Financial Services Bill

Mark Garnier Excerpts

Monday 23rd April 2012 Commons Chamber

[Chris Leslie]

There might well be a case for that, but we are talking about people’s homes and the roofs over their heads. Repossessions can seriously hurt people, especially if they were unable to anticipate the situation because of a shock or unpredicted changes to their interest rates. As I have said, this point in the cycle is the right time to make this sort of change. It is about preparedness and information for home owners, and I feel strongly that we ought to have that in statute. If the Minister does not agree, this is certainly one of the issues on which we want to test the will of the House.

[Mark Garnier (Wyre Forest) (Con)]

Will the hon. Gentleman give way?

[Chris Leslie]

I will give way, but there are a number of other amendments I have to talk about.

[Mark Garnier]

I am incredibly grateful to the hon. Gentleman. He talks about an incredibly significant problem in this country: the £1.2 trillion-worth of mortgage debt for all the people of this land. What he is describing is a steepening in the yield curve, but that could also be the result of an increase in deposit rates, so what could be taken away with one hand could be a result of giving with the other hand. What I am really struggling with in the new clause is how he envisages mortgage lenders being able to deliver the warning, given the fact that he defines a shock in interest rates as something that cannot be predicted. Moreover, how does he envisage this working in practice?

[Chris Leslie]

The hon. Gentleman might know that in annual pension statements, for example, in the key facts documents a number of scenarios are put forward for what the pension might be worth under a range of growth options, such as annual growth of 3%, 5% or 9%. All I am seeking to do is ask the Financial Conduct Authority to consider a way of giving a range of scenarios and helping to provide information for customers, which would not be impossible. That is why I think that that is necessary for mortgages. I hope that hon. Members on both sides of the House will support what is a pretty modest change. It is something that I know we are all concerned about. The Government definitely need to go away and look at the issue again.

Amendment 37, which also stands in my name, relates to the Consumer Financial Education Body, which we now call the Money Advice Service. We are seeking to amend the Bill so that it specifically targets

“proactive and easily accessible advice to those encountering economic disadvantage, financial exclusion or financial exploitation.”

In our view, it is vital that the Money Advice Service focuses as much effort as possible on the vulnerable and those susceptible to problems, whether as a result of misinformation or choices made in financial investments. We know already, from examples in our surgeries, that those on the lowest incomes—the most vulnerable in society—need to be better protected in legislation, and that is why the new clause has been tabled.

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[Mr Mudie]

One can see many scenarios. I have seen many political philanthropists since I have been a Member of Parliament. I worry because they come to the House as politicians, but seem not to want to do anything or take any responsibility. They have offloaded power to quangos and agencies, and gave independence to the Bank. The real question is why are the Chancellor and the Treasury sitting back and watching their ground—sensitive economic ground—being given away to a quango, an unelected bunch of people? Under the Bill, those people can take the remit and the guidance on it, which the Treasury sets, and say to the Treasury, “We don’t agree with you,” and that is that. That is the situation we are reaching on accountability and responsibility despite the worry about giving away powers.

On amendment 23, some hon. Members were hard on my hon. Friend the Member for Nottingham East, although it is not as if he cannot defend himself. The Government’s original proposition, which was put out for consultation, included macro-prudential tools, which, as hon. Members have said, are highly sensitive and powerful. One aspect of the proposal they have given up because of its sensitivity—I am going by what has been in the papers in the past few days—is the ability to interfere in the mortgage market on loan-to-value and similar matters. What happens if the unelected Financial Policy Committee starts leaning against the wind in a way that affects large numbers of people, and there is no way of talking to it or affecting its position?

The Government’s original proposal was that decisions on macro-prudential tools would go upstairs to the Committee Corridor as statutory instruments—secondary legislation—for a 90-minute debate on a measure that would not be amendable. All hon. Members know what happens upstairs. The Minister talks for an hour, the shadow Minister talks for 25 minutes and we all go home, with the measure voted through by the Government majority. That happens with Governments of all parties. The way secondary legislation is dealt with in Parliament is an absolute disgrace. We can excuse a lot of it, but matters as important as the ones we are discussing, it is scandalous.

To be fair to the Chancellor, I raised the proposal with him when he first introduced it and asked him to look at it again because of its undemocratic nature. I am pleased that the line has softened, but there is more talking and work to be done. If hon. Members are asked to give away powers that affect our constituents so directly, it is important for us to be absolutely sure that we have had the opportunity to at least have our say in the strongest possible terms and ones that might allow the regulator to think about what has been said, although it is not for us to take its take its job.

A Government Member attacked my hon. Friend the Member for Nottingham East and asked him whether he would interfere with a regulator. We had that situation when the Treasury Committee discussed the retail distribution review with the chief executive of the FSA. We said to him, “This Committee feels strongly about this matter. We’ve had a lot of press about it and a lot of pressure, and we’d like you to think again.” He replied, “No, we won’t think again, unless you give me evidence.” The Treasury Select Committee giving evidence to the chief executive of the FSA—what arrogance! My hon. Friend the Member for Nottingham East is doing the Government a favour. They might not agree with the detail of the amendment, but the spirit is that we give the House every opportunity to comment on, think about and be aware of the powers we give to individuals that might affect our constituents.

[Mark Garnier]

It is a great pleasure to follow the hon. Member for Leeds East (Mr Mudie), with whom I serve on the Treasury Committee. It is interesting that I am the fourth consecutive Committee member to speak.

The House will not be surprised to hear that I rise to speak to new clause 1, tabled in the name of my hon. Friend the Committee Chairman, under whom it has been a great pleasure to serve. He is a very forensic Chairman of a Committee doing some extraordinarily good work at a time when it could not be more important—when we are facing some of the most fundamental problems in the economic world and when it is incredibly important that we do something significant about financial regulation. There is no doubt that something needs to be done. We have had a problem with a system of financial regulation that failed to address the problems with the banks, and the Bill travels a huge distance in trying to resolve those problems and come up with a robust new regulatory framework.

Having been a compliance officer under not one but three regulatory regimes—the Securities and Futures Authority, the Financial Services Authority and the Securities and Investment Board—and, prior to that, a regulated dealer on the floor of the stock exchange under the old stock exchange rules, I have had a fair degree of practical experience of financial regulation. Furthermore, in the past 18 months or so, I have, with the rest of the Committee, spent a huge amount of time scrutinising and studying the draft recommendations for the Bill. I also spent some 50 hours, in the Bill Committee, with the hon. Member for Nottingham East (Chris Leslie), who waxed lyrical and at great length—and with great intelligence, I might add; and here we are on the Floor of the House talking about the matter yet again.

A number of things in the Bill are not ideal, but the one surgical cut that would have the most effect would be new clause 1. The Bill contains perhaps the single most fundamental change that we will see in financial regulation—the creation of the Financial Policy Committee. We have heard a lot about the FPC. One of the criticisms is that it could make profound changes to our financial system in trying to deal with financial instabilities, with bubbles that seem to be growing and all the rest of it. We can speculate ad nauseam about the type of interventions that could be made, but the one that people talk about a great deal is where the FPC may, with one of its tools of direction or recommendation, direct banks to change the loan-to-value ratios on mortgages. That could have far-reaching effects for our constituents.

[Mr Hoban]

May I make it clear that the FPC has ruled out intervening on loan-to-value ratios? It is important that we do not let this hare continue to run much longer.

[Mark Garnier]

I am grateful to my hon. Friend for that clarification. Interestingly enough, though, it is perhaps one of the powers that the FPC should have kept. Although it could have profound effects for people moving and so on, it is incredibly important not to lose sight of what others issues the FPC is there to address. In the past, as bubbles have grown, Members have sometimes been reluctant to take away the punch bowl before the party is over. Sometimes, when we allow bubbles to get bigger than they should be, the result is a financial crisis of the kind that we have seen. There are many things, on an analysis of the financial crisis, that could have happened, but one of them was allowing a colossal asset bubble to grow against uncontrolled lending. If a Member of Parliament or the Chancellor of the Exchequer had turned around in 2007 and said, “We’re going to stop that,” there would have been an absolute outcry. However, if the FPC had done that, it would have been acting without the worry about what would happen at the next general election, and perhaps we would have avoided the problem. It is for that sort of intervention that the FPC is being created.

[Bob Stewart (Beckenham) (Con)]

What happens when the FPC gets things wrong? How will it be held responsible for the decisions it makes?

[Mark Garnier]

I am grateful for my hon. Friend’s intervention, because that is exactly the point I am coming to. What is the accountability of the FPC? Ultimately, it has to come down, in some way, to the court of the Bank of England making an intervention to assess what is going on.

