Financial Services (Banking Reform) Bill

Steve Barclay Excerpts

Monday 11th March 2013 Commons Chamber

[Chris Leslie]

My hon. Friend is entirely right. Ducks go quack, cows go moo and Conservatives hate regulation of the market. It is part of their ingrained DNA.

[Stephen Barclay (North East Cambridgeshire) (Con)]

Will the hon. Gentleman give way?

[Chris Leslie]

I will make a bit of progress and give way in a minute.

There is not enough in the proposed legislation on the safety of the banking system, not enough to rebuild consumer confidence, not enough to reform the high-risk banking culture and not enough to support growth and create a banking system that serves the needs of our economy. Too often, Ministers sound as though they are acting like shop stewards for banking executives desperate to retain bonuses that are many multiples of their salaries. Instead, Ministers should roll up their sleeves and put the taxpayer, the consumer and the UK economy first.

I want to address some of the issues the Minister raised about the detail of the Bill. First, on banking safety and protections for the taxpayer, Labour believes that a reserve power for full separation is needed, not just the firm-by-firm approach that the Government have conceded. Stopping short on backstop powers will reduce the chances that ring-fencing will succeed. Ministers are ignoring the commission’s conclusions, claiming that it would be wrong to give the regulators full separation powers, but the commission is scathing in its report today, saying:

“The Government has erected a straw man which it has then successfully demolished, because we made no such recommendation”

in the first place.

It is clear that the commission wants a full separation power only after a full review and decision by Government and Parliament—perhaps it was being inadvertently misrepresented by the Treasury—so it would be far more sensible to legislate now, not just if one or two individual banks misbehave, but in case ring-fencing as a whole fails across the sector. Indeed, we see cross-sector failings, as LIBOR illustrates, so it is not enough to have a half-done backstop. Stopping short will deliver only half the backstop measures that we need and will have corporate lawyers across the City rubbing their hands with glee at the prospect of litigation against regulators who might want to intervene on a case-by-case basis. However, given the possible views of the other place, I suspect that the Government will eventually be forced to change their mind.

Let me turn to leverage and the risk-weighting of assets, which has been introduced as an antidote by regulators to the high-risk, high-reward culture that was pervasive in banks before the crisis. However, the risk-weighting process has been partial and, in some cases, self-defining by the banks, and in the EU the zero risk-weighting attributed to some palpably risky sovereign debts has brought the system into some disrepute. The Basel committee published new evidence in January highlighting the major variants between jurisdictions and banks on this issue. Regulators and the Bank of England need to get a grip of this, but as a counter-balance we also need protections against the over-extended vulnerability of bank balance sheets. That is why the leverage ratio powers need to be clearly set out in the Bill and phased in ahead of the European Union plans for the end of this decade, which is one of the main recommendations and conclusions of the Vickers report.

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[Chris Leslie]

If the hon. Gentleman’s analysis is correct, he will no doubt join us in the Division Lobby to institute the recommendations on leverage from the parliamentary commission. Is that his intention? Will he join us in supporting our amendments? I will give way to him if he wishes to answer that question, but I do not think he does. That is a shame, because I know that he feels strongly about these matters, but I can detect the gagging influence of the Treasury Whip as he texts the message “Be careful: Jesse Norman is on his feet again.” Forgive me, Mr Deputy Speaker, I meant to say the hon. Gentleman. The alert has gone out that rebellion is in the air.

We need more protections to deal with standards and culture, and we need to make sure that whistleblowers in the banking sector are given protection. We also need to set up a financial crime unit within the Serious Fraud Office, using some of the resources that are flowing from the fines. We probably also need to deal with the statute of limitations issue, going beyond the three years to give the regulators additional powers.

