Interest Rate Swap Derivatives

Pat McFadden Excerpts

Thursday 24th October 2013 Commons Chamber

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

I pay tribute to the hon. Member for Aberconwy (Guto Bebb) and all the supporters of this debate on raising an important issue. I also pay tribute to my Treasury Committee colleague, the hon. Member for Wyre Forest (Mark Garnier) for his detailed explanation of a complex aspect of this subject that probably not everyone understands.

This is the latest in a series of issues that has corroded, damaged and sometimes destroyed trust between banks and their customers following the payment protection insurance scandal. We should pause and consider a couple of features of the PPI scandal. It was characterised, first, by a refusal to admit that there was a problem; secondly, by a refusal to take responsibility for that problem; and finally, by a huge bill for the banks because it had taken too long to face up to those things. I wonder whether any of those lessons have really been learned given the way that this issue is being dealt with.

Like the hon. Member for Wyre Forest, I spent much of the past year serving on the Parliamentary Commission on Banking Standards chaired by the hon. Member for Chichester (Mr Tyrie), where we looked into the standards and culture of the banks more widely. We found a sales culture, backed by the bonus systems, going right down to branch level. The banks pushed products like this, often allied with a product that the customer wanted, namely a loan, yet sometimes the customer was not even aware that a product was being sold to them or, if they were, whether it was a voluntary agreement or something they had to accept as a condition of the loan.

[Stephen Lloyd (Eastbourne) (LD)]

The right hon. Gentleman has hit on something really important, which is that the banks’ whole modus operandi was to sell products that individuals wanted and slip in the interest rate swaps underneath. I am glad that he has reminded us of that. Does he agree that it is important for these businesses to know that it has been agreed on the Floor of the House, and it is recorded in Hansard, that they will be offered compensation that aims to put them back in the position in which they would have been if there had not been a mis-sale, plus interest rates of about 8% a year?

[Mr McFadden]

I do agree, but there is also the question of who gets that redress and who does not.

Underneath this sales culture, we found that instead of a culture of a duty of care to the customer there was—characterised by the combining of products, often a simple product with a complex one—a culture of “buyer beware” that put the responsibility for fully understanding and being aware of all this in the customer’s lap, with, in many cases, the bank showing a lack of responsibility.

[Mr Straw]

I entirely endorse what my right hon. Friend has said. Does he accept that what made the banks’ behaviour even less acceptable is that such was the complexity of the swap products that often—and to my certain knowledge in a case that I have dealt with—the person providing the loan from the bank had no proper understanding of how the hedge product was going to work?

[Mr McFadden]

That is a really important point. Having heard the speech by the hon. Member for Wyre Forest, I wonder how many of the people selling these products would have been in a position to explain the consequences to their customers. I think we know the answer.

Products were being sold, allied to another product, that may or may not have been suitable for the person buying them. The customer may or may not have fully understood what they were buying, but they were left fully with the consequences of having bought it, to the extent that we had the situations highlighted in this debate whereby the banks pursued customers to such a degree that they were put out of business. We should recognise that hedging is not always wrong, and trying to insure against risks is not always wrong, but a degree of understanding is important. People have to understand what they are buying and the product has to be suitable for them. When the lifetime of the hedging product is completely different from that of the loan, there is a serious problem about that product’s suitability.

This issue provides a really important test of the standards and culture in the banks after everything that has happened. They have to show whether they have learned the lessons of previous mis-selling scandals or whether there has been a repeat of the pattern of behaviour that we saw before in which there was first a refusal to face up to responsibility. That was followed by increasing anger among the customer base and the destruction of trust, followed by a redress scheme that might have ended up being more expensive than the one that might have been put in place earlier.

This is also a test of the FCA. We are in the early stages of a new regulatory system, as the FCA has been in existence for only about six months. The system of redress that it has proposed is an important test of whether it is going to be able to do its job in restoring trust between banks and consumers in the face of sometimes increasingly complex financial products;

[Mr Heath]

The right hon. Gentleman is absolutely right to say that restoring trust between customers and banks is a crucial element. Businesses must not only get redress for what they have lost but be put back into the position that they would have been in and that includes the relationship with the bank, credit lines, and everything else that makes small businesses work.

[Mr McFadden]

The hon. Gentleman makes a good point. Culturally, we should be trying to get to a situation in which the banks have a duty of care to their customers instead of marketing and developing products that are driven by a sales and bonus culture that, in effect, says “Buyer beware” and puts all the onus on to the customer.

The proposed system of redress is based heavily on the sophistication test. That leaves a lot to be desired, because unless it is very carefully designed it cannot take account of the wide variety of types of business. Size and sophistication are not the same thing. It cannot take account of the wide variety of circumstances in which these products were sold or the wide variety of difficulties that businesses find themselves in.

Previous mis-selling scandals have been characterised by years of unnecessary delay that have caused incredible grief to those subject to them. If there is one further lesson that should be learned about interest rate swaps, it is that this process should not drag on for years. We need a system of redress that learns the lessons of the past and is implemented as quickly as possible.

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[Nia Griffith (Llanelli) (Lab)]

Thank you, Madam Deputy Speaker, for allowing me the opportunity to speak in this very important debate. I congratulate the hon. Member for Aberconwy (Guto Bebb) on the work he has done over the years and on bringing the matter to the House’s attention through this debate.

This issue affected successful businesses that were trying to expand and help create more jobs in the local economy. Some of the businesses that have visited me were successful and had excellent plans for expansion. The really sad thing is that during their negotiations to change or expand their loans, it was often the case, as my hon. Friend the Member for Alyn and Deeside (Mark Tami) has said, that they were told right at the very last minute that, unless they accepted this clause, the whole thing would be shelved and they would lose all the transactions and work they were about to undertake. That was significant for them, because it meant having to say yes or no to a very important loan.

I think that such businesses are intrinsically fearful of going to the banks, which is a real problem. The terms and conditions for small businesses have changed so much over the past few years that they are fearful that, if they explain their difficulties to a bank, they will suddenly be told that their terms and conditions for a loan will be changed again. That is a real disincentive. The key thing to remember is that these are people who genuinely are trying to do the right thing, but who are fearful—perhaps ashamed—because they did not know exactly what was going on in the first place, even though, as my right hon. Friend the Member for Wolverhampton South East (Mr McFadden) has said, the people who sold them the scheme were incentivised to do so in an underhand way. Often they would not make it at all clear to the businesses exactly what they were entering into. We need to redouble our efforts and look in particular at why there are so many delays, because every delay means businesses raking up yet more debt.

[Mr McFadden]

On the sales culture, what does my hon. Friend have to say about the evidence that the Parliamentary Commission on Banking Standards received from the trade unions representing bank staff that said that, sometimes, if branch staff did not meet their sales targets, they would be taken aside, given special management and pressurised to sell more products over the next month or two in order to meet the targets on which their bonuses were based?

[Nia Griffith]

My right hon. Friend makes a valid point. I have met people who were put in that situation and who ended up leaving the bank because they found it so difficult and uncomfortable working in that sort of culture. That does not help small businesses, which want a decent banking system from which they can get decent advice and the loans they need.

The worry is that the Financial Conduct Authority and the banks are not doing things as speedily as they might and that there will be a distinct delay. We are all aware that the agreement was that an independent reviewer would look at each case and that that process would be overseen by the FSA. My hon. Friends the Members for Nottingham East (Chris Leslie) and for Chesterfield (Toby Perkins) wrote to the Chancellor over a year ago outlining what we wanted to happen. When the Financial Secretary sums up, will he tell us what progress has been made?

We want a clear message that there will be no adverse effect for people if they tell their bank that they think they may have been victims of this particular mis-selling. We also want a moratorium on the foreclosure of affected businesses by their banks. People are really worried that, if they start looking at the issue in detail and open the box, they might be forced to reschedule their loans in an unmanageable way and that they eventually might be foreclosed on by their banks. The Chancellor and the Business Secretary need to send a much stronger message to the FCA about how we want the banks to work.

As many Members have said, we want the quickest resolution possible, but time limits also need to be looked at. The problem is that businesses that signed up to these agreements back in 2006 and 2007 are now reaching the six-year limit, and they will find themselves in considerable difficulties if they do not get redress through the scheme and end up going to court. We need to look at the way in which complaints are handled and the time limit that is being allowed. Perhaps there could be movement on that issue.

In summary, this issue needs urgent attention. We need a much speedier resolution and people need to be treated properly and courteously by their banks. They should not have to be fearful of loans being rescheduled or of being thrown out of the frying pan into the fire, which is their real worry. Speed is of the essence, because these businesses provide jobs in our communities and if they go under, it could mean not one lost job, but many job losses. I urge the Financial Secretary to say what more the Government can do to put pressure on the FCA and the banks to ensure a speedy resolution.

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[The Financial Secretary to the Treasury (Sajid Javid)]

First, let me take this opportunity to welcome you to your new Chair, Madam Deputy Speaker. It is a great pleasure to see you in your place. I also welcome the hon. Member for Birmingham, Ladywood (Shabana Mahmood) to her new role and wish her luck with it.

I start by thanking all the hon. Members who secured this debate and by congratulating everyone on presenting their case well. Special thanks must go to my hon. Friend the Member for Aberconwy (Guto Bebb) for the time, energy and passion that he has put into this issue and for the leadership he has shown. We can see from this debate that this issue is very serious; 17 of my hon. Friends and four other hon. Members have spoken today. I am sure that everyone in this Chamber, like all those others watching in the Public Gallery, at home and elsewhere, including the hundreds watching in the Central Methodist hall from the many businesses that have been affected, is keen to see a quick conclusion to the FCA review and to see that those businesses that were mis-sold financial products are compensated accordingly.

When I was growing up, my father ran a small family business in Bristol, so I was made aware from a young age about the importance of cash flow and the dangers of unexpected costs. As such, I sympathise wholeheartedly with the small businesses that have been affected by this mis-selling scandal and have put such energy into lobbying on this issue. This Government have made it clear from the beginning that the mis-selling of financial products is totally unacceptable. We take extremely seriously the abuse that has taken place, and we are determined that any wrongs that have been inflicted on businesses should be righted.

