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.

--- Later in debate ---

[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.

Autumn Statement

Steve Baker Excerpts

Wednesday 5th December 2012 Commons Chamber

[Mr Osborne]

I have never used that language at all. What I have said is that we have got to make savings in the benefits bill and, in my view, it is very important that we have fairness in our society. One element of fairness is that people on out-of-work benefits should not be earning more on average than the family that goes to work, which is why we have introduced the benefits cap. I could not quite understand what the shadow Chancellor was saying about Labour’s position on the benefits cap. He certainly led all Labour Members through the Division Lobby time and again against the benefits cap, but I think they will want to check exactly what he said in reply to my statement.

[Steve Baker (Wycombe) (Con)]

This morning City A.M. reported that just 6% of the public appreciate that this Government have been forced to put up the national debt. Will my right hon. Friend confirm that the deficit is coming down, and will he take steps to ensure that discussion in the media is based on the facts, not the incoherence and cruel fairy tales of the Labour party?

[Mr Osborne]

I will certainly work with my hon. Friend and publications such as City A. M. to make sure that happens. The deficit is how much is added to the debt each year, and we are getting the deficit down. We inherited the highest budget deficit in the world, and we have been able to reduce it by 25%.

Oral Answers to Questions

Steve Baker Excerpts

Tuesday 6th November 2012 Commons Chamber

[Steve Baker (Wycombe) (Con)]

We need more competition in banking. Later today, I will chair a meeting with Mr David Fishwick, who has been trying to start a responsible and trustworthy local bank but has found that the barriers to entry are far too high. Will my right hon. Friend look at Mr Fishwick’s report on community banking and consider meeting him to discuss his experiences and see whether we can make it easier for communities to create the banks they need?

[Greg Clark]

I certainly will. I think that there has been a concentration in the number of banks as a result of the financial crisis, and that is not a situation I want to see endure. If the suggestions in the report will help to reverse that, I am all ears.

Tax Avoidance and Evasion

Steve Baker Excerpts

Thursday 13th September 2012 Commons Chamber

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

I beg to move,

That this House has considered the matter of tax avoidance and tax evasion.

I would first like to thank very sincerely the Backbench Business Committee for giving me the opportunity to raise this issue for debate. Tax avoidance and evasion is a cancer in Britain’s society today. The Prime Minister was right to condemn it as morally wrong and the Chancellor was right to condemn it as morally repugnant. The problem is that the Government’s actions to deal with it have been feeble and do not match those words, if indeed they are not downright evasive, as I shall show.

The extent of tax avoidance and evasion is much disputed, but even the Government admit that, along with uncollected taxes, it reached £42 billion a year in 2009, which is equal to one third of the entire UK budget deficit. Spread over the past six years, it amounted to £228 billion. The Tax Justice Network believes that the true figure might be up to three times higher. For the purposes of this debate and this argument, let us accept the Government’s figure at the moment—it is certainly big enough.

[Steve Baker (Wycombe) (Con)]

Will the right hon. Gentleman give way?

[Mr Meacher]

I am always ready to give way to the hon. Gentleman on these issues.

[Steve Baker]

I congratulate the right hon. Gentleman on securing the debate; it was an honour to join him in bidding for it.

I wanted to check where the right hon. Gentleman was getting his figures from. I am looking at the 2011 tax gap document from Her Majesty’s Revenue and Customs. It gives a figure of £35 billion for 2009-10. Where did he get the figure of £42 billion from?

[Mr Meacher]

I got it from the same source. I thought that the figure for 2008-09 was £42 billion. I shall write to the hon. Gentleman later. The average over the period is, I think, £38 billion and I am sure that the level reached £42 billion.

--- Later in debate ---

[Steve Baker (Wycombe) (Con)]

I congratulate the right hon. Member for Oldham West and Royton (Mr Meacher) on securing this debate. He has introduced it with the highest standards and in the finest traditions of the House. I know that he feels he is on the moral high ground, and in many ways he is. I hope that the whole House will join me in wishing him the speediest of recoveries from his injuries.

On evasion, Parliament is absolutely entitled to expect the law to be obeyed and its will must be expressed in law. If people are able to behave lawfully but other than in accordance with the spirit of the House, the law should be changed, which is a point that my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) has made on numerous occasions. I am prepared to accept the possibility that I am the only Member who does not know the tax code from one end to the other. I see that you are nodding, Mr Deputy Speaker, so perhaps I am alone in that regard.

About 12 years ago, when I worked as a software engineer servicing HMRC, I recall setting up electronic checking for certain pay-as-you-earn, end-of-year returns. It simply was not possible to submit a valid expenses and benefits return in 2001. We had to go to some lengths to persuade HMRC that it had to change its rules if it was to have an internally valid submission. Since then, the tax code has lengthened infamously. I may be alone in not understanding the tax code, but it appears that in some instances, HMRC has not understood it either.

My first point is that Parliament’s will must be expressed clearly in the law and that people should obey it. I object to the most complex tax avoidance schemes for two reasons. First, as was set out by the right hon. Member for Oldham West and Royton, if people are setting up sophisticated schemes to avoid the clearly expressed will of Parliament, they are shifting the tax burden on to others who are less able to pay. I agree with him about that.

My second reason was not given by the right hon. Gentleman. My most profound objection is that people quit the moral high ground when they engage in such schemes. They make it more difficult for those of us who believe that low taxes are in the general interest to make our case. They open the door to another industry—not merely the tax avoidance industry—that uses the complexity in our tax system, its opaqueness and its openness to various interpretations to construct a case that discredits not only our tax system, but the rule of law. For those two reasons, I object to the sophisticated schemes that we all know so well.

I will move on to the scale and the breakdown of the tax gap. We had an exchange earlier about the figures. The total tax gap in 2009-10 was £35 billion. Of that, £5 billion or 14% was due to avoidance and £2 billion due to error. The remaining categories were broadly equal. Criminal attacks, evasion and the hidden economy all involve breaches of the law and ought to be pursued in the usual way. I am grateful to the Minister for acknowledging that. The other three categories were a failure to take reasonable care at £4 billion; non-payment, which includes insolvency, at £4 billion; and legal interpretation at £5 billion. Although those figures sound large, we need to bear it in mind that avoidance and legal interpretation, which is a potential source of avoidance, make up £10 billion of the total of £35 billion stated by HMRC.

[Caroline Lucas]

I share the hon. Gentleman’s opposition to the level of tax evasion and avoidance. Does he agree that it is therefore regrettable that his Government are cutting the number of people working at HMRC by about 7,000? The very people who could be chasing after tax avoidance and evasion are being sacked by his Government and we therefore do not have the resources to go after it. Is that not the worst kind of false economy?

[Steve Baker]

To return to my earlier remarks, having serviced HMRC as a technical consultant on and off for a very long time, I could give the hon. Lady lengthy examples of enormous waste, partly through people not being given adequate skills. I will not bore her with the technical details, but a job that I could have done in about two days with software was going to be done over the course of six months by a team of 20. That kind of nonsense has to stop. They were doing something by hand that ought to have been done using software. The level of work that people were doing was almost degrading. People must be upskilled so that such nonsense can be brought to an end. I therefore support the Government in their drive to increase efficiency at HMRC.

We all know why tax avoidance happens: people desire to pay less tax. The Government know that. Through forms of tax avoidance that are barely worthy of the name, such as individual savings accounts and pensions, the Government have always deliberately incentivised certain behaviours by creating tax breaks. That is not really the subject of the debate. I mention it only to demonstrate that we all understand that everybody would like to pay less tax. I would be grateful if the Minister confirmed for anybody who is watching, listening to or reading this debate by what mechanism they can make voluntary payments to the Treasury, not because I wish to make one, but because I think that it ought to be established how one could make a voluntary payment if one so wished.

The heart of this debate is the question of altruism. My feeling is that Members of all parties often feel that people constructing sophisticated avoidance schemes are insufficiently altruistic. There is a wide range of perspectives on that. Rarely in this country do we hear the cry, “All tax is theft”, but at one extreme there is the rather childish hysteria of objectivism, which totally rejects all altruism, and at the other there is the altruism of the state collective.

As it happens, I believe that having the state collective as the basis of all altruism is extremely dangerous. I am a great believer in individual altruism, so I say to the wealthy that they should not only pay their taxes as Parliament intends but be altruistic and engage in philanthropy wherever they can. Let us win the moral high ground for lower taxes so that people can give more voluntarily and demonstrate that voluntary individual altruism is a better basis for society than coercion. I believe that liberty is the proper context for all virtue. There is very little virtue in obedience to an inescapable authority or in simply submitting to the pay-as-you-earn tax system, but there is a great deal of virtue in someone making their fortune and choosing to give it away.

