Banking

Mark Garnier Excerpts

Wednesday 15th January 2014 Commons Chamber

[Harriett Baldwin (West Worcestershire) (Con)]

It is a pleasure to follow the hon. Member for Linlithgow and East Falkirk (Michael Connarty). I, too, encourage many of my small businesses to look around and to act as customers. They do not have to stay with the bank they have been with since they were students.

I could not believe the bare-faced cheek of the Opposition motion on the Order Paper when I read it this morning. I am sure you felt the same, too, Madam Deputy Speaker, because you will recall—in your very impartial way—the state of the banking sector when this Government came to power. It is worth recalling the mess that we had to deal with when we took over. We had had the first run on a bank in this country for well over 100 years; we had had the biggest banking failure in the world; and we had had a decision, taken under conditions of panic by the former Chancellor and Prime Minister, effectively to nationalise large parts of the banking system. The Opposition motion should acknowledge that that was a deliberate decision. The natural course of events under capitalism would have been for those banks to fail, for all their employees to lose their jobs and for the branches in all our constituencies to close, followed by a restructuring process taking place outside state ownership. Instead, we have effectively perverted the course of capitalism, and that was a deliberate choice.

[Mark Garnier (Wyre Forest) (Con)]

Will my hon. Friend remind the House who the architect of the Financial Services and Markets Act 2000 was? That Act set up the Financial Services Authority, the regulator that manifestly failed to regulate the banks properly, which allowed the collapse to happen. Will she also remind us who the City Minister was at the time of the banking collapse?

[Harriett Baldwin]

I think I am right in saying that the then City Minister is now the shadow Chancellor. My hon. Friend rightly reminds us that the regulatory architecture that allowed this disaster to occur was also set up by the previous Government. Having been regulated by that regulator for many years, I know how important it is that the regulation of banks has been returned to the Bank of England. That is important because the Bank of England sees the canary in the coal mine when banks have problems with day-to-day liquidity. The Bank of England was able to see such problems in the run-up to the crash, whereas the Financial Services Authority, in its lofty headquarters in Canary Wharf, was at one remove from that, and there was no ability to join up the reaction. My hon. Friend makes an incredibly important point.

At the start of this Parliament, our Government inherited, in effect, a state-owned oligopoly in the banking system, and that is not a good place to be if we want to achieve a competitive and healthy banking system. The Government have embarked on a long-term economic plan to reform the banking system and make it more responsive to the needs of businesses and consumers up and down the land. That cannot be done overnight—it takes time. Step No. 1 was to reform the system of financial regulation. That was an extremely thorough and elaborate process, involving many people from within this House and the other place, and as of last year we had the final enactment and implementation. So we have taken some difficult and long-term decisions to reform the regulatory architecture in a way that will make it impossible for this sort of crisis to occur in the future.

Secondly, we have established a long-term economic plan for people and for businesses in this country. We have reformed the way in which the economy is working: we have lowered the cost of mortgages for home owners; we have lowered the cost of government for council tax payers; and we have lowered the cost of fuel over and above what the Opposition planned, so that people who drive to work do not have to pay that extra £11 in tax that had been planned for them.

Thirdly, I come to the final piece of this journey in passing on to future generations a banking sector that is, once again, fit for purpose: addressing this problem of the state-owned oligopoly. We cannot restructure the failed banks effectively within the Government’s ownership, and the best way to say that we have closed this terrible chapter that we inherited in the banking system will be by privatising the banks that are publicly owned and returning them to the private sector. We have started on that with the sale of the first tranche of Lloyds shares. I sincerely hope that the Minister will be able to reassure us that it is the Government’s plan to return Lloyds shares to the private sector.

I also argue that it is in the best interests of the economy and the country that we move now to return RBS, whose share price is still well below that paid by the former Prime Minister for its shares, to the private sector, even if that means recognising and crystallising a loss which is the price we pay for Labour’s banking failure. At the moment we are in the worst of all possible worlds: we have a system where we need to allow new entrants to come into the space, but a large semi-state-owned dinosaur is taking up a lot of market share. It would be better for that to be restructured effectively within the private sector.

My argument today is that the Government need to get out of the banking business as quickly as possible. It is not the role of government to be setting the compensation of every banker in this country. The Government must set the framework and the regulation, but this level of micromanagement is a function—a symptom—of the terrible inheritance that we received. By getting out, we must recognise that we will reform the banking sector for our children and our grandchildren. It will mean that those banks will then restructure within the private sector, and the socialists will never be able to get their hands back on running a large sector of our economy.

[Andrew Gwynne (Denton and Reddish) (Lab)]

I am grateful to be called in this debate, Madam Deputy Speaker, and to follow the hon. Member for West Worcestershire (Harriett Baldwin). I do not necessarily share her views or her assessment, but she made an illuminating contribution. Given today’s news about RBS, this is a pertinent and timely debate for the Opposition Front-Bench team to have called, and we must take the opportunity to debunk some myths that have been allowed to penetrate into the debate so far.

First, we must point out the fact that the banking crisis was global. The Minister gave a history lecture, but perhaps conveniently the chapter he missed was the one on Lehman Brothers’ collapse in New York in September 2008, which triggered a tidal wave of chaos across most major western economies. I would argue that the action taken by the previous Labour Government was necessary; we all remember the queues outside Northern Rock and the chaos that was created, and default would have been a disaster, for not only the British economy, but for the wider global economy. Confidence would have completely collapsed in the banking sector and we would have seen a run on all major high street banks. The alternatives to Labour’s action would have been disastrous and it is not worth contemplating them. The action was costly to the public purse, but nobody—none of my constituents or those of the hon. Member for West Worcestershire—lost their savings. That is an important fact to remember, as it shows precisely why the banks that think it is back to business as usual just do not get it.

It was not only this bonuses-as-usual mentality from the banks but some of the other structural weaknesses that remain within our banking system that allowed the LIBOR and Euribor rigging attempts for which RBS, Lloyds, Barclays and Deutsche bank were fined by the regulators, to take place. It is also the mis-selling of interest rate swaps and of payment protection insurance—

[Mark Garnier]

rose—

[Andrew Gwynne]

I will not give way because many hon. Members wish to contribute. Clearly, those structural weaknesses remain in the banking sector and the Government should be doing more to address them, both in the UK and globally. I would like the British Government to take a lead on addressing banking reform, not just in this country, but across Europe and across the globe.

The banks also have a social obligation to taxpayers. I said that the Labour Government’s action was costly to the public purse and important to secure people’s savings, but I do not believe, unlike the hon. Lady, that we perverted the course of capitalism, because the alternatives would have been disastrous. However, banks should be doing more to help the Government meet their social needs and the wider social needs of society—those for whom it does not feel as if the recession is yet over. That is why the proposal from my hon. Friend the Member for Nottingham East (Chris Leslie) to have the bankers bonus tax to fund a compulsory jobs guarantee is absolutely right and why I think he gets it. It is also right that the bank levy should also be increased, specifically to fund the expansion of free child care for three-year-olds and four-year-olds from 15 hours a week to 25. The Government try to make out that this is the same pot of money. We are talking about two very different socially responsible measures that will ensure that the banks start to repay what they owe to society

Finally, bank lending and access to bank services are important if the banks are to take on socially responsible roles in securing the recovery and helping local communities. Let me turn first to lending to small and medium-sized enterprises. I despair when companies come to see me as their Member of Parliament and set out perfectly viable business propositions to which, before the banking crisis, banks would have fallen over themselves to lend money, and yet they cannot even get a foot through the door. We must ensure that the Government’s attempts to get banks lending start to work, because it is just not happening at the moment. Indeed, the most recent data show a huge drop-off in bank lending to small businesses, which should cause some concern to the Treasury.

There are still too many communities without good access to banking services, and branches continue to close. That is a huge problem not just in rural communities, but in some of the most deprived urban communities. It is very much a social justice issue. People should have good access to banking services within their community. Perhaps there is a greater role in that regard for the Post Office. One scheme under the previous Labour Government was to increase the number of free cashpoints in our most deprived communities. It was outrageous that people in some of the poorest areas were charged to get cash out of machines. The previous Government were absolutely right to install 600 free cashpoints in such communities. However, some of those measures have stalled under this Government, and there is a lot more that we should be doing to ensure that the most deprived communities have proper access not just to free cashpoints but to a full range of banking services.

In conclusion, we need a vibrant and socially responsible banking sector, and to ensure that bad practices are ended. The Government must recognise that banks have an important role in our communities, offering services and lending to businesses, and they must face greater competition. The Government and the banks must recognise that it is far from business as usual. It is time for proper banking reform.

Financial Services (Banking Reform) Bill

Mark Garnier Excerpts

Wednesday 11th December 2013 Commons Chamber

[Sajid Javid]

It is possible, although it is difficult to answer that question specifically as it would depend on the legal process, as anticipated in the Bill. As I progress with my remarks, the hon. Lady will see the kind of actions that can lead to prosecution.

[Mark Garnier (Wyre Forest) (Con)]

Does the Minister agree that a lot of the changes that are coming through as a result of PCBS recommendations should in some respects be treated rather like the nuclear deterrent? It is not necessarily about trying to punish people; it is about trying to drive behaviour that avoids a crisis in the first place. Had these rules been around at the time, it is far more likely that Fred Goodwin would not have led his bank over the cliff, that we would not have had the financial crisis, and that we would have a more stable banking system as a result. That is the intention behind the proposed law.

[Sajid Javid]

My hon. Friend has explained well the reasoning behind the recommendation from the PCBS—which, of course, he was part of—and the deterrent effect this change could have should not be underestimated.

--- Later in debate ---

“kind of professional standards...that you see in the medical profession or the legal profession”.

[Mark Garnier]

Is the shadow Minister aware that the banks have already initiated the creation of a professional banking standards body?

