Eurozone (Contingency Plans)
Mark Hoban Excerpts(13 years, 5 months ago)
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Ms Gisela Stuart (Birmingham, Edgbaston) (Lab)
(Urgent Question): To ask the Minister what are Her Majesty’s Treasury’s contingency plans in case of a Greek default.
The Financial Secretary to the Treasury (Mr Mark Hoban)
Hon. Members will be aware of the recent developments in Greece. There has been considerable media speculation about what this means for the Greek adjustment programme and potential market reactions. I am not going to engage in speculation on what might or might not happen but give the House an account of the facts as they currently stand.
Let me begin with some background on Greece and the financial assistance package. The international financial assistance package for Greece was agreed in May 2010. The package is composed of two elements: a loan of €30 billion from the International Monetary Fund and €80 billion of bilateral loans from euro area member states to the Greek Government. Although they were created at a similar time, neither the European financial stabilisation mechanism, which is backed by the EU budget, nor the euro area-only European financial stability facility contributed to the package for Greece.
The adjustment package requires Greece to undertake significant actions. There are some very difficult questions that Greece has to address now, because the package assumed that it would be able to access market funding again in 2012, but this now looks unlikely in current market conditions. The House will also be aware of political developments in Greece; a new cabinet has been appointed and the Government will soon be subject to a vote of confidence in the Greek Parliament. Later this month, the Greek Parliament will also be voting on a medium-term fiscal strategy, which is a key element of the conditions attached to the current adjustment programme.
Against this backdrop, the euro area member states have been discussing the next steps. The Eurogroup, which comprises euro area member states, today released a statement calling on
“all political parties in Greece to support the programme’s main objectives and key policy measures to ensure a rigorous and expeditious implementation”.
The statement also said that Ministers will
“define by early July the main parameters of a clear new financing strategy”.
This is a statement from the euro area member states only. Let me be clear: the UK has not been involved in these discussions. We did not participate directly in the May 2010 package of support for Greece, and there has been no formal suggestion of UK bilateral loans or use of the EFSM, which is backed by the EU budget. The UK participated in the May 2010 package for Greece only through its membership of the IMF. So the burden of providing finance to Greece is shared between the IMF and euro area member states, and we fully expect this to continue. Our position on that is well understood across the euro area.
The UK believes that the international community needs a strong IMF as an anchor of global economic stability and prosperity. Over the past few years, we have seen how important that role can be in times of crisis, as the IMF has taken swift and decisive action to support the global economy.
There is, of course, no room for complacency. The Treasury, the Bank of England and the Financial Services Authority are monitoring the financial system, including in the euro area, on an ongoing basis. Many scenarios are considered as part of the normal policy development process. Hon. Members will agree that it would not be appropriate for me to discuss the detail of those scenarios. I also remind hon. Members that UK banks have little direct exposure to Greece.
The continuing uncertainty in the euro area is a reminder of the benefits of taking early action to stabilise and recapitalise the banks, as the UK has done. The UK banking system has developed a strong capital position, which has made it more resilient and will insure it against future risks. UK banks have made good progress in sourcing funding, despite the difficult market conditions.
The difficulties faced by eurozone countries such as Greece and Portugal reinforce why it is right to pursue the course that we set last year to tackle the deficit. The House should reflect that our deficit is larger than that of Portugal, but that our market rates are similar to those of Germany. The action we have taken to strengthen the country’s finances stands us in good stead during this period of instability in the eurozone. No one on either side of this House should lose sight of the importance of these decisions in protecting the UK economy.
Ms Stuart
It is absolutely true that there is no room for complacency, but there is also no room for selective blindness and deafness, which there clearly is on the Front Benches. We have yet another question on a bail-out to which Ministers say, “Of course, we cannot be specific and we will not indulge in speculation on events that may or may not happen.”
The United Kingdom will not be isolated if Greece defaults. Economists across the world are increasingly saying that it is a question not of if, but of when and are arguing that, for all intents and purposes, it has already happened. Another bail-out package will not solve Greece’s problems because it is not regaining competitiveness and cannot do so while it is in the eurozone. Therefore, is it not time that Her Majesty’s Government woke up and prepared for the possibility and almost inevitability of Greece defaulting? The situation will lead either to a Greek default or to the break-up of the eurozone. Whichever way it goes, we will not be isolated.
I will therefore ask the Minister some questions that go to the heart of the resilience that needs to be built up. The first is about institutional resilience. If he is really telling the House that people at the Treasury and the Bank of England have not started to get together to make practical provisions about who will meet, hold discussions and take action in the case of a default that would be comparable to Lehman Brothers, he is guilty of not stepping up to the responsibilities of his office.
Secondly, the Minister’s economic plans are completely predicated on the rest of Europe and the world being economically successful. If Greece defaults, other economies will not grow and ours will be affected. Therefore, should he not reconsider his VAT increase, because that would give us greater resilience?
Ms Stuart
The Minister shakes his head; I ask him to take me seriously.
Thirdly, I ask the Minister to consider article 66 of the treaty on the functioning of the European Union, which states:
“Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council”,
after consultation, can impose
“for a period not exceeding six months”
measures to restrict capital flows between the EU and the rest of the world. The UK would be affected by such restrictions of capital flows. Has he discussed that with the Commission? Has he made provision for how the UK economy would deal with that if it was imposed?
Mr Hoban
The hon. Lady poses a series of very good questions, to which I will respond.
The hon. Lady asked whether the authorities are working together. I said in response to her initial question that the Treasury, the Bank of England and the FSA are working closely on this matter and monitoring the situation. We are keen to ensure that the UK banking system is resilient. The additional capital that the banks hold now, compared with at the start of the crisis, will help with that. As I said, UK banks have not had difficulty in sourcing funding in the market. There is a concern about liquidity risk, but UK banks are continuing to source funding.
I mentioned in my statement the exposure of UK banks to the Greek Government. It is $4 billion, which is less than our exposure to, for example, the Irish banks. The hon. Lady should bear it in mind that French banks’ exposure is about four times that amount and that German banks’ exposure is about five times that amount. We are taking the matter seriously and considering it carefully, and the Chancellor is currently at the ECOFIN meeting in Luxembourg, where I am sure it will be discussed.
The hon. Lady talked about reversing the VAT increase. The shadow Chancellor proposed last week a cut in VAT that would cost £51 billion, which would put at risk our credibility in international markets. We have taken the difficult decisions to ensure that UK market rates are in line with those of Germany. The proposal that she put forward, and which her right hon. Friend put forward last week, would mean interest rates rising for families and businesses across this country, putting the recovery at risk. I do not think that is a gamble that we can afford to take.
Mr William Cash (Stone) (Con)
Will the Minister concede that it is crystal clear that the Greek situation, like those of Ireland and Portugal, does affect us? Does he also accept that the idea that is being put forward in the European Union Bill of not having a referendum on treaties that relate to the eurozone would mean that, although we are affected by the situation, we would not be allowed to have a referendum on it? Will he ensure that when the Bill returns to the House of Commons, there are amendments to ensure that there is a referendum on this matter, which affects us, so that the British people can vote on it?
Mr Hoban
My hon. Friend makes a couple of points about our exposure to Greece and the Bill that is currently going through the House of Lords. As I said, the UK’s exposure to Greece is relatively small, with bank exposure at $4 billion. He will recognise that we have a big interest in ensuring the continued stability of the eurozone. That is why the treaty changes are being made—to put the European support mechanism for eurozone countries on a permanent footing and replace the EFSM, to which we have to contribute thanks to a decision taken by the previous Government, with a mechanism that is funded entirely by the euro area. We do not believe that there is a transfer of sovereignty from this Parliament to Brussels, so there is no need for a referendum on those treaty changes.
Mr Jack Straw (Blackburn) (Lab)
Will the Minister first check his figures? Figures in the Financial Times, citing Moody’s and Reuters, suggest that the exposure of British public and private sector banks to Greek debt is €13 billion, and that of Germany and France €34 billion and €53 billion. Those figures are much bigger than the ones that he gave.
Secondly, will the Minister not recognise that there is now a mood change in Europe? Der Spiegel, the German magazine, has had a cover story contemplating the end of the euro as we now know it, and Mr Charles Grant, the well known europhile, has done the same in The Times today. Instead of sheltering behind complacent language and weasel words that we should not speculate, the Government should recognise that this eurozone cannot last. It is the responsibility of the British Government to be open with the British people now about the alternative prospects. Since the euro in its current form is going to collapse, is it not better that that happens quickly rather than it dying a slow death?
Mr Hoban
May I just deal with the right hon. Gentleman’s factual questions? The figures about UK banks’ exposure to Greek sovereign debt were provided by the Bank of England, based on results at the end of quarter one this year.
On the right hon. Gentleman’s second question, I seem to remember that he was a member of a Government who seemed committed to taking this country into the euro. I do not know whether we have seen a damascene or deathbed conversion from the Labour party. I think it was right for this country to stay out of the euro, and that is the policy of this Government. We have a strong interest, though, in the continued stability of the eurozone, as it is our major trading partner. Continued instability in the eurozone could be a factor in holding back the recovery of the British economy.
Mr John Redwood (Wokingham) (Con)
Given that Greece needs a work-out rather than another bail-out, will the British Government go to the International Monetary Fund and the EU and say the following? First, a second bail-out would mean sending good money after bad and should not be done; secondly, we need an urgent conference of all the interested parties to reschedule and re-profile Greek debt in an orderly way to avoid huge systemic damage, while accepting that the problem has already occurred. Greece went bankrupt more than a year ago, but the Ministers of certain countries cannot believe it and are wasting taxpayers’ money on trying to pretend that it has not happened.
Mr Hoban
My right hon. Friend highlights the need for private sector involvement, and he will know that Chancellor Merkel and President Sarkozy agreed this weekend that there should be voluntary and private sector involvement in resolving the Greek debt. Some very strong accountability is attached to any future financial support for the Greek economy: a tough programme of privatisation, and structural reforms to improve its competitiveness. I emphasise to my right hon. Friend that although it is right that there should be private sector involvement, it is not in our interests for there to be huge turmoil in our largest trading partner, the European Union.
Chris Leslie (Nottingham East) (Lab/Co-op)
Clearly, it is vital and in all our interests that sustainable resolutions are agreed for Greek debt financing, but surely the Government must recognise that there needs to be a smarter approach than simply piling more and more austerity on Greece. What is the Financial Secretary’s response to those, including Boris Johnson, who said yesterday that
“austerity measures are making the economy worse”
in Greece?
Why does the Financial Secretary allow the EU to procrastinate continually and to kick a solution on the bail-out mechanism into the distance repeatedly? He says that the EFSM has not yet been used. The European Council meets at the end of this week. Will the Government ensure that they grasp the nettle this time, and make sure that a permanent eurozone-only bail-out mechanism comes into force as soon as possible rather than pushing it back again? Will he give assurances that the UK will attend any future meetings, which could involve the use of EFSM, even if they are eurozone Finance Minister meetings, because the UK’s empty-chair policy clearly is not working?
Given that the Financial Secretary tabled a little-noticed Commons motion last week to double the UK’s subscription to the IMF from £10.5 billion to £19.7 billion, was not the Foreign Secretary being disingenuous when he said on “Sky News” earlier that
“any such support for Greece is for the eurozone and for the IMF, not for the UK”?
Britain will end up paying more for the Greek bail-out via the IMF, so will the Financial Secretary come clean and say what he estimates our share of IMF bail-out costs will be for our taxpayers? Surely Ministers should pull their fingers out and ensure that the EU makes some final decisions on all that. Is not it about time that the Government showed some leadership?
Mr Hoban
The hon. Gentleman continues to amaze me with his remarks. He seems to forget the role that his Government played in setting up the EFSM. The Conservative party has delivered a commitment to ensure that it is replaced with a permanent mechanism—one matter that will be discussed at the European Council later this week.
It is clear that we do not want to be part of a bail-out of the Greek economy and that we do not want the EFSM to be used. The fact that we are outside the Eurogroup sends a clear signal that it does not expect us to participate in that bail-out. Of course, Madame Lagarde, the French Finance Minister, made it clear last month when she appeared on “Newsnight” that she thought that the resolution for Greece was a matter for the eurozone only.
