Matt Hancock
Main Page: Matt Hancock (Conservative - West Suffolk)Department Debates - View all Matt Hancock's debates with the HM Treasury
(12 years, 10 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Mr Osborne
I give way to my hon. Friend the Member for West Suffolk (Matthew Hancock), who has worked in the Bank of England.
Matthew Hancock (West Suffolk) (Con)
Does the Opposition’s proposal not seem to be an attempt to re-create a tripartite structure in which there is more than a relationship between one and one other? We have problems with the concept of “too big to fail”, and the example of Barings has been cited. That bank did not bring the rest of the system down: the directors ended up losing their jobs and the person responsible went to prison. Will the Chancellor consider the scale of that failure, compared with what happened in 2008 when the whole system collapsed?
Mr Osborne
My hon. Friend is absolutely right. There was a failure of regulation with Barings, but the collapse of Barings did not bring down the financial system, either in the City of London or more broadly.
Ed Balls
Yes.
I will set out what needs to be done to turn this bad Bill into a good Bill and to put the public interest, not party politics, in the driving seat in financial regulation. I will set out four objectives that should guide this legislation. The first is stability. We must ensure that we have a system of financial regulation that is robust in good times and in bad times. The second is to protect the taxpayer. We must guarantee that the public purse is protected from irresponsible decision making and wider systemic failures. The third is to be on the side of the consumer. There must be effective regulation, more competition and action on financial education and exclusion. The fourth is to support growth and employment. Let me take each objective in turn.
On stability, provisions to improve the structures for financial regulation and financial stability are at the heart of the Bill. As I have said, we support the FPC and we look forward to debating its powers. We are pleased that the Chancellor has today done a U-turn and decided that the Government will take up the recommendation of the Joint Committee that the macro-prudential tools to be used by the FPC should be properly scrutinised by Parliament. I hope that he will ensure that that happens not just when they are introduced, but when they are subsequently changed and updated. We believe that a new scrutiny committee should be established in this House to play that role. We will propose such an amendment.
On the splitting of the PRA and the FCA from the FSA—I know that these acronyms are hard to keep up with, but this is quite a complex system—it is fair to say that there are advantages and disadvantages. The jury is out. The Chancellor’s decision to put all this new and more complex architecture under the umbrella of the Bank of England, and arguably under the personal direction of its Governor, raises serious questions of accountability and clarity in decision making, as has been highlighted by the Treasury Committee and the Joint Committee.
We share the Treasury Committee’s concerns about accountability within the Bank and accountability to Parliament. As the Committee stated,
“the governance of the Bank needs strengthening and…it needs to be more open about its work. The Bank must be held more clearly to account”.
The Committee has proposed that
“the role of the Court of the Bank of England should be substantially enhanced. It should be transformed into a leaner and more expert Supervisory Board, with the power to conduct retrospective reviews of Bank policies and conduct.”
The Chancellor has said that he does not want to go down that road. He has made some moves, but we think that there is further to go to ensure that there is proper accountability. Again, we will propose reforms in Committee.
It is on the issue of crisis management and the processes for deliberation and decision making within the new, more complex structure, that we have misgivings. The Joint Committee was right to state:
“The powers and responsibilities of the Bank of England and the Treasury during a crisis are key.”
However, the Bill and the memorandum of understanding are deeply confused and opaque, as we have just heard from the Chancellor. We welcome the fact that the Chancellor has accepted the Treasury Committee’s recommendation that the Chancellor should be provided with a discretionary power to direct the Bank when there is a material risk to public funds. The British Bankers Association also welcomed that in its submission, but stated that it was
“unclear that the assignment of powers now proposed is consistent with the strategic division of responsibilities envisaged by the Government, including the proposed power of direction over the Bank.”
Article 20 of the memorandum of understanding exposes the hole. I will quote it in full:
“During a potentially fast-moving crisis, it will become especially important to ensure close and effective coordination so as to maintain coherence in the overall crisis management process. At the heart of institutional coordination during a live crisis will be frequent contact between the Chancellor and the Governor. However, the Chancellor and the Governor may agree to establish ad hoc or standing committees at other levels to support this process.”
Under the Bill, there will be three deputy governors at the Bank, a new Financial Policy Committee, two new sub-agencies at the Bank—the PRA and the FCA—and a new quartet of relationships, in which there are separate statutory responsibilities for the Treasury, the FPC, the PRA and the FCA, as well as for the MPC. Will the Chancellor hear any of the views in a crisis, or pre-crisis, from the statutory office holders? Only, according to the MOU, if the Chancellor and the Governor decide that he should. It states that there will be frequent contact just between the Chancellor and the Governor. It is inevitable that there will be a variety of views and dissenting voices, not only at senior levels within the Bank, but between the different statutory agencies, because those agencies have overlapping and, in certain types of crisis, contradictory objectives. Those different statutory responsibilities are being put under one umbrella organisation—the Bank of England.
