Financial Services Bill

Mark Hoban Excerpts

Monday 6th February 2012 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

This has been a thoughtful debate. We have had 21 speeches, led by the Chairman of the Joint Committee, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), who was supported by his colleagues on the Committee, including my hon. Friends the Members for Bury St Edmunds (Mr Ruffley) and for Warrington South (David Mowat), the right hon. Member for Newcastle upon Tyne East (Mr Brown) and the hon. Member for Leeds East (Mr Mudie).

We have also heard from my hon. Friends the Members for St Austell and Newquay (Stephen Gilbert), for West Suffolk (Matthew Hancock), for Wyre Forest (Mark Garnier), for Cities of London and Westminster (Mark Field), for North East Cambridgeshire (Stephen Barclay), for Vale of Glamorgan (Alun Cairns), for Macclesfield (David Rutley), for Thurrock (Jackie Doyle-Price), for Wycombe (Steve Baker) and for North East Somerset (Jacob Rees-Mogg). There were some thoughtful speeches from Opposition Members, too, of which I would highlight those made by the hon. Members for Islwyn (Chris Evans) and for Foyle (Mark Durkan).

I shall deal with some of the issues that have been raised in the debate, and first with Europe, which hon. Members on both sides raised several times. It is absolutely right to ensure that, at a time when Europe is becoming increasingly important in determining the regulatory framework, we engage in the debate about Europe. We took on board the Joint Committee’s comments, and it is fair to say that the regulators and the Treasury already co-operate effectively on influencing the shape of European regulation, but it is also important that we get the regulation right to enable the FSA’s successor bodies to supervise firms based in the UK.

That is why, in the debate about capital requirements directive 4, for example, we seek to achieve a single rule book through high common minimum standards of capital, and to give the supervisors in the UK the flexibility to go further in imposing high levels of capital if they think it appropriate, given the structure and nature of banking in the UK. That will also enable them to introduce the reforms proposed by Sir John Vickers and his commission.

Several hon. Members raised the issue of the Financial Policy Committee, so let me explain why we have set it up. It is a fundamental part of the architecture, it ensures that there is a body tasked with identifying risk to financial stability and, crucially, it remedies a flaw in the architecture that the previous Government set up, giving it the power to tackle those risks.

Those powers are important. We talked about the macro-prudential tools that the FPC will have, but it will also be able to give advice on where the regulatory perimeter should be in order to tackle issues such as shadow banking. It is also worth pointing out, in response to a comment made two or three times this evening, that its objective is symmetrical: it is about financial stability and considering the impact of its decisions on the prospects for growth in the economy. That symmetry is absolutely important, and we have gone a long way to address the concerns that have been raised today.

As well as the FPC, we will also see a move to unite key parts of micro and macro-prudential supervision in the Bank of England, joining it to the Bank’s existing responsibilities for stability and monetary policy and removing a structural flaw that helped such disastrously unsustainable levels of risk to build up in the run-up to the financial crisis.

The reforms answer the question posed during that crisis: “Who is in charge?” There is currently confusion over who is in charge in a financial crisis, and that cannot continue. The Treasury Committee, the Joint Committee, the Governor and the previous Chancellor of the Exchequer all recognise that. The Government will end that confusion. The Bill makes it clear that as soon as there is a material risk to taxpayers’ money, the Chancellor will have targeted power to direct the Bank to take action. The responsibility for each part of that action is clear, whether it is with the PRA in triggering the use of the special resolution regime or with the Bank in the day-to-day responsibility for crisis management. As soon as there is a threat to public money, the Bank must notify the Chancellor of the Exchequer. That happens when there might be a risk. It does not prejudge what the decision should be. I think that that deals with the point that the shadow Chancellor raised early in his speech.

On consumer protection, the old regulatory structure not only failed to maintain financial stability, but let down consumers. As the FSA’s report into RBS made clear, the remit given to the FSA by the previous Government was too broad, covering both prudential and conduct-of-business regulations. Those require different cultures, experience and expertise. That is shown most acutely by the FSA’s failure to prevent the payment protection insurance mis-selling scandal. With prudential supervision at the Bank of England, we will have a regulator that is focused on conduct issues and driven by consumer protection, market integrity and promoting effective competition.

The FCA will be more proactive, transparent and accountable. It will have new powers to deliver better consumer outcomes, including the power to ban toxic products. It will promote effective competition so that consumers get a better deal. My hon. Friend the Member for North East Cambridgeshire talked about the risk appetite of the FCA. Let me make it clear that it will be much more likely to intervene to tackle consumer detriment than it has been in the past. That is an important advance that will protect consumers.

Across the House, there has been widespread concern about consumer credit. That matter has been debated this evening. The hon. Member for Walthamstow (Stella Creasy) took a narrow view about what one can do to protect consumers and focused on the total cost cap. Like my hon. Friends the Members for St Austell and Newquay and for Thurrock, I think that we need a broader range of powers to ensure that there is proper consumer protection for those who take out loans. There should be the same level of protection that people take for granted when they buy an insurance policy or take out a mortgage. The Bill gives us the power to transfer the regulation of consumer credit from the Office of Fair Trading to the FCA, giving a better deal for borrowers.

As my right hon. Friend the Member for Hitchin and Harpenden and others have said, our reforms are as much about the style of regulation as about the structure. They are about culture, focus and philosophy. A key failure of Labour’s regulatory system was its focus on tick-box regulation. The financial crisis demonstrated the inadequacies of that approach to bank regulation. That approach also helps to explain failures of conduct regulation, such as with PPI. Judgment and discretion will be at the heart of prudential and conduct supervision. We expect the PRA and FCA to be pro-active, to challenge and to intervene.

I believe that we will see a significant change in conduct regulation and prudential regulation, moving away from the detailed prescriptive rules of the past to giving the regulators the power and authority to intervene, exercise their judgment and spot problems as they emerge, rather than waiting to resolve them once the crisis has broken. That will tackle the broken system that we inherited. That style and structure of regulation let down consumers who were sold toxic products, taxpayers who paid the bill for the banking crisis, and those who relied on banks to finance their business or to enable them to buy a home. Our reforms will change the structure and style of regulation.

The Bank of England and the PRA will have clear responsibility for the stability of banks, insurers and the financial sector. The FCA will have the power to ban the sale of toxic products and to name and shame those who have let consumers down. The FPC, the PRA and the FCA will exercise the judgment and discretion that are needed to supervise financial services better across the UK. The Bill will help mend our financial system to benefit families, businesses and the taxpayer. I commend it to the House.

Question put and agreed to.

Bill accordingly read a Second time.

Financial Services Bill (Programme)

Motion made, and Question put forthwith (Standing Order No. 83A(7)),

That the following provisions shall apply to the Financial Services Bill:

Committal

1. The Bill shall be committed to a Public Bill Committee.

Proceedings in Public Bill Committee

2. Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Tuesday 20 March 2012.

3. The Public Bill Committee shall have leave to sit twice on the first day on which it meets.

Consideration and Third Reading

4. Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.

5. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.

6. Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.

Other proceedings

7. Any other proceedings on the Bill (including any proceedings on consideration of Lords Amendments or on any further messages from the Lords) may be programmed.—(Bill Wiggin.)

Question agreed to.

Business of the House

Motion made, and Question put forthwith (Standing Order No. 15),

That, at this day’s sitting, the Second Reading of the Consumer Insurance (Disclosure and Representations) Bill [Lords] may be proceeded with, though opposed, until any hour and Standing Order No. 41A (Deferred divisions) shall not apply.—(Bill Wiggin.)

Question agreed to.

Financial Services Bill (Money)

Queen’s Recommendation signified.

Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),

That, for the purposes of any Act resulting from the Financial Services Bill, it is expedient to authorise—

(1) the payment out of money provided by Parliament of—

(a) any expenditure incurred under or by virtue of the Act by a Minister of the Crown or government department (apart from any expenditure to be met from the National Loans Fund), and

(b) any increase attributable to the Act in the sums payable under any other Act out of money so provided, and

(2) the payment out of the National Loans Fund of any increase attributable to the Act in the sums so payable under any other Act.—(Bill Wiggin.)

Question agreed to.

Financial Services Bill (Carry-over)

Motion made, and Question put forthwith (Standing Order No. 80A(1)(a)),

That if, at the conclusion of this Session of Parliament, proceedings on the Financial Services Bill have not been completed, they shall be resumed in the next Session.—(Bill Wiggin.)

Question agreed to.

Counter-Terrorism Act 2008 (Schedule 7)

Mark Hoban Excerpts

Thursday 2nd February 2012 Written Statements

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

Paragraph 38 of Schedule 7 to the Counter-Terrorism Act 2008 requires the Treasury to report to Parliament after each calendar year in which a direction under the schedule is at any time in force. This report provides details of the Treasury’s exercise of their functions under schedule 7 during the calendar year 2011.

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 Financial Restrictions (Iran) Order 2011 (“the Order”) came into force on 21 November 2011. The Order contains a direction by the Treasury requiring all UK financial and credit institutions to cease business relationships and transactions with all banks incorporated in Iran, including all subsidiaries and branches of such banks, wherever located, and the Central Bank of Iran.

The direction was issued 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. Iranian banks play a crucial role in providing financial services to individuals and entities within Iran’s nuclear and ballistic missile programmes. Any Iranian bank is exposed to the risk of being used by proliferators in Iran’s nuclear and ballistic missile programmes.

The Order was approved by the House of Lords on 12 December 2011 and by the House of Commons on 13 December 2011.

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 relationships between UK and Iranian banks.

In operating the licensing regime in respect of the Order, the Treasury’s aim is to minimise the impact of the restrictions upon third parties, without compromising the objective of the direction.

The Treasury issued six general licences on 21 November 2011:

General Licence 1 permits existing and new transactions involving transfers of under €40,000 for humanitarian purposes;

General Licence 2 allows personal remittances under €40,000;

General Licence 3 permits existing or new transactions related to the provision of insurance permitted by EU Regulation 961/2010;

General Licence 4 allows UK banks to continue to hold accounts for asset-frozen Iranian banks and credit payment to those accounts in accordance with EU Regulation 961/2010;

General Licence 5 allows UK banks to continue to hold accounts of non-frozen Iranian banks, although they cannot process any transactions on these accounts; and

General Licence 6 provided a seven-day grace period to allow payments in progress under existing contracts to be completed.

Applications that fall outside the scope of the six general licences are assessed on a case-by-case basis. In making the decision to issue a licence, the Treasury upholds the objective of the restriction while seeking to minimise the impact on third parties.

Between 21 November 2011 and 31 December 2011, four licences were granted and none refused:

Two were granted to facilitate banks exiting their relationships with Iranian banks in accordance with the restrictions.