[Cathy Jamieson]

I thank the hon. Gentleman for that comment. I know that he has done considerable work in his role on the commission, but it is important that these issues be put on the record. It would have been useful to consider them in Committee, and I mention them now to show that significant pressure has been applied to move things forward and bring about change. The Government appeared to resist that and some of the commission’s recommendations until, of course, their recent change of heart following their defeat in the other place on the amendment for the licensing regime. At that point, they felt they had to bring forward their own plans.

The Opposition might have expected the Government to be reasonably gracious and accept the decision of the other place, but today they have tabled an amendment to disagree with and remove Lords amendment 41 from the Bill. To be fair, what they have tabled, under pressure to replace that amendment, is better than nothing, but it does not go anywhere near as far as the amendment they wish to strike out. The main difference essentially concerns the code of conduct. Lords amendment 41 states specifically that the

“licensing regime must…apply to all approved persons exercising controlled functions, regardless of financial sector;…specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules”.

That is important, given that the Government’s position does not call specifically for a code of conduct. In some ways, their regime legislates for the commission’s recommendations, but by failing specifically to legislate for an open and transparent code of conduct, they risk failing to address some of the ethical issues surrounding so-called casino banking. Their more permissive amendment does not focus specifically on a code of conduct.

Several other hon. Members wish to speak, so I shall conclude with some brief comments about remuneration. As hon. Members might be aware, the Opposition have given considerable thought to the regulation of bankers’ remuneration, and there remain certain issues that the Government must consider before the general public can have confidence in the industry. The public find it difficult to understand, and have concerns about, the culture of high risk, high reward that was evident in the previous system and which contributed to the crisis.

--- Later in debate ---

[Emily Thornberry]

There are other things that can be done, and I shall briefly touch on some of them. May I begin with the difficulties that exist in relation to this offence? Under the Bill, it would be an offence for a senior manager recklessly to take a decision. I appreciate that some of the additional 175 pages that have been added to the 35-page Bill have been to backfill exactly what a senior manager is and how they will be defined. That is clearly an improvement, and it is unfortunate that it was even suggested that the Bill would be sufficient in its original form. One must remember that even if a definition of senior manager is now one with which we can all be happy, there have been banks that have been brought down by people other than senior managers. Nick Leeson from Barings bank comes to mind, as does the £2 billion that was lost to UBS by Kweku Adoboli.

[Mark Garnier]

I am fascinated that the hon. Lady chooses to use Nick Leeson as an example, because he went to jail, in Singapore, for four years.

[Emily Thornberry]

The point is that he was not a senior manager and he brought down a bank. This measure will not solve the problem of banks being brought down. An offence of reckless banking that will apply only to senior managers is not by itself sufficient, which is why I want to go on to say what I think should be done instead.

--- Later in debate ---

[Emily Thornberry]

I am more than happy to put it on the record that I am a critical friend of the Serious Fraud Office. Sometimes the emphasis is more on the word critical, especially after what we have seen in the newspapers today, with the crash of yet another serious fraud case because the SFO asked an agent, which clearly had a conflict of duty, to do its investigation. That is yet another mistake that the SFO has made. If we want the SFO to turn a corner, we need to do more than show good will. This Bill provided us with an opportunity to change things. It is unfortunate that more attention was not paid to changing corporate liability.

I listened carefully to what the hon. Member for Chichester (Mr Tyrie) said in his contribution, and I undertake to send him, as a Christmas present, Labour’s policy paper in relation to fraud. If we can change corporate liability to ensure that if an individual within an organisation behaves in a way that is dishonest and to the advantage of the larger organisation, we can prosecute the organisation, unless it can show, in the same way that it can under the Bribery Act 2010, that it has in place controls over its staff, it would have an impact on our banking system. If I may say so respectfully, introducing such legislation will have a greater impact than the measures proposed in this Bill. If we were to introduce a different form of corporate liability, we could increase the fines hugely, and that money could be ploughed back into the Serious Fraud Office. Then we would have an organisation of which people in the City of London would be afraid. They would be prepared in most circumstances to come to an agreement with the SFO to have a deferred prosecution agreement.

DPAs will not ever exist under the status quo. The DPA legislation has been passed but, as I understand it, no one has come forward to say that their company has been doing wrong, that they want to admit that, that they will pay a fine, that they will change their ways, that they want auditors to come and see how they are behaving and that they will point out the individuals who have been behaving in a criminal way. I respectfully submit that that is how to change the culture. That is how we ought to be working and I look forward to discussing it with the hon. Member for Chichester once he has read the Christmas present I intend to send him. If elected in 2015, Labour intends to introduce its own economic crime Act, and I hope that we will take the issues further and develop them. Obviously, I would be interested to hear the hon. Gentleman’s reactions.

[Mark Garnier]

I intend to talk principally about Lords amendment 41, but before I do so let me echo the comments made by the Chairman of the Parliamentary Commission on Banking Standards, my hon. Friend the Member for Chichester (Mr Tyrie), at the beginning of the debate. He said that he was grateful to the Government for moving such a long way along the road towards the commission’s recommendations. That is a tribute to the organisation that he chaired extraordinarily well for about 18 months and that came up with such sound proposals. It was a great honour for me to be part of that process. It also says a huge amount for the Government that they have taken great heed of what the commission said and have moved a great deal further towards implementing the proposals.

On Lords amendment 41, I suspect that there is not too much of a difference of opinion in the House about what we are trying to achieve through the Bill—that is, a change in the culture of banks. I take slight issue with the hon. Member for Islington South and Finsbury (Emily Thornberry), because it is not just about preventing banks from collapsing. It is about getting better standards and better service for consumers. Many constituents will complain about their treatment by banks and that has nothing to do with criminal matters; it is simply about the culture and how certain people address other people in their everyday lives. We want to drive that out and to ensure that the banking culture is one of which we can be proud and which consumers can trust enormously.

[Mr Love]

Is the hon. Gentleman not disappointed that, since 2007, when there has been such a focus on the problems and difficulties of banking, no greater progress has been made in creating the type of culture we all want to see?

[Mark Garnier]

I do not necessarily agree. I speak not only as a Member of Parliament, a member of the Parliamentary Commission on Banking Standards and a member of the Treasury Committee but as a former investment banker and investment manager. My hon. Friend the Financial Secretary is also a former banker, so to a certain extent we have a private interest in ensuring that banking standards are greater than they have been. There has, however, been an enormous amount of progress. We have a new regulatory regime, there have been a number of changes in the banks and we have seen a complete change of culture at the top of many of the banks. Things are moving in the right direction but it will take a long time and this Bill is part of that process.

Although we are all trying to achieve the same thing, the important question is how we will achieve it and who, ultimately, we should ask to ensure that the licensing regime is upheld and looked after. The Parliamentary Commission on Banking Standards was perfectly clear that we felt that the approved person regime was complete and utter nonsense. One of the Bank of England’s greatest thinkers, Andy Haldane, highlighted why that was the case: if regulation is devolved to a regulator, all that happens is that the individuals at the head of the banks think that they have nothing to worry about. It becomes the regulator’s problem to worry about such things, and not that of those individuals.

When we met a number of the banks—particularly UBS, the Union Bank of Switzerland, the senior directors of which appeared in front of us just after it had been fingered for its share in the LIBOR scandal—we discovered that there was an incentive to be ignorant of what was going on within them. The senior managers of UBS who were running the bank when the LIBOR scandal happened within their organisation knew nothing about it until they read about it in the Financial Times three or four weeks before our hearing. That gave rise to the accusation that there was an accountability firewall between the management of the banks and the individuals working on the front line—that is, those at the coal face on the dealing room floors and servicing our consumers.

We were trying to work out how on earth we could reach a system in which those at the top of the bank took accountability for the work and standards of the individuals in the lower part of the bank. That is crucial in leading me to support the Government in rejecting amendment 41: it does not deal with that accountability but rather gets around the problem. That is why it fails to hit the nail on the head.

--- Later in debate ---

[Stewart Hosie (Dundee East) (SNP)]

The personal responsibility argument is extremely strong and powerful, but does not the hon. Gentleman see some merit in the fact that Lords amendment 41 talks about a code of conduct? Is not the code of conduct described in the amendment a mechanism that could be used to drive the change in culture throughout the organisation that he describes?

[Mark Garnier]

I agree entirely. A number of professional bodies in the banking industry have a code of conduct. I, for example, am a fellow of the Chartered Institute for Securities and Investment, which has a code of conduct. Many people working in investment banks will be fellows of the CISI. Indeed, Sir Richard Lambert’s proposals, about which we shall hear more in the new year, will include a code of conduct. It is also worth bearing in mind that the banks are producing their own code of conduct that is being fed back to the regulator, which will consider what they are saying.

Let me wind up, because I think the Minister would like to speak at some point. I would be the last person to stand in his way, because I know that he will have some intelligent things to say. Suffice it to say that I think amendment 41 will prevent the behavioural changes we desire, and that is why I will reject it.

[Sajid Javid]

I thank the shadow Minister, the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), for her comments and all other—

Interest Rate Swap Derivatives

Mark Garnier Excerpts

Thursday 24th October 2013 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

May I start by adding my congratulations to my hon. Friend the Member for Aberconwy (Guto Bebb), who has not only been brave in what he has done on this matter, but has shown outstanding leadership in a technical, complex issue?

I wish to develop a couple of points, the first of which has started to resolve itself. I am talking about the big question of the linking of consequential loss to the technical redress. Clearly, the technical redress is people’s money—that is an agreed thing, and it is only right that it should be paid as soon as possible. The consequential loss was always a separate issue, and to have linked it was completely the wrong thing to have done. HSBC has broken ranks and RBS is following suit, and Martin Wheatley is now coming on board, saying that there should be no conditionality between the technical redress and the consequential losses claims. That is a good thing; it is excellent progress, and we can thank my hon. Friend for his work on that.

[Peter Luff (Mid Worcestershire) (Con)]

May I add my thanks to my hon. Friend the Member for Wyre Forest (Mark Garnier) for the leadership that he, too, is showing on this issue? Is it his experience, as a fellow Worcestershire MP, that this scandal, although apparently technical, is affecting well run, long-established and deeply respected real businesses across a wide range of sectors, and that the delay is going to kill businesses that our constituents value very deeply indeed?