The hon. Gentleman mentioned the increase in the IMF commitment. Of course, the former Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), committed to doubling the resources available for the IMF at the April 2009 G20 summit in this country. I am surprised that hon. Members have such short memories of those matters.
Sir Peter Tapsell (Louth and Horncastle) (Con)
As several EU members have said that the only long-term solution to the crisis in the eurozone is establishing a fiscal union, has the Chancellor made it clear to them that there is no possibility of Britain joining that? As a member of the IMF, we are already playing a role in trying to bail out the European Union from its folly with its single currency.
Mr Hoban
As ever, my hon. Friend, whom I congratulate on becoming a member of the Privy Council in the birthday honours list, speaks wise words. The Chancellor has been very clear that we do not wish to be part of a fiscal government for the European Union. That is why we have fought for the right package for economic governance, which safeguards the independence and sovereignty of this House when it comes to making fiscal decisions. My hon. Friend rightly reminds us why it was right never to join the euro.
Kelvin Hopkins (Luton North) (Lab)
Whatever happens in Greece this afternoon, and even if there is a fire sale of public assets to buy time, the fact is that the euro is moving inexorably towards its death throes. The realistic choice is between a controlled deconstruction of the euro and the restoration of national currencies, or a crash that would be catastrophic for everyone.
Mr Hoban
The hon. Gentleman once again reminds us how important stability in the eurozone is—the situation could have a significant impact on the UK economy, which is why it is important that the Greeks resolve their problems in conjunction with eurozone member states. However, let me make this quite clear again: we do not want to be part of that bail-out.
Duncan Hames (Chippenham) (LD)
How does the Government’s disposition on these matters differ between the case of Greece and that of other strained but larger or more closely integrated economies, such as, say, Spain?
Mr Hoban
My hon. Friend will of course recollect that one reason why we made a bilateral loan to Ireland was the particularly close relationship between the UK and Irish economies. That relationship did not exist with Portugal, and it does not exist with Greece, so there is a different approach. It is important to remember that Greece was bailed out by eurozone countries, and that the bail-out of Greece should continue to be done by them.
Chris Bryant (Rhondda) (Lab)
Is not the danger of the Government’s deliberate attempts to steer as far away from any involvement whatever that the indirect, knock-on effect for British businesses and banks, and in the end for British taxpayers, will be far more significant than he is letting on? That is why many Opposition Members feel that he is being deeply complacent.
Mr Hoban
I do not think anyone is in a position to accuse this Government of being complacent. We are the Government who have taken action to tackle the fiscal deficit that we inherited from the Labour party. That has enabled the spreads between UK gilts and German bunds to narrow, reflecting market confidence in the measures that we are taking to sort out the problems in the British economy. The Labour party is failing to take its responsibilities seriously or to acknowledge the mistakes that it made when it was in government. It also fails to recognise the strength of support for the actions that this Government have taken to resolve the economic crisis in this country. Had we not taken that action, we might well have been in the firing line with Greece.
Mr Richard Shepherd (Aldridge-Brownhills) (Con)
The eurozone was never an optimal currency zone. It is predicated on a treaty arrangement that calls it irrevocable and irreversible. We should never have accepted the hubris contained in those phrases, which brought about the passage of the Maastricht Bill and the current situation. This Government and this country should not be involved, and it would be helpful if we said what everyone in the press now says: this arrangement cannot survive in its current form. The hubris of those politicians who led the poor Greeks and all those who believed in this arrangement should be exposed as such.
Mr Hoban
My hon. Friend is absolutely right that we have seen during this crisis the strains within the eurozone mechanism. The actions that needed to be taken to resolve the consequences of those strains include the bail-outs of the Greek, Irish and Portuguese economies. It is absolutely right that we secured that opt-out to the Maastricht treaty, to ensure that this country did not have to be a member of the euro, a position that the previous Government seemed not to support.
Graham Stringer (Blackley and Broughton) (Lab)
The Minister, the Government and the House want stability, but quite frankly, Greece is bankrupt, and cannot restore its economy while it remains in the euro. Is not the answer to introducing stability an orderly return to the drachma? Should not that be the burden of the Government’s policy?
Mr Douglas Carswell (Clacton) (Con)
Most previous IMF rescue packages that I can think off have generally involved first a currency devaluation and secondly a debt default—or, should one prefer the term, a restructuring. Does the Minister agree that the IMF should be consistent with that approach in regard to Greece, and should not the IMF oversee a decoupling from the euro and a default on the debts, which would be consistent with its approach in other instances and rescue packages?
Mr Hoban
The IMF is the body best placed to decide the conditions to be attached to any rescue package that it puts forward. Strict conditionality is attached to the rescue package for Greece, including significant privatisations, tax collection reform and wider structural reforms. However, I think that this is a judgment for the IMF to make.
Mr Dennis Skinner (Bolsover) (Lab)
Does the Minister recall that when the Tories and Liberals were in opposition and sat over here on the Opposition Benches, the Tories wanted to see the collapse of the eurozone, but the Liberal Democrats thought the opposite and wanted to prop it up? Here we are today with a great opportunity to see the back-end of the euro, and I can only reach the conclusion, based upon his complacent answers, that the Lib Dems are running the coalition.
Mark Reckless (Rochester and Strood) (Con)
It is only six weeks since £26 billion of European financial stabilisation mechanism funding was nodded through for Portugal. May I congratulate the Minister on the change we have seen in those six weeks, on his statement now that there is no question of any further EFSM funding, and in particular on what we read in the weekend press—that this is a red-line issue for the Treasury and that any further use of the EFSM is unacceptable? Long may it continue.
Mr Hoban
My right hon. Friend the Chancellor has made it very clear in his discussions with the Finance Ministers of EU member states that we do not want the EFSM to be used in this bail-out—a statement that Madame Lagarde confirmed on British television only a few weeks ago. I welcome my hon. Friend’s congratulations.
Mr Denis MacShane (Rotherham) (Lab)
The Minister is prudent not to join in the glee of the euro’s gravediggers, because if Greece defaults, it will not stop on the Acropolis—Portugal and Ireland will be next—and the nine out of 10 banks in the City that are European and foreign-owned will pay a terrible price. Rather than waiting for the eurozone to disintegrate into a set of competing currencies hiding behind capital-controlled walls—the notion that an open-trade Europe can exist in those conditions is nonsense—we should be very careful about where we are going. Boris Johnson said today that Greece was bankrupt. That is a signal to every Greek to get on his bike and seek work elsewhere. Is that really what we want—a new flood of economic migrants into Britain?
Mr Hoban
The right hon. Gentleman raises a series of points in his speech, but he makes a strong argument for why it is important that the eurozone is strong and stable. That has broad economic and social benefits. Clearly, if that is to happen, it is important for the Greek bail-out to work and be effective.
Mrs Anne Main (St Albans) (Con)
I am very concerned. The next debate is about trying to cut back on pensions and save taxpayers’ money, yet we are still planning to put through the IMF—a third party—taxpayers’ money that we are having to scrimp and save at home. My constituents will not stand for it. I am disappointed to hear the language of the Government at the moment, which seems to imply that Greece is an economy that is too big to fail. That is the same thing we had with the banks. We should put Greece out of its misery—it is flatlining—and no more of our public money should be sent abroad to Greece, even through the IMF. There are riots on its streets. Its people do not like the medicine being offered to it, and we cannot expect it to take any more. Let it depart peacefully from the euro. It cannot be sustained as it is; it is just good money after bad.
Mr Hoban
My hon. Friend will be aware that these are matters for the Greek Government, but I would say this. When money has been lent to the IMF, that does not reduce the amount of money available for public spending. We get interest on the balances that we lend to the IMF, and it has never defaulted on a programme yet. We need to recognise the importance of support provided through the IMF, although I do not really think that my hon. Friend is suggesting that we should withdraw from it. On fiscal consolidation, let me reiterate to my hon. Friends and to the Opposition, who have ignored this crucial fact, that if we had not taken the tough action that we took a year ago in our emergency Budget, it would be the UK, not Greece, in the firing line.
Stewart Hosie (Dundee East) (SNP)
Nobody wants to see Greece default, but that is most certainly possible. Were it to happen, there would be an immediate shock to the eurozone and, more widely, to the EU, our largest trading partner. That would have an impact on the UK. I am glad that the Minister said that the situation was being monitored, but the House and the public deserve more detailed information. If he has not already done so, will he ensure that the Treasury asks the Office for Budget Responsibility to assess the impact on UK growth of a potential Greek default, and publish that assessment quickly, so that we can understand precisely what the consequences might be?
Mr Hoban
The OBR will take into account the state of the eurozone economy in its normal forecasting. However, let me be clear to the House that the Treasury, the Bank of England and the Financial Services Authority work closely to monitor the strength of the financial system, and the exposure of UK banks to the Greek Government and the wider eurozone economy. The actions taken to date have ensured that our banks are well capitalised, have strong balance sheets and are less exposed to the Greek economy than, say, French or German banks. British banks can still access funding in international markets, which is a sign of the UK banking system’s strength.
Mr Bernard Jenkin (Harwich and North Essex) (Con)
May I urge my hon. Friend to bear it in mind that the nearer we get to the inevitable break-up of the euro, the faster the denials will be made that it is not going to happen? Will he urge the European Union to design a policy that creates a legal framework for an orderly departure of Greece from the euro? Can he name a single reputable economist who believes that the Greek economy can recover without a devaluation?
John Cryer (Leyton and Wanstead) (Lab)
In answer to one of his Back Benchers, the Minister said that if we put money into the IMF or the EU, that does not affect the rest of public spending. However, the rest of the world would recognise that if we spend money on one thing, that gives us less to spend on other things. Is that right or is it wrong?
Mr Hoban
If that is the hon. Gentleman’s view, he should talk to those on his Front Bench, who seem happy to propose £51 billion of unfunded tax cuts. Money that we lend to the IMF is money that is sitting on the Government’s balance sheet; it does not affect the spending decisions that we make. We are paid interest on the amounts lent to the IMF, which do not affect the amount of money that we can spend on pensions, schools or health, and I made the same point about how the EU funds the European financial stabilisation mechanism.
Sajid Javid (Bromsgrove) (Con)
Like Greece, we, too, have an enormous national debt, which more than doubled over the last 13 years, to more than £1 trillion, with an interest bill of more than £40 billion this year. Does the Minister agree that had we not had a change in Government 13 months ago, we, too, could have been facing the same sad fate?
Mr Hoban
My hon. Friend is absolutely spot on. We can see from the reaction of the Labour party in opposition that it has not learnt at all from its mistakes in government. If we had not taken tough action, we would have seen high market rates of interest, which would have increased costs for families and businesses across the country. We are now seeing the benefits of the tough decisions that we took in last year’s emergency Budget.
Mike Gapes (Ilford South) (Lab/Co-op)
Given that the tough, sado-monetarist programme imposed on the Greeks a year ago has not worked, how many more sado-monetarist programmes will work?
Mr Hoban
When the Greek Government agreed last year’s debt bail-out package, it was assumed that they would be able to re-enter the markets in the spring of next year. That is clearly not the case, given current market pressures, which is why the Greek Government had to seek a second round of refinancing. However, they still need to take action to improve Greece’s competitiveness, reduce the size of the state sector through further privatisation and improve taxation, to get the economy back on track.
Mr Peter Bone (Wellingborough) (Con)
I congratulate the hon. Member for Birmingham, Edgbaston (Ms Stuart) on securing this urgent question, and I say gently to the Minister that it is a shame that he did not volunteer to make a statement on this matter first. What is Her Majesty’s view on whether the euro can survive in its current format?
Mr Hoban
I cannot speak for Her Majesty on this occasion, but I would say to my hon. Friend that we did not come forward with a statement today because no decisions have been taken. A statement was put out by the Eurogroup last night which recognised that work was in progress, and my right hon. Friend the Chancellor has continually sought to keep the House informed of the outcome of such discussions. Once ECOFIN has met today, there will be an opportunity for him to lay a statement on the outcome of that meeting.
Mr William Bain (Glasgow North East) (Lab)
Despite the European lenders having cut their exposure to risk in Greece by 30% in the past year, the risk of contagion in the eurozone has become the paramount concern. Will the Minister acknowledge that, with about $2 trillion exposure to Portugal, Ireland, Italy and Spain by lenders in the eurozone, any Greek default would have the potential to devastate the European banking system and jeopardise the economic recovery in the eurozone?
