Financial Services (Banking Reform) Bill

Steve Baker Excerpts

Monday 11th March 2013 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I add my congratulations to the hon. Member for Eastleigh (Mike Thornton) on his maiden speech. I remember when I made my maiden speech: it was the most terrifying event of my life. If he continues with that masterful performance, the good people of Eastleigh will be very well represented in the years to come.

I am grateful to my hon. Friend the Member for Chichester (Mr Tyrie), who is no longer in his place. He started by talking about the members of the Parliamentary Commission on Banking Standards. As one of those members, it falls on me to pay tribute to the extraordinary work he has done in the past nine months or so, pulling together what is quite a tour de force.

At the heart of this debate lies the balance of interests within banks. Any commercial organisation—or, indeed, any bank—must balance the interests of its shareholders, the interests of its staff, and, importantly, the interests of its customers and the wider society at large. When those interests become unbalanced, we end up with problems. When staff are over-incentivised with bonuses, they will take greater risks at the expense of shareholders. When shareholders see stellar returns, they will fail to provide the governance oversight needed to protect the organisation. When looking after customers is seen as a tricky task in an ever-increasingly competitive world, the customer takes second place to proprietary trading, and is relegated to providing mere liquidity to help the proprietary traders. When those balances of interests become too skewed in favour of staff and shareholders, society loses out altogether, with the banking collapses and the bail-outs we saw, and which we are trying to avoid in the future.

One of the concerns that I have been wrestling with is that of over-regulating our banks. Can we, unwittingly, drive our banks to relocate offshore by supposedly over-regulating them? We need to look closely at the problem. What do we mean by relocating? In part, we are looking at banks changing their domicile, and in part we are looking at the moving of specific operations to different parts of the world. Those are two very different things, and it is important to make sure that we do not confuse them. Setting up a trading desk in Spain, for example, is decided by where the traders want to work. Moving a global bank to Singapore is a very different thing indeed.

First, these banks are huge. One has to asked oneself the question: who would want to have one of them located in their economy? If HSBC went to Singapore, its balance sheet would be over 1,000% of Singapore’s GDP. Not many countries can take a bank of that size, and, of those that could, do they have the same offering that we have here? There would be no question whatever of any implicit guarantee. London offers some key elements that banks need: we speak English, we are in the centre of the global time zone, we have a transparent and well-tested legal system, and, importantly, we have what amounts to a relatively good regulatory system. All those points are absolutely key.

The banks benefit from an implicit guarantee—valued at between £10 billion and £40 billion, depending on where we are in the cycle—that comes as a result of the expectation that the British Government would stand behind a failing bank in exactly the same way that we saw in 2007 and 2008.

[Steve Baker (Wycombe) (Con)]

I am glad that my hon. Friend raises that point. Does he agree that if we subsidise anything, we get more of it, and that this actually subsidises risk taking?

[Mark Garnier]

Yes, it does, absolutely. I am going to develop that point in a second, if my hon. Friend will bear with me. We need to get rid of this implicit guarantee for exactly that reason and in order to encourage competition, because competition requires a guarantee for all banks, not just the big banks.

If we combined a transparent legal system with a robust and secure regulatory regime, international capital would come to this country—because of that security—and because capital would trust the UK’s legal and regulatory system, it would be prepared to take a slightly lower return. London would provide an environment in which the cost of funding for banks would be lower. That cheaper funding, as a result of regulatory security, should replace the banks’ implicit guarantee and thus result in a lower cost of capital. As a result of that cheaper funding cost, which is reliant on good regulation, we should not fear banks relocating when we introduce regulatory reform. They might complain, but they will ultimately thank us for the strongest regulatory regime in the world.

That also depends, however, on how the Government take forward the Bill. The Banking Commission has made its early recommendations, and the Government have responded. As we heard from my hon. Friend the Member for Chichester, we are grateful to the Government for listening to some of our recommendations, but they could pay more attention to certain other areas. We want a leverage ratio set at 4% by the Financial Policy Committee, a full reserve power for full industry-wide separation and regular reviews of the effectiveness of the ring fence in order to ensure the most effective and secure regulatory regime in the world. By winning the race to the top, we will ensure cheaper capital funding for our banks and help to preserve our country’s lead position in the financial world.

I turn to the thorny issue of proprietary trading. The term “casino banks” was coined by someone at a time when I suspect they were keener to play to the gallery than necessarily to address the serious issue of what investment banks actually do. It is important to remember that investment banks raise huge amounts of debt and equity capital, generating thousands, if not millions, of jobs in the UK and around the world in commerce and industry—jobs that create wealth and tax receipts for this country—but there is an element within investment banks of proprietary trading. The important thing is to define proprietary trading. Every bank that makes a loan makes it on a proprietary basis, but no one would want to prevent banks from doing that—it is the key to what they do. Pure proprietary trading, however, for the sole purpose of enhancing shareholder returns—with no benefit to the customer or society—has no place in our banks. It fails the balance of interest test and is incredibly difficult to define.