[Mark Garnier]

My hon. Friend is absolutely right in what he says. The banks made an incredibly cynical effort to persuade people to enter into these contracts where, in many instances, they should not have done so. Sometimes it was the right thing to do, and I think that many businesses will agree that they just got it wrong, but we need to look after the smaller businesses that were simply mis-sold these products.

[Mark Lazarowicz]

Do not the banks, or at least some of them, also have to be much more proactive in identifying the people who been the business victims of this practice? As we all know, whenever we have a debate such as this, more people come forward who were frightened to come forward before or who did not even realise that they were victims of these schemes. It is up to the banks to be much more proactive in identifying the cases and then trying to resolve them.

[Mark Garnier]

That is absolutely right. Part of the problem, however, is that the banks have an incentive not to get in touch with people, for obvious reasons. That relates to the second point I wish to develop. It is a technical point, but it is incredibly important in terms of why it is incentivising banks to delay technical redress for as long as they can, and it has implications for the financial stability of the banks.

We should not think of these things as stand-alone products, but should recognise them for what they are. They are not stand-alone products; there is another side of this trade. They are swaps for a reason, and it is important to understand what a swap is. Any one of our victims will have been persuaded to take out a contract with the bank that has the beneficial effect of capping interest rate payments at a certain level. That is a virtuous thing and we are all familiar with the financial planning behind the thought process, through things such as fixed-rate mortgages. But these are not fixed-rate mortgages; they are stand-alone products that relate to a loan, but are not part of that loan. Importantly, many people have paid off the loan but still have the outstanding liability on the swap. The quid pro quo of having a fixed cap on interest payments is the collar that has caused so many problems for our victims, whereby they have to pay a relatively high rate of interest in today’s terms. What is not fully understood is that this is not a simple contract with the bank, as it first appears. The bank is not taking a naked bet with its customers that, in the environment of falling interest rates, it has won. It is not receiving as profit the penalty in the increased premiums being paid in interest rates by the victim, because for a swap to actually be a swap, there is a matching trade with a third party on the other side. What the banks receive in higher interest rate payments they are paying to an opposing and third-party counterpart on the other side.

I shall now go into a bit more detail. Businesses may want to make sure that they do not pay too high an interest rate; that is why they are persuaded, rightly or wrongly, to take the swaps. However, an organisation such as a pension fund needs to guarantee its income should a severe drop in interest rates, such as we have seen, occur. It would want to take a position opposite that of the businesses, which are the victims.

The pension fund will forgo a rise in rates while winning the guaranteed floor rate that it will receive. For a business to have a rate cap at, say, 7%, it will guarantee to pay no less than 5%. For a pension fund to be guaranteed to receive a minimum payment of 5%, it would agree to receive no more than 7%. In that way, the business’s and pension fund’s interests are perfectly aligned in opposition.

As both the pension fund and business are clients of the bank, the bank does two simultaneous trades—one with the business, to cap and collar the rate payments, and the other with the pension fund, to collar and cap the interest rate receipts. The bank makes a small margin, but essentially its liability, if everything stands up, is perfectly and oppositely aligned. That is the symmetry of liability and the basis of the swap market.

[Stephen Metcalfe (South Basildon and East Thurrock) (Con)]

I thank my hon. Friend for his understandable explanation of the product. I will be honest—I am new to this issue, which constituents have brought to my attention. Is it possible to explain the issue to an individual in a phone call lasting one minute and 20 seconds? That, apparently, constitutes the contract between the bank and the client.

[Mark Garnier]

I will try to explain the issue as simply as I can now.

Imagine a second-hand-car dealer. He may buy a dodgy motor on his own books and try to make as big a turn as he can, but he risks not getting his money back. Now imagine a car dealer with a valuable vintage car who aligns a seller and buyer at exactly the same time. He takes a turn with no risk at all, and that is how a swap behaves. Now imagine that, having lined up that trade, he takes the money from the buyer, so has a contractual agreement with them, and agrees a sale with the seller. However, on the way to deliver the car, he writes it off in a crash and is not insured. He still has liabilities on both sides—he still has to deliver a car to the buyer and has to pay the seller. That is the mess that the banks are in. They have caused themselves a massive car crash and have to look after the other side of the trade.

We are fully aware of the losses to the banks on the financial redress scheme—plus, obviously, the consequential loss scheme as well. We have heard about how much has been put aside, and there will be debate about whether that is the right amount or not. However, we have heard nothing yet about the value of the liability on the other side of the swap—the liability to institutions, most likely to be pension funds, that still needs to be honoured. That has implications for the stability of the banks and shows why it is important for banks to keep the redress scheme running for as long as possible.

[Richard Fuller]

rose—

[Mark Garnier]

I see that my hon. Friend wants to intervene, but may I develop my point?

The financial redress scheme has a specific value, based on a number of factors—including, crucially, interest rates and time. Similarly, time to run is a key component of the value of the other side of the swap. With interest rates so low, the longer the time to run, the higher its value to the customer and the higher the liability to the bank. As a result, we get a built in incentive for the banks to delay settlement for as long as possible. With each day that goes by, the liability on the other side of the swap is reducing.

Harry Wilson, of The Daily Telegraph, has put in freedom of information requests to the Financial Conduct Authority to find out exactly what the loss on the other side of the trade will be. Amazingly, nobody seems to have the answer. It seems inconceivable that the banks would not have the information. Any derivatives trading room team, especially on a swaps desk, will have detailed information on the extent of the liabilities; they have to know that. Even if the swaps team does not, the risk or treasury department should know it—loads of people should know it. It is extraordinary that nobody is coming forward with the information.

The issue has been dragging on for far too long. Too many businesses have failed as a result of it and it is likely that too many more have fallen into that twilight zone of bad forbearance by banks, which sometimes keep otherwise dead institutions alive simply because it is in their interests.

I spent the best part of the last year on the Banking Commission considering the matter. It is worth noting that this crisis happened before the Banking Commission, the financial crisis and the rest of it. However, today the banks have to prove that they have moved on, that they should now be allowed to come into polite society and will do the right thing by the consumer.

Oral Answers to Questions

Mark Garnier Excerpts

Tuesday 10th September 2013 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

Household debt peaked in 2008 at 170% of household income. Since then it has come down, but households are still very vulnerable to rising interest rates. Does my hon. Friend agree that any fiscal policy must give comfort to the bond markets in order to help the Governor of the Bank of England keep interest rates low and mitigate the effect of rising rates on households?

[Sajid Javid]

My hon. Friend is obviously referring to the fact that when this Government came to office, we had the biggest deficit in our post-war history. The previous Government were borrowing £5,000 a second—£300,000 each and every minute. We have reduced that deficit by a third and, as my hon. Friend suggests, that has brought confidence, investment and jobs.

Financial Services (Banking Reform) Bill

Mark Garnier Excerpts

Tuesday 9th July 2013 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I wish to speak substantially to new clause 14, which stands in the name of my hon. Friend the Member for South Northamptonshire (Andrea Leadsom). She has waged a Boadicea-like war to bring about account portability, and I have been happy to follow that banner—certainly over the past two years—when trying to increase competition. Between the two of us, my hon. Friend has led on account portability, while I have looked closely at barriers to entry and regulation.

I repeat my hon. Friend’s point about how the regulator has given way a bit on regulatory barriers to entry. Although I would not say it has moved substantially, it has made it easier for challenger banks to enter the marketplace. Two or three years ago, any potential challenger coming to the marketplace looked to spend between £300,000 and a potential £25 million just to get to the regulator’s front door and open a formal dialogue to get a banking licence. That is now changing, and the regulator has come up with a new process that makes it a great deal easier. None the less, smaller banks have certain problems due to ongoing expectations that give an advantage to the bigger banks. Those bigger banks have greater granularity with their account holders, and can therefore consider more sophisticated risk-weighting models for their assets. Smaller banks do not have those IT advantages and the cost of their asset book rises with greater capital requirements, which is still a problem.

Before I get to the substantial points, when considering effective competition within the marketplace we must remember the importance of a well-educated consumer. I am pleased that the Government have already responded on that—yesterday the Secretary of State for Education announced the new curriculum, which includes financial literacy, and I pay tribute to his wisdom in realising that that is one of the greatest engines of social mobility. In any sophisticated society such as ours, it is important that those we are educating can deal with the most basic measure of the economy we live in—looking after their own money. That has been achieved through the hard work of organisations such as the Personal Finance Education Group and the all-party group on financial education for young people, and it is a very good thing.

Financial education, understanding and literacy are core to driving competition. It is no good giving people a multiple choice of banks they can use if they do not understand the products being presented. When considering standards within banks, it is important that the marketplace, as well as the regulator, holds those banks’ feet to the fire to ensure they are performing well, providing a good service and delivering trust, which is crucial to restoring a properly functioning banking market in the UK.

On account number portability, in September this year seven-day switching will start. The banks have come to us proudly and said that they have spent £700 million implementing that system, but in essence it is less a switching service and more a redirection service that lasts a year—more of the chewing gum and Sellotape we heard about earlier. The measure of success for the seven-day switching service is expected to be how many people switch, but I do not think it will pass that test because I do not expect many people to switch their accounts. It comes down to the fundamental problem that there are still barriers to entry for new entrants, which leaves a small number of banks in the marketplace. Most people cannot see the difference between one bank and another, and even if they can, they do not necessarily understand what it is. In their mind, the risk of an uncertain future with a different bank far outweighs the benefits of finding a better service and challenging the bank to be more efficient.

The proposals for account number portability in new clause 14, which the Government have already agreed is a good thing, are important and will make it simple for new banks to enter the marketplace and steal market share from existing banks. The provision has the advantage of being pro-competition—we have already heard strong discussions about that—and there are number of other important issues alongside that. First, in this world where we would like a lot more transparency, the new Financial Policy Committee is considering the state of the financial system. That will help it understand what is going on in terms of transparency, and bring the visible part of the system within the auspices of VocaLink. As a result, the FPC will be able to head off any disasters if it sees anything going on.