Mr Hoban
The hon. Gentleman makes an important point. In the event of a default, there would be consequences for the strength of bank balance sheets across Europe. That is why we are going through a stress-testing process across Europe at the moment to determine the consequences of various scenarios on the strength of bank balance sheets. UK banks have strengthened their balance sheets significantly and they hold high levels of capital. That will give them some insulation against the impact of a default.
Mr Julian Brazier (Canterbury) (Con)
I welcome my hon. Friend’s commitments on the non-IMF involvement of British funds in another bail-out for Greece. Does he accept that a country running a large balance of payments deficit can pay off foreign debts only if it is able to reverse that balance, and that to do that, it has to devalue? The man from Brussels cannot make water run uphill.
Mr Hoban
My hon. Friend has pointed to one way in which a country can regain competitiveness—through devaluation. There are other ways, including reducing labour costs and increasing productivity, and all those actions should be taken to ensure that the Greek economy and those elsewhere in the eurozone reach a much stronger position.
Andrew Gwynne (Denton and Reddish) (Lab)
The impact on the British economy of events in the eurozone, and in Greece in particular, is potentially very significant. May I press the Minister further on what contingency plans the Treasury is putting in place to protect the UK’s financial and economic interests in the event of a Greek default or, worse still, a domino effect across the eurozone?
Mr Hoban
I will say this again, so that no one leaves the Chamber unaware of what is happening: as ever, discussions are taking place between the Bank of England, the Treasury and the FSA, and we are considering a number of scenarios and potential market events. I can say to the hon. Gentleman that British banks are better capitalised than they were at the start of the crisis, and because of the strength of their balance sheets, they are able to access funding in what can be quite difficult market conditions. That is a good sign of market confidence in the strength of the UK banking sector.
Harriett Baldwin (West Worcestershire) (Con)
Madame Christine Lagarde is clearly an outstanding candidate to be head of the IMF, but is the Minister slightly concerned that she is French and, given that the French banks have a very large exposure to the Greek problems, that she might therefore be conflicted in her approach to the problem?
Mr Hoban
Madame Lagarde is a strong candidate for the role of director-general of the IMF. My hon. Friend is absolutely right to point out that she is French; that fact has not escaped us in ECOFIN meetings. Madame Lagarde said on “Newsnight” a couple of weeks ago that she recognised that the bail-out of Greece involved a series of agreements between eurozone countries, and that that should remain the case.
Bill Esterson (Sefton Central) (Lab)
The Minister has an extraordinary level of confidence—well, I think it is confidence—in the Greeks’ ability to repay the loans they are currently receiving. I just want to check with him: how much of the £19.7 billion UK contribution to the IMF forms part of the Greek bail-out and how long he is prepared to see us continue to make our contributions through the IMF?
Mr Hoban
I do not think the hon. Gentleman is suggesting that we should withdraw our membership of the IMF—[Interruption.] It is not clear from the question he is asking. Part of the condition of any bail-out of an economy by the IMF—whether it is a eurozone economy or another economy—is a debt sustainability plan, which is a rigorous part of the assessment process. As was clear in the Eurogroup statement last night, the IMF and the Eurogroup have signed off on Greece’s debt sustainability plan, so they expect that money to be paid back.
Joseph Johnson (Orpington) (Con)
The hon. Member for Birmingham, Edgbaston (Ms Stuart) questions the UK’s resilience in the event of a wave of eurozone defaults. Does the Minister agree that in the eyes of the markets, the UK has already become something of a safe haven, with UK 10-year borrowing rates and credit default swap rates falling last week while the comparable rates in other countries soared, precisely because the UK Government have a good deficit reduction plan, and a good plan for settling our banks and making them stronger—and they are sticking to it?
Mr Hoban
My hon. Friend is absolutely spot on in his analysis. I believe that the 10-year gilt rates fell to 3.2% at the end of last week, which reflects the markets’ vote of confidence in the UK economy and particularly the fact that we took the difficult decisions that the Labour party shied away from when they were in government. We took those decisions, which is why the market rates are similar to those in Germany, yet our deficit is more in line with that of Portugal.
Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)
Can the Minister give an assessment of what effect a Greek default will have on the German and French economies, which are more exposed to such a default, and in turn on UK manufacturing?
Mr Hoban
The hon. Gentleman is right to say that German and French banks have a greater exposure to the Greek sovereign debt than the UK banks do. The French exposure is, I think, four times that of the UK, while the German banking sector’s exposure is about five times ours. That is why it is important that, as we go through the process of stress testing European banks, we look very carefully at the level of capital that our banks hold to ensure that they are in a position to withstand shocks and thus to support and sustain the economy.
Nadhim Zahawi (Stratford-on-Avon) (Con)
The hon. Member for Birmingham, Edgbaston (Ms Stuart) attacks this Government’s VAT policy and, by implication, the deficit reduction policy. Does not what is happening in the eurozone absolutely serve as a timely reminder that we have to attack the deficit because that is how this country will maintain low interest rates?
Mr Hoban
My hon. Friend is absolutely right. It was clear in the reaction to last week’s statement by the shadow Chancellor that everyone thought his plan lacked sense and would have undermined the recovery in this country by putting interest rates at risk and forcing up the interest costs of businesses and families. We have taken the tough decisions to get the economy right; the markets have demonstrated through the rates at which firms and businesses can borrow that they have confidence in our plans.
Mr Philip Hollobone (Kettering) (Con)
Does the Minister believe that the eurozone will remain intact with all its present members?
Alec Shelbrooke (Elmet and Rothwell) (Con)
Does the Minister agree that one of Greece’s biggest problems is that its people, backed up by the unions, have not accepted the austerity measures going through? Is that not a timely warning to unions in this country, which are complaining about how we are trying to get the deficit under control, of the consequences unless proper and sensible action is taken?
Mr Hoban
My hon. Friend has made an important point. It is clear that difficult decisions must be made if our economy is to be put back on the right track, and the Government are demonstrating their commitment to making them. Interest rates are lower than they would have been if we had not made those tough decisions, which is good for families and good for businesses.
Regulatory and Banking Reform
Mark Hoban Excerpts(13 years, 5 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Financial Secretary to the Treasury (Mr Mark Hoban)
With permission, Mr Deputy Speaker, I should like to make a statement.
It is now well known that the tripartite system set up by the last Government failed spectacularly in its mission to maintain stability. The decision to divide responsibility for assessing systemic financial risks between three institutions meant that, in reality, no one took responsibility. The crisis dramatically exposed that flaw and cost the taxpayer a vast amount of money. We cannot allow another crisis such as the one we have just witnessed. Shortly after taking office, this Government set in train a consultation on reforming our system of financial regulation. Today, after two extensive rounds of consultation, I am presenting to the House a White Paper, including draft legislation, setting out the blueprint for a completely new system of regulation. Let me summarise the main proposals.
A permanent Financial Policy Committee will be established within the Bank of England. Its job will be to monitor overall risks in the financial system, to identify bubbles as they develop, to spot dangerous inter-connections and to stop excessive levels of leverage before it is too late. It has already started operating on an interim basis and is having its first formal meeting today. Subject to legislative process, the permanent body will be in place by the end of next year.
We will abolish the Financial Services Authority in its current form and transfer its significant prudential functions to a new Prudential Regulatory Authority that will sit in the Bank of England. The Prudential Regulatory Authority will focus on microprudential regulation and will bring judgment to the vital task of regulating the soundness of individual firms that manage risk on their balance sheet, particularly banks and insurance companies. We recognise, of course, that such firms engage in very different businesses, which is why we are proposing to provide the PRA with a specific statutory objective for its insurance responsibilities.
We are also bringing in a new approach to protecting consumers. A financial conduct authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers, with new powers to ban the sale of toxic products. I can confirm that as an integral part of its mission to secure better outcomes for consumers and investors, the authority will also have a new duty to promote competition. Judgment, discretion and proactive intervention will be the hallmark of our new regulators.
We are bringing forward the draft Bill for pre-legislative scrutiny, for which a Joint Committee of both Houses will shortly be convened. We are seeking valuable input from Members on both sides of the House as it is in all our interests to get this right.
Last week, we also established under Sir John Vickers an Independent Commission on Banking to resolve the debate about the structure of the banking sector in the UK. I am sure that the whole House will join me in paying tribute to Sir John and his fellow commissioners for the excellent job they are doing. The commission’s interim report made two particularly important proposals: bail-in, not bail-out, so that private investors, not taxpayers, bear the losses when things go wrong; and a ring fence around better capitalised high street banks to make them safer and protect their vital services to the economy if things go wrong. I can confirm that the Government agree in principle with both proposals.
Of course, we will await the commission’s final report, but I can tell the House that any reforms will need to meet the following principles: all banks should be allowed to fail safely without affecting vital banking services, without imposing costs on the taxpayer, through reforms that are applicable across our whole banking industry and in a manner consistent with EU and international law. I can also confirm today that we welcome the commission’s recommendations on increasing competition in retail banking and we are working closely with it to achieve this aim.
We are also taking the first steps towards normalising the Government’s involvement in the financial sector. One legacy of the crisis is that today’s taxpayers have a direct interest in several banks through large-scale guarantees and shareholdings. We do not believe the Government should be a long-term investor in financial institutions. It will take some time—possibly several years—before we can make a complete exit from our investments in the banks, but today I can confirm the start of that process.
On the advice of UK Financial Investments, we have decided to launch a sale process for Northern Rock. This follows extensive work over the past three months to consider potential options for returning Northern Rock to the private sector while generating the best possible taxpayer value. The sale process will be open and transparent and in line with state aid rules. I have already written to the chair of the all-party group on building societies and financial mutuals, my hon. Friend the Member for Cardiff North (Jonathan Evans), to reassure him that any interested parties can bid for it, including mutuals. This reaffirms the Government’s commitment actively to promote the mutuals sector. That does not mean that other options to return Northern Rock to the private sector have been ruled out, but I believe that at this point in time a sale process is the most promising.
I also want to make the House aware that following an application by the Bank of England to the High Court today, Southsea Mortgage and Investment Company Ltd, a very small bank, has been placed into the bank insolvency procedure. That follows a decision by the FSA that Southsea no longer satisfied its threshold conditions for operating as a deposit taker. The Financial Services Compensation Scheme has been triggered and eligible depositors with balances up to the limit of £85,000 are safeguarded. Eligible depositors with amounts in excess of the insured limit of £85,000 may be entitled to receive a share of their savings above this limit as part of the insolvency process.
Finally, I want to update the House on the ongoing negotiations on international financial regulation. When I was in Brussels yesterday, my message was clear. We must learn the lessons of the crisis and create the foundations for stable and sustainable economic growth without fragmenting global markets. That is why global standards are in our national interest. Much of the debate has focused on the implementation of Basel III and we have been busy making the case for implementing it in full right around the world, including here in Europe. Last week’s International Monetary Fund assessment supported our arguments for minimum standards here in the EU, with discretion for national authorities to increase them where necessary.
When the coalition Government came into office, questions were being asked about the future of banking and regulation but they had not been answered. It has been our job to resolve them. Our goal should be a new settlement between our financial system and the British people; a new settlement where the banks support the people, instead of the people bailing out the banks. The statement today sets out the progress we have made towards building this new settlement and the actions we are taking to complete it and I commend the statement to the House.
Chris Leslie (Nottingham East) (Lab/Co-op)
What utter contempt the Government are showing to Parliament by announcing these major proposals first to the bankers in the City yesterday and only today to elected representatives. Time and time again, Ministers give policy speeches outside this place and the House of Commons is merely an afterthought. Why is the Chancellor not here to make these announcements today?
That total disregard for the democratic process is reflected in the draft legislation, which hands vast new powers over the lives of all our constituents to the unelected Bank of England and leaves a gaping accountability deficit, with no mention of parliamentary accountability in all its 408 pages. Why are Ministers still so sketchy about the detail of these new powers for the Bank of England, with nothing on the face of the Bill, and is it true that there may be no further clarity on the toolkit for the Financial Policy Committee until next year?