I share the disappointment of fellow hon. Members about the progress made under the FCA review to date. I stood up in a Westminster Hall debate about four and a half months ago to discuss this very issue, and the fact that the FCA has not made any significant progress since that debate is, frankly, not good enough. As we have heard today, the FCA said in January this year that the full review process would begin, but it has since confirmed that the full process did not start until May this year. That delay has been disappointing, and the FCA should have been much clearer about exactly when this full review actually started. However, the review is now up and running, with the large majority of cases being looked at. I understand from the FCA that it believes that about 85% of cases are now under review, but hon. Members are absolutely right to say that it is time for the banks and the FCA to do more to speed up the process and get redress out the door. As such, the Government will continue to push the banks and the FCA to complete the process as quickly as possible. As the motion says, the redress scheme’s progress has been too slow. That is costly and has caused further undue distress to the businesses involved. The FCA and banks need to get on with the job.

[Mr McFadden]

Before the Minister leaves the issue of the FCA, will he say what he thinks of the FCA’s reply to some businesses in distress—that it will not consider individual cases?

Financial Services (Banking Reform) Bill

Pat McFadden Excerpts

Tuesday 9th July 2013 Commons Chamber

[Chris Leslie]

That broadens things out into a whole new terrain, but suffice it to say, we should be able to trust our banks. We should be able to know that all these issues will be going on safely. To be fair to the banks—I do not say that often—some of their systems are able to cope, and complaints mechanisms are in place to deal with these things.

This is just about the customer being able to grasp and understand what is going on. The grey mist descends on many constituents—and, heaven knows, on many hon. Members, as we can see—at the mention of financial services, and that is without getting into pensions and some of those issues. Basic bank account services are incredibly important and we need the Government to say a little more than warm words in their response on this issue. I commend the hon. Member for South Northamptonshire on her campaign and we are very much behind the spirit of the changes she suggests, hence our new clause 12.

Finally, I wish to deal with new clause 10, which relates to the sale of state-owned bank assets. We feel that before a sale takes place of assets in the ownership of Her Majesty’s Treasury—we are very much focused on the Royal Bank of Scotland and Lloyds at the moment —the Treasury ought to set out clearly a report discussing the manner in which the best interests of the taxpayer will be protected in the sale, and the expected impact that any sale might have on competition for customers and on the rate of economic growth. That should be accompanied by a proper appraisal of the options for potential structural change in the banks concerned, including: whether there should be any changes to the division between retail banking and investment banking in those institutions; whether some asset classes need to be held back—this is sometimes characterised as a good bank/bad bank split; and, crucially, the impact of the sale on the creation of a regional banking network. We think that is essential.

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

My hon. Friend will know that the banking commission recommended having a proper study of the good bank/bad bank option for RBS. Does he think that in advance of that study it might help if the Government exercised a little more care in their stewardship of RBS, given that their disastrous political meddling of the past month has resulted in a fall in the share price of some 20%, the bank losing a chief executive without a plan being put in place for replacing him, and confidence among investors being lost by the Government’s handling of the bank?

[Chris Leslie]

My right hon. Friend is completely correct about that. If the British public realised what has happened to the value of that taxpayer stake in RBS, they would be appalled. Today’s figures show that £2 billion-plus has been taken off the value of RBS since the botched handling of the departure of the chief executive, Stephen Hester. That mishandling forced the Chancellor to back down from a foolhardy dash towards a fire sale, which we know was part of the plan from the conversations that Sir Philip Hampton, the chairman of RBS, let slip in comments to journalists around that time. Labour Members, however, are absolutely focused on the need for the taxpayer to get good value for money, to get our money back. That is entirely possible. Stephen Hester revealed the flaw in the Chancellor’s strategy for a hasty sale driven by the electoral timetable when he gave an interview to the BBC last month. When asked whether taxpayers would get back their £45.6 billion, he answered:

“RBS is capable of being worth more than what the government paid for the shares”.

When asked again whether it is possible for us to get our money back, he said:

“RBS is capable of that and I would be disappointed if over the passage of time that that won’t be the case.”

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[Mark Garnier]

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

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

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

[Mr McFadden]

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

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

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

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

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

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

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[Andrea Leadsom]

The right hon. Gentleman may recall a meeting we had with senior bankers in which they said that, although they were reluctant about bank account number portability, if it is going to happen let us make sure that we will be the first country in the world to do it and not wait until somebody else does it. That would give us first-mover advantage and it could provide a huge business opportunity for UK plc. What does the right hon. Gentleman think of that idea?

[Mr McFadden]

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

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

[Mark Garnier]

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

[Mr McFadden]

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

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

[John Thurso]

I also rise to support new clause 14 tabled by my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) and to which I have added my name.

The right hon. Member for Wolverhampton South East (Mr McFadden) chaired a panel of the banking commission and one of the first visits we undertook was to Birmingham, where we had a number of sessions, one of which was with representatives from small and medium-sized enterprises who were very vocal about the importance of securing a fair deal from the banks.

Which? organised an evening session that allowed us to visit different tables where individuals talked about their experiences. I had an interesting experience when I asked a table of people of a variety of ages, although mostly younger than me—not that that is difficult—about the ability to switch bank accounts. They were not really that keen and said, “It’s too much hassle. Why bother? It won’t be any different.” I said, “Suppose you could do it in the same way that you change your mobile phone, where you take your SIM card-equivalent and plug it into another machine.” At that point they all said, “Oh, that would be wonderful. What a good idea. Is it possible?” I said, “Not yet, but it is very likely to happen.” They said, “Actually, even that won’t work because it will just be the same old names that I will be going to.” I said, “How would you feel if the chap who has that nice transatlantic airline had a bank?” They said, “Oh yes, that would be jolly good.” That bunch of average customers had no idea that it might be possible to move accounts and no idea of the array of accounts that might be available as a result.

That experience drove home to me that the relationship between banks and their customers has been the reverse of what it should be. We go cap in hand and say, “Will you please take my account?” It ought to be the other way around. The banks should be coming cap in hand to us saying, “Please can I have your business?” New clause 14 goes to the heart of that dilemma. All right hon. and hon. Members who have spoken have made the point that the new clause is not a silver bullet and that many other measures are required, but it would be one of the key enablers of that change in the relationship, along with the payments regulator and other things that might be done. Ultimately, we need banks to be genuinely fearful of losing business—at the moment they are not, because they know that people cannot go anywhere else —and genuinely to want to win business. The commission has made progress on that and new clause 14 is very much a part of that.

I am sorry that my hon. Friend the Member for South Northamptonshire told us early on that she will not press her new clause to a vote. I always find that Ministers go a bit further if one waits until they have said nice things before telling them that. Clearly, she has had a tremendous impact on the Minister ahead of the debate. I look forward to hearing what he has to say.

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[Mr McFadden]

This is an unusual Bill, in that at the same time that it has sought to implement a reform recommended by the Vickers commission two years ago, it has run in parallel with the Parliamentary Commission on Banking Standards, which periodically has produced reports and asked the Government to use the Bill to implement their findings.

I place on record my thanks to colleagues who served on the commission and all its staff. It was an intense effort and I do not think we could have produced our reports without the able efforts of the many staff who worked for us, led by Colin Lee, who is a great servant of this House.

I want to draw the Minister’s attention back to yesterday’s official response from the Government to the commission’s report of a few weeks ago. We read in yesterday’s newspapers that the Government were going to accept the vast bulk of the recommendations and the Minister opened the debate by saying something very similar. However, I have looked through the Government document in detail and wonder whether the Minister could confirm that the position is not that simple.

Paragraphs 2.32 and 2.33 reject part of our recommendations on pay. Paragraph 4.5 makes no commitment to legislation on access to basic bank accounts. Paragraph 3.24 passes to the regulator only consideration of the changes that we recommended on the corporate governance responsibilities of executives and bank chairmen. Paragraphs 3.34 and 3.35 in effect reject our recommendation for gender reports on operations on the trading floor. Paragraph 5.11 rejects our recommendation to consider splitting RBS into regional banks as part of the Government’s study on RBS. Paragraph 5.28 rejects our recommendations on the governance of the Bank of England. Paragraph 5.31 rejects our recommendations on the chairmanship of the Prudential Regulation Authority.

As my hon. Friend the Member for Nottingham East (Chris Leslie) said, the Government have also rejected recommendations on leveraging and ring-fencing, in particular ring-fencing in respect of the sector as a whole. When it comes to the implementation of recommendations, the chairman of the parliamentary commission yesterday described the attempt to ring-fence one particular group as “virtually useless”.

I stress to the Minister that it is not accurate to say that the Government have accepted the vast majority of the parliamentary commission’s recommendations. The document that was published yesterday is full of excuses and sleights of hand that pass on to the regulator for consideration firm recommendations that we made. I stress to those in another place, who may have a greater opportunity to amend the Bill, that they should read the document that was published yesterday with a careful eye to see what has been accepted and what has not.

[Greg Clark]

The right hon. Gentleman is not giving the response a fair reading. First, not all of the recommendations were addressed to the Government. Some of them were addressed to the regulators. Secondly, some of the recommendations that were made to the Government have been taken forward through actions that can be taken by the regulators. When colleagues look at the response, they will see that it is a broad endorsement of what was an excellent report.

[Mr McFadden]

Perhaps the Minister and I have different interpretations of the word “broad”. He may be able to persuade the hon. Member for Chichester (Mr Tyrie), on the basis of some warm words, that these are great concessions, but I remain to be convinced.

The Government have a great deal more to do to convince Parliament—this House and the other House—that they endorse the vast majority of the recommendations. The more one reads the report that was published yesterday, the less one comes to that conclusion. I hope that those who are in a position to amend the Bill in future take heed of that and press with greater determination than Members of this House the amendments that would fully and faithfully implement the recommendations of the Parliamentary Commission on Banking Standards.

Financial Services (Banking Reform) Bill

Pat McFadden Excerpts

Monday 8th July 2013 Commons Chamber

[Mr Love]

The press release that was—

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

On a point of order, Mr Speaker. I rise to seek your guidance, because the Minister is making, in effect, a statement on a series of Government policies related not to clause 1 or amendment 1 but to policy areas where amendments have not yet been tabled. Is that in order? Should this not have been done in the proper way—making a statement and allowing the House to ask questions in the normal way?

[Mr Speaker]

The Minister may wish to reply, because it is important to be clear about the context in which the observations he is making are made. That is central to this matter, and it is difficult to rule on it unless there is some clarity on the subject. I am grateful to the right hon. Gentleman for his point of order and let us hear what the Minister has to say.

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[Greg Clark]

I do not agree with that. We will come on to talk about what the commission referred to as the electrification of the ring fence, and whether it is appropriate to have a power to break up the whole system, so I will address that in a second, if I may. Amendments 6 to 10 concern that electrification of the ring fence, to use the memorable phrase of my hon. Friend the Member for Chichester—or, I dare say, the whole commission.