There seems to be a suggestion inherent in the debate that people who are wealthy have in some sense done something wrong. If somebody in business has at every step created value for other people without force or fraud, they are justly wealthy. If people believe that wealth has been obtained by criminal acts of force or fraud, criminal prosecutions should be pursued. If people are wealthy because they have made a just profit and created value for society, they should be applauded. If we are to have a free, just and prosperous society, we must reconcile ourselves to the notion that profit is a social good.

An enormous amount of damage is done by misinformation. The Tax Justice Network, which was mentioned earlier, has been discredited in another report, and we could go to and fro arguing about who is right and who is wrong, but it is important that people do not discredit the tax system unnecessarily.

My next point is about the rule of law and the general anti-avoidance rule. I initially ranted about that to the Attorney-General, and he related a case—I cannot recall which right now—indicating that there is a long-standing tradition of HMRC being able to interpret the law in a particular way in order to apply Parliament’s will. I am extremely sceptical of anything that allows the law to be applied retrospectively so that people cannot predict how their actions will be interpreted.

Having visited sub-Saharan Africa, Egypt and Pakistan since my election, I am absolutely convinced that the primary reason for poverty in those places is that they lack the rule of law. We interfere with the rule of law at our peril, and if we are really serious about the prosperity of the poorest, we must ensure that it continues to be possible in our country to invest capital productively to raise real wages. That requires certainty and the rule of law.

What, then, is to be done? I will not even be able to attempt in one minute and 50 seconds to enter into evidence the 2020 Tax Commission’s report on the single income tax, but I encourage the Minister to proceed with radical tax simplification. I believe that much of what we are discussing could be dealt with if taxes were both simpler and lower. At this stage, with the mess that we have been handed, it seems to me that there is no chance of low taxes before the election. I would be astonished if the Government were able to deliver them. However, I encourage them to do everything possible to simplify taxes so that they can be applied equally to all and we can end the discrediting of the law and Parliament that happens when people engage in schemes that are obviously mendacious. I am grateful to the right hon. Member for Oldham West and Royton for securing the debate and hope that we will have a productive exchange of views.

--- Later in debate ---

[Mr David Winnick (Walsall North) (Lab)]

I congratulate my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) on initiating this important debate. I hope that I can take up one or two of the points made by Government Members.

The overwhelming majority of people in this country pay tax through pay-as-you-earn, in the same way as we in this House do. In my constituency, the average salary for full-time employment is under £23,000. I think we can proceed on the reasonable assumption that my constituents are not making inquiries about how to set up personal service companies, let alone make offshore tax arrangements. What is at stake, as my right hon. Friends the Members for Oldham West and Royton and for Barking (Margaret Hodge) rightly pointed out, is fairness and justice.

It simply cannot be right for some of the richest individuals in this country significantly to minimise their tax liability. My right hon. Friend the Member for Barking also made the point that it cannot be right that those who receive a very high income—£500,000 or more—pay a lower rate of tax than my constituents who are earning £23,000. It is Robin Hood in reverse. That is why this debate is so important, and I hope that these discussions will not end without further action being taken by the Government.

The Prime Minister tried to make political capital out of the tax arrangements of a particular individual during the recent mayoral election in London, but it was that same Prime Minister who appointed Sir Philip Green to examine Government spending—I suppose we should be grateful that he was not asked to examine tax avoidance. The hon. Member for Wycombe (Steve Baker) said that we should not be unfair to those who create wealth, and that we should recognise their value. I do not dispute that, but I do dispute the way in which those who are heavily involved in industry, commerce or retail arrange their tax affairs in such a way that they pay nowhere near the amount of income tax that they should pay.

[Steve Baker]

I hope that the hon. Gentleman also heard me say that one of my two reasons for objecting to sophisticated tax avoidance schemes was that they involve people quitting the moral high ground. In a sense, I agree with him on this point but, ultimately, what I want is lower taxes.

--- Later in debate ---

[Stephen Williams (Bristol West) (LD)]

I am very pleased that we are having this debate, and I thank the right hon. Member for Oldham West and Royton (Mr Meacher) for persuading the Backbench Business Committee to obtain the time for it. I have sat through loads of debates on the general economy, Finance Bills and all the rest of it during my seven years in the House, but we have never really engaged in a debate on the rights and wrongs of the tax system. We have started to get there in today’s debate, although, if I may say so, I did not think that the right hon. Member for Oldham West and Royton quite got there himself. I felt that some of his opening remarks were a bit too aggressive towards the Government. However, I am glad that he initiated the debate, because it is important to debate the definitions of tax avoidance and tax evasion, the perceptions of those quite different issues, and where the wrongdoing actually lies.

This is not about the tax rates that we discuss quite often in the Chamber, and it is not about who is paying their fair share, although I agree with my right hon. Friend the Member for Bermondsey and Old Southwark (Simon Hughes) that there is an important debate to be had about how much an individual and a corporation should contribute to society, and whether there should be a floor below which no one who is making a profit should drop in any given year. What we should be discussing today is payment of what is assessed and what is legally due: no less and no more.

Tax evasion is always wrong. I do not think that that is said clearly enough. It is illegal, and it is a fraud on the public and other taxpayers. It is always wrong, whoever is doing it, and whether a person is squirreling away millions in a secret bank account, paying in cash for work to be done on his or her own house, or paying a guest house owner. We shall all be going to party conferences soon, and I hope that none of our delegates will be tempted to pay guest house owners in cash. Those who do so should know, and should own up to themselves, that they are avoiding the obligation to pay VAT, and that it therefore follows that the person they are paying for the service is not putting the transaction through the books and is evading income tax as well.

[Steve Baker]

Does my hon. Friend agree that one of the reasons low-paid people evade tax is that taxes on them are far too high? One of the things that we need to do is continue the trend of lifting the lowest paid out of tax altogether.

[Stephen Williams]

I entirely agree with my hon. Friend. I am sure that he is delighted that his party is in a coalition with mine, because we are indeed lifting more of the low-paid out of tax completely by progressing towards a £10,000 income tax threshold. We should make taxes simpler as well as lower for people on low earnings.

This is a moral as well as a legal issue, and I think that perhaps we should discuss morals more in the Chamber. We all have a duty to pay, and cash in hand actually means cheating your neighbour. I think that, as Members of Parliament, we should be more courageous about making that clear. I agree with what the hon. Member for Walsall North (Mr Winnick) said about Sir Philip Green, but he is an easy target. We should be clear about the fact that if you are evading tax, it does not matter who you are: it is always wrong.

Health issues also arise, relating to tobacco and alcohol. My hon. Friend the Member for Amber Valley (Nigel Mills) mentioned beer duty. I am the chair of the cross-party group on smoking and health, and later this year I shall chair an inquiry into the smuggling trade—particularly the trade in tobacco, but there are cross-over issues involving alcohol. There is a very easy thing that the Government could do about those problems: they could tighten the bonded warehouse regime. There are currently very few restrictions on who can operate a bonded warehouse. Perhaps the Public Accounts Committee could consider that as well. A large amount of tax is evaded through the misuse of bonded warehouses and, as a result, people consume more alcohol and cigarettes and damage their health.

While evasion should be a black-and-white issue—it is always wrong—in respect of avoidance there are many shades of grey, which is a big problem. At the innocent end of the spectrum, tax avoidance is when people plan to pay no more tax than we in Parliament intend them to pay under the schemes we lay out in Finance Bills every year. I assume most of us have an individual savings account. I opened a new ISA earlier this year with Triodos bank, the ethical bank that has its headquarters in my constituency. Some of us signed a joint letter urging all parliamentarians to set an example by moving our money into ethical providers of finance, such as Triodos and the Co-op bank. By investing in ISAs, however, we are, of course, avoiding some income tax on our surplus capital.

I support all the various enterprise incentive schemes to encourage entrepreneurs to set up new businesses. I should declare a former interest, in that before entering Parliament I was a tax consultant working for some of the large firms that the right hon. Member for Oldham West and Royton laid into, but what we were doing was enabling people who were setting up businesses to take advantage of the reliefs his Government had introduced, in order to encourage more such people to take up good ideas, transform them into a business, create wealth and employ people. That is a good thing; that is good tax avoidance in the dictionary sense. Things go wrong, however, when such sensible planning is stretched too far and there are egregious schemes of avoidance, artificial transactions and contrived schemes.

The Chair of the Public Accounts Committee mentioned the very good exposés The Times did during the summer. As well as attacking Sir Philip Green and other fat cats, parliamentarians should make it clear that we condemn similar activities by those who are popular with the public—pop stars in Take That, premiership football players or Formula 1 racing drivers whom we are asked to believe all live in Monaco. These people make huge amounts of money because of the public enjoyment of what they do and they do not need to mitigate their tax below what the people who watch them perform think they have to pay.

