Bank of England and Financial Services Bill [Lords]

Debate between Mark Garnier and Richard Burgon

Monday 1st February 2016 Commons Chamber

[Richard Burgon]

It may be that others can explain to the Minister the real purpose of a reasoned amendment in these circumstances. I think our action is entirely right.

The presumption of responsibility is so reasonable and necessary that the policy was introduced with cross-party support. That should not be forgotten. It was originally proposed by the Parliamentary Commission on Banking Standards, led by the Conservative right hon. Member for Chichester (Mr Tyrie) and Labour’s Lord McFall of Alcluith, and it was the Liberal Democrat Lord Newby, a Minister in the Conservative-Liberal Democrat coalition, who moved its introduction into law. I have to echo a point previously made by the hon. Member for East Lothian (George Kerevan), sitting on the SNP Front Bench, that it was passed as recently as December 2013, and the presumption of responsibility has yet to come into effect. It was meant to come into effect in March this year, and it remains untested. We must remember that this was a safeguard brought in by the very same Chancellor who is now seeking to scrap it.

[Mark Garnier]

The presumption of responsibility has not gone. The senior managers regime absolutely includes the presumption of responsibility for everybody in these institutions. The hon. Gentleman may have had a number of conversations with some of the banks being affected by this, as I have, and I served on the banking commission that brought in the reverse burden of proof. What is interesting is that the banks are now complaining bitterly that the reverse burden of proof has now been reversed, because that managed to be a tick-box operation and they now have a much more onerous responsibility for management than they ever had before. This is a far stronger measure for ensuring probity for the managers of banks than the reverse burden of proof.

[Richard Burgon]

I thank the hon. Gentleman, who is experienced in these matters, for his intervention, but every time we have received correspondence from, and listened to, bankers on this matter, they seem desperate for the reverse burden of proof to be scrapped. They say how dreadful it would be, how it was totally unjustified and that business as usual is fine—that we can just return to things with no risk of a repeat of the financial crisis of 2008. Unfortunately, I believe they were wrong, but we need to remember that this presumption of responsibility, or the reverse burden of proof, was a safeguard brought in by the very same Chancellor who is now seeking to scrap it.

In 2013 the Chancellor said he had

“called for a thorough and intensive investigation into how to improve standards in the banking system and the PCBS has delivered. I am pleased to say that the government will implement its main recommendations.”

Of course one of its main recommendations was this presumption of responsibility.

On that occasion, the Chancellor was not alone. This was his Bill and Conservative Members backed it. Indeed, the right hon. Member for Tunbridge Wells (Greg Clark), then Financial Secretary to the Treasury, clearly explained that his Government were introducing new rules to promote higher standards for all bank staff and were reversing the burden of proof so that bank bosses are held accountable for breaches within their areas of responsibility.

The Conservative Member for Macclesfield (David Rutley) was briefly on the Treasury Committee, and he said:

“It is critical to bringing about the individual accountability that many of us want to see across our financial services sector, with the tough senior persons regime, reversing the burden of proof and criminal sanctions for reckless misconduct. All those steps are vital”.—[Official Report, 9 July 2013; Vol. 566, c. 261.]

His party colleague, the hon. Member for North East Cambridgeshire (Stephen Barclay), said:

“I do not think there can be any doubt about the merits of reversing the burden of proof…The Government’s announcement that they will reverse the burden of proof is extremely welcome.”—[Official Report, 8 July 2013; Vol. 566, c. 119.]

I could go on, but instead I ask this question: what has changed? What, or who, has so dramatically changed the mind of the Chancellor? At the Treasury Committee in October the hon. Member for Wyre Forest (Mark Garnier) put the question many of us are thinking when he asked the Chancellor whether the proposed scrapping of the presumption of responsibility was “largely as a result of lobbying by the banks, which has the flavour of getting stronger.”

--- Later in debate ---

[Richard Burgon]

My hon. Friend hits upon an important point. The role of a City Minister, a shadow City Minister and of the Government is not to represent the interests of the City to the population, but to fulfil their democratic function. A Government are not there to take orders from the City of London. Yes, we must listen to the City of London and value its contribution, but we are not its political representatives on earth.

On the Chancellor’s change of mind, the Chair of the Treasury Committee put it well when he asked his Chancellor a very reasonable question: “Why did you not wait for the regime to come into force to enable an assessment of it, how it works, before implementing this further change?” That was an extremely serious question. The change is based on no evidence, which is the worst kind of change.

Banks are having to put significant effort into identifying and establishing new procedures to meet the requirements of the 2013 Act, which received cross-party support in Parliament. The issues were already abundantly clear then, but now the Conservative Government have performed a dramatic U-turn and are not willing even to test the procedures that they initially supported. It is rare for an important measure to be abolished before it has even been introduced.