We can recognise the evil type of proprietary trading when we see it, but let us take market marking, for example. It provides a service to customers and liquidity to the markets, and so passes the balance of interest test, but at what point does a residual position on a trading book stop being that which is left over from normal market making activities and start being deliberate directional betting? That inability easily to distinguish between one and the other leads me to believe that, although a Volcker rule would probably be desirable, it would be too difficult to impose in a meaningful way. That is why, reluctantly, I come down on the side of not banning pure proprietary trading. If the Vickers proposals that the Bill implements seek to put a ring fence around the deer park, does it matter what type of predator is kept outside? The consumer will be protected from both the wolves of market makers and the tigers of proprietary trading.

Much of the commission’s work has looked at competition. With a handful of super-huge banks dominating the market, competition is tricky. Long before the commission was set up, however, I spent much time meeting smaller banks, including challenger banks, and those seeking to win new banking licences. It was clear that there was a huge problem with banks being too small to start—the regulatory hurdles facing small banks, such as licence applications and ongoing supervision, distorted the market in favour of the big banks—but the FSA has responded to pressure and had a change of heart. The regulator is moving in the right direction, and I am grateful to the FSA for taking heed of our warnings about new banking application processes and the treatment of asset risk weightings on the balance sheet. The regulator is moving towards greater opportunity for small banks in terms of regulation, which is very important.

There is also the thorny issue of account switching. Later this year, the seven-day switching programme, which is a significant step forward, will be put in place. I strongly believe, however, that the ultimate goal has to be full account number portability. VocaLink, which provides the payment system services, is considering doing for banks what the telecoms regulator did for mobile phones, and it is making good progress. My hon. Friend the Member for South Northamptonshire (Andrea Leadsom) has done a lot of work on this subject, and for four reasons her proposals for full portability are right: first, it will ensure greater competition, as I am sure we will hear later; secondly, the financial system will be more transparent and so provide greater oversight for the FPC, which is charged with ensuring stability in the financial system; thirdly, in the event of a collapsing bank, full portability will make bank resolution far easier and cheaper; and finally, the legacy IT systems in many banks have their foundations in the ’50s and ’60s, with the punch-card system. At some point, the banks will have to massively update their systems, and combining everything makes huge economic sense.

What is the point of banks? Why are we so keen to reform them? Those questions are crucial to the whole debate. Clearly, people need a safe place to deposit their money, to manage their finances and to plan for the future, but banks also provide an incredibly important social and economic function. There has yet to be devised a better way of taking money from where it has accumulated and distributing it to where it is needed. Successful investors and business men need a way to get their money to where it will work for them, and those with an idea but no cash need to be introduced to investors with surplus funds. So far, banks have done that job better than anyone else. No matter what we say, they have a fantastic distribution network, which we must utilise to the fullest extent.

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[Mr Michael Meacher (Oldham West and Royton) (Lab)]

We have had an interesting and thoughtful debate, which has concentrated on detail, but I think it is worth putting it into context. Despite the banks triggering, as we all know, the biggest economic crisis since the 1930s, with the Government having to provide nearly £1 trillion in loans, guarantees and asset protection schemes to ailing banks, it has taken five years to reach this point of proposing reform—and even then, by any standards, this Bill is woefully short of what is urgently needed to prevent a recurrence of financial collapse and to produce a safe and desirable finance sector. I have a lot of sympathy with my hon. Friend the Member for Bassetlaw (John Mann) when he said, “Is this it?”

First, the Bill’s central mechanism—ring-fencing between the investment and retail arms of the banks—is all too likely to be subverted by the Machiavellian skills of the City in regulatory arbitrage. The Minister mentioned that, but rather slithered over it, I thought, by saying that he had confidence that it would work. The only evidence he quoted in favour of that was the opinion of Sir John Vickers. Since it was his proposal, it is not surprising that he believes it will work. Historically, however, all the evidence is that Chinese walls will be circumvented.

Let me deal with the Parliamentary Commission on Banking Standards. One has to ask, as has been asked a number of times already in this debate, why after five years of delay this Bill is being rushed through just a few months before the Government’s own appointed commission actually reports? The Tyrie banking commission has made it very clear that it strongly advocates electrification of the ring fence. The Chancellor initially rejected that until the commission’s chair, the highly respected hon. Member for Chichester (Mr Tyrie), and Lord Lawson threatened to table amendments to force the Chancellor’s hand to ensure that the full sanction of separation remained in the Bill. Finding his hand forced, the Chancellor then made the absolute minimum concession he could get away with, namely giving regulators the power to dismantle an individual bank that tried to undermine the ring fence, but not a more general power to apply full separation across the industry. Even after that, dubiety remains because the Bill does not say what precisely is to be ring-fenced. Savings, for example, can certainly be placed in a variety of exotic securities.

The Government have also succumbed to the banking lobby in permitting banks to locate simple derivative products within their retail operations. As my hon. Friend the Member for Nottingham East (Chris Leslie) pointed out, that can be, and indeed already has been, uncomfortably extended. The Government’s retreat can only have the effect of opening the door to other forms of speculative activity to nest inside retail banking.

There are other uncertainties. Let me give just one example. Let us suppose that funds are transferred from a ring-fenced to a non-ring-fenced entity via a foreign subsidiary or affiliate in a place where there is no such separation. Is that a breach of the ring fence? How does anyone actually know? I presume that we will not rely on the good intentions of bankers.