As we have discussed, the FPC will have far-reaching powers to intervene, some of which we may never know about. Some might be restricted to a 30-year rule, so we might hear about them in the future, although an awful lot may well be published. However, it is incredibly important that we look at what the Bank of England does to supervise. Currently, the court of the Bank of England is responsible for administrative matters, as we have heard—it is responsible for pay and rations. What we on the Treasury Committee want is the Bank to have a proper board—probably with a new name that reflects its updated role, although I do not think that will happen. We recommended that it should have a majority of external members who must have the relevant skills and experience, and the Treasury Committee wants the court of the Bank to be able to conduct—this is an important point—retrospective internal reviews of policy decisions of the Bank. The Bank’s response envisages limiting that to commissioning external reviews or conducting internal reviews only of the decision-making process of the Bank.

The creation of the FPC—on which my hon. Friend the Member for Beckenham (Bob Stewart) intervened on me—makes this governance issue incredibly important. As we have heard, the Monetary Policy Committee has just two tools: quantitative easing and interest rates, which it uses openly and publicly. We see detailed minutes of the meetings, followed up by evidence sessions by the Treasury Committee, which is also part of an incredibly important scrutiny process, which is fully transparent and very simple. However, as we have heard, the FPC has a large range of tools at its disposal, which means that it might not be able to give a full and open account to the Treasury Committee or publish entirely transparent minutes. Moreover, as I have said, it might be years before we know what intervention has been made. That is why we need an organisation that can intervene to look at what the FPC is doing and take on a strong governance responsibility.

That is why the court of the Bank of England needs to be able to look at the merits of the FPC’s policies and not just the method. The Bank’s board must not be restricted to finding out whether the wrong decisions were made but in the right way. That is why I would be incredibly grateful if the Minister gave serious consideration to new clause 1.

[John McDonnell]

I am not part of the charmed circle of the Treasury Committee, but I wish to add my congratulations to the hon. Member for Chichester (Mr Tyrie) and the members of the Committee on the work they have undertaken in examining the Bill as it has gone through the House.

I have tabled amendments 46, 47, 49 and 50, which seek to enhance the Treasury Committee’s role in the appointments of the Governor and deputy Governors of the Bank of England, and the chair and chief executive of the Financial Conduct Authority. I have done so because the background to this legislation is perhaps the most catastrophic failure of the Bank of England and the financial regulatory authorities that we have seen in 70 years. Their failure to predict or intervene effectively to ensure that the financial crisis was averted or dealt with adequately, speedily and effectively is there for all to behold. It has brought this country to its financial knees and into a recession that is turning into a depression, which is something we have not seen since the 1930s. The reasons for that have been evidenced today. New clause 1 would address part of the issue—namely, the lack of transparency of the old regime—but another element was the lack of accountability.

This legislation will create, in the Governor of the Bank of England, one of the most important roles in the country. The Financial Times editorial of Thursday 19 April stated:

“The central bank governor is not just some technocrat, but the most powerful unelected official in the country. His role has become more political since the crisis, not less, and will be even more sensitive when the BoE acquires new powers to avert financial crises. The next governor must win public acceptance and possess sharply honed political antennas. This might be harder for a foreigner.”

That last comment refers to the speculation about some of the candidates that the Government are considering.

In today’s Financial Times, the shadow Chancellor sets out his concerns about the range of powers and responsibilities that the new Governor will have, stating that only a superman or superwoman need apply, because the job will be so influential and will have such a wide range of roles and responsibilities. The Treasury Committee appreciated that fact very early on in the game, in its consideration of the new legislation. That is why, way back in November, it recommended that it should have a role in the appointment of this significant post. The Chancellor of the Exchequer argued against that proposition. I find it extraordinary that the Treasury Committee won the right to have a veto over the appointment of the chair of the Office for Budget Responsibility, yet failed to win a role in the appointment of the much more significant post of the Governor of the Bank of England. Indeed, it has no role in the appointment of the deputy governors, and no effective role in the appointment of the Financial Conduct Authority proposed in the Bill.

I genuinely thought that the Government were about to shift their stance on this matter, because, back in November 2011, the Treasury Committee stated strongly that it was not persuaded by the Chancellor’s refusal to grant it a role in the appointment. It went on:

“The power of veto with respect to the OBR was given to ensure the independence and accountability of that body. The Governor of the Bank’s independence from Government is crucial for his or her credibility. Given the vast responsibilities of the Governor, the case for this Committee to have a power of veto over the appointment or dismissal of the Governor is even stronger than it is with respect to the OBR. We therefore recommend that, in order to safeguard his or her independence, the Treasury Committee is given a statutory power of veto over the appointment and dismissal of the Governor of the Bank of England.”

I wholeheartedly supported that view. The Chancellor’s argument was that the Treasury Committee could not have such a role because the Governor was exercising an Executive function and should therefore be a Government appointee. That is an absolutely specious argument.

The legislation to give independence to the Bank of England went through the House, although I never supported it. That means that the Governor has more than an Executive function. The Bank is not an Executive arm of the Government. The Chancellor of the Exchequer and the Government cannot have it both ways. If they support the independence of the Bank of England from the Government, they must establish some other form of accountability to Parliament. If they do not believe that it is independent, and that it is simply an Executive arm of the Government, the Governor will be appointed directly by the Chancellor of the Exchequer. Even if that is the Government’s argument, the Chancellor of the Exchequer is still accountable to the House, so there must be some role that the House can play in advising him on the appointment of this important post.

My amendments would simply reassert the role of the Treasury Committee and thus Parliament itself in this vital range of decisions about appointments to key elements of the new structure proposed by the Government. Let me be frank. I agree with everything said about the role of the Treasury Committee Chairman and I agree that he needs to be called “right honourable” and the all the rest of it, but sometimes people are born great and sometimes people avoid greatness being thrust upon them. I do not know what negotiations went on, and it might well be that the negotiations were along the lines of, “We will not push for a veto on appointment as long as we can get some transparency and thus at least some element of accountability for that post to the Committee itself.” If that was the tenor of the negotiations with the Government—I happily allow the Treasury Committee Chairman to intervene to clarify it—I am afraid that the deal is not good enough.

What needs to be said very clearly by this House is that these are such significant appointments—particularly the Governor of the Bank of England but also the head of the Financial Services Authority in view of its key role in seeking to avoid further crises and in regulating this country’s financial services—that this House must have at least some say over the calibre of these persons.

Finance (No. 4) Bill

Mark Garnier Excerpts

Thursday 19th April 2012 Commons Chamber

[Graham Evans (Weaver Vale) (Con)]

I pay tribute to my hon. Friends the Members for Stourbridge (Margot James) and for Ipswich (Ben Gummer), who have eloquently made many of the points that I intended to make. I do not want to repeat them.

First and foremost, the Bill makes it clear that the Government are sticking to the plan to deal with the mess left by Labour and eliminate the structural deficit. That is essential for market confidence in the future of our economy and wealth creation.

Secondly, the Bill is clearly on the side of working people and pensioners. It is pro-business and helps people who want to do better for themselves and their families. It cuts tax for 24 million ordinary families across the country, including 2.5 million in the north-west. Thanks to the Budget, most basic rate taxpayers will keep an extra £220 of their salary every year. That represents the largest real personal tax cut for people on average earnings in more than a decade. I appreciate that £220 might not seem like that much to the Labour leader, sat in his multi-million pound home in Primrose Hill, but for people struggling to get by in Cheshire, £220 is a real help. The Bill therefore helps working people.

[Mark Garnier (Wyre Forest) (Con)]

Does my hon. Friend agree that over the period of the changes to the tax-free allowance, the total contribution will be more than £500 for the average individual?

[Graham Evans]

I am most grateful to my hon. Friend for making that good point, with which I agree. It is a good Budget for working people on basic rate tax.

--- Later in debate ---

[Katy Clark]

Government Members keep trying to return to that point. As I have said, the freeze applied to all allowances, and it is not comparable to what we are debating. This is a specific debate about long-term Government policy towards pensioners and the long-term cumulative effect that this change will have.

As I say, this is the wrong time to come forward with changes of this nature. We heard a well-informed contribution from the hon. Member for Banff and Buchan (Dr Whiteford) on the situation faced by pensioners who rely on private savings. I suspect that many of us as constituency MPs have had a considerable number of representations from individuals who have planned their pension and retirement savings over many years on the assumption that higher rates of interest would apply, enabling them to live off the savings they had made over a long period. I very much hope that in 2013, when these changes come into force, the economic situation will be different, but I suspect that those pensioners will be in a similar position. That is another powerful reason why now is an incredibly bad time to make changes of this kind. In my view, they should have been introduced with far greater notice.