We also heard that resolution of failing banks is incredibly important. Part of the Bill’s raison d’être, and indeed that of all the work done by Vickers and everyone who has worked on this since the crisis of 2007-08, is to try to ensure that people affected by failing banks do not lose their livelihood or face a financial crisis, so a simple resolution of a failing bank is incredibly important. Under the proposals, although an individual might see on television that there has been a run on their bank and that it is collapsing, the next morning they would simply wake up to discover that their bank account had automatically been transferred to another bank. The systems would continue to work, so their pay would be received on their behalf, their standing orders would still be paid and their house would not be repossessed because they had not paid their mortgage. More importantly, if they do not like the new bank they had been sent to, a couple of days later they could move to a better bank that they felt more comfortable with. Resolution is therefore incredibly important.

The other incredibly important point is that some banks have legacy IT systems that have been around for a huge number of years. Parts of these IT systems can date back to the punch cards of the 1950s and 1960s. In a recent conversation with someone who has done a certain amount of work in one of the larger state-owned banks, I happened to make a throwaway comment about the old IT systems. He responded, “Oh yeah, absolutely.” He explained that he had been looking at some of the software surrounding the small and medium-sized enterprise accounts and had noted that one of the software models had a converter sitting alongside it for converting pounds, shillings and pence into decimals. That must be at least 42 years old, as decimalisation was in 1971.

We know for a fact that there are a lot of old and incompatible systems being held together with string and chewing gum. Andy Haldane at the Bank of England has done a study and estimated that 80% of banks’ IT spend is on holding old systems together. If we take into account the fact that it is timely because at some point all the banks will need to update their systems, and if we consider resolution, transparency and competition, we will come up with a pretty convincing set of arguments that now is as good a time as any to introduce what will amount to fairly substantial IT investment, and there are a number of reasons that come together to make it worth while.

VocaLink, which runs a payments system, has already done a great deal of work on that. I have heard from a number of the larger banks that it could cost £10 billion, but they are dead against any sort of account number portability, so I suspect that it would be a lot cheaper. That is why it is incredibly important that the Government come forward as soon as possible to get the cost-benefit analysis on moving to full account number portability and, importantly, not be distracted by looking at the seven-day switching service in a year’s time.

[Mr David Ruffley (Bury St Edmunds) (Con)]

I congratulate my hon. Friend, and I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) on introducing new clause 14, which I call the Leadsom clause. Before concluding will my hon. Friend share with us the work he has done in speaking over the past two years to potential new entrants, new challenger banks, that have said that they would consider entering the market if bank account number portability came to pass?

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[Mark Garnier]

Yes, without a shadow of a doubt. A great many of the smaller banks that are looking to enter the marketplace have to use a piggyback system with the big clearers. For example, C. Hoare & Co., which has been around for 341 years and is still a private bank, uses RBS for its clearing. To that extent, the larger banks are providing a service, but ultimately it is causing a great problem for them. Over the past two years I have met about 20 potential challengers looking to enter the marketplace, and certainly it is largely the regulatory barriers to entry that have caused the problem.

Ultimately, the challenger banks are going to be running current accounts. Some of the larger ones, such as Metro Bank and Virgin Money, are 100% behind having full account number portability and recognise—I think that this is one tribute to them—not only that that will be an opportunity for them to attract accounts from existing banks, but that they will have to work incredibly hard to meet the challenge of a more sophisticated consumer in order to keep those accounts once they have them. That is crucial to one of the key points of the Parliamentary Commission’s report, which is the need to ensure that we drive better standards.

I return to the fundamental point that the best way to drive better standards is to have a very discerning and demanding consumer in order to ensure that those banks provide a service, and for that discerning consumer, once we have taught them how to do it, to hold the banks’ feet to the fire, so they need to be able to move their account very simply and overnight.

[Mr McFadden]

I want to make a few points about new clauses 10, 12 and 14.

New clause 10 deals with securing the best interests of the taxpayer as regards the state-owned banks and their future. If the best interests of the taxpayer were in the Government’s mind in recent weeks in their stewardship of RBS, that has been shown in a very peculiar way. This story does not begin with the departure of the chief executive. It begins before that with a briefing from the Minister’s Department about the share price in which it said that the previous Government had overpaid for the shares, and the briefing tried to set the scene for a pre-election fire sale of the bank that would have short-changed the taxpayer. I am glad to say that despite that briefing, the Government seem to be edging away from that strategy. If they were holding out hope that the banking commission would have given them comfort on that front, it did not turn out like that, and rightly so, because it would have been wrong to give a running commentary on the share price for an institution. An institution’s share price should be determined by the market, based on its future prospects.

After the briefing, we then had the unseemly departure of the chief executive at the Government’s hands. Most people saw him as doing a good job of reducing the risks on the bank’s grossly overblown balance sheet and trying to get it back into a healthier position, in the best interests of the taxpayer. Not only was he bundled out before he had completed that task, but this was done without any proper succession plan being put in place. Over the period of a month, we have had political briefing about the bank’s share price and the announced departure of the chief executive with no successor in place, and, as a result, a loss of investor confidence in the Government’s future strategy for the bank. That is no way to exercise stewardship of arguably one of the most important banks in the country. It has undermined the Government’s reputation as regards these state-owned assets and done harm and damage to the bank. I hope that in future the best interests of, and best value for, the taxpayer will be uppermost in the Minister’s mind rather than the politically motivated dabbling that we have seen in recent weeks.

On a happier and more bipartisan note, I turn to the new clause tabled by the hon. Member for South Northamptonshire (Andrea Leadsom) and the very similar new clause tabled by my hon. Friend the Member for Nottingham East (Chris Leslie). At the heart of this is how much banks care about reputational loss; the hon. Lady referred to that. If the banks were in a normal business environment and there were a big IT failure or another failure of conduct such as mis-selling or LIBOR interest rate fixing, they would care because they would worry that their customers would walk, but they are not in a normal business environment. Banks seem to be immune to, and careless about, reputational damage that would really matter in another business environment.

During the banking commission’s deliberations, a parallel was drawn with the car industry. When a fault appears in a model of one of the big-brand car makers, they will very quickly issue a recall notice to ask the customer to come in and have the fault fixed at no expense and at a time that is convenient to them. Car companies do that because they care about their reputation and want that customer to buy a car from them the next time they get one. The same logic does not apply in banking, because the same forces of easy departure do not apply. There are two sides to this story. It is not all about the easy transfer of accounts, although that is important; it is also about what one would be transferring to and from. There is little point in creating a perfect exit system if the choice is merely between three or four offers that are all much the same anyway. There is inertia on both sides. We need more competition among the banks as well as an easier system of transferring accounts.

The seven-day switching process that will come into play in September is an advance, and it should be given a chance to work; we should test it properly. At the same time, the new clauses tabled by the hon. Member for South Northamptonshire and by my hon. Friend the Member for Nottingham East call for proper reports to be produced on full account portability. The hon. Lady set out very well the reasons why we need a proper report, one of which is the issue of cost. The incumbents say, typically, that this will cost a fortune and that it will have to be passed on to the consumer, so let us explore the cost properly and get to the bottom of whether that argument is valid.

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[Mr McFadden]

The hon. Lady may be right and that is another reason that we should have a proper report to drill into the issue.

On privacy, in addition to the cost argument I think that customers could also be discouraged by the argument that all their account details could be held in a single black box to which all the banks in the country have access.

[Mark Garnier]

The right hon. Gentleman raises an incredibly important point. I think that the vast majority of consumers would be very fearful of a central database holding their bank details. The beauty of the system proposed by VocaLink is that, although the payment system and the central infrastructure will hold the sort code and account number, the identity of the holder of the account number will be held by the bank. Therefore, the customer’s relationship will be with the bank, not with the payment system.

[Mr McFadden]

I thank the hon. Gentleman for making that important point. If consumers are going to have confidence in a system of speedy switching such as that being advocated by the hon. Members for South Northamptonshire and for Wyre Forest (Mark Garnier), these questions about privacy and security of information will have to be bottomed out to the public’s satisfaction. My view is that that will be a more important argument than the one about the cost to the banks of whatever IT changes will be necessary to put this system in place.

In conclusion, it is important that we give the seven-day switching service a chance to operate, but the report that the hon. Member for South Northamptonshire and my hon. Friend the Member for Nottingham East are asking for is also important, because it would bottom out theses issues and others that I have not mentioned. It is a shame that the hon. Lady does not intend to put her new clause to the vote. After all, it only asks for a report; it does not seek to mandate a change before we have done the work and got the proper evidence. I hope that the Minister will respond positively to her suggestion and that of my hon. Friend. It is really important that there is proper competition between providers in this sector to attract consumers and that the kinds of free choices that enable consumers to walk away and get another product from another provider are available in practice, not just in theory.

Financial Services (Banking Reform) Bill

Mark Garnier Excerpts

Monday 8th July 2013 Commons Chamber

[Mr McFadden]

I entirely agree.

[Mark Garnier (Wyre Forest) (Con)]

To follow up on that point, rather than having a gun in the locker, some of these powers should be seen as akin to a nuclear deterrent. As parliamentary commission members will remember from doing the media rounds after the publication of the report, one of the big questions was whether Fred Goodwin would have gone to prison if we had had these powers in place. The answer to that is that RBS would not have gone bust in the first place. The deterrent element of these powers, rather than the enforcement element, is what is important.

[Mr McFadden]

The hon. Gentleman makes a very good point. Without wishing to pursue this analogy too far, the difference between a gun in the locker and the nuclear deterrent is that it is conceivable we would use the gun in the locker, but less so the nuclear deterrent. I am therefore not entirely sure which of the two commission members has got this quite right, but deterrence is certainly part of the effect we are looking for.