Two more were issued to enable payments due under contracts agreed before the restrictions came into force to be made:

one allowed a UK business to receive payment owed under an existing contract for the delivery of goods; and

the other enabled an existing loan to be repaid.

Bilateral Loan (Ireland)

Mark Hoban Excerpts

Tuesday 31st January 2012 Written Statements

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I would like to update Parliament on the loan to Ireland.

Ireland completed the fourth quarterly review of its International Monetary Fund and European Union programme of financial assistance on 14 December 2011, at which point the utilisation period for the second instalment of the UK bilateral loan began.



Upon request, the Treasury has disbursed the second instalment of £403.37 million on 30 January 2012, with a maturity date of 30 July 2019.

HM Treasury will provide a further report to Parliament, as required under the Loans to Ireland Act 2010, at the end of this reporting period.

The Government believe that it is in our national interest that the Irish economy is successful and its banking system is stable. The Government continue to support Ireland’s efforts to improve its economic situation.

Oral Answers to Questions

Mark Hoban Excerpts

Tuesday 24th January 2012 Commons Chamber

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

5. What assessment he has made of the Office for Budget Responsibility’s most recent forecast of levels of unemployment in 2012.

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

In line with the weaker outlook for gross domestic product growth, the OBR has revised up the projected level of unemployment over the near term, peaking at the end of this year before falling. In the autumn statement, the Government committed to important new steps to support private sector job creation and reduce unemployment, such as nearly £1 billion for the youth contract; an initial £1 billion for the regional growth fund; and a £21 billion package of credit easing to support firms and encourage job creation.

[Seema Malhotra]

I thank the Minister for his answer. The youth claimant count last year in my constituency of Feltham and Heston rose 25.2%. The long-term claimant count for over-50s rose 48%. Both statistics are more than twice the UK average. What measures have the Government taken to tackle unemployment in Feltham and Heston, and when does he expect the number of unemployed to fall?

[Mr Hoban]

The hon. Lady makes an important point, but let me be clear: as she will know, youth unemployment in her constituency peaked in December 2009—it is actually lower today than it was then. No one should be complacent about youth unemployment, but she should recognise, as the right hon. Member for South Shields (David Miliband) did, that youth unemployment is not a problem that this Government created, and that it is a long-term challenge and grew even when the economy was booming. We are taking steps—such as the youth contract and boosting the number of apprenticeship places—that will benefit every constituency in the country, including hers.

[Mr John Redwood (Wokingham) (Con)]

When will we see more of the details of the credit easing scheme and what is the Minister’s forecast of the monthly draw-down for the rest of this year?

[Mr Hoban]

We are working with banks on the details behind the national loan guarantee scheme. We have set aside £20 billion to enable the rates that are charged to small businesses to fall by up to 1%. The utilisation of the scheme will very much be driven by the demand from businesses for debt finance.

[Owen Smith (Pontypridd) (Lab)]

Yesterday the Chief Secretary appeared not to know too much about what the Work programme was going to do to deal with unemployment. This morning, the National Audit Office tells us that the programme will fail to get a third of the people the Government are targeting back into work. Can Ministers now tell us how much extra this latest failure to tackle unemployment will cost the Exchequer?

[Mr Hoban]

The NAO’s report this morning was based on guesswork. The scheme has not been fully implemented and there are no published figures as yet on the out-turn for the scheme. Let me just say that private sector providers expect that this scheme will be more effective than the schemes put in place by previous Governments.

[Matthew Hancock (West Suffolk) (Con)]

Given the increasing private sector employment levels, have the Government made any assessment of the impact on those levels if we lost all credibility of economic policy by having the sort of incoherence proposed by the Opposition?

[Mr Hoban]

The levels of interest that businesses in this country pay are determined by the credibility of our fiscal policy. If interest rates rose as a consequence of diverting from the fiscal plan the Government have set out, we would see higher interest rates and that would have a huge impact on families and businesses across the country.

[Sheila Gilmore (Edinburgh East) (Lab)]

6. What estimate he has made of the likely effect on the level of child poverty of the fiscal measures in his autumn statement.

--- Later in debate ---

[Neil Parish (Tiverton and Honiton) (Con)]

7. What steps he is taking to encourage banks to charge competitive rates for loans to small and medium-sized businesses.

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

At the autumn statement the Government announced the launch of the national loan guarantee scheme. The scheme will provide up to £20 billion of Government guarantees for bank funding, which will lead to a reduction in loan interest rates to smaller businesses of up to 1%.

[Neil Parish]

I thank the Minister very much for that statement, but businesses in my constituency of Tiverton and Honiton are being held back by the banking sector, which is charging interest rates of up to 20% to financially sound businesses. When and how are we going to get much more competition into the banking sector?

[Mr Hoban]

My hon. Friend makes an important point. We need to see a more competitive banking system. At the moment we are seeing, for example, the acquisition by Santander of businesses from RBS, which will create a challenger. We have also seen the outline decision by the Co-op to buy branches from Lloyds bank. Those measures, together with the sale of Northern Rock to Virgin Money, point towards a more competitive landscape for banking and will lead to better outcomes for consumers and businesses.

[Stewart Hosie (Dundee East) (SNP)]

It is not only the cost and availability of bank lending that is the problem; it is what the nationalised banks are doing with that debt. They are selling it to private equity firms for discounts of 40% to 50%, which reflects a net loss to the taxpayer-shareholder and fundamentally changes the relationship between the business and the bank. Let me ask the Minister, first, whether he is aware of that; and, more importantly, whether he has any information that would tell him that equity funds have had access to bank records on individual companies that would allow them to cherry-pick the assets they are buying.

[Mr Hoban]

As the hon. Gentleman will know, the responsibility for commercial decisions is a matter for the management of RBS and Lloyds. He has flagged up a concern, and if he brings forward details of those matters, I will raise them with the chief executives concerned.

[John Thurso (Caithness, Sutherland and Easter Ross) (LD)]

Following on from that question. Given that banks can lend only if they have capital and that 80% of financial transactions take place within the financial services industry, so that only 20% result in an end user, can the Minister say what steps the Government are taking to look at the marginal utility of the financial services industry, or what Lord Turner described as its “social usefulness”?

[Mr Hoban]

My hon. Friend makes an important point. It is vital that banks and other participants in the financial services sector play their full role in supporting growth across the economy and meeting the aspirations of families across the country. It is vital when banks are faced with difficult decisions about how to use their capital that they should focus their efforts on securing lending and boosting economic growth.

[Chris Bryant (Rhondda) (Lab)]

The thing that my constituents who work for Peacocks do not understand is why there seems to be plenty of money in the banks, including RBS, to pay exorbitant bonuses to senior executives, when there is not enough money to keep the company afloat. What will the Government do to try to ensure that those jobs, in a company that is still making money, are protected?

[Mr Hoban]

I do not want to comment on particular decisions. I am well aware of the concerns that people in the hon. Gentleman’s constituency have about the prospect of Peacocks closing. It is vital that banks are in a position to lend to viable businesses. That is why we entered into Project Merlin, which has led to an increase in bank lending compared with last year. That is the right thing to do, and I would encourage the management of Peacocks to engage with the banks and other investors to get the right outcome for them and for their business.

[Annette Brooke (Mid Dorset and North Poole) (LD)]

9. What steps he plans to take to ensure that the burden of taxation is fairly distributed.

--- Later in debate ---

[Mr Peter Bone (Wellingborough) (Con)]

12. What recent estimate he has made of the level of the UK’s current account balance with the EU.

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

In 2010, the UK had a current account deficit of £49 billion. That deficit results from a deficits of £48 billion with the EU and of £1 billion with non-EU countries.

[Mr Bone]

That was a most incredible figure of a deficit of nearly £50 billion to the EU. Does the Minister agree that the Deputy Prime Minister is quite wrong to go around to the television studios claiming that the EU creates 3 million jobs for British workers when it is quite clear from those figures that the EU costs millions of British jobs?

[Mr Hoban]

My hon. Friend should bear in mind that the deficit on traded goods between the UK and the EU is £43.9 billion but that the deficit outside the EU is even larger at £54.7 billion. We should be encouraging businesses across the UK to invest more and to export more to places in the EU, as well as to Brazil, Russia, India and China. I encourage him to talk to businesses in his constituency and encourage them to export more to close that gap.

[Geraint Davies (Swansea West) (Lab/Co-op)]

Does the Minister accept that, unlike some other EU members, we have flexible exchange rates, flexible interest rates, market access and very limited exposure to the euro bail-out? Is it not time that we invested in a growth strategy to take advantage of those opportunities and build Britain so that it is strong again, getting rid of the deficit to growth and not cutting?

[Mr Hoban]

The key thing is to have a credible fiscal and economic policy. The Conservative party and this Government have that credible economic policy, whereas the Labour party has no idea where it wants to take the economy. The measures we are taking to tackle the deficit which keep interests rates low are providing the biggest benefit we can give to businesses to help them grow in future.

[Mr David Hanson (Delyn) (Lab)]

13. What assessment he has made of the likely level of economic growth in 2012.

--- Later in debate ---

[Naomi Long (Belfast East) (Alliance)]

15. On what basis HM Revenue and Customs calculates surcharges levied for handling payments made by credit cards.

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

Her Majesty’s Revenue and Customs is able to levy a reasonable charge for the use of credit cards for payments. There are many other ways in which people can pay their tax bill without paying a surcharge. HMRC also flagged up quite early in the process how much it would cost to pay by credit card. HMRC adopts best practice, and that is why we have decided to extend these practices across business. We are launching a consultation paper later this year on banning unreasonable credit card surcharges.

[Naomi Long]

I thank the Minister for his answer. We know that the amount charged by different credit card companies varies depending on the transaction amount and the size of the institution receiving the money. Will he undertake to keep this issue under review to ensure that individuals pay only the charge that is levied by the company, and that there is no benefit to HMRC from its making additional charges?

[Mr Hoban]

The hon. Lady makes an important point. It is absolutely vital that HMRC looks carefully at the costs it incurs in processing credit card transactions and that it charges taxpayers only what are reasonable costs. We want that same approach to be adopted in the private sector as well, as that would bring huge benefit to consumers.

[Mr Stewart Jackson (Peterborough) (Con)]

16. What steps he is taking to maintain the UK’s triple A credit rating.

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

The Government’s macro-economic strategy is designed to protect the economy through this period of instability, and to lay the foundations for a stronger, more balanced economy in the future. The autumn statement set out a comprehensive plan to return the public finances to a sustainable position and meet the Government’s fiscal targets. In recent months, the major credit rating agencies have reaffirmed the UK’s sovereign credit triple A rating, with a stable outlook.