What should we do about this? First, Her Majesty’s Revenue and Customs needs to focus much more on tackling avoidance. The headline figure of the number of people who work in HMRC has been mentioned, but how many people work for a particular arm of Government is less important than what they actually do when they are working. I hope the Minister will confirm that the efforts in the HMRC large business units and high net-worth units will be ever more relentlessly focused. The staff must have the appropriate training so they can match the skills levels of the lawyers, bankers and accountants pitted against them, and they must also have the necessary IT and other technical resources.

We parliamentarians have a duty as well. We can change the rates and rules, and we have done that in several Budgets since the 2010 general election. Last year, the Government tightened the rules in order to block a scheme of disguised remuneration, where individuals were receiving loans from their employers that they had absolutely no intention of ever repaying, and thereby were avoiding income tax. However, the Labour Front-Bench team at the time—I do not think its current occupants were part of that team, so I do not hold them personally responsible—instructed all its Back Benchers to vote against that coalition Government measure.

Under this year’s Finance Bill, we are introducing new stamp duty regimes in order to tighten up on the move of people buying properties via corporate envelopes and thereby avoiding stamp duty. The Liberal Democrats, and in particular my right hon. Friend the Business Secretary, called for that at the last election. Avoiding stamp duty in that way will now be almost impossible unless people want to incur an enormous liability in the future.

I listened carefully to what the right hon. Member for Oldham West and Royton was saying about the general anti-avoidance or anti-abuse regime. His words would have had more force if he had at least acknowledged that this Government had commissioned a report by Graham Aaronson. He has been in the business for more than 40 years, so I cannot think of anyone better to chair a committee looking at how we can tighten up on avoidance schemes. At least this Government are introducing an anti-abuse regime. It may not be perfect to start with, but a rule is being introduced. The right hon. Gentleman’s Government had 13 years to do that, but it was persistently ruled out by the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown).

--- Later in debate ---

[Mr Gauke]

If the right hon. Gentleman will forgive me, I will turn to that point later, although I am sure the House is looking forward to debating this matter at greater length tomorrow—I know that he is.

These aggressive tax avoidance schemes are the reason we recently launched our consultation entitled, “Lifting the Lid on Tax Avoidance Schemes”, setting out ways to improve the information on avoidance available to the public and making it easier for taxpayers to see whether their adviser has promoted failed avoidance schemes in the past. I have been encouraged by the response of the professional bodies, which share the aim of addressing the small fringe of cowboy advisers who promote such schemes. Some of the criticism of the tax profession as a whole has been unfair, but there is an issue with some aspects of it, which is why we are consulting on what we can do to address the problem and also to expand the regime covered by DOTAS—the disclosure of tax avoidance schemes—which the hon. Member for Newcastle upon Tyne North (Catherine McKinnell), speaking for the Opposition, touched on. She is right that between its introduction in 2004 and the end of March 2012, it resulted in a total of 2,289 avoidance schemes being disclosed to HMRC. That, in turn, has led to more than 60 changes in tax law to stop avoidance.

[Steve Baker]

My hon. Friend makes his case powerfully, but I am concerned that we are locked into a paradigm of complexity and trying to deal with the consequences of that complexity. Does he share my view that if only we could find a route to tax simplification, we could make some of the problems disappear at source?

[Mr Gauke]

My hon. Friend is right to say that tax simplification has an important role. I do not think that it is a magic bullet or that it cures every problem, because there will inevitably be some complexity in a modern economy. However, where we can remove some of those complexities and boundary issues, that is clearly helpful. My point is that DOTAS is a valuable part of our tax regime, but we want to improve on it. There is scope for improvement, and more information could and should be disclosed to HMRC to enable it to address tax avoidance.

Let me turn to the GAAR. We are improving how we counteract avoidance once it is detected, through the UK’s first general anti-abuse rule. I note the criticism made by Labour Members, but when they were in power—indeed, some of them were distinguished in the former Government—they refused to bring forward a general anti-abuse rule. The GAAR will specifically target the most aggressive and persistent forms of avoidance without undermining taxpayer certainty or adding undue compliance costs to the tax system. I am confident that, unlike other suggested approaches, the Government’s approach strikes the right balance between protection against avoidance and clarity for taxpayers.

I know that there is an alternative argument, based on the proposal from the right hon. Member for Oldham West and Royton, which was drafted by Richard Murphy, as he said. However, I would make this argument to him:

“I…think that many appropriate checks and balances are built in to the drafting. HMRC cannot use this”—

the GAAR—

“willy-nilly, and that’s right. This should be a tool of last resort and not a battering ram for widespread use.”

Those words are from Richard Murphy, who was commenting on Graham Aaronson’s proposals. I know that Mr Murphy will be following this debate closely, and I think it right that we quote his views thoroughly. He also said:

“Appropriate defences for action are built in. Safeguards to prevent HMRC over-using the provision are included. The result is that the rule will be used against egregious cases, and not be aimed at all tax planning. That’s right: where the law provides for choice, planning is inevitable and right and I for one have never denied that fact.”

Finally, Mr Murphy said this in response to the Aaronson proposals:

“Let’s have no doubt about it: this is a very big step forward for tax justice and I warmly welcome this report and hope it moves rapidly towards becoming law.”

I entirely agree with those comments. I do not, in all fairness, always agree with Mr Murphy, and he does not always agree with me, but on this occasion he is absolutely right to set out the fact that there are safeguards.

I want to let the right hon. Member for Oldham West and Royton respond, but let me quickly deal with evasion. We encourage compliance, while making it clear that if people do not take the opportunity, we will find them and they will be subject to stringent penalties, and possibly prosecution. The measures that HMRC is taking include: 1,000 extra prosecutions a year for tax evasion by 2014-15; an enhanced, state-of-the-art risk profiling tool, Connect, that helps to identify tax cheats by cross-matching data to uncover hidden relationships between people and organisations; campaigns and new policies—such as the contractual disclosure facility—to encourage voluntary disclosure of evasion; specialist staff to provide a single point of contact for the 2,000 largest businesses and to address the growing risk of cybercrime; and taskforces carrying out intensive reviews in high-risk trade sectors.

We are active in tackling offshore evasion activity. That concern was raised by a number of Members. We now have a number of agreements with other tax jurisdictions, including the Liechtenstein disclosure facility, which the hon. Member for Newcastle upon Tyne North mentioned. That will require financial intermediaries to identify those who may have a UK tax liability, and it is expected to raise £3 billion by 2016. More recently, the Government have finalised a ground-breaking agreement with Switzerland on tackling tax evasion. It will apply to UK-based Swiss account holders and is expected to raise £4 billion to £7 billion a year.

Collectively, the avoidance and evasion measures that I have set out today, along with our record on general compliance, show how seriously this Government take any threat to our tax base. We are not complacent, however, and our plans to take a tougher stance on disclosure rules and the promoters of avoidance, to introduce a general anti-abuse rule, and continuously to target those who illegally evade tax all help to demonstrate that fact. I hope that the House will appreciate the steps that we are taking.

Banking Competition

Steve Baker Excerpts

Thursday 12th July 2012 Westminster Hall

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

It is a pleasure to serve under your chairmanship once again, Mr Chope.

I congratulate the hon. Member for South Northamptonshire (Andrea Leadsom) on securing this important debate, which is of great interest and importance to all our constituents.

Our banking system is badly broken: Members of this House know it, the public know it and the industry knows it. Almost four years on from the collapse of Lehman Brothers and the part-nationalisation of two major banks in the UK, our banking system is failing to support the wider economy with the lending that is required to promote growth; there is still regulatory uncertainty over the mis-selling of derivatives; there is insufficient competition; and pay and bonuses in the banking sector are rocketing out of control. Last month, a major UK clearing bank could not even ensure that employees received their salaries or that businesses could pay their bills on time. The public are therefore right to demand further radical change and to seek new entrants to the banking sector.

Despite being given support—both directly and in guarantees from the taxpayer—on the awesome scale of £1.4 trillion during this crisis, and despite our central bank having printed £325 billion of new money since 2009 through quantitative easing, with up to another £50 billion on the way following the decision of the Monetary Policy Committee last Thursday, the banking system is failing to bolster growth or to provide a satisfactory supply of credit.

[Steve Baker (Wycombe) (Con)]

On that point, I notice that the banks are simultaneously failing to provide savers with a decent return. I am sure that the hon. Gentleman will agree that that is an astonishing failure of a system that is supposed to act as an intermediary between savers and those who wish to borrow money for productive uses. It is astonishing.

[Mr Bain]

Indeed. The hon. Gentleman makes a very powerful case.

Bank lending to businesses fell by 11% between 2008 and 2010 and it has continued to slump since, with bank lending to small and medium-sized businesses having fallen for five consecutive quarters. It is small wonder that in such circumstances economic demand in the UK is at rock bottom. In the G20 this year, economic demand is lower only in the eurozone, the Czech Republic and Hungary. As the Nobel laureate economist Joseph Stiglitz wrote about the financial system in an article in Vanity Fair in January:

“We have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.”