[Mr McFadden]

The Minister is being generous in giving way. I would like to take him back to the intervention by my hon. Friend the Member for Edmonton (Mr Love). Will the Minister confirm that paragraph 5.11 of the publication that his Department published today states:

“The Government does not believe that the case for breaking RBS’s core operations into multiple entities meets the objectives of maximising the banks’ ability to support the British economy”?

In layperson’s terms, the Government have today rejected the notion that their review will look at regional banks, as distinct from a good bank/bad bank split. Is that how we should read that?

[Greg Clark]

No. The right hon. Gentleman has not got it quite right. We are absolutely enthusiastic about creating regional banks, and the exchange that I had with my hon. Friend the Member for Hexham, and the changes made by the regulator to the approvals process, underline that. The right hon. Member for Wolverhampton South East (Mr McFadden) asks a specific question about whether RBS, in which we, of course, have a very substantial stake, should be broken up in that way. It is important that we have regard to value for the taxpayer. I suspect that we will talk about these things tomorrow, but I confirm that it is the Government’s view that we should not damage the potential value to the taxpayer in that way.

As members of the Bill Committee will recall, I made a commitment to introduce on Report amendments to implement electrification, and here they are. The amendments give powers to the regulator, with the consent of the Treasury, to require a group to separate completely its retail and wholesale banking operations. The regulator would be able to require the group either to sell its interests in ring-fenced or non-ring-fenced entities, or to transfer specified businesses to outside ownership. The regulator will be able to require separation if it is satisfied either that the group’s ring-fenced bank is not sufficiently independent of the rest of the group or that the conduct of any member of the group is such that it undermines the regulator’s ability to achieve its new statutory objective to ensure the continuity of core services.

The amendments set out a process for the exercise of that power. The first step is that the regulator must notify all affected members of a group that it is minded to exercise its powers and how it proposes to do so. The affected bank has the right to make representations following the receipt of each notice. Following that stage, the regulator is required to allow members of the group at least a year to take action to rectify the position. If, after that period, the regulator wishes to proceed it must issue a warning notice before a requirement to separate is imposed. The regulator would then allow five years to complete the separation required in line with the disposals required under competition law, particularly state aid interventions.

As the parliamentary commission recommended, the Treasury’s approval is required before that action can be taken. We agree with the commission that providing for a deterrent against any bank that seeks to game or evade the ring fence is a sensible reinforcement in keeping with the recommendations of the Independent Commission on Banking. Government amendments 11,12, 13 and 14 make technical adjustments to ensure that all the necessary components of structural reform comply with the ring fence and are brought within the scope of the ring-fencing transfer scheme.

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[Greg Clark]

The hon. Gentleman gets to the nub of the matter, because of course any attempt to evade the ring fence or to nibble the electric fence, as dangerous to health as that would be, could be undertaken only on the part of a particular institution, not the system. That is why we agreed with the commission’s report—it was not part of the Vickers report—that it was necessary, for exactly the reasons the hon. Gentleman mentions, to have a sanction against that type of behaviour, and that is what we have done.

A further power to separate the whole system could not be triggered by an individual and could not punish the actions of an individual institution. That is why I think that is a very different policy. It commands the support of some very distinguished and influential people. The Glass–Steagall approach, which of course the policy is modelled on, has its place in history, but I think that history also reveals that the Glass–Steagall arrangements were not immune to the very dangers my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) pointed to. It is a good job my hon. Friend the Member for Chichester secured his amendment to the programme motion, because we are having a very interesting debate, but I would like to conclude, because there are other amendments that hon. Members would like to speak to. On that point, however, I urge the House not to allow at this stage the introduction of a very different policy into the Bill.

Let me turn to the amendments tabled by my hon. Friend the Member for Chichester, who I dare say will speak for himself in a few moments. I know that some of them were tabled to afford us the opportunity to discuss his commission’s report, and I think that this is now established as a very relevant opportunity. I will of course listen carefully to what he says. I am confident that the amendment the Government have tabled in response to the commission’s report can be improved during the Bill’s passage to take into account whatever concerns are embodied in his amendments.

Amendment (a) to Government amendment 6 would add a new condition under which the separation powers could be used: namely, when the regulator

“judges that there are serious failings in the culture and standards of the ring-fenced body or another member of its group.”

Of course, under the Government’s amendment the regulator would have the ability to separate the group if its conduct threatened to undermine the regulator’s ability to meet its continuity objective, but I think that, as the commission’s extensive deliberations showed, cultural failings might be present in banks that can result, for example, in significant harm to individual consumers or groups of consumers but nevertheless do not have systemic consequences. I think that the relevance of the proposed new power to take into account the culture is adequately covered under the provisions already in the Bill.

Amendments (b) to (p) concern the procedures for exercising the separation power. They would remove from the process: the second and third preliminary notice stages that extend to six weeks the time for banks to make representations; the requirement that the group be given a minimum of five years to effect separation; and the requirement for Treasury consent before a group can be required to separate. It is, of course, essential that a clear process be established for the exercise of the separation power. As I have said, I will listen carefully to what my hon. Friend says about reducing the number of warnings, which I think is the essence of what he is recommending, and about departing from the standard practice in financial services of allowing 14 days, rather than the six weeks that he proposes, for representations.

[Mr McFadden]

I want to compare the Minister’s six-year timetable with the one that the hon. Member for Chichester (Mr Tyrie) has set out in his amendments. What would be the difference for an individual group between moving to full separation under the Minister’s timetable and its doing so under the timetable that would apply if the amendments tabled by the hon. Member for Chichester were accepted?

[Greg Clark]

As I have said, I shall hear from my hon. Friend. I do not think there is any difference of intent between us; we have accepted the commission’s recommendation. We have taken the period of five years because that is the standard time for the disposal of assets when they are required through competition law proceedings.

I am certainly concerned, however, that the banks should be given a chance to address the concerns, and that chance would be lost if amendment (k) were followed. If amendment (p) were followed, we would deny banks the five-year period for divestments to be made that is typical under competition law. But as I have said, I remain open to considering these matters further during the Bill’s passage. I am confident that it can be improved to meet the concern, as I know that there is no disagreement in principle between me and my hon. Friend on the issue.

The requirement for Treasury consent follows from the commission’s own recommendation, without which the regulator could, on its own initiative, instigate radical structural reforms.

Amendment 19 is retabled as an alternative to Government amendment 6, providing for the specific full separation power. As I explained in Committee when the amendment was previously debated—when the hon. Member for Nottingham East was channelling my hon. Friend the Member for Chichester, as he frequently did—it suffers from technical flaws. That is why I committed to introducing a Government amendment to deliver its objectives.

Specifically, amendment 19 is rather vague, giving the regulator power to require a group to take steps to separate without specifying what those steps are. It also lacks provision for a minimum period over which groups must execute a separation, leaving the risk of the regulator’s ordering a rushed disposal that could be destabilising to the system.

The Government amendment is intended to address those technical problems, although I have signalled our willingness to make any further improvements that may be necessary as the Bill progresses. I hope that my hon. Friend the Member for Chichester will be able to withdraw his amendment at this stage, pending further consideration.

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[Mr Tyrie]

There is considerable force in what my right hon. Friend says. We considered the issue in great depth and published a report—the third report—on exactly that. We discussed the case for full separation, but concluded that although the ring-fence proposals had merit, they should not be reconsidered until we have given the Vickers ring-fence approach a try. We also examined the merits of a closely related proposal for the separation of proprietary trading—exactly what is being suggested—from the rest of banking activity. We concluded that further statutory support was not needed for that approach now, because the Prudential Regulation Authority might already have the powers to implement an effective separation of prop trading. We asked the PRA to present a report to the Treasury and to Parliament on its use of a range of monitoring and corrective actions, which could serve as the subsequent basis for a full and independent review of the case for full separation of prop trading. Unfortunately, as far as I can tell—I have had very little time to absorb this publication, which came out only at 12.30 pm—the Government have rejected even examining the proposal for prop trading. That is a mistake. I regret that, but I hope it will be put right in the other place.

Returning to amendment (a), the Government accepted the case for ring-fencing, arguing that banks that test the ring fence should be strongly deterred and, if necessary, prevented from doing so. However, I am afraid that that will not be the effect of the Government’s amendments. On the contrary, the Government amendments almost guarantee that banks will not get a shock, and will not be discouraged from testing or gaming the ring fence. The regulator needs a useable and credible deterrent. This proposal creates too many obstacles and delays to the sanction of full separation.

Frankly, it is inadequate for three main reasons. First, it requires the regulator to issue—we have already heard a little about this—no fewer than three preliminary notices and a warning notice before it can act. Secondly, it then requires the regulator to obtain permission from the Treasury no fewer than three times while the process is in train. Putting that requirement on the statute book would transfer most of the effective regulatory decision-making power away from the PRA and the Bank of England to the Treasury. It cannot be appropriate for the Treasury to be the regulator. The commission argued for a Treasury override at the end of the process, not at the beginning or in the middle, but the Government’s amendment requires the regulator to secure the consent of the Treasury on three occasions prior to that point. Even so-called preliminary notices—in effect, expressions of concern by the regulator—will require Treasury consent. That is absurd and compromises the regulator’s independence.

The third objection has also been alluded to. The Government’s amendments allow at least five years for the completion of the separation after a decision has been made. That would create enormous scope—indeed, it would make it ideal—for lobbying for a change of heart in the interim. It would create far too much room for that and we can do without it. It also flies in the face of what the Minister said in Committee, where he alerted Parliament to the risk of what he described as an “inordinately long” delay in implementation. A tool that is so difficult and slow to use is likely to deter no one and that is why I have proposed a number of amendments that would remove some of the obstacles erected by the Government to taking action to separate banks.

[Mr McFadden]

I want to ask the hon. Gentleman the same question that I asked the Minister about the difference in time scales between his amendments (a) and 19 combined, and the five to six-year timetable in total that the Government have set out. Were we to go down the road recommended in the hon. Gentleman’s amendments, how long does he think it would take between a decision on separation of an individual group being taken and that eventually happening?

[Mr Tyrie]

That is something on which we can usefully take advice from the regulator, but I would have thought that two years would be a reasonable maximum. Five years is ridiculous. It might take less than two years, but we have people down the road who can give us a clear view and the Government should ask them, if necessary publicly.

