Financial Services (Banking Reform) Bill

Debate between Mark Field and Pat McFadden

Monday 11th March 2013 Commons Chamber

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I would like to begin where the Minister began, with this issue of the British dilemma: the relationship between the size of our financial services industry and the rest of our economy. It is right that it is a very big UK industry. It is a big contributor to taxes, as the Minister said, and it is a major employer. It has a cluster of expertise around it, including law, accountancy, and consultancy services, which are also important contributors to our exports.

There are two views that we can take because of that importance. One is the view, sometimes canvassed, that because of its size we cannot touch it, or only in a minimal way, because if we harm this huge industry it will go to Singapore or the United States; it will go somewhere. But there is another view, which I would like to advance in this debate, that the very size of the industry in relation to the UK economy places a responsibility on us to ensure that that size does not damage the interests of UK taxpayers or the real economy.

We have seen through the crisis that occurred several years ago precisely how damaging failure in that industry can be to the wider economy. I do not have to remind the House about the results of that failure in terms of the bail-outs, the deficits and the decisions about tax and spending, the consequences of which our constituents are living with today and will be living with for many years to come. The approach that we should take to this British dilemma is to say, yes, the industry is valuable and important, but because of its very size we believe in the need for particular measures in the UK to insulate us from wider damage. Simply to stress the size of the industry and to ask for it to be left alone whenever someone comes up with a regulatory proposal is, to put it in the language that bankers would understand, a one-way trade, and a one-way trade is not good enough. We need a two-way trade that protects the interests of taxpayers too.

[Mark Field (Cities of London and Westminster) (Con)]

The right hon. Gentleman was a Minister in the Department for Business, Innovation and Skills at the time of the bail-outs of the banks, which are commonly regarded as a great success. As part and parcel of looking back on the past while also preparing for the future, does he recognise that elements of those bail-outs were not quite the success that they were portrayed as at the time? To get out of the large positions that we still hold in Lloyds Banking Group and RBS with any profit, let alone the large profit that perhaps we should have been negotiating at the outset, seems a long time away. Does he recognise that mistakes were made over the bail-outs which will be with us for many years to come?

[Mr McFadden]

One of the reasons for having this debate is that when the crisis hit in 2007-08 there was no proper resolution mechanism or bail-out regime in place to ensure that bondholders, rather than taxpayers, were on the hook for bank failure. We are having this debate precisely because we did not have the tools in place in legislation to deal with the global crisis when it unfolded. As I have said, what we need is a two-way trade.

[Mark Field]

I do not buy into the argument that the tools were not in place. In reality, it was not that many of the businesses were too big to fail, but that they were too interconnected, which I accept put us in a very different position from that in any previous bail-out. In relation to any insolvency or restructuring, there were and are protocols in place, and they should have been adopted to ensure the best value for the taxpayer in the long term. That did not happen in 2008-09.

[Mr McFadden]

If the hon. Gentleman believes that the tools were in place, I must refer him to the Chancellor, who is constantly saying that his predecessor, my right hon. Friend the Member for Edinburgh South West (Mr Darling), had no alternative when the crisis hit in 2008.

Let me turn to the Bill and some of the issues before us today. There is broad agreement on the need for some kind of structural separation between retail and investment banking. It is important to understand that the point of ring-fencing, as recommended by the Vickers commission, is not to ensure that no retail bank can ever fail—that is impossible—but to make failure, if it does occur, more manageable by insulating the risks and focusing the resolution effort on the essential services that the Government judge it in the public interest to protect: people’s savings, the payments service and simple consumer and SME lending. It would be going too far, and it would be far too rash, to say that that solves the “too big to fail” problem. However, ring-fencing ought to reduce the risks of future failure to taxpayers and the wider economy.

As the hon. Member for Chichester (Mr Tyrie) has said, the parliamentary commission, on which I serve, made two proposals in relation to structural separation. The first was the reserve power to separate individual banks should they try to burrow under, climb over, erode or get through—or any other metaphor that has been used—the fence, and the Government have accepted that recommendation. The second was to have a wider power to enforce separation on the sector as a whole. That second power would be needed precisely because problems in the sector do not come in the neatly wrapped form of one institution. As we saw in 2007-08, contagion is a fact of life in banking; the weakness of one can quickly affect others. Cultural problems in one part of the sector also spread quickly. It is precisely because problems in the industry are often widespread that there is a strong case for taking a reserve power to enforce separation on the sector as a whole, in the event that the sector tries to get around the intention of the Bill.