The real problem with the Bill, however, is that it does not deal with the fundamental causes underlying the reckless and destructive banking that has done so much damage. It is preoccupied with investment banking, and it offers no relief from those suffering from the abuses in retail banking. As many people have mentioned, payment protection insurance, money-laundering, the fixing of endowment mortgages and interest rates, and pension mis-selling are just some of the rackets that have been run by retail banking. Nothing in the Bill offers any reform.

Many of those abuses, on not only the investment but the retail side, are fuelled by the incessant stock market demands for higher short-term returns, as well as the profit-related pay of executives and traders. Even when the European Union tried to limit the latter by means of bonus caps, the Chancellor went out of his way to stop it without managing to secure a single ally in any of the other 26 member states. I can only say that the banks certainly do not provide half the annual donations to the Tory party without expecting a very big return.

However, even more important than the ring fence and the ambiguities relating to the status of so-called simple derivatives, which are anything but simple—for example, there is the obvious question of whether currency hedges can be sold to small businesses from within the ring-fenced operations—is the leverage ratio. As has been mentioned, the Vickers recommendation was for capital of 4% with a lending ratio of 25:1. The Chancellor, in yet another very big concession to the banks, dropped that to 3%, opening up a 33:1 ratio. In its interim report published today, the Tyrie commission—rightly, in my view—rejected that as being wrong-headed and unnecessarily risky, precisely because of the excessive size of the finance sector in our economy, relative to the size of those in other economies and, indeed, absolutely. I think that that unwise concession ought to be overturned in both Houses.

This is not, I think, a great Clark-Javid Bill. It is a mini-Bill which, unforgivably in my view, entirely ignores the wider banking framework. The big four—and this, surely, is the background to the Bill—have let Britain down badly. We need to transform the whole banking culture, and end its present obsession with property, overseas speculation, offshoring and tax avoidance. By being too big to fail, the big four exacerbate moral hazard; because of their size and weight they choke competition and new entrants to the market; and they have manifestly failed to keep adequate funding flowing to business. They should be broken up, initially by a clean break between the investment and retail sides—on the basis of all the historical evidence, I think that a ring fence is highly unlikely to work—and beyond that by a wider restructuring.

What the country really needs is a national investment bank supported by a range of smaller specialist banks, focusing on infrastructure development, science and technology, small and medium-sized enterprises and a low-carbon economy—to mention only some—together with a regional spread of banks along the lines of the German Mittelstand. The other essential requirement is the regaining of public supervision of the money supply. As the Minister mentioned in his opening speech, the total gross lending of the banking sector has been about £7 trillion a year, five times as much as GDP. What the Minister did not say, however, is that only about 8% of that has gone towards productive investment. The banks have used their virtual monopoly over domestic credit creation—amounting to some 97%—largely to fuel successive property booms and speculative foreign ventures. That is a basic reason for the fact that the country now has a fast-rising and unsustainable deficit in traded goods, which last year amounted to more than £100 billion —7% of GDP.

[Steve Baker]

The right hon. Gentleman has raised a point that many people fail to appreciate: the banks lend money into existence and into housing, partly because they are encouraged to do so by the risk weightings in Basel. Does he agree that, at least in that respect, the money supply tripled because regulators encouraged banks to do it?

[Mr Meacher]

I do agree, and I know that the hon. Gentleman believes that banks have far too much power to create money out of nothing. He and I may not agree on exactly how that can be dealt with, but it certainly needs to be dealt with.

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[Steve Baker (Wycombe) (Con)]

One man has done more than any other to popularise the cause of banking reform. Astonishingly, he is not a member of the Government or a Member of the House of Commons; he is, incredibly, a minibus salesman in Burnley named Dave Fishwick.

On these occasions I generally stand up and say something arcane, usually referring to literature from the 1930s, but today it is my pleasure to talk about the Channel 4 documentary “Bank of Dave”. Of course, Mr Fishwick has not been allowed to start a bank; he has had to start a savings and loans company. The documentary reveals just how difficult it is today to start a tiny little bank. But what does he do? He knows his depositors—his savers—and his borrowers; he goes out and personally shakes hands; and he understands the businesses into which he is lending. In the documentary, we can see what tiny sums are necessary to allow a small business to grow—just a few thousand pounds to buy a new oven. Yet he puts his own personal assets at risk to guarantee what he does. He knows his depositors and he wants to make sure they get their money back, so all the savings he accepts are underwritten out of his personal wealth. If you read his book, Mr Deputy Speaker, you will discover that he believes in 100% backing for demand deposits and would do so were he allowed to start a bank.

This is an incredible thing, because Dave Fishwick, working on little other than his basic entrepreneurial ability—his street-level ability to get business done—has come up with a model of banking that has overwhelming public support and that demonstrably can be seen to be serving those in his local community, be they savers or borrowers, those working in business or the elderly who cannot afford to lose their money. In addition, all this service to the community is personally underwritten by him. I have introduced a number of Bills in this House, one of which was the Financial Institutions (Reform) Bill. It would have made bank directors liable without limit for their commercial losses and put bank bonuses into a pool to be treated as capital for five years. That would realign incentives so that those operating banks would take sensible decisions, cease to be reckless, lend well and think about what they were doing for their customers. We are in the absurd situation where a simple, unsophisticated man running a corner shop in my constituency was subjected to a bank calling him—a bank that had specifically procured an Urdu speaker in order to obtain his trust—to sell him a sophisticated interest rate swap that he did not need. This is a bank that has been bailed out at taxpayer expense but is now paying bonuses. So we have that injustice, yet a man such as David Fishwick, who is doing the right thing and underwriting the commercial risk at his own expense, is not allowed to call himself a bank—it is disgraceful.

