With your permission, Mr. Speaker, I would like to make a statement on national curriculum tests—and the next steps that we will now take to strengthen school accountability. The far-reaching reforms that I am announcing today will strengthen the role of key stage 2 national tests for 11-year-olds; radically reform the current key stage 3 testing regime in secondary schools; and introduce a new, simpler and more comprehensive way of reporting to parents on primary and secondary school performance.

When I made my statement to the House on 22 July, the Qualifications and Curriculum Authority was engaged in commercially sensitive contractual negotiations with ETS Europe. On 15 August, the QCA terminated its five-year contract with ETS Europe and recovered payments amounting to £24.1 million—two thirds of the moneys due to ETS Europe for the first year of the contract which was paid back to the taxpayer. I also announced that the QCA would tender for a single-year contract for the delivery of the 2009 tests. That new procurement is under way and has been informed by advice from Lord Sutherland, whose independent inquiry into the procurement and management of the contract for the delivery of this year’s tests will set out important lessons for all such future contracts. Lord Sutherland expects to complete his final report before the end of the year.

In my statement in July, I also made it clear that the current testing and assessment regime is not set in stone. I know that some hon. Members were disappointed that I was unable to go further at that time, but it was important that we evaluated the case for change before making decisions. Over the summer, we have been able to study the Select Committee’s report on testing and assessment, which was debated in the House last week. We have studied more detailed evidence from our Making Good Progress pilots and I have heard from a range of experts and partners, including Ofsted, head teachers, teachers and parents.

I fully agree with the Select Committee that the principle of national testing is sound, but I take seriously the concerns raised by the Select Committee, teachers and parents. Testing, assessment and accountability must encourage and reward the best teaching so that it properly supports pupils in their learning and development. Schools should be judged fairly on how they support the progress and well-being of every child.

I believe that three key principles must guide our approach. Our system of testing and assessment should first give parents the information they need to compare different schools, to choose the right school for their child and then to track their child’s progress. Secondly, it should enable head teachers and teachers to secure the progress of every child and the school as a whole without unnecessary burdens or bureaucracy. Thirdly, it should allow the public to hold national and local government and governing bodies to account on the performance of schools. Over the summer, and guided by those principles, the Schools Minister and I looked carefully at our system of national testing and accountability across key stages 1, 2 and 3.

For more than a decade, testing and assessment have played a vital role in delivering rising standards in primary schools. This year, 107,000 more pupils left primary school secure in English and maths than did so in 1997. Those are the basics that every parent knows that their child needs if they are to succeed in secondary school. The national curriculum tests at the end of key stage 2, at 11, are the only objective measure of attainment in primary schools for parents, head teachers and the public.

The current format of key stage tests at the ages of seven and 11 is not set in stone. At key stage 1, we have already rightly replaced externally marked tests with teacher assessment and introduced new catch-up teaching for children at risk of falling behind. We will now examine whether the current system of requiring teachers to use nationally set tasks as part of moderated teacher assessment is working effectively. We are also piloting “stage not age” single-level tests at key stage 2. Although the emerging evidence from the continuing pilots is encouraging, it is too early to decide to proceed nationally. However, I am convinced that externally marked key stage 2 national curriculum tests are essential to give parents, teachers and the public the information they need about the progress of each primary age child and of every primary school. Some argue that we should abolish the tests, but that would be the wrong thing to do.

The testing and assessment system has also supported rising standards in our secondary schools, with some 68,000 more pupils gaining five or more good GCSEs including English and maths in 2007 than in 1997. Having looked hard at the current testing regime, we do not believe that the three principles that I have set out justify the key stage 3 testing arrangements in their current form. Parents want to be able to choose the right secondary school for their child and to see how the school is performing, but it is usual for them to look at the school’s GCSE results to help them to do so. Parents also want to be able to track the progress of their child, but the measures that we have already introduced to improve real-time reporting of progress will mean that parents get much more regular information than just the results of a single national test.

Head teachers have told me repeatedly over the past year that a more flexible system of assessment throughout key stage 3 would allow schools to focus their efforts more effectively on personalised teaching and learning and to use the flexibility of the new secondary education curriculum. We have considered a shift to “stage not age”, single-level tests in secondary schools too, and we have also been piloting them at key stage 3, but the emerging evidence that I have seen over the summer shows that single-level tests at key stage 3 are not working effectively. Therefore, on the advice of the National Assessment Agency, we will now bring the key stage 3 piloting of single-level tests to an end.

I am announcing today that, as part of a wider overhaul of key stage 3 assessment, children will no longer be required to do national tests at the age of 14. Instead. we will ensure that every parent receives regular reports on their child’s progress in years 7, 8 and 9, and that teachers have the training and support to help every child make good progress. We will continue to provide key stage 3 test papers to any school that wants to use them internally, and we will ensure that schools properly focus in years 7 and 8 on the progress of those children who did not reach the expected standard at key stage 2, with effective one-to-one tuition and catch-up learning. We will also introduce an externally marked test, with a sample of pupils to measure national performance at key stage 3, so that the public can hold the Government to account.

Some parents find it difficult to judge how well their local schools are doing from national tests or Ofsted reports alone, so we also want to go further on school accountability. With the support of Ofsted, and following discussions with our social partners, it is our intention to introduce a new school report card for all primary and secondary schools. The school report card will help parents better to understand how well schools are raising standards and improving, compared with other schools in their area. It will show how each school is supporting the progress of every child and playing its role in supporting the wider development and well-being of children. It will draw on the successful model being used in New York city and elsewhere, but it will be designed to suit our schools. We will set out detailed proposals for consultation before the end of the year, with a White Paper to follow in the spring.

These are far-reaching reforms and it is vital that we get the details right. We will draw on the analysis and findings of the Select Committee report, and we will work closely with our social partners to take them forward without unnecessarily adding to teacher work load. To advise us on the development of this new system, I am also today appointing a new expert group, and placing copies of its detailed terms of reference in the Libraries of both Houses.

Today’s reforms require changes to the procurement of national tests for 2009. Consistent with our plans for future years, we will continue to require pupils to take the national curriculum tests at key stage 2, but we will not require pupils to take key stage 3 tests from 2009 onwards. The QCA is now extending its procurement deadline accordingly.

The package of reforms that I am announcing today will give parents better, more regular and more comprehensive information about their child’s progress and their school. It will support head teachers and teachers to ensure that every child can succeed, and it will strengthen our ability to hold all schools to account, as well as the public’s ability to hold the Government to account. I commend this statement to the House.

I thank the Secretary of State for his announcement, and for keeping us up to date throughout the summer with the steps taken to resolve the problems with this year’s SATs tests. As he eventually admitted, the administration of those tests was a fiasco. I stress that we want to work with him to ensure that we never again put pupils, parent and teachers through the stress and chaos of this last year. Therefore, I want to underline that we welcome the broad thrust of his announcement today.