[Stephen Barclay]

rose—

[Chris Leslie]

I think I ought to make some progress, and I want to talk about the need for the banking system also to enhance our economic prospects, support enterprise and growth, and maintain the supply of credit to the economy. Those are some of the issues that our constituents are concerned about for the future. Nothing in the Bill looks forward at the challenges facing business or the economy more broadly. So we want to see urgent action—ideally in the Budget, but if not in this Bill—that improves the operation of the funding for lending scheme to ensure that lending to small business is prioritised. We called for that last summer when the scheme began, but since then net lending to business has fallen further and further still. It is very important that we take this moment to improve and adapt the funding for lending scheme in this way. We must recognise that we have had the failure of Project Merlin and we have had credit easing, which was given eight months to do the job. So funding for lending is the third scheme that the Chancellor has tried and we have to make sure that it is changed in a way that makes these things work.

Even if the Government eventually create a fully formed Bill, we need regular parliamentary oversight of how ring-fencing and the new structures are working. As the Parliamentary Commission on Banking Standards says today:

“The Government’s proposal for the periodic review to be conducted by the regulator is wholly inadequate.”

We also need to have more than the one-and-a-half-hour, rubber-stamping Committees to scrutinise the detailed secondary legislation, which is why we advocate a super-affirmative order-making process to give time for the Treasury Committee and others to examine the technical detail of the changes in respect of the clauses and the orders that flow from them.

We want a Bill that makes banking safe and protects the taxpayer, but this one falls short in several areas. We want a Bill that improves banking standards, enhancing probity and conduct, and reforming the culture of banking, but this Bill contains none of those changes yet. We want a Bill that helps to rebuild consumer trust and choice, supporting more competition, new entrants, mutuality and consumer switching. We want a Bill that creates a banking system that supports jobs and growth, and maintains the supply of credit to the economy. The Opposition will not oppose the Bill on Second Reading today, because reforms are clearly needed, but too many important policy changes are still conspicuous by their absence. After such a big global crisis, and so many scandals and inquiries, the Government have no excuses and they need rapidly to populate this shell of a Bill with some real substance.

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[Stephen Barclay (North East Cambridgeshire) (Con)]

It is always a pleasure to follow my hon. Friend the Member for South Northamptonshire (Andrea Leadsom), and, Mr Deputy Speaker, to be the last speaker to catch your eye before the wind-ups.

The Father of the House spoke about one of his speeches in 1984, so I took the liberty of having a look. If the House will indulge me, I will quote from it:

“There has been a great deal of talk about capital. Of course that is important, but vastly more important than that is expertise, integrity and judgment.”—[Official Report, 16 July 1984; Vol. 64, c. 68.]

Indeed, there was much expertise, integrity and judgment in my right hon. Friend’s remarks, and in essence I want to focus my comments on them. The Bill addresses structure and it is right to learn the lessons. Of course there was too much leverage in the system. No one would think that the level of liquidity available to the banks at a time of crisis was adequate, and there has been much work by regulators and central bankers since the 2008 crisis to address that. What there has been rather less of, however, is a willingness to tackle culture.

While I commend the Government for the Bill’s focus on leverage, and on dealing with the well-measured suggestions of my hon. Friend the Member for Chichester (Mr Tyrie) and his commission, we should be clear on what the Bill is not doing. It will not stop retail bank failures, such as Northern Rock and Bradford & Bingley; it will not stop investment bank failures, such as Lehman’s; and it will not stop the regulatory failures of universal banks, as we have seen with the anti-money laundering and sanctions abuses or the LIBOR abuses by some of our largest banks. The Bill does not address the shadow banking world—the £200 billion of risk that is currently carried in private equity. Most of all, the danger of today’s debate is that we do what is so often the case after a regulatory crisis: we focus on solving the problem we have just had. We are not talking about the impact on banks if we lose control of interest rates, which we all hope will not be the case. The focus is on the structural failures relating to liquidity and capital, and that has been the tenet of the debate.

[Jim McGovern]

Why would it be wrong to focus on our recent problem?