This Bill should help a man such as David Fishwick to serve his community by setting up a tiny bank. Three things about his approach make it feasible. The first is his personal guarantee. The second is his personal relationship with his customers. The third is that if he were to take demand deposits, he would put a 100% reserve on them. If that were also capped at a certain level of lending, it would be possible for that bank to exist as a bank with very little regulation. That business man, who just knows how to get good honest business done, would be able to get on and serve his community. That approach would answer so many of the points made in this debate.

Of course I cannot resist addressing the rest of the Bill’s provisions and some of the more arcane points, which I like so much to talk about.

[Frank Dobson]

The hon. Gentleman is fairly youthful, so he may not remember the time when most big banks had local bank managers and so had some of the characteristics of the Bank of Dave, in that there was someone local who knew the locality and its businesses. Many people now find that they apply to the bank and the algorithm says no.

[Steve Baker]

My bank manager is named Guy Birkby, and I am sure that he would not wish to be compared with Dave Fishwick because he is an employee of Handelsbanken. I moved my money to Handelsbanken specifically so that I could have a local bank manager who knows me. Indeed, when I ring the bank, people recognise my voice and off we go, and that is a far better way to do business. This particular combination of personal relationship and personal liability—in Dave’s case, not Handelsbanken’s—is a way to re-establish trust. What are the other ways of doing that? They are unlimited liability, which I have discussed, trustee savings banks and mutuals. I am afraid that one of the big flaws of the big bang was that it encouraged this limited liability corporate form where nobody ends up taking the risk and it falls to the taxpayer—it is a disaster.

On ring-fencing, I very much share the comments made by the Father of the House, my right hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell). I am extremely sceptical that ring-fencing will work. I think that the efforts in the Bill are extremely brave, and of course I shall support it, but this is the last brave attempt to prop up the contemporary monetary orthodoxy. I shall come back to that subject after talking about depositor preference. When we combine the ring fence with the particular instance of taxpayer-funded compensation, there is a real problem that the same old incentives are being preserved. Commercial risk is being subsidised by the taxpayer and to deal with the consequences of having encouraged that reckless behaviour at taxpayer expense an attempt will then be made to regulate those risks away—it has not worked before and it will not work now.

On depositor preference, I have learned through my last five or six years of working with academic economics that if there is one subject we cannot resolve it is who owns—or should own—the money in someone’s bank account and what the contractual obligations should be. In other words, if someone’s money is on demand and they can have it back any time, should there be a 100% reserve—it is their property and the bank is safekeeping it—or should it be the bank’s property which it can use to fund itself?

That question is extremely difficult to resolve, but I shall just cite a speech I have used before, in which the Earl of Caithness said:

“The current crisis, like previous ones, emanated from a base of judicial decisions. Prior to 1811, title to the money in depositors’ accounts belonged to the depositor. However, in that year, decisions in Carr v Carr and, in 1848, Foley v Hill gave legal status to the banking practice of removing depositors’ money from their accounts and lending it to others. Since then, title to depositors’ money has transferred from the depositor to the bank at the moment when the deposit is made.”—[Official Report, House of Lords, 5 February 2009; Vol. 707, c. 774-75.]

That goes very much to the point about the money creation process on which the right hon. Member for Oldham West and Royton (Mr Meacher) and I had an exchange. There was a time when this fractional reserve process created money, but that has now become meaningless, as banks are able to lend with almost no restraint. As I explained in my maiden speech, that is the fundamental reason for this massive boom-bust cycle.

I try never to have an idea of my own on these matters, so let me come back to what Irving Fisher wrote in 1935, when he brought forward a plan for 100% money. He said:

“The essence of the 100% plan is to make money independent of loans; that is, to divorce the process of creating and destroying money from the business of banking. A purely incidental result would be to make banking safer and more profitable; but by far the most important result would be the prevention of great booms and depressions by ending the chronic inflations and deflations which have ever been the curse of mankind and which have sprung largely from banking.”

So I return to David Fishwick, because he knows instinctively, as a business man, that if he takes somebody’s money on demand deposit he should 100% reserve it, in case they want it back.

By this point, I will have upset my friend Professor Kevin Dowd, who was a tutor to Andy Haldane at the Bank of England. I have had the privilege of meeting both of them to discuss these matters. Kevin is a free banker—he would believe in fractional reserves on demand deposits, without a shadow—but in his banking system there would be no limited liability and no taxpayer-funded deposit insurance, banks would issue their own notes and money, at bottom, would be gold. That commodity backing would limit the banks’ ability to create deposits.