First, I welcome the clarity of the Secretary of State’s analysis of the case for external assessment at the end of key stage 2. We need proper information on how individual children are making progress, and we need accurate information about how individual schools are doing. However, he is aware that there is still widespread concern that preparation for national curriculum testing occupies too much school time. He will know, I hope, that there are real worries that a move to single-level testing at key stage 2—the so-called “stage not age” testing—may lead to individual schools testing their pupils more often and more intensively as they try and retry to get individual pupils to the appropriate level so that league table rankings improve. Will he ensure in the pilots that he is undertaking that there will not be more tests, more teaching to the test and a narrower learning experience and that there will not be league tables that distort rather than clarify?

May I also welcome what I take to be the spirit of the Secretary of State’s announcement on key stage 3 testing? I have argued for fewer national tests and more rigour, and we want to work constructively to improve the assessments and qualifications regime. So I welcome his proposal to ensure that all parents have timely information each year about the progress that children are making between 11 and 14.

The transition from primary to secondary can often be a time when pupils, especially boys from disadvantaged backgrounds, falter and become disengaged. On present measurements, 84,000 pupils in one year made no progress or fell backwards in English between key stage 2 and key stage 3; 28,000 made no progress or fell backwards in maths; and 140,000 made no progress or fell backwards in science. As my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb) has pointed out, those years are some of the most important in education, and it is a tragedy that thousands of children aged 14 have a reading age lower than 11. These young people are often on a conveyor belt to truancy, delinquency and unemployment. My hon. Friend has underlined that, whatever their failings, the current SATs have reinforced the need to focus extra attention on pupils from disadvantaged backgrounds who are falling behind. Will the Secretary of State therefore guarantee that, as changes are made, there will be a special focus on ensuring that we track and reverse under-achievement among the poorest?

Ofsted clearly now has a more crucial role to play than ever. Does today’s announcement mean that the Secretary of State will change the inspection regime brought in by the Education Act 2005? Will he now give Ofsted the remit and the resources necessary to conduct in-depth inspections to help underperforming schools improve? With regard to the expert group, will he give sympathetic consideration to recruiting the best head teachers from our highest-performing schools to that group to underpin a commitment to excellence?

As well as concern about too much testing, there is concern about a lack of rigour in all national tests. The Secretary of State will, I am sure, know that one of the questions in the most recent key stage 3 science tests was, “What part of a rider’s body does a riding hat protect?” and one of the questions in our GCSE science tests asked students whether we looked at the stars through a telescope or a microscope. Does he consider those questions evidence of sufficient rigour in the curriculum and, if not, what instructions has he given to the Qualifications and Curriculum Authority and the exams watchdog Ofqual to ensure that standards are high?

The Secretary of State will be aware that concern about the national curriculum has meant that more and more high-performing schools are abandoning state exams and opting for qualifications such as the international general certificate of secondary education. Will he allow state schools to offer the IGCSE and have achievement in that exam count in their league tables?

On the issue of new exams, the Secretary of State will know that the take-up of diplomas so far has been disappointing, with just 12,000 rather than the expected 50,000 pursuing these new qualifications. We want the exams to be a success, but, given how few high-performing schools are embracing the full diploma offer, will he take this opportunity to confirm that the A-level will now be safe beyond 2013?

Over the past seven years, we have fallen behind as a country in every external measurement of educational performance. We have dropped from fourth to 14th in science, from seventh to 17th in literacy and eighth to 24th in mathematics. Those are OECD figures. We congratulate the Secretary of State on recognising that change is necessary. We hope that we can continue to work in a consensual fashion to push forward the case for reform, built around fewer and more rigorous tests, less bureaucracy, more freedom for professionals and a commitment to excellence for all, underpinned by a special focus on the most disadvantaged. Our children deserve no less.

I am grateful for the hon. Gentleman’s support, although I am somewhat surprised by his remarks. He did not seem to address any of the issues that I raised in my statement. He seemed almost to be responding to a different statement delivered by a different Secretary of State on a different subject. It was not a statement about A-levels or diplomas. The thing that I found odd about his response was that he did not tell us whether the Conservative party supported our decision to abolish key stage 3 tests at 14—yes or no. Nor did he tell us whether he supported our decision to introduce report cards—yes or no. However, he did support my clarity on the fact that at key stage 2, we will continue with external assessment. We will also make sure that we evaluate the pilots on single-level tests in a way that genuinely supports the best teaching and learning, and the progress of every child. We are not, at this stage, making a decision on whether to proceed with single-level tests; we will do so on the basis of proper evaluation. I am grateful for his support for our making those decisions in the right way.

On key stage 3, I welcome the hon. Gentleman’s saying that we should do more to focus on pupils who fall behind in years 7 and 8 of secondary school. That is precisely why I am today giving the expert group a remit to look into those issues. I welcome his support for that, too. Clearly, we want to ensure that Ofsted, our inspection regime, and our accountability regime more widely, focus on the issue of pupils who fall behind.

What the hon. Gentleman did not tell us, in a conclusion that veered off towards the subjects of diplomas and A-levels, was whether he supports our decision to abolish key stage 3 tests. I know that the Leader of the Opposition has, in past interviews, said that the Conservative party wants to continue with tests at 14. I know that last week, the shadow Schools Minister, the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb), told the House of Commons in a debate:

“The SATs that are most criticised…are the key stage 3 tests. However, those are probably the most important.”—[Official Report, Westminster Hall, 9 October 2008; Vol. 480, c. 176WH.]

I understand that there will be a need for a period of reflection on those issues before the Conservatives’ policy is decided, but I hope that when they reflect on our principles, they will conclude that the proposals that we are putting forward today are in fact the right way to take forward the learning of every child.

I was also disappointed that the hon. Member for Surrey Heath (Michael Gove) did not tell us whether he supports our proposals for new report cards, but again I hope that when Opposition Front Benchers have had the opportunity to reflect, they will decide to support those proposals, too. I can tell him that we will ensure rigour in our expert group.

As for the hon. Gentleman’s final remarks, I can make very clear commitments on the wider issues that he raised. I can make a very clear commitment: we will take forward our reform to ensure that education continues not just until the age of 16, but until 18 for every child, and not just some. We will ensure that every young person in our country has the choice of one of 17 diplomas, and the best chance to break out of the old two-tier divide between academic and vocational learning. We will ensure that every young person has a properly funded educational maintenance allowance. Those are three clear commitments, none of which Opposition Front Benchers support. That—more so than anything that the hon. Gentleman said in response to my statement—tells us everything that we need to know about the modern Conservative party.