How will the public feel when they learn that the Chancellor is scrapping a duty on senior managers in banks—a duty that was welcomed as necessary on a cross-party basis—before it has even been implemented? The public’s deep concern about the behaviour of some senior bankers should extend to the Chancellor, who, it appears, is doing the bankers’ bidding, not the bidding of the British people. Do not the Chancellor and the Government understand the widespread anger of the public and their mistrust of the banking system? The public are right to remember that, because of the bankers’ behaviour, people whom this House is meant to represent lost their homes and their jobs. We should never forget that it was the bankers’ crisis that caused the deficit that this Government have relied upon as their justification for their political choice to cut our public services, cut funding to our local authorities, cut the incomes of working people and cut support for the most vulnerable people in our communities.

[Mark Garnier]

The hon. Gentleman is being generous with his time. I am sorry to be a pedant, but in 2005 there was a £43 billion budget deficit. There was a deficit long before the banking crisis, and there was a structural deficit that the banking crisis brought out.

[Richard Burgon]

I appreciate the hon. Gentleman’s pedantry. With respect, he makes a point that does not bear too much political scrutiny. The global financial crash caused the huge increase in the deficit and stalled the economy. It also gave the Government the opportunity to carry out their long-harboured ideological desire, decades old, to cut public services and wither away the state.

The Bill comes to us from the other place, where there was considerable debate at every stage. The Bill has changed, following a number of amendments proposed by the Government. In our reasoned amendment, we recognise those changes as improvements, and they are welcome, but the Bill has not changed significantly enough. As I mentioned, the Bill is in two parts, and on the first part—on the Bank of England’s structures—we recognise that the Government have made some positive movement, although it is insufficient. We recognise that they have moved on aspects of the oversight powers of the Bank’s court of directors, but the directors’ forum for discussion—the oversight committee—remains abolished.

We also recognise that the Government have moved on the proposed power of veto for the Bank’s court of directors over National Audit Office investigations, but the memorandum of understanding referred to in the Bill remains under negotiation and unpublished. On other aspects, in the House of Lords, there was no agreement. I wrote to the Chancellor asking that the memorandum of understanding be presented to this House during the passage of the Bill. I am glad to say that the Economic Secretary responded, explaining that it is not yet complete and is subject to ongoing discussions between the Bank and the National Audit Office. She explained that she will write to the Governor of the Bank of England and the Comptroller and Auditor General at the National Audit Office to see whether they will be in a position to share the draft memorandum of understanding during the passage of the Bill. In such an important matter, it can only be right for the House to have sight of that crucial memorandum of understanding. Any other approach would be a cause for concern.

The Bill replaces the Prudential Regulation Authority with a new Prudential Regulation Committee. Peers on both sides—including Government peers—expressed concern that that represented a downgrading and threatened a loss of independence.

As I have discussed at length, the Bill also replaces the presumption of responsibility with a duty of responsibility. Opposition peers challenged that on Report, and the Government’s measure scraped through by only 200 votes to 198. If I believe what I am told by the Minister, scrapping the presumption of responsibility is entirely uncontroversial and entirely reasonable. Unfortunately, that is not the case, and the issue gives us particular cause for concern in the wider context of the Chancellor’s new settlement with financial services.

We need a healthy and effective banking sector that is appropriately regulated, that serves the interests of the whole economy, that does not hurt ordinary people or small and medium-sized businesses, and that delivers the vital investment our country needs for long-term growth. The Conservative Government climbdown on the presumption of responsibility, which they previously supported, will hinder, not help, the fulfilment of those ambitions. Personal responsibility is vital for the operation of our regulatory systems. The Chancellor’s policy U-turn reduces exactly the personal responsibility that the Parliamentary Commission on Banking Standards recommended in its 500-page report. Scrapping a key measure before it has even had the chance to be tested makes no sense—unless, of course, the Chancellor is just following bankers’ orders. The startling and precipitous scrapping of a widely welcomed measure shows that there is a very real risk of failing to learn the lessons of the bankers’ crisis.

Our concerns go much wider than the presumption of responsibility, to the role of the Governor, the work of the FCA and the programme of selling off, for example, Royal Bank of Scotland shares at a loss to the taxpayer. The Chancellor’s whole approach says, “Let’s get back to business as usual.” However, it was the bankers’ business as usual that brought Britain to the brink; it was the bankers’ business as usual that caused the deficit. Returning to business as usual will make another financial crisis even more likely, with disastrous consequences for those we are meant to represent in this place, and that—to clear up any confusion on the part of the Minister—is why we are asking the Government in our reasoned amendment to think again today.

Capital Markets Union

Debate between Mark Garnier and Richard Burgon

Thursday 3rd December 2015 General Committees

[Richard Burgon (Leeds East) (Lab)]

It is a great pleasure to serve on my first European Committee under your chairmanship, Mr Hanson. I am pleased to serve opposite the Minister.

On this occasion, my remarks will be brief, but I note the late arrival of two letters from the Minister to the European Scrutiny Committee and to members of this Committee. I understand that the letters were sent to the European Scrutiny Committee on Monday evening, and I believe that I should have received them yesterday, although I have no record of doing so. I therefore had sight of them only this morning, which means that I have not had time to seek advice. I defer to the member of the European Scrutiny Committee, the hon. Member for Rochester and Strood, and I will raise a few issues that the Minister may be able to respond to. Why were the documents provided so late and what opportunity there is for further consideration of them?