Sadly, the same is true of the financial sector in the UK too.

Studies by the International Monetary Fund and the European Central Bank powerfully demonstrate that financial systems in which there is more banking competition with institutions less dependent on wholesale funding are less prone to systemic shocks of the sort the UK and others experienced in 2008. The banking sector has expanded hugely in the past five decades. In 2010, the assets of the 10 largest UK banks had soared to 459% of GDP. Barclays assets exploded from 10% to 110% of GDP in the same period. That size, the implicit public guarantee and the resultant lower borrowing costs allow the big banks to maintain a large competitive advantage over any small competitors trying to enter the market. It comes as no surprise that business organisations such as the British Chambers of Commerce, the Federation of Small Businesses and EEF are calling for more competition in the banking system.

The European Commission found in its inquiry into the financial system in 2007 that the retail banking sector accounts for more than 50% of total banking activity, measured by the gross income indicator, but that banks face greater pressure on profits where consumers are more mobile. In this country, the Office of Fair Trading issued a report on the banks in 2008, finding that many consumers do not know the fees associated with their accounts, and that three quarters of them are not aware of the credit interest rate, because of both a lack of transparency in fees and their self-evident complexity. It also established that few consumers monitor the account market to switch to accounts offering better conditions. Only 6% of account customers had switched in the previous year and 61% of customers had held their main account for more than 10 years. It also found cross-subsidies from those consumers who incur insufficient fund charges, who are more likely to be in the socially or economically vulnerable categories, to those who do not—those on higher incomes or who have reasonable levels of savings with the banks—which create significant market distortions, as well as resulting in social unfairness.

On the structure of the banking system, the Independent Commission on Banking chaired by Sir John Vickers had a limited remit and was unable to consider the level of support that the banking system provides to growth in the economy, the existence of potentially criminal practices, the nature of the products being traded by banks, or the culture of greed exposed by excessive bonuses and pay. That is why we need to consider further whether the Vickers proposals for ring fences and higher capital buffers will be enough to protect against future scandals, or whether a complete separation of retail and investment banking services, or the break-up of those institutions, with the creation of new banks, is the only answer. As my hon. Friend the Member for Erith and Thamesmead (Teresa Pearce) and the hon. Member for South Northamptonshire said, there have been recent additions to the challenger bank market in the form of Metro Bank, and Virgin Money’s acquisition of Northern Rock. The Lloyds Banking Group’s divestment of branches will bolster the role of the Co-operative bank as a stronger mutual institution, too, which I welcome.

The Bank of England revealed in a report in 2010 that the implicit taxpayer subsidy to the banks could be as much as £100 billion, and a further Bank of England study from this year emphasises that that is largely a transfer of resources from Government and taxpayers to creditors, staff and shareholders. The effect of that could be to allow the amount of risk adopted by protected banks to rise. A more comprehensive examination of the banking system would make it possible to determine the underlying issue of whether it currently offers sufficient value for that investment by the taxpayer. There is much evidence from the IMF and the London School of Economics that it has not done so, and that higher pay and profits have been the principal results, at the cost of a slower flow of credit.

Interest rate swap arrangements that were mis-sold could affect up to 28,000 small businesses in Britain. The LIBOR scandal will undoubtedly draw in other financial institutions, and create the potential for court cases involving billions of pounds in compensation awards. Morgan Stanley produced figures today revealing that the global cost to the banking sector of every basis point of LIBOR suppression could be $6 billion, or $400 million for every bank affected. Other countries have been better able to survive the financial crisis because their banking systems have more competition, more effective direction from Government, and more socially beneficial lending practices. In Germany, the state-owned investment bank KfW last year provided €11.4 billion in new loans to small and medium-sized enterprises, focused on exports and job creation. Because of their statutory duty to put the good of the local economy over the maximisation of profit, the local savings banks, or Sparkassen, continued to lend even in the depths of the 2008-09 slump in output. While the major commercial banks in Germany cut lending to businesses by 10%, the Sparkassen increased lending by 17% between 2006-2011. Three in every four SMEs in Germany have links with the Sparkassen. A system whose ownership and remit were more diverse would help SMEs in the United Kingdom, too.

In a very good discussion of the banking system on “Newsnight” last night, it was startling that Jim O’Neill, the investment banker from Goldman Sachs, powerfully made the case for a state investment bank in this country, to support economically important industries. A more comprehensive examination of the banking system, including its structure and competition, could also consider the case for making the bank balance sheet levy more progressive, as Duncan Weldon, the chief economist of the TUC, has recently proposed, and whether it should be larger for bigger banking institutions, while greater competition would be promoted through a lower levy for smaller banks.

Lack of competition is also leading to a culture of excessive pay and bonuses within the banking system. The work of the High Pay Commission last year exposed the fact that within Barclays, while the average pay of employees rose by 866% in the three decades from 1980, the pay of top directors in that bank rose by a staggering 4,899%. Top directors’ pay at Barclays and Lloyds Banking Group rose from 14 times that of ordinary tellers working in the bank’s branches to some 75 times that of an average Barclays or Lloyds employee’s pay by 2011. That is the extent of the culture of greed that has grown in our banking system.

In other countries, over the decades, the need for a wider examination has been clear. The Pecora commission, founded in the United States in 1932, under an independent chief counsel, led to the uncovering of the reasons behind the Wall street crash of 1929, and to radical legislation to separate retail from investment banking under the Glass-Steagall Act. It created new criminal penalties and re-regulated the stock exchange. The work of that commission safeguarded the US financial system for the next fifty years. Afterwards, in his memoirs, entitled “Wall Street Under Oath”, Ferdinand Pecora wrote of the ills of the banking system across the world in the 1930s:

“Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies.”

It is our constituents, particularly the poor and working families with children, and most of all the growing army of unemployed and underemployed, who are paying the price for the recession—the longest since the 1870s—that has resulted from this financial crisis. They did not cause the recession, but they have been asked to shoulder the heaviest burden, while the super-wealthy at the top of the financial services sector have continued to enrich themselves, and our banking sector is being protected from the radical structural reforms we now need. The very least that we as parliamentarians can do is to give them the fullest account of why our banking system is so badly broken, why it lacks effective competition, and why it is failing to promote any kind of recovery or sense of responsibility from people at the top. Only then can we begin the task of creating a banking system that serves the people of this country, and not the other way around.

[Steve Baker (Wycombe) (Con)]

It is a pleasure to serve under your chairmanship, Mr Chope. I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) on securing this debate with particular serendipity. She called for more heart in banking, and tonight there will be a documentary on TV that I expect will be wonderful. “Bank of Dave” is about David Fishwick, an entrepreneur who sought to start a bank. It is a remarkable tale, and I hope the Minister will take a look at the programme because it speaks very much to the problem of barriers to entry.

Mr Fishwick is a successful entrepreneur who sells minibuses. He owns a Ferrari, a helicopter and a nice pad. He is a self-made man. He discovered that his customers could no longer get finance to buy his minibuses, and so his own business was endangered by the lack of credit. He therefore began to lend them the money himself. It seemed straightforward enough, and he thought, “I could do this, and serve my local community.” He set out to establish a bank, and his documentary, which is a series, talks about the difficulties he had. He is legally forbidden to call his institution a bank, so he does not take demand deposits but instead takes people’s life savings, personally guarantees them with his own wealth, and then lends them to productive businesses based on trust and relationships. That speaks very much to all the calls we have had from Members on both sides today for a new kind of banking. It is super local, personally guaranteed and based on trust and relationships, so I very much hope the Minister will watch Channel 4 at 9 pm to see Dave Fishwick and “Bank of Dave”.

I want to talk about the personal guarantee in particular. Members have talked about the loss of faith, and Mr Fishwick is restoring faith by knowing the people from whom he is borrowing and those he is lending to, and personally guaranteeing the finance. I introduced a private Member’s Bill in the last parliamentary Session to give directors of financial institutions strict unlimited liability for their banks’ losses, and to require them to post personal bonds to be used as capital and to place the bonus pool into capital for five years. That might seem a harsh measure, but it is based on the idea that without moral hazard, people will behave well.

[Andrea Leadsom]

That takes me back to the old days—I sound very old. Before the big bang, most small banks and financial institutions were run on a partnership basis and people ate what they killed. If they had a good year they took a huge bonus, but if they had a bad year they gave back the car, the house and the children’s school fees—I do not quite know how they would have done that. That changed when the institutions all became plcs and it was one-way traffic only, so I have a lot of sympathy with what my hon. Friend is saying.

[Steve Baker]

My hon. Friend demonstrates that the accusation of inexperience that is often levelled at this House is wholly false. Both she and my hon. Friend the Member for Macclesfield (David Rutley), who is sitting next to me, have extensive experience in the City and understand the changes and how things have moved on.