[Mr Jackson]

Does the Minister agree that the systemic risk to our triple A credit rating is unlikely to be ameliorated by a form of state-sponsored laundering of UK taxpayers’ money through the International Monetary Fund to the failed eurozone, which hitherto has not received the confidence of the bond markets?

[Mr Hoban]

My hon. Friend raises an issue about resources for the IMF. It is absolutely vital that the IMF has the resources it needs to play its part in ensuring that there is a stable global economy, which is in our economic interest. My right hon. Friend the Chancellor has said that if there is a request from the IMF for more resources, he will look at it carefully. If he agrees to the request, and the amount requested exceeds the limit in place at the moment, we shall seek parliamentary approval, but it is absolutely vital, and in our interest, to ensure that there is a stable global economy, because that is of benefit to the UK economy. I hope that the Opposition have changed the approach they adopted last year of opposing increases in the IMF subscription.

[Steve McCabe (Birmingham, Selly Oak) (Lab)]

With borrowing set to grow by £158 billion more than the Government planned, how many more miscalculations can the Minister afford before the precious credit rating goes the same way as all the other economic indicators?

[Mr Hoban]

Let me just tell the hon. Gentleman what Moody’s said in December last year:

“The currently stable outlook on the government’s Aaa rating depends in part on the assumption that the government will stay on track with its fiscal consolidation programme.”

We will stay on track. The Opposition, with their policies on debt and borrowing, would throw this country off course, leading to higher interest rates that would hit families and businesses. We will stick to our course.

[Nicky Morgan (Loughborough) (Con)]

T1. If he will make a statement on his departmental responsibilities.

--- Later in debate ---

[Jessica Lee (Erewash) (Con)]

Does my hon. Friend agree that local enterprise partnerships, such as Erewash Partnership in my constituency, play a vital role in advising SMEs on the difficulties with the availability of credit and can provide an overview for banks and the Government on the current concerns?

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

My hon. Friend makes an important point. It is absolutely vital that businesses and banks engage together to understand the challenges businesses face. We have taken a number of measures through the seed enterprise investment scheme, relaxing the rules on venture capital trusts and enterprise investment schemes, to encourage more equity funding for business. We are working closely with the banks to ensure that we do all we can to reduce the cost of funding to SMEs.

[Jim McGovern (Dundee West) (Lab)]

Yesterday I found myself again agreeing with a Government Minister, at least in part, when the Under-Secretary of State for Work and Pensions, the hon. Member for Basingstoke (Maria Miller) said in answer to a question from my hon. Friend the Member for Midlothian (Mr Hamilton) that the most sustainable way to reduce child poverty is through parents going to work. GMB, my old trade union, today published a study showing figures suggesting that, on average, eight jobseekers are chasing every vacancy in Scotland, and unfortunately in Dundee the figure rises to 12 jobseekers for every vacancy. What are the Government doing to address this scandal, and are they working with the Scottish Executive on the matter?

Connecting Europe Facility

Mark Hoban Excerpts

Thursday 19th January 2012 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I beg to move,

That this House takes note of European Union Documents No. 16176/11 and Addenda 1 and 2, No. 16499/11, No. 16006/11 and Addenda 1 and 2, No. 15629/11 and Addenda 1 to 35, No. 15813/11 and Addenda 1 and 2, relating to the European Commission’s draft regulations on the Connecting Europe Facility in the next Multiannual Financial Framework 2014-20; supports the Government’s view that at a time of ongoing economic fragility in Europe and tight constraints on domestic public spending, the Commission’s proposal for substantial increases in EU spending in this area compared with current spend is unacceptable and incompatible with the tough decisions being taken to bring deficits under control in both the UK and countries across Europe; considers that spending in this area should focus on identifying and providing genuine EU-added value, and not on spending where domestic governments and the market are better placed to act; and further supports the Government’s ongoing efforts to reduce both the Commission’s proposed budget for the Connecting Europe Facility and the overall level of spending in the next Multiannual Financial Framework 2014-20.

The European Commission’s proposal for a connecting Europe facility for transport, energy and telecommunications infrastructure cuts across the work of Government. I am therefore grateful that I have been joined in the Chamber by ministerial colleagues from the Department of Energy and Climate Change, the Department for Transport and the Department for Culture, Media and Sport, in putting forward the Government’s case on the motion.

Matters of deficits, spending and growth are at the top of all of our concerns, not just here in the UK, but across Europe. Those issues go to the very heart of the continued instability in the euro area. That ongoing instability vindicates the Government’s decision to get ahead of the curve, cut our deficit and impose strict financial discipline on our budget.

[Mr William Cash (Stone) (Con)]

Whereas many hon. Members will agree with the sentiment of the Government’s motion, the idea that we should contribute to the EU indirectly through the International Monetary Fund on the scale that is proposed is unacceptable.

[Mr Hoban]

My hon. Friend’s point is outside the topic of the debate this afternoon. He is aware of the Chancellor of the Exchequer’s comments and assurances on that matter.

As I have said, at home, we have taken tough decisions to tackle our deficit and demonstrated leadership. We expect exactly the same leadership on spending in Europe from the European Commission, but whether on the annual budget or the financial framework, such leadership has been completely lacking. Instead of finding ways to cut spending or to drive better value for money, the Commission, through the connecting Europe facility, proposes to increase spending on transport, energy infrastructure and telecommunications by 400% as part of a multi-annual financial framework that increases payments by more than €100 billion over its duration.

Just as at home, where we have prioritised spending on growth while tackling the deficit, the Government would like a higher proportion of a restrained EU budget spent to promote sustainable growth. The proposal does not achieve that objective. We are arguing that spending should be lower, and that what spending remains should be focused on areas that offer genuine added value across the EU.

[Mr John Redwood (Wokingham) (Con)]

A number of people who have written to me condemning the High Speed 2 project have alleged that Britain has to build it under the EU network ruling. Will the Minister confirm that Britain remains free to make its own decision on whether to have High Speed 2?

[Mr Hoban]

My right hon. Friend is, as is often the case, spot on. There is no requirement under the proposal for us to build High Speed 2.

[Kelvin Hopkins (Luton North) (Lab)]

Following the intervention from the right hon. Member for Wokingham (Mr Redwood), is not the nation state rather than the EU the best place to judge how much should be spent, what it should be spent on and how efficiently it should be spent?

[Mr Hoban]

The hon. Gentleman makes an important point. There is a debate to be had on where such decisions should be taken and what our priorities should be. That is why it is important for us to impose discipline on the EU budget and try to influence debate on it to ensure that when money is spent, it is spent well and wisely in pursuit of our objectives.

Let me remind the House of three key aspects of the Commission’s proposal for the next financial framework: first, an increase in the budget of more than €14 billion a year compared with a freeze on current levels; secondly, a new financial transactions tax to fund the EU budget; and thirdly, an end to the UK’s permanent rebate. That financial framework proposal and the proposals to increase spending through the connecting Europe facility are unacceptable.

In November, the House agreed that the Commission’s financial framework was

“unacceptable, unrealistic, too large and incompatible with the tough decisions being taken in the UK and in countries across Europe to bring deficits under control and stimulate economic growth”.

[Graham Stringer (Blackley and Broughton) (Lab)]

I am following the Minister’s logic carefully and agree with him, but would it not be more sensible to set an objective of reducing the European budget by around a third, which is the cut that has been imposed on local government?

[Mr Hoban]

I will set out the Government’s position on the financial framework in my own sweet time.

Continuing financial instability in the eurozone owing to unsustainable levels of public debt makes the case for restraint stronger: the EU budget must be part of fiscal consolidation, not immune to it. As the Prime Minister has stated, alongside leaders from France, Germany, the Netherlands and Finland, the maximum acceptable increase in EU budget size until 2020 is a freeze in current payment terms.

Since November’s debate on the financial framework, we have made significant steps towards achieving that goal. In the face of a Commission proposal to increase the 2012 budget by 4.9%, the UK led the European Council in demanding, and achieving, a restriction of the 2012 budget to a real freeze to 2011 payments. In pursuit of a real freeze in payments, the UK’s position must, and will, be consistent and clear in annual budget negotiations, financial framework negotiations and negotiations on the individual spending programmes that make up the framework, of which the connecting Europe facility is one.

[Mark Reckless (Rochester and Strood) (Con)]

When the Minister refers to seeking to achieve a real-terms freeze, what deflator or measure of inflation is he using?

[Mr Hoban]

The measure that is used in these discussions is the forecast of inflation provided by the EU, which is currently 2%.

The nature and size of these spending programmes are negotiated in parallel with the negotiations on the overall financial framework. That means that the eventual size and shape of the financial framework are influenced by negotiations on those individual programmes. Given our call for a real freeze, any increase in the size of individual programmes means a corresponding decrease in other programmes.

[Mr James Clappison (Hertsmere) (Con)]

My hon. Friend is making a compelling case. Will he confirm, as appears from the documents before us to be the Government’s view, that in just one of the documents—that on the trans-European networks—the European Commission is proposing a €40 billion increase above the level of the freeze he described?

[Mr Hoban]

In that €40 billion, there are three components. At the moment, about €6 billion is spent. The proposal before us represents an increase of €24 billion, which takes us to €30 billion. In addition, there is a transfer of €10 billion from structural funds, which gets us to the €40 billion figure. The actual increase is €24 billion, or about 400%. I think the whole House would agree that an increase of that scale is not acceptable. The €24 billion increase set out in the documents has to be seen in the context that the Commission’s financial framework proposal is €100 billion more than a real freeze. The Government cannot accept the Commission’s proposal for an increase in the facility, and we will argue for significant reductions to it.

[Mrs Anne Main (St Albans) (Con)]

In discussions with the Commission about the proposed increases in spending, what justification does the Commission give regarding the ability to afford this extra spending, given the crisis afflicting the eurozone?

[Mr Hoban]

Of course, in a way, the Commission’s view is that it is probably somebody else’s problem to resolve the financing. It put forward measures in the multi-annual financial framework that will increase the amount of money flowing to Europe. It has put forward an EU-wide financial transactions tax, which we object to. Its view is that if such a tax went ahead, the revenues would go not to member states, to spend at their discretion, but to the European Commission to spend. As part of its financial framework, the Commission also proposed the end to our rebate—another proposal we would reject.

The Commission would look to member states to meet the cost of these projects, which is why it is absolutely vital that we work with like-minded allies to restrain the EU budget and ensure that we can spend more money at home, while less money goes abroad. [Interruption.] The hon. Member for Nottingham East (Chris Leslie) chunters, but if he had listened to my speech, he would have heard me say that we have signed a letter with the Chancellor in Germany, Angela Merkel, and with the French President calling for a real-terms freeze in payments. That is the sort of alliance we can build in Europe. I will come to the hon. Gentleman’s amendment later, but I am rather bemused: the Labour Government talked tough in EU negotiations, but they happily gave away our rebate, costing this Government €10 billion over the life of this Parliament.