The Government should know that pensioners are being disproportionately affected by the policies they are pursuing. We hear a great deal from Government Members about their ambitious deficit reduction plan—so far, of course, we have only seen the deficit increase. What we are seeing locally, and I suspect they will be seeing it, too—[Interruption.] Government Members are well aware that they are borrowing more and that the deficit is going up. In their constituencies as well as mine, however, local people will be experiencing the start of draconian cuts in public services, which will have and are already having a disproportionate effect on those in retirement. Even before the current economic difficulties, we were all aware of the struggle councils were having in trying to provide the social services required for our changing demographic and our ageing population.

[Mark Garnier]

The hon. Lady really must get the point about the deficit right. The deficit has been reduced from more than £150 billion when this Government first came to power to, I think, £132 billion this year. She may be getting confused between deficit and debt, and Government debt is going up, but it is going up because we have such catastrophic public finances as a result of the previous Government.

[Katy Clark]

The hon. Gentleman is well aware that borrowing is going up. As I was saying, despite the fact that the Government are failing and have consistently failed to meet their own targets, the reality is that the cuts in public spending they have already made—and they propose more for the coming years—are having a disproportionate effect on the pensioner community.

--- Later in debate ---

[Cathy Jamieson]

My hon. Friend makes a significant point and that is part of the fairness test, which I do not think has been met. The Centre for Social Justice has been very critical of this aspect of the Government’s plans, which it argues could

“threaten a new wave of family instability and breakdown…which flies in the face of their commitment to ‘shared parenting’.”

[Mark Garnier]

I am not entirely unsympathetic to a great many of the hon. Lady’s points, but what she is describing has a great deal to do with the complexity of the tax system as a whole. That tax system doubled in complexity under her Government.

[Cathy Jamieson]

With respect to the hon. Gentleman—he said he had some sympathy with my points, so I do not want to be entirely negative in response—we will not solve the complexities of the taxation system by adding even more complexities that are unfair to families and will affect children negatively.

Let me put one final issue on the record. People who are not in work and who receive child benefit for a child under 12 receive national insurance credits to enable them to build up entitlement to state pensions. The Government’s original announcement led to concerns about the impact on future pension entitlements of women, in particular, if families stopped claiming child benefit. The Government said from the outset that no one would miss out on national insurance credits as a result of the child benefit changes, but it is unclear how they proposed to ensure that. Under the latest proposals, people who are entitled to child benefit and families affected by this charge may elect not to receive it, but a claim for child benefit will still need to be made in order to receive national insurance credits. Information published by HMRC confirms that.

I am extremely conscious of the time so I will not say anything more, other than that I think that everybody should listen carefully to the debate and to the points that have been made. When Members consider how to vote, they should consider both the principles involved of support for families with children as well as the layers of complexity and confusion there will be if the proposal goes through.

Finance (No. 4) Bill

Mark Garnier Excerpts

Wednesday 18th April 2012 Commons Chamber

How will the proposed regulation be monitored? Are we going to see hordes of VAT inspectors armed with thermometers swooping down on bakers’ customers as they leave the shop and sticking their thermometers in their pies to see whether they are hotter than the ambient temperature?

[Mark Garnier (Wyre Forest) (Con)]

My hon. Friend may be interested to hear that the written evidence given to the Treasury Committee by the Institute of Chartered Accountants in England and Wales states that these VAT changes are broadly sensible reforms

“but will still leave plenty of anomalies”.

[Gordon Henderson]

I can only agree with that:

I accept that there is an argument for trying to address the current situation whereby some shops sell hot pies without charging VAT but others, such as my local chippy, have to charge VAT on the hot pies that they sell. However, the Government’s proposal is not an answer. Nor, sadly, is the Opposition’s new clause 1, which is why I cannot support it. I very much hope that the hon. Member for Pontypridd (Owen Smith) will withdraw it, and that he and his colleagues will support new clause 5, which I believe would achieve the Government’s objectives while protecting businesses such as that run by my friend.

Budget Resolutions and Economic Situation

Mark Garnier Excerpts

Friday 23rd March 2012 Commons Chamber

[Gregg McClymont]

There is no doubt, and the hon. Gentleman is right to say, that not everything in the garden was rosy by 2010. That does not take away from the current Government their responsibility to stimulate the economy. On any metric, growth of 0.8% this year and next year is only very limited growth. On current estimates we will not return to 2007 GPD levels till 2013. That slump will be the longest since the 19th century—six years to get back to a previous level of GDP. That is indeed a slump, and this is a stagnation Budget.

[Mark Garnier]

Does that not illustrate the fact that such an appalling mess was made by the previous Government that it resulted in such a long and deep recession?

[Gregg McClymont]

As the hon. Gentleman knows, whatever the situation when this Government took office, they are now, by their own estimates, going to borrow £150 billion more than they estimated, so they are adding debt upon debt, with no growth to show for it.

Financial Services Bill

Mark Garnier Excerpts

Monday 6th February 2012 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

It is a great pleasure to speak in this debate, partly because in a previous existence I spent a number of years on two occasions as a compliance officer under three different regulatory regimes, and also because I am the third of the three Treasury Committee musketeers who did not go on the trip to Shanghai and who were left behind to hold the fort.

What is abundantly clear—I do not need to repeat it—is the utter uselessness of the current regulatory regime and how the FSA operates. That can be illustrated by the exchange of words between my right hon. Friend the Chancellor of the Exchequer and the shadow Chancellor about the operation of the day-to-day running of the tripartite regime. Only last week we heard from Hector Sants, the chief executive officer of the FSA, that while he was a managing director of wholesale and institutional markets at the FSA, he had no discussions whatever about the Royal Bank of Scotland’s investment bank. Lord Turner went on to add that the FSA was singularly incapable of meeting the expectations placed on it given the breadth of its regulatory responsibility. Given that, the need for a new regime is unquestionable. I am certainly satisfied, in the broadest sense, that the Bill makes great progress, not least in response to Lord Turner’s comments. We are dividing up regulation between the Financial Conduct Authority, which will be charged with protecting the consumer, the Prudential Regulation Authority, which will look after the nuts and bolts of the system, and the Financial Policy Committee, which has been set up to look at systemic risks.

As the third member of the Treasury Committee to speak in this debate, I fear I might repeat some of the points that have been made. If I do so, it will be to reinforce those points. One thing that has not been talked about, however, is the speed and complexity of the Bill. It is complex and has very far-reaching implications for the long-term security of our financial system as well as for the competitiveness of this country. It is worth remembering that financial services employ more than 1 million people in the UK and raise more than £50 billion a year in tax revenue.

The Bill seeks to amend three previous Acts. The Treasury Committee recommended that the Government start afresh with a new Bill dedicated to addressing all the myriad points discussed since the financial crisis and, indeed, before. The Governor of the Bank of England agrees; he said to a meeting of the Committee last year that

“our first preference had been to have a clean, new Bill, spelling out the new system rather than just amend FSMA.”

He continued, and on this point I wholeheartedly agree:

“We are losing the simplicity and the ability to have a cleaner debate about the…framework.”

The more complex a system, the easier it is for it to go wrong and the more difficult it is to find out why it went wrong in the first place and to repair it.

One of the most profound elements of the Bill is the creation of the FPC, and we have heard a lot about that this afternoon. The FPC is charged with making sure that systemic risks do not emerge and that bubbles, such as credit bubbles, are not allowed to develop. That is unprecedented in our financial system and will have far-reaching implications. The interim FPC, as we have heard, has been in place for some time and the Treasury Committee has spoken with its members about how it is moving along, but its final format is yet to be set in stone.

At the FPC’s disposal will be a range of macro-prudential tools that it can use to control the financial system and markets, and I was pleased to hear the Chancellor say that we would be able to debate the matter on the Floor of the House and decide which tools will be available. The tools will fall into two categories, however. Those in the first category, which will be debated in the House, will be the tools of direction and might include such things as loan-to-value ratios for mortgages, liquidity requirements and capital ratios for banks, which could be directed on to the system via the PRA or the FCA. The measures in the second category, which have not really been talked about this afternoon, will be powers of recommendation and they can be absolutely anything. The actions of the FPC, however, will have the most effect not just on our economy but on our society.

Let me take one of the simplest cases by way of an example. The FPC, in its wisdom, might decide that a credit-fuelled asset bubble is emerging so it wants to tighten up loan-to-value ratios on mortgages. Instead of a 10% or 15% deposit on a house purchase, it will direct that lenders move to a 30% deposit. That is all very simple and fair enough. However, those who are affected first and most deeply will almost certainly be first-time buyers who will suddenly find they do not have the deposits to make a house purchase. People who have only recently bought a property and who therefore probably have relatively low equity might find that they are now not in a position to move house, which will have implications for the mobility of our work force. For a property developer, the tightening of the loan-to-value ratio alone might influence a decision not to develop their land bank. The tightening of that potential supply could lead to exactly the opposite effect on house prices to that which is desired. I hope that illustrates that the implications of such a simple move are widespread and can, indeed, be unpredictable.