Historically, there were three ways of restoring trust in an industry—taking deposits—that has always been risky: mutuality; the historic trustee savings bank model, in which the directors were not able to take any personal reward; and unlimited liability. Some of the greatest bankers in history—the original J. P. Morgan and Nathan Rothschild—operated with unlimited liability, so everyone understood what they would lose if they got a deal wrong, and there was trust.

The implications of my private Member’s Bill would be, first, that banks would have a much better culture and people’s interests would all be aligned to the banks’ success. Secondly, if we gave directors sufficient warning that they would shortly be accepting unlimited liability for their banks’ losses and that the losses would come out of their personal possessions—their pensions and homes, and forgone school fees—we would soon find that they would break up the banks for themselves, because they would not wish to try to manage unmanageable behemoths. That would stimulate a natural diversity across the banking system, as directors created institutions that they could manage and understand. Similarly, as someone is hardly likely to keep retail and investment together if it is not in their interests, I would expect them to separate them.

Thirdly, if directors and staff stand to lose, there is a good case for lowering barriers to entry. If we can expect good behaviour from bank staff, and responsible lending, it is legitimate to lower barriers to entry, and a virtuous circle could be created. It might well be that going for strict, unlimited personal liability for directors would be a step too far as a first measure, but I invite the Government to consider it as an alternative way forward, which could lead to a more self-regulating banking system that served society more positively.

I think I am well known for believing that the state is the problem and that there should be less intervention, but if we must have intervention the suggestion of account portability made by my hon. Friend the Member for South Northamptonshire is a good one, because it promotes competition. We just need the banks to move accounts into.

I urge the Government to be cautious about the idea of a state investment bank. Whenever any Government—not necessarily this one—get into lending, it is to ensure that loans are made that would not otherwise be made because they would be bad loans. There is no kindness in encouraging a small business man to put his home at stake by taking on a loan he will never repay, because small business men, in all practical terms, often take unlimited liability. It would be better if they were employees. I urge the Government not to intervene too excessively in credit markets, although I realise that there are some elements they will proceed with.

Finally, I have some questions for the Minister. To what extent have the Government considered how their policies, such as the national loan guarantee scheme, promote big banks? We have all seen examples of officials being institutionally better at dealing with large companies, including banks, be it risk aversion or the simplicity of dealing with a small number of contacts to achieve a big result. Does current policy promote a small number of large institutions? That is the antithesis of the direction we want to go in.

--- Later in debate ---

[George Freeman (Mid Norfolk) (Con)]

I thank Mr Speaker for allowing this important debate to take place, and for my chance to contribute to it. I congratulate my hon. Friends on securing the debate and on their contributions, particularly my hon. Friends the Members for South Northamptonshire (Andrea Leadsom), for Wyre Forest (Mark Garnier) and for Wells (Tessa Munt), but other hon. Members who have spoken, too.

I am not, never have been and never will be a banker, unlike hon. Friends who have specialist expertise in the world of high finance and banking. It is important that hon. Members bring to the House expertise in sectors that we need to regulate and guide. My interest, and my contribution today, is offered not with great expertise in the specific measures needed to put the banking sector right, but to articulate concerns about the implications of the banking crisis for what is sometimes referred to as the real economy.

I speak as somebody with a deep interest in growth, small business, enterprise and innovation. In a 15-year career before coming to the House, I was involved in starting small companies in the field of science and innovation, principally the biosciences. Typically, they were companies with an idea, a small team, a business plan and no money, raising funding for ambitious businesses to develop innovative products and services, often through a number of financing rounds, before acquiring another company or being acquired, or achieving an exit through the public markets.

I therefore speak with a particular interest in the life sciences, of which colleagues will be aware. The sector has much to offer the nation, as we seek to build a rebalanced recovery and a sustainable economic model. It has vast potential to help us to grow our trade links with the emerging world—the BRIC economies. A reference to Jim O’Neill and Goldman Sachs has already been made, and we met recently to discuss his latest analysis that, on top of the BRIC countries, the next 11 coming behind have phenomenal rates of growth in already large economies. Our life sciences have the potential to allow us to seed—literally, in some cases—the markets of tomorrow and to grow the alliances of tomorrow, which will, among other things, have the benefit of de-leveraging our financial dependence on the sclerotic eurozone.

I speak also as somebody with a long and passionate interest in the East Anglian innovation economy, a region that the Government increasingly recognise as a key driver for sustainable growth. It is a net contributor to the Treasury and has at its heart Cambridge, a globally recognised centre of science innovation, entrepreneurship and companies in need of finance. In my own county of Norfolk, the Norwich Research Park, a globally recognised centre of innovation, is becoming increasingly linked to Cambridge through the Government’s excellent investment in infrastructure.

I speak also as the father of two children. I am concerned about the world in which they will grow up and the economy in which they will have to make a living. Our generation in Parliament is important if we are to get this right. I want to touch on the context in which it is helpful to view this issue. This is not just a crisis of debt, although it is surely that. It is not just a crisis of regulation. It is not even just a crisis of political leadership. We are living through a deep crisis of political economy, which is shaking the very foundations of the world as we have come to know it in the past 20 or 30 years. One of the profoundly unsettling things about crises of political economy is that they undermine the very legitimacy of the institutions through which we seek to tackle them. That creates something of a perfect storm—a financial and political hurricane that fuels itself. As we see trust in the media, trust in the political class, trust in the bankers and trust in the regulators undermined—not least by the way in which those groups, in the past 20 or 30 years, have become too cosy—we start to fuel a growing public distrust of the idea that there is any institution capable of fundamentally tackling this problem. I am more optimistic than that. If we are honest about the causes of the problem, and rigorous and robust in our analysis, we can be optimistic about the future.

[Steve Baker]

My hon. Friend is making an absolutely magnificent speech. He has reminded me that, in his Bagehot lecture, the Governor of the Bank of England said:

“Of all the many ways of organising banking, the worst is the one we have today.”

I am sure that my hon. Friend can be assured of Sir Mervyn King’s support.

[George Freeman]

I thank my hon. Friend for that helpful and extremely generous intervention.

As the Chancellor put it so eloquently in his Budget speech, the recovery will require a new economic model. That is at the heart of this debate. The banks have a crucial role to play in that economic model, but for them to play that role we need to restructure the way they work, and retune what we expect of them and the people who run them. I shall concentrate on that point.

At the heart of the new economic model, we need a much more profound commitment to an enterprise economy and to a rebalancing of the relationship between risk and reward. I do not think any of us on either side of the House—indeed, I think it was the former Member for Hartlepool who said he was passionately relaxed about wealth creation—have a problem with wealth creation through people who take risks, or for reward to flow from risks. At the heart of the problem is the fact that people have been receiving huge rewards without taking the risks. If the public saw people paying back some of what they have earned for success on failure, there would be much more public support for the industry. It is about the break-up of some of the old structures, the big and literally bankrupt structures, that are saddling this economy with debt and a lack of leadership. It is about unleashing a creative revolution of hungry, entrepreneurial little platoons who can rebuild an economy of which we can be proud and on which we can rely.

I come now to three points: the nature and causes of the problem; my particular rural constituency interest; and what we need to do, with particular emphasis on the importance of competition and new entrants, and encouraging new sources of finance for the small companies that we will need to grow our sustainable recovery.

As other hon. Members have more eloquently testified, we are seeing multiple failures: the mis-selling of payment protection insurance; a manipulation of LIBOR, which, of course, is a benchmark used to set payments on a vast amount of money, up to $800 trillion-worth of financial instruments affecting the price of everything from simple mortgages to interest rate derivatives, as The Economist set out clearly recently; and the mis-selling of complex interest rate products. They are symptomatic of a much deeper shift in recent years in our banking culture out in the regions.

Banks in Norfolk and East Anglia have moved from the traditional model of looking after savings and lending money to small companies. They have shifted their emphasis, closing local branches and investing in new types of staff who are more salesmen than bankers in the traditional mould, and they seem to be much more interested in making money from complex charging structures, and instruments and derivatives. Instruments and derivatives may be appropriate—indeed, vital—for the City of London. There is a perfectly legitimate trade in such instruments; indeed, they sit at the heart of any functioning market economy. They are not, however, appropriate instruments on the high streets of such towns as Watton in my constituency, which has been the victim of the inappropriate selling of inappropriate products. I will say a little more on that in a moment. Swaps, options, warrants, futures and forwards should not be the concern, and are not the concern, of most couples taking out their first mortgage, or most entrepreneurs starting a small business. The mentality which says that complex bank products and charging structures are a more attractive source of revenue than the traditional role of banking has been deeply corrosive of the real economy.

I plead guilty to being slightly misty-eyed—I am, after all, a Conservative. I remember as a boy going with my stepfather, who was starting a business, to our local bank. The bank manager knew his name. Rather to my amazement, he knew mine. He offered us a cup of tea. He had a notepad and a file, he knew the business and he knew what had happened at the last meeting. He wanted to talk about the cash flow, the harvest, the outlook for business and how he could help. What a long way that is from small businesses’ experiences of banks in today’s economy.