Why is there still no clarity about the crisis management memorandum? Why have the Government not yet published the consolidated Financial Services and Markets Act 2000 draft for Parliament to see? Why is there no clarity about where consumer credit regulation will fit into this alphabet spaghetti of new quangos? Why are they still fumbling around with the composition of the Financial Policy Committee? Why have they failed to negotiate the flexibility needed from the European Union and the European banking regulators to ensure that all these new UK structures are allowed discretion to use the macro-prudential tools in the first place?
There will be significant concern, especially in the Portsmouth area, about the news on the Southsea mortgage bank—Southsea is perhaps a name that resonates in other ways—but we will need to watch developments closely.
Although there are clear inadequacies in the proposals published today, we will consider them carefully, and there are areas where we agree with the Government. The Chancellor is right that this was not a financial crisis made in Britain. It was caused by a failure in the banking industry in every major financial centre and a global failure in banking regulation. Families and businesses worldwide have paid a heavy price for the irresponsible actions of the banks, but Governments and regulators failed to see this coming and we in the Opposition must accept our part in that. Thankfully, however, we ignored the advice of the Chancellor, who called for lighter regulation and opposed the previous Labour Government’s decisions to step in to prevent financial catastrophe by nationalising Northern Rock and Royal Bank of Scotland and by cutting VAT to get the recovery moving.
Today’s announcement vindicates the rescue measures taken by my right hon. Friends at the time and shows that taxpayers always had a good chance of recouping the lion’s share of the sums involved. But on Northern Rock, can the Minister explain the haste in the sale? We hope he is not playing politics and rushing for a fire sale when a measured approach to maximising value and diversifying the banking system would be better. Why has the Treasury failed to consider mutualising Northern Rock and is the Minister really content to see it return to business as usual as yet another plc without exploring the benefits that a new building society might bring?
There are three tests by which the Chancellor and the Minister should be judged. First, are taxpayers and bank customers adequately protected from future bail- outs by the so-called firewalls in the bank structures? How can the Chancellor say he agrees with the conclusions of the Vickers Banking Commission before it has even published its final report?
Secondly, has the Minister secured sufficient international agreement on regulation and bank restructuring to secure a workable system protecting jobs here in Britain? Sadly, the Treasury has already shown a woeful lack of leadership internationally on pay transparency and bankers’ bonuses, which, by the way, should be taxed to pay for jobs and businesses here at home.
Thirdly, will we end up with a banking system that delivers the goods for our economy as a whole? Are small businesses getting the bank loans they need and why is Project Merlin already unravelling with confusion between the Department for Business, Innovation and Skills and the Treasury over so-called “stretch” targets, or capacity targets, how they are going to be enforced and whether the banks are really participating wholeheartedly? We need a diverse banking system, which should include a strong mutual sector—something that was promised in the coalition agreement but that the Government seem uninterested in delivering. We need clear and comprehensible regulatory structures with far clearer lines of accountability, and we need a Government who put customers, taxpayers and the real economy first.
Mr Hoban
That response clearly demonstrated the emptiness of the Opposition’s thoughts on these matters. They have had a year to consider whether these reforms are in the interests of strengthening financial regulation and whether they will strengthen the banking system, but here they are today, a year later, with no idea on the best way to proceed. That is not surprising given that the shadow Chancellor was a champion of light-touch regulation when he was the City Minister and he presented that argument not just in London but across the world. It is time for the Opposition to make their mind up: are they prepared to acknowledge the mistakes of the past and accept the tougher regulatory regime we have proposed, or are they going to cling to the legacy and wreckage of the previous Government’s financial regulation system?
Let me deal with one or two of the points that the hon. Gentleman raised. It has been clear from the outset that one of the roles of the interim Financial Policy Committee, which is meeting formally for the first time this afternoon, is to provide advice to the Treasury on the macro-prudential tools that it believes would be appropriate for the FPC. Until the interim FPC has concluded its work it is very difficult to give the House information on that, but what we are doing in the Bill is making sure there is a process in place to ensure there is consultation and that there is discussion in the House. Those tools will not be given to the Bank until we have gone through a legislative process in this place.
The hon. Gentleman raised the issue of Northern Rock. As someone who was born and brought up the north-east, I understand his concern and the importance of Northern Rock to the regional economy. We have, as part of our review, considered remutualisation and our financial adviser Deutsche Bank is reporting to UK Financial Investments on Northern Rock. The advice is to proceed in the first instance with a sale option and the option of remutualisation has been explored with Co-operatives UK and the Building Societies Association, which commissioned the report by Professor Michie. The final decision will be judged against such other options as an initial public offering or a stand-alone remutualisation, but I remind the Opposition that it is important to secure taxpayers’ interests, as we have invested £1.4 billion in Northern Rock.
On the Independent Commission on Banking, we have indicated that we would support the proposal, but we have said that we want to see the final proposal that Sir John Vickers makes. We have dealt with an issue that the previous Government failed to tackle. They closed down the topic of whether there were some structural issues in the UK banking sector that put taxpayers at risk. They were not prepared to confront that debate, but this Government have been prepared to do that and to take some serious and difficult decisions on that matter.
On the issue of bank lending, it is all very well the hon. Gentleman preaching, but the previous Government did not in any way attempt to get the big banks together to talk about increasing lending to small businesses. As the banking sector and the economy deleverage, it is important that those businesses seeking finance have that opportunity. That is why we secured commitments from the banks, and they are held to account on the published targets that were announced earlier this year. The package of measures we have announced demonstrates the progress we are making towards a new settlement on financial regulation and banking, and it is a pity that the Opposition are not prepared to face up to their responsibilities and take part in this debate.
Mr Peter Bone (Wellingborough) (Con)
I thought that the shadow Minister let the Government off far too lightly regarding Parliament. This place should hear new policy from the Government first. Yesterday, this was published by the BBC first and was then announced at Mansion House. I am afraid that the Government have failed on this occasion. Will the Minister please publish the media grid?
Mr Hoban
I would just point out to my hon. Friend that last night the Chancellor did not read out the White Paper—the blueprint for reform that we have before us today. That is the centrepiece of today’s announcement. We have engaged fully with Parliament on this and he will be aware that what we are doing is starting a process of pre-legislative scrutiny to ensure that Members across the House can take part in debate on this. Throughout this whole process, we have sought to keep Parliament informed of the actions we are taking and to ensure that Parliament has a chance to scrutinise the decisions that the Government have made.
Chi Onwurah (Newcastle upon Tyne Central) (Lab)
Northern Rock is headquartered in my constituency and my predecessor MP, Jim Cousins, played an important role in saving the bank when the Conservative party had no understanding of the crisis and would have let it go to the wall. Could the Minister explain how the auction will be structured so as to promote Northern Rock’s mutualisation, which he says he wishes to see? Could he also say what guarantees he will offer on the name, headquarters, jobs and community contribution of Northern Rock?
Mr Hoban
The hon. Lady raises some important points about how a potential bidder would seek to maintain employment in the north-east, how they would use the Northern Rock name and how the headquarters would be structured. That is a case that the bidders will need to make in putting together their bid. I would encourage all those who have an interest in bidding for Northern Rock to engage with the people of the north-east and present to them why they believe that their deal would secure the best future for Northern Rock and its employees.
Sajid Javid (Bromsgrove) (Con)
Drawing on my 19 years as a banker—[Interruption.] I was far more popular then than I am now. Drawing on that experience, may I say that the Minister has rightly identified some deep structural problems with the UK banking system? Although over the coming weeks and months he will hear some howls of protest from certain sections of the UK banking community, may I reassure him that the principles he has outlined today will lead to a safer and more stable UK banking system?
Mr Hoban
I am grateful to my hon. Friend for his support. I am not quite sure at times which is the more popular profession, MP or banker, but he has experience of both. He is absolutely right that we need to stick to our course on this. There are some important issues that we need to tackle to make sure that the banking system is safer, to improve the regulatory structure and to ensure that the style of regulation is much more interventionist and proactive than in the past. That will doubtless cause some institutions some difficulty, but we have to recognise that it is in the long-term interests of the stability and sustainability of our economy for there to be better regulation of the banking sector and the financial services sector more broadly.
Mr Andrew Love (Edmonton) (Lab/Co-op)
The Government set up the Independent Commission on Banking last year. The commission produced its interim findings in June and its final recommendations will not come out until September, but the Chancellor yesterday in his Mansion house speech and the Financial Secretary today in this Chamber have pre-empted two of those decisions, although it was made clear by the commission that it had not reached its final conclusions. Do not the Government owe an apology to members of the commission of inquiry?
Mr Hoban
Is that it? I really did wonder. The hon. Gentleman has played an important role in the Treasury Committee in challenging both this Government and the previous Government and holding them to account on banking reform and I should have thought he would welcome the fact that we are taking action to strengthen regulation of the banking system and to make sure that our banks are more secure. It would have been great if he had supported those measures.
Mr Brian Binley (Northampton South) (Con)
I welcome the Minister’s statement, but may I remind him that the reorganisation of the regulators or, indeed, of the banking structure will do little to stimulate demand quickly? Mortgages were down 9% in April on the same period last year and other sectors are seriously under pressure. Will the Government think more seriously about stimulating demand?
Mr Hoban
My hon. Friend makes an important point and one reason why it was important to reach agreement with the banks on Project Merlin was to send a clear signal to businesses that there was credit available to viable businesses, as well as encouraging businesses to come forward to banks with applications for loans. Also important is the work that the British Bankers Association taskforce is doing to commission an independent survey to look at the relationship between banks and their customers. One concern is the amount of discouraged demand in the system and I believe that by looking very carefully at the relationship between banks and their customers, we can see whether banks are putting off businesses from making those applications.
Ian Mearns (Gateshead) (Lab)
I listened with care to the Minister’s statement, but he has not mentioned the Northern Rock Foundation, which has disbursed millions to deserving causes in the north-east over several years. That disbursement is about 1% of profits, yet Treasury officials told a reporter from Newcastle’s Evening Chronicle this morning that the retention of the Northern Rock Foundation will not be a condition of sale. How will the big society survive in a region such as the north-east, let along thrive, without such a guarantee?
Mr Hoban
The hon. Gentleman raises an important point, and I am pleased that he gave prior notice during business questions. We all recognise, particularly those of us with strong roots in the north-east, the important work that the Northern Rock Foundation has done not only in the north-east, but in Cumbria. An agreement was reached that Northern Rock would continue to contribute 1% of its profits to the foundation between now and December 2012, but I am sure that any bidder looking for support from the north-east will think very clearly about the role that the foundation will play in future.
Mr Mike Hancock (Portsmouth South) (LD)
Will the Secretary of State give an assurance to the House and to the country that the sell-off of Northern Rock will not proceed unless there is absolute certainty that every penny of taxpayers’ money that was put into it will be recouped, plus interest, and that the proposed transformation of the banking system will begin to give people some trust in the system again?
Mr Hoban
My hon. Friend makes two important points. In the process of selling Northern Rock and returning it to the private sector, we are seeking to get the best possible deal for the taxpayer, given the investment we have put in so far. He is absolutely right that one of the challenges is to restore trust and confidence in the banking system, which has taken a blow in recent years for a range of reasons, including the mis-selling of payment protection insurance and the financial crisis itself. There is a big challenge for banks. The best way that they can establish trust and confidence is by demonstrating to the people of this country that they are doing what they should be doing, which is helping families and businesses realise their full potential by ensuring that credit is flowing to our businesses and that our constituents have opportunities to buy their own homes.
Mr Kevan Jones (North Durham) (Lab)
The Minister, who knows the north-east very well, will be aware that when Northern Rock was a building society it was a highly respected institution, not only because of its prudent lending, but because it was the first choice for many small savers. Although he reaffirmed in his statement the Government’s commitment to mutualisation, will he not be straight with the people of the north-east and say quite clearly that mutualisation is not an option and that Northern Rock will be privatised, as was spun out in the newspapers this morning?
Mr Hoban
As I said earlier, re-mutualisation is an option. The advice we have received is to proceed with the sale process, which could be to a proprietary business or another mutual. Once that process is under way, we will be able to compare that outcome with the other two possible outcomes, which are an initial public offering or a stand-alone re-mutualisation. I am keen that United Kingdom Financial Investments engages with this, as it has done already, to see whether that is a viable option.