Ed Balls
In a second. I will make the argument and the hon. Gentleman can then ask a question.
Senior and responsible figures who hold statutory offices will get to put their views to the Chancellor only if they are on one of the ad hoc or standing committees, which do not yet exist. It seems as though the Governor will decide whether they should exist at all and who should attend them. My advice to the Chancellor is that one cannot just rely on Treasury officials or gossip by the water pump. Unlike many of the Back Benchers who have intervened, I am not seeking to play a party political game; I want him to change the Bill. [Laughter.] Honestly. This is a deeply confused and highly dangerous ambiguity.
Ed Balls
I will give way in a minute. Let me just make the argument, and then the hon. Gentleman, with all his experience of crisis resolution meetings at the Bank, can share his intervention with us.
In the run-up to a crisis or during a crisis itself, having such a high degree of ambiguity in the structure and placing such a concentration of power and access to the Chancellor in the person of the Governor would be highly unstable. If the deputy governor and head of the PRA—a statutory individual, but not the Governor—the head of the FCA or the majority on the FPC believed that there would be a systemic risk from one troubled company without support from public money, the Chancellor must know about it, and in time so must Parliament. They must know about it whether or not the Governor agreed. Whether or not the Governor believed that there was or might be a risk, and whether or not he believed that the moral hazard outweighed the risk, the Chancellor must know about it.
If the Chancellor wants a personalised, twin-peak system with all the responsibilities and accountabilities of the Bank of England located in just one person, the Governor, as is set out in the memorandum of understanding that he has negotiated with the Bank and as it seemed he did at times during his speech, the Bill is flawed. The new system will be unstable and the taxpayer will potentially be more exposed. All the statutory architecture of the FPC, the PRA and the FCA will be for the birds.
If, instead, the new committees and agencies are to have a separate statutory identity with clear and separate purposes that may sometimes conflict, and with leaders who must be properly heard, that must be clarified in the Bill. That was what the Chancellor seemed to suggest at other times in his speech, and the Bill seems to suggest it in places. It must be clarified not just in the memorandum of understanding but in statute.
The Bill sets out clearly the statutory identities of the FCA, the PRA and the FPC, which seems to suggest that the Chancellor intends to move from the tripartite system to a quartet system under the umbrella of the Bank of England—the Treasury, the FPC, the PRA and the FCA. If so, he should say so clearly in the memorandum of understanding and in legislation, for reasons of accountability, financial stability and effective decision making in a crisis. We will table amendments to that effect in Committee.
Matthew Hancock
I know that the right hon. Gentleman is desperate to defend the tripartite structure that he designed—
Matthew Hancock
It is not, by far.
The accusation that the right hon. Gentleman makes undermines his point that the Bill sets out a quadripartite system. It sets out a bipartite system, involving the Governor of the Bank of England and the Chancellor. The fact that it will be delivered through the person of the Governor, who has to manage his own institution with appropriate accountability to court, means that it is a binary system rather than a tripartite one. It will therefore be better at resolving crises at the rushed times when they occur.
Ed Balls
I made it very clear that I was not defending any particular regulatory structure. I do not think the crisis was caused by institutional structures in particular, because other countries with different structures had a crisis as well. We will seek to support the Government in reforming and strengthening the system of financial regulation, including through the addition of the FPC and the new powers of the PRA and FCA. However, all those individual agencies are being given statutory authority in the Bill.
The Bill cannot be setting out a binary or twin-peak system, because there will be the Treasury and the Governor of the Bank of England, then underneath him there will be a deputy governor who is also the head of the PRA, another who is also on the Financial Stability Committee, the head of the FSA—also a statutory office holder—and another deputy governor on the Monetary Policy Committee. The Bill is designed to bring in not a twin-peak system but a quartet system, which will be more complex than a tripartite one.
There may be very good arguments for having a quartet system and for splitting the FSA into the PRA and the FCA, and I support the FPC, but the system will be more complex, not simpler. The Chancellor is trying to fudge the matter by giving the impression in the memorandum of understanding that it will be not a quartet system but a twin-peak system, because things will be sorted out between him and the Governor.
That is not an ad hominem point. Other Chancellors and Ministers from Governments through the ages have known very well that there is an inevitable conflict in financial regulation between the regulator, examining systemic risks from individual firms, and the guardians of the system, who worry about potential systemic risks on the one hand and moral hazard on the other. The Chancellor’s role is as the guardian of the public purse and wider financial stability, so there are different points of view.
My advice to the Chancellor is that to try to subsume all those points of view into a separate institution away from him, without transparency and with multiple and overlapping roles for different statutory office holders, but then say, “I’m only going to deal with the Governor,” is ahistorical, deeply foolish and flawed. If the Chancellor changes and clarifies the Bill, we will be pleased, but at the moment it is a terrible fudge.
