Financial Services (Banking Reform) Bill

William Bain Excerpts

Monday 11th March 2013 Commons Chamber

[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.