David Rutley (Macclesfield) (Con)
I welcome the Chancellor’s move to put an end to the failed tripartite model. What steps will be put in place to enhance the working relationship between the Treasury and the Bank of England, given the Bank’s enhanced role?
Mr Hoban
My hon. Friend makes an important point, and one that the hon. Member for Nottingham East (Chris Leslie) noted in his remarks. It is absolutely vital that the Bank has a good and robust relationship not only with the Treasury, but with this House. I think that we all agree that the relationship between the Treasury Committee and the Monetary Policy Committee, for example, is one of the most transparent between any central bank and any legislature across the world. We want similar standards of transparency and openness to apply in the relationship between the FPC and the House.
The White Paper sets out how the relationship between the Treasury and the Bank will be strengthened and how the Governor will meet the Chancellor to discuss the outcome of the financial stability review. We are also in the process of developing a crisis memorandum of understanding to ensure that the proper channels of communication are open between the Treasury and the Government. That is a much better set of arrangements that will ensure that the House is kept informed and that we can hold the Bank to account for its new responsibilities.
Mr Iain Wright (Hartlepool) (Lab)
Is there not an inherent contradiction in Government policy? On the one hand there is stricter ring-fencing of banks’ capital reserves, and on the other there are the Business Secretary’s proposals, via Project Merlin, for banks to lend more to small businesses. Who will win this battle of economic policy—the Chancellor or the Business Secretary?
Mr Hoban
There is no dispute between the two. It is very clear that we need banks to hold more capital and, based on the work done at Basel III on the implementation of the higher level of capital, that should not restrict the amount of credit available. Yes, we need to see banks deleveraging and reducing the size of their balance sheets, but that should not be at the cost of businesses in our constituencies and across the country that need capital in order to grow and expand. Banks should be reducing their lending to each other, rather than reducing the exposure to businesses in this country.
Mrs Anne Main (St Albans) (Con)
I welcome the Financial Conduct Authority if it genuinely gives consumers greater protection. Under the current regulations, a constituent of mine, Mr Joseph Choonos, was pressured into taking out a Barclays loan in the most inappropriate way by a course provider, which then dumped the course. Barclays is now pursuing him dreadfully for the loan, which he has no way of paying back. He has no way of having a good dialogue with Barclays. If the proposals help vulnerable consumers in any way, I will be truly grateful.
Mr Hoban
I cannot comment on the case my hon. Friend raises, but we have corresponded about it. We need to see better outcomes for consumers of retail financial services. As she may be aware, we are also consulting on the future regulation of consumer credit and will announce our response to the consultation proposals shortly. One of the challenges we face is the disjointed regulation of consumer financial services. Credit, in the situation she raises, is regulated by the Office of Fair Trading, and other aspects of financial services are currently regulated by the Financial Services Authority and, in future, the Financial Conduct Authority. Whatever body is the regulator, we need to see better outcomes for our consumers, which will help to restore the trust in regulation that we all recognise is so vital.
Stella Creasy (Walthamstow) (Lab/Co-op)
Further to that point about the powers of the Financial Conduct Authority, will the Minister clarify whether it will have oversight of the consumer credit market, particularly the high-cost credit market, which is a source of concern for many Opposition Members? Perhaps he will take the opportunity to confirm whether the FCA’s powers of intervention could include capping the total cost that lenders can charge for lending where it is detrimental to consumers so that we can deal with the toxicity of the legal loan shark market.
Mr Hoban
The hon. Lady will have an opportunity later this afternoon to quiz me on this in more detail as we are meeting to discuss it. She will recognise that credit, particular the high-cost credit to which she refers, is currently regulated by the OFT, not the FSA. We will announce shortly our response to the consultation on who should regulate consumer credit in future.
Joseph Johnson (Orpington) (Con)
Many of my constituents depend on the existence of a thriving financial services industry in London. They are hard-working, responsible and diligent employees and not at all deserving of the opprobrium that is often heaped on people who work in the sector. Like Professor Willem Buiter of the London School of Economics, they are very much of the view that the financial crisis damaged London’s prestige and international standing much more than it did other leading financial centres around the world. Does the Minister share that view?
Mr Hoban
The financial crisis clearly had an impact on London’s standing as a global financial centre, but my hon. Friend will be pleased to note than in the most recent survey of global financial centres London still came top. That is a recognition of London’s continued strength. It is important to ensure that we have a well-regulated and well-functioning financial services sector that can not only meet domestic demand, but serve the interests of an array of international companies. I believe that the package we have announced today, coupled with further regulatory changes being made in the European Union and internationally, will help to ensure London’s continued pre-eminence as a centre for financial services.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
Before the general election, the Chancellor and the Business Secretary were involved in a verbal fistfight about who was going to be toughest on the banks, so it is not surprising that neither is here today to make this business-as-usual statement. If the previous Government were charged with light-touch regulation, are not this Government guilty of light-touch reform?
Mr Hoban
The reforms we have set out are proportionate, and the recognition of the need to strengthen the banking sector through structural reform is a significant move. We, unlike many other economies, were exposed to a financial sector challenge of some scale, and it is right to respond to that. We have ensured a proper debate about those issues, which the Independent Commission on Banking has led, and the reforms announced in its interim report have been widely welcomed. That gets the balance right. It is not about being tough or about being light touch; it is about getting things right.
Steve Baker (Wycombe) (Con)
Do the Government agree that the best form of regulation is exit from the market? Does the Financial Secretary agree with me and my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) that there should be a primary duty on the regulator to promote competition?
Mr Hoban
My hon. Friend makes an important point about exit. One area on which we are all working, not just in the UK but elsewhere, is to ensure that, when an institution fails, the matter can be resolved and that the resolution can take place without an impact on the taxpayer. That will help with competition and to tackle the broader issues, whereby taxpayers have to stand behind banks. We need to get that right.
On competition, we need to recognise that the role of regulation in financial services is quite broad. Some of it is about promoting competition, and some of it is about consumer protection when there are asymmetries of information. In the blueprint that we have published today, we see an acknowledgement of the role that competition will play, and that is why we have given the Financial Conduct Authority a primary duty to use competition in pursuit of its regulatory objectives. That gets the balance right between the different roles that the FCA has to play.
Keith Vaz (Leicester East) (Lab)
In three weeks’ time, 5 July marks the 20th anniversary of the closure of the Bank of Credit and Commerce International. The Minister on that day 20 years ago was a young accountant working for Price Waterhouse, the much-criticised auditors of BCCI. For 20 years, the bank has been in liquidation and for 20 years we have been asking for the publication of the confidential parts of the Bingham report, which, as the Financial Secretary will know, was the basis on which we had the system of regulation that he has just changed. Is he absolutely certain that the best way of dealing with these matters is to hand them back to the Bank of England? If he is, will he please do what the previous Government failed to do and ask the Chancellor to publish the confidential parts of the Bingham report?
Mr Hoban
I hear the right hon. Gentleman’s request, and his right hon. Friend the Member for Edinburgh South West (Mr Darling) has made a similar request, to which he did not seem to accede when he was Chancellor of the Exchequer. The new regulatory regime does learn the lessons of the past, and the supervisory style and confused mandate of the FSA mean that we need to change.
The lesson that we have learned from the financial crisis is that, importantly, the Bank of England’s expertise in market surveillance and in understanding macro-prudential trends can best work with the needs of a micro-prudential supervisor by ensuring that that micro-prudential supervisor is an independent subsidiary of the Bank. And, just so the right hon. Member for Leicester East (Keith Vaz) does not get the wrong impression, I did not work on the audit of BCCI.
Mark Garnier (Wyre Forest) (Con)
My hon. Friend will know that the financial services industry in this country employs some 1 million people and generates £50 billion a year in tax revenues. Will he assure me that these proposals strike the right balance between protecting the consumer, whom the Financial Services Authority failed so much, and maintaining our leading position in the global financial marketplace?
Mr Hoban
My hon. Friend is absolutely right to highlight the numbers of people employed in financial services not just here in London, or in Edinburgh and Glasgow, which are well-known financial services centres, but throughout the country. We need to ensure that the industry continues to be a strong contributor to employment, to economic growth and to tax revenues, and to ensure a balance so that it does not pose an excessive risk to the strength of the UK economy. The measures that we have put forward today strike the right balance between encouraging the industry to continue to be a wealth and employment creator and ensuring that the right protections are in place for consumers, so that they buy the products that those companies sell. Those companies will not thrive unless there is consumer appetite for buying pensions, for investing in their futures, for taking out deposit accounts and for buying life insurance policies. We need to get that balance right between consumer interest and business interest, but businesses will be best served if consumers feel happy about buying products from them.
Toby Perkins (Chesterfield) (Lab)
The Minister rightly says that a key part of the recovery of the banking sector’s reputation is an increase in the public’s confidence in the system, and he is putting a lot of power and confidence in the role of the Bank of England. What specific new powers will the Bank have to enable more public confidence in a safer banking system in future?
Mr Hoban
The Bank of England and the FSA published a couple of weeks ago a document setting out the new regulatory approach that the PRA will set. They were clear that, rather than waiting for a bubble to burst and for problems to emerge, they will intervene earlier to force firms to take action to correct problems, and that shift in style—from waiting for a problem to happen to trying to pre-empt its creation—is absolutely vital. We are reliant on the judgment and the discretion of the regulators in following through that new regulatory approach, but rather than waiting until it is all too late, as happened in so many different examples over the past 10 years, giving the regulator the power to intervene early will have a significant benefit on outcomes for our constituents.
Mr David Nuttall (Bury North) (Con)
I welcome the Minister’s statement. Does he agree that the best way to protect consumers is to have a fully functioning and competitive free market, and that the best way for the free market to work efficiently is, ultimately, for all companies, including banks, to be allowed to fail?
Mr Hoban
My hon. Friend makes an important point, which goes back to the point that my hon. Friend the Member for Wycombe (Steve Baker) made about exit from the financial system. That is why it is important that resolution tools are in place to enable firms to be wound up in an orderly fashion, rather than being reliant on taxpayers’ money to keep them going.
Katy Clark (North Ayrshire and Arran) (Lab)
The Minister is well aware that savers are getting a very low interest rate, while for those who try to borrow there are high interest rates and unattractive terms—not just for individuals but for businesses. That must be stifling the economic recovery. The banks are not meeting Project Merlin’s targets, so should not the Government use regulation and their ownership of banks to address those issues?
Mr Hoban
The hon. Lady is absolutely right to say that it is important that banks lend to businesses. If the economy is to continue to recover and to pick up momentum, banks need to be able to lend. That is why we introduced the lending commitments under Project Merlin, and we will monitor them very carefully. We have said that we will not be afraid to use any tools at our disposal if those targets are not met.
Paul Uppal (Wolverhampton South West) (Con)
Continuing the theme of competition, and being mindful that the Vickers report will be published in September, will the Minister assure the House or provide guidance on how any future framework will provide genuine competition? In the US, in particular, banks fail without adverse publicity or at any cost to the public purse because there is a larger proliferation of smaller banks, and that would swim against the tide of mega-super-banks, on which we have been over-reliant.
Mr Hoban
My hon. Friend makes an important point about diversity in the financial system. One of the points that the Governor of the Bank of England made in his Mansion House speech last night was about the need to reduce the barriers of entry to the banking system in order to encourage more competitors to come forward. That is an excellent way in which we can promote choice and competition and get a better outcome for consumers, whether individuals or businesses.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I, like many hon. Friends, believe the Government’s decision to proceed so quickly with a sale process for Northern Rock shows that they are willing to miss a golden opportunity to learn the lessons of the financial crisis and diversify the UK banking sector. On remutualisation, will the Minister undertake to release all the advice he has received, information on all the meetings he has been to and all the rest of the paperwork, so that we can decide—Co-operative MPs such as myself, and other Members—whether remutualisation has been taken as seriously as it should have been?
Mr Hoban
The hon. Gentleman makes an important point. I reiterate what I said before. Yes, Northern Rock has been put up for sale. The purchaser could be a proprietary company or another mutual. An acquisition by another mutual could actually help strengthen the mutual sector. I have made it clear that as the sale process proceeds, we will compare the outcome with either an initial public offering or a stand-alone remutualisation. The challenge that those supporting a stand-alone remutualisation need to address is how we ensure that the taxpayer gets value for money from that.