To return to the issue of the power to separate in respect of one institution or the sector as a whole, my overall reflection, having served on the commission for the past year is that, although its recommendations should be supported, even if we take all the steps set out—even if we put a new system of regulation in place, including the twin peaks system, even if we have the ring-fencing powers on structure that are in this Bill, and even if we faithfully implement the standards and culture recommendations to which the hon. Member for Chichester referred—it would still be rash to come to the conclusion that we had fully resolved the problems of too big to fail or too complex to manage. These reforms should be implemented and they can make a difference, but if we think we have fully resolved the problems of this huge sector, we will be guilty of complacency and possibly kidding ourselves. The problem of too big to fail is still there.

Our recommendations will make a difference but we also need powerful weapons, even if their use is unlikely, to enforce good standards and to make those running banks think long and hard about the consequences before they decide to test or game the system in any situation in future. That is why I think my hon. Friend the Member for Nottingham East (Chris Leslie) is right to say that a periodic review of ring-fencing and how it is operating is a good idea. It is why I support a more general power, to be held by the Government, to allow broader separation if the ring-fencing reforms do not work. That is what amendments 17 and 18 are designed to achieve and they are very much in line with the recommendations of the commission’s first report.

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We as a Parliament also need to learn the lessons of the past. We made false assumptions that things were going swimmingly in the City and everything was okay, which is why the Opposition’s proposals for a periodic review are so important. People do not trust Parliament to be alert enough, which is why we need to legislate for ourselves and for the regulators—and, most importantly, to regulate for the public interest.

[Mark Garnier]

I, too, pay tribute to the members of the parliamentary commission, with whom I served for 10 months. Huge numbers of people were involved as well as huge amounts of effort. One statistic that has not come out yet is that we apparently asked 9,198 questions of our witnesses, so we certainly got stuck into it in a big way. It was truly a tour de force, as Members can see from the 571-page document I have in my hand.

The Commission was an incredibly important piece of work. We have been trying to deal with the fundamental loss of trust in banking and what pleased me enormously was that one of the passages quoted relatively early in the report, on page 83, was from one of our big banks, Lloyds Banking Group, and was about trust. Let me read it out:

“Trust goes to the heart of what banking is about. Customers need to be able to trust their bank to look after their savings. They need to trust their bank to manage their financial transactions smoothly; trust that their bank will be diligent and not provide levels of credit or mortgage that are more than the customer can re-pay; and trust their bank to provide products that genuinely meet the customer’s needs and which the customer can understand.”

That has been crucial to the problem we have had: of course we considered LIBOR and all the various scandals, but at the end of the day there is a fundamental mistrust between the consumer, who is not very well educated, and the banks, which are well educated. In part, we are seeking to resolve that misbalance of trust.

I urge the Minister not to be shy in legislating to help build that trust. As TheCityUK wrote, again cited on page 83:

“The sustainability of the UK’s position as the pre-eminent global financial services centre is grounded in the integrity of its financial markets and probity of market participants.”

That is key to the debate about ring-fencing, criminal sanctions and the various other important measures available to the Government in the arms race in which we are involved—ranging from the gun locker of the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) to my offshore nuclear deterrent—to ensure that the people who run the banks pay attention and take seriously their role in looking after those institutions. I speak as someone who spent 17 years as an investment banker and 10 years as a hedge fund manager. As I have now gone into politics, I have the hat trick of holding the three most unpopular jobs on the planet—I plan to become a traffic warden when I leave this place.

We hear threats from the banking community that if we over-regulate, that community will get up and go, but there are two incredibly important points to consider, the first of which is: where would the banks go? They do not have a big range of options. A bank that wanted to go to the far east, for example, would face several problems, not least of which is the fact that were HSBC to up sticks and go to Singapore—this would apply to the remainder of the major four banks—its balance sheet would be about 1,100% of the country’s gross domestic product, and no regulator would enthusiastically receive a bank of such a size. Secondly, we should remember that several factors in this country are incredibly important to banks, such as our robust, transparent and tried-and-tested legal system. We are a member of the single market, which gives banks access to the whole of Europe; we speak English, which is the language of the international business and banking community; and we are also at the centre of the time zones.

Our regulatory regime is also absolutely crucial. A great deal of our work was to try to get rid of the implicit guarantee whereby the Government are seen as standing behind the banks in case they fall over. That guarantee can be worth anything up to £40 billion a year, depending on the stage of the cycle, and that gives the big four banks an advantage. The problem is that that anti-competitive advantage represents another barrier to entry for challenger banks, so we need to get rid of the implicit guarantee. However, by regulating firmly, well and efficiently, and by winning the race to the top on regulation, we will replace the implicit guarantee with a cheaper funding rate for the UK banks, because they will see large amounts of international capital coming to the UK to take advantage of the protection that our regulatory and legal regimes provide. I therefore urge the Minister not to be shy about coming forward and to consider carefully the amendments proposed by my hon. Friend the Member for Chichester (Mr Tyrie), which reflect the recommendations of the Parliamentary Commission on Banking Standards and have a great deal of merit.

[Greg Clark]

We have had a fascinating, high-quality debate. I am grateful for the contributions of all hon. Members, but especially for those of the Members who served with such distinction on the Parliamentary Commission on Banking Standards: my hon. Friend the Member for Wyre Forest (Mark Garnier); the right hon. Member for Wolverhampton South East (Mr McFadden); the hon. Member for Edmonton (Mr Love), who is no longer in the Chamber; the Chair of the commission, my hon. Friend the Member for Chichester (Mr Tyrie); and the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso). With the help of Members of the other place, they laboured hard to produce a report that not only will stand the test of time, but will be a reference document for many generations in this country and throughout the world. The report will be seen as a major contribution to addressing the less tangible aspects of culture and standards, which is something that has eluded regulators throughout the world. I am sure that the report will be read with a great deal of interest.

The report’s central judgment includes the acute point that for too long questions of standards and culture have been contracted out to regulators, rather than being an intrinsic part of the institutions themselves. That aspect of the report stood out as the essence of the required change, because it should no longer be simply for the regulators to decide on such questions, as the culture throughout the institutions should reflect the correct standards that we expect.

I spoke at length at the beginning of the debate, so I shall deal briefly with several of the points that hon. Members raised. I was asked about timetabling. On Second Reading, I made two commitments, the first of which was that the House would have adequate time to consider all provisions, including amendments proposed by the parliamentary commission. I hope that hon. Members will concede that I have been true to that in Committee and throughout our two days on Report, and I repeat that that commitment remains as the Bill goes to the other place. I also said explicitly on Second Reading that the recommendations of the commission’s final report on standards and culture would be reflected in amendments to be made in the House of Lords. Of course, those measures will subsequently be considered by this House, so our intention has not changed. It was right to expedite the response to the report so that it was available much more quickly than usual. It has been useful in informing today’s discussions, as will be the case tomorrow, and it will be available to their lordships during their consideration of the Bill.

The hon. Member for Nottingham East (Chris Leslie) asked several specific questions, including about whether Government amendment 8 contained a typo. It does not, but it would require more than the four minutes remaining for me to explain why, so I hope that he will trust me on that at least. The upper tribunal is not a new invention; it is the court that considers all references made under FSMA for adjudication.

The hon. Gentleman made a substantive point about the notice period, as did my hon. Friend the Member for Chichester and the right hon. Member for Wolverhampton South East. I was asked whether an elongated process in some way diminishes the effectiveness of the ring fence. Our intention was—and is—to implement faithfully the parliamentary commission’s recommendation on the institution-specific ring-fencing rule. As I assured my hon. Friend the Member for Chichester, I am confident that if the Government’s proposals can be improved during the Bill’s passage, all his concerns about the use of the power can be addressed. In fact, the procedure under consideration has been described as pressing the nuclear button.

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[Chris Leslie]

I am grateful for the quality of the debate that has taken place in the short time we have had.

I am glad that we tabled this new clause on leverage, because otherwise we would not have had the opportunity to start to focus on the issue. I understand what the right hon. Member for Wokingham (Mr Redwood) said about getting the balance right and the care and caution that are needed as we move towards what we want, which is a better, safer level of leverage within the overall system. It is worth reiterating that we want to do this only to make sure that banks do not over-extend themselves and become so lopsided that when they topple over they are not able to absorb the losses should things take a turn for the worse.

I am particularly grateful for the contribution from my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who rightly pointed out that saying that we need action either on leverage or on getting lending going into the real economy does not represent opposite poles of the argument. It is not as clear as that. Some are arguing not only that the extra capital could be lent out but, as he said, that compensation ratios, as they are sometimes known—the remuneration levels within banks—could also be tackled. Given that we are the major financial centre worldwide, we should not just be leaving this to international regulators. We certainly should not be leaving it to the European Union completely to decide these things for us. We have a duty in the UK to make sure that we think these things through properly and spend much more time on them.

[Mark Garnier]

The hon. Gentleman proposes that the individual leverage ratios of the banks be published, but if that information were in the public domain it could have implications for a bank’s funding costs. If the regulator deems that a particular institution has a greater risk, and therefore looks at a lower leverage, that will clearly have implications for the business.

[Chris Leslie]

I would tend to err on the side of publication and transparency. It is long overdue that we have better insight into banks’ balance sheets and the quality of their assets generally.

If we are to have this architecture, it could be a useful dynamic to have a leverage target set by policy makers—by Government. I slightly take issue with the parliamentary commission on this. There is a systemic aspect that ought to rest in the hands of politicians. Ultimately, the buck stops with us and Parliament is sovereign; the arguments about that are well known. However, as the commission said, the operational decisions taken institution by institution have to be left to the regulator. It would be invidious for that to be in the hands of the Treasury.

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[Cathy Jamieson]

I might have been tempted to support new clause 2 had the hon. Gentleman decided to put it to the vote, and I look forward with interest to hearing what the Minister has to say. I understand the issues relating to length of time and the dangers of a catch-all provision but, in the aftermath of the banking crisis, the legal and regulatory structures, and the further changes that the Government promise to introduce, we need to ensure that the banking culture really changes. New clause 5 attempts to ensure that banks think for themselves about how to ensure that their performance is sustainable. Now that the Government have moved to an acceptance of the broad principle, the devil will be in the detail of what they do next. Perhaps the Minister will have more to say on that.