As for my particular constituency interest, the mis-selling of complex instruments has devastated a number of individuals and businesses, the most celebrated of which—if that is the word—is Adcocks of Watton, featured recently on the BBC. Adcocks is a historic business on the high street of Watton, one of the four towns in my constituency, that is now saddled with £175,000 in bank charges. They threaten to cripple that small business, which is at the heart of the high street as a major employer. Also, a constituent of mine, Mr Leonard, was the subject of international property fraud by an equity trust. Investigations have been conducted over the past several years, and still have not concluded.

Those are just a couple of examples, and the more the debate unfolds—I do not know whether other Members have had the same experience—the more people come forward. I believe that we are witnessing the beginnings of something rather bigger than has hitherto been apparent. There is an iceberg of hidden claims and effects in my constituency, and if that is true in Norfolk I suspect that it is true elsewhere. The impacts in a rural area are far more profound than in an urban area. It takes only one business to fail on the high street of a town like Watton for the whole town to feel the reverberation. In that context, it is important that whatever the small print in the contracts says and whatever the findings may be under contract law, the Government should be sensitive, as I know they are, to the need for accountability, responsibility and appropriate compensation in order to send a signal that such things must and will stop, and to prevent the fall-out from undermining the Government’s efforts to drive an economic recovery and growth in the regional economy.

I have one or two thoughts on what needs to be done. Several colleagues have discussed culture and the importance of a new culture, and whether we should agree with Bob. I remember hearing Mr Diamond say, as The Economist reported:

“We all know that these events are not representative of our culture.”

I do not believe that to be true. It is precisely because much of that activity was deeply representative of a culture that we need to tackle that culture.

Not all in the City take that view. I was struck by the comments of John Nelson, chairman of Lloyd’s of London, who stated in a recent Financial Times article that

“the future for banks…is dependent upon finding the right model, and critically the right culture…None of the revelations over the last week means that the City is inherently corrupt”,

but:

“It is imperative that we tie performance to longer-term incentives and sustainable profits.”

We need responsible banks with a culture of fostering local business growth and a strong understanding of their role in helping to generate economic growth and innovation on the ground, and good banks that encourage a competitive marketplace in which the local bank can flourish and real banking for the real economy.

A number of good measures have been put in place. I commend the Government for the fundamental restructuring in the banking reform Bill, and the Treasury White Paper issued in June on banking reform sets out numerous important initiatives and measures. I suspect that more may have to be done over the coming years. The Merlin agreement covered a number of important initiatives, and it is important that we ensure that it is enforceable and has appropriate teeth to guarantee that it is followed through.

Principally, my concern and my call are for much greater focus on competition and new entrants into the banking sector, as other Members have discussed. Colleagues may be familiar with some of these facts, but I think they bear repeating. The size of the top 10 banks in proportion to UK GDP in 1960 was 40%; in 2010, it was 459%. Something has gone profoundly wrong with how we have allowed the banking industry in this country to develop. It needs serious reform. In the US, the top 10 banks were equivalent to 10% of GDP in 1960 and 62% in 2010, so it is not a global phenomenon; it is a distinctively British one. Only one new high-street bank has launched in more than 100 years. The big five have an estimated market share of 85% for personal current accounts and 67% for mortgages.

Statistics from the Federation of Small Businesses show that 15,000 financial institutions compete in the US market: about 7,700 banks and 7,000-odd credit unions. The German Sparkasse network comprises 431 locally controlled banks, and Switzerland has 24 cantonal banks, which explicitly recognise social and economic responsibility. We should not be hidebound as we deal with the fallout from the crisis. There are other models for reforming our banking system in terms of retail banking on the ground that supports the local economy. I encourage us to look as far and widely as we can.

We need two things: a much more competitive retail banking sector with many more new entrants and a regulatory structure that encourages rather than hinders new entrants. After the glad, confident dawn of new entrants to the banking sector in recent years, I was depressed to see that a number of them had floundered against reportedly impossible regulatory barriers. It is shutting the stable door after the horse has bolted. What we need now are new banks. Cambridge Bank is one, and there are numerous other excellent local initiatives. We should do whatever we can to encourage local entrepreneurs to set up new banks.

Finally, alternative sources of finance are important for our innovation sector. In my 15 years of starting more than 20 companies, the banks never came in and invested in risky ventures in the first five years. They needed to see positive cash flow and revenues, and they always wanted all their risks covered. The innovation sector relies on a much broader group of people who should be promoted, celebrated and encouraged. Angel investors put their personal wealth into extremely high-risk ventures. Their return is often more personal wealth, but I argue that if the reward is balanced to the risk, it is all to the good and should be encouraged. Venture capital trusts have put substantial funds to work in less risky but still emerging ventures. Corporate venture funds are coming into the UK, and there is good news in the sector. In the past six months, we in the life sciences sector have raised more than £1 billion. International money is coming to the UK, not through banks but through new investment vehicles.

More locally, I highlight the importance of credit unions, mutuals and innovative microfinance schemes such as the excellent Kiva, which I commend to you, Mr Davies, when you are next browsing the internet. It is a powerful global microfinance network providing debt finance to small ventures in the emerging world. A lot of money in this country sits in our banks earning very little, and it could be put to use supporting small ventures. Particularly in the localities with which people are affiliated, such as counties, towns or urban neighbourhoods, we may be able to consider unlocking money from personal bank accounts to provide £500 or £1,000 microfinance loans to support small companies. We need an innovative, entrepreneurial and early-stage company financing sector, and we need to reform our banks to allow one.

--- Later in debate ---

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

I declare my interests, which are in the Register of Members’ Financial Interests. I am a Labour and Co-operative Member of Parliament and have connections with various parts of the co-operative movement and a number of credit unions.

I thank the hon. Member for South Northamptonshire (Andrea Leadsom) who ensured that the debate took place, and other hon. Members who supported the application for a debate. This has been a welcome opportunity to look in more detail at competition in banking and to hear some thoughtful speeches. The fact that nine hon. Members have contributed, in addition to the hon. Lady’s opening speech, and that hon. Members have made many interventions shows the level of interest.

I should like to respond to points made in the debate and set out our policy position. It goes without saying that there was consensus on this matter; I am glad about that. We need real change in the British banking system if we are going to rebuild our economy. That message was set out clearly as a way forward by the Labour leader, my right hon. Friend the Member for Doncaster North (Edward Miliband), and the shadow Chancellor earlier in the week, when they visited the Co-operative bank. That message is important and worth restating today, notwithstanding differences of emphasis across the political parties. I think hon. Members agree that we need to build a banking system that recognises that it is not just an industry that serves itself. That came through in a number of hon. Members’ speeches. Banking must have a fundamental and higher responsibility to serve the economy, but Members gave examples of banks not necessarily having served either constituents or local businesses.

As the hon. Member for South Northamptonshire said, the revelations of the past two weeks have shown precisely what has gone wrong in some aspects of banking—it has had an impact on our economy—and what has gone wrong over decades, with cultural changes taking place slowly and not necessarily being picked up until crisis point. Problems have been highlighted that require further scrutiny.

As in the wider economy, we need a banking system that is based not just on short-termism. It is not about making the fast buck and not about people taking what they can and not worrying about the longer-term consequences. Instead, we should begin to look again at how we can rebuild the economy and our banking system through patient investment, looking to do the right thing in the longer term and sharing responsibility for how the process moves forward.

The short answer is to try to shift the culture so that it is not about predatory behaviour and banks trying to make the hard sell and the quick extra buck by selling a product and pushing it on people, whether they want it or not. It is about productive behaviour and considering how we encourage people to save and how to use those savings productively for local communities and small businesses. Hon. Members have focused on that.

Above all, I want an economy and a system that do not work just for the powerful, privileged few. My hon. Friend the Member for Islwyn (Chris Evans) mentioned how angry people are when they see what has happened in the banking system, particularly when they have worked all their lives and saved and done the right thing, and now find that they and their families and communities have been let down and left out, because many of them have used their savings and now have nowhere else to turn. It will be difficult for many people approaching their retirement years, or in retirement, who thought that they would be okay and that they had done the right thing, but now discover that they are in difficulty.

Again, as the Labour leader set out earlier in the week, the move from what has been described as casino banking to stewardship banking is important. That use of language is interesting, because the idea of stewardship is that we have responsibility for looking after the money and the people who have invested their money in the banks.

The point was made strongly that we need a banking system in which the bankers are not given incentives, overtly or in other ways, to focus only on a short-term return. We should move to a system that is about building up long-term, trusted relationships with customers, whether individuals or small businesses. The hon. Lady also made an important point: we need a banking system in which no bank feels that it is either too big to fail or too powerful to be challenged. Yes, banks need to face real competition and customers must have proper choices, but above all we need a banking system in which all the people in the UK have confidence once again.