Nigel Mills (Amber Valley) (Con)
Although I warmly welcome the long-term direction that the Government are taking, may I press the Minister a little further on the short-term problem of the regulators’ demands for banks to improve their balance sheets? That is leading to deleveraging, which is starving businesses of the funds that they need to provide the growth that we need. Is there any way in which we can force—or encourage, at least—the regulator to go against the cycle and, when times are tough, to be a little more relaxed and allow banks to lend more in these difficult situations?
Mr Hoban
My hon. Friend makes an important point. The Chancellor was very clear last night. Yes, we do want the banks to deleverage, but one way of doing that is to reduce their exposure to other banks and to the financial sector. That will give them the capacity within their capital, as they build up their capital levels, to continue to lend to small and medium-sized enterprises and larger corporates. That is one of the reasons why we set out to establish a commitment from the banks to lend up to £190 billion this year to businesses of all sizes, including £76 billion to SMEs. I think we have the right approach. We want a stronger, more sustainable banking system but we need one that will lend to small and larger businesses. Project Merlin helps us to achieve the right balance. We need the banks to deliver on that commitment.
Thomas Docherty (Dunfermline and West Fife) (Lab)
Does the Minister now regret having voted against the saving of Northern Rock?
Mr Hoban
The challenge is to make sure that we tackle the legacy that we have been left and that we get the banking system back on a firm footing. What we have announced today is a process in which the Government will cease to be a long-term investor in the banking system. We would all agree that that is the right approach.
Angie Bray (Ealing Central and Acton) (Con)
I welcome the reforms, particularly the separation of investment banking from retail banking. However, do we not still have the problem that some of our banks are literally too big to fail?
Mr Hoban
The package of proposals that the Independent Commission on Banking is developing is aimed at tackling that. It is one of the reasons why it proposed a retail ring-fence and increased capital so that the ring-fenced retail business will continue to be strong. But we need to make sure that we have the right resolution tools in place in the event of a bank failure. I commend the previous Government for their introduction of the special resolution regime, to which I referred in my statement in the context of Southsea Mortgage and Investment Company Ltd. We need to continue to work on tools that will help us resolve a bank failure without the taxpayer having to pick up the bill. That is the position that we ought to be in.
Mr Philip Hollobone (Kettering) (Con)
My constituents in Kettering want to know that the household savings that they have deposited in their local high street bank are safe from financial speculation and that never again will large banking groups imperil the UK economy through unsustainable banking practices. How far does the Minister’s statement today go to reassure my constituents?
Mr Hoban
My statement today has demonstrated the action that we have taken over the past year to create a more stable and sustainable banking system. That should give comfort to my hon. Friend’s constituents in respect of the safety of their savings. Savers and depositors should be mindful of the limits on deposits imposed through the financial services compensation scheme, but the range of interventions that we are making, through this statement and further reforms, will ensure that we have a safer, more sustainable banking sector in the future—one that does not impose a burden on the taxpayer, but makes sure that it continues to meet the needs of businesses and households across this country.
Harriett Baldwin (West Worcestershire) (Con)
Does the Financial Secretary share my astonishment at the selective recollection of historical facts by Opposition Members? The run on Northern Rock started well over a year before the global financial crisis, and it was the first run on a bank in this country for more than 100 years. In rebuilding the stability of the financial system, will the Financial Secretary repeat for my constituents the reassurance that their deposits up to £85,000 are now effectively guaranteed by the Financial Services Compensation Scheme?
Mr Hoban
My hon. Friend makes two important points. The first is to recognise the role played by the Financial Services Compensation Scheme in protecting depositors up to that £85,000 limit. The other point is that there is collective amnesia among the Opposition about their role in the financial crisis. Yes, Northern Rock took place before the global financial crisis—and they were the champions of light-touch financial regulation and introduced the tripartite system of regulatory reform that was shown to fail during the crisis. The Opposition need to recognise their responsibility; until they do so, it will not be possible for them to move on.
Andrew Bridgen (North West Leicestershire) (Con)
Does my hon. Friend agree with the recent report from the other place saying that the tripartite authorities
“failed to maintain financial stability and were found wanting in dealing with the crisis, in part because the roles of the three parties were not well enough defined and it was not clear who was in charge”?
Mr Hoban
My hon. Friend makes an absolutely vital point. The failure of the financial regulatory system put in place by the Labour party when in government was hard-wired into the system. It was destined to fail because of the failure to identify a clear match between the people who had the power and those who had the responsibilities for managing financial stability. My hon. Friend is absolutely right. The previous system was destined to fail. We have learned the lessons from that crisis; I am not sure that the Labour party has.
Bob Blackman (Harrow East) (Con)
I welcome the statement and the announcements today. However, will my hon. Friend elucidate on the expected time frame for the setting up of the new regulatory bodies? There must be at least a risk that one or more bodies that are being abolished will take their eye off the ball while they are doing their work, and there will be a time frame before the new bodies are set up.
Mr Hoban
My hon. Friend makes an important point. We hope that the pre-legislative scrutiny of the Bill will start shortly. It is programmed to take 12 sitting weeks. We want to make sure that the legislation progresses through this House and the other place as quickly as possible and that it is properly scrutinised. We need to make sure that we do not make mistakes in haste that we repent of at leisure. It is also important to recognise that the FSA is starting to adopt the new style of supervision that we would like to see it exercise, and that should give us some comfort that the lessons have been learned and are now being put into practice.
Alun Cairns (Vale of Glamorgan) (Con)
I welcome my hon. Friend’s statement, which I am sure will go a long way towards reintroducing stability within the economy in general and the banking system. What reassurance can he give that the stability will apply to the banks as well as consumers, so that the banks can go on generating wealth? That will reduce the risk that banks’ headquarters will leave the UK to establish elsewhere.
Financial Services Authority (Annual Report)
Mark Hoban Excerpts(13 years, 5 months ago)
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The Financial Secretary to the Treasury (Mr Mark Hoban)
The annual report 2010-11 of the Financial Services Authority (FSA) has today been laid before Parliament.
The report forms a key part of the accountability mechanism for the Financial Services Authority under the Financial Services and Markets Act 2000 (FSMA), and assesses the performance of the Financial Services Authority over the past 12 months against its statutory objectives.
Money Laundering Regulations
Mark Hoban Excerpts(13 years, 5 months ago)
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The Financial Secretary to the Treasury (Mr Mark Hoban)
Today the Government are publishing their response to the review of the money laundering regulations, copies of which have been placed in the Libraries of both Houses. This includes proposals for consultation and a request for information on the costs and benefits of these proposals to inform robust analysis and ensure they will make the regulations more effective and proportionate. This follows a review by the Regulatory Policy Committee and approval from the Cabinet Reducing Regulation sub-Committee.
There has been an extensive period of engagement with industry, supervisors, law enforcement, business customers, private individuals and across Government. While I have concluded that the regulations and their implementation are broadly effective and proportionate in practice, more needs to be done.
Businesses are overly focused on process and I want to strengthen the risk-based approach provided for in the regulations, in order to ensure they are as effective as they can be in helping to prevent and detect money laundering and terrorist finance.
Through this response and the proposals for consultation it includes, I want to give businesses the confidence to adopt policies and procedures that reflect their own assessment of risk. To help achieve this, I am consulting on removing the criminal penalties in the regulations. Those responsible within businesses should not be applying the same requirements to all customers regardless of the level of risk they present because of a fear of prison if they get it wrong.
In addition to proposing changes to the regulations, my officials will be working to strengthen the risk-based approach in a number of other ways from the development of global standards by the financial action taskforce to working with the supervisors and providing further support for industry guidance in the UK.
The consultation closes on 30 August, after which changes to the regulations will be finalised and proposed with a view to them taking effect during 2012.
Schedule 7 to Counter-Terrorism Act 2008 (Annual Report to Parliament)
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The Financial Secretary to the Treasury (Mr Mark Hoban)
This report sets out details of the Treasury’s exercise during the calendar year 2010 of their functions under schedule 7 to the Counter-Terrorism Act 2008. Paragraph 38 of schedule 7 requires the Treasury to report to Parliament after each calendar year in which a direction under the powers is at any time in force.
The schedule 7 powers
Schedule 7 provides HM Treasury with powers to implement a graduated range of financial restrictions in response to certain risks to the UK’s national interests. The risks it addresses are those posed by money laundering, terrorist financing, and the proliferation of chemical, biological, radiological and nuclear weapons.
Direction given under the powers in schedule 7
The Iran (Financial Restrictions) Order 2009 (“the Order”) came into force on 12 October 2009. The order contained a direction by HM Treasury requiring persons operating in the financial sector to cease business relationships and transactions with Bank Mellat and Islamic Republic of Iran Shipping Lines (“IRISL”).
The direction was given on the basis that activity in Iran that facilitates the development or production of nuclear weapons poses a significant risk to the national interests of the UK. Bank Mellat had provided banking services to a UN proscribed organisation connected to Iran’s proliferation sensitive activities, and been involved in transactions related to financing Iran’s nuclear and ballistic missile programmes. Vessels of IRISL have transported goods for both Iran’s ballistic missile and nuclear programmes.
The order was approved by the House of Commons on 28 October 2009 and by the House of Lords on 2 November 2009.
The direction was in force for a period of 12 months from the day on which the order was made, and expired on 9 October 2010, in accordance with paragraph 16 of schedule 7. A further direction was not given on its expiry because the European Council, in Decision 2010/413/CFSP of 26 July 2010 (“the Council Decision”) had imposed restrictive measures against Iran, including designating both Bank Mellat and IRISL (among other entities) for an asset-freeze.
The asset-freezing provisions of the Council decision were implemented by Council Implementing Regulation (EU) No 668/2010 on 26 July 2010. The effect of the designation is that all funds and economic resources owned or controlled by Bank Mellat or IRISL in the EU were frozen with immediate effect, and it is prohibited to make funds or economic resources available to either entity. On 27 October 2010 Council Regulation (EU) 961/2010 came into force, implementing the additional financial restrictions contained in the Council decision, including a ban on providing insurance to Iranian persons.
Bank Mellat challenged the order in November 2009. The order was upheld by the High Court on 11 June 2010. Bank Mellat appealed to the Court of Appeal, which dismissed the appeal on 13 January 2011. Bank Mellat have been granted permission to appeal to the Supreme Court.
IRISL also challenged the order in early 2010. In March 2011 IRISL withdrew their challenge (which had been stayed pending the outcome of proceedings in the Commercial Court).
Licensing
Under paragraph 17 of schedule 7, the Treasury can exempt acts specified in a licence from the requirements of a direction requiring the cessation or limiting of transactions or business relations.
In operating the licensing regime in respect of the order, the Treasury’s aim was to minimise the impact of the restrictions upon innocent third parties, without compromising the objective of the direction. Licences were considered on a case-by-case basis.
The Treasury issued three general licences:
General licence 1 concerned the holding of accounts and funds of designated persons;
General licence 2 concerned payments to designated persons due under prior contracts; and
General licence 3 provided a seven-day grace period for the provision of insurance to designated persons, after which the prohibitions would apply.
Applications were made to the Treasury on a case-by-case basis for Acts not covered by any of the general licences. Between 12 October 2009 and 9 October 2010, 135 licence applications were received. Of these, 101 licences were granted and five applications were refused. The other 29 applications were either duplicate applications or for acts that did not require a licence.
Eurozone Financial Assistance
Mark Hoban Excerpts(13 years, 6 months ago)
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The Financial Secretary to the Treasury (Mr Mark Hoban)
I congratulate my hon. Friend the Member for Rochester and Strood (Mark Reckless) on securing the debate. I will start by setting out our view, which is that responsibility for sorting out the problems of the euro area ultimately rests with euro area Governments. We are not members of the euro area, so it is not our responsibility to deal with all its problems. However, no one should be under any misapprehension about the importance of the euro area to the UK economy.