I start by thanking the Secretary of State for advance sight of his statement. I welcome the Government’s U-turn on the key stage 3 tests; it will be widely welcomed outside this place, and no doubt in his own household. I also welcome what I think was a U-turn from the Conservatives on the key stage 3 tests. Four or five days ago, they were telling us that they were committed to those tests. I think that the shadow Secretary of State said today that he was happy with the announcement that the Secretary of State made, although we await clarification of that.

Outside this place, key stage 3 tests have long been regarded by all parties involved in the education debate as a complete waste of time, expensive, inaccurate and unwanted, not only by parents but by schools and other players in the educational debate. We are very pleased that they have gone, because they are expensive without adding anything to the system.

We support the Secretary of State’s decision to keep the key stage 2 tests, which are vital for primary school accountability. He said that they should be externally marked. Will he clarify whether he is saying that he will always insist on full external marking, or is he still considering internal marking with external moderation?

The Secretary of State has made one very welcome U-turn; may I urge him to make a number of others on similar issues? He said, I think, that single-level tests were being axed at key stage 3, but that on key stage 2 the emerging evidence was encouraging. I should like to know what that emerging evidence is, since most of the people to whom I speak and most of the evidence that I am aware of is that those tests are a failure, that they would erode accountability at the primary level, and that they would institutionalise a testing factory farm in schools in an unwelcome way that runs directly counter to the other announcements today.

May I ask the Secretary of State about one potentially important announcement that he made today, and discover whether it is as important as it looks? The Department’s response to the Select Committee report indicated that it was sceptical about the random sampling across the school system of particular cohorts so that we could find out what was happening over time to standards, without those figures being distorted by teaching to the test or the dumbing down of examinations. What is the meaning of his statement today that he will introduce sample testing, presumably at key stage 3, and who will do it?

If the Secretary of State is serious about introducing more sample testing to end the debate about standards in education, will he beef up the Ofqual that he announced a year ago and make it a genuine educational standards authority that will have credibility in the education standards debate, which it does not possess at present? Will he also consider the future of AS-level examinations and whether they are necessary? Will he consider the systems of targets that are used alongside Government tests, which often have distortive impacts, particularly on the borderline between level 4 and level 3 and between C grades and D grades?

Finally, on the shambles of the key stage 2 and 3 tests in 2008, may we have an update not only on the number of papers that have yet to be marked, but on the appeals situation? I understand from the Qualifications and Curriculum Authority that appeals are up 50 to 100 per cent. on last year, which indicates that the confidence that the right hon. Gentleman displayed in his statement of 22 July that marking remains of high quality is not shared by many schools across the country. What are the latest statistics on appeals, and is he as confident about marking quality as he was a number of months ago?

The changes announced today are long overdue and will be welcomed by people right across the political spectrum, from extreme left to extreme right. I hope that this is the first of a number of major changes that can restore credibility to the standards debate in education and ensure that we strike the right balance between school accountability and genuine freedom and liberalisation.

I welcome the hon. Gentleman’s support for our reforms and proposals. I found his response comprehensible and I agreed with almost all of it. I was glad that I was not the only person in the House to be totally confused by the remarks of the shadow Schools Secretary. We know that the hon. Member for Surrey Heath (Michael Gove) likes to read out a prepared text, but as I had given him mine an hour before, one would think that he could have written a slightly more comprehensible one. [Interruption.] Yes, he would almost certainly have failed to get to level 4 at key stage 2 in comprehension with that reply.

We will continue with externally marked key stage 2 tests. We are not proposing a move towards external moderation but internal marking. That is not the approach that we are taking at key stage 2, 3 or 1.

I will share with the hon. Member for Yeovil (Mr. Laws) the emerging evidence from the evaluations of the single-level tests. As I said, the evaluation at key stage 3 shows that the single-level test approach does not work. It seems that it is not possible to have an effective test that crosses the primary-secondary school divide and the divide between key stage 2 and key stage 3. That is why, on advice, we are ending the pilot. However, at key stage 2 the early results are encouraging. If we can have a testing regime in primary schools consistent with external marking and proper objectivity, which allows testing to be set more to meet the level of individual children on the basis of teacher judgment, that would be a good thing, but we will not do so until there has been proper scrutiny of those pilots. I assure the hon. Gentleman that we will not rush to hasty judgments.

Sampling is an important issue. As I said when I set out the principles, the testing, assessment and accountability regime plays different roles. We want to ensure that every parent has an objective view on the progress of their child and the performance of their school. Sampling clearly cannot deliver either of those, but it can allow us to check the progress of the whole school system. Because GCSEs give us that external check on the performance of the school, and because individual progress is assessed by teachers in years 7, 8 and 9, at key stage 3 we can use a sample to assess the system as a whole, but to use a sample at key stage 2 would take away from parents that objective evidence on the performance of an individual school. Sampling is a good thing where it works to meet an objective, and that is why we will ask the expert group to advise us on how to do that effectively at age 14 in our schools.

I made no announcements today about AS-levels or qualifications after 16. That will need to be for another day and another discussion. But to give an update on progress over the summer, schools now have 99.9 per cent. of results and scripts. The appeals process is moving ahead.

Going up.

Of course appeals are up, and understandably so, because schools were inevitably going to appeal more this year. It is important that through that appeals process we give assurance to schools and governing bodies that standards have been maintained. The statements made by Ofqual support the view that standards have been maintained, but it will need to look at the appeals process. We will have the opportunity this year in the Bill that we introduced in the Queen’s Speech to ensure that Ofqual has the independence and powers that it needs. I look forward to those debates, but Ofqual represents a substantial step forward.

I welcome the hon. Gentleman’s comments and support. We have not given him everything that he wanted, but I think that we can agree that this is a substantial step forward for schools in the 21st century, and it will allow pupils and parents to have the information that they need while reducing bureaucracy in secondary schools.

I welcome most aspects of the Secretary of State’s announcement today, particularly the school report card, and I hope that that information will be transmitted to parents electronically as well as in a paper version. As a governor of Ibstock community college, which is an 11 to 14 school, as high schools and community colleges are in Leicestershire, ending at year 9, may I ask my right hon. Friend whether he feels that Ofsted, school improvement partners and others will have sufficient objective information for those middle schools in counties such as Leicestershire to provide the type of accountability and report-back to parents and others that they have had so far?

We will need to pay particular attention to two categories of schools. One is middle schools, where pupils leave at 14, and the second is those that have opened as new schools, in which, for the next five years, pupils, as they move through the years, will not have done a year 11 externally marked test. We particularly asked the expert group to consider that issue and advise us on it. We need to ensure, consistent with the right decisions that we have made about key stage 3, that we can provide parents with enough information and certainty about the performance of those schools. This is a particular issue that we will now consider on the basis of the expert group’s advice, and I will ensure that my hon. Friend is closely in touch with that work.