I have also tabled an amendment that would give effect to the Banking Commission’s proposal for allowing for full separation, as well as trying to improve the Government’s faulty amendment a bit. I recognise that the amendment has been debated in Committee and that the Government said they did not like it, but their reasons for not liking it were frankly not strong. I still find it curious that the amendment was rejected as a starting point for putting in ring-fencing. When the Bill goes to the other place, I hope that that amendment might be seen to be a better starting point than the Government’s. The Government have had several months to get this right. It is regrettable that they have made so little progress on it, but we are where we are. In any case, even ring-fencing with electrification is no cure-all for the standards problems in banks. To improve them, we all have to move forward on many other fronts.

I would like briefly to refer to the main other areas that are needed. To improve competition, we recommended a range of measures. We asked the Competition and Markets Authority to initiate a market study of the retail and SME banking sectors. I noticed that the Government were so enthusiastic about that recommendation that they announced it as soon as they received the embargoed copy of our report. We asked the Government immediately to establish an independent panel of experts to assess ways of enabling much greater personal bank account portability. The Government appear to have ridden back a little from that in the proposals they published today, although I cannot be sure.

We also took a good deal of evidence on RBS. Competition is weak partly because RBS is weak. Further restructuring may well be needed. In our view, the Government will need to be bold. We recommended that they undertake a detailed analysis of a good bank/bad bank split as part of an examination of the options for the future of RBS. That is vital work. In the field of banking reform, a healthy RBS, with the restoration of normal lending to the SME sector, is probably the biggest tonic that could be given to the British economy.

The way in which banks run themselves also needs reform. An accountability firewall had grown up that allowed senior bankers to deny responsibility for their failings. That wall has to be taken down. To give effect to that, we proposed the introduction of a senior persons regime. This would ensure that the direct personal responsibilities of board members, particularly the chairman, reflected the importance of their roles, so that it was clear to bankers and regulators who should reasonably be accountable when things went wrong, and for what. Our study of HBOS—our fourth report—provided a clear example of exactly the opposite. It guided our thinking on this and a number of other areas. Senior board members at HBOS did not take responsibility for what went wrong.

The crisis of standards was partly caused, and considerably inflamed, by the fact that bankers were rewarded for doing the wrong thing. Bonuses were often paid out well before the risks of the actions that they ostensibly rewarded became apparent. Bankers took huge rewards and when the risks turned sour, taxpayers picked up the tab. That has to stop. The Government and regulators should not set levels of remuneration. However, much more radical steps are needed to incentivise better behaviour among all staff whose actions or behaviour could seriously harm a bank, its reputation or its customers. Deferred remuneration for executives should not be viewed as an entitlement. People should keep their deferred bonuses only when it is clear that they have really been earned. That will mean long deferral, in some cases up to 10 years.

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All this is a great challenge, but it is also a great opportunity. It is an opportunity for all of us, and in particular the banks, to demonstrate a commitment to improving standards and to putting an end to the rip-off—of both the taxpayer and the consumer—culture that has marked recent years. It is also incumbent upon us here to show a preparedness to help restore trust by supporting banks where they show a willingness constructively to engage in implementing these proposals.

[Mr McFadden]

I do not propose to follow the hon. Member for Chichester (Mr Tyrie) by making a wide-ranging speech on the recommendations of the banking commission’s final report, as he has set them out perfectly adequately. However, I do want to say that I do not think the Minister has served himself or this discussion well by publishing the Government’s conclusions at lunchtime today, and then coming along and making a de facto statement of new policy, thereby simply compounding the sense of frustration in this House about the adequacy of the procedures for discussing these issues. Instead of going over all of that in great detail, however, I want to concentrate on the amendments before us, and on the discussion of ring-fencing and separation. I specifically want to talk about amendments 17 and 18 in the name of the shadow Chancellor and his shadow Treasury team colleagues; and amendment (a) to Government amendment 6 and amendment 19 in the name of the hon. Member for Chichester.

The banking commission’s first report, issued before Christmas, focused on ring-fencing and separation. It made two principal recommendations in respect of what has become known as electrification of the ring fence, which is the power to go further than the ring fence and enforce full separation between investment and retail banking.

The first of those proposed powers was in respect of individual institutions, and it was accepted by the Government, at least in name. The second power was in relation to the sector as a whole, and it was not accepted by the Government. No convincing reason has been given for accepting one and rejecting the other. The Government have today tried to make a virtue of issuing a response to the banking commission’s final report which says they broadly support its conclusions, yet in terms of the legislation before us the Government are continuing to reject a major recommendation of our first report, and as we have teased out of the Minister, even in the document published at lunchtime, they are rejecting recommendations on UKFI and regional banking. We may learn about others, too.

On the question of backstop powers to enforce separation in respect of either individual groups or the sector as a whole, one of the clearest lessons from the banking crisis of 2007-08 was how interconnected the banking system is. Institutions involved in banking are not islands cut off from one another. They lend money to one another. They engage in the same practices. Their culture is often shared. They place similar bets. When one falls, it often has the capacity to drag others down with it, as we learned to our great cost.

The same is true of the standards and culture questions we examined in such detail after Christmas. The LIBOR fixing was the straw that broke the camel’s back in terms of the establishment of the commission, but that did not just happen within one bank. Groups of traders within banks were co-operating with one another to rig the interest rates, and groups of traders across different banks were co-operating with one another to rig the interest rates. Against that background, it makes no sense at all to restrict the policy armoury that this Bill establishes to respond to the undermining of the system by taking powers that will affect only individual banking groups and not the sector as a whole. As the hon. Member for Chichester said about our recommendation on new criminal offences, some of those powers may never need to be used, but their existence on the statute book should focus the minds of those running these major organisations.

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

We also discussed at length the fact that, if we do not have the weapon in the armoury, we cannot use it, and it is usually too late to put it in place once a crisis comes along. Far better to have the gun in the locker, even if we never use it, than not to have it at all.

[Mr McFadden]

I entirely agree.

[Mark Garnier (Wyre Forest) (Con)]

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

[Mr McFadden]

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

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

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

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[Greg Clark]

I am grateful for my hon. Friend’s intervention. I always take praise when it comes—especially from him, as he is often very flinty in issuing it. I do not think that what I said amounts to a concession, because it has always been our intention to reflect the spirit of his suggestion.

Let me make an important point on the process that my hon. Friend describes. In his amendments, he does not have a time period in mind for the exercise of the power.

[Mr McFadden]

rose—

[Greg Clark]

I have one minute left, so the right hon. Gentleman will understand that I cannot give way. The proposal that there be five years to implement the action has been discussed with the regulators; it reflects best regulatory practice. In point of fact, if there were no time limit in the Bill, which is what one of the amendments tabled by my hon. Friend would ensure, that would render the use of the power without limit, so I think we are in the same territory—the right territory—in wanting to specify that there should be a limit. It should be clearly understood that there is a limit to the use of the electrification powers, in terms of a timetable, and a deadline for action. Of course it is right that the regulators should advise on the appropriate use of that. In terms of the amendment—

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[Mr Redwood]

Indeed. That point also shows that we need banks to be profitable—particularly RBS, which is still largely state owned. Until the bank is making profits, its capital ratios will not improve quickly enough and it will then not be in a position to lend the money that the Government would like it to. The taxpayer would be grateful if it could be more profitable, because our shares would be worth more, which would be in the general interest.

I conclude by making the same point to the Minister. Yes, I want us to get to stronger banks with tighter ratios, but I want us to get there through growth and growth in bank profits—particularly for HBOS and RBS, in which we have a large state stake and whose results have been disappointing for a number of years. If we can get to that happy position, we can have a bit of growth and some more profitability and then the regulator will have to have a sensible conversation with the banks; it will say that some of the money has to be put into cash and capital so that they are stronger. We will be the better for that.

[Mr McFadden]

I will not detain the Chamber for long; I just want to make a few points.

The argument is really about complexity versus simplicity in how banks are regulated. One of the points that my hon. Friend the Member for Nottingham East (Chris Leslie) is trying to bring out is the inadequacy of the over-complex Basel regulations, which have allowed banks to game the system and say they had hugely different capital ratios on similar classes of assets in different institutions. The truth is that the Basel system is so complex that it does not give confidence about the safety of our banks. That is why this debate about leverage is so important.

In all the debate about ring-fencing, separation and so on, what has perhaps been under-discussed is the fact that not enough attention has been paid to leverage—a basic measure of banks’ safety or resilience against future risks and very important in respect of banks’ ability to absorb losses. One of the features consistently pointed out, both to the Treasury Committee and the Parliamentary Commission on Banking Standards, was that in the run-up to the crisis banks were hugely over-leveraged. That meant that their capacity to absorb and deal with problems when they came was minimal.

Our banks still have very high gearing today. The banks lobby hard on the issue. I counsel caution on the basic trade-off that has been raised about lending and leverage. There are other ways for banks to improve their capital ratios than simply by reducing lending. They could, for example, look at the proportion that they give out in remuneration every year; that could make a difference to their capital ratios. Over the past decade or two, vast amounts of money have been paid out in remuneration that could have improved capital ratios without having any effect at all on lending. Let us not fall for the argument that we can either have banks that lend, or safe banks, but we cannot have both. It would be wrong of us to fall into that false dichotomy. We should aim for banks that are both safe and have the ability to lend.

Corporate Structures and Financial Crime

Pat McFadden Excerpts

Thursday 4th July 2013 Commons Chamber

[John Mann]

I will finish my introduction first, because banks are just one aspect of the problem and I want to focus on all aspects in my brief comments.

The problem is that we have opaque structures that mean that people can avoid tax and participate in illegal activities such as smuggling and money laundering. The amount of unregistered money involved is estimated by some analysts worldwide as being in excess of £20 trillion. A third of that is estimated to be directly linked with the European Union, and a third with UK Crown dependencies.

I will illustrate how the problem works. An individual sets up a firm in a country that keeps the names of directors a secret, then links that firm with another firm in a respectable place such as the United Kingdom, where the details of who owns a company do not have to be registered if it is owned by another company. They then set up nominees to be directors of the opaque firm, register with the corporate registry in the initial country, open a bank account for the original firm and funnel money through the firm in the legitimate area to the original firm in the opaque country.