There is also a problem in our banking system with accounting, which is another area where I have introduced a Bill. Since I did so, significant progress has, thank goodness, been made on one aspect—loan loss provisioning, which Members can refer to in the media. However, there is another problem with international financial reporting standards accounting for banks, which is mark-to-market accounting. We have heard today the story of how banks have securitised lending and sold it. In a chronically inflationary banking system where banks lent money into existence and, as we heard from another hon. Member, were encouraged to make bad loans—they were creating money to make bad loans into property—they of course wanted to get this off their books. So they wrapped it up in a bond, insured it with a derivative and sold it. They did not even have to sell it. They just took this instrument, moved it from one accounting book to another and they could then immediately mark its value to market. What does that mean in plain terms? It means that one can take 30 years of cash flows, unrealised, from mortgages not yet paid, and by marking them to market within a bond, around a vehicle that is all these mortgages securitised, one can take bad loans—loans that probably will not be repaid—and take it all as profit in capital today. You can pay yourself a massive bonus out of cash not realised—out of capital.

If hon. Members and the Minister wish to know more about how this works, I hope that they will look at my colleague Gordon Kerr’s book, “The Law of Opposites: Illusory profits in the financial sector”. Gordon has spent many years engineering financial products. In a sense, he is a dissident banker gone good. In that book, he explains how those accounting problems, combined with easy money, create so many of the problems that are, as Fisher said, the curse of mankind today.

At bottom, there will ultimately turn out to be two banking reforms that we should adopt. As I have said before—this is particularly the case for the question of the status of demand deposits, gold as the ultimate backing to money and so on—we will find in the end that the Bill is an honourable and brave attempt to prop up a contemporary monetary orthodoxy that is failing. This is the end of the post-Bretton Woods monetary order through which we have been living. We were told that it was a banking crisis. We learned a little later that it was a debt crisis. In a minute, people will realise that what we use as money is debt, that what the banks deal in is debt and that the vast majority of the money in our accounts was created by somebody else taking a loan. When that is accepted, we will discover that this is a monetary crisis. We will then find that there are two plausible ways to reform money and banking.

We could have 100% reserves on demand deposits and the preservation of state control over money and banking—that is, paper money, fiat money, the central banks planning interest rates, taxpayer backing and so on. That is the sort of plan advocated by my friend Jesús Huerta de Soto as a route to what we really should do, which is get the state out of money and banking. We should have a free banking system, as proposed by my friend Professor Kevin Dowd. He has brought forward a plan called “two days, two weeks, two months”, which would return us to a free banking system backed by gold within that time scale. It would not need regulation and it would be just and moral because people would take responsibility for the things they did.

This is not the first time that a monetary order has come to an end. By some calculations, in the 20th century there were about eight global monetary orders. The thing that is remarkable about the post-Bretton Woods order is not that it is ending but that it has lasted so long. I am afraid that I agree that this Bill is not enough, but it makes some progress and I hope that it will be the last attempt to prop up a contemporary banking system that cannot last.

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[Mr William Bain (Glasgow North East) (Lab)]

The Bill matters greatly to my constituents in Glasgow because the financial services sector north of the border contributes nearly 8% towards Scotland’s GDP, which is the second highest in the UK after London, and 8.6% of jobs in Scotland are in the financial services sector. The Bill will affect a large number of savers, businesses and employees in Scotland.

I have to say, with regret more than anything else, that the Bill is desperately weak and disappointing and it will need substantial amendment in Committee if it is to provide the radical surgery that the banking and economic system needs. The truth is that our banking system is badly broken. It is failing to supply or boost demand for lending to businesses in key parts of the economy. As the Institute for Public Policy Research found in December, the remuneration packages within the industry have been responsible for a huge rise in inequality across our country.

It is disappointing that we have not had a commitment from the Government to introduce a proper financial transactions tax and that they have not shown leadership by pressing for that to be introduced at G20 level, given that we already have such a tax in this country in the form of the stamp duty that is paid on share transactions.

[Steve Baker]

Between 1997 and 2010, the broad measure of the money supply, M4, tripled. That new money had to go to somebody first. That meant that it widened wealth inequality. The hon. Gentleman is arguing that because the state encouraged this enormously elastic money supply and created wealth inequality, we now need more state intervention to try to fix it. That would be a disaster.

[Mr Bain]

I know that the Prime Minister has been very much a fan of a magic money tree. The Chancellor, by refusing to change course on fiscal policy and putting everything on to monetary policy, shows that the policy of the Government is to treat the Bank of England almost as if it were a magic money tree, so I am not sure of the point that the hon. Gentleman is making.

There is very little in the Bill on competition. There is nothing that would impose a fiduciary duty on the banks in relation to their clients’ money in the same way that company directors have in relation to company funds or lawyers in relation to clients’ funds, so there are huge deficiencies. There is also the great suspicion that the Bill waters down some of the key recommendations of the Vickers report. The maximum leverage that the Chancellor is prepared to accept is way beyond the Vickers recommendation. The Chancellor appears to be prepared to allow a leverage of 33 times, whereas Vickers’ recommendation was for only 25 times. That is because instead of adopting the Vickers report on the level of equity capital at 4% of assets, the Chancellor is going for the Basel III recommendations.

As I said, the IPPR, in a report published in December, examined the culture of greed and how the remuneration system got out of control in the banking system. For example, the top 0.5%, or even the top 0.1%, enormously enriched themselves because of the practices in the industry. That is one reason why it is regrettable that the Bill does not contain provisions for a banking code of conduct or to put ordinary employees of the banks on remuneration committees to ensure that there are annual binding shareholder votes on executive pay. Neither does it propose properly to enforce the legislation passed by the last Government to reveal how many people in the banking system earn more than £1 million a year. There are great areas where the Bill is enormously disappointing.