[Stephen Barclay]

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

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

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

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

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

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

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

[Stephen Barclay]

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

[Chris Leslie]

I believe that the hon. Gentleman was director of regulatory affairs at Barclays bank from 2006 right up, I think, until the general election. Will he assure the House that he was not aware of any of the LIBOR issues that took place under his watch?

[Stephen Barclay]

Once again the hon. Gentleman has got his facts plain wrong, because although I was—[Interruption.] We can all see that he has had a quick read, but as so often with Labour politicians he has not understood what he has read. I was director of regulatory affairs in the retail bank and, as anyone knows, the retail bank was not responsible for LIBOR. That was an investment banking issue.

[Chris Leslie]

Will the hon. Gentleman give way?

[Stephen Barclay]

Unlike the hon. Gentleman, who repeatedly refused to take interventions, I will happily take another.

[Chris Leslie]

I did take a fair few interventions. If the hon. Gentleman was the director of regulatory affairs at Barclays bank from 2006 until the general election on the retail side, was he aware of the mis-selling of payment protection insurance?

[Stephen Barclay]

Once again the hon. Gentleman has not listened to the answer. I was actually head of anti-money laundering and sanctions for half the period, so once again he is getting the basic facts wrong. It is interesting that he does not want to debate the issues. He does not want to debate the fact that there were guaranteed bonuses or a fines system that incentivised the wrong things. He does not want to debate the fact that, as my hon. Friend the Member for South Norfolk (Mr Bacon) correctly pointed out, we had a Treasury that was not even aware of its own powers. We also had a tripartite system in which it was unclear who was in charge. We then had Treasury officials looking at banks and their assets without being able to rely on what was under their noses. That is the legacy that Labour left us.

[Chris Leslie]

Will the hon. Gentleman give way?

[Stephen Barclay]

No. I have taken two interventions from the hon. Gentleman and he did not do well with either. I want to make progress, because I am conscious that time is moving on.

I shall return to the comments made by someone who, unlike the hon. Gentleman, speaks with professional expertise, namely the Father of the House. He was correct—as he is on so many issues, but particularly this one—to talk about the danger of focusing on structure and not rooting out conflicts of interest. That is at the heart of the point I want to make about individual accountability, linked to conflicts of interest—about the awareness, as my hon. Friend the Member for South Norfolk pointed out, of those in institutions who know where the risks are and how they are incentivised to speak up. On Thursday we will have a debate on the NHS and the fear of whistleblowers to speak out. Many of the issues in the NHS are similar to what we have seen in our banks. Let me give the House an example that makes the point highlighted by my hon. Friend. So far, the two biggest fines imposed on any individuals in banking were imposed on two Northern Rock executives. On both occasions they were less than those individuals’ bonuses the preceding year. How are people incentivised to do the right thing in our financial sector when they can see such short-term benefits from wrongdoing and very little downside risk?

I very much endorse what my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) said about empowering consumers by having portability in the system and grass-roots pressure. However, we cannot rely on that alone—I do not think she would suggest for a minute that we could—to address the regulatory failures or the asymmetry of information that customers face.

[Jim McGovern]

I became an MP in 2005, and between then and about 2009, I do not think any business people approached me. Since then, however, a lot of them have approached me to express their grievous concern about keeping their businesses going. I have to say that I am struggling to understand what the hon. Gentleman means, and I think the people in my constituency who have started small businesses as joiners, bricklayers or whatever would also struggle to understand him. Will he please make his point in lay terms?

[Stephen Barclay]

Yes, I can address that question head on. It is logical to have introduced measures to try to manage risk in the financial sector, but we are requiring banks to retain more and more assets at the same time as asking them to lend more. We are therefore asking them to do two conflicting things, as well as introducing a structural fix that innovative people will often be able to find ways around. For example, the shadow banking sector is not affected by this kind of proposal. If we want to address innovation, to be flexible and to move with the market, and retrospectively to impose fines for wrongdoing, we would be far more successful if we changed the culture than if we imposed rigid rules.