There are many examples of that, and all areas of our national life, such as football, now seem to be covered by such structures. Whether it is illegal or legal, it is a major problem for transparency. We as legislators should be particularly concerned about any illegal aspects, and the banks have been at the forefront of those, as we have seen with the problems of money laundering. HSBC funded Iran with transactions involving £19.4 billion through shell companies over seven years, through the Channel Islands and the Cayman Islands. That broke sanctions but was incredibly hard to trace, because it happened through opaque shell companies

In the case of crime, in one year alone the same company funnelled £7 billion through the Mexican Zetas drug cartel, the biggest and most violent criminal agency anywhere in the world. Again, it did so through shell operations. Various mafias have also been involved.

The BBC’s “Panorama” exposed rather efficiently a woman called Lana Zamba, a Russian-born Cypriot yoga teacher, who was the director of a firm called Nomirex and 23 other UK-based firms. Records showed that those firms were inactive between 2007 and 2009, but “Panorama” demonstrated that £350 million had passed through them in that time.

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

I thank my hon. Friend for his energy in securing today’s debate. In the cases he outlines, does he agree that the complexity of modern global banking should not be used as an excuse for ignorance by those charged with the stewardship of the banks, and that we should put in place regulatory—and if necessary criminal—sanctions to ensure that responsibility cannot be evaded on the basis of professed ignorance? Responsibility for running large global complex organisations must be taken by those in charge.

[John Mann]

My right hon. Friend makes a valid and relevant point about criminal sanctions. The banks’ uniqueness is that they are the channel for funds. Because things are recorded in this technological age, it is straightforward for banks to investigate themselves and see what is going on, so the plea of ignorance by those at the top is inexcusable.

What my right hon. Friend and I are saying, and what I interpret the Financial Services Authority to be saying, is that responsibility must be taken at the top. Pleading ignorance is simply not good enough. We are talking not about small, missed operations but about huge major operations that funnel vast amounts of money. It is easy for banks to identify and track such operations, yet they choose not to do so. There seems to be a particular problem of huge reputational risk to the City of London because banks based in the UK have been those most often caught out. However, I have produced a document that demonstrates that this is not simply a UK problem. In recent years, every one of the top 50 banks in the world has had this problem and experienced prosecutions or ongoing investigations into prosecutions.

Oral Answers to Questions

Pat McFadden Excerpts

Tuesday 25th June 2013 Commons Chamber

[Mr Osborne]

I completely agree that Labour’s plan to borrow more to borrow less is completely nonsensical. It really is extraordinary that a day after the Labour leader said that Labour had ruled out borrowing more, the shadow Chancellor committed the party to doing just that. It is a catastrophic position for his party to hold. Frankly, I do not think that the country will ever adopt it.

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

Given that the Chancellor appears unwilling to give us the answer that dare not speak its name on last year’s borrowing, I will ask him about the time available to debate the recommendations of the Parliamentary Commission on Banking Standards. A number of those recommendations require legislation before they can be given effect. The Government have allocated only one day on Report for the banking Bill. Although I respect their lordships, surely it should be the elected House that is given a chance to debate the recommendations. Will he reconsider and allow two days on Report?

[Mr Osborne]

First, I thank the right hon. Gentleman for his contribution to the Parliamentary Commission on Banking Standards, along with all Members of this House and the other House who took part in it. The very fact that the Commission has done its work speedily means that we can consider its recommendations for the banking Bill going before Parliament. Of course, allocation of time is a matter for the Leader of the House to make clear in his statement. The right hon. Gentleman has my commitment that over the course of the Bill’s scrutiny—it will go to the Lords and then come back to the Commons—there will be proper time to consider all the Commission’s recommendations and, if necessary, for the Government to draft changes in order to implement them. It is a parliamentary commission, which is what I wanted it to be, and it is of course right that Parliament should consider its report in detail.

Royal Bank of Scotland

Pat McFadden Excerpts

Thursday 13th June 2013 Commons Chamber

[Sajid Javid]

I thank my hon. Friend, the Chairman of the Treasury Select Committee and of the Parliamentary Commission on Banking Standards, for his comments. He is absolutely right to praise the work of Stephen Hester and I agree wholeheartedly with his views on what Stephen Hester has achieved in his five years at the bank. Perhaps my hon. Friend had his work with the Parliamentary Commission in mind when he asked his second question. The approach must be bipartisan and we must keep the interests of RBS and the economy as a whole uppermost in our minds.

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

I agree that Stephen Hester did a good job in reducing the size of the bank’s balance sheet and beginning to turn the bank around, but that job was not complete at the time of his enforced departure. Will the Minister tell us more about the implications of this timing and strategy for returning the bank to the private sector? May I also tell him that, whatever else the Parliamentary Commission on Banking Standards has to say about this, if he was looking for a permission slip for a quick sale at a knock-down price, he will be disappointed?

[Sajid Javid]

It might help the right hon. Gentleman if I tell him that Stephen Hester himself has said in the past 24 hours that, for him, privatisation was the “end of a journey”, and that the board was looking for someone who would see it as the beginning of a journey. He has said that, for that reason, he understands the board’s decision. This is a voluntary agreement and a mutual decision between Stephen Hester and the board. The RBS board has said in its statement that it is looking forward to having a bank that is more focused on UK business and on the inevitable privatisation process.

Economic Growth

Pat McFadden Excerpts

Wednesday 15th May 2013 Commons Chamber

[Mr Osborne]

This is a coalition Government with a coalition Queen’s Speech, which contains things such as the single-tier pension, the Care Bill and the help for small employers, which will make a real difference to people across the country. Our view is that the best route to achieving what I know my hon. Friend wants to achieve is by legislating in this House. As the Prime Minister said in his January speech, we now have draft legislation for an in/out referendum on the EU. We have done it in good time for this Session’s ballot for private Members’ Bills. It is now open to any hon. Members who do well in that ballot to adopt the draft Bill that we published yesterday and take it forward as the basis for legislation. As the Prime Minister said yesterday, we will do everything we can to make it law.

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

A moment or two ago the Chancellor said that if the renegotiation that the Prime Minister has set out on produced fundamental change, he would vote to stay in the EU. What will his position be if the renegotiation does not produce much change? That is what happened the last time this was tried in the 1970s. Not much change is not exactly an unlikely prospect, given the attitude of other European member states so far to the Government’s stance.

[Mr Osborne]

I do not think the Prime Minister will fail in his negotiating effort. I do not think the Conservative party will fail in its negotiating effort with the European Union. Do Members know why I do not think we will fail in that effort? The Prime Minister pulled us out of the eurozone bail-outs when everyone said that was impossible. The Prime Minister delivered a cut in the European budget when everyone said that was unachievable. The Prime Minister vetoed a bad treaty when people said that was unprecedented. I am confident we can achieve that new settlement.

There is another reason why I am confident we can achieve that settlement. I see around the table in Europe—around the ECOFIN table, where I was yesterday— many countries as concerned as we are about the future of jobs and investment on the European continent, people who know that the EU is not working as currently arranged.

--- Later in debate ---

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

The central question since the financial crash has been how to secure recovery in tough economic times. When the election took place, economic growth had been restored and unemployment was falling, but since then we have seen precious little growth, and unemployment is rising once again. Dealing with that should have been the central purpose of this Queen’s Speech and this debate.

There are measures in the Queen’s Speech—some worth while—to help small businesses to recruit new employees, which we called for, and to extend apprenticeships, which were significantly expanded during our time in government. However, one is left with the impression that although some of the measures may be worth while, as a whole they are not equal to the depth and durability of our economic problems. In fact, the Government seem to have given up and are waiting desperately for the new Governor of the Bank of England to secure the economic growth that they have so signally failed to secure.

The Queen’s Speech seems to be more about positioning and fear of the UK Independence party than about genuinely dealing with the country’s economic problems. UKIP, however, is a movement against the political establishment as a whole. It is based on a vision of the United Kingdom as it used to be, not as it is or how it will be. I have to say to Government Members that they cannot fight nostalgia with policy or positioning; the only way to answer nostalgia is to offer a better tomorrow, rather than having an argument about a better yesterday.

The Queen’s Speech has been completely overtaken by the argument about Europe. The amendment has attracted more and more signatures, and as it has done so, the Prime Minister’s professed relaxation has become greater and greater—presumably, by 7 o’clock tonight he will be completely asleep. His relaxation is not strength but weakness, and it fools no one. It is not only about the Back Benchers; while he is in the United States arguing for a European-American trade agreement, his own Cabinet Ministers are touring the studios to say that they would vote to come out of the European Union. It all feels very familiar, and it is little wonder that John Major’s former press secretary said this week that

“there are some parallels with the back end of John Major’s premiership.

One of the differences is, that was when the Conservatives had been in power for 17 or 18 years. Now the Conservatives have only been in power in coalition for two or three years.”

No wonder President Obama had to warn the Prime Minister this week that the UK’s influence is greater when we are engaged with and in the European Union. The notion that we can swap membership of the European Union for some other transatlantic embrace is confounded by that warning, which I hope is heard on the Government Benches.

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

Is it not about time that we asked the British people—that the people of the United Kingdom made the decision, rather than politicians dictating to them the future relationship with Europe?

[Mr McFadden]

We then come to the draft Bill. There was no talk of that beforehand, no suggestion of it in the Queen’s Speech. It is a panic response to the amendment, a failed attempt to buy off tonight’s rebels. This tells us so much about how the Government operate—short-term tactics, not long-term strategy. However, the tactics fail to buy off the rebels, who are simply emboldened and come back for more. Even this afternoon we have heard people saying, “2017 is not soon enough. We need the referendum now.”

The truth is that whether the Bill is a private Member’s Bill or a Government Bill in this Parliament, no Parliament can bind the next Parliament. The time to put legislation forward to have a referendum is before the Government want the referendum, not four or five years in advance. The tactics will not work in the short term; they will simply increase the Government’s pain. Instead of stopping banging on about Europe, the Tories are back to doing little else. That is because too many people on the Government Benches care more about this than about the country’s economic problems or about being in government.

The centrepiece of the Prime Minister’s strategy is renegotiation. We have been here before, too. Harold Wilson had exactly the same strategy in the 1970s—renegotiate, then hold a referendum. He put the conclusions to the House in March 1975. To those who have not read them, I recommend that they do so. They will find plenty about beef, butter and sugar, but nothing about fundamentally altered terms of membership.