[Mr Peter Bone (Wellingborough) (Con)]

The Minister is being far too generous to Labour Members. Over the last five years of the Labour Government, our net contribution to the EU was an extortionate £19 billion. Under this Government, it will be £41 billion, because Labour gave away a large part of Mrs Thatcher’s rebate. That is a disgrace, and Labour should be held to account for it.

[Mr Hoban]

I like to be generous in politics, but the previous Government were generous in giving away our money, by giving away part of the rebate. I will come back to that in a moment.

[Dan Byles (North Warwickshire) (Con)]

My understanding—I was not in the House at the time, so perhaps my hon. Friend can help me—is that the rebate was given up in exchange for reform of the common agricultural policy. Will my hon. Friend update us on how well that is going?

[Mr Hoban]

My hon. Friend is absolutely right: there were bold and tough words from the previous Government about being prepared to give up part of our rebate for real reform of the CAP. Well, we gave up our money, but we did not get real reform. That was typical of the Labour party’s reactions when it was in government: lots of tough talk, but no action to back it up.

[Kelvin Hopkins]

Will the Minister give way?

[Mr Hoban]

I will give way just once more, but then I want to try to make some progress.

[Kelvin Hopkins]

Like Government Members, I was opposed to giving up that great tranche of our rebate. The Government have made much of the issue. Is it not time they started trying to renegotiate the rebate to get it back again?

[Mr Hoban]

We have made it absolutely clear that the rebate is there to stay, and that is one of the key parts of our negotiating strategy.

I want to say a few words about infrastructure spending. The Government have made it clear that focused infrastructure improvements are a domestic priority. When undertaken wisely, it is clear they can boost growth, protect the environment and improve lives. In his autumn statement, my right hon. Friend the Chancellor announced investment of £100 million in the creation of up to 10 super-connected cities across the UK with 80 to 100 megabits per second broadband and city-wide, high-speed mobile connectivity. Last week, the Secretary of State for Transport announced details of the new high-speed rail network.

However, the key is having carefully focused investment. When prioritising spending for infrastructure, the Government have taken the wider economic context into account. The urgent need to reduce our domestic deficit has meant that we have had to choose our investments carefully and focus infrastructure spending on where it can have the most positive effect.

That is the approach the Commission needs to take to European infrastructure spending, focusing affordable levels of spending where they will make most difference. Therefore, while the Government will, first and foremost, argue for a reduction in the overall size of the connecting Europe facility budget, we will endeavour to ensure that the final settlement agreed is focused on spending money where it will add most value. That means spending money only where neither the market nor domestic Governments are better placed to act—the point the hon. Member for Luton North (Kelvin Hopkins) made in his first intervention.

We will be pushing the Commission for additional information to allow us to judge where the money will best aid growth and support our environmental objectives. That is consistent with the Government’s desire to see spending that promotes sustainable growth take a bigger share of a tighter budget in the next financial framework. The ambition of the connecting Europe facility, while laudable, must respect the fiscal realities of Europe.

The Opposition have tabled an amendment to today’s motion. It is rather incredible, in a week when Labour’s policy on deficit reduction has become ever more confused, that the hon. Member for Nottingham East has tabled an amendment calling for an effective deficit reduction strategy. Ever since the shadow Chancellor said on Saturday that

“we are going to have keep all these cuts”,

the Labour party has been totally confused, with its deputy leader later saying:

“We’re not accepting the Government’s austerity cuts, we are totally opposing them”.

So Labour Members accept the cuts, but then oppose them.

Labour Members cannot say they are credible on the budget, because of the legacy they have left. Despite our entering the downturn with the largest structural deficit in the G7, the Labour leader told Andrew Marr this weekend that he did not think Labour spent too much. Let us remind him that it is because of Labour’s record on spending that our triple A rating was on negative outlook when the Labour party left office. That downgrade threat has been lifted because this Government have a credible and effective deficit reduction strategy. One would think that the Labour party would have learned from that, but, no—its five-point plan would add £20 billion to the deficit this year. Rather than seeing an effective debt reduction strategy from Labour, all we have is more of the same: more spending, more borrowing and more debt. So before Labour lectures anybody else on the deficit reduction strategy, it had better get its own house in order.

If that was not bad enough, the hon. Member for Nottingham East has scored another own goal in his amendment by calling for reform of the common agricultural policy—we touched on that earlier. We have heard brave words before from Labour politicians about CAP reform. Tony Blair said that

“the rebate remains because the reason for the rebate remains. Of course, if we get rid of the common agricultural policy and we change the reason why the rebate is there, the case for the rebate changes.”—[Official Report, 29 June 2005; Vol. 435, c. 1293.]

Those were tough words, but as we know, he gave way to the French, sacrificing €2 billion in our rebate a year, which will cost the country €10 billion over the lifetime of this Parliament. In the current financial framework, CAP spending has not fallen, as Labour said that it would, but increased by €3 billion. So it is all very well the hon. Gentleman talking tough in his amendment, but we have heard it before from Labour—all bark and no bite.

Achieving the priorities that the House has supported in the next financial framework will not be an easy task. The Government need to defend the rebate, resist EU taxes and restrain the budget size. The UK can deliver results in Europe, as outcomes in the 2011 and 2012 annual budget negotiations have shown, but to achieve our overall aims we must be constant and vigilant in our resistance to increases in the budget. A 400% increase to infrastructure spending in the EU budget, without any corresponding reductions elsewhere, is unacceptable in the current economic environment. We will work with our allies to cut this programme down to size, delivering fiscal restraint and value for money. Although we are clear that we need infrastructure investment to boost productivity and growth, projects need to be effective and affordable, but the plans in the connecting Europe facility proposed by the Commission are neither. I therefore urge my hon. Friends to support the motion.

[Madam Deputy Speaker (Dawn Primarolo)]

I inform the House that Mr Speaker has selected amendment (a), in the name of the hon. Member for Nottingham East (Chris Leslie). I call him to move the amendment.

Equitable Life Payment Scheme

Mark Hoban Excerpts

Wednesday 11th January 2012 Written Statements

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

The Treasury can confirm that the Equitable Life payment scheme is making high volumes of automated payments—10,000 this week alone.

The Equitable Life payment scheme is due to make in the region of £1.5 billion worth of payments. This represents a significant logistical exercise, which requires complex systems to be established to not only make payments but also respond to the resultant policyholder queries. The Government met their commitment to start making payments by the middle of last year and high volumes of automated payments are now being made.

Many thousands of payments a week are being made and the volume will continue to be ramped up. This means that over the coming months hundreds of thousands more eligible policyholders will receive their payment from the scheme. These payments will be made in accordance with the recommendations of the Independent Commission on Equitable Life payments. The Treasury has also confirmed that the first payments to with-profits annuitants have also commenced, and over 3,000 annuitants have already had their first payment issued.

The scheme is making good progress in paying out the £500 million provided for this financial year by the 2010 spending review, and as part of the Government’s commitment to transparency, the scheme will be publishing a more detailed report on the scheme to date. This report will be made available via the scheme’s website in the coming weeks.

Eligible policyholders that have not received payment yet need not do anything—the scheme has policyholders’ details from Equitable Life and the Prudential and will contact all the eligible policyholders it can by June 2012 at the latest.

Terrorist Asset-Freezing etc. Act 2010

Mark Hoban Excerpts

Thursday 15th December 2011 Written Statements

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

Mr David Anderson QC has completed his first annual report as independent reviewer of terrorist asset-freezing legislation. The report covers the first nine months’ operation of the Terrorist Asset-Freezing etc. Act 2010 and will be laid before the House today.

The Government are grateful to Mr Anderson for his detailed report and will consider carefully his recommendations. The Government’s response to his report will be placed in the Libraries of both Houses on or before 15 February 2012.

Annual European Union Finances Statement

Mark Hoban Excerpts

Wednesday 14th December 2011 Written Statements

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I am today laying before Parliament the annual European Union finances “Statement on the 2011 EU budget and measures to combat fraud and financial mismanagement” (Cm 8232). It is the 31st in the series.

The statement gives details of revenue and expenditure in the 2011 EU budget and covers recent developments in EU financial management and measures to counter fraud against the EU budget. It also includes updated details on the UK consolidated statement on the use of EU funds in the UK and changes related to the multi-financial framework.

Looking forward to future years’ budgets, and particularly in the current economic and financial climate, the Government remain determined to ensure better value for money in EU budget spending, to oppose unacceptable budget increases, and to push for improvements in EU financial management.

Prevention of Nuclear Proliferation

Mark Hoban Excerpts

Tuesday 13th December 2011 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I beg to move,

That the Financial Restrictions (Iran) Order 2011 (S.I., 2011, No. 2775), dated 21 November 2011, a copy of which was laid before this House on 21 November, be approved.

Today I seek the support of the House for the financial restrictions measures against the Iranian banking sector that the Chancellor announced on 21 November. The Government have taken decisive action to respond to a significant threat against UK national interests by putting a stop to all business between UK financial institutions and those in Iran. The Treasury has laid the Financial Restrictions (Iran) Order 2011 before Parliament under the power in schedule 7 to the Counter-Terrorism Act 2008. This order contains restrictions requiring UK credit and financial institutions to cease business relationships and transactions with all banks operating in Iran, including their branches and subsidiaries, and with the Central Bank of Iran.

I turn first to the rationale behind the order. The Government have serious concerns about activity in Iran that facilitates the development or production of nuclear weapons. This concern has been repeatedly raised by the International Atomic Energy Agency, the UN body charged with monitoring Iran’s nuclear activities. Its latest report, in November, highlights its deepening concerns about

“possible military dimensions to Iran's nuclear programme”.

The restriction in the order was made in response to Iran’s nuclear activities, as highlighted by the IAEA, and the urgent calls from the Financial Action Task Force for counter-measures to be taken against Iran. Iran’s nuclear programme poses a significant risk to the UK’s national interests. This order seeks to address that.

[Paul Flynn (Newport West) (Lab)]

Is there not a danger, if we push Iran too hard, of it expelling the IAEA inspectors from the country? If that happens, instead of acting in the knowledge with which they provide us, we would be acting in ignorance.

[Mr Hoban]

It is important that we continue the twin-track approach—of engagement and challenge—that the Government have set out and which the previous Government also followed.