As we have heard, the FPC will have a financial stability objective, which will develop from recommendations by the Treasury. The FPC will need to monitor indicators of financial stability, but we do not yet know what those will be. Nor do we know at what levels they will start triggering intervention. The interim FPC has given us a guide, but it gives little indication as to what will actually happen. Were it to publish its dashboard of limits in relation to where it does intervene, the markets would, to a certain extent, be self-correcting. However, there will be occasions on which it will not want to publish because it wants to be discreet or even secretive about its interventions. Under those circumstances, the Treasury Committee will find it difficult to scrutinise such secret interventions.

That brings me to my next point, which is incredibly important, on the governance of the Bank of England. Let me address the good news first: the Treasury Committee very much welcomes the move to a single eight-year term for the Governor of the Bank of England, as opposed to two five-year terms. However, that raises the possibility of a Governor crossing Governments of two flavours, and we on the Treasury Committee think it would make sense if Parliament, through the Treasury Committee, had a power of veto over the Governor’s appointment. The Chancellor took the unprecedented and extremely welcome move, after the election, of giving the Treasury Committee a power of veto over the appointment of the chairman of the Office for Budget Responsibility. Now we have seen how well that works in practice, we think the Governor’s appointment is another occasion for which such a power of veto would be appropriate.

More widely, the Treasury Committee is concerned about the governance of the Bank of England. I welcome the Chancellor’s comment about the new oversight committee, but currently the court is responsible for essentially administrative matters—pay and rations. We want the Bank to have a proper board with a new name that reflects its updated role. We recommend that the board should have a majority of external members, as we have heard from my hon. Friend the Member for Bury St Edmunds (Mr Ruffley), who must have more relevant skills and experience. The Treasury Committee wants the board to be able to conduct retrospective internal reviews of the Bank’s policy decisions. In its response to these calls, the Bank envisages limiting that power to commissioning external reviews or conducting internal reviews only of the decision-making processes of the Bank.

The creation of the FPC makes this governance issue particularly important. As we know, the MPC uses just two tools—quantitative easing and interest rates—and the minutes of its meetings are published so we know exactly what is going on, which is a very good thing. The FPC, however, has many measures at its disposal, both directive and recommendational—potentially an infinite range. By their nature, those measures might on occasion be implemented in a secret way, which means that the FPC might not be able to give a full and open account to the Treasury Committee or to publish entirely transparent minutes. Moreover, it might be years or even decades before we know that an intervention has taken place or even that an intervention has become necessary. That is why the governing body of the Bank needs to be able to look at the merits of the FPC’s policies and not just at the methods. The Bank’s board must not be restricted to finding out whether the wrong decision was made, but in the right way.

Crisis management is a crucial area about which much has been said this afternoon. I certainly welcome the creation of a new power of direction for the Chancellor over the Bank in a crisis, which was recommended by the Treasury Committee. The Bill requires that the Governor must formally notify the Chancellor in the event of public funds being at a material risk. The Chancellor cannot direct the Bank unless there is a threat to financial stability as well as a threat to public funds, and the scope of the power of direction is narrowly defined. The arrangements for crisis management are something that could be discussed in Committee, but clarity is vital. For me, the answer to this simple question is crucial. If I see an unhappy bunch of customers outside a bank in Kidderminster high street, who should I telephone? I think the Bill answers that question.

I have voiced a number of concerns from the Treasury Committee and they include my personal feelings. However, I welcome the aims and thrusts of the Bill and the fact that the Government have moved some way towards the Treasury Committee’s recommendations. Let me finish on this point: the financial services industry is incredibly important to this country in terms both of employment and of economic and fiscal contribution. It represents around 11% of gross domestic product, but it is already under widespread attack, including from the press and politicians. Over the next few months there will be a change to the regulatory regime, which we are debating today, followed by a change in the banking regulations, all mixed in with a plethora of new rules from Europe. It is vital that we sort out the current regulatory framework to ensure that we can spot and resolve the crises of the future, but it is just as important that we provide a stable regulatory platform to allow all the firms and individuals involved in this industry to continue to be profitable, to plan for the future with confidence and to be sure of regulatory stability.

[Several hon. Members]

rose—

--- Later in debate ---

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

To be frank, I still regard too much of this legislation as deficient, and I shall touch on some specific concerns, but it would be remiss not to give the Treasury significant credit for some of the work it has done. The extensive and broadly constructive pre-legislative consultation by the Joint Committee is a positive step. The outstanding and ongoing contribution of the Treasury Committee will help to focus the Government’s mind on some of the key institutional pitfalls. There is also an increasing recognition by the Treasury that this is an area of public policy where political judgments will need to be made, and that ultimately the buck must stop with it, not with the Bank of England, however good a Governor we may have.

My general dissatisfaction relates first and foremost to the inevitable guillotine in this House, which means that the high-level sophisticated scrutiny will have to come from the other place, and I fear that that shows our House in a poor light. It is not that we lack collective experience in this crucial field, but the wish of Governments, throughout my 11 years in the House, to get legislation through by whipped votes means that we continue to fail to hold the Executive to account, particularly on such important pieces of legislation.

This is probably the only area where I have some sympathy with the shadow Chancellor. The genesis of the Bill was perhaps a rather simplistic political analysis surrounding the financial collapse of 2007-08. It was not really the tripartite system of regulation that was at the heart of those concerns, but an old-fashioned debt and credit bubble and the global imbalance between the east and the west. It is important that we recognise that, because the result was not simply the failing of banks, bankers and Labour politicians; the simplistic analysis also fails to answer the core question that has dogged regulators ever since the financial crisis began: “When the crash came, who was in charge?” The risk is that we will replace an unsatisfactory tripartite system with a potentially even more complex four-way system. I think that there is a risk that that will come to pass, although I do not buy into the shadow Chancellor’s entire analysis. In truth, the new FCA will have too few people of the requisite expertise and sound judgment. Unsurprisingly, it remains very unloved and unrespected by too many professionals in the City, and I am afraid that that matters, given the important role that it will have.

Let me touch on some of the more substantial political issues that the press have not focused very much on. There is an overall concern about how prescriptive the new regime will be, and to what extent the Bill will recalibrate things in a way that will have unintended and potentially damaging consequences for the industry, the UK and the consumer. I will give a few examples. On the warning notice publicity, the Bill will change the current position whereby enforcement action becomes public only at the end of the process, after the firm has decided whether to go to tribunal, and before that stage has had two opportunities to make representations. The new approach means that there will be negative publicity at the stage of the warning notice—the first notice—and the firm will have no right to make representations before that. The reality is that, essentially, the Daily Mail test means that all the damage to the firm’s reputation will be done before any due process has been gone through. The argument in favour of the change is that this is similar to a criminal case, but that misses the important difference between the cases, and represents a worrying trend in the thinking, to the effect that everyone in the industry is somehow a would-be criminal.

[Mark Garnier]

Will my hon. Friend give way?

[Mark Field]

I am afraid that I will not.

Product regulation and financial promotion powers are another issue. There are powers to intervene earlier in the product life cycle and ban financial promotions. There is an argument that the FSA already has the power to do this. The big political point is the balance between market and regulatory failure. All the debate has been about how the powers are needed to prevent market failure and how the regulator will be far more involved in product design and in the business. It is difficult to argue with the concept, but the position that there is no moral hazard in going down this route is arguably naive, and fails to recognise that the regulators never have perfect vision.

The cost of regulation is in many ways the dog that has not barked. There is nothing in the Bill to apply more financial discipline to either the PRA or the FCA, so the cost-benefit analysis does not apply to the rules that they have in place. We must also ask how the new regulators will work together. The Bill sets out certain principles for the memorandum of understanding between the PRA and the FCA, which is perhaps all that can be expected. However, that leaves on trust a lot of the detail of how the new organisations will work together. That is a key practical issue for firms if this is not to lead to new and inconsistent regulation.

One good example relates to threshold conditions. The Bill provides the PRA and the FCA with the power to make threshold condition codes, which will elaborate on the conditions and how they will apply to different classes of firm. Those codes will be binding. What will happen if the two regulators take inconsistent approaches on, for example, explaining what they mean by the suitability condition? The last thing anyone wants is the development of an industry engaged in arbitrage between the two inconsistent approaches to regulation for different parts of the industry. That is a particular worry for dual- regulated firms, and firms left under the FCA, such as fund managers, are concerned that they could suffer from more heavy-handed regulation, rather than the more senatorial style that it is assumed the PRA will adopt.