When today’s Prime Minister is asked what he wants from the renegotiation, the only specific he mentions is the working time directive. The working time directive was already renegotiated in the previous Parliament. We dealt with the on-call issue and the preservation of the UK’s opt-out. The important thing about that is that it was done without threatening to leave the European Union. If that is all that the Prime Minister can come up with, no one will believe it. Of course the European Union needs reform. It needs to be more flexible and less rigid and it needs to concentrate more on growth and jobs. The Prime Minister has a far greater chance of achieving those goals if he is not threatening to leave at the same time. This is a broader argument about our vision of the UK. Is it to be engaged or is it to retreat into nostalgia? I know which I prefer.

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

I thank my hon. Friend the Member for Corby (Andy Sawford) and my many other hon. Friends for their consistently strong arguments about the shortcomings of the Gracious Speech. It is a Queen’s Speech that lacks vision, substance and coherence. It lacks any answers to the big challenges that Britain faces. As such, it is entirely typical of this pitiful excuse for a Government. It is as though they could not be bothered to think through the legislation that is needed to get our economy moving, perhaps because their minds were elsewhere. We know where their minds were. Downing street has been caught in the headlights. It is fixated with internal party management and is frantically trying to hold it all together, when what we really need is a Prime Minister and a Chancellor who can focus relentlessly on the weaknesses in our economy and on the action needed to kick-start growth. They are so distracted, however, that they have lost sight of the things that matter most to the British people.

Youth unemployment still stands at nearly 1 million, and the Work programme is so useless that the number of young people on the dole for more than a year has tripled since it was introduced. At the spending review in 2010, the Chancellor said that there would be at least 6% economic growth by now, but we have seen barely more than 1%. As my hon. Friends have pointed out, house building is at its lowest level since the 1920s, yet the Government housing scheme offers a better subsidy for second home buyers than for building new homes. The construction sector is collapsing on this Government’s watch, but only seven projects from the list of 576 in their infrastructure plan are actually completed or operational. That is pathetic.

The Government promised to help 400,000 businesses with a national insurance holiday for new firms, but they have helped barely 5% of them. They are now having to replace that legislation. We are experiencing the slowest economic recovery for more than 100 years, and deficit reduction has ground firmly to a halt. When we hear the Government claim that they have cut the deficit by a third, we must remember that it was the same last year as it was the year before, and that it will be the same again this year. It is no wonder that they have lost the triple A credit ratings that they promised to preserve. It is a simple lesson: if the economy is flatlining, they should not be surprised if the deficit stubbornly remains high.

The Government are either too weak to admit that they have made mistakes or too distracted to see it for themselves. As a result, we are left with a legislative agenda that fails to rise to the challenges facing our country. These Ministers see consumers and businesses that lack confidence and they see weak economic demand, but their Government’s response is to pull back from the role that they should play, pull the rug from beneath the feet of those who are trying to move forward, pull away the safety net from families facing hardship and pull up the drawbridge against the entrepreneurs and investment that our country needs.

Where is the jobs Bill to ensure that all the long-term unemployed are offered a decent job opportunity on at least the minimum wage, with the private sector in partnership with the Government? We could do all that, and cover the costs, if only the Chancellor would stop being so weak towards the banks and instead make them pay their fair share. Where is the finance Bill to reverse the unfair tax cuts for the richest 1% and to help to make work pay with a 10p starting rate of income tax? Where are the measures that my hon. Friends have so eloquently called for to tackle rip-off energy bills, extortionate train fares and rogue landlords? Where is the action, the drive, the activity? Nowhere, because the Government are frozen to the spot.

It says everything about the hollowness of this Government that the Queen’s Speech debate today has been totally dominated by one subject that is not even in it. Where once we had a Conservative Prime Minister who boasted of her convictions, tonight we have a Conservative Cabinet united only by their abstention. As that Prime Minister once said, this is not leadership but “followership”. The truth is that this Queen’s Speech is not a legislative programme of a functioning Government; it is a sticking-plaster programme trying desperately to hold things together while Conservative MPs kick lumps out of the Prime Minister.

A week ago, the Prime Minister did not think that an EU referendum was important enough to put in the Queen’s Speech, but a week later we find that it is the first Bill that the Government have published. If they want a referendum, why are they not supporting the amendment; if they do not want a referendum, why have they drafted their Bill?

The draft Bill that the Government have rushed out—I do not know whether the Chief Secretary or the Chancellor had a hand in the very technical drafting of the one side of A4—had nothing to do with consulting the public; it was all about silencing the Conservative party’s internal divisions. They are not so much a coalition as a contradiction. There are three parties in this Government: the two faces of the Conservative party in league with the Liberal Democrats—perhaps best represented by the Chief Secretary to the Treasury, to whom I wish many happy returns today. Hon. Members will be interested to know that this right hon. Gentleman spent a decade of his life before entering this House making the case for a federal Europe. What a triumph it is for the Government Whips facing a difficult vote on Europe that the final speech in support of the Government’s programme should come from the former chief spokesman for the campaign to join the euro. You couldn’t make it up, Madam Deputy Speaker. The sad truth is that this Government are too weak, too divided and too distracted; they are fiddling on about Europe while the economy burns.

[Mr McFadden]

On the subject of the Government’s tactics over the rushed, panicked publication of this referendum Bill, does my hon. Friend agree that today’s debate shows that the tactic has already failed because during the debate the people who wanted this were already asking the Government to go further by having the referendum this side of the general election rather than after the next one?

[Chris Leslie]

The Prime Minister said yesterday, “No more concessions; that is the line in the sand; this is as far as they will go.” It is amazing to think, though, that he has to keep feeding the beast. The problem is that Conservative Members are carrying on a bit like the strange man in the corner of that country pub endlessly moaning about the dreadful threat of outsiders and incomers. I have to tell them that if they spend all their time trying to be like UKIP, they should not be surprised when people vote for the real thing.

We are left with a Government increasingly out of touch with the real problems facing real families across Britain. Tonight, it is those families that are paying the price: higher taxes because growth is stagnant and lower living standards because wages are falling. Every year that goes by while our economy stands still and while our Government are divided and distracted, our international competitors get further and further ahead.

The Queen’s Speech lists 15 Bills that look as though full time has been called for this Parliament, not just the end of the first half of it. The Government’s legislative agenda, supposedly to drive Britain forward, did not even make it from Downing Street to the Cabinet Office before running out of support. We should look at their child care strategy, stumbling in more directions than a toddler learning to walk. They are not going to convince the public that it is sensible to have one nursery worker looking after six two-year-olds on their own if they cannot even persuade their own Deputy Prime Minister. Surely, the Prime Minister of all people must know how difficult it is single-handedly to watch over a group of immature and disobedient trouble-makers, constantly throwing tantrums. They cannot even manage the basics.

Just at the moment when we need a strong voice for the United Kingdom arguing for the reforms and change of direction we need across the European economy, we get a Prime Minister saying one thing, an Education Secretary who is not here and a Defence Secretary who is not here saying another, while his Back Benchers are revolting and the Deputy Prime Minister is wielding his veto. Our country and our partners deserve better than that. Britain needs to be leading in Europe, not leaving Europe, and the Prime Minister should be brave enough to say it. He should stand up to those who are undermining his authority. On the very day when he was extolling the virtues of a new EU trade deal with the United States, his own Ministers implied that they would rather turn their backs on that £10 billion advantage.

The amendment has blown the last semblance of unity in the coalition to smithereens. The Prime Minister could not even tell his own troops to vote against it, so we have ended up with the absurd spectacle of Ministers being told to abstain while the Prime Minister is supposedly “chillaxed” about the rest of them supporting it. The Prime Minister should not be relaxed when those on his own side express regrets about his own Government and his own Queen’s Speech; he should be embarrassed by it. He should not “chill” at the thought; he should be chilled by it. He should have led from the start and asserted his authority, but he is too weak, and his party is too divided and distracted to be brought into line.

The fact is that this in/out, in/out, hokey-cokey referendum policy sends all the wrong signals. The Prime Minister’s party is left leaderless, and the country is left rudderless. Make no mistake, Madam Deputy Speaker: there is a real-world price to be paid for this weakness, and it will be paid in jobs, with inward investors left mystified about whether or not they would have access to a single market with 500 million customers if they came here.

When will the Conservatives realise that the top priority for this country must be the strength of our economy, not their obsession with Europe? The Prime Minister once said:

“Instead of talking about the things that most people care about… we were banging on about Europe.”

They are back to banging on, and on, and on—not about jobs, not about growth, not about recovery, but about Europe, yesterday, today and tomorrow. They are too distracted to see what needs to be done, too divided to agree on how to do it, and too weak to take the action that the country needs. Weak, divided, distracted: we see a Government who are slowly imploding under the weight of their own contradictions.

Britain, at home and in Europe, needs a Government who are strong enough to make the tough decisions for our country’s future, united in seeing those decisions through, and focused on securing growth and recovery. That is the only genuine way of improving our national finances. Britain needs that one nation Government and we need it now, but sadly, with this Queen’s Speech, with this Government and with this Prime Minister, Britain must wait.

Oral Answers to Questions

Pat McFadden Excerpts

Tuesday 14th May 2013 Commons Chamber

[Greg Clark]

As the hon. Lady knows—her colleague the right hon. Member for Wolverhampton South East (Mr McFadden) might also like to comment on this—the commission has been hard at work considering various representations, including those from Which? and the British Bankers Association, on whether there should be a code of conduct. I am sure that the House would expect us to wait for the commission’s recommendations and then to respond to them.

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

Does the Minister agree that it was politically unwise for the Treasury to brief that it hoped the Parliamentary Commission on Banking Standards would endorse its politically motivated attacks on the previous Chancellor’s bail-out of the Royal Bank of Scotland? Does he further agree that the uppermost criterion for the reprivatisation of RBS must be the interests of the taxpayers who bailed it out, rather than any political or electoral timetable?

[Greg Clark]

It goes without saying that the interests of the taxpayer must be paramount, and I am not aware of any of the briefing that the right hon. Gentleman refers to.

Financial Services (Banking Reform) Bill

Pat McFadden Excerpts

Monday 11th March 2013 Commons Chamber

[Greg Clark]

The hon. Gentleman will discover that through our debates in Committee he will have plenty of opportunity to scrutinise the Bill. When we have the commission’s recommendations, if we think that they need more than a day on Report then I will make the case for that. Whatever happens, I will ensure that this House has the opportunity fully to consider these matters.

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

I am afraid that I want to press the Minister further on the same point. He said that the Government would ensure that there was full consideration in this House of further recommendations from the Parliamentary Commission on Banking Standards, yet the timetabling motion that he will move later says:

“Proceedings in the Public Bill Committee shall…be brought to a conclusion on Thursday 18 April”.