Out of 10, what mark would the Secretary of State give the QCA for its oversight of this year’s testing regime, and will he reassure the House that no senior member of the QCA will receive a bonus for their performance this year?

I am relieved to say that that is not an exam that I set, mark or moderate. Lord Sutherland is taking evidence as part of his inquiry. He will set out his conclusions in due course and we will ensure that every lesson is learnt from what happened during the past two years in the management of that contract.

May I join in the welcome for my right hon. Friend’s statement, particularly for the clarity of principle and intellectual rigour behind it? I extend a particular welcome to the school report card proposal, but if it is good enough for secondary schools, will it also apply to primary schools, and what does it mean for the nature and future of league tables?

Our intention is for the school report card to be for every secondary and primary school, and to take forward both cards at the same time. We will consult in the next few weeks and produce a detailed plan in November, at the time of the one-year-on update on our children’s plan. We will have a formal consultation in advance of the White Paper in the spring. We will need to sort out a number of details, and I hope that there will be an opportunity for discussion and to hear the views of the Children, Schools and Families Committee and experts in the House.

On the issue that my hon. Friend has raised, I should say that the school report card will be important to parents as a simple and comprehensive view of a school’s performance, alongside Ofsted reports and the raw data on the school. We publish clearly information that is compiled by others in school league tables. That information, of course, will continue to be published in a simple and accessible form, so school league tables will continue to be compiled and parents will continue to look at them.

However, we hope that alongside the Ofsted report and those tables, the school report card will give parents a more comprehensive view of the school’s performance which takes into account not only standards for the average child at the school, but how every child is supported to learn—value added in respect of the school—and some of the broader issues that matter to the well-being of children in a school. The aim is to capture the idea of the 21st-century school in one report card, and I hope that we will be able to discuss it in more detail in due course.

The Secretary of State spoke about raising standards, yet in the past seven years we have dropped from fourth to 14th when it comes to science results and from eighth to 24th when it comes to maths results. Why is that, and how do the measures that have been announced help to raise those standards?

In my statement, I cited the results of national tests. I am pleased to say that they are supported by Conservative Members, at least in respect of primary schools. In 1997, 69 per cent. of pupils reached level 4 in science; today, the figure is 88 per cent. In key stage 3, the number has risen from 60 per cent. to 71 per cent. in the past 10 years. Standards have been rising year on year. I have always said that there is further to go to get to the world-class standards to which we aspire. Like most experts, I am sure, I am dubious about some of the measures that the hon. Gentleman peddles. Look at the raw figures at key stage 2: standards are rising and have done consistently for 10 years, having been stagnant for the previous 20 years. Nobody wants to return to those days.

As probably the only member of the Children, Schools and Families Committee in the country, I warmly welcome the report; my colleagues are in Canada on a study visit. The report has taken a lot of notice of our work on testing and assessment.

In his earlier response, the Secretary of State suggested that cohort testing would be reserved for key stage 3 only. Cohort testing is a mechanism through which we can hold accountable children’s progress nationally, rather than through individual schools. Will he ask his expert group to consider whether cohort testing at other ages might be appropriate, and how the whole system has progressed over time?

I should put on the record that the expert group that we are establishing, with its terms of reference, includes one primary school and one secondary school head teacher—Gill Mills and Yasmin Bevan, from the Cross-in-Hand Church of England primary school and Denbigh high school respectively. The group also includes Jim Rose, a leading expert in curricular matters who is doing our primary curriculum review, Maurice Smith, a former chief inspector, and Tim Brighouse, who ran the London challenge. The five members will make sure that they consult widely, including with the Children, Schools and Families Committee.

I was disappointed that the Committee Chairman and other members could not be here today; I discovered only yesterday that they were in Canada. However, I have suggested to the Chairman that he and his colleagues might want to go to Alberta to look at the report card system there, and that they might want to change planes in New York city on the way back to start investigations into how the report card can work. The Committee’s report in July was careful, measured and forward thinking. My hon. Friend the Member for Slough (Fiona Mactaggart) and others played an important role in ensuring that the report was good, and it has influenced our thinking.

On the issue of sample testing, I made the point that such testing cannot deliver for every parent their child’s progress, and it cannot deliver their child’s school’s progress either. Sample testing has a role to play, however, and it will do so at key stage 3, for children at the age of 14, on the basis of the expert group’s advice. As part of its work, I am happy to ask the expert group to look at the wider issues that my hon. Friend has raised.

rose—

Order. I gently say to the Secretary of State that I appreciate his full replies, but perhaps they could be shorter. We have a limit in the main debate, and those replies will take time out of that limit.

When the Secretary of State looks at the curriculum for the politics and government GCSE, he might want to consider the 1954 Crichel Down precedent, which established ministerial responsibility, because that is clearly anathema to him given that we have still not had a proper apology from him for the debacle of last summer. How much faith can we put in any future testing regime when that is the case? Would he like to apologise to my constituents and to the head of Werrington primary school, Ben Wilding? The data on four children at that school have not been accounted for, and are still missing after four and a half months. Maths papers have gone back a second time for marking. That is lamentable. Even though they might be in that 0.1 per cent. it is not—

Order.

I apologise to you, Mr. Speaker, for the length of my answers. I very much regret what has happened in the school in the hon. Gentleman’s constituency. Two thirds of the ETS first-year payments have been returned—some £24 million. I was careful in my language when I made a statement in July on the basis of legal advice. If we had followed the advice of Opposition Members, the taxpayer would be substantially in deficit. That is the difference between responsible government and irresponsible, posturing opposition.

I welcome this statement. My right hon. Friend will be conscious, however, that how a school is described publicly can have a huge effect on morale in the school, for good or bad. How will he take action to ensure that this new form of accountability to parents—the school report card—takes account of the context in which the school is operating, such as its intake, so that parents can get a sense of whether that school is doing well, and whether it would benefit their child?

As my hon. Friend has said before, there are many schools with low average results, but with high value added. There are also many schools with seemingly higher average results, where low value is added, which are coasting along and not doing their best for children. The school report card will allow us to put the raw data on standards in that wider context and I hope that it will enable her constituents to make the sort of judgment about schools’ performance that she has been urging through the national challenge.

I, too, welcome the statement, particularly as it affects key stage 3. Could I ask the Secretary of State why he rejected teacher-marked and externally moderated methods of testing for key stage 2? That would save a lot of money and give schools a lot more freedom with regard to how they organise their time.