The November IAEA report documents Iran’s failure to co-operate fully with the agency and the possible military dimensions to Iran’s nuclear programme. The IAEA reports on Iran’s programme on a quarterly basis, but the November report set out its concerns in the strongest terms to date. It states that information available to the IAEA indicates that Iran has carried out activities relevant to the development of a nuclear explosive device. The report notes that

“while some of the activities identified have civilian as well as military applications, others are specific to nuclear weapons”.

The Government view these developments with the utmost concern.

In response to the November IAEA report, its board of governors issued a resolution expressing “deep and increasing concern” about the possible military dimensions of the Iranian nuclear programme. The board urged Iran to abide by its international obligations and called on it to engage seriously on the nuclear issue. These concerns are of the most serious nature and have far-reaching consequences for the UK’s interests and those of the region. Some 32 of the 35 countries on the board of governors supported the resolution.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

The Minister might be about to answer my question, but what are other nation states doing in response to events in Iran? In particular, I am thinking about UN Security Council members Russia and China.

[Mr Hoban]

I will outline some of the action taken by several countries to exert pressure on the Iranian regime and to ensure that targeted action is taken to prevent the development of nuclear technology. I shall address some of those issues later.

The case for UK action is also underlined by the recent calls from the Financial Action Task Force for countries to apply effective counter-measures to protect their financial sectors from money laundering and financing-of-terrorism risks emanating from Iran. Those calls were renewed with urgency on 28 October 2011 and noted the taskforce’s particular and exceptional concern about Iran’s failure to address the risk of terrorist financing. It also flagged up its concerns about the serious threat that this posed to the integrity of the international financial system. The taskforce has not expressed such serious and ongoing concerns about any other country.

The UK is leading action against Iran because Iran’s proliferation-sensitive activities pose an ongoing concern for the UK and the international community as a whole. The measure that we have imposed is strong but necessary, and we encourage other countries to take similar tough action. The UK is an important global financial centre, so UK restrictions will have a significant impact on the options available to Iranian banks. That will make it more difficult for Iranian banks to use the international financial system in support of proliferation-sensitive activities and protect the integrity of the UK financial sector. Other countries share our and the taskforce’s concern about Iran’s nuclear activities.

[Mr Jack Straw (Blackburn) (Lab)]

rose—

[Mr Hoban]

I will finish this paragraph and then give way.

That includes the US and Canada, which implemented further restrictive measures against Iran on 21 November, alongside the action that the UK took.

[Mr Straw]

I sought to intervene on the Minister when he started talking about other countries. One of the things that slightly surprise me about this measure, whatever its merits, is that only two other countries supported it, which left us rather isolated and an easy target for the thugs in Tehran. Why did the Government not discuss and then take steps to agree with as many European Union partners as possible a similar measure in advance of this measure being promulgated?

[Mr Hoban]

Given the UK’s importance as a financial centre and its interconnectedness, there was an opportunity to act to close down opportunities for banks in Iran to use our facilities. The other point is that on the day that we announced our measures, President Sarkozy wrote to us supporting our financial sanctions and also proposing sanctions on oil. There will be a further debate in the European Union about that next month at the Foreign Affairs Council, where we will push this issue further. We are working in concert, not just with our European allies but with the US and Canada, as I have said. Indeed, the EU already has strong financial sanctions in place against Iran, and introduced asset-freezing measures and travel bans against 180 Iranian individuals and entities at the beginning of this month. The EU is considering taking further measures to implement that, and we will be pushing our partners to take strong measures too.

[Mr Straw]

I am grateful to the Minister for giving way, but with great respect, I am still rather perplexed. We are members of the EU, and although I am aware of the individual-specific action that the EU is taking, that is different from the measures in this order. What I simply do not understand, just to repeat the point, is this. Whatever the merits of this measure, the manner of its introduction must leave us very isolated and exposed. Why was there such a hurry? Was it because of an American timetable, or was there some other, more commendable reason for doing it in advance of getting what I would have thought the Minister might judge to be a significant number of other nations alongside us and then making a co-ordinated announcement?

[Mr Hoban]

The Government bore in mind when making their decision the strong concerns raised by the IAEA in its November report. Indeed, the way in which it expressed them marked a step change in its level of concern compared with previous quarterly reports. The increase in concern on the part of the Financial Action Task Force about how financial systems could be used to finance terrorist acts or in other areas led to the Government’s decision to move, which was an important thing to do. It is a proportionate response to the risk posed by Iran to require the UK financial sector to cease all business relationships and transactions with the Iranian banks and their branches and subsidiaries, including the Central Bank of Iran.

[Mr Ben Wallace (Wyre and Preston North) (Con)]

Can my hon. Friend perhaps answer a technical question relating to the Treasury’s responsibilities? Is the United Kingdom in the correct legal position unilaterally to stop banks being used in trade with Iran, or could we find UK companies that abide by the European Union ruling or law, which still allows that, taking the UK Government to court to allow them to continue using those banks?

[Mr Hoban]

We are acting under powers that were put on the statute book by the previous Government. My hon. Friend will be aware that there is a licensing regime in place, and some licences have already been issued on a general basis—there are applications that I shall perhaps turn to a little later when dealing with specific examples. Permission has been given on a general basis to enable transactions to be completed, for example, so there is a regime in place. However, if my hon. Friend has particular concerns, I would encourage him to engage with Treasury officials to take them forward. I know that my hon. Friend, as chairman of the British-Iranian all-party group, has a clear interest in this subject. If there are particular concerns of which businesses are aware, I encourage them to talk to us about them.

[Jeremy Corbyn (Islington North) (Lab)]

The Minister has been speaking for about 10 minutes, during which he has come from expressing concerns about Iran’s nuclear activities to discussing financial regulations. He would, however, recognise that Iran remains a signatory to the nuclear non-proliferation treaty. Does the Minister not think that a serious diplomatic initiative by all members subscribed to the nuclear non-proliferation treaty would be a more fruitful way of dealing with the issue, rather than descending to what some of us fear will be a much more serious situation, including possible military conflict with Iran?

[Mr Hoban]

The purpose of the order is not to enable debate of the broader issues of engagement with Iran, but to put in place financial restrictions against Iran. As I said earlier, there is a twin-track approach of both engagement and sanctions, where appropriate. That is what we are doing. I think we would all want Iran to come back and engage in this process; we need to find a mechanism for that to happen.

Let me return to explaining why we have imposed the restrictions in the order. Iranian banks play a crucial role in providing financial services to individuals and entities within Iran’s nuclear and ballistic missile programmes. Many Iranian banks have already been sanctioned by the UN and the EU for their role in Iran’s proliferation-sensitive activities. However, experience under existing financial sanctions against Iran demonstrates that targeting individual Iranian banks is no longer sufficient. Once one bank is targeted, a new one can step into its place.

Taking this action will also protect the UK financial sector from the risk of being used unwittingly to facilitate activities that support Iran’s nuclear and ballistic missile programmes. As I said to the hon. Member for Islington North (Jeremy Corbyn), the action is in line with the Government’s dual-track strategy of pressure and engagement with Iran. The aim of the pressure track is to encourage Iran to begin serious and meaningful negotiations.

Let me explain the specifics of the order. It was made under schedule 7 to the Counter-Terrorism Act 2008, which provides the Treasury with the power to give a range of restrictions to UK credit and financial institutions in response to certain risks to the UK national interest. The power enables the Treasury to respond to proliferation risks, money laundering and terrorist-financing risks, or where the Financial Action Task Force calls for counter-measures. The restrictions in the order sit alongside sanctions already imposed on Iran by the UN and the EU, but go further, as they prohibit additional activities.

The restrictions came into force at 3 pm on 21 November 2011; shortly after that, the Treasury published a series of documents on its public website to alert the financial sector to the restrictions and to provide detailed guidance on their implementation. Those documents were also e-mailed to more than 13,000 subscribers to our e-mail alert system. In previous debates on these measures, one concern raised by the Opposition was about how we ensure that people are made aware of the restrictions.

[Paul Flynn]

Will the Minister give way?

[Mr Hoban]

I want to make some progress. This is a time-limited debate, and in looking at the number of Members present on both sides of the House, I am conscious that others wish to participate.

The Treasury asked various supervisors, including the Financial Services Authority, Her Majesty’s Revenue and Customs and other Government organisations, to publicise the restrictions and to provide information to firms on the requirements associated with them. Alongside the order, we published six general licences exempting specific activities from the restrictions. Those general licences enable credit and financial institutions with existing business relationships or transactions with the entities concerned to manage the cessation of business in an orderly and controlled way. The licences permit the provision of financial services for humanitarian purposes and of personal remittances between individuals here and in Iran. Further licences, whether general or individual, may be granted by the Treasury to manage the impact of the requirements on third parties. This approach is similar to that used in asset-freezing measures.

The restrictions apply requirements to persons operating in the UK financial sector, including FSA-authorised firms, money service businesses and insurers. Firms are required to establish whether any current or future business relationships or transactions are affected and comply with the requirements of the restrictions. Although the restrictions are given only to the financial sector, they will make it more difficult for other companies to trade with Iran. The UK Government actively discourage trade with Iran, and UK trade with the country has declined by 46% during the first eight months of this year in comparison with the same period in 2010.

As I said to my hon. Friend the Member for Wyre and Preston North (Mr Wallace), companies affected by the restrictions can apply for a licence of exemption, and we are willing to grant licences where UK companies are owed money under existing contracts that can only be paid via an Iranian bank to the company’s UK account. We will examine applications on a case-by-case basis.

The use of existing procedures means that firms will already have in place systems to meet obligations relating to financial sanctions and anti-money laundering, which should assist in minimising the burden of compliance with the restrictions. All institutions operating in the UK financial sector will need to ensure that they do not undertake new transactions or enter into new business relationships with any bank incorporated in Iran, including the central bank, and branches or subsidiaries. It is expected that compliance costs for the sector as a whole will be moderate, although any institution with significant business relationships with an Iranian bank will face higher costs.

Supervision of compliance with the restrictions will form part of the existing supervisory regime of entities such as the FSA, Her Majesty’s Revenue and Customs, the Office of Fair Trading, and the Department for Enterprise, Trade and Innovation in Northern Ireland. It is an offence to fail to comply with the requirements of the direction or intentionally to circumvent the requirements. Breaches may be subject to civil penalties imposed by supervisors, or to criminal prosecution. The maximum criminal penalties are: a fine not exceeding the statutory maximum, £5,000, in the magistrates court; or two years’ imprisonment or an unlimited fine in the Crown court. Those penalties are equivalent to those for breach of other financial sanctions regimes such as the EU asset-freezing regime in relation to Iran. The financial services sector takes very seriously the implementation of restrictions and sanctions, and takes steps to ensure its compliance with any restrictions.