Will there be enough of the secondary framework to be able to consider the new structure properly? That is a general question, and one example is whether investment firms are within the PRA’s scope. Firms do not yet know, and things keep changing. For example, the Government agree that the risks posed by investment firms and the concerns arising from last autumn’s MF Global failure should continue to be subject to scrutiny by the authorities, which might change the boundary. The point about MF Global is that it did not take proprietary positions, and so would have fallen on the FCA side. The argument is that the organisation has caused great systemic problems, and so surely should have been regulated by the PRA.

That question has now been partly—but only partly— addressed, through the draft designation order published on the Treasury’s website, setting out the criteria that the PRA will apply when considering whether it should designate individual firms as “dealing in investments as principal” for PRA regulation. Has enough thought been given to that issue, however? There is a parallel debate about large hedge fund managers, who deal only as agents, and therefore stay on the FCA side, yet arguably pose a systemic risk themselves. It is hard to look at the new framework in the round until all such details are sorted out.

I shall conclude soon, because I appreciate that other Members have more to say. Indeed, there is so much more that I could say myself. One issue that has been widely discussed is the competition objective, which was especially well dealt with in the Joint Committee’s report. The point often missed is that the whole discussion is about competition within the market, and whether that itself should be an objective or principle to which the FCA ought to be compelled to have regard. It is not about the more fundamental issue of the competitiveness of the UK as a financial services centre, important though that is. That says something about the new approach to the industry.

I fear that we risk throwing the out baby with the bathwater. Why should the UK not have regard to the competitiveness of one of its most important industries, subject to the other important goals of market stability and consumer protection? Rebalancing the economy is all well and good, but it should not mean undermining the vital importance of the City and of financial services to the UK as a whole.

Fuel Prices

Mark Garnier Excerpts

Tuesday 15th November 2011 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

Speaking as somebody whose combined family mileage approaches 50,000 miles a year, and as a Member who represents a semi-rural constituency, I am acutely aware of the burden placed on local households by fuel prices. The cost of fuel does not just affect those who use cars; it affects everyone through food prices and prices on the high street, and it affects those who use public transport.

Some argue that if we want to move towards a more sustainable economy, high fuel prices will encourage a greener outlook. I do not disagree with that. However, when we are doing everything we can to improve our economic prospects, now is not the time to allow rising fuel prices to limit the mobility of our work force and hinder manufacturers and retailers through increased transport costs.

[Mr Mark Spencer (Sherwood) (Con)]

Does my hon. Friend agree that young people in particular feel the pressure of high fuel prices when they are trying to find their first job, which is often low paid? Does he also agree that the cost of insurance adds a burden to young people who have to get to and from employment?

[Mark Garnier]

My hon. Friend raises a very good point. The cost of car insurance is unbelievably high for young people. That is a particular problem when they are trying to get on the job ladder. We should certainly be doing everything we can to help young people.

The price of oil, as we have heard, is determined by commodity markets as well as by the sterling-dollar exchange rate. The only way to control pump prices is therefore through fuel duty. However, the country has incredibly little room for manoeuvre. I am convinced that helping economic growth through tax breaks works, especially when those tax breaks are targeted at specific areas such as fuel duty.

A cut in the price of fuel at the pump would reduce manufacturing and distribution costs, increase the mobility of our work force, increase household disposable income and lessen, overall, the headwind facing our economic recovery. Taking into account the work that we are trying to do in Kidderminster to promote advanced manufacturing and help boost the retail industry, I would welcome any reduction in costs, including fuel and transport costs. However, given where our economy is, any reduction in fuel revenue would have to be met by an increase in revenue elsewhere. Everything that the Government do has to be fiscally neutral. We simply do not have the resources available to cut fuel duty significantly without putting in jeopardy our low borrowing rates, which mean that we are in greater control of our own destiny than some of our European neighbours.

Although I support the efforts that the Government have already made in cutting 1p off the fuel duty in March and suspending the fuel duty escalator—a reduction of £1.9 billion in fuel duty—I urge them to see whether more can be done to help. The rising price of oil leads to increased profit for the oil companies from existing oilfields, as we have heard, and that extra profit gives the Government more opportunities to look again at tackling the high pump price of fuel, either through encouraging price reductions by the oil companies or through the tax system.

What has recently been causing a great deal of anguish among my constituents is that it costs more to run a car in Wyre Forest than in nearby Dudley. The average of 134.8p per litre of unleaded is about 6p higher than in Dudley, just 10 miles up the road. I have written to the petrol companies to see whether they can explain why they want my constituents to pay more for their petrol than people in nearby Dudley or Wolverhampton. Just one has taken the trouble to reply, to say that it has received my letter, but I have had no other replies, and certainly no explanation as yet.

It is right that we are debating the overall cost of fuel duty to our economy, and it is right that we are looking for ways of reducing that burden. However, I want the oil companies to explain why they see fit to charge my constituents in Wyre Forest more for their motoring. Can they justify subsidising more urban areas, not just in the black country but in the country as a whole, at the expense of our semi-rural and rural communities? Can they please let us all know when they intend to remove that rural surcharge on fuel?

Oral Answers to Questions

Mark Garnier Excerpts

Tuesday 1st November 2011 Commons Chamber

[Mr Osborne]

This morning’s GDP numbers are a positive step, but of course the British economy has a difficult road to travel from the very high debts—the record debts—that we inherited. That is made more difficult by the international situation, as people can plainly see today, but we are determined to make that journey to the growth and prosperity that this country was so lacking under the previous Government.

[Mark Garnier (Wyre Forest) (Con)]

6. What recent discussions he has had on social impact bonds.

[The Chief Secretary to the Treasury (Danny Alexander)]

Important work is going on within both the social investment sector and government to develop and test social impact bond models, and we meet regularly with colleagues to discuss the progress that the Government are making in growing the social investment market, including through social impact bonds.

[Mark Garnier]

My right hon. Friend will be well aware of the exciting potential that social impact bonds have, not only in offering financial support for the third sector, but in securing genuine savings for the Government. Will he or one of his Ministers meet me and representatives from the Social Finance investment bank to explore ways in which the Treasury can help to maximise the potential of this nascent financial instrument?

[Danny Alexander]

The hon. Gentleman is absolutely right about the enormous potential of this sector, and I congratulate him on his work and the close interest he has taken in this subject. The Exchequer Secretary to the Treasury would be very happy to meet both him and representatives of the Social Finance investment bank.

Private Finance Initiative

Mark Garnier Excerpts

Thursday 23rd June 2011 Westminster Hall

[Mark Garnier (Wyre Forest) (Con)]

It is a great pleasure to speak under one’s chairmanship, Mrs Main. [Laughter.] I also add my name to the chorus of congratulations for my near neighbour and hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman), who has not only secured this debate but worked so hard on the thorny issue of the PFI. His work includes his PFI rebate campaign, which I have enthusiastically signed up to. He has also managed to secure a Treasury Committee investigation into the future of PFI. It is good to see that four members of the Select Committee have come along this afternoon.

The PFI does not directly affect my constituency—there is only a magistrates court there under a PFI contract. However, it indirectly affects my constituents because they are served by the Worcestershire Royal hospital. Famously, Kidderminster hospital was downscaled to help pay for it. When my constituents hear that we have overspent on those contracts to the tune of half a billion pounds, they will be rightly even more furious than they were when the Government wound down Kidderminster hospital.

The PFI is something that we all love to hate. It has come to signify the inability of the public sector to write proper contracts and it is a symbol of trying to hide capital investments on the country’s balance sheet. However, is that a fair summary of what is a reasonably legitimate way of financing part of the supply side of the economy? I have certainly argued in the past that the public sector will always negotiate bad contracts for the simple reason that there is an asymmetry in negotiating skills. I am certainly not here to criticise the knowledge of public sector employees in terms of how to go about writing a contract. However, when it comes to a contract between the public sector and the private sector, we have, on one side of the table, a well-read and well-intentioned civil servant who is doing his best and possibly looking forward to his retirement, while on the other side we have a hardened businessman who is motivated by profit and return on equity and quite probably incentivised by direct equity in his business and a bonus for concessions won. A civil servant will certainly be very well educated in negotiating, but the hardened PFI negotiator from the private sector will have the concept of return on equity, risk evaluation and profitability etched into his DNA. There is no doubt that there is plenty of money to be made out of PFI for the astute negotiator.