In many ways, I agree with the hon. Gentleman, in that we all have constituents who complain that the banks are not lending, but perhaps that is an issue for another day. There are many areas in which the banks’ behaviour is wrong, but we cannot change the culture through rules alone. We had more than 6,000 pages of rules, but that did not achieve the right culture. We can achieve it by having individual accountability, and one of the best ways of doing that is through personal fines.

I am sure that the hon. Gentleman read the Daily Mirror today, as I did; I always try to avail myself of the Daily Mirror. On the front page, there was a story about the “Fat cat in the hat”, who is a former Barclays executive, according to the report, and it must be true because it was in the Daily Mirror. The point is that it is individuals like that, where there is alleged wrongdoing, who are able to keep their bonuses and keep their profits. That does not send the right message on culture. Rules are too blunt a tool.

If we want to change the banks, the Bill is extremely welcome, but I hope that the very constructive proposals put forward by my hon. Friend the Member for Chichester will be given further consideration. There is much to support in the Bill, however.

[Mark Garnier]

Does my hon. Friend agree that the Chancellor’s measures stating that the fines levied on RBS should be taken from the bonus pool go some way towards addressing the point that he makes?

[Stephen Barclay]

Those measures are a step in the right direction, but they will also catch the legitimate people, rather than focusing on those who have done wrong. There will be no means of clawing back from wrongdoers. Let us take the example of Sir James Crosby. To what extent would he face retrospective clawback? He is long gone, and he has taken the money.

[Andrea Leadsom]

Is not this exactly the issue that we have been debating over the past week, with the EU proposal to cap bonuses? That would have the unintended consequence of pushing up salaries, which are notoriously difficult to claw back. Does my hon. Friend agree it would be much better to put in place a proper compensation scheme, perhaps through statute, that was determined by the banks themselves and that ensured clawbacks and full accountability?

[Stephen Barclay]

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

[Mr Bacon]

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

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

[Stephen Barclay]

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

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

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

We have had a wide-ranging debate and heard some useful, thoughtful and constructive contributions. Everyone has had the opportunity to make all the points they wanted to—except, perhaps, for the Father of the House, who understandably bemoaned the fact that he had only 12 minutes. He might well be disappointed not to have been here at a later stage of the debate to give us the benefit of his wisdom, as he certainly gave us an interesting contribution.

We heard the maiden speech of the hon. Member for Eastleigh (Mike Thornton). He paid tribute to his predecessors in the traditional style, but raised a number of important points, not least of which was about bank lending and particularly the lending scheme for small businesses.

I would like to pick up some of the general points and themes running through the debate. My hon. Friend the Member for Nottingham East (Chris Leslie) gave a comprehensive opening speech from the Opposition Front Bench. Other Members picked up the point that he made that we cannot have any repetition of the actions that led to the taxpayer bail-out. The actions and attitudes of the bankers meant that the banking sector—or individuals in it, as many hon. Members have said—thought that it was okay to retain the profits privately when the sun shone, to use that metaphor, but to let the losses fall to the public purse when the rainstorms arrived. We simply cannot allow a repetition of such risks to taxpayers in the future. That is why the banks must be reformed here in the UK, and further reformed in the EU and across the world.

As my hon. Friend the Member for Nottingham East outlined—it was echoed by my right hon. Friend the Member for Wolverhampton South East (Mr McFadden) and by my hon. Friend the Member for Wirral South (Alison McGovern)—our financial sector is larger than most. The greatest global financial centre is in the City of London, and there are important centres in Edinburgh and across the UK, so we have to take any additional steps required to guard against any risk of future collapse.

My hon. Friend the Member for Nottingham East also spoke eloquently about the passage of the Financial Services Act 2012, which sought to address some regulatory shortcomings. Many hon. Members will have heard him during the course of the Public Bill Committee speaking eloquently—and, I have to say, frequently—about many of the issues that we are looking to this Bill to address. He highlighted a number of them, including concerns about LIBOR.

