a disaster and nobody argues the case for industrial conglomerates any more.