That is before the date of the parliamentary commission’s final report. How meaningful will be his commitment to full consideration of those proposals, given that he is rushing the Bill through Committee before the commission, which I remind the House was set up by the Chancellor, has even issued its final report?

[Greg Clark]

The right hon. Gentleman will find that he is satisfied with the scrutiny that is available. It is a question of chickens and eggs. We have not yet had the recommendations of the commission, on which he serves. When it makes its recommendations, if we think that they require more time then we will certainly make sure that there is plenty of opportunity for the House to scrutinise these matters.

--- Later in debate ---

[Greg Clark]

I have taken to heart the need to allow into the market smaller players, whether they be building societies or banks. I will say something about that shortly which I hope will satisfy the hon. Gentleman.

[Mr McFadden]

I suggest to the Minister that he has just ducked the British dilemma that he set out at the beginning of his speech by saying on the one hand that we have a huge financial services sector, but on the other hand that we are going to go at the speed of the slowest ship out of Basel on the capital and leverage rules. Is not the proper response to having a huge financial services sector relative to our economy to ensure that we have adequate rules to protect the UK taxpayer, rather than always going for the lowest common denominator internationally on such standards?

[Greg Clark]

I think that the right hon. Gentleman would concede that what Vickers recommended will advantage us and protect the British taxpayer in a number of respects, including through ring-fencing and higher capital requirements. We are already doing those things. He will know that Vickers did not recommend an early increase in the leverage ratio. I have been candid with the House that we would like to see one. However, in line with what Vickers advised and given the discussions that are taking place in other jurisdictions, we think that it is right to have the consideration in 2017, with a view to introducing the higher leverage ratio later.

--- Later in debate ---

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

I am sorry that the Chancellor has not been able to join us for the debate. The Bill may be called the Clark-Javid Act, but it will certainly not be called the Osborne Act given his disappearance.

As the Financial Secretary said, the global financial crisis has cast a long shadow. Our recovery to pre-crisis levels of economic output has still not been achieved because of the drag anchor of the Chancellor’s austerity programme. The high-risk, high-reward culture of worldwide banking systems required a taxpayer bail-out; profits were retained privately in the good times, but losses fell on the shoulders of the public when things turned bad. We cannot allow a repetition of those risks to the taxpayer in future, which is why banks must be reformed in the UK, across the EU and across the globe.

The Bill has its roots in the 2009 G20 Pittsburgh summit when world leaders decided to insist on tougher loss-absorbing capital rules for banks. Britain’s financial services sector is larger than most, and with the greatest financial centre on the planet in the City of London we must take additional steps to guard against the risk of future collapse. The Financial Services Act 2012 sought to address regulatory shortcomings, but the jury is out on whether the Bank of England will be inherently stronger than the Financial Services Authority.

The advent of the FSA in 1998 was a step forward from the dark ages of self-regulation, but that regulatory framework was not capable of policing the extreme risks and dangers of a rapidly expanding global banking sector, interdependent from country to country. We agree with the need to introduce prudential regulation and greater systemic oversight, but that theory has not yet been translated into reality. Although there were regulatory shortcomings, we should be in no doubt that primary culpability rests with the banks, which should not be allowed to get away without reform.

The Vickers Banking Commission concluded that structural firewalls are needed to supplement capital safety buffers, which is undoubtedly true. With this Bill some of the legislative underpinnings for those firewalls will gradually take shape, and to the extent that it enables the ring-fencing of retail from investment banking, we welcome that. However, the Bill merely provides the scaffolding for the basic building blocks that will come at a later date, largely in secondary legislation by Treasury order. It focuses only on structural scaffolding, not on wholesale reform of the standard and culture of the banking sector—something we hope that the cross-party Parliamentary Commission on Banking Standards will help focus on to help fortify the Bill in due course. As the Banking Commission points out, it is perhaps not the beginning of the end of banking reform, but the end of the beginning.

The timing and process for consideration of the Bill, and the programme motion before the House, propose a ridiculously compressed Commons scrutiny process and for the Bill to be out of Committee by 18 April. As I said earlier, that shows total disregard for the parliamentary process and flies in the face of the Banking Commission’s careful recommendations. The Bill is already a cursory framework because it is largely a string of enabling powers for the Treasury to arrange for ring-fencing through secondary legislation. The Government established the Parliamentary Commission on Banking Standards to ensure that recommendations could be added to the Bill. So far, however, we have had only part 1 of that commission’s points about structural questions.

The Government now expect the Commons to consider this partial Bill in Committee without having the final report on standards and culture from the parliamentary commission. That is treating the Commons as though this is merely a tick-box exercise and a part of the process that does not matter, and there is no need to scrutinise the final proposals. Dropping in late additions to the Bill on Report or—more likely—during consideration in the Lords, is not an appropriate way to legislate. As I said, the parliamentary commission recommended a three-month gap between publication of the Bill and commencement of the Committee stage, but the Government rejected that idea.

[Mr McFadden]

My hon. Friend said, I think, that the timetable was inappropriate. Does he agree that it may also be unwise, given that if the amendments are moved in the other place, the first three speakers in that debate are likely to be the former Conservative Chancellor, the former Chair of the Treasury Committee, and the Archbishop of Canterbury?

[Chris Leslie]

Recently I have been looking at a number of Thatcher quotes, given that the Prime Minister mentioned TINA—there is no alternative—which hon. Members will remember. Another famous quote from Lady Thatcher was, “Always leave yourself a way out”, and I wonder whether the emollient approach taken by the Financial Secretary is because he realises that when there is inadequate scrutiny in this House, the questions go to the other place and it is likely that the Government will have to back down on some of these matters. Perhaps he is listening to the advice of Baroness Thatcher on some of these issues.

It is not adequate to expect, as the Minister suggested, that we will be able to scrutinise the Bill sufficiently on the Floor of the House on Report. As he knows, with the knives that come into effect during considerations on Report, one often finds that amendments are put without a full debate. It is a different process from the Commons Committee stage. The programme motion should reflect the right of the Commons to scrutinise the full version of the Bill, and that is not the version we have before the House today. If the Government were serious about this issue, the Chancellor would be here. Clearly, our downgraded Chancellor has downgraded the banking reform Bill.

--- Later in debate ---

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

I would like to begin where the Minister began, with this issue of the British dilemma: the relationship between the size of our financial services industry and the rest of our economy. It is right that it is a very big UK industry. It is a big contributor to taxes, as the Minister said, and it is a major employer. It has a cluster of expertise around it, including law, accountancy, and consultancy services, which are also important contributors to our exports.

There are two views that we can take because of that importance. One is the view, sometimes canvassed, that because of its size we cannot touch it, or only in a minimal way, because if we harm this huge industry it will go to Singapore or the United States; it will go somewhere. But there is another view, which I would like to advance in this debate, that the very size of the industry in relation to the UK economy places a responsibility on us to ensure that that size does not damage the interests of UK taxpayers or the real economy.

We have seen through the crisis that occurred several years ago precisely how damaging failure in that industry can be to the wider economy. I do not have to remind the House about the results of that failure in terms of the bail-outs, the deficits and the decisions about tax and spending, the consequences of which our constituents are living with today and will be living with for many years to come. The approach that we should take to this British dilemma is to say, yes, the industry is valuable and important, but because of its very size we believe in the need for particular measures in the UK to insulate us from wider damage. Simply to stress the size of the industry and to ask for it to be left alone whenever someone comes up with a regulatory proposal is, to put it in the language that bankers would understand, a one-way trade, and a one-way trade is not good enough. We need a two-way trade that protects the interests of taxpayers too.

[Mark Field (Cities of London and Westminster) (Con)]

The right hon. Gentleman was a Minister in the Department for Business, Innovation and Skills at the time of the bail-outs of the banks, which are commonly regarded as a great success. As part and parcel of looking back on the past while also preparing for the future, does he recognise that elements of those bail-outs were not quite the success that they were portrayed as at the time? To get out of the large positions that we still hold in Lloyds Banking Group and RBS with any profit, let alone the large profit that perhaps we should have been negotiating at the outset, seems a long time away. Does he recognise that mistakes were made over the bail-outs which will be with us for many years to come?

[Mr McFadden]

One of the reasons for having this debate is that when the crisis hit in 2007-08 there was no proper resolution mechanism or bail-out regime in place to ensure that bondholders, rather than taxpayers, were on the hook for bank failure. We are having this debate precisely because we did not have the tools in place in legislation to deal with the global crisis when it unfolded. As I have said, what we need is a two-way trade.

[Mark Field]

I do not buy into the argument that the tools were not in place. In reality, it was not that many of the businesses were too big to fail, but that they were too interconnected, which I accept put us in a very different position from that in any previous bail-out. In relation to any insolvency or restructuring, there were and are protocols in place, and they should have been adopted to ensure the best value for the taxpayer in the long term. That did not happen in 2008-09.

[Mr McFadden]

If the hon. Gentleman believes that the tools were in place, I must refer him to the Chancellor, who is constantly saying that his predecessor, my right hon. Friend the Member for Edinburgh South West (Mr Darling), had no alternative when the crisis hit in 2008.

Let me turn to the Bill and some of the issues before us today. There is broad agreement on the need for some kind of structural separation between retail and investment banking. It is important to understand that the point of ring-fencing, as recommended by the Vickers commission, is not to ensure that no retail bank can ever fail—that is impossible—but to make failure, if it does occur, more manageable by insulating the risks and focusing the resolution effort on the essential services that the Government judge it in the public interest to protect: people’s savings, the payments service and simple consumer and SME lending. It would be going too far, and it would be far too rash, to say that that solves the “too big to fail” problem. However, ring-fencing ought to reduce the risks of future failure to taxpayers and the wider economy.

As the hon. Member for Chichester (Mr Tyrie) has said, the parliamentary commission, on which I serve, made two proposals in relation to structural separation. The first was the reserve power to separate individual banks should they try to burrow under, climb over, erode or get through—or any other metaphor that has been used—the fence, and the Government have accepted that recommendation. The second was to have a wider power to enforce separation on the sector as a whole. That second power would be needed precisely because problems in the sector do not come in the neatly wrapped form of one institution. As we saw in 2007-08, contagion is a fact of life in banking; the weakness of one can quickly affect others. Cultural problems in one part of the sector also spread quickly. It is precisely because problems in the industry are often widespread that there is a strong case for taking a reserve power to enforce separation on the sector as a whole, in the event that the sector tries to get around the intention of the Bill.

