Financial Services (Banking Reform) Bill

Richard Bacon Excerpts

Monday 11th March 2013 Commons Chamber

[Stephen Barclay]

Of course that is not wrong. I said that the Bill is welcome, and that it is a positive response to the commission’s report. The focus on leverage and liquidity is absolutely right, and that is why I pay tribute to the work of central bankers and regulators. I am not sure that the hon. Gentleman was listening to my remarks. The danger is that we focus on the past and do not anticipate the future. There is a need for flexibility, and for that the Bill needs to tackle culture. The paradox is that individuals in banks are motivated by big bonuses, which drive their behaviour, yet when things go wrong, we do not have their corollary, which is big fines against individuals. That might be the sort of thing to grab people’s attention when they become aware of issues.

I am glad that the hon. Member for Nottingham East (Chris Leslie) is back in his place, because he missed addressing that point in his remarks—it is a shame he would not take interventions from me. Under his Government, the Financial Services and Markets Act 2000, probably the most-debated Act for many years, created a rulebook of more than 6,000 pages. He spoke about the need for more regulation and suggested that Conservative Members had failed because of the lack of regulation, yet we had 6,000 pages of it. The issue was that the regulation was not enforced.

It is even worse than that, because the hon. Gentleman actually allowed a regulatory regime that included things such as guaranteed bonuses. Not only would somebody get a bonus if they performed well, but they got a guaranteed bonus even when the bank collapsed. When the financial crisis hit in 2008, contractually the banks were signed up to guaranteed bonuses, so they were still doling out money under the enhanced regulatory regime to which he referred—true socialism in action.

It gets worse. There was a fines system that incentivised banks to profit from the wrongdoing of other banks. When a bank was subject to a regulatory fine, the money went not to the taxpayer in the form of funding good works or to customers of the bank affected, but to the other banks in the form of lower levies to the regulator. When a bank committed a wrongdoing, therefore, other banks in the sector profited. This is the regulatory regime on which we are now being lectured.

Let me give another example on structure: the collapse of RBS. After 10 months of the brightest minds in our Treasury—I am sure they are the brightest minds—looking at this issue, they still could not rely on the books. So untrustworthy was RBS’s auditing that the permanent secretary to the Treasury had to send for a letter of direction from the Chancellor saying, “I can’t rely on the books. It’s such a mess, Chancellor, you’ll have to give me a letter of direction.” We will not take any lectures from the Opposition, therefore, about their regulatory regime or the mess in which it has left our constituents, who are the ones footing the bill.

[Mr Richard Bacon (South Norfolk) (Con)]

It is a pleasure to listen to my hon. Friend, who, unlike many in the House—particularly in the Opposition, but also, I fear, on the Government Benches—as a former financial regulator actually knows what he is talking about, which is a dangerous thing here. In September 2007, when Northern Rock collapsed, the Treasury did not even know if it had the power to take it over, which was something of an indictment of thousands and thousands of pages of regulation. Does he agree that it might not be a coincidence that John Pierpont Morgan and Nathaniel Rothschild, the founders of two of the most successful banks in the 19th century—JP Morgan and NM Rothschild —had a considerable personal interest and stake at risk in those institutions if things went wrong?

[Stephen Barclay]

My hon. Friend is absolutely right, and he is right because, as I know from my time in banking, people in banks are usually aware of the problems, but there is a perverse incentive—a short-termism—that says, “If the rewards are delivered short term, but the risk is unlikely to crystallise”—

--- Later in debate ---

[Stephen Barclay]

My hon. Friend is absolutely right. One-size-fits-all rules often capture the good but are insufficiently robust to deter the bad. Yes, the Bill is welcome and takes constructive steps forward, but we also need to see more measures from the Treasury on individual fines.

[Mr Bacon]

There are some people here who are not interested in the debate, but they can go away if they want to. I am grateful to my hon. Friend for giving way; I have now caught up with those on the Labour Front Bench in terms of interventions.

I heard from 27 employees of Lloyds bank who were caught by the temporary ban on bonuses. Some of them were getting bonuses of only £2,000, so that was quite unfair. I think my hon. Friend the Member for Wycombe (Steve Baker) might have suggested that senior bankers and bank directors should be required to post personal bonds. Does my hon. Friend agree that that would go some way towards dealing with the problem?

[Stephen Barclay]

My hon. Friend is right. We have to introduce into the system a position in which those at the top who are getting the biggest rewards also face the biggest risks. Some colleagues have talked about criminal sanctions, but the burden of proof is such that it is often difficult for the prosecuting authorities to get sufficient evidence to make it an effective tool. I am not against that, but it is often not an effective tool in practice. We need to ask how we can get to a situation where we do not catch those on £2,000 bonuses and those who have done no wrong, and do not set in place a whole load of rules that fetter innovation or deter business, but where we do create a stick and a deterrent for those who have abused the system and know they are still on the hook for significant financial loss. Those are the people most motivated by big fines in the first place; we should have a correlation between the bonuses and the fines.

In conclusion, the Bill is constructive and welcome, but we need to hear much more from Treasury colleagues about individual accountability, not just structures.