In terms of the overall reforms, we have three major issues of contention with the Bill as framed. First, too much of the detail of the Government’s policy is to be dealt with by delegated or secondary legislation and is not present in the Bill. Secondly, the Government are prepared to allow too much flexibility within the ring fence, and do not give consumers and taxpayers the assurances they deserve that the principle of too big to fail will not still exist within a regulatory system. Thirdly, the culture of the banking system is not changed enough by the Bill. There are insufficient steps to ensure the proper degree of lending to households and SMEs that is required.

To take that final point first, the figures we have seen on the national loan guarantee system, Project Merlin and funding for lending have one thing in common: the Government are not matching up to their promise and the banking system is inadequate to meet the needs of households and businesses. After a net growth in lending of just £0.9 billion in the third quarter of last year, net lending through funding for lending participating banks contracted by £2.4 billion in the fourth quarter of last year. Whereas Lloyds was drawing £3 billion through funding for lending, lending by Lloyds shrank by the same amount in the final quarter of the year. Whereas RBS has drawn £750 million, it decreased its lending by £1.7 billion in the same quarter. It is clear that funding for lending, as it has been conceived and is operating, is simply not providing the lending to small and medium-sized businesses. There is a missed opportunity in the Bill to change course and ensure that the system provides the support to businesses that is necessary if we are to have the growth that is the only means of cutting the deficit.

We also see from the bank data published last week insufficient detail on the breakdown of lending to households and businesses. However, we know that business investment fell by 1.2% in the last quarter of 2012, and it is clear that confidence in the economy is stubbornly low. There are still high levels of corporate surpluses, but the banking system is failing to deliver money to those businesses to start increasing orders, to deal with our low productivity and to restore confidence where it is most needed now.

It is also clear that there are unfortunately no provisions to establish immediately a British investment bank that would break the logjam of getting money out of corporate surpluses and flowing into the real economy and promoting orders and demand. Why have the Government persisted with this argument, even in the light of the proposal in the second report from the parliamentary commission for a secondary reserve power to ensure that where there are examples, or even the possibility, of the primary reserve power being circumvented by the banks, there is a reserve back-up power to break up the entire system if that is necessary in the national interests and to prevent financial collapse?

The commission’s report argued that the banking industry could indeed dilute the impact of the ring fence, and that not just the primary but the secondary reserve power was necessary in order to ensure that that did not occur and that we had proper enforcement of the ring fence. The Bill also introduces a requirement for directors of ring-fenced entities to be approved by the regulator, with such persons being subject to disciplinary action by the regulator if they have been involved in any contravention of the ring-fencing rules. It is clear that those powers should also be increased.

The problem with the Bill is that the devil is in the detail, but a huge amount of the detail is not apparent. One reason why the Chancellor said that he could not accept the secondary reserve power is that he claimed it would be anti-democratic. He said that it would not be present on the face of the Bill and it would not be fair to introduce that by delegated legislation. The question remains for the Minister: if that is the objection, why not put more of the detail into the Bill? Why not ensure that we can then have that secondary reserve power, which the hon. Member for Chichester (Mr Tyrie) and the other members of the parliamentary commission deemed to be absolutely necessary to have confidence in our banking system? Then we would be able to move on in a spirit of consensus, instead of, with regret, having to point out the Bill’s great deficiencies.

The other shortcoming of the Bill is the inconsistent treatment of derivatives. Those were described by the US investment guru, if we can call him that, Warren Buffett as financial weapons of mass destruction, but sadly the Government have yielded to some of the more regressive parts of the financial lobby and will permit banks to locate simple derivative products—whatever simple means—within their retail banking operations. They should look at that again.

The Bill is weak and does not learn the real lessons from the financial crisis. It does not learn the lesson that we have a very small number of very large banks, whereas other countries, such as Germany, France, Canada and United States, have a more diverse range of successful financial institutions, including co-operatives, credit unions and Government savings banks. There is little in the Bill that would help to expand the thriving credit union movement. I recently visited credit unions in my constituency and others in Glasgow city centre that are providing mortgages and expanding the range of financial services in a responsible way given the scale of financial exclusion that many of our constituents face. Having different types of banks in an economy introduces different incentives and gives the public real choice. The point is not to have more banks competing on the same business model of short-term speculative profit, but to have competition across different business models with diversity of form and diversity of function.

Unfortunately, the Government refuse to listen to those points and have taken insufficient steps to make the reforms that our country needs. I hope that in Committee they will listen to the arguments again, because our constituents, businesses and the people who save and invest in our financial system deserve no less.

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[John McDonnell]

Exactly. I accept that point, but the relatively simple point that I am trying to make is that a group of people who have, in effect, been caught with their hands in the till are trying to use the money that has been used to bail them out to profiteer at the taxpayers’ expense. That is staggering and it says to me that regulation will not work with these institutions. Even when they are absolutely shamed, subject to public opprobrium and under the acute gaze of the public eye, they still try to profiteer.

[Steve Baker]

This is the point that I have been trying to make. Every time the state sets up these dreadful institutions, people are able to profiteer. If we tell people that we are creating new money out of nothing and giving it to them in exchange for Government bonds, of course they will seek to make a profit. The thing to do is to make sure that they have institutions within which they can make a profit justly.