[Mark Garnier]

The shadow Minister raises the 10-year deferral of bonuses recommended by the Parliamentary Commission on Banking Standards. We made that recommendation so that we could at least see the business of a bank through a business cycle, as it can take 10 years to expose irregularities. One problem occurs that when people in receipt of such bonuses—there are already some deferred bonuses, in particular in UBS—want to move to another institution, they are bought out of their held-back bonus. Does the hon. Lady have any proposals to deal with that?

[Cathy Jamieson]

The hon. Gentleman makes an extremely good point. It is perhaps worth remembering that not only did the Parliamentary Commission on Banking Standards make that recommendation, but Andy Haldane supported it when he came before the Treasury Committee. I am sure that the Minister will have something to say on that when he sets out his next set of actions.

New clause 7 relates to protection for whistleblowers. It is important to ensure that workers are protected if they make a disclosure in the “reasonable belief” that misconduct has occurred, is occurring or could occur. The new clause would amend the Employment Rights Act 1996 and impose a duty on managers to inform the bank chairman—or chairwoman, if that is the case—of any report of wrongdoing that qualifies as a “protected disclosure”. This is an updated version of a clause tabled in Committee, and reflects the final report of the parliamentary commission, which in paragraph 788 states:

“A non-executive board member—preferably the Chairman—should be given specific responsibility under the Senior Persons Regime for the effective operation of the firm’s whistleblowing regime. That Board member must be satisfied that there are robust and effective whistleblowing procedures in place and that complaints are dealt with and escalated appropriately. It should be his or her personal responsibility to see that they are.”

In new clause 7 we are attempting to trigger a cultural change in the financial services sector. There is no doubt that a bank employee would wrestle with their conscience before deciding to break ranks. If an honest trader suspects wrongdoing and is considering informing the authorities, there must be protections to mitigate his or her fear of losing their job.

The LIBOR scandal illustrates the importance of making it easier to report wrongdoing. At that time there was a quite a lot of speculation in the press and elsewhere about the accuracy of LIBOR, yet nobody came forward with the evidence. New clause 7 seeks to bolster the maintenance of law and order—I think everyone would generally agree with that—and would make it easier for the regulators and the banks’ compliance teams to do their jobs.

I looked closely at the Government’s response to the commission today, which says:

“The Government recognises the important role that whistleblowing can play in exposing wrongdoing”.

It continues:

“BIS is publishing a ‘call for evidence’ to establish a strong evidence base to help Government better understand the operation of the whistleblowing framework in today’s employment environment”.

It seems that the Government are now linking whistleblowing in the financial services sector with the wider review. We need to be careful about how a code of conduct, support for regulators and the role of regulators—including their interaction with employment tribunals, which is how the report couches this issue in context—are dealt with. Will the Minister say in his response when he anticipates the review being completed and what legislative vehicle would be proposed to implement any recommendations? It was not immediately apparent to me on reading the report that that had been established or thought through. Does he agree that any delay in dealing with the issue would risk putting that change out of sync with some of the other important changes that will be made to banking and the banking culture?

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[Richard Fuller]

I am grateful for that intervention. A lot in the commission’s recommendations reflects the seriousness with which it considered that point, and rightly so. In the intervening 12 months, I have dealt with constituents whose businesses have been put at risk because of the fraud of interest rate swap mis-selling and whose lives have been rent asunder by payment protection insurance mis-selling, and the Government have also taken action on the fiddling and fixing of LIBOR. Beyond that, some of us have been dealing with regulatory failures on Equitable Life. My view is that jail for such bankers and for those responsible is the only fair outcome for the victims of those scams. Despite the intervention from the hon. Member for Edmonton (Mr Love), I must still ask where justice is to be found for the victims of those crimes in the recommendations and in the amendments tabled today.

Banking is full of honest and decent men and women. As my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) said, one of the attractions of new clause 2 is that it focuses like a laser beam on the individuals who are responsible and culpable. If we fail to do that and those people do not go to jail, where is the justice for all the other people who work in financial services honestly on behalf of their clients every day?

It is not a habit of this House to consider retrospective legislation, but I want to mention that in a minute. First, let me ask the Minister a couple of questions. In the senior persons regime and the actions that would be covered by new clause 11, the focus is on named individuals at the top. As we saw in the interest rate swaps, a lot of the decisions made by the senior ranks at the banks were translated into budgets and business plans and transferred down through the hierarchy of the banks. Perhaps the Minister, when he considers the issue of conduct, could answer the question of how those extensions beyond the senior persons regime will be handled.

[Mark Garnier]

I am grateful to my hon. Friend for his comments about my contribution to the Parliamentary Commission on Banking Standards. He raises a number of points and as the chairman of the sub-panel that considered below board level corporate governance I can say to him that the management structures of banks are so fiendishly complex that there is little way that the senior managers of banks can translate their wishes all the way down to the bottom. Other evidence gave reasons why the senior management in banks can effectively set up what amounts to an accountability firewall, thereby putting wilful ignorance between them and the activities that go on in the front line and absolving themselves from any responsibility for any misconduct at the bottom end of the bank. That is a very serious issue.

[Richard Fuller]

I am grateful for that intervention, but I do not want to attempt to get into the debate that the commission has considered thoroughly and much more knowledgably than I would be able to do.

The House does not frequently indulge in passing retrospective legislation, but if the senior persons regime is appropriate, is there merit in applying it retrospectively, if only in the form of an exercise through which to judge the conduct of those involved in financial services—in the banks and elsewhere? Whether that took the form of a self-audit conducted by the financial institutions themselves, or further work for the banking commission, to the extent to which that would be feasible, it would be welcome.

Finance (No. 2) Bill

Mark Garnier Excerpts

Wednesday 17th April 2013 Commons Chamber

[Chris Leslie]

I do not recognise that figure. [Interruption.] The Minister is making various projections about the bonus pool, but even if the changes meant that we did not manage in years to come to yield what we now feel we can yield—he could equally make the argument that said, “Well, the European Union is making changes to limit bonuses,” which would obviously mean changes to salaries and elsewhere—what we are proposing would add considerably to the bank levy revenues that he has managed to generate. As we have set out in the amendment before the Committee, we need to incorporate a repeat of the bank payroll tax. It is important to recognise that, although I am happy for the Treasury to commission further research on the issue. If the Government are interested in this agenda and are starting to move in that direction, that might be useful.

[Mark Garnier (Wyre Forest) (Con)]

I am slightly confused about one thing. Is the hon. Gentleman trying to reduce profligacy and excesses in bankers’ bonuses or is he trying to raise revenue? The problem is that if he gets rid of bonuses or drives them down—a great many of us, and certainly the Parliamentary Commission on Banking Standards, have said that we do not like this at all—he will not get the payroll taxes, namely national insurance and income tax, on those bonuses, so the revenue will go down. I am not too sure what position he is trying to get to.

[Chris Leslie]

Of course that argument could be made about any demerit activity or level of taxation. People have been making that argument about cigarette taxes over the years, saying “Well, if people give up smoking, will the Treasury not lose a lot of money from it?” I do not want to divert too much into the wider principle, but I would say that a very considerable tax cut has been given to bankers by reducing the 50p rate of income tax to 45p—a cut that is providing a very significant bonus to those individuals in this year. The hon. Gentleman need not worry too much about these poor maligned executives in the banking system. I know that things must be very difficult for them—they may even have to defer the purchase of their yachts for that little bit longer—but we must start capturing and getting a grip on this issue in a way that the bank levy has not worked to achieve so far.

--- Later in debate ---

We should control the risk of people using money invested in good faith and making enormous amounts from reckless and irresponsible gambles on strange derivative products. Why should we not recover at least some of the money that the Chancellor and the Prime Minister gave back to them in the Budget?

[Mark Garnier]

The hon. Gentleman speaks from the heart about the 50p tax rate and I can understand why Labour Members do so, because during 13 years they spent 12 years and 11 months thinking deeply about introducing it.

[Chris Leslie]

Should we have brought it in earlier?

[Mark Garnier]

It would have been wonderful if it had been brought it in earlier because it would have shown more resolve from the Labour party.

Will the hon. Gentleman enlighten the Committee about what is behind the proposal? Is the intention of the levy to reduce the risk of perverse incentives through what can be an obscene bonus system, or is it to generate revenue? One or the other, which is it?

[Geraint Davies]

I will come to that point. In his preliminary commentary, the hon. Gentleman asked why the Labour party failed to bring in the 50p tax rate, and indeed the Prime Minister boasts that he is taxing the rich more than Labour ever did, and that is great. The Labour party does not exist to introduce high taxes; it exists to give people opportunity and employment. Higher levels of employment bring prosperity and opportunity, so there is enough tax yield from a lower tax rate to fund public services. Between 1997 and 2008, the economy grew by 40%.

If one is concerned, as I am—as we all are—about the debt to GDP ratio, which is the total debt divided by the value of the economy, there are two ways to get it down. The first is to cut the debt directly, cutting most from the poorest as the Tories do. The other is to increase the size of the economy. In 2010, after we had gone through the financial tsunami, but luckily on the back of 10 years of unparalleled increase in growth under Labour, the debt to GDP ratio was 55%; now the forecast is 85%. The reason is not just that the Tories are keen on cutting money for the poorest and getting money from people who do not have it, but that they cannot get their act together strategically to generate a growth strategy that reduces the ratio so that we do not need higher tax rates. We do not want people who are making obscene bonuses to pay higher taxes for the sake of it; we want people in work.

[Mark Garnier]

Is not the biggest inequity that it is not Government debt that is the real problem, but household debt? In the period from 1997 to 2008, household debt as a percentage of household income went from 80% to 140%, and the boom in the economy was paid for by a colossal bubble of household debt. That is the real problem.

[Geraint Davies]

That simply is not the case. I was at the Bank of England relatively recently looking at the profile of debt in the run-up to 2008 and from 2010. From 2010, the ratio of the debt between the Government and the banking community was 1:2. Two thirds of the debt was that of the banking community. Do not misunderstand me: there has been a problem with the general public ratcheting up more private debt through the availability of low interest rates, which in themselves are a good thing, thanks to the fact that my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) introduced Bank of England independence and all the rest of it, and thanks to a feeling that there would be a continuation of growth. People were investing in houses and they were growing in price and so on.

