Financial Services Bill

Peter Tapsell Excerpts

Monday 6th February 2012 Commons Chamber

[Mr Osborne]

The key issue in our regulatory system that we are seeking to restore is judgment by the regulator, and I will explain how the Bill will enable us to do that. I agree with my hon. Friend that the financial services are an incredibly important industry for this country. They employ more people than any other industry in Britain and, crucially, its proper regulation is not only good for the economy, but essential to prevent taxpayers from being exposed to what they have been exposed to in recent years.

[Sir Peter Tapsell (Louth and Horncastle) (Con)]

As we are in the mood for recollection, and I am one of those who strongly opposed the tripartite system of supervision when it was introduced, may I say that I very much welcome the Bill? However, the whole strategic object of what we should be doing now is to ensure that we get rid of the shibboleth of the bank that is too big to fail. I doubt whether this admirable Bill, even combined with the Vickers report, will go anywhere near to restoring Glass-Steagall. We will not get rid of banks that are too big to fail until we get back to Glass-Steagall.

[Mr Osborne]

My right hon. Friend has been entirely consistent in the views he has expressed, and he was right all along about the weaknesses of the tripartite system. On the explicit issue of whether to introduce the actual physical separation of retail and investment banking—in other words, to introduce Glass-Steagall- like legislation in Britain—I asked John Vickers, who everyone accepts was an independent and extremely expert person for the job, to look specifically at this issue with his commissioners. Some of them were probably inclined at the start to believe that physical separation was the right way to go, but when they examined the issues—and they took an enormous amount of evidence—they believed that the same objective of protecting retail customers from the collapse of an investment bank, and giving the authorities of the day greater powers to protect retail customers as they resolved problems in a retail bank, could be achieved through the ring-fencing proposal that the Vickers commission put forward. That would also maintain some of the benefits of one part of the bank being able to support another part in trouble.

The commission explicitly considered the Glass-Steagall issue, but decided that ring-fencing was a better approach. We will introduce legislation that I hope and intend will have pre-legislative scrutiny in the House during the coming Session. I hope that that will be an opportunity for Parliament to examine the issue that my right hon. Friend rightly raised. As a country, we must decide once and for all how to proceed with the structure of our banking industry.

--- Later in debate ---

[Mr Osborne]

There are examples of central banks, such as the Canadian and Spanish central banks, which were much more aggressive in counter-cyclical regulation, and which felt empowered to make the decisions. In the United States—I am sure that the right hon. Gentleman has had conversations about this with the United States Treasury Secretary and the Federal Reserve chairman—things have been taken to the opposite extreme. There is a plethora of regulators—too many different regulators. The single biggest problem in the United States probably occurred in the insurance industry, in the American International Group. There was an insurance regulator based in one particular state and it was not something for which the Federal Reserve had a responsibility. Ben Bernanke has talked about the role of central banks, and I shall say something about his view later.

I think it right for us to create a Financial Policy Committee that is on a statutory footing. I have talked about the importance of its having external independent members who are able to provide market expertise and challenge received opinion, but I believe—and this may be something that we can tease out in Committee—that we should think about how we can get the balance right, and avoid conflicts of interest while also bringing in people with real expertise.

What makes the Financial Policy Committee that the Bill will establish such a radical departure in terms of policy making is that we are not only asking it to assess the risks throughout the financial system, but proposing to give it powerful tools with which to do something about those risks. The Monetary Policy Committee assesses the risks of inflation and whether it will overshoot or undershoot the target, and then alters interest rates as appropriate. The Financial Policy Committee will be given macro-prudential tools with which to hit the financial stability objectives set out in the Bill, and to reduce and remove systemic risks to the stability and resilience of the UK financial system.

[Sir Peter Tapsell]

The shadow Chancellor raised the question of both Barings and BCCI, and it underlines the nature of the regulatory problem. The Barings failure was largely a failure of the Singapore regulatory authority. I was closely involved with Singapore as an adviser to the monetary authority at the time. The Government in Singapore were horrified by the fact that a British rogue trader had not been spotted, but it was the responsibility of Singapore to find him.

As for BCCI, which I also knew well in my stockbroking days, its regulator was in Luxembourg, which was the reason why the Bank of England did not spot the problem until too late. That problem will continue. There are considerable limits to what any regulator can ever achieve. In worldwide banking, there will always be people overseas who are up to mischief, and no regulator based in London can ever conceivably know what they are all up to.

[Mr Osborne]

My right hon. Friend makes a very good point about the international nature of this business. We must try to design a regulatory system that protects the British taxpayer from rogue traders and illegal activity in individual firms that might create broader systemic risks. We must also be alert to broader risks building up in the system—for example, when trying to moderate the impact of a credit boom. This is not just a question of dealing with individual risks and individual firms; it is also a question of dealing with risks across the financial system.

My right hon. Friend is completely right to draw our attention to the need for regulators to work together better internationally. The least well-developed piece of the financial regulatory system, post-crash—the one lesson that has not yet been taken far enough—involves the way in which we can better protect the world from large international businesses that live internationally but die nationally, such as Lehman Brothers. Co-ordinating resolution regimes across the different jurisdictions will be the work of international bodies such as the G20 and the Financial Stability Board in the year ahead.