Matthew Hancock
I am very grateful to the right hon. Gentleman for giving way again. Does not his argument—that we cannot have an umbrella regulator under which inevitable tensions are resolved, and that we must instead have separate organisations—show exactly the thinking that led to the problems in the tripartite system, under which responsibilities were segregated and separated and problems fell between stools? The FSA and the Bank were told that one was to look at the regulation of individual banks and the other at the macro-economy, and never the twain shall meet. That is precisely the problem that needs to be addressed.
Ed Balls
The Chancellor referred to his years of thinking about this legislation. I am afraid that his former adviser demonstrates the kind of muddled thinking that has got the Chancellor into this difficulty.
I am not saying that the tripartite system is the best one. I am quite happy to go along with the shift to the quartet system—I can see the advantages of the FPC and the split of the FCA and the PRA. I am not worried because individual statutory agencies will be under the umbrella of the Bank of England; I am worried because the deputy governor and head of the PRA, who has a clear responsibility, is not part of the decision-making process. That is what I am worried about. I want the MOU to say that at the heart of the system—in pre-crisis and crisis—there will be a “clear view” group, in which the Governor and his key deputies, who will have separate and sometimes contradictory statutory responsibilities, come together with the Chancellor to make the decision.
Even if the Chancellor—this is not an ad hominem point—has the umbrella of the Bank of England and the quartet system, he should want to hear from the person whom he appoints on a very large salary and in law to be the head of the PRA. What I do not understand is why that would not be written into the MOU. Actually, I sort of do understand. There is a history in the Bank of England of the Bank equalling the Governor of the Bank—of wanting to personalise the appointment—as the Chancellor has described. However, we cannot personalise something as complex as the proposed system. It is not just that the system is complicated; there are also tensions and differences of view.
My right hon. Friend the Member for Edinburgh South West (Mr Darling) is quite right that it is hard to operate a tripartite system in which there are different views, but those differences will not be avoided by burying them under the table and pretending they do not exist. Had that happened at key moments in the previous crisis, the wrong decisions would have been taken.
Matthew Hancock (West Suffolk) (Con)
It is a pleasure to follow the hon. Member for Walthamstow (Stella Creasy). She speaks with passion and determination about consumer credit issues.
We have heard much about consumer credit and accountability, and, indeed, about culpability for what went wrong. Those are important questions, but I want to concentrate on the substance of the Bill and its impact on financial and economic stability. We did not hear much from the Opposition Front-Bench spokesperson about the question of substance, but I think this Bill is one of the Government’s most important pieces of legislation so far. It is an attempt to draw the right lessons from the economic crisis, and to set out a regulatory structure that will last for years to come. I am therefore very pleased that the debate has taken place almost entirely—almost, I repeat—in a spirit of constructive criticism.
It is said that the next financial crisis occurs when the last person to witness the previous crash retires. I hope that that will be a long time from now—and I also hope that that last person may be sitting here in the Chamber today. It is important that there is a long time frame, because the Bill must be right not only when memory of the recent crash is vivid, but when the boom is booming again and once more people are saying, “This time it’s different.” Our aim must be to embed a culture of responsibility into the big balance-sheet banks, while also encouraging and supporting the broad multitude of smaller, energetic, innovating, enterprising, exporting, wealth-producing, vitality-bringing, tax-paying City firms and companies that are not underwritten by the taxpayer and that make up the vast majority of firms in the City—and that ensure that our financial services industry leads the world.
Before turning to the substance of the Bill, however, I want to deal with the two questions that have dominated the media debate: accountability and culpability. To those concerned about accountability, I add only the following few comments to the long exchanges that have already taken place. The Bill represents an important step forward. At present, the Governor of the Bank of England reigns imperial on questions of financial stability. Executive action is vested in him and him alone. By creating the Financial Policy Committee, the Bill ensures that the Governor will be the chairman of a powerful committee, but instead of his being imperial, a committee decision will carry the day.
On the question of culpability, I do not know whether the Opposition admitted that they got things wrong, but it falls to us to learn the lessons from the failures, as well as the successes, of the past. My central argument on this question is as follows. Our financial system is complex, ever-changing and interconnected. We must therefore treat it as a system and understand the human behaviour of the people in it, rather than treat it like a textbook.
First, instead of segregating the regulation of the banks from the management of the economy as a whole, as the tripartite system tried to do, we must treat them as one part of the whole system. The attempt to turn the Bank of England into a monetary authority and to leave the FSA as a micro-regulator was bound to fail because no one was in charge of the size of bank balance sheets not only in the bust—as we well know—but in the boom, too. Monetary policy works through the banking system. Banks create money and transmit interest rates to the wider economy. As finance and money are deeply intertwined, their regulation must also be intertwined. That is the first lesson to be learned from the crisis, and this Bill addresses that point.