Dexter Whitfield, director of the European services strategy unit, in his submission to the recent Treasury Committee investigation, highlighted the profitability of PFI equity sales—that is where a PFI contract is sold and the profit made is in addition to the profit that is gained on an ongoing basis. He pointed out that although there is little readily available information on PFI sales, the ESSU database holds 63 transactions covering 154 PFI projects, and he has looked at how much they have made. Average equity profit has been 50.6% on the 63 transactions. What is interesting is how they fare by sector. Health has been given a profit of 66%, housing 80% and leisure 86%. However, the truly eye-watering winner by miles goes to the defence sector, which has been giving PFI providers a whopping 134% profit on their equity sales. The Treasury Committee inquiry was lucky enough to have a representative from the PFI industry, one of the directors of Balfour Beatty, and he was surprisingly evasive in his reply to my questions, implying that that profit may have included the annual premium returns and therefore was not a fair judgment. But my interpretation is that PFI providers that have sold their investments have already made an annual return on the projects—that is perfectly reasonable, given the way that the projects are structured—but that the sale profit is in addition to that annual return.

What does that mean in terms of the contracts that have been negotiated? It seems that the valuation of risk, which is a key part of a contract, has been miscalculated in favour of the provider and it is that premium, in favour of the provider, that gives the opportunity for the sizeable equity sale profit. Indeed, the fact that there is someone out there to buy the equity stake with their own measure of risk and expectation of return means that there is still more to be made by the subsequent buyer, implying even further mispricing of risk.

That is the point. PFI projects do two things: first, they provide a so-called off-balance sheet way of financing a vital piece of investment; and secondly, they devolve the risk element of any project to the private sector. But the private sector will evaluate that risk and charge for it, and the evidence put forward by Mr Whitfield suggests that the PFI provider is making a great deal of that opportunity.

[David Mowat]

I have been listening very closely this afternoon to the points that have been made about the super-profits, the 180% margins and all the rest of it. I have also tried to hear the names of the companies that are making those profits and the only two that I have heard are Balfour Beatty and Bovis. My understanding is that neither of those organisations has a particularly high return on capital employed. So I am a little bit mystified as to where the money is going and I genuinely would like somebody to help me with that point.

[Mark Garnier]

I thank my hon. Friend for that intervention—what a perfect opportunity for me to do so. These are the profits of equity sales by the companies concerned: 41% for Carillion; 59.1% for John Laing; 53.9% for Interserve; 78% for Lend Lease Corporation, so well done to that company; 42.9% for Costain Group; 20% for Serco Group, which was perhaps not the best investment for someone’s money; 71% for Balfour Beatty; and 59% for Kajima Partnership.

[David Mowat]

What are those numbers?

[Mark Garnier]

Those are the equity sale profits. So those companies are PFI providers who have then sold their contracts, and those figures are the profits they have made. Just to be fair, the figure was 56.3% for Kier Group. Those are pretty sizeable returns.

[Jesse Norman]

It is very important to distinguish two things. One is the internal rate of return, or IRR, of an investment, which is the annual amount by which it gets upgraded; the second is the value that a provider gets when it sells a share. We do not know the answer to this question, but those values are perhaps what they are in part because of the period of time that they have been held. If someone held a share in the London stock market for 10 years, they would see a certain uplift in its value. I do not know what the number is, but it might be 20%, 30% or 40%. It is that kind of thing. The contrast is with the returns that were being made, for example, with the Norfolk and Norwich university hospital, where the refinancing, which loaded up the hospital with £100 million of additional debt, realised an IRR—an annual upgrade in the return to the investors—of 60%. So what my hon. Friend is talking about might be, in fact, a 7% or 8% return each year. We just do not know, and that in itself is a great embarrassment for the previous Government, because we do not have the numbers.

[Mark Garnier]

My hon. Friend makes an incredibly important point. I suspect that what these numbers are telling us is that the annual returns are being treated rather like the dividends on an equity investment in the stock market and these capital returns—the sales of equities—are the capital return that the company gets. So they are already getting their annual rate of return and this money is in addition to what they would expect to receive if they ran the contract to the end. But we need to clarify that, because these are incredibly important points.

The Government are committed to the PFI and, as we have already heard, they have 61 new projects being procured as of earlier this year, with a value of £7 billion. That is not necessarily a bad thing because money is being invested into the supply side of the economy, and we need that investment to support our expectations of economic growth and to sort out the financial mess that the coalition Government have inherited. The PFI allows that investment to happen without any immediate impact on measures of public sector capital expenditure or borrowing. However, the efficiency case for the PFI rests on the model’s ability to allocate risk more effectively than regular procurement. To date, there seems to be no empirical evidence to support any claims that the higher price of PFI finance has offset any reduction in costs.

The efficiency case looks even more fallacious in the light of falling interest rates, as we heard earlier in the debate. The Government can borrow directly at around 3.3% and yet the IRR on a PFI contract is now 4% higher than that. That is a significant risk premium to be paid by the Government, especially when the PFI investor frequently offloads risks on to subcontractors. We have heard that before. Given that we have very low interest rates and can issue gilts on a 25-year basis, should that not be one way to look at financing some of the supply side of the economy?

Coming away from the financial side, I am not sure that some of the users of PFI facilities are always that happy. Wyre Forest was one of the areas that suffered under the cancellation of the Building Schools for the Future programme. I am continuing to work hard to get rebuilding finance for up to 11 of my local schools. We are waiting for the James review on that.

Wyre Forest secondary schools were to be built under PFI contracts. In private chats that I had with various head teachers and governors, they were concerned that a PFI contract would tie their hands financially, limiting their ability to determine their budgets and, therefore, investment in teaching and teachers. We all want new schools, but at what cost to education? PFI has a place in the future in terms of funding investment, but it has to be done at the right price. A lot more work needs to be done on ensuring that we get the end product at the right price. That is why I am incredibly grateful to my hon. Friend the Member for Hereford and South Herefordshire, for taking the initiative to question this important area so closely, and to work so hard for the future of PFI.

Regulatory and Banking Reform

Mark Garnier Excerpts

Thursday 16th June 2011 Commons Chamber

[Mr Hoban]

I hear the right hon. Gentleman’s request, and his right hon. Friend the Member for Edinburgh South West (Mr Darling) has made a similar request, to which he did not seem to accede when he was Chancellor of the Exchequer. The new regulatory regime does learn the lessons of the past, and the supervisory style and confused mandate of the FSA mean that we need to change.

The lesson that we have learned from the financial crisis is that, importantly, the Bank of England’s expertise in market surveillance and in understanding macro-prudential trends can best work with the needs of a micro-prudential supervisor by ensuring that that micro-prudential supervisor is an independent subsidiary of the Bank. And, just so the right hon. Member for Leicester East (Keith Vaz) does not get the wrong impression, I did not work on the audit of BCCI.

[Mark Garnier (Wyre Forest) (Con)]

My hon. Friend will know that the financial services industry in this country employs some 1 million people and generates £50 billion a year in tax revenues. Will he assure me that these proposals strike the right balance between protecting the consumer, whom the Financial Services Authority failed so much, and maintaining our leading position in the global financial marketplace?

[Mr Hoban]

My hon. Friend is absolutely right to highlight the numbers of people employed in financial services not just here in London, or in Edinburgh and Glasgow, which are well-known financial services centres, but throughout the country. We need to ensure that the industry continues to be a strong contributor to employment, to economic growth and to tax revenues, and to ensure a balance so that it does not pose an excessive risk to the strength of the UK economy. The measures that we have put forward today strike the right balance between encouraging the industry to continue to be a wealth and employment creator and ensuring that the right protections are in place for consumers, so that they buy the products that those companies sell. Those companies will not thrive unless there is consumer appetite for buying pensions, for investing in their futures, for taking out deposit accounts and for buying life insurance policies. We need to get that balance right between consumer interest and business interest, but businesses will be best served if consumers feel happy about buying products from them.

Independent Financial Advisers (Regulation)

Mark Garnier Excerpts

Monday 29th November 2010 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I beg to move,

That this House has considered the matter of regulation of independent financial advisers.

I am delighted that my hon. Friend the Member for West Worcestershire (Harriett Baldwin) and I have secured this debate. As all hon. Members will know, this country finds itself in a dire financial situation, which extends deep into the private lives of many of our citizens. This country has the lowest personal savings ratio in the G20 and the highest level of personal debt, with half of all the personal debt in the EU borne by the inhabitants of these islands. We face a well-known problem of pensions underfunding, involving not just a deficit on pension liabilities but the fact that people are not putting enough aside for their retirement. Mortgages were taken out at the height of the boom, in some cases at levels higher than 100% of the value of the property to which they relate, and mortgage lenders worry about the next time bomb that may hit our economy—a trend towards interest-only mortgages. These are mortgages where the borrower hopes that inflation and an opportunity to downscale will pay off their mortgage. We also have a housing market in which many commentators still consider there is more readjustment to come.