[Stewart Hosie]

I am not yet convinced about the reserve power and have many questions. The three banks that actually collapsed were Northern Rock, Bradford & Bingley and Dunfermline, all narrow mortgage banks. How would the ability to separate investment from retail banking have helped in those circumstances?

[Mr McFadden]

The hon. Gentleman neglects to mention RBS, a universal bank, which needed major intervention to bail it out.

The Minister has said that he does not want wider separation because the Bank of England does not want it. It is true that the Bank of England has expressed some reservations about the power if it were to be wielded by the regulator. I took the opportunity to ask the Governor about it last week when he appeared before the commission. He replied that

“a provision so important that it affects the entire sector is one that both de facto and de jure will and should be taken by Parliament.”

When I explained to him that it had never been the commission’s recommendation that this be a policy decision taken purely by the regulator, and that all along we had been clear that it was a decision for Government, he said:

“As long as the decision is taken by Government, we would have no objection to that.”

I hope that we will no longer hear Ministers saying that they are rejecting this power because the Bank of England is opposed to it. This should of course be a decision taken by Government. As for the Chancellor’s point that it would be “undemocratic”, what is undemocratic about holding a proper review into legislation passed by this House as the Banking Commission suggests, or about taking a reserve power the exercise of which would involve the parliamentary process of debate and approval? The truth is that it would not be undemocratic at all.

[Kelvin Hopkins]

Will my right hon. Friend give way?

[Mr McFadden]

I am afraid that I want to make some more progress.

This is not, as the Minister argued, about introducing two policies at once; it is about introducing a policy and making sure that it is adhered to. As the hon. Member for Wyre Forest (Mark Garnier) said in this House a few weeks ago, the banks have nothing to fear if they adhere to the spirit and letter of the Bill. It need not introduce uncertainty, as some have argued; in fact, it ought to provide certainty that we are serious about the ring fence.

On capital and leverage, it is absolutely true that in the run-up to the crisis banks were over-leveraged, and that is because they held too little capital against the risks that they had. The Vickers commission was very clear about that. It recommended a future leverage ratio of 25:1, which is still quite high in historical terms, while the Government are recommending 33:1 because that is the internationally accepted Basel outcome. Without going into any more detail, I just say to the Minister that this goes back to the one-way trade to which I referred. It is a really important question running through all these reforms. If, every time we rub up against an issue, we say that we cannot damage the industry because it is so big here in the UK and we therefore have to stick to the lowest common denominator of international reforms, we will not be doing our duty to the UK economy or to UK taxpayers. If we have learned anything from the crisis of 2007 and 2008, it ought to be that there is a case for taking particular measures here in the UK precisely because of the size of the sector in relation to our wider economy. That is the basis on which we should judge the correct degree of leverage for the banks that operate in the UK.

Then there is the question of resolution and bail-in: in other words, what happens when a bank fails, and who is on the hook for that failure? In 2008, it was the taxpayers, not the bondholders, because a resolution mechanism was not in place in law that could allow for normal insolvency procedures were those to whom the banks owed money to take the risk. A very important part of the reforms is to change that situation. Bail-in is signed up to by the Government, but, like my hon. Friend the Member for Nottingham East (Chris Leslie), I am very curious as to why the Government are pursuing this through the European resolution and recovery directive. I would have thought, particularly after last week, that the Government might be somewhat nervous about pursuing a major financial services reform through a European directive. I return again to the one-way trade argument. Surely, because of the importance of this industry here in the UK, we should legislate to make sure that bondholders take a future risk and not UK taxpayers, and we should not leave it to the very uncertain process of a European directive negotiation. That might work out fine; there might be spontaneous agreement among the 27 member states. However, I am sure that the Minister agrees that that there is a very real possibility—this is not uncommon—that that would not be the case. I ask him to think again on the bail-in regime and to ensure that a proper UK decision is taken rather than leaving it all to a European directive. I would have thought that Government Members would support such a suggestion.

In conclusion, I want to reiterate the point about time. The parliamentary commission, which was set up by the Chancellor, has spent six months taking in—the chairman, the hon. Member for Chichester has done more totting up than me—60-odd oral evidence sessions and much written evidence. It is simply not good enough for the Minister to say that he will take the Bill out of Committee by the end of April, before we issue our final report. The Opposition supported the establishment of the parliamentary commission after the House had voted on the issue. We expect its recommendations to be properly considered by the Government, not swept out of the way by the timetable. I hope that the Minister will think again, because the structural issues under discussion are not the only issues. Important changes still need to be made to banking culture, standards and corporate governance, so that this very important industry contributes positively to the UK and does not put the economy and taxpayers at risk.

--- Later in debate ---

[Alison McGovern]

That was the point I was trying to make, and I refer the hon. Gentleman to comments made by my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who said that although that is true, it is not enough to say, “We’re a big employer; leave us alone.” The influence of the financial services in the City is greater than that, and that will not do anymore.

Wage inequality in financial institutions skews influence to insiders at the top. This is a classic insider-outsider problem, and we in Parliament must work out how to scrutinise more what goes on in the City. I believe that the Royal Bank of Scotland’s final report makes great play of how it is finally a living wage employer. Well, good for RBS, but it is perhaps a little too late.

On the bonus culture, the Government have said that there could be a perverse incentive in controlling bonuses and that people might be paid more if their bonuses are reduced. That is true if—and only if—they think the following two things: that it might not be better to have more fixed costs and less turbulence, and that we might want to think about the impact of those highly variable costs on incentives; and, secondly, that the overall remuneration of bankers is just fine and the current inequality in the financial services sector is okay. Well, it is not okay. The hon. Member for Cities of London and Westminster (Mark Field), who represents the City, mentioned the many people all over the country who work in financial services, but when I make the point about inequality in the financial services sector, it is those very people, and the money in their pockets, who I am thinking of.

[Mr McFadden]

On pay and reward, does my hon. Friend agree that it is unfair that the vast majority of financial services workers, who are in ordinary branches of banks and so on and paid normal, average salaries, get tarred with the brush of excess and of salaries way out of kilter with what normal people earn, when in fact that is taking place at the very top of banking and not in the local branch?

[Alison McGovern]

I could not agree more. It is also not okay that people in regular branches were pressured to sell all kinds of products, which we know happened.

I was very much taken by the contribution made by the Father of the House, the right hon. Member for Louth and Horncastle (Sir Peter Tapsell). Unfortunately, he has left his place. I was going comment on the deregulation of building societies and the big bang back in 1986, but as he has already covered that very well, I will not do so except to say this. On reading Lord Lawson’s account of the impact of the 1980s boom on the real economy, I think he is clear that he thinks he made a mistake. We should listen to the lessons of history. We should also congratulate the right hon. Member for Haltemprice and Howden (Mr Davis), Lord McFall and Baroness Kramer on establishing the New City Network, which is trying to find ways to answer some of the questions I have raised.

To turn to my second point, which is more specific to the Bill, we need to ask ourselves what kind of economy we want. My constituents, unsurprisingly, are interested in having a job to go to, and in having enough money in their pockets to feed their family and have a roof over their heads. They want a Government who do not tell them that they will cut debt to solve the problem, only to see debt rising. Notwithstanding that, the Bill ought to help finance to underpin a growing economy. Will the ringfence help us do that? That is determined by what we think banks are for. We should say that banks are not just like any other industry: cavalier risks are totally unacceptable, and that is why the ringfence matters. We need to assure ourselves that we have done enough to provide for business continuity in a real, productive economy.

I am not sure that the ringfence is necessarily enough to do that, however. What about the examples of straightforward bad lending? What about investment banks with no retail operation, such as Lehman’s in the US? What about retail banks that went under in this country? How does the ringfence de-risk in those cases? Then there are the comments from the hon. Member for Chichester (Mr Tyrie) about the industry marking its own exam. That gives rise to the need for reserve powers, which other hon. Members have described well.

We need to be clear that some in financial services argue against separation at all—they worry about the cost to the bank. I am afraid that that sounds a little too much like special pleading. Saying that this will hurt lending to the real economy because it passes costs on just sounds like tit-for-tat: “Block our preferred business model and we will punish small and medium-sized enterprises, small business and the average small lender.” Why do they have to do that? I am not sure that one necessarily leads to the other—it is about their business model. How does the Bill help with protection from banking failure in other European countries?

We have heard other hon. Members talk about competition, so I will not dwell on that for too long, but the Government must be clear and Ministers must say exactly what kind of competition they want. Any economics textbook will tell us that three firms are enough for competition, but I think we all think that common sense dictates otherwise. How many new entrants to the market are sufficient? More importantly, what kind of competition do we want?

There is nothing in the Bill about ownership, but perhaps there should be. What are the Government doing to open up banking to more mutuals? Could we look back over our history at what happened to building societies, as my hon. Friend the Member for Bassetlaw (John Mann) mentioned, and see whether there is room for change in that sphere? I have raised before the Financial Services Compensation Scheme and pre-funded deposit insurance. If we compare the EU’s position on making sure that banks commit properly to the UK’s position, I wonder whether Ministers have got that one right.

In conclusion, this is a shell of a Bill and we can do much better. To paraphrase John Donne, financial services is not an industry entire of itself; it is a piece of the continent, a part of the main. We therefore need a greater commitment from the industry that it is prepared to change, and from the Government that they are prepared to legislate to help it do so. The impact of the financial crash on people in my constituency was huge, be that from the threat of losing their house, or losing their job. That is too important for this subject to remain a matter of technical, niche interest. The Government must be much stronger and listen to the voices calling for change.

Economic Policy

Pat McFadden Excerpts

Monday 25th February 2013 Commons Chamber

[Mr Osborne]

I would say that the credit rating agencies are important, but they are one test—[Interruption.] It is the shadow Chancellor who wants to say that the rating agency’s decision is not important, but we should still have a debate on it in Parliament. It is a completely contradictory position. It is important, but it is just one test of the Government’s economic credibility in the markets, and that is tested by the gilt yields, by the value of sterling, by the rates of the stock market and all sorts of other things, and as I say, today we have not seen excessive volatility. I say to the shadow Chancellor and to my hon. Friend and the Treasury Committee that we have to convince the world that we can pay our way in the world, and that is what this Government are going to do.

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

If the Chancellor did not want this to be the test, he should not have set it up to be the test. Does he agree with himself that for the UK to lose its triple A rating would be a humiliation?