I hope that the hon. Member for North East Cambridgeshire (Stephen Barclay) will take the point made by my hon. Friend the Member for Nottingham East. The hon. Gentleman talked a lot about regulatory shortcomings, but we need to remember how members of the public and ordinary people in the street will view this issue. People in the banks were culpable; they were individuals who somehow thought it was all right to take those risks and—[Interruption.] I hear the hon. Gentleman say, from a sedentary position, that it was our system. At the end of the day we can have systems, we can have regulatory reform, we can have all those rules in place, but if the culture and the attitude of the people involved do not change, that will simply lead to more problems in the future. Members on both sides of the House have recognised that today. I am surprised that the hon. Gentleman, who, I understand, previously had a career in the banking industry and, indeed, in regulation, does not seem to accept that individuals as well as systemic failures bear some responsibility.

[Stephen Barclay]

rose—

[Cathy Jamieson]

I am happy to be corrected if I have misunderstood the hon. Gentleman.

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[Stephen Barclay]

The hon. Lady seems to be misrepresenting the entirety of my speech. The whole speech was about the need for individual accountability. I said that under the system established by the hon. Lady’s party, there was no such accountability. That is why Sir Fred Goodwin walked away with his huge bonus untouched. Under that system, there were no real fines and no individual accountability. That is the essence of it.

[Cathy Jamieson]

I understood the hon. Gentleman to be blaming the regulators rather than the individuals who were involved in the wrongdoing. Let me repeat that, notwithstanding the amount of regulation that is introduced, if there are people who are intent on wrongdoing, we need to address the culture and the expectations in banking. I think that members of the public expect us to do that.

A number of important points were made at the outset of the debate about the timing of the Committee stage. My hon. Friend the Member for Nottingham East, and a number of those who intervened subsequently, expressed concern about the fact that the Bill provides such a slim framework for further secondary legislation, largely by Treasury order. My hon. Friend the Member for Bassetlaw (John Mann) described it as an “Is this it?” sort of Bill, and my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) called it a mini-Bill.

The Minister seemed to suggest that we would have adequate opportunities not only to scrutinise the Bill itself, but to scrutinise and respond to whatever other measures or recommendations were made by the parliamentary commission at a later stage. I think that how, when, and where that scrutiny will take place remains rather uncertain. The hon. Member for Chichester (Mr Tyrie), the chair of the commission and of the Treasury Committee, asked for two days to be provided on Report, but it seems that Ministers did not consider that appropriate, or did not wish to do so. That is serious, because the Bill is very thin as it stands, and a great deal of work will be needed in connection with the secondary legislation. We ought to have every opportunity to scrutinise not just the good work that has already been done by the commission, but what it will do in future.

The commission report has helpfully provided us with a series of amendments and explanations of why they are important. It has also provided us with information on why the members of the commission feel that certain amendments should be proceeded with even if the Government do not agree with them. I think that we should have an opportunity to look at those amendments properly. I think that the public would expect us, having given the responsibility to the commission to make recommendations, to pay proper attention to them, and would expect the Government to take heed of them.

It is hard for the public to believe that things have changed when they perceive that a massive bonus culture is alive and kicking, and that has been reflected in the debate. A number of Members pointed out that debates of this kind may appear to be technical, and concerned very much with the rules and regulations. People watching may wonder how it affects their everyday lives. A number of hon. Members made the point that we have to ensure that we use the opportunity of legislation to rebuild consumer confidence, but we also have to talk about financial inclusion and diversifying the sector, and we have to change the culture of high-risk banking and see an improvement in standards, because that is what people expect legislation and the change to deliver. We also want action to support growth and to create a banking system that serves the needs of our economy, a point well made by hon. Members on both sides of the House.