I say with feeling as a Scot—we have at times been castigated for our thrifty nature, and sometimes even been described as mean rather than thrifty—that the values and principles I spoke about are the foundations on which the Scottish banking system was built. Many of us have taken it badly that those values and principles were cast aside. Not only did the banks find themselves in difficulties, but there were wider questions about the culture of Scottish banks, which we were once upon a time extremely proud of.

[Steve Baker]

I have always admired the Scottish banking system. My friend Professor Kevin Dowd is a huge advocate of Scottish free banking. At its height, its key distinguishing feature was the almost complete absence of the state. Banking was at its best when the state was at its least intrusive.

[Cathy Jamieson]

That is an interesting point, but I will speak about some collective approaches to banking. The nub of much of this debate is what caused the banking system, which at its height was doing well for the economy and working well for people, suddenly to tip over. It put people on the wrong side of the decision-making process, and forgot that it was supposed to be looking after other people’s money. That is the issue I would like to explore in more detail when we have the opportunity to scrutinise the matter.

In her opening speech, the hon. Member for South Northamptonshire referred to the culture in her day. As a young person, I saved threepence a week in old money and took it to school every week to put in a school bank account. I still remember the day I got to the wonderful point of having £1 and, in addition to having a school bank account in which to save threepenny bits, or whatever it was, became the proud owner of a Trustee Savings bank account book.

I did not live in an affluent area—far from it—and my family was not well off. My father was often unemployed, but the principle of saving a little every week for a rainy day established for me and many of my generation at a young age the importance and responsibility of saving. I remember my horror at secondary school when I had to buy a set of drawing instruments and had to go the bank and take money out. That was the first time I realised the trauma of having to take money out instead of putting it in, and then to work doubly hard to replace it.

At that time, banking was a respectable job, as hon. Members have said. It was a job that people vied for.

LIBOR (FSA Investigation)

Steve Baker Excerpts

Monday 2nd July 2012 Commons Chamber

[Mr Osborne]

As the Prime Minister said and I repeat, Mr Diamond has to account for himself before the Treasury Committee this week, and I congratulate the Committee on doing that. The chairman of Barclays has resigned, but it is not the job of the Chancellor of the Exchequer to hire and fire the bank chiefs at this Dispatch Box. I am not sure that we want to go down that path; it is much better for the shareholders to do it, the board to do it, and they will have the appearance before the Committee of Mr Diamond to go on.

[Steve Baker (Wycombe) (Con)]

Further to the question from my hon. Friend the Member for Bracknell (Dr Lee), will the Chancellor look again at my Financial Institutions (Reform) Bill, which would transfer commercial risk back to the banking sector and end the incentives that have created the culture of recklessness and rule-breaking that is ruining the City?

[Mr Osborne]

I will certainly take a close look at my hon. Friend’s Bill and get back to him on it.

Interest Rate Swap Products

Steve Baker Excerpts

Thursday 21st June 2012 Commons Chamber

[Guto Bebb]

That is another example that should be taken on board in this debate.

Another example of general mis-selling already touched upon is where a swap is for a period longer than the loan. I have also seen examples of where the swap was for a sum in excess of the loan. Another crucial example is where the break cost for terminating the swap was described in one e-mail from a bank as being £9,000 but, three years later, when the customer approached the bank to break the swap, a figure of £135,000 was quoted to settle. I fail to understand how it could go from less than £10,000 to £135,000 in three years. That is another example of mis-selling. Another one worth mentioning is where the bank classified the client as a professional client and experienced derivative trader. I can assure the House that the business in question was blissfully unaware of the nature of the product it was buying, yet, for paperwork purposes, the bank had described it as a professional client rather than a retail client.

It is generally agreed that there is an issue here. The FSA accepts it is an issue. Bully-Banks, an organisation representing 350 victims, has done some work highlighting that 96% of businesses in its organisation were approached about such products by relationship managers. Businesses did not go looking for these products; they were approached with a solution to a problem that often they did not have. Some 87% of businesses surveyed by Bully-Banks were unaware that the adviser was not an adviser but a salesperson, and there was a general lack of understanding. In 95% of cases, businesses stated categorically that they entered into these agreements on the basis of advice and guidance given by their bank relationship managers.

[Steve Baker (Wycombe) (Con)]

I would like to offer my hon. Friend an explanation of why banks are doing this kind of mis-selling. In my private Member’s Bill last year on the regulation of derivatives, I explained how mark-to-market rules allowed banks to up-front unrealised cash flows to declare profit immediately on moneys that they have not received. I wonder whether the Treasury Committee will investigate whether that is a key factor in encouraging this bad business.

[Guto Bebb]

rose—

Banking Reform

Steve Baker Excerpts

Thursday 14th June 2012 Commons Chamber

[Mr Hoban]

I know that the right hon. Gentleman has raised this matter on a number of occasions, and I am not going to give a different answer from those that I or the Chancellor have given before.

[Steve Baker (Wycombe) (Con)]

I congratulate my hon. Friend on the measures relating to bail-in and depositor preference in particular. However, I am sure he will remember that under the last Government the FSA came under political pressure. Will his measures deal with that and ensure that, in future, banks are resolved under the rule of law?

[Mr Hoban]

It is important that independent regulators exist and that their independence is credible. Going back to the FSA’s report on the RBS failure, it was interesting that the FSA clearly came under sustained pressure from the shadow Chancellor and the then Prime Minister to have a light-touch regulatory system, and we have seen the consequence of that. It is important that there are clear rules to ensure that regulators act independently and that their regulation is seen to be credible. The shadow Chancellor should recognise that he got it wrong when he called for light-touch regulation and championed it throughout the world.

Financial Services Bill

Steve Baker Excerpts

Tuesday 22nd May 2012 Commons Chamber

The operation of that company has damaged the reputation of this country in Peru in the long term, so the Government must be seen to act to put in place a regulatory system to prevent that from happening again. The least we can do is take on board the amendment tabled by my hon. Friend the Member for Wigan, which states that one factor to consider when overseeing the operation of a company listed in this country is its “ethical corporate behaviour”. In fact, the UN recently suggested that that was the role of member states, which should put place the necessary legislation and structures. My hon. Friend’s amendment is in line not only with the best interests of human rights and environmental sustainability but with the international obligations being placed on us and preserving the long-term reputation and viability of our financial services industry.

[Steve Baker (Wycombe) (Con)]

The hon. Gentleman makes a compelling case, but are not directors already responsible under the Companies Act 2006 for many of the matters he raises? Would it not be more expedient to pursue directors?

[John McDonnell]

I understand where the hon. Gentleman is coming from but we have tried that and it has not worked. We sought under the recent Companies Act to increase the responsibilities on directors, but unfortunately we were unsuccessful. The evidence that came to the London Mining Network report, which I shall send to the hon. Gentleman, clearly shows that the existing system is not working, and this Bill provides an opportunity to enhance the powers of the regulatory authorities in this country.

My hon. Friend the Member for Wigan will not push the amendment to a vote. I understand why, although I am a bit more proactive on these matters. May I suggest to the Minister that the Government usefully look at the report and bring together the relevant representatives, including the existing authorities and the new individuals who will sit on the various authorities when the Bill has gone through, to discuss where we go from here? How do we ensure that we have an effective mechanism that includes the monitoring of corporate ethical behaviour within companies that are listed in this country and that gain all the advantages from that, such as reputational advantage, but that are doing our country a disservice through their operations in the developing world?

--- Later in debate ---

[Chris Leslie]

It is important that we have some metrics by which to measure the Financial Secretary’s performance on his coalition promise. After all, it is there in black and white—the Government said they would bring forward not just proposals but detailed proposals for promoting the mutual sector. This is his moment. We want him to explain to us what those measures will be. I am sure he does not believe in putting such promises in an agreement straight after an election and then letting them drift as though they did not need to be attended to. Many people want to see greater diversity in the financial services sector, and it is important that he is held to account.

[Steve Baker]

Looking at the amendment, I wonder whether it illustrates the tensions in the contemporary labour movement. On one hand, this should be a time of celebration for all those who believe in mutuality, co-operatives and voluntary self-help, because Members of all parties are signed up to the idea. There is a Conservative co-operative movement, and many of us are very serious about it. On the other hand, Labour insists on top-down control and state direction. It wants to enshrine in legislation measurement, management and the direction of Ministers’ performance.

Is it not time that, rather than insisting on the production of numbers and pretending that the Financial Secretary can direct people to help one another voluntarily and mutually, we eliminated barriers to entry, accepted spontaneous order and encouraged people to build up the bonds of friendship and mutual co-operation? Ministers cannot direct or legislate for those bonds.