To conclude, the order was issued by the Government to respond to the severe risk that Iran’s nuclear activities pose to the UK national interest. The measure is strong but necessary. Iran’s proliferation-sensitive activities are a serious and ongoing concern for the UK and the international community as a whole. It is vital that we continue to take steps to increase pressure on the Iranian regime and encourage Iran back to the negotiating table to find a diplomatic solution. For those reasons, I commend the order to the House.

[Mr Deputy Speaker (Mr Nigel Evans)]

I remind the House that the debate can continue until no later than 6.48. After the shadow Minister has finished speaking, Members will wish to do the maths in their heads to divvy up the time. If they do not do so, in the spirit of Christmas, a time limit will be introduced.

--- Later in debate ---

[Mr Hoban]

This has been an interesting and wide-ranging debate. As anyone listening to it will have recognised, there is a range of views about Iran and how the UK should engage with it, but there is also the common strand that everyone expressed—our concern about the proliferation of nuclear weapons and how we seek to tackle that.

In response to my hon. Friend the Member for Basildon and Billericay (Mr Baron), I say that we all want to see a diplomatic solution, but we need a process whereby there is not only engagement but pressure on the Iranian Government. At the moment, unfortunately, there are no signs to suggest that the Iranians are interested in meaningful and serious negotiations on the key issue of their nuclear programme, and it does take two parties to engage. The E3 plus 3 has been trying to negotiate with Iran, and it is not that group’s fault that the negotiations have not yet succeeded. It is Iran that needs to engage in serious negotiations.

Let me reflect on some of the comments that have been made. The right hon. Member for Blackburn (Mr Straw) and my hon. Friend the Member for Wyre and Preston North (Mr Wallace), who are co-chairmen of the all-party group on Iran and are currently at one of its meetings, asked about support for the action that the Government have taken and why we did not act in concert with EU member states. It is worth highlighting two points in that regard. We have undertaken a significant programme of lobbying internationally and continue to do so. As I said earlier, the US and Canada acted alongside us in imposing the sanctions on 21 November. However, there is a balance to be struck. Clearly, we want to encourage as many people as possible to join with us to impose these sanctions, yet at the same time there is a real sense of urgency on this issue. The risk of Iran acquiring a nuclear weapon becomes more serious as time passes, as was highlighted in stark terms by the IAEA report. We consider it imperative to act now and to encourage others to follow.

[Mr Baron]

Will my hon. Friend give way?

[Mr Hoban]

I want to make progress and conclude fairly promptly because there is a time limit on this debate.

We will engage with our European counterparts at the Council meeting next month. As I said, President Sarkozy wrote to us supporting moves for financial sanctions but also suggesting broadening them to the import of oil.

Let me turn to the points raised by the hon. Member for Nottingham East (Chris Leslie). I have dealt with his first point about putting pressure on other countries to act. His second point was about whether the UK will use significant fines to promote enforcement. As I said earlier, the civil and criminal penalties for breaching these restrictions enable the authorities to levy unrestricted fines. In the context of the civil sanction, for example, the fine should be proportionate, effective and dissuasive. I believe that the authorities take this matter seriously and will act proportionately to that.

The hon. Gentleman asked about exemptions, which relate to the licensing process that we have talked about in other situations. Some general licences are in place to deal with transactions that are already in progress. People can also apply for specific licences. Fifteen specific licences have been applied for; one has been granted and 14 are in the process of being considered. This is an ongoing process. I hope that that also addresses the point raised by my hon. Friend the Member for Wyre and Preston North.

We are committed to reporting regularly to Parliament. The Counter-Terrorism Act 2008 says that we should report as soon as possible after the calendar year in which the actions have been taken. We will endeavour to do so, and we will keep the House informed about the progress that is made.

Everyone across the House recognises the dangers that attach to nuclear proliferation. This is a process of negotiation and diplomatic engagement. We need the other party to engage in that diplomacy, too, but we should not be afraid of applying pressure to the Iranian regime where we think that that is appropriate and proportionate and will help to further our objective of keeping the world a safer place. I commend the motion to the House.

Question put and agreed to.

Resolved,

That the Financial Restrictions (Iran) Order 2011 (S.I., 2011, No. 2775), dated 21 November 2011, a copy of which was laid before this House on 21 November, be approved.

Royal Bank of Scotland (FSA Report)

Mark Hoban Excerpts

Monday 12th December 2011 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

With permission, Mr Speaker, I should like to make a statement.

Today the Financial Services Authority published its report on the failures that led to the near collapse of the Royal Bank of Scotland. It is a thoroughly detailed report, listing a catalogue of management and regulatory failures that almost felled one of the world’s largest banks. Given the billions of pounds of taxpayers’ money that was needed to bail out the bank, not once, but twice, and for a total sum of £45 billion, it is right that taxpayers are told the full story.

It is fair to say that the report makes for depressing reading. For the shadow Chancellor, it is as damning as it is depressing. The report lays bare the gross failures of the regulatory regime that was devised and driven by the shadow Chancellor and his party.

It is now well known that the tripartite system set up by the previous 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. As the report laments, the FSA was solely responsible for the entire range of financial regulation issues, from the prudential soundness of major systemically important banks, to the conduct of some 25,000 financial intermediaries.

The failure of regulatory culture was equally significant as the failure of institutional design. The report says:

“What was wrong in the case of RBS was the FSA’s overall approach to prudential supervision, rather than the execution of this approach in relation to RBS.”

More than that, the report says that it was an approach that

“responded to political pressures for a ‘light touch’ regulatory regime.”

The report singles out the shadow Chancellor as one of the three senior Labour politicians who were responsible for this “sustained” pressure. It quotes his first speech as City Minister in which he said

“nothing should be done to put at risk a light-touch, risk-based regulatory regime.”

It was political dogma at the cost of prudential regulation, and it left us hamstrung with a complacent regulator, powerless against the risks in the financial system. It meant that the FSA failed sufficiently to challenge RBS management over its decisions, and was over-reliant on the firm’s own assessment of its position. Rather than exercising judgment and foresight, the FSA adopted a tick-box and reactive approach to regulation.

Left to its own devices, without proper regulatory oversight, RBS got away with some of the most shocking decisions taken by any bank in the years and months leading to the crisis in late 2008. Poor judgment was fostered by a style of management and governance that promoted a culture of aggressive risk-taking over prudence. That was most clearly demonstrated by RBS’s decision to grow its investment bank by aggressively expanding its structured credit and leveraged finance activities. That build-up of risk was compounded by RBS’s relentless pursuit and purchase of ABN AMRO. The current chairman of RBS said that the acquisition was

“the wrong price, the wrong way to pay, at the wrong time and the wrong deal.”

As the House is aware, it was the losses in the RBS investment banking arm that crippled the entire bank. As the credit trading losses mounted, the bank’s excessive reliance on short-term wholesale funding and its weak capital position were brutally exposed, and led to its near collapse.

The British economy is still recovering from the near collapse of RBS and the wider financial system just three years ago. Recovering from that crisis is this Government’s No.1 priority. We simply cannot afford a repeat of it, which is why we have embarked on fundamental reform of our regulatory system. As the House is aware, the Government are legislating fundamentally to reform the failed tripartite system. We are establishing a permanent financial policy committee inside the Bank of England. Its job will be to monitor overall risks in the financial system, identify bubbles as they develop, spot dangerous interconnections and stop excessive levels of leverage before it is too late. It is exactly the kind of judgment and foresight that we needed in the years preceding the last crisis.

We are also abolishing the Financial Services Authority in its current form, and creating a new Prudential Regulation Authority with a focus on micro-prudential regulation. Prudential regulation of banks will go back to where it belongs, under the auspices of the central bank, as a subsidiary of the Bank of England, bringing micro and macro-regulation under one roof.

The PRA will be a focused, expert regulator. Whereas the FSA was responsible for thousands of financial services firms, the PRA will focus exclusively on the prudential regulation of deposit-takers, insurers and investment banks. And when regulating banks, it will have the single statutory objective of promoting safety and soundness. Responsibility for the protection of consumers and the conduct of financial services firms will transfer to the new Financial Conduct Authority, leaving the PRA free to focus first and foremost on stability.

We are also working closely with the FSA and the Bank of England to ensure that the new PRA has the powers that it needs to ensure that banks do not take excessive risks and that directors who act improperly face appropriate penalties. We will consider carefully the further recommendations made in the report, particularly Lord Turner’s suggestion that it should be made easier for action to be brought against the directors of failed banks.

I share the frustration of many Members that it has not been possible to bring action against those responsible for the failures at RBS, but strengthening legal powers in this area would raise some complex issues, and we will want to reflect carefully and listen to a range of views before deciding on any action.

The report into the failure of RBS fully complements our analysis of the faults of the previous regime and supports our wider reforms to the banking system. We will respond to the recommendations of the Independent Commission on Banking next Monday. We have already said, though, that we support in principle not only a ring fence around better-capitalised high street banks to protect them against investment banking losses but, when things go wrong, a bail-in of private investors, not a bail-out by taxpayers. Together with recovery and resolution plans, that means that we are working to ensure that banks can fail in an orderly fashion without any recourse to taxpayers’ money.

We will not make the same mistakes as the previous Government but will ensure that we have a system of regulation that secures our financial stability while protecting our competitiveness, and we have already made substantial progress in that ambition. I welcome the action already taken by the FSA to strengthen its supervisory capacity, to become a more intensive and intrusive regulator and to improve its ability to ensure that banks are well governed.

We continue to lead the international debate to impose higher capital requirements and tougher funding standards on banks across the globe, and we will resist any attempt to unpick Basel III in Europe. With the world focused on the strength of bank balance sheets, this is not the time to pander to vested interests. We will ensure that Basel III is implemented in full and that we can go further to impose higher capital standards where necessary to meet risks unique to our sector.

We know that the financial sector will continue to be a critical part of our economy and our recovery, and we are committed to supporting the sector and protecting the open and competitive markets that have allowed the sector to flourish in the UK, but that success cannot come at a cost to the wider economy. That means getting the structure and substance of regulation right and correcting the mistakes of the previous Government.

Today’s report reminds us of the gross failures of the previous regime and the previous Government. This Government will not repeat those mistakes. We will reform the regime to preserve the innovation that fuels the sector’s success without putting the wider economy at risk and to build a successful but stable financial services sector. I commend this statement to the House.

[Chris Leslie (Nottingham East) (Lab/Co-op)]

The report confirms that there was institutionalised dysfunction at the heart of the Royal Bank of Scotland and confirms what we all know—that there was a collective failure of regulation not just in Britain but around the world, and that there were failures not just of one individual, institution, political party or Government but failures that allowed irresponsible bankers to take excessive risks and cause a global financial crisis.