[John McDonnell]

There is another route and I will come on to it. The hon. Gentleman and I agree about the problem, but there is another solution. As he has said, regulation does not work with these institutions or the motivation to profiteer. I do not think that the new regulatory system—whether it be subject to a ring fence, an electrified ring fence or leverage ratios—will work. The reality is that as long as the banks are in private hands and have profit as their motive, they will aim to get around a regulatory system. The hon. Gentleman has mentioned how they will dig under and go around the fence. Like a chicken finding its way into the coop, they will always find a way. The regulatory regime proposed by the Bill is complex and, to be frank, virtually unenforceable. I think it will be almost impossible to execute the attempt to impose a firewall, as the Good Banking Forum concluded recently.

I agree with the hon. Member for Caithness, Sutherland and Easter Ross that we need to revisit the question of what role banks should play and what people want. I think that people and society want and need banks in which they can safely deposit their money and savings and which lend responsibly and provide credit to finance investment growth across the country. That is not what this Bill will secure and it is certainly not what is happening at the moment. The larger banks have an estimated £6 trillion at their disposal, but just £200 billion —3% of the overall total—is used to fund investment in this country’s industry. I do not think that a system of honest, responsible banking or long-term investment is deep in the culture. That may well have occurred at the earliest stages of capitalism but, many crises of capitalism later, we should have learned the lesson that this system is not working.

I believe that the only way to secure probity and to ensure that people’s funds are safe and secure and that we can invest in our economy in the long-term to create jobs is through a publicly owned and democratically controlled banking system. Of course, we own banks at the moment—we nationalised them. After Northern Rock, I remember standing up in the House to urge the then Chancellor of the Exchequer, my right hon. Friend the Member for Edinburgh South West (Mr Darling), to nationalise the banks. The next day he said that he had nationalised three of them. I told him that I had been right and he said, “Well, you were bound to be right at least once in 30 years.” We nationalised those banks, but we have no control over them. They are not democratically accountable to Government, workers, investors or the wider community. That is why they are not investing and why people cannot secure loans.

We should take full ownership of the larger banks. We already own Northern Rock, RBS and Bradford & Bingley and a large part of Lloyds. We should take public ownership and control of the UK-based operations of Santander, Barclays and HSBC, and we should create a unitary industry. That would enable us to control investment, secure savings, stop the paying out of large bonuses and ensure that any surpluses are returned to the public by investing in the public good. That is secure and safe banking, which is what I thought was the House’s objective.

What would full nationalisation cost? An excellent piece of work for the Fire Brigades Union by Michael Roberts and Mick Brooks, which was published and launched in this House only a week ago, estimates that it would cost £55 billion at current market rates. That is 3% of GDP. We could ensure that there would be no need for any cash exchanges and could simply swap shares for bonds, thereby saving the public purse a large amount of money. The Co-operative bank and mutuals would continue to operate as alternatives, as would credit unions, because we have confidence in them as safe and secure banks. We could also—we called on the previous Government to do this—remutualise those banks that transformed themselves from mutuals into limited companies.

In that way, we could achieve the stated objectives of the Bill not through regulation, but through public ownership and control. I do not believe that regulation will work. The system has gone too far and the profit motive has overridden any sense of value or judgment in the City. Unless we take action now, we will be back in a limited number of years to deal with another banking crisis. To be frank, we have not even talked tonight about the shadow banking process, the scale of the transactions that take place within it or how we should deal with it. That is beyond all our controls at the moment.

I will finish by saying who we are taking action for. We are doing it for my constituents, some of whom are threatened with evictions or job losses or are having their welfare benefits or their services cut, all because of an economic crisis that they had nothing to do with. They did not cause it and did not contribute to it. It was caused deep in the financial sector of this country and across the world. My constituents deserve not reform of the banking sector in this country, but an absolute transformation of it, based on public ownership and democratic control.

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[Andrea Leadsom]

I always think that the proof of the pudding is in the eating, and the fact is that Barings was culpable for a potential massive run on the banks, because of rogue trading. It did not happen, and why? It was because one individual took responsibility, surrounded himself with people who could prevent it and ensured that it did not happen. We do not need to look any further to see that it was working.

There is one area in which the Bill is a lost opportunity. It offers us the chance to address the big elephant in the room, which is the lack of competition in the banking sector. We have the chance to go well above and beyond what John Vickers proposed. Retail banking in this country should be truly competitive. As we all know, one of the biggest problems in our economy right now is the lack of finance for small and medium-sized enterprises, which are the lifeblood of our economy.

[Steve Baker]

My hon. Friend is absolutely right, of course, but the other problem is the lack of return for savers. Is that not the other of the current system’s twin failings—that it is failing to intermediate between the two groups?

[Andrea Leadsom]

I agree completely, and my hon. Friend tempts me down the route of blaming quantitative easing for the extraordinarily diverse results in the savings market, particularly for pensioners and other savers whom we desperately need to spend more. The evidence is that as a result of reduced annuities, their propensity to save has increased. We would like people to spend more in the economy, but they are not doing so.