A strong euro area means a growing market for our goods and services. A weak euro area puts at risk jobs and businesses in our constituencies, as my hon. Friends the Members for Orpington (Joseph Johnson) and for Bristol West (Stephen Williams) noted in their contributions. More than 40% of UK exports are to the euro area, and we know, as has been repeated ad nauseam, that we export more goods and services to Ireland than we send to Brazil, Russia, India and China combined. We have a clear interest in ensuring that the problems in the euro area are resolved and that the right mechanisms are in place to do so, but it is not our responsibility to sort them out and it is right, as the amendment makes clear, for us to find a permanent solution that does not require us to contribute to this.
Mr Hoban
If my right hon. Friend will be patient with me, I want to respond to some of the important points raised by a number of Members who have contributed to the debate. If I have time at the end, I will take interventions.
My hon. Friend the Member for Rochester and Strood said that taxpayers had contributed £12.5 billion to bail out euro area states, but that is simply not the case. Let me explain why. The European financial stability mechanism is funded by the European Commission borrowing from capital markets, and it is only in the event that a beneficiary member state defaults that the EU budget, and so the UK, will be called upon to contribute. The UK does not fund the EFSM, which is a contingent liability. Not a single pound of taxpayers’ money has gone into the EFSM. On Ireland, as my hon. Friend the Member for Devizes (Claire Perry) has said, we have made a loan, not a gift or a grant, and we expect to get our money back. Not a penny of the money that we have saved through spending cuts has been used to make that loan.
Let me go back to the events of a year ago. Europe faced a crisis, with concerns about the stability of Greece, and in the May ECOFIN meeting the EFSM and the EFSF were created. They were created at the height of the Greek crisis, in exceptionally turbulent conditions, before the Government took office. Markets were increasingly questioning the EU’s response to the situation. Indeed, there were fears about the stability of the entire euro area and the risk of contagion was real and dangerous. European Finance Ministers decided to create a broader package to restore confidence and stability. ECOFIN agreed to establish the EFSM and at the same time euro area Finance Ministers agreed to create the much bigger EFSF, which is backed entirely by euro area countries and does not create any liability for the UK.
It is worth reminding hon. Members that, although the Greek crisis triggered the creation of the new mechanism, the EFSM was not used by Greece. The Greek rescue package was financed by the IMF and a series of bilateral loans between individual euro area member states and the Greek Government.
The EFSM was agreed at ECOFIN by qualified majority voting and before this Government took office, and Cabinet Office protocol was followed throughout. At the time, in a conversation with his predecessor, the current Chancellor made his views on the EFSM clear and cautioned against committing the UK to proposals that would have a lasting effect on the UK’s public finances. Members need not take my words for it; the right hon. Member for Edinburgh South West (Mr Darling) gave his recollection of the conversation to the House on 15 December 2010:
“I discussed with the Chancellor what we should do about the financial stability mechanism. He had his reservations and stated very clearly that he was against deploying it”.—[Official Report, 15 December 2010; Vol. 520, c. 954.]
That exactly matches the account given by my right hon. Friend the Chancellor.
Mr Hoban
No. As I said earlier, I want to make some progress on the matter.
My right hon. Friend was also clear that, in the days prior to the formation of the coalition, the right hon. Member for Edinburgh South West was still the Chancellor of the Exchequer, representing the UK in a dynamic negotiating environment, and it was for him to reach that decision.
The hon. Member for Nottingham East (Chris Leslie) quoted an extract from an explanatory memorandum, and yes there was consensus between the parties about the process, but not about the outcome—as the former Chancellor of the Exchequer made clear in his statement to the House in December. It was a matter for the previous Chancellor to decide, and he was the man occupying the office at the time.
Some of my hon. Friends have today articulated concerns about the use of article 122. The EFSM was created following agreement by a qualified majority of member states at the ECOFIN meeting on 9 May 2010, and the terms of the mechanism are set out in an EU Council regulation. It is based on article 122 and states:
“Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional circumstances beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned.”
The Council decided that in those circumstances those criteria applied.
Several hon. Members have raised the issue of article 125 of the treaty, the so-called “no bail-out” clause, but article 125 does not preclude member states from providing loans to one another, and, as evidence of that, the EU’s balance of payments facility has already provided medium-term financial assistance to a number of member states.
Over the past year, we have had to deal with the legacy that we inherited from the previous Government and the previous Chancellor of the Exchequer, but we have made sure that the permanent arrangements to sort out the euro area are the ultimate responsibility of euro area member states.
My right hon. Friend the Prime Minister made that his goal at last December’s European Council, where he secured two significant victories for the UK. First, he made sure that article 122 could not be used for euro area bail-outs in the future. Secondly, he ensured that the UK would not have to contribute to the European stabilisation mechanism, the permanent mechanism that will replace the EFSM and the EFSF. As the Prime Minister said, we have a good “belt and braces” approach—a no need, no use approach.
Mr Hoban
If my hon. Friend allows me to continue for a few minutes longer, I may be able to take some interventions.
We ensured that the recitals—the preamble—to the decision by Heads of State and of Government at the March European Council stated that article 122
“will no longer be needed”
and “should not be used” to ensure financial stability for the whole euro area once the permanent mechanism is in place.
In shaping the debate about the ESM, we had clear priorities. First, we had to ensure that there was no transfer of powers from the UK to the EU. We would never have accepted such a transfer, so the treaty change applies only to euro area member states, and only euro area member countries have to contribute to the rescue of other euro area countries. There is no transfer of power, competence or, indeed, funds from the UK to Brussels under that treaty change, but that judgment will not be for Ministers alone.
Mr Hoban
I have two minutes left to conclude my remarks and to respond to the very detailed questions that hon. Members on both sides have raised, so I should like to continue to do that.
The treaty change was agreed at the Council in March and will have to be ratified according to the process set out in the European Union Bill. Ministers will need to make a statement explaining why the treaty change does not transfer power or competence from the UK to Brussels, and Parliament will need to pass primary legislation before the UK can ratify that change.
Mr Hoban
My hon. Friend and his Committee have a particular view on the legality of the arrangements, but as I have said there was a clear view that article 122 could be used in those circumstances.
Although we have had to live with the decisions of the past and the EFSM, we have fought to free our nation from the constraints of those decisions in the future. We will not have to contribute towards a European rescue of another euro area member state once the permanent ESM comes into force.
I believe that the amendment tabled by my hon. Friend the Member for Daventry (Chris Heaton-Harris) captures the essence of our position. As a consequence of the action taken by the previous Government, we are part of the EFSM. This Government have had to ensure that we are outside the scope of the permanent mechanism. My right hon. Friend the Prime Minister has already delivered that commitment at the European Council in December. I hope that my hon. Friends recognise that the action we have taken has freed the UK from the obligation to take part in future bail-outs of euro area member states.
Consumer Insurance (Disclosure and Representations) Bill
Mark Hoban Excerpts(13 years, 6 months ago)
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The Financial Secretary to the Treasury (Mr Mark Hoban)
I am pleased to announce that having considered the response to the Treasury’s targeted consultation on the Consumer Insurance (Disclosure and Representations) Bill, the Government have decided to take forward the proposed reforms, when parliamentary time permits.
These reforms are based on the recommendations made by the Law Commission and the Scottish Law Commission in their 2009 report “Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation” (Law Com 319/Scot Law Com 219).
The Bill will replace the requirement for consumers to volunteer information about everything which a “prudent insurer” would consider relevant with the requirement that insurers ask particular questions to obtain specific information about the customer. The current law and regulations on information disclosure are complex, and this Bill will provide protection for consumers and reduce costs for industry.
The Bill is the result of lengthy consultation and has broad-based support from industry and consumer groups. The Bill will be subject to minor modifications to meet concerns raised during the consultation.
A summary of the responses to the consultation, and the Government’s response, has been placed in the Libraries of both Houses.
Equitable Life Scheme Design Document
Mark Hoban Excerpts(13 years, 6 months ago)
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The Financial Secretary to the Treasury (Mr Mark Hoban)
The Treasury has today published the Equitable Life payment scheme design document.
The publication of the design document is a key step towards delivering the Government’s pledge of May 2010 to
“implement the parliamentary and health service ombudsman’s recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure”.
The document sets out the detail of the scheme design, including:
the scheme rules;
the scheme administration and timetable;
the methodology behind loss and payment calculations;
the scheme’s approach to making payments;
the details of the queries and complaints procedure; and
the plans for communicating with policyholders.
Fairness, transparency and simplicity have been the guiding principles behind the Government’s approach to designing the scheme. The final design reflects these principles, as well as the actuarial analysis carried out by Towers Watson, the evidence and arguments received in response to the Government’s call for representations following the publication of Sir John Chadwick’s advice, and the recommendations of the Independent Commission on Equitable Life payments.
The scheme also reflects previous announcements that with-profits annuity policyholders will have their losses covered in full, and that scheme payments will be free of tax and will not affect eligibility for tax credits.
The Government have previously stated their ambition to make the first scheme payments by the middle of this year. They remain on track to do so, with plans to make the first payments before the end of June. Policyholders will not need to do anything to claim their payments—the scheme has policyholders’ details from Equitable Life and the Prudential and will contact policyholders in the first instance.
Copies of the paper are being placed in the Libraries of both Houses and are available via the Treasury website.
Oral Answers to Questions
Mark Hoban Excerpts(13 years, 6 months ago)
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Tessa Munt (Wells) (LD)
2. What recent assessment he has made of trends in levels of bank lending to small businesses.
The Financial Secretary to the Treasury (Mr Mark Hoban)
Repayment of debt by small businesses is running ahead of lending to the same sector. As a consequence, net lending fell in the first quarter of this year. However, the availability of credit to business in the same period increased.
Tessa Munt
I would like to draw attention to the situation affecting my constituent George Archer, a business man who has had a £5,000 overdraft that was unused for three years, with the exception of four days when he requested a £20,000 extension. The bank—which is one of the big four—offered him £25,000 on rates that he initially refused, before beating it down to acceptable rates. On paper, that bank has increased its lending to a small or medium-sized business by £20,000, but I wonder what the Minister can do to halt this duplicity and ensure that loans are real, active, needed and utilised.
Mr Hoban
I cannot comment on the particular circumstances that my hon. Friend has raised, although I am happy to look at them more carefully. I am sure that she would welcome, as does the whole House, the commitment of banks to increase their capacity to lend to businesses of all sizes.
Chris Leslie (Nottingham East) (Lab/Co-op)
I wonder whether the Minister still thinks that Project Merlin was such a great deal with the big banks. Lending to small businesses continues to fall, while the charges for those loans are rising. The banks’ promise to support the big society bank looks less generous, as we learn that money will be lent only on commercial terms, and now we hear that Santander is pulling out of the business growth fund, which was a key plank of the deal. Is this a failure of Project Merlin or a failure of the Government?
Mr Hoban
It is rather churlish of the hon. Gentleman to be critical of Project Merlin. When his party was in office it was able to secure lending commitments from only two banks. We have achieved a comprehensive package with all banks, including Santander, to increase the amount of money that they will lend to businesses, including small businesses. The business growth fund, which he also raised, is an opportunity for businesses to seek equity finance in a way that is currently not available and that meets the equity gap, which the previous Government did little to resolve.
Esther McVey (Wirral West) (Con)
3. What fiscal measures he is taking to reduce the costs faced by businesses.
Harriett Baldwin (West Worcestershire) (Con)
7. What steps he is taking to ensure that the Financial Services Authority exempts from new domestic regulation businesses employing fewer than 10 people and new businesses for the next three years.
The Financial Secretary to the Treasury (Mr Mark Hoban)
Where the Government are granting new powers to the Financial Services Authority through primary and secondary legislation, we will seek to apply the moratorium. The FSA is, however, an independent regulator with powers to make rules under the Financial Services and Markets Act 2000. The Government’s policy on exempting micro-businesses and start-ups from new regulation will therefore not apply automatically to rules made by the FSA.
Harriett Baldwin
In his testimony to the Treasury Committee, the chief executive of the FSA said that up to 10,000 jobs—in many cases, those of small independent financial advisers—could be lost as a result of the retail distribution review. Will the Financial Secretary meet the chief executive of the FSA as a matter of urgency to discuss ways in which the impact could be mitigated?
Mr Hoban
I know that my hon. Friend has campaigned tenaciously for IFAs. I remind her that although the FSA is an independent regulator—this addresses her question directly—it has an obligation to assess the impact of its rules on businesses, including small businesses, and to make its rules proportionate. I should add that it is not planning any initiatives by means of its powers under the Financial Services and Markets Act apart from those that are already under way.