It is against that background that we are debating the regulation of an important group of professionals, namely independent financial advisers. I am particularly keen to talk about that group because if we are even to begin to deal with the problems that I have outlined, we need a resource of professionals who will be able to spread the word and give sound financial advice to the wider population. The marketplace for retail investment advice in the UK is very diverse, involving banks, building societies, stockbrokers and some 33,000 independent financial advisers, as well some other players. It is fair to say that there have been problems in the past, and the Financial Services Authority suggested in its evidence to the Treasury Committee last week that there was and still is a significant amount of mis-selling every year; a figure of some £250 million a year was volunteered, but that is based largely on assumption and extrapolation from previous mis-selling scandals.

[Mr Brian H. Donohoe (Central Ayrshire) (Lab)]

A number of constituents have come to me because they are very concerned about what the hon. Gentleman is talking about, as they are going to have to revalue themselves and go through another examination. Can he shed some light on why that should be?

[Mark Garnier]

I trust that the hon. Gentleman is referring to the independent financial advisers, who will have to do that. I will come to that a little later in my speech, if I may, but I will address it specifically.

The point I was making is important because it highlights the significant amount of money being drawn out of the net savings pool of the country. It is only right that the FSA and the regulators should address the problem. They looked into it and surmised that in this marketplace competition is hindered by opaqueness and incentive conflicts, resulting in the interests of firms versus those of customers not being fully aligned. The FSA set up the retail distribution review—RDR—in 2006 to address those problems, and the new rules are due to come into force in January 2013. Specifically, according to the FSA, the RDR aimed to bring about three principal changes. The first was an improvement in the clarity with which firms describe their services to consumers. Secondly, it sought to address the potential for advisers’ remuneration to distort consumer outcomes. Finally, it aimed for an improvement in advisers’ professional standards.

[Tony Cunningham (Workington) (Lab)]

On that final point, I have also had a number of people writing to me. Would the hon. Gentleman agree that one of the overriding concerns—I have had letters from people with 29 or 30 years’ experience—is that experience does not seem to count for anything?

[Mark Garnier]

That is a recurring theme and I shall come on to that point, but the hon. Gentleman is right to raise it. It has been raised by huge numbers of IFAs who have got in touch with me, my hon. Friend the Member for West Worcestershire and with many other Members.

The three aims that the FSA has talked about are, I believe, laudable in principle, overall. It is not our intention tonight to derail the retail distribution review, which will improve standards for consumers. I suspect that not a single professional in the industry would disagree with the overall principles. Indeed, Which?, the consumer champion, strongly supports the measures contained in the RDR, and states that its members

“firmly believe that the IFA industry is best placed to offer this advice”.

However, the devil is, as always, in the detail.

In addressing the problems, the FSA has, through the RDR, introduced issues that disproportionately affect the IFA community. The IFA trade organisation, the Association of Independent Financial Advisers—AIFA—suggested in evidence to the Treasury Committee that although some 30% of IFAs strongly supported the RDR and 40% were rather ambivalent towards it, 30% would not put up with the RDR. The 30% who are against the RDR suggest that it would be better to leave the industry altogether, so the community of IFAs would shrink significantly.

[Glyn Davies (Montgomeryshire) (Con)]

Does my hon. Friend agree that that is particularly damaging in rural areas, where all the independent advisers are either one-man businesses or very small businesses, and that a huge proportion of the 30% who do not like the RDR are likely to come from such rural areas?

[Mark Garnier]

My hon. Friend makes an important point. Small businesses in rural areas are likely to be most affected because they have so few resources in their offices. As a direct result, poorer communities in rural areas will be denied access to independent financial advice. That is not a good thing.

Lord Turner, the chairman of the FSA, suggested that reducing the number of IFAs might well reduce the overall cost of investor advice. How can reducing competition possibly result in improved service to consumers? The key issues facing the worried community of IFAs can be reduced to just a handful of salient points. The first concerns qualifications, which are probably the cause of the biggest mailbags on this subject. It has been said, perhaps a little harshly, that IFAs hold a qualification no better than that of a McDonald’s burger bar employee—a qualification and credit framework level 3 pass, which is equivalent to an A-level.

The RDR requires all financial advisers to attain the QCF level 4 pass and, in the broadest sense, that is not unreasonable. However, it does not take into account the fact that a great many IFAs have a wealth of experience but, with an average age of 47, little enthusiasm to start taking exams. It is estimated that the exams will require 100 hours of study for each of four modules—that is 400 hours of study. We must bear in mind the fact that that is for a full-time professional who needs to earn a living and who may, as my hon. Friend the Member for Montgomeryshire (Glyn Davies) mentioned, be working by himself in a rural community with little support.

[Mr John Baron (Basildon and Billericay) (Con)]

Can my hon. Friend come up with any explanation of why grandfathering rights could not be applied to those with long experience as IFAs, given that such experience is much needed in the marketplace by savers who are desperate to make good financial decisions?

[Mark Garnier]

I can see no reason at all for not introducing grandfathering rights. Indeed, when the FSA was set up it introduced grandfathering rights when IFAs came over from the personal finance authority.

[Mr Graham Stuart (Beverley and Holderness) (Con)]

I congratulate my hon. Friend on opening this important debate this evening. Jon Marris, a constituent of mine and an IFA, came to see me on Friday. He has already passed the exams that will be required—he has done the 400 hours of study—but, even from his position, he believes it is ridiculous that those who have been in the industry for many years should be forced to go through that. Although he has been able to do this, he thinks that the removal from the market of people who are perfectly capable of doing their job but who might not be able to get through the exams, even though they have shown for many years that they can look after customers, is completely wrong.

[Mark Garnier]

I think my hon. Friend’s constituent agrees with us all.

The IFA community is broadly in support of raising excellence in the profession, and many are opting to take qualification exams on their own initiative without the dead hand of the FSA pressing them to do so. Indeed, the website unbiased.co.uk lists IFAs by their qualifications, so the move towards improved excellence is already going ahead under its own steam. A significant number—possibly as many as a third—feel that their 20, 30 or 40 years of experience not only trumps any exams but covers a significant depth of knowledge in their chosen areas, which will surpass any exam requirements. In taking exams, they will also be tested on areas they choose not to specialise in. As I and many hon. Members have said, the FSA seems blind to their expertise. The FSA does not recognise that experience and is determined to put out of business any IFA who is reluctant to take their exams or to subject themselves to the FSA’s ill-thought-through in-house assessment.

[Mark Pawsey (Rugby) (Con)]

Does my hon. Friend agree that if experienced independent financial advisers are driven from the market, those who will lose out most will be those with the smallest amount of assets, who will not get the advice that they receive at present?

[Mark Garnier]

Absolutely. The other group of people who will lose out because of the removal of these grey-haired sage IFAs will be the younger ones. Who will mentor the young, aspiring and highly qualified but short on experience new trainee? The FSA has no answer.

Let me turn now to fees and commissions. The FSA is further proposing that from January 2013 consumers will no longer be able to choose how their adviser is remunerated.

[Tracey Crouch (Chatham and Aylesford) (Con)]

Does my hon. Friend know of any survey that has been conducted of whether consumers have any appetite to pay fees for their financial advice?

[Mark Garnier]

My hon. Friend will not be at all surprised to hear that there are a number of surveys. Which? Undertook a survey that showed that 85% of people would prefer to pay fees, yet a survey by Harris Interactive showed that only 6% of the public said they would be happy to pay fees as opposed to commissions. That is a big problem, I think.

In future, customers will need to agree a fee with their adviser. That means that no longer will a client pay for advice via a commission charged on a transaction.

[Justin Tomlinson (North Swindon) (Con)]

I congratulate my hon. Friend on securing this excellent debate. Does he agree that if it is believed that commission makes advisers more inclined to promote products with higher commission, the same would surely apply to banks that offer their staff product sales incentives? Should changes not be consistent across the sector?

[Mark Garnier]

Yes, they should, and it is fair to say that the FSA is looking at the whole sector.

At the moment, every client is given the option of paying for their advice via a fee or commission. Since 1991, every client of every IFA has been given full details in writing of the adviser’s commission, and the overwhelming majority of clients elect to pay by commission. During that period, the market share of the IFA sector has increased from 29% to more than 65%—based on commission charging—with consumers demonstrating a clear understanding of and preference for independent financial advice. It should be noted that independent advice is not the preserve of the wealthy. Some 60% of IFA clients are ranked as C1 or below. If consumers are forced to pay a fee for advice, it is inevitable that many who would benefit from independent advice will not seek it, resulting in only the well-off accessing a significantly reduced IFA sector. The subject of commissions is extensive and I am sure that many hon. Members will want to expand on it in their speeches.