The best way to shake the banks out of their current complacency is to allow new entrants to get into the market, bringing with them the high standards of service that customers believe they should be able to take for granted, including IT that works. To go back to Adam Smith in “The Wealth of Nations”, a truly competitive environment requires that there is free entry and exit for market players. That is not the situation in banking in this country right now. New entrants have experienced massive barriers to entry not just from competitor banks but from the regulators. Likewise, failure has not been possible, as we have seen at eye-watering cost to the taxpayer. Rather, the trend has been towards consolidation and mergers, with a small number of very large banks dominating. In 2000, there were 41 major British banking groups and subsidiaries, whereas in 2010 there were just 22. Four banks have an almost 80% market share of the personal current account and SME lending market, so there is evidently a need for genuinely comprehensive action to increase competition in Britain.

One significant step in the right direction would be to take the opportunity to sell off the state-owned banks, as the Governor of the Bank of England himself suggested last week at the Parliamentary Commission on Banking Standards. Selling off the taxpayer-owned banks in small parcels would instantly create potential new challenger banks, and I urge the Government to consider doing so again. The Governor regretted the fact that RBS remained in public ownership and pointed out that we had not yet solved the “too big to fail” problem. He urged the Government to do more.

As right hon. and hon. Members have heard me say a few times before, the real game changer would be introducing full bank account number portability. We take that for granted with our mobile phones—if we change our provider, we take our mobile phone number with us. Why should it be any different with our bank accounts? Earlier this evening, the Father of the House told me that one of his ex-colleagues had spent years banging away in the Chamber about the importance of mobile pensions in the private pension sector. I was unaware that it had ever not been possible for someone to take their pension with them when they changed jobs, but apparently one of the greatest revolutions in the pensions sector happened when account number portability was achieved. We know what such portability did for the mobile phone sector; surely the time has come to introduce it to the banking sector.

At a recent round table meeting with various luminaries from the banking sector, Which?, the Bank of England and so on, all those present agreed on a show of hands that if anyone is to achieve bank account number portability, the UK should be first. Let us, as the world’s leading financial services centre, be first to innovate and not wait until someone else does it.

Switching instantly between banks would remove the huge barrier to entry that currently constrains new, innovative banks. Several benefits would accrue from that policy. First, it would cut barriers to entry for new challenger banks. Increased competition would force existing and new banks to differentiate themselves to retain customers, leading to enormous improvements in customer service and the differentiation of bank offerings. Secondly, new challenger banks would mean more banks and increased access to new and different sources of funding, and over time that would reduce the risk of banks being “too big to fail”. The US has more than 3,000 banks and when a retail bank fails there is just a ripple and hardly anyone notices. We need diversity of financial service providers, which I genuinely believe such a measure would provide.

Thirdly, industry experts argue that the impact of creating a new shared payments clearing infrastructure would mean the banks sorting out the problem of multiple legacy systems that dates back to the consolidation of the 1990s. Clearing banks currently spend billions each year on string and Sellotape solutions for creaking systems, and we have seen twice recently the problems that RBS subsidiaries had in managing payments for their customers because of poor systems and systems failure. New systems could lead to a reduction of up to 40% in bank fraud that costs the sector billions of pounds each year.

Fourthly, multiple legacy systems within banks make it hard for them to evaluate business ideas. The banks’ poor systems make it harder for them to assess good business ideas versus good collateral, and better and new systems would enable them to make better lending decisions to SMEs. Finally, and importantly, account number portability would offer the potential for the orderly resolution of a failed bank. The potential to close down a bank and transfer its accounts overnight to a solvent bank would be a valuable tool in any future financial crisis.

To kick-start a move to account number portability, the Government would need to introduce a new payments regulator with the power and mandate to require equal and fair access to money transmission systems. Only an independent regulator of money transmissions would get the job done, and using an existing regulator or the Office of Fair Trading is unlikely to be effective. I therefore welcome the Minister’s announcement of a consultation on establishing a new, independent payments regulator.

I conclude by saying that seven-day switching, as proposed by John Vickers, is not the same or even similar to full bank account number portability. It is a costly, overly-manual way of way of improving the customer experience, and does not solve the problem for small businesses, many of which—some 80%—have felt unable to change bank account provider in the past three years. Banks have SMEs tied up and want them to have personal overdrafts and bank accounts, business accounts and fully funded bank loans, whether or not they draw them down. It is extremely complicated for an SME to move banks in the current environment, and trying to change bank account number is part of that problem, as well as the lack of other banks that are willing to lend.

The first problem with seven-day switching is that it will not change the future for SMEs. Secondly, it does not address the administrative burden for SMEs. If we find that seven-day switching dramatically increases the number of people who switch bank accounts, that will simply increase the burden on all of our milkmen, dry cleaners, Tesco or whoever it might be. We will all have to change our bank account numbers with them, and they will have to change their systems. For big businesses that might not be a problem, but it is certainly a problem for small businesses. Which? has provided a wealth of evidence showing that SMEs are concerned about the impact of seven-day account switching on their administrative burden. I urge my hon. Friend the Member for Chichester (Mr Tyrie), in his Parliamentary Commission on Banking Standards, to put forward proposals on bank account number portability when he produces the final report later next month.

Now is not the time for timidity in reforming our banking sector, and it is not the time for false economies. We have to focus on enabling new entrants into the market, taking steps that are good for the consumer and for small businesses, and beginning the long process of restoring the reputation of our banking sector.