[Mr Thomas]

Perhaps the hon. Gentleman could describe how the amendment would in some way create a barrier to entry to the financial services market.

[Steve Baker]

I was not suggesting that it would create a barrier to entry. I was suggesting that it would put in place measurement and management. That may well appeal to some people, but if we want spontaneous order, mutual societies and bonds of friendship, we cannot get them by state direction. There is very little point in measuring the Financial Secretary’s performance when we want spontaneous order and the bonds of mutuality. I do not support the amendment, but like many other Government Members, I certainly support the thrust of the Government’s policy.

[John Healey (Wentworth and Dearne) (Lab)]

I congratulate my hon. Friend the Member for Nottingham East (Chris Leslie) on tabling the amendment. He is doing the job that the coalition parties promised to do in the coalition agreement but are failing to do.

I shall remind the House of a quotation from the coalition agreement. That is the benchmark for the action that the Government have pledged to take, so the House and others can judge them on it. It states:

“We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.”

I applaud the aim of greater diversity and competition, but missing from that statement is the aim of greater confidence and trust in financial services. My hon. Friend’s amendment captures the aims of diversity, the promotion of mutuals and greater growth in mutuals. Crucially, it would also require an action plan from the Government within six months. We have not had one after two years. It would also require regular public reports and stock-takes of progress. I say to the hon. Member for Wycombe (Steve Baker) that those reports would be about not the Minister’s progress but the growth of mutuals, the diversity of the industry and the growth of competition in the sector—all the aims that the Government set for reform.

Mutuals bring something quite special—a concern about values, not just valuation. That is the root of the consistently greater levels of confidence and trust demonstrated by those who deal with and borrow from building societies and mutuals compared with those who deal with their corporate competitors. Mutuals display a prudence born of concern for and knowledge of their members. If we look back over the past several years, we see that building societies and mutuals have not run the reckless risks that banks and other financial services have. They have not lost their core business purpose and their sense of what they are there to do and who they are there to serve, as many banks and other financial service companies have. Mutuals did not need a public bail-out and did not cost the UK taxpayer billions of pounds to make up for their mistakes like others in the banking and financial services sector did.

Amendment of the Law

Steve Baker Excerpts

Monday 26th March 2012 Commons Chamber

[Harriett Baldwin (West Worcestershire) (Con)]

This is a Budget that rewards work from a Government who are making work pay, and I want to express on behalf of the small businesses in Malvern and the surrounding cyber valley in my constituency the enthusiasm that exists for taking advantage of the opportunities for growth and the lower taxation rates for small businesses.

Since today’s debate is the technology debate, I point out that in my constituency we have a growing cyber sector. There is an enormous amount of business growth, and it is estimated that 500,000 jobs will be created in the sector over the next decade. Those jobs are great for young people. There is enormous demand among firms in my constituency for teenagers who may have spent a lot of time in their bedrooms on their computers and have become ethical hackers. People in my constituency with those skills are snapped up by local businesses. Perhaps that is why the number of unfilled jobcentre vacancies in West Worcestershire rose by 70% last month, which shows that there are a lot of businesses with the confidence to take on an additional employee.

As a member of the Select Committee on Work and Pensions, I wish to make a point about the Government’s introduction of universal credit. We have talked a lot in these debates about the top rate of tax, but let us think about the rate that those on the lowest incomes had to pay for 13 years under Labour. Page 95 of the Red Book shows that the marginal deduction rate for a lone parent with one child working more than 10 hours was 100%. We are changing such disincentives to work by moving to universal credit, which will be very powerful in helping those on the lowest incomes into work and out of poverty.

I want to make the rather controversial statement that despite the bad press on behalf of pensioners on Thursdays, this Government have done more to help pensioners and future pensioners than any other Government in history that I can remember. First, there is the triple lock on the state pension, which will increase pensions every year by the higher of inflation, 2.5% or earnings. That is worth an enormous amount to today’s pensioners—no more 75p increases.

[Steve Baker (Wycombe) (Con)]

Did my hon. Friend, like me, hear the shadow Chancellor appearing on the Vine show during the week? The first person who came on after he had spoken was a pensioner, who denounced him and his measures.

[Harriett Baldwin]

My hon. Friend will also have heard in the Budget that we are abolishing the means test, which has been such a disincentive to saving for low-income pensioners, and bringing in a powerful simplification of the state pension. That will be worth much to future pensioners.

The Government are also introducing auto-enrolment, which will bring 5 million additional savers into the occupational pensions market. That is a most important step to strengthen the pensions system, and it has cross-party support.

Most important was what the Budget did not do. It did not make further changes to pension taxation and regulation, such as the amount that people can defer from their salaries to take as future retirement income. That is an important point for the overall stability of the system. Did you know, Mr Deputy Speaker, that under the previous Government it was possible to put £250,000 into your pension fund? That was absolutely extraordinary, and I welcome the fact that this Government have lowered that limit substantially so that pensions provide fewer tax reduction opportunities for those on the highest incomes.

Finally, the Government have taken some difficult decisions on overall pensions policy and made some sensible changes that will stabilise the pensions system and make it more sustainable for the future. This is a Budget that rewards work and is good for business, and I urge all hon. Members to walk through the Lobby this evening to support it.

--- Later in debate ---

[Steve Baker (Wycombe) (Con)]

I refer the House to my interest in Cobden Partners.

This is a Budget of fiscal conservatism and monetary activism. It is a Budget, above all, of economic expectations, setting out to people that we will reward work, support families, help those looking for work, back business and back aspiration. In the short time available to me, I would like to speak directly to the point of monetary activism, which is one of the Budget’s key pillars. I hope the Government will not take it as a criticism, because the Chancellor has emphasised that the Bank of England is independent and, of course, its policies are symptomatic of those followed all around the world.

Over the past 13 years under new Labour, the money supply expanded from about £700 billion in 1997 to £2.2 trillion in 2010. That was through a massive expansion of bank balance sheets—a huge amount of monetary activism led by central banks, with the Bank of England keeping interest rates too low for too long. That goes to the heart of points that Opposition Members have made. It has redistributed wealth towards the south-east and the first recipients of new money. I would say that it is at the heart of our difficulties. The scatter chart in the Red Book shows how the balance between our fiscal position and the bank balance sheet position is interlinked, and has placed us as an outlier.

When many people look at monetary activism, and quantitative easing in particular, they get worried about inflation—and why not? It would, however, be hysterical to worry about hyperinflation at this stage, when the asset purchase facility is at £325 billion—just one seventh of the money supply. I would nevertheless like to sketch out something that troubles me in my darker moments.

Right now, there is not a problem, but a housing bubble became a banking crisis—at least not a problem of inflation—which became a sovereign debt crisis, which has now been turned into an asset bubble in the bond market. The Bank of England has deliberately inflated bond prices in order to suppress long-term interest rates—interest rates that our constituents cannot do without because they are so indebted. The problem is that, as we know, all bubbles burst; the questions are when and what might burst the bond bubble. Inflation expectations might do it. If we were to look at M4 and M4ex from the Bank of England, we would see that there is no reason to doubt its inflation forecast. If we look at my preferred measure of the money supply, however, which is Kaleidic Economics MA, we can see that from July last year, year on year money supply growth was minus 2%; today, money supply is growing by that measure at plus 6%. We should thus be very cautious indeed about the Bank’s forecasts.

If the bond market bubble bursts, there will be pressure on the Bank of England to continue to prop it up. That will lead to further quantitative easing and create an expectation of rising interest rates. That could cause a flight from the bond market into cash; and it could cause the public, as they see QE continuing, to lose faith in cash itself, which could lead them to start spending.

[Karl MᶜCartney (Lincoln) (Con)]

Will my hon. Friend give us an idea of when he thinks this bubble might burst—in the near or the distant future?

[Steve Baker]

I am grateful to my hon. Friend, as this is a critical problem. It is a problem of expectations; it about the human mind, which is extremely difficult to predict.

I was saying that, as we go through, we could find that people lose faith in cash. If they do that, they will spend it, and move into real value. Keynesians could end up celebrating an apparent boom, but actually one that is a crack-up of the currency. I sketch these events not to frighten, but to set out a perspective for the House of which we should be aware when we know that the central banks and the Bank of England have deliberately inflated this bond market bubble.

We could end up facing a choice: if prices and wages are accelerating, but less quickly than the money supply, the Bank of England will have to choose whether to supply more money or whether to abandon that monetary inflation and reveal the underlying havoc created by decades of inflationary money. Perhaps new money, instead of real resources, can be used to paper over the cracks. Perhaps expectations can be managed to avoid the bubble bursting. If I were to quote with just a little adaptation something that Hayek wrote in 1932, I would say: “We must not forget that for the last 86 or 88 years, monetary policy all over the world has followed the advice of the monetary activists. It is high time that their influence, which has already done harm enough, should be overthrown.”