Since 2010, when the Chancellor said, “We will have half a million people unemployed in the public services” and did not say who they were or when they would lose their jobs, there has been a sharp rise in savings rates and a fall-off in consumer demand. We have seen consumer demand basically flatlining, which underlines the reason why we do not have growth, which is why we do not have a reduction in the debt to GDP ratio.

We need confidence to get back on a growth path so that people can spend in the knowledge that they will have jobs in the future. Part of that is to re-engineer the financial world in such a way that money is channelled into productive capacity. Although, allegedly, we have an extra million people in work, overall output is the same. Average production has fallen and average productivity is down, which is very worrying. So we need to think how to ensure that the banking community pays its fair share and how to direct money, in a meaningful way, into job creation and public and private assets.

I was not in the Chamber for the previous debate, but part of that thought process would be, how to encourage the banking community, not in a high-risk way, to start helping people to build desperately needed housing—to get people who have been out of work, many of them in the construction industry, back into work to provide social houses.

--- Later in debate ---

[Sammy Wilson]

The hon. Gentleman brings me to my next point. Even some within the banking industry would say that there is no economic rationale for the obscene bonuses that are given at the top of the industry, and that there is no necessity for those bonuses to make it work efficiently. On a weekly basis, businesses and individuals come to me and say that if anything is strangling growth and the potential for it, in the economy today, it is the performance of the banking industry. When I hear about of some of these bonuses, I wonder what they are being paid for. They are certainly not being paid because the banking industry is performing well in helping to grow the economy and lift us out of recession.

[Mark Garnier]

The hon. Gentleman is making a very powerful point. However, that is exactly why some of us have spent the past nine months on the Parliamentary Commission on Banking Standards examining the problems he is talking about. It is why the Government introduced the Financial Services Act 2012 in order to repair the regulatory environment and to establish the Financial Policy Committee to look at the instability in the system that can come about as a result of perverse incentives from bonuses. It is why the Government are currently taking the Financial Services (Banking Reform) Bill through Parliament. A huge amount is being done for exactly the reasons he mentions.

[Sammy Wilson]

Yet the situation continues. Despite all that, we do not see any change.

Some of the arguments advanced by Government Members, mainly through interventions, as to why the proposal is a bad idea, have become increasingly desperate as the debate has progressed. I believe that this should be done, first, on the basis of fairness, and secondly, because it has some potential for changing behaviour, and that ought to be given serious consideration.

The first argument was to say, “If we do this, we will be taking money out of the economy.” What do these people who get the bonuses do with them? Are they generating additional expenditure in the economy? If someone gets a bonus of £1 million, are they likely to spend it? We all know, and it is well evidenced in economic theory, that the more money we get, the higher the proportion of that additional income we tend to save—it does not contribute to the economy. During the Budget, the Chancellor said that the poor performance in the economy was because consumer spending had been suppressed and was not what had been anticipated. When I hear the argument that discouraging these bonuses, or taking them back in the form of tax, removes spending power from the economy, I find it rather bizarre.

--- Later in debate ---

[Sammy Wilson]

Although saving is, of course, good in any economy, the important question at the moment is: how do we generate spending? The hon. Lady has reinforced the point that if money goes to unemployed people they are likely to spend 100% of that income, but someone who gets a £1 million bonus is likely to save 90% of it—perhaps more—so it will not be injected into the economy. I do not think that the argument that the amendment would remove money from the economy and, somehow or other, deflate it stands up to scrutiny.

The second argument, which was made by the hon. Member for Dover (Charlie Elphicke)—he tried to promote it in a couple of interventions on the hon. Member for Nottingham East (Chris Leslie)—is that all this levy would do is make finance either pricier or less available. As has been said, that implies that the only part of bank spending that is sacrosanct is the amount of money spent on bonuses. Making an activity more expensive tends to direct people away from it, and I cannot see how the banks would be any different. If we make it more expensive and more costly for them to give bonuses, they will be driven away from using those funds in that way and it would create a behavioural change. If that change did not happen, however, and bonuses continued to be paid and the tax on them recouped from customers, the alternative would be regulation. The customer should not have to pay for them—if banks do not change their behaviour, we should ensure that the taxes cannot be passed on to customers.

The third argument—I found this one bizarre, especially with regard to the bank levy—is that since we cannot be sure how much money will be raised, we should not pursue it. If that were true, we probably would not tax anything. How often do we hear the Government predict the amount that will be raised in tax revenue, only then to revise the figure within six months, either because behaviours have changed and the expected amount has not been raised, or because the economy performed in a different way than expected?

The hon. Member for Wyre Forest (Mark Garnier) made that argument, but on that basis we would not have the bank levy, which was supposed to raise £2.5 billion this year, and raised only £1.1 billion. I do not know why that revenue was not raised—perhaps there was some change in the economy—but whatever the reason the bank levy did not raise the money intended. Moreover, the Government made spending plans on the assumption that that revenue would be available. I do not think that the amendment can be argued down on the basis that it may not raise the money and therefore no commitment should be made.

[Mark Garnier]

On that point, the hon. Gentleman does not seem to have read the amendment, the whole point of which is to raise money specifically to be invested in creating new jobs and tackling unemployment. If the Opposition want to invest a specific amount, they need to know how much money they will raise.

[Sammy Wilson]

The hon. Gentleman has missed my point; perhaps I did not make it very well. When the Chancellor declares what taxes he intends to levy in the Budget, that announcement is accompanied by what he intends to spend that tax revenue on. Sometimes that revenue materialises and sometimes it does not.

The only requirement that I would make of an amendment of this nature is that it does not throw out a reckless figure and say, “We will make £x billion from this provision and spend it.” The Minister was right to ask on what basis the amendment’s calculation was made, but it cannot be argued that, because there is a degree of uncertainty, this is not a good proposition. I would have been very unhappy had the amendment said, “Let’s raise the money and then we’ll see what we will do with it.” It is much easier to make an argument on the grounds of fairness: “Let’s raise the money and this is what we will do with it.” Knowing where the money comes from, the purposes for which it was being used and the purposes for which it will be used once collected would enable us to judge whether the proposition is fair. It is not possible to divorce how the money is raised from what will be done with it.

Oral Answers to Questions

Mark Garnier Excerpts

Tuesday 12th March 2013 Commons Chamber

[Mr Osborne]

The advice from the rating agency could not be clearer: a reduced political commitment to fiscal consolidation would put Britain’s creditworthiness at risk. That reduced political commitment would come from the Opposition, who oppose every single spending cut, who have no credible economic policy and who, despite having promised for two years to produce a deficit reduction plan, still do not have one. We hear that a draft Labour manifesto is coming this July; perhaps then we will see a proper plan to deal with the deficit Labour created.

[Mark Garnier (Wyre Forest) (Con)]

Does my right hon. Friend agree that the only true measure of creditworthiness is the price paid by the Government to borrow? Gilt yields are still 16 points lower today than before Moody’s downgrade. Does that not reconfirm the international markets’ confidence in this country’s ability to pay its debts and the Chancellor’s programme to tackle Labour’s deficit crisis?

[Mr Osborne]

My hon. Friend is right that our credibility as a nation is tested every day when we seek to borrow money to pay for the deficit that the Opposition racked up. We can borrow at historically low rates, which means low rates for people’s mortgages and low rates for people’s small business loans. Of course, if we lost that credibility by pursuing the Opposition’s policies, interest rates would rocket, people would be put out of their homes and businesses would go bust. That is exactly what we will avoid.

Financial Services (Banking Reform) Bill

Mark Garnier Excerpts

Monday 11th March 2013 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I add my congratulations to the hon. Member for Eastleigh (Mike Thornton) on his maiden speech. I remember when I made my maiden speech: it was the most terrifying event of my life. If he continues with that masterful performance, the good people of Eastleigh will be very well represented in the years to come.

I am grateful to my hon. Friend the Member for Chichester (Mr Tyrie), who is no longer in his place. He started by talking about the members of the Parliamentary Commission on Banking Standards. As one of those members, it falls on me to pay tribute to the extraordinary work he has done in the past nine months or so, pulling together what is quite a tour de force.

At the heart of this debate lies the balance of interests within banks. Any commercial organisation—or, indeed, any bank—must balance the interests of its shareholders, the interests of its staff, and, importantly, the interests of its customers and the wider society at large. When those interests become unbalanced, we end up with problems. When staff are over-incentivised with bonuses, they will take greater risks at the expense of shareholders. When shareholders see stellar returns, they will fail to provide the governance oversight needed to protect the organisation. When looking after customers is seen as a tricky task in an ever-increasingly competitive world, the customer takes second place to proprietary trading, and is relegated to providing mere liquidity to help the proprietary traders. When those balances of interests become too skewed in favour of staff and shareholders, society loses out altogether, with the banking collapses and the bail-outs we saw, and which we are trying to avoid in the future.

One of the concerns that I have been wrestling with is that of over-regulating our banks. Can we, unwittingly, drive our banks to relocate offshore by supposedly over-regulating them? We need to look closely at the problem. What do we mean by relocating? In part, we are looking at banks changing their domicile, and in part we are looking at the moving of specific operations to different parts of the world. Those are two very different things, and it is important to make sure that we do not confuse them. Setting up a trading desk in Spain, for example, is decided by where the traders want to work. Moving a global bank to Singapore is a very different thing indeed.

First, these banks are huge. One has to asked oneself the question: who would want to have one of them located in their economy? If HSBC went to Singapore, its balance sheet would be over 1,000% of Singapore’s GDP. Not many countries can take a bank of that size, and, of those that could, do they have the same offering that we have here? There would be no question whatever of any implicit guarantee. London offers some key elements that banks need: we speak English, we are in the centre of the global time zone, we have a transparent and well-tested legal system, and, importantly, we have what amounts to a relatively good regulatory system. All those points are absolutely key.