Labour Members have accepted our responsibilities, and as my right hon. Friend the shadow Chancellor said, for the part that the previous Government played in that global regulatory failure, we are deeply sorry. Acknowledging our part in those global failings is the right approach to take, so let me ask the Minister: does he accept that the Conservatives got it wrong too? During the 2007 debates on Northern Rock, he beseeched the Treasury

“to counter the pressure for greater regulation”,

and talked of

“the strength of our regulatory regime”

and how it was

“vital that this crisis does not erode that standing”.—[Official Report, 12 December 2007; Vol. 469, c. 391.]

It would be unparliamentary to call the Minister a hypocrite but perhaps he needs some medical advice about his selective amnesia. Let us have some contrition from the Conservative party, which never once called for more regulation or criticised the FSA for not having enough powers. In fact, it argued precisely the opposite. The Chancellor of the Exchequer, who is sitting on the Front Bench, complained constantly of burdensome and complex regulations.

The FSA is clear that there was a collective failure, but there was also clarity about how the regulator was at fault. Specifically, the report says that the monitoring of RBS’s capital position was “reactive”, and that “supervision of liquidity” was a “low priority”. The FSA did not scrutinise the trading book or loan impairments adequately, and the takeover of ABN AMRO was not questioned sufficiently. Can the Minister say, first, whether the FSA had the co-operation of all former RBS directors, and whether they were all interviewed? His statement was somewhat vague about action against those responsible—he says that he will reflect carefully. Can we take it then, reading between the lines of his statement, that the Government will not pursue action to disqualify former RBS directors from sitting on other company boards?

Secondly, the Minister says that he will “consider” tough action to ensure that bankers who jeopardise the solvency of our retail banks cannot escape responsibility. There should be a new strict liability requirement specifically for banking directors. If the Minister does not amend the draft Financial Services Bill to achieve that, we will table amendments to that effect. The report suggests that future bank takeovers should require formal approval by the regulator, which was not required when RBS took over ABN AMRO. That is sensible, so can the Minister say whether he will amend the draft Bill accordingly?

Thirdly, will the Government take steps to strengthen the corporate governance of large public companies, including banks? Regulators have to do a better job, but shareholders also need to be able to exert their authority. Fourthly, will the Minister agree to implement the legislation already approved in law to publish the pay deals of everyone working in the banking sector earning more than £l million? The Government have dragged their feet on this issue. A simple signature to a statutory instrument is all that is needed. Surely it is important to have transparency and accountability for all the high earners in the banks, not just the richest eight in each bank, as he has conceded so far.

Fifthly, the report highlights a culture of incentive fees for City advisers, whose rewards are greatest if large takeovers are completed. The report recommends ending that bias in the advisory fee structure. Why did the Minister ignore that recommendation in his statement? Does he agree that the proposal would make good sense? The FSA and the Government did not see the financial crisis coming, but neither did the Bank of England. Is the Minister certain that putting all the new regulatory powers in the hands of the Bank will work? Is there a risk that the accountability of the Bank of England—an important point—is substandard in his current proposals? Will he accept the suggestions from the Select Committee on the Treasury and others that those safeguards need to be significantly enhanced?

We of course support moves to enhance prudential regulation, but there is always a danger of fighting the last battle, especially when there could be a eurozone credit crunch just around the corner, so is the Minister not taking his eye off the ball? Will he acknowledge that the new European supervisory structures are incredibly powerful and that, by mishandling negotiations in Europe so badly, the Government have jeopardised our ability to influence and steer those European regulations, which can overrule the tougher capital buffers for our banks, as suggested by the FSA here in Britain?

The regulators did not do enough, and we have to learn lessons. However, ultimate culpability rests on the shoulders of the bankers involved. It is astonishing that deeply irresponsible decisions by those bankers should have forced a £45 billion bail-out, and yet no enforcement action is brought and nobody is punished. It is about time that this Government stopped pandering to the big banks and took action to speed up banking reform and rein in the excessive bonus culture.

[Mr Hoban]

The approach taken by the hon. Gentleman, who seeks to try to blame everybody for the crisis, overlooks the key role that the shadow Chancellor—who is not in his place today—played in the design of the regulatory system that led to the problems we saw at RBS. That design—driven by the shadow Chancellor, who took great credit for it—meant that no backstops were in place when RBS took those decisions.

The other point that the hon. Gentleman should bear in mind is that only three politicians are named in the report as having put pressure on the FSA to adopt a light-touch regulatory regime. One was Tony Blair, one was the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), and the third one—the person who is missing from the Opposition Front Bench today—is the shadow Chancellor, the person who in his first speech as City Minister called on the FSA to adopt a light-touch regulatory regime, a regime that, when confronted with the challenge of RBS, turned from a light touch to a soft touch. It is, of course, the taxpayer who has picked up the bill for the fundamental flaws in Labour’s regulatory regime.

The hon. Gentleman talked about disqualification of RBS directors. It is a pity that the previous Government did not think about that issue in the aftermath of the financial crisis. My right hon. Friend the Secretary of State for Business, Innovation and Skills has referred the report to counsel to see whether it is possible to disqualify the directors of RBS.

The hon. Gentleman talked about approval for acquisition. We will look carefully at the proposal Lord Turner made, but the reality is that the FSA had powers to intervene, but chose not to use them—partly as a consequence of the light-touch regime foisted on them by the previous Government.

When the hon. Gentleman talks about bonuses, let us not forget that it was under the previous Government that bonuses could be paid out in cash and taken straight away. Under the regime in place now, bonuses are deferred, paid out in shares and can be clawed back. Let us not forget that the moment that it was possible to exercise the maximum leverage on Sir Fred Goodwin—the banker Labour knighted—was the moment when it gave away his pension scheme. So I will take no lessons from the Labour party on the way in which we should deal with the problems of RBS.

The hon. Gentleman referred to the Bank of England and seemed to question whether it was able to take on the additional responsibilities. I thought he was moving away from his party’s position of supporting the package of reforms that we have put forward. Let me remind him that it was the Bank of England that identified the problem of the mispricing of risk in the financial markets. The problem was that the regulatory structure it had to deal with meant that the Bank did not have the power to tackle the problem—nor, indeed, did the FSA. What we are faced with is a problem of dealing with the regulatory regime left to us by the previous Government. They chose not to make these reforms when they were in government; we are taking action now to ensure that we have the right regime in place to tackle those risks and ensure that we have a stable, but successful, financial services sector.

[Mr Andrew Tyrie (Chichester) (Con)]

Powerful institutions do not leap forward to explain themselves when they make mistakes, and neither did the FSA. The fact is that the almost 500 pages of this report would never have been written had it not been for the unremitting pressure from the Treasury Select Committee. I would like to thank my colleagues on that Committee for helping me to secure this report from the FSA. Furthermore, to make sure that the report was of adequate quality, we took the unprecedented step of sending our own specialist Committee advisers into the FSA with full powers to examine papers and personnel in order to check that the papers underlying the compilation of this report were fairly reflected in it.

Is it not now crucial that the new regulators—the Bank of England and the Financial Conduct Authority—are subjected in future to far more vigorous parliamentary scrutiny than the FSA has been in the past? Will the Government commit in the draft legislation to secure a much higher level of parliamentary scrutiny of these powerful quangos than we have had hitherto?

[Mr Hoban]

I, too, commend the work of my hon. Friend and his Select Committee, along with the work done by Bill Knight and Sir David Walker in scrutinising the FSA’s report and making consequent improvements to it. One of the challenges we face is, as my hon. Friend said, to ensure that there is proper scrutiny. He commented on the fact that it took the pressure of his Committee to produce this report. The reality is that the existing powers in section 14 of the Financial Services and Markets Act 2000 to require a report to be produced where there is regulatory failure have never been exercised. One measure we have put in place in the Bill is to enable such reports to be produced on a more regular basis—not at a Minister’s request but in response to objective triggers to ensure that reports are published in a timely fashion so that we can learn the lessons from past mistakes. I think that is a helpful way of enabling Parliament to hold the regulators to account. We look forward shortly to responding not just to my hon. Friend’s Select Committee report, but to that of the pre-legislative scrutiny Committee.

[John Mann (Bassetlaw) (Lab)]

Is the position of Hector Sants at the Bank of England still credible following the report, and does the Minister agree that it would not be tenable for anyone connected with the FSA to replace Sir Mervyn King as the next Governor of the Bank of England?

[Mr Hoban]

As the hon. Gentleman will know, RBS was regulated by the retail division of the FSA, while Hector Sants was managing director of the wholesale division. He took charge of the FSA about three months before the ABN AMRO acquisition, and one of the things on which he should be commended is the way in which he has led its implementation of a more intrusive and intense programme of supervision. I think that that has yielded dividends during the last two or three years, and that it is an important part of his record that we should recognise.

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

The Government’s proposed new regime will be judgment-based, not rule-based, and will therefore require banking supervisors of much higher quality than we have seen hitherto. What steps will the Financial Secretary take to ensure that such people are in place under the new regime?

[Mr Hoban]

My hon. Friend is right to recognise that the quality of supervision needs to be higher than it was in the pre-crisis days. The need for much more engagement by better qualified banking supervisors is a priority not just for the FSA but for the Bank of England, which will be introducing measures for precisely that purpose.

[Stewart Hosie (Dundee East) (SNP)]

The Minister said that the FSA had failed to challenge the RBS management sufficiently over its decisions. That is a masterful understatement. In October 2007 the FSA had precisely four and a half staff in RBS: half a manager and four team members. It was possibly the biggest bank in the world, it was systemically important, and its asset base was bigger than the GDP of the United Kingdom. Will the Minister guarantee that, irrespective of the future shape of banking and regulation, the RBS’s successors—the Prudential Regulation Authority and the Financial Conduct Authority—will always have enough of the right people in such systemically important banks, so that we never encounter such a situation again?

[Mr Hoban]

That is an important question. I referred earlier to the pressure under which Tony Blair put the FSA to adopt a proportionate regulatory regime. One of the examples put to the then Prime Minister about the light-touch quality of the regime was the fact that there were only six people supervising HSBC, and even fewer have been supervising RBS. I understand that there has been almost a fourfold increase in the number of RBS supervisors, and I think that that is a much better approach. We must ensure that there is intrusive, intensive supervision, and that requires not just more resources, but a higher quality of resources.

[Matthew Hancock (West Suffolk) (Con)]

I warmly welcome the report. I think that the proposal to debar directors from high office in future should be implemented so that we can ensure that rewards are not received for failure at the top, but will the Minister also consider the proposal to debar others mentioned in the report who were culpable?