The motion references a number of documents from the European Commission relating to the capital markets union and the action plan to deliver the CMU’s objectives, which the commissioner, Lord Hill, set out on 30 September. There is much technical detail in the paperwork for this debate, but I will make some general points. The CMU is being driven forward at a rapid pace by Commissioner Hill and is part of a process of the economic recovery of the European Union as a whole and a contribution to supporting jobs and growth. The initiative’s intention, as Commissioner Hill and the Minister have said, is to build a single capital market across the European Union.

The central goal of the proposals, as set out by the Minister, is to make it easier for small and medium-sized enterprises to access funding in a period when finance has dried up from banks. Delivering finance where it is needed is, of course, vital for economic activity to deliver the necessary investment for future growth, which Opposition Members set out as our priority at the recent autumn statement. The Opposition naturally wish to support measures that generate finance for investment, and to support jobs and growth, as would be expected. We want accessible finance to be delivered across the economy, particularly for small and medium-sized enterprises to ensure that they deliver the dynamic and innovative economic activity that our economy needs.

I note that we are discussing this in the week of the recent Bank of England stress test results, when, despite the fact that two banks have to take action to boost their capital reserves, the Governor of the Bank of England stated that the post-crisis period is over. We should recognise the wariness and the real concerns with regards to the CMU and the return to securitisation in the wake of the financial crisis.

The Minister has said that this needs to be done in a

“simple, transparent and standardised way”,

but I am sure that she will understand those who urge caution. The recent statement by Finance Watch, supported by a number of non-governmental organisations, states that

“the CMU revives pre-crisis trends without adequately integrating the lessons from the crisis.”

It has expressed concern that there is a risk in the CMU agenda of favouring short-term growth and competitiveness over long-term, sustainable development.

To quote two academics, Daniela Gabor from the University of the West of England and Jakob Vestergaard, from the Danish Institute for International Studies,

“if the CMU is to make a substantial and lasting contribution to investment and job creation in Europe, it must be accompanied by reforms that address systemic risk in securities-based financial systems and enhance pan-European supervision of securitization”.

The Minister said in October that we need to turn our attention from financial services reform

“to reform that boosts our economies, and increases competitiveness.”

Our belief is that, although we wish to boost our economies, we should not consider financial reform to be done and dusted. Indeed, there is the potential for further reform to deliver that boost to our economy. There is a real need to discuss the role of securitisation, particularly as banks have increased their capital and cleaned up their balance sheets and can now lend more, not less. There is no overall shortage of credit supply. Opposition Members—I know that all Members would agree with me—do not wish to see a return to the securitisation that facilitated the US sub-prime mortgage crash, from which the global economic crisis originated. It will be necessary to demonstrate what lessons have been learned as the action plan is developed.

To do that, I hope that the Minister can address a number of points. Will she ensure that the key principles of good securitisation are not watered down through pressure from large, international banks? Will she set out how the CMU will deal with a lack of convergence or consistency in existing supervisory regimes? Do the Government support a new single regulatory or supervisory body for capital markets across Europe?

The Opposition believe that we should be open to a wider range of measures to deliver finance for business and investment, as we recently discussed in the debate on the RBS share sale, including: encouraging increased lending by the private banking sector and using our influence where we have direct interest in banks, such as RBS; the establishment of a dedicated national investment bank; and the development of regional banking. Capital markets might be an area for future development in Europe, but UK business remains largely reliant on bank lending. We need to ensure that we do not take our eye off the issues raised in the Lawrence Tomlinson and Andrew Large reports, or overlook the difficulty businesses have had in accessing bank finance following the economic crisis and the bank bail-outs.

The commissioner has said that securitisation under CMU will

“free up bank lending for the wider economy.”

Will the Minister say how CMU will affect the steps being taken by the Government to ensure that SMEs can access the finance they require from UK banks?

[Mark Garnier]

Perhaps I can help the hon. Gentleman. Reducing the requirement for large businesses to borrow money from banks by going to the securities markets would leave more capital in the banks that could then be passed down to smaller businesses. That would shift the big requirement on banks’ assets away from big businesses to concentrate on smaller businesses.

[Richard Burgon]

I welcome that clarification of the Government’s position.

Finance Watch has argued that CMU

“is also likely to undermine important financial reforms processes such as the long-awaited separation of risky capital markets activities from basic banking”.

Will the Minister respond to that concern and set out what impact CMU will have on bank ring-fencing and the separation of retail and investment banking?

CMU is an opportunity for European finance, but we must maintain the goal of having finance act for the UK and European economies and for the general public as a whole. With Europe rising up the agenda, it would certainly help to be able to highlight the positive benefits to the finance sector that EU membership and the CMU will deliver, but many questions about the proposals still need to be addressed. I will seek to increase my discussions of these matters with members of both the European Scrutiny Committee and the Treasury Committee.

We do not wish to raise any controversy about the information the Minister has given. I am grateful for being allowed to address these issues.