The banks benefit from an implicit guarantee—valued at between £10 billion and £40 billion, depending on where we are in the cycle—that comes as a result of the expectation that the British Government would stand behind a failing bank in exactly the same way that we saw in 2007 and 2008.

[Steve Baker (Wycombe) (Con)]

I am glad that my hon. Friend raises that point. Does he agree that if we subsidise anything, we get more of it, and that this actually subsidises risk taking?

[Mark Garnier]

Yes, it does, absolutely. I am going to develop that point in a second, if my hon. Friend will bear with me. We need to get rid of this implicit guarantee for exactly that reason and in order to encourage competition, because competition requires a guarantee for all banks, not just the big banks.

If we combined a transparent legal system with a robust and secure regulatory regime, international capital would come to this country—because of that security—and because capital would trust the UK’s legal and regulatory system, it would be prepared to take a slightly lower return. London would provide an environment in which the cost of funding for banks would be lower. That cheaper funding, as a result of regulatory security, should replace the banks’ implicit guarantee and thus result in a lower cost of capital. As a result of that cheaper funding cost, which is reliant on good regulation, we should not fear banks relocating when we introduce regulatory reform. They might complain, but they will ultimately thank us for the strongest regulatory regime in the world.

That also depends, however, on how the Government take forward the Bill. The Banking Commission has made its early recommendations, and the Government have responded. As we heard from my hon. Friend the Member for Chichester, we are grateful to the Government for listening to some of our recommendations, but they could pay more attention to certain other areas. We want a leverage ratio set at 4% by the Financial Policy Committee, a full reserve power for full industry-wide separation and regular reviews of the effectiveness of the ring fence in order to ensure the most effective and secure regulatory regime in the world. By winning the race to the top, we will ensure cheaper capital funding for our banks and help to preserve our country’s lead position in the financial world.

I turn to the thorny issue of proprietary trading. The term “casino banks” was coined by someone at a time when I suspect they were keener to play to the gallery than necessarily to address the serious issue of what investment banks actually do. It is important to remember that investment banks raise huge amounts of debt and equity capital, generating thousands, if not millions, of jobs in the UK and around the world in commerce and industry—jobs that create wealth and tax receipts for this country—but there is an element within investment banks of proprietary trading. The important thing is to define proprietary trading. Every bank that makes a loan makes it on a proprietary basis, but no one would want to prevent banks from doing that—it is the key to what they do. Pure proprietary trading, however, for the sole purpose of enhancing shareholder returns—with no benefit to the customer or society—has no place in our banks. It fails the balance of interest test and is incredibly difficult to define.

We can recognise the evil type of proprietary trading when we see it, but let us take market marking, for example. It provides a service to customers and liquidity to the markets, and so passes the balance of interest test, but at what point does a residual position on a trading book stop being that which is left over from normal market making activities and start being deliberate directional betting? That inability easily to distinguish between one and the other leads me to believe that, although a Volcker rule would probably be desirable, it would be too difficult to impose in a meaningful way. That is why, reluctantly, I come down on the side of not banning pure proprietary trading. If the Vickers proposals that the Bill implements seek to put a ring fence around the deer park, does it matter what type of predator is kept outside? The consumer will be protected from both the wolves of market makers and the tigers of proprietary trading.

Much of the commission’s work has looked at competition. With a handful of super-huge banks dominating the market, competition is tricky. Long before the commission was set up, however, I spent much time meeting smaller banks, including challenger banks, and those seeking to win new banking licences. It was clear that there was a huge problem with banks being too small to start—the regulatory hurdles facing small banks, such as licence applications and ongoing supervision, distorted the market in favour of the big banks—but the FSA has responded to pressure and had a change of heart. The regulator is moving in the right direction, and I am grateful to the FSA for taking heed of our warnings about new banking application processes and the treatment of asset risk weightings on the balance sheet. The regulator is moving towards greater opportunity for small banks in terms of regulation, which is very important.

There is also the thorny issue of account switching. Later this year, the seven-day switching programme, which is a significant step forward, will be put in place. I strongly believe, however, that the ultimate goal has to be full account number portability. VocaLink, which provides the payment system services, is considering doing for banks what the telecoms regulator did for mobile phones, and it is making good progress. My hon. Friend the Member for South Northamptonshire (Andrea Leadsom) has done a lot of work on this subject, and for four reasons her proposals for full portability are right: first, it will ensure greater competition, as I am sure we will hear later; secondly, the financial system will be more transparent and so provide greater oversight for the FPC, which is charged with ensuring stability in the financial system; thirdly, in the event of a collapsing bank, full portability will make bank resolution far easier and cheaper; and finally, the legacy IT systems in many banks have their foundations in the ’50s and ’60s, with the punch-card system. At some point, the banks will have to massively update their systems, and combining everything makes huge economic sense.

What is the point of banks? Why are we so keen to reform them? Those questions are crucial to the whole debate. Clearly, people need a safe place to deposit their money, to manage their finances and to plan for the future, but banks also provide an incredibly important social and economic function. There has yet to be devised a better way of taking money from where it has accumulated and distributing it to where it is needed. Successful investors and business men need a way to get their money to where it will work for them, and those with an idea but no cash need to be introduced to investors with surplus funds. So far, banks have done that job better than anyone else. No matter what we say, they have a fantastic distribution network, which we must utilise to the fullest extent.

[Mr Love]

Unfortunately, the banks are not doing a good job of providing loans to small businesses. In particular, those banks in partial public ownership seem to be struggling to do so. Is there any way—a funding for lending scheme, for instance—of encouraging more lending from banks to small businesses?

[Mark Garnier]

The hon. Gentleman is absolutely right. The two of us have spent much time together wrestling with this thorny issue over the past nine months—and before that on the Treasury Committee. Part of the problem is that, with the risk weighting of assets, a loan to a small business carries the least weighting, because it is deemed to be one of the greatest risks. The world is putting pressure on banks to reduce their balance sheets and become less risky institutions, and the simplest way to do that is to withdraw lending to small and medium-sized enterprises. That is the natural outcome, if we ask them quickly to reduce their balance sheets. Funding for lending schemes seek to bypass the risk-weighting element, but none the less it is incredibly difficult to encourage more of what the regulatory regime sees as the riskiest type of lending. It is a problem we have to resolve, however, because, as I said, there is no alternative way of getting money to businesses.

It is incredibly important that the Government never again have to bail out banks when things go wrong. Broadly speaking, the Bill is an enabling Bill. There is much more detail about the nuts and bolts to be introduced in secondary legislation, but it is important that it achieves what it is trying to achieve, which is to ensure that banks can go bust without bringing the system down with them. For a functioning financial market to work properly, it is important that poorly run banks be allowed to fail—but elegantly and non-destructively. The Bill will ensure that, in a crisis, the vital parts of a bank can be resolved in a dignified and stable way and that the British taxpayer will never again be left on the hook to bail out bankers for their foolhardy recklessness. That is why the Government are right to introduce it. They were right not to rush into anything, but to have spent a great deal of time listening to Vickers, Erkki Liikanen in Europe and others, including of course the Banking Commission. For those reasons, I have no hesitation in supporting the Government fully and look forward to working with them as part of my work on the Banking Commission.

--- Later in debate ---

[Stephen Barclay]

Yes, I can address that question head on. It is logical to have introduced measures to try to manage risk in the financial sector, but we are requiring banks to retain more and more assets at the same time as asking them to lend more. We are therefore asking them to do two conflicting things, as well as introducing a structural fix that innovative people will often be able to find ways around. For example, the shadow banking sector is not affected by this kind of proposal. If we want to address innovation, to be flexible and to move with the market, and retrospectively to impose fines for wrongdoing, we would be far more successful if we changed the culture than if we imposed rigid rules.

In many ways, I agree with the hon. Gentleman, in that we all have constituents who complain that the banks are not lending, but perhaps that is an issue for another day. There are many areas in which the banks’ behaviour is wrong, but we cannot change the culture through rules alone. We had more than 6,000 pages of rules, but that did not achieve the right culture. We can achieve it by having individual accountability, and one of the best ways of doing that is through personal fines.

I am sure that the hon. Gentleman read the Daily Mirror today, as I did; I always try to avail myself of the Daily Mirror. On the front page, there was a story about the “Fat cat in the hat”, who is a former Barclays executive, according to the report, and it must be true because it was in the Daily Mirror. The point is that it is individuals like that, where there is alleged wrongdoing, who are able to keep their bonuses and keep their profits. That does not send the right message on culture. Rules are too blunt a tool.

If we want to change the banks, the Bill is extremely welcome, but I hope that the very constructive proposals put forward by my hon. Friend the Member for Chichester will be given further consideration. There is much to support in the Bill, however.

[Mark Garnier]

Does my hon. Friend agree that the Chancellor’s measures stating that the fines levied on RBS should be taken from the bonus pool go some way towards addressing the point that he makes?

[Stephen Barclay]

Those measures are a step in the right direction, but they will also catch the legitimate people, rather than focusing on those who have done wrong. There will be no means of clawing back from wrongdoers. Let us take the example of Sir James Crosby. To what extent would he face retrospective clawback? He is long gone, and he has taken the money.

Economic Policy

Mark Garnier Excerpts

Monday 25th February 2013 Commons Chamber

[Mr Osborne]

Infrastructure spending—actual money being spent on infrastructure—is higher in this Parliament than it was in the previous Parliament. That is, I am afraid, the simple fact produced and audited by the independent Office for Budget Responsibility. We have increased capital spending compared with the plans that we inherited, and under this Government in this Parliament it is higher as a percentage of GDP than under the previous Labour Government. That is what has happened.

[Mark Garnier (Wyre Forest) (Con)]

Does my right hon. Friend agree that it is going to take slightly longer than two and a half years to sort out a problem that was 13 years in the making?

[Mr Osborne]

My hon. Friend puts it very simply. It is a bit like the arsonist calling the fire brigade and then complaining that we have not put the fire out quickly enough.