[Mr Hoban]

I think that we should give careful consideration to the idea of debarring people who have been incompetent and mismanaged their leadership of institutions. That applies to the directors of those institutions, but it may also apply to the politicians who designed the system in the first place.

[Frank Dobson (Holborn and St Pancras) (Lab)]

Let me begin by declaring an interest: my wife and I have both current and deposit accounts with the Royal Bank of Scotland. As one who was always in favour of tougher regulation of banks, I must also confess that I do not recall encountering an organisation before the collapse which could be described as “Tories for tougher banking regulation”.

Will the Minister confirm that the failures extend beyond the area that he has covered? Will he confirm that the auditor, Deloitte Touche Tohmatsu—which received substantial fees—did not seem to notice that there was anything wrong, and that the benighted rating agencies, which keep telling us what should be happening now, gave triple A ratings to both RBS and ABN AMRO right up to the day on which the balloon burst?

[Mr Hoban]

The right hon. Gentleman makes some important points, and clearly a number of institutions involved with RBS and the regulatory system more widely should bear responsibility for what happened, but let us be absolutely clear that the principal responsibility for the failure of RBS lies with its management.

[Mike Crockart (Edinburgh West) (LD)]

I should, first, declare that the global headquarters of RBS is in Gogarburn in my constituency. Today’s report apportions blame for the RBS demise on previous RBS management, insufficient challenge by the FSA and Labour’s light-touch, lip-service regulations; this Government are now dealing with those. Will the Minister join me in recognising that one group not blamed was the tens of thousands of ordinary employees of the bank, who have continued to work in an exemplary way, despite more than 27,000 redundancies and a slump in the bank’s fortunes and share price, which was previously a major element of their benefits package? Does he agree that today’s report is no reflection on them?

[Mr Hoban]

My hon. Friend makes an important point. Responsibility clearly rests with the leadership of RBS, not with those working in the bank’s branches, those working at its insurance company and others, who did their job properly and to the highest standards. It is important to recognise that, having identified regulatory issues to address, his party and my party came together in a coalition Government committed to regulatory reform. The Labour party was wedded to the status quo and to the regulatory regime that allowed this to happen unchecked. That party should take its full responsibility, just as we should recognise the excellent work that people at RBS did.

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

The report makes it clear that the primary responsibility for the collapse of RBS lies with the firm. The shadow Minister was big enough to say what he did about past regulation, and the Minister’s anger would be more credible if he and his party had not continually called for lighter regulation. The Minister had said:

“Effective light-touch, risk-based…regulation is in the interests of the sector globally, and the Government need to send that message more strongly to the US Administration and Congress”.—[Official Report, 28 November 2006; Vol. 453, c. 995.]

The Chancellor had said:

“I fear that much of this regulation has been burdensome, complex and makes cross-border market penetration more difficult.”

If people are going to admit culpability on regulation, the truth is that those on both sides of the House need to look in the mirror. Is that not the case?

--- Later in debate ---

[Mr Hoban]

It was my party, through the work done by Lord Sassoon, that examined the regulatory system set up by the previous Government, identified some of the challenges and determined that the best thing to do was to reform that system. We have recognised the challenges and the failings of the previous regulatory system, and proposed measures to improve it, and to ensure that it serves consumers and ensures a stable, successful financial services business.

[Several hon. Members]

rose—

[Tony Baldry (Banbury) (Con)]

The shadow Minister said that the regulation did not work and the regulator did not do anything sufficiently. Surely the reason for that was because the regulator was put under sustained and unacceptable political pressure by two former Prime Ministers and by the current shadow Chancellor. Will my hon. Friend confirm to the House that this Government, and the Treasury under the stewardship of this Chancellor, would not put such pressure on regulators and that the constitutional convention as to how a Government should work with regulators will be properly observed?

[Mr Hoban]

My hon. Friend makes an important point. We have made it clear that we want to give the new regulatory organisations that independence, power, authority, discretion and judgment to get on with their job, so that we ensure that we tackle issues that need to be tackled and ensure that there is tough regulation where that is needed. For example, we are going to introduce powers for the Financial Conduct Authority to ban particular products—a power that has not been available so far. We are prepared to take those tough decisions and let the regulators get on with their job.

[Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)]

One of the features of the RBS takeover of ABN AMRO was that lots of people warned against it at the time, and not just with hindsight—many people in the financial services and elsewhere warned of severe consequences. Was the decision to go ahead with that takeover about not just the role of Sir Fred Goodwin, but the fact that those who were meant to prevent him from doing such things did not do so? Was this not only about a question of regulation, but about a culture of takeover, acquisition, internationalisation and over-ambition which was at the heart of the problems of RBS and other places? What will the Minister’s proposals do to prevent that kind of attitude from affecting future managements and future banks when the current financial crises have passed?

[Mr Hoban]

The hon. Gentleman makes some important points. It is important that shareholders play a more active and engaged role in businesses in which they have a holding. My right hon. Friend the Secretary of State for Business, Innovation and Skills has commissioned John Kay to conduct a review of long-term interest in business and business investment. We need to strengthen corporate governance in boards, as they clearly were not sufficiently robust in their challenge to executives. One of the things that has happened in the FSA is that a much more robust approach is being taken to understanding and examining people who want to hold positions of significant influence in our major banks, including those who want to become board members. That is a good way not only of raising the quality of people in the boardroom, but of ensuring that they are robust enough to stand up against a dominant and aggressive chief executive officer.

[Stephen Barclay (North East Cambridgeshire) (Con)]

Will my hon. Friend ensure that the rules allow enforcement action against incompetence? The point being missed by Labour Members is that there are more than 6,000 pages of FSA rules. There is no shortage of rules, but they do not allow enforcement against incompetence; they allow it only against dishonesty. That is what has fettered the hand of the FSA and what angers my constituents, who are aggrieved that individual directors of RBS have not faced sanction.

[Mr Hoban]

My hon. Friend makes an important point and he speaks with some experience, having worked with the FSA. We need to look carefully at the fit and proper person test for people becoming registered with the FSA to ensure that they are good quality, and can do the job properly and competently.

[Dr William McCrea (South Antrim) (DUP)]

I welcome the Minister’s statement. It is right and proper that we review past failures and learn from them, but how can we use the current situation to get the banks to lend to the hard-pressed small and medium-sized businesses crying out for finance they urgently need, especially in Northern Ireland, where credit is particularly squeezed?

[Mr Hoban]

The hon. Gentleman makes an important point about the credit situation in Northern Ireland, and I know that the hon. Member for East Antrim (Sammy Wilson) pays close attention to it. We need to ensure that banks are sufficiently well capitalised to enable them to lend to businesses. One of the things that the hon. Gentleman may have noticed from last week’s report from the European Banking Authority is that no UK banks required additional capital, because they are already well capitalised and should be in a position to lend, as was demonstrated by the third quarter Project Merlin figures.

[Nadhim Zahawi (Stratford-on-Avon) (Con)]

This report is a damning indictment of the decisions taken by the previous Government, so it is regrettable that the shadow Chancellor could not be here to apologise in person to the House and to the country. Does the Minister agree that the something-for-nothing culture allowed to fester under the previous Government is something that this Government will not allow and that they will examine how to shift the dynamic in boards in systemically important businesses so that non-execs are able to challenge powerful CEOs and hold them to account?

[Mr Hoban]

My hon. Friend makes an important point, because there was a culture, as documented in the report, that meant that directors on the board of RBS did not challenge the CEO sufficiently robustly. That needs to change. We also need to ensure that the incentive arrangements for directors are robust. Under the previous regime, bonuses could be paid out in cash straight away. Over the past couple of years, tougher rules have been put in place to defer bonuses, to make sure that they are paid in shares and to claw back bonuses where there has been failure. That is a tough regime in place and it should make sure that the incentives of directors are in line with those of shareholders.

[Mark Durkan (Foyle) (SDLP)]

What are the issues inhibiting the Minister from making a clear commitment to strengthen legal powers so that action can be brought against directors of failed banks?

[Mr Hoban]

I understand the frustration expressed in the hon. Gentleman’s question. We need to look carefully at the proposals in Lord Turner’s report and we will have the opportunity to legislate in the Financial Services Bill, if appropriate, but the hon. Gentleman would not want me to engage in a knee-jerk response to a report that was only published first thing this morning. I want to ensure that we have the right measures in place, whether through company law or regulation, to ensure that we have good-quality people running such organisations.

[David Mowat (Warrington South) (Con)]

The report makes it clear that had the Basel III legislation been in place, the AMRO transaction could not have happened. Will the Minister confirm that it remains his intention to implement Basel III as soon as possible and ideally before 2019?

[Mr Hoban]

It is our commitment to implement Basel III. We want to ensure that it is implemented consistently across the whole of Europe in capital requirements directive IV and we are pushing for member states to have the freedom to go further and raise capital standards when they believe it is in their interests to do so. We want to see tougher regulation of banks and that requires better and more capital and better and more liquidity.

[David Morris (Morecambe and Lunesdale) (Con)]

The FSA’s report mentions three Ministers in the previous Government who applied sustained political pressure to give a light touch, shall we say, to the regulation. Can my hon. Friend tell me who they were?

[Mr Hoban]

It is interesting, is it not? It is not often that we see particular Ministers highlighted in reports published by independent bodies. The three who are mentioned are Tony Blair, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) and the shadow Chancellor. The shadow Chancellor took great pride in taking credit for the design of the regulatory structure, which failed, and he compounded those mistakes in the design of the structure by putting pressure on the FSA to go for a light-touch regime. The taxpayer has picked up the consequences of the failure to design that structure correctly and of the inappropriate pressure to have a light-touch regime when it came to the regulation of RBS and others. The taxpayer is paying the cost and the Opposition should be apologising for that.

[Richard Fuller (Bedford) (Con)]

Although the report includes useful forward-looking recommendations, its review of the actions of executives, directors, regulators and Ministers that led to the crisis amounts to 487 pages of “Oops!” That includes the laughable statement on page 352 that

“deterrence will most effectively be achieved by bringing home to such individuals the consequences of their actions.”

Does the Minister agree that deterrence would be more effectively achieved by those people hearing the clunk of the prison door and the turning of the key?

[Mr Hoban]

My hon. Friend is right to say that many taxpayers up and down the country who have seen £45 billion poured into RBS want to know why action has not been taken against its directors. Today’s report is an attempt to address those issues. It recognises that there are some problems with the sanctions available to the FSA and in the Companies Acts, and we are committed to reviewing them and seeing which tougher sanctions can be put in place to deal with directors who let down the businesses they work for and the customers they serve.