Jim Shannon (Strangford) (DUP)
I thank the Minister for his response. Clearly, if the economy is to be regenerated and rebuilt, it will be small and medium-sized businesses that will achieve that, and one of the things they tell me as their elected representative is that they need rates relief and assistance. What assistance is the Minister considering giving to such businesses?
Mr Hoban
As the hon. Gentleman will be aware, this Government have taken many actions to provide support to small companies. For example, we have cut the small profits rate of corporation tax—which the previous Government sought to increase. We have done a lot to encourage the growth of small businesses, and we will continue to look at what further measures we might take to encourage their future prosperity.
Mr Marcus Jones (Nuneaton) (Con)
9. What fiscal measures he is taking to support first-time home buyers.
The Financial Secretary to the Treasury (Mr Mark Hoban)
Until and including 24 March 2012, first-time buyers can apply for relief from stamp duty land tax on properties of up to £250,000. The Government are currently reviewing this relief, and will announce the outcome of the review in the autumn. The Government are also investing £250 million in 2011 to assist more than 10,000 first-time buyers to purchase a new-build home of their own through the FirstBuy Direct scheme. That scheme is being co-funded by developers.
Mr Jones
I thank the Minister for his response. First-time buyers are the lifeblood of the residential property market, and while I congratulate the Chancellor and his team on the deposit scheme announced in the Budget to assist first-time buyers to purchase new-build property, will the Treasury team consider apportioning part of that funding to assist first-time buyers who want to purchase second-hand property, in order to give the property market the vital shot in the arm that it needs?
Mr Hoban
My hon. Friend makes an important point, but it is crucial that we target help where it will deliver the greatest economic benefit. By targeting assistance on first-time buyers purchasing new-build property, the FirstBuy scheme helps to unlock stalled developments and stimulate additional house building, with a further 10,000 homes being built for open market sale, supporting 42,000 jobs directly and a further 24,000 jobs indirectly for a year. If we were to pursue the route my hon. Friend suggests, we would potentially lose the benefit of the financing that comes from home builders.
Kate Green (Stretford and Urmston) (Lab)
Is the Minister concerned that the proposed savings cap in the universal credit will make it more difficult for first-time buyers to save for the much higher levels of deposit that lenders increasingly require?
Mr Hoban
Everyone in the House will understand the challenges that face many first-time buyers in trying to save up for a deposit. That is why we announced this scheme at the time of the Budget, which has been widely welcomed. We should also recognise that a number of lenders are now reducing the loan-to-value ratio, to enable more first-time buyers to get on to the housing ladder with a smaller deposit.
Sheryll Murray (South East Cornwall) (Con)
10. What steps he is taking to support investment in the regions.
The Financial Secretary to the Treasury (Mr Mark Hoban)
The hon. Gentleman is right to highlight the mis-selling of PPI. This happened under the regulatory regime that his colleagues set up when they were in government. One aspect of the reforms that we are introducing by setting up the financial conduct authority is to give the regulator more powers to intervene earlier to prevent that sort of scandal happening again.
Duncan Hames (Chippenham) (LD)
Given the Chancellor’s concern for the use of taxpayers’ money, will he really allow members of GP consortia boards to be paid as much as £30,000 a year for just one day’s work a week?
Equitable Life
Mark Hoban Excerpts(13 years, 6 months ago)
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The Financial Secretary to the Treasury (Mr Mark Hoban)
I congratulate the hon. Member for Central Ayrshire (Mr Donohoe) on securing this debate. It is the first time for some time that we have had the opportunity to discuss Equitable Life, and I am grateful for the opportunity to update Members on the progress that we have made on resolving the issue.
The hon. Gentleman was right to highlight that some time has elapsed since these problems first arose. A number of reports that established that maladministration had taken place had been published, but the previous Government failed to act on them. When the ombudsman published her report in July 2008, we immediately accepted her recommendations and her findings of maladministration. We were clear that compensation should be paid for relative loss, but we also accepted the second leg of that recommendation, which was that it had to be subject to the constraints of the public purse. We have been clear throughout. If the hon. Gentleman looks at the speeches that I have made in this Chamber and in the main Chamber on Opposition day motions, he will see that we have been explicit about the two legs of the ombudsman’s recommendations. As my hon. Friend the Member for Tiverton and Honiton (Neil Parish) has said, if the issue had been resolved earlier, perhaps policyholders would have been in a better position than they are now.
I remind the hon. Member for Central Ayrshire that, while we accepted the ombudsman’s findings on the day on which they were published, Labour Ministers waited until the January of the following year before accepting only some of her recommendations, and they were challenged on that in court.
The hon. Gentleman asked when we are going to make payments and claimed that there had been a series of delays. However, I made it clear in the House last July, when I made an oral statement on the day on which we published Sir John Chadwick’s work, that we would start to make payments before the end of the middle of this year—that is, before the end of next month—and it remains our intention to do so. I am not sure where these mythical delays have emerged from, because over the course of the past nine months it has been clear when we expected to start to make payments.
Mr Donohoe
Will the Minister be specific and say what the payments will be and when they will start to be made?
Mr Hoban
As I have said, we will start to make payments before the end of next month. I will address the structure of the payments and the next formal step in the process later in my speech.
We have been clear from the date on which the coalition was formed that we want to end the plight of policyholders. Indeed, one of our first pledges—it is in our coalition agreement—was to implement the ombudsman’s recommendation to make fair and transparent payments to Equitable Life policyholders for their relative loss as a consequence of regulatory failure. We have kept that promise. In the year since we came into government, we have made significant progress towards achieving that ambition. Last July, we introduced the Equitable Life (Payments) Act 2010, which gave the Treasury the authority to incur expenditure when making the payments. I am grateful to both Government and Opposition Members for supporting the 2010 Act and for allowing it to receive Royal Assent to an accelerated timetable. That has enabled us to press forward with our preparations for making payments as soon as possible.
We published Sir John Chadwick’s advice on the financial losses sustained by policyholders, as well as the calculations of the actuaries, Towers Watson, of the relative loss figure. At that time, I invited all interested parties to make representations to the Treasury so that they could be considered as part of the preparations for the spending review. We considered the full range of those representations, including those from individual policyholders and lobby groups, such as the Equitable Members Action Group and Equitable Life Trapped Annuitants, and from Equitable Life itself. After final refinements of the calculations by Towers Watson, we quantified the relative loss at £4.1 billion. That is based on the Government’s full acceptance of the ombudsman’s findings of maladministration. That is more than 10 times the figure arrived at through Sir John Chadwick’s methodology, which was based on the previous Government’s limited acceptance of the ombudsman’s findings. In last October’s spending review, we announced that approximately £1.5 billion would be made available for payments to policyholders through the scheme. That is perhaps not as much as we would have liked but, as the ombudsman herself has acknowledged, the impact of the scheme on the public purse has to be taken into account.
It is also important to note that, even in the midst of last year’s understandably constrained spending review, we still found a way to cover the losses of the with-profits or trapped annuitants in full. That was achieved by paying their losses through annual payments that reflected the structure of their policy. Those policyholders were particularly vulnerable to their losses because they were unable to move their funds elsewhere or mitigate the impact of their losses through employment. They were also generally the oldest policyholders.
The hon. Member for Central Ayrshire raised his concerns about the exclusion of those with-profits annuitants who purchased their policy before September 1992 from the scheme. He is not the first to do so, but this is an important opportunity to restate what I have said in correspondence to a number of hon. Members and what I said in the Committee that considered the 2010 Act. In her report, the ombudsman recommended that the aim of the scheme should be
“to put those people who suffered a relative loss back into the position that they would have been in had maladministration not occurred”.
With-profits annuitants who bought their policies before September 1992 did so before maladministration could have affected their investment decision. The first returns that the ombudsman found were affected by maladministration were those of 1991, which would not have influenced policyholders’ decisions until September 1992. Once a with-profits annuitant had purchased their policy, they did not have the option to move it elsewhere. Therefore, the correct question is not what these policyholders would have received if they had invested in a different company or had transferred their policies at some date after September 1992, but how their Equitable Life policy would have performed if maladministration had not occurred. Calculations by Towers Watson show that, if there had been no maladministration, those policies would not have performed better than they actually did, so no loss has been suffered.
For pre-September 1992 with-profits annuitants, the reduction in the levels of annuity payments is largely due to a combination of circumstances, such as poor investment market performance and the fact that early annuity payments were artificially high due to the structure of the product and over-bonusing. I understand that this is a complex issue, and I have happily engaged in correspondence and discussions with hon. Members on it. However, I hope that my explanation about the situation facing with-profits annuitants clarifies our position.
I want to move on to the principles that have guided our decisions on Equitable Life. At all times we have sought to ensure that our choices have been both fair and transparent. In that vein, we set up an independent commission to advise on the distribution of funds to people with policies other than with-profits annuities. The commission reported in January and we accepted the principles it recommended: that we should introduce a pro rata allocation of funding in proportion to the size of relative losses suffered; that we will take a single policyholder view wherever that is fair and practicable to offset relative gains against relative losses for individuals with more than one policy; and that we should announce a minimum amount in the region of £10 beneath which payments should not be made. The reason behind that decision is that administering payments below that amount would be disproportionate to the administrative costs of making them in the first place. Subject to practical constraints, payments to the very oldest policyholders and the estates of deceased policyholders should be made an absolute priority. I want to make that clear to hon. Members today.
We are working on translating those principles into a quick and efficient payment scheme. That work is nearly complete and, as promised during the debates on the 2010 Act, I will be placing a scheme design document before Parliament imminently. In that document, hon. Members will find details on how the new payment scheme will work, including information on who will receive payments, how those payments will be calculated and how they will be made.
We have appointed National Savings and Investments as the scheme delivery partner to oversee that process. I am confident that its experience in processing large numbers of payments makes it the best choice for this important and complicated role. To reduce the complexity of the scheme, we announced in the spending review that payments will be both tax-free and should not affect eligibility for tax credits. That is both fair and sensible, and I know that hon. Members here today will welcome it. A statutory instrument introduced under the 2010 Act to put that into effect is currently before Parliament, and it will be debated shortly.
I want to make one final point to set policyholders’ minds at rest. Policyholders do not need to do anything to claim their payments. Those operating the scheme will contact them in the first instance. A website and call centre will be up and running for the duration of the scheme to guide policyholders and address any queries they may have.
Mr Donohoe
Will the Minister tell me for how long the scheme will be up and running and whether payments will be made over a three-year cycle?
Mr Hoban
The hon. Gentleman has raised an important point. We need to distinguish between two groups. The first is the eligible with-profits annuitants. Payments will be made to them over the lifetime of their policy. That has enabled us to extend the cost of this beyond the spending review and therefore to spend more on resolving the problem than would otherwise have been the case. Other policyholders who have suffered losses and are eligible for compensation will receive a single payment at some point over the next three years, with priority being given to the oldest policyholders and the estates of deceased policyholders. That is to ensure the cost of the scheme is manageable and that the scheme is deliverable in the period.
We have spent a lot of time making sure that the administration and delivery of the scheme works as effectively and as quickly as possible. However, I do not want to give any false promises to people. We said that we would start to make payments before the end of next month. It is a three-year scheme for people, apart from for those who are with-profits annuitants. For with-profits annuitants, payments will be made over their lifetimes, which is the right way to maximise the amount of money available to policyholders given the economic situation that we inherited.
I look forward to hon. Members’ comments on the scheme design document, which aims to be as simple and clear as possible both for policyholders and for those who take a more detailed interest in the technical details of the scheme design. The scheme holds out a prospect that policyholders will receive compensation, and it brings to an end a long-running saga that has not reflected well on how such issues are handled. Of course, as my hon. Friend the Member for Tiverton and Honiton has rightly said, we need to ensure that people have confidence to save for the future. That is why, as part of our reform of financial regulation, which focuses principally on the lessons to be learned from the financial crisis, we are introducing a dedicated financial conduct regulator—the Financial Conduct Authority—which will be responsible for all aspects of the regulation of financial conduct. That will help to strengthen consumer confidence in this area, and we hope will ensure that a problem on the scale of Equitable Life does not happen again.