The second lesson is not about who regulates; it is about how they regulate. The debate about whether there was too much or too little regulation is sterile and defies the facts. Instead, we should be seeking the right regulation. Between 2001 and 2008 the number of pages in the Financial Services Authority rulebook increased from 2,700 to 9,300, yet, as we know from the report into the failure of RBS, not a single FSA rule was broken at RBS. There are some vivid examples of the FSA’s box-ticking mentality. In 2006 the FSA noticed that certain financial institutions were conducting biased stress tests on their balance sheet strength. In 2004 the FSA identified Fred Goodwin’s management style as a risk for RBS, yet nothing was done. No one was held to account. The FSA also failed to regulate balance sheets or check that business models were sustainable. There were 9,000 pages of rules, therefore, but there was no view on the sustainability of the business models of banks. In fact, FSA chiefs hardly ever met senior management. The FSA had meetings with Northern Rock’s senior management eight times in the two years before the crash. Two of those interviews were conducted by phone, while five of them took place on the same day. In 2007 when Northern Rock went bust, it was on the at-risk register but the next set of meetings between its senior management and the FSA was scheduled for two years later, in 2009. The pendulum between sticking to the rulebook and allowing the authorities to exercise discretion had swung to the extreme end of using the rulebook and leaving no room for judgment.
Stephen Phillips (Sleaford and North Hykeham) (Con)
My hon. Friend is making a powerful case. Does he agree that a key point is that flexibility is required for effective regulation of the financial services sector, and that one of the problems with the previous regulatory system was that the monolith that was the FSA simply imposed more and more rules without there being the flexibility to be able to tailor the rules to the circumstances?
Matthew Hancock
That is absolutely right, and I should also pay tribute to my hon. and learned Friend’s profession outside this House, because, as in the common law, every successful system of oversight that has stood the test of time allows room for both rules and judgment. The common law is an example of a system that has built up over time and that understands the complexities of human behaviour. It has strict rules in some regards, but it also allows the exercise of judgment in order to be able to adapt to modernity and circumstances. If we move entirely towards rules and away from the exercise of any judgment, we take away that ability to adapt.
Steve Baker
My hon. Friend makes an interesting point in comparing the approach under discussion to the common law. Does he agree that a key difference is that whereas in the common law anybody can look at previous judgments and know how the law will respond to their behaviour today, under this proposal to have flexible forward-looking, judgment-based regulation we cannot necessarily be sure today how the state will treat our current actions at some point in the future?
Matthew Hancock
It would be better if we had an embedded and long-standing system in which there were those precedents, but as we do not have about 800 years to put it in place it is better to have a forward-looking system. If my hon. Friend has a suggestion as to how we can use precedent built up over time, given that we are starting from a system that catastrophically failed, I would be very interested to hear it.
Matthew Hancock
As I said, this pendulum swung too far, but why do we need to allow the authorities to exercise discretion? It is because the world we face is as we find it, not as it is written in the rulebook. Indeed, the very complexity of the system calls for simple rules, because the more complex the rules applied to a complex system, the more likely somebody is to try to game it and, therefore, the more complex the set of rules that will need to be imposed again on the system to try to account for that behaviour. We see the same thing in respect of other areas of Government policy, not least the tax system, where complexity has led to avoidance activity, which has led in turn to complexity, and so we now have the longest tax code in the world. This attitude towards regulation and oversight makes no sense in the modern world of complexity. Complex systems need simple rules.
Complexity also adds cost to businesses not targeted initially. Worse still, the complexity leads to a moral abdication, because the rules become a substitute for personal responsibility. Just as we need to allow for the exercise of discretion by regulators, we also need, within a system that promotes responsibility, to allow for the discretion of management. That is why I have concluded that we need to ensure, especially in such a high-paying business, that the sanctions for failure and for irresponsibility are strong. It is not a good enough sanction for someone simply to lose their job in an industry where it is easy to move into another one.
In the first instance, we need to move to a system where the debarring of directors is made easier, not least because when a bank is rescued it technically does not go through the current debarring rules. The FSA is right to regulate pay and introduce claw-back, but we also need, in extremis, to introduce a measure to ensure that for recklessness at the helm of a systemically important bank there is a stronger and, if necessary, criminal sanction. I hope that such a measure would never be used but, as with other areas of life where these measures are hardly ever used, it greatly concentrates the mind to know that a deep sanction exists for reckless and deeply irresponsible negligence. I hope that such a measure would be a check on hubris and would last the test of time so that it would be in existence next time there is a boom and the associated hubris.
I hope that that change, the changes in this Bill and other changes will allow those of us who support the free market, enterprise and innovation to support, unabashedly and with enthusiasm, the wealth creators, who make our prosperity possible.