I answered that question a moment ago. We have looked carefully at these matters, and our view is that it is important to have externally marked, rather than moderated tests, once during a child’s time in school in order to give parents a degree of certainty about the results. There is an important role for teacher moderation, but the fact that we have externally marked exams at the ages of 11 and 16 is important and it would be a backward step to drop them.

Educational success is totally dependent on a child’s ability to access the curriculum, so I welcome the emphasis on catch-up in the early stages of key stage 3 with one-to-one support. Can my right hon. Friend assure parents that a similar emphasis will be placed on high-quality, stretching education for all pupils?

I can definitely give that assurance. We will ensure that that focus on pupils who are at risk of falling behind starts in the earliest years of primary school and continues through key stage 1 and into secondary school. I know that the Opposition want to reintroduce a new external test for six-year-olds, but that would not be the right way to proceed. It is much better at that age to have effective teacher assessment and one-to-one catch-up tuition. That is the approach that we will take.

Does the Secretary of State agree that we now need much more rigorous examinations? If he does, why does his Department prevent state schools from entering rigorous qualifications, such as the international general certificate of secondary education?

As our qualifications advisory group recommended earlier in the year, entering the IGCSE would be the wrong thing to do for schools in the state system in England. I am happy to send out the details about that. The IGCSE is a qualification drawn up for particular circumstances and is not one that is relevant or which should be funded in our state schools. As for the hon. Gentleman’s suggestion that we should have more rigorous examinations, I thought that the Opposition were calling for fewer exams a moment ago. I am totally confused as to what the Conservative party is talking about today. It seems to have a range of different shadow Schools Ministers, who all contradict each other week by week and almost hour by hour. It is a shambles.

I warmly welcome this afternoon’s statement, but what would the Secretary of State say to Mrs. Alison Adams, from Kent avenue, Fazely, who, along with parents from Millfield primary school, is still awaiting the results of the English key stage 2 SATs? They do not want to know about the history; they want to know when they can expect to receive the results. What can we tell them to increase their confidence that this afternoon’s statement will strengthen the system?

As I have said, 99.9 per cent. of primary schools have received their key stage 2 results. I obviously do not know what has happened in the case of Millfield primary school, but I hugely regret the stress that Mrs. Adams and her school have gone through. I am happy to ask the National Assessment Agency, which is now leading the testing process, to see what has happened in that case and will write to my hon. Friend.

We have touched on this issue already, but I seek further clarification. A number of schools in the country have requested a remarking of some of the 2008 key stage test papers. Can the Secretary of State tell the House how many papers we are talking about and what the cost implications are?

Every year, there are tens of thousands of appeals in national tests at key stages 2 and 3. We extended the deadline this year and we changed the arrangements for the management of the appeals process. I said in an earlier answer that the number of appeals this year would be up, and they will all be done rigorously and properly. We will ensure that the results are returned to schools as soon as possible, as happens every year, including this year. I cannot give the hon. Gentleman a figure for the number of appeals, because the process is not yet complete, but it is being done rigorously and properly, as it always is.

I warmly welcome the Secretary of State’s statement this afternoon, but I have serious concerns. It is important that simpler ways of reporting to parents be seen as valuable. I also see getting rid of key stage 3 as totally appropriate. However, I still have serious concerns that we are relying on private companies to deliver a structure, a system and a process. In my day, we relied on the teaching profession. I marked for London university. We should see the teaching profession as central to the delivery of the process and the marking. Then and only then will we have a system that is trusted and respected by parents, governors and teachers.

I understand my hon. Friend’s concerns. I am pleased that she supports the decisions that we have made on key stage 3. However, at level 4, GCSE, the qualifications are managed, marked and processed by a combination of private and charitable companies. They do that well and with objectivity. In today’s statement we have strengthened teacher assessment at key stage 3, as we have already done at key stage 1. However, in my judgment, parents want the same certainty at key stage 2, at the end of primary school, that they currently get with GCSE qualifications. Asking schools to take on the burden of marking all those scripts would not be popular with our teaching profession and would not be the right thing to do for parents. That is why we have not gone down the road of teaching assessment at key stage 2.

I particularly welcome the inclusion of Professor Tim Brighouse in the expert group. He completely transformed education in Birmingham in the 1990s. The Secretary of State has referred to parents receiving more information. May I urge him to stress that parents also have a responsibility in regard to their children’s education, not only in the primary sector but in the secondary sector as well? Will the expert group pay as much attention to parental responsibility as it does to schools’ responsibilities?

I completely agree. One of the things that secondary school teachers regularly say to me is that they find it hard to engage parents in secondary school learning. I also hear parents say that secondary schools can sometimes be rather forbidding places for them. The evidence is clear that if parents are involved, their children do better at school. Real-time reporting and the new school report cards are among the ways—there will be others—in which we can strengthen the engagement of parents in secondary schools. My hon. Friend is absolutely right to say that that is critical to the learning and progress of their children.

I particularly welcome the collegiate way in which the Secretary of State has worked with the Select Committee on these issues. Speaking as a young parent, and on behalf of young parents in my constituency, may I point out that there is particular concern among parents about the transition of pupils from primary to secondary school in relation to attainment levels? How will today’s statement help to address that issue and ensure that attainment levels remain solid, and rise, over that transition from the primary to the secondary sector?

We have looked carefully at the transition issues, and will continue to do so through the expert group. One proposal was that we should hold year 6 pupils back and make them do a further year in primary school, rather than letting them go to secondary school, if they had fallen behind. Surprisingly, that was not raised by the hon. Member for Surrey Heath (Michael Gove) in his response today. I do not know whether that is still the policy of the right hon. Member for Witney (Mr. Cameron). We will look very carefully at those issues, and we will ensure that there is a proper focus on pupil progress in years 7 and 8. However, holding 12 and 13-year-olds back in primary school would be totally the wrong thing to do.

Of course, it is not just the transition from primary to secondary school; key stage 3 is absolutely crucial in enabling the right decisions to be made about which GCSE options to take. Given that the key stage 3 tests are going—I think that that is the right decision—can my right hon. Friend guarantee that there will still be an element of challenge in relation to educational attainment at key stage 3, as that is crucial to ensuring that the progress made at GCSE continues?

There will be sample tests, and there will continue to be teacher assessment of 14-year-olds. Every parent will also get a report on progress in years 7, 8 and 9. The most important thing that we need to ensure is that pupils in year 9 are making the proper decisions about which GCSEs or diplomas to do. We believe that the changes that we have made today will free up time for teachers, pupils and parents to focus on those critical decisions. But people can make good decisions at that stage only if we have ensured that any problems in years 7 and 8 have been properly addressed. The focus on every child’s progress will help to deliver that objective, and to ensure that every child can go on to succeed at 16.