[John Woodcock (Barrow and Furness) (Lab/Co-op)]

Does the hon. Gentleman not agree that this issue is not clear cut? Surely it is right that there is some concern about the idea of a commission. Is it not the case that the concern over not wanting to pay fees is about paying a fee up front? Could the fees not be back-ended in the way that commission effectively is, making it a flat rate?

[Mark Garnier]

The issue of commissions is complex and is surrounded by several other issues, one of the simplest of which is that the Office of Fair Trading has deemed it right that the providers of the products should be able to charge or incentivise IFAs and salespeople in a variety of ways. The difficulty with allowing different levels of remuneration to IFAs is that it creates some of the problems we have talked about, but the OFT will not allow a flat rate of commission, which is one solution that could have dealt with this issue.

The risk in being an IFA is a major issue. All professions carry an element of professional risk, which is covered by professional indemnity insurance. In pricing that risk, underwriters take into account the fact that there is a so-called long-stop of liability, which is usually about 15 years, but that is not the case for IFAs. It has been deemed fair for IFAs to have an unlimited period of liability, such that an 80-year-old retired sole trading IFA might be liable for a product sold half a century earlier. It might be that the claimant has a legitimate claim, but in our compensation culture it might be that he does not feel satisfied with what he has got and is just having a go.

In practical terms, for a limited liability company, as the business gets older it becomes less saleable as it accrues a large pool of risk on the products it has sold since it opened its door to trading. Is it fair that an IFA could be chased to the grave in a manner that no other profession allows? Will that indefinite level of risk be an incentive to newcomers coming into the profession? I think that the answer to both those questions is no.

The cost of implementing the RDR is high. Currently, a firm of IFAs with up to 25 advisers is required to put aside only £10,000 by way of regulatory capital. That minimum will double under the RDR, but there is a new element to come in. Under the new rules, firms may be required to put aside 90 days’ worth of operating costs. For the better-run firms with sophisticated systems and offices that could be a significant increase. It is not inconceivable that a firm employing 10 qualified IFAs supported by high-quality support staff could see its regulatory capital rise from £10,000 to £200,000, £300,000, £400,000 or even £500,000. That rule alone is an incentive for firms to go from providing a high-level service to a cut-price one.

But what does all this mean for the cost of the RDR to the consumer? The original estimates for the cost-benefit analysis of the RDR gave a net present value of £600 million for the first five years including one-off costs. That has now risen to a truly staggering £1.7 billion in order to address an unsubstantiated cost of mis-selling £250 million. Moreover, it is by no means the responsibility of the IFA community alone. In 2009, according to the financial ombudsman, just 2% of complaints in this area related to the activity of IFAs, while 61% related to banks, but 65% of the market share is held by IFAs.

[Dan Rogerson (North Cornwall) (LD)]

I congratulate the hon. Gentleman and the hon. Member for West Worcestershire (Harriett Baldwin) on securing this debate. Does the hon. Gentleman agree that in putting together the RDR, the FSA has throughout consistently ignored all the comment from the industry, this place and elsewhere and that the time has come for it to listen and to review the whole set-up?

[Mark Garnier]

The hon. Gentleman is absolutely right. The overriding message coming back from the IFA community is of being ignored by the regulator. It has been suggested that Adair Turner, as someone who comes from McKinsey, looks at the issue from a box-ticking perspective as opposed to considering the fundamental needs of the consumer, which is the important issue.

IFAs are going to bear the brunt of the changes, and especially those with small operations in rural communities.

[Mr Adrian Sanders (Torbay) (LD)]

Is not the problem with the whole process the fact that it is angled disproportionately at hurting small traders, often in the poorer areas of the country? That needs to be reversed if the changes are to receive any credibility in or support from this place.

[Mark Garnier]

That is absolutely right.

[Mr Andrew Tyrie (Chichester) (Con)]

I apologise for breaking up my hon. Friend’s excellent speech. Does he agree that a crucial point that we must get across to the FSA tonight is that the increase in these compliance burdens will be paid for by the consumer who will therefore lose out? The loss of perspective from the FSA and the inflexibility of its approach in implementing the changes are reflected in the large number of people here today.

[Mark Garnier]

Absolutely, and I am very grateful to my hon. Friend the Chairman of the Treasury Committee for bringing that up.

The £1.7 billion costs being pushed on to the consumer mean that £1.7 billion will be taken out of the savings pool. We simply cannot take that approach if we are trying to encourage people to save and to pay off their debts. That is why the changes are so fundamentally wrong. IFAs will have to bear the brunt of them, especially those with small operations where the requirement to sit exams, recapitalise and install new compliance systems, as well as all the other requirements of RDR, will often be handled by the same individual who is offering advice to the customer. Hector Sants estimated that implementation might mean a loss to the IFA community of 20% of the professionals who work in this arena today. Adair Turner has said that this is an acceptable cost, but I do not agree. It is unacceptable that up to 3,000 professionals according to the FSA’s figures, and more according to other research, will lose their livelihoods. Among those who stay, the cost will be passed on to the consumer, as my hon. Friend the Member for Chichester (Mr Tyrie) has said.

There are many questions to ask. Will the RDR deal with the cowboys? Will a reduction in the number of IFAs encourage a savings culture or detract from it? Is it right that when we are encouraging entrepreneurs to set up new businesses, the outgoing regulator should be bringing about such devastating change to this industry? My constituent Mike Jeacock is typical of the type of IFA who is threatened by the RDR. He runs a high street shop in Stourport-on-Severn and he networks for new business among his mates in the Stourport Workmen’s Club. These are not high-rolling wealth managers prowling family offices in Mayfair. We are talking about people who earn a living honestly servicing the financial interests of people who can afford little but who need financial advice.

The retail distribution review is a significant market intervention, and market interventions, particularly of such a fundamental and far-reaching nature, require overwhelming evidence of consumer detriment and the appropriateness of the solution. In addition, any solution needs to meet cost-benefit requirements. Does the RDR satisfy these tests? It appears to be based on a combination of unfounded assertions, limited and contradictory research and, as regards some of its solutions, little more than a hunch that the outcome will somehow be better than the present system.

It is estimated that up to 10,000 experienced IFAs of good standing will be forced to retire for no valid reason.

[Teresa Pearce (Erith and Thamesmead) (Lab)]

The FSA says that only less competent advisers will not be able to comply with the new qualifications and that the changes will therefore act as a sort of natural selection for the industry. Does the hon. Gentleman agree that the opposite might be true because it will be the more successful and long-experienced advisers with well-developed client lists who will not be able to comply or who will choose not to, and that we will therefore lose their experience from the industry?

[Mark Garnier]

Yes, I agree entirely. It is absolutely the case that the harder-working and more successful IFAs simply will not have time to take the exams and start dealing with the dead hand of regulation from the FSA.

With up 10,000 experienced IFAs of good standing potentially being forced to retire for no valid reason, it is estimated that as many as 3 million existing clients, many of whom will be elderly, will lose access to their trusted adviser as of 1 January 2013. I fear that without the FSA looking again at grandfathering the experienced through the process of implementation and without a rethink about commissions, independent financial advice will become the preserve of the wealthy only.

[Alun Cairns (Vale of Glamorgan) (Con)]

Will my hon. Friend give way?

[Mark Garnier]

I have just about finished actually.

[Several hon. Members]

rose—

--- Later in debate ---

[Mark Garnier]

I am conscious that I have just over one minute to sum up this incredibly useful debate. There has been an extraordinary amount of unanimity on both sides of the Chamber; the debate has been completely unpolitical. We have talked about financial inclusion for those who need help and about protecting smaller businesses. We have questioned why the RDR was necessary and talked about grandfathering. IFAs are singular in the sense that they are not allowed to be grandfathered; long-stopping is something else that they are singularly affected by. We have talked about pushing savers into the hands of the banks, even though the banks have a worse track record than IFAs.

Importantly, we have also talked about the fact that we need more time to address this issue. I completely appreciate that we have already had six years, but we are entering a period when European legislation will be affecting these matters as well. We are also seeing the FSA moving into areas covered by the Consumer Protection and Markets Authority and the Prudential Regulation Authority. There are ongoing changes that give us an opportunity to extend the period.

I hope that three things have come out of the debate. First, Parliament has not had a chance to do this before because it is the first time that we have had such a Back-Bench debate, so will the FSA please listen following this new development? We have the feeling—