I beg to move,

That leave be given to bring in a Bill to prohibit the breeding, selling, purchasing and keeping of primates as pets in the United Kingdom; and for connected purposes.

It might come as a surprise to some Members of the House—and certainly to some members of the public—that it is currently not illegal to keep a primate as a pet. Such practices do not fit well with our so-called enlightened and modern society—a Britain that is supposed to have world renown as a nation of animal lovers. Keeping primates as pets is like something from Victorian times. It is outdated, and comes from a darker period for animal welfare in this country. That was a different age, in which very few data on the declining number of primates were available. Today there is little excuse for lack of knowledge or access to information.

The Bill is about serious monkey business. It is estimated that up to 3,000 primates are currently being kept as pets in the United Kingdom. Many, although by no means all, are kept in cruel and cramped conditions. Whatever their captive conditions, these wild animals will always remain wild. These are animals that need large areas of vertical and horizontal space; they need certain room temperatures and humidity; they need long hours of natural sunlight; and they need a varied and balanced diet.

There are many examples of rescued primates having been malnourished and fed completely inappropriate diets, which often cause medical conditions such as rickets, muscular waste, curved spines, brittle bones, major psychological and mental disorders, respiratory complications and tooth decay—the list is endless. One particular example is the case of Joey the monkey who was kept in a tiny wire cage for more than nine years, so that his neck was fused to his spine; but I am glad to say that he has now been rescued through the excellent work of the monkey sanctuary trust in Cornwall.

Primates are extremely sociable animals. In the wild, they can live in colonies of up to 50 individuals and they sometimes occupy areas as large as 130 hectares per colony—not a 3 ft 2 in wire cage or a 6 ft 6 in shed in the back garden of a three-bedroom semi-detached house. Scientific evidence points to social, physical and behavioural suffering for primates kept as pets. Many owners fail to realise that many primates will live up to 40 years of age. Cheeta, the chimpanzee from the “Tarzan” movies, for example, recently celebrated his 76th birthday. I hope that some Members will support my campaign to get Cheeta an honorary Oscar so that he can highlight the cause and the plight of his cousins who do not swing on the lanyards, but are kept in wire cages. The Government, along with my colleagues on the shadow DEFRA Front-Bench team, should act to put an end to this antiquated and cruel practice.

Primates are the fathers of the forest, and the Prime Minister’s new rainforest review will be meaningless without added protection for primates. I recognise that the Government are doing some good work in some areas, particularly in respect of the convention on international trade in endangered species of wild fauna and flora, known as CITES. However, it is inconsistent to talk about millennium development goals and the sustainability of ecosystems, habitats and forests when the great sowers of the seeds of the forests are themselves being eliminated and imprisoned in this country.

I am not being alarmist when I use the word “eliminate”, for as long as primates are snatched from the wild, that particular lineage will never be replaced: the gene pool is running dry. Each year, according to “Animal Issues”, 32,000 wild caught primates are sold on the international market, and according to a recent global review of the world’s primates, 48 per cent. of species face extinction. The World Conservation Union—or the International Union for Conservation of Nature—red list of threatened species suggests that 70 per cent. of primates in Asia are now endangered. The figure is 90 per cent. in Cambodia; 86 per cent. in Vietnam, 79 per cent. in China, and 84 per cent. in Indonesia. The statistics are alarming.

I hope that the Government of Portugal will do more to stop the illegal trade of primates through the port of Lisbon. I also hope that the Democratic Republic of the Congo will stop the mainly illegal markets that take place in that country. It is a blight on the international reputation of those countries and a possible threat to their future eco-tourism—particularly that of the DRC—when they take so little action to deal with this issue.

It is said that the world’s forests are the lungs of the world. If that is true, primates are the alveoli—the tiny air sacs that give vocal life to the world’s forests. I want to pay tribute today to some Governments who have taken action—the Governments of Holland, Germany, Italy, Denmark and Israel, who have already taken serious steps to restrict the keeping of primates as pets, many banning them altogether years ago, as in the case of Israel. The UK should shut off the demand for primates in this country and should take the lead, as it has on so many other issues such as climate change and CITES.

According to the International Union for Conservation of Nature’s red list of threatened species, 11 per cent. of the 634 recognised species and sub-species are critically endangered, 22 per cent. are endangered and 15 per cent. are vulnerable. Scientists noted in the study that the data constituted

“probably the worst assessment for any group of species on record”.

That is a worrying and damning indictment of Government and, indeed, perhaps parliamentary inaction. Bouvier’s red colobus, for example, may already be extinct: it has not been seen in the wild for 25 years, and we may never see one again.

The causes of depopulation are many and varied, including loss of habitat, hunting for bushmeat, and disease. I appreciate that the United Kingdom Government’s inability to deal with some of those issues is very limited, but the Government can and should take action to stop domestic pet owner demand in this country. Overwhelming evidence suggests that smuggling and the import of primates into the United Kingdom have a direct and adverse impact on wild populations. Government inaction, including the inaction of past Conservative Governments, also ignores the health risks that primates pose to public health: the inter-species transfer of diseases such as monkeypox—a form of smallpox—the herpes B virus, the Marburg virus and the serious flesh-eating disease Ebola.

Primates pose a severe biodiversity and bio-disease risk. I hope that Her Majesty’s Revenue and Customs will do far more; it currently has a pretty miserable record of intercepting the illegal import of primates which could be carriers of the diseases to which I have referred, and I hope the Minister will be able to ask about that. Is he confident that no serious emerging infectious disease is being hosted by one of the United Kingdom’s pet primates?

What action should be taken? First, let us phase out the keeping of primates as pets by 2012, introduce a registration system for all existing primate pet owners so that animal welfare standards can be monitored and inspections can be made, and not de-list tamarins, squirrel monkeys, woolly lemurs and owl monkeys under the Animal Welfare Act 2006: they need licences too.

The Bill has cross-party support. We, as human beings, do not own this world; we are merely custodians for the generations that will follow us. We may have dominion over the world and its creatures, but we must also be good stewards of the natural world as much as of—as we shall hear in a moment—the material world.

My final question is this: does the Minister think that, in modern Britain and with rapidly declining primate populations, allowing the trading of primates as pets is the right and the civilised thing to do, and can we, in all good conscience, allow it to continue?

Question put and agreed to.

Bill ordered to be brought in by Mark Pritchard, Mr. Elliot Morley, Mr. Edward Vaizey, Michael Jabez Foster, Mr. Philip Hollobone, Mr. Stewart Jackson, Mr. Eric Martlew, David Taylor, Mr. Colin Breed and Mr. Eric Pickles.

Trading of Primates As Pets (prohibition)

Mark Pritchard accordingly presented a Bill to prohibit the breeding, selling, purchasing and keeping of primates as pets in the United Kingdom; and for connected purposes: And the same was read the First time; and ordered to be read a Second time on Friday 17 October, and to be printed [Bill 152].

I beg to move, That the Bill be now read a Second time.

Yesterday I set out the Government’s proposals to restore confidence and stability in the banking system now, and I am pleased to report that during the course of yesterday other countries in Europe, and today the United States, have made announcements along similar lines, showing that countries all over the world are now acting in order to help to stabilise and rebuild the banking system, which is absolutely essential. Yesterday’s announcement was significant and important, and it is also important that it is followed through throughout the world as we get through what is undoubtedly an extremely turbulent time.

Our proposal yesterday included comprehensive plans on both liquidity and capital, and I said yesterday that eight of our major banks and our major building society have signed up to that. I also said yesterday that HSBC had announced last Friday a transfer of £750 million of equity capital into its UK subsidiary, and I want to make it clear that it has already done that. I also said yesterday that we would take steps to strengthen the supervisory and regulatory system. That is not in this proposed legislation, but I am in no doubt that we need to learn lessons not only in this country but across the world in relation to improvements we may need to make in the regulatory system, and we will bring forward proposals after I have received recommendations from Lord Adair Turner, who chairs the Financial Services Authority.

When we nationalised Northern Rock, there was some debate about whether that extended to Granite, the arm of Northern Rock that was based in Jersey. Does the Bill address the problem of offshore centres? If it does, what are we doing about it?

No, the Bill does not address the question of offshore centres directly. As I shall describe, it provides wide-ranging powers to allow us to deal with a financial institution that gets into trouble. I do not want to go over the ground of Granite again, as it was debated extensively in February. The question of offshore financial centres is interesting, but the Bill does not directly address that.

As the Chancellor knows, I am a strong supporter of bank recapitalisation and of his statement yesterday. In that statement, he said the

“shareholdings will be managed on a fully commercial basis by an arm’s length body”.

Can he say a little more about what that arm’s length body will be, and why he has decided not to use the FSA or the Bank of England for that purpose? Will he also explain what the

“precisely defined remit to act in the interests of taxpayers”—[Official Report, 13 October 2008; Vol. 480, c. 540.]

is, if it is not to act on a fully commercial—

Order. May I remind Back-Bench Members that there is a time limit, and therefore if they make interventions I request that they show some respect to their colleagues who wish to participate in the debate by asking just one question?

I shall certainly answer the hon. Gentleman’s question, but as I have not yet even got on to clause 1, I think I had better take the hint that Madam Deputy Speaker has dropped to us. The hon. Gentleman asked a perfectly pertinent question, and I will shortly be setting out how we intend to manage that. We are not using the FSA because it is the regulator, and it would be compromised if it were also managing the Government’s shareholdings. I think the hon. Gentleman is aware that the Government’s shareholdings in the private sector—such as they are, as there are not that many now—are managed by the Shareholder Executive. Obviously, it is responsible to Government and it is a public sector body, but it distances Ministers from the day-to-day business of owning shares. As I made clear yesterday, I want the banks in which we have shareholdings to be managed on a commercial basis at arm’s length from Government, because Ministers cannot possibly be making day-to-day decisions or anything like that. Fairly shortly, I will set out for the House precisely how we intend to do this, but that is not addressed in the Bill, which is essentially about dealing with failing banks. I will come back to that point, however; I can give that undertaking to the House.

Will my right hon. Friend give way?

I will give way to just about everybody who asks to intervene, but I would like to make—[Interruption.] Yes, “just about”, as I reserve the right not to give way to some Members. I would like to make some progress, but I know that my hon. Friend wants to make an intervention and he will have the opportunity to do so.

Northern Rock has been mentioned, and I have undertaken to keep the House informed. To bring the House up to date, in its third quarter trading statement Northern Rock reported that its outstanding loan from the Government is down from the high point of £27 billion to £11.56 billion. I have said that that money is being repaid, and that remains the case.

May I also say by way of introduction that I really do welcome the commitment from those on the Opposition Front Benches to give the Bill a fair passage? Of course there needs to be proper scrutiny, and I wish to indicate that we are open to suggestions to improve and tighten up the Bill, subject to the usual caveat that we cannot allow endless amendments so that it becomes virtually unworkable. If there are suggestions, I am happy to work with Members of all parties just as we are working with those outside who have an interest.

The Banking (Special Provisions) Act 2008, which we passed in February, will lapse on 20 February next year. If the Bill has not received Royal Assent by then, we will have to introduce a one-clause Bill to extend that Act. Obviously, I would much prefer to have the present Bill on the statute book by that stage. I welcome what has been said about that both publicly and privately.

Let me repeat in public what I have told the Chancellor in private—that we will do everything we can to get the Bill on the statute book by next February, when the special powers taken over Northern Rock will expire.

Which you voted against.

The point that I made was that it would have been good to have the present Bill a bit earlier, so that we would not have needed those emergency powers. However, that was my Second Reading speech on the previous Bill, so we will wait for today’s speech.

On the specific point about the code of practice, which is absolutely crucial to the Bill—it is how the special resolution regime will actually operate, be triggered and so on—can the Chancellor assure us, in the spirit of our co-operation, that the Government will publish it as soon as possible so that we can debate in Committee how the bank failure regime will operate, which is at the heart of the Bill?

I can give the hon. Gentleman that undertaking. As I understand it, it has been agreed through the usual channels that the Bill will be taken in a slightly different order from that in which the clauses appear, so that when we reach the special resolution regime we will have the code of conduct. I understand that that has already been agreed, and I am quite sure that we can co-operate on that and other matters.

As the hon. Gentleman mentioned one part of his Second Reading speech on the previous Bill, I shall say that it would have been quite impossible to produce a 200-clause Bill this February. What I had to do earlier this year was ensure that we had powers to nationalise Northern Rock and—very presciently, as it turns out—to take additional powers. Otherwise, we would have been in real difficulties over the past few weeks.

On that point, it is probably worth clarifying that the genesis of this Bill was in the depositor protection consultation of last October, when powers were sought to deal with failing banks based on the economic crisis that started last summer. The Bill, 200 clauses though it is, will not be on the statute book until 2009, so it is not exactly decisive action in relation to that point.

I shall come to that in a moment, but I would just say that we took action in February. I remember the hon. Member for Runnymede and Weybridge (Mr. Hammond) asking articulately and forcefully at the time why we were going beyond the clauses necessary to acquire Northern Rock. I had to put it somewhat delicately because I knew a number of things that were not then in the public domain, but I said that there might be cases in which we would have to intervene.

If we had not had the special powers for which we argued in February, I could not have dealt with the Bradford & Bingley situation, which arose during the parliamentary recess. We would have had to recall the House, which would have exacerbated an already difficult situation. Nor could we have dealt with the collapse of the Icelandic banks Kaupthing and Heritable if we had not had those powers. We do not have to imagine what life would be like without the current Bill, because we have seen in the past few months what can happen, and what can happen very quickly. I am glad that we got the special powers, and I am sorry that the Opposition voted against them. It was essential to have them, otherwise we would have been in real difficulty.

rose—

I shall take one intervention, then I would quite like to get to clause 1 before the day is out.

My recollection is that, at the time, the Chancellor said that Northern Rock was unique and that no other financial business was in trouble. Have I misunderstood the situation?

The hon. Gentleman may well want to check his recollection. We would not have taken those powers if we had not anticipated that there might be difficulties. Indeed, I remember a right hon. Gentleman—he is not in his place, so I shall not name him—specifically asking me why I was mentioning building societies. Building societies were included in that Bill because we thought there might be occasions when we had to do something to help them. That piece of legislation was essential because it looked ahead to what, I think, all of us could have contemplated might happen in the ensuing few months. As I say, I am glad that eventually we got parliamentary approval for the Bill. The only point I am making, for those who doubted whether that Bill was necessary, is that events have proved that it was very necessary. It is also very necessary for us to pass this Bill.

rose—

I hope to return to it. I shall give way to my hon. Friend, not least because he is a fellow Edinburgh MP.

Without the powers that the Government had from a number of directions they would not have been able to come forward with a proposed merger between HBOS and Lloyds TSB. My right hon. Friend will be aware that people were commenting this morning, in Scotland, in particular, that, given last week’s announcements, the merger should not go ahead. What does he say to people who take that point of view?

My hon. Friend will recall that the decision to merge was taken by the boards of HBOS and Lloyds TSB; it was their commercial judgment that was important. It was the judgment of ourselves, the Financial Services Authority and the Bank of England that it was also in the interests of greater financial stability that the merger should go through. Indeed, that is why we amended the provisions on the competition law. As I said at the time, that was one example of where financial stability trumped competition concerns, and that remains our view.

I understood and supported at the time the idea that the competition laws had to be removed, because there was a serious risk of the collapse of one or other—or both—of the banks. That is no longer the case; the Government are now in a position to take a substantial stake in those banks if they remain separate, and they undoubtedly will do so if the banks merge. What is the point of setting aside competition law now? Why do the Government want to take a stake in a large bank that will have a dominant market share that would not have been permitted if the banks had carried on, financially solvent?

As the right hon. and learned Gentleman knows, we are proposing—I set this out yesterday—to take a stake in the merged bank. The decision to go ahead with the merger was primarily taken by the two boards; they considered it again at the weekend. It is still my view that the merger would not just be beneficial for them—that is their decision primarily; in the interests of financial stability, the two banks together would be stronger than the separate organisations. That remains our position, but, primarily, the decision to merge was taken by the two banks because they thought that to do so was in their best interests.

I want to get on to the Bill. First, I remind the House of the basic supervisory architecture that has been in place for the past 10 years and remains so. In addition to its prior existing functions, the Bank of England has, since the Bank of England Act 1998, also been responsible for monetary policy. It has a responsibility for ensuring financial stability, but that is not a statutory responsibility, and that is one of the things that the Bill seeks to change. The FSA brought together eight or nine different regulators. That was the right thing to do, and I do not think that anyone would argue for going back to the situation before then. Interestingly, the United States is seeking to follow that model, with legislation being proposed there to do the same thing. The Bank of England, the FSA and, of course, the Treasury—because of the wider public interest and financial interest—will remain essentially as they are. The one change that we propose is to give the Bank of England a statutory duty in relation to financial stability, and that is very important.

If that minor change is all that is needed, perhaps the Chancellor could explain to the British people how on earth we have come to this pass. The FSA has been responsible for the authorising of individual practitioners in the banking business and allowed the ramping up of capital ratios, so that we have reached this dreadful state of affairs. Has the Chancellor got no explanation of how that happened under the regulation of the FSA, and no alternative approach to doing something about it apart from this minor tinkering?

Perhaps I should have stuck to my guns and gone through the Bill. We are not just proposing that one change: we are proposing many changes. However, the point I was making was that the basic architecture of the Bank of England having responsibility for monetary policy and an overall responsibility for financial stability, and the FSA regulating and supervising each individual institution, is right. We consulted on that point, and the vast majority of people said that that basic architecture was right. Of course, the FSA has to learn the lessons of what happened with Northern Rock and other institutions. As I said earlier, of course improvements need to be made to the supervisory regime, but no one is arguing that we should go back to the past, when the Bank of England regulated some aspects of the banking system but not others and we had eight or nine different regulators for everything else.

rose—

No, I shall make some progress; otherwise it will not be fair to those who wish to speak in the debate.

The Bill will build on that framework, and I shall outline the broad scheme that it follows. Part 1 provides for a permanent special resolution regime that is at the heart of what is proposed. As hon. Members are aware, it will allow us to accelerate the transfer of a bank to another private sector bank or to transfer some or all of a bank’s business to a publicly controlled bridge bank, on the way to a private sector sale. It will also modify the insolvency procedure and allow us to take a bank into temporary public ownership, should that be necessary. Part 1 also includes measures to strengthen the Bank of England, which I have touched on and to which I shall return, including a role in overseeing the inter-bank payment system because of its possible systemic importance.

Part 4 of the Bill will improve protection for depositors through the Financial Services Compensation Scheme, and it includes other measures to build confidence. I shall return to those points later, but I wish first to deal with the provisions in part 7 to strengthen the Bank of England. These will have a new statutory objective of financial stability. They will provide the Bank with statutory immunity as a monetary authority in pursuit of its financial stability objectives. The provisions will also establish a financial stability committee as a sub-committee of the court. That is important. The Monetary Policy Committee, which of course determines interest rates independently of the Government, has been a great success and other countries have followed our lead. We also need to bring in outside expertise to advise the Governor on financial stability. The court, which is at present too large at 19, will be reduced to 12 members.

The committee of court members will bring in expertise from the City and elsewhere to advise the Governor, and that will be important. It will ensure that the Governor has at his disposal a wider range of advice. Its deliberations will be made public, although probably not immediately in many cases for obvious reasons. In situations such as we have seen in the past few weeks, it would not be wise to provide a daily, weekly or even monthly commentary on what has been discussed, but the Bank will consider how the deliberations of the committee can be publicised when it is right to do so.

Clause 229 of the Bill, as I said earlier, will allow the Bank of England to provide liquidity assistance to building societies on the same basis as banks. In that difficult area, I wish to draw the House’s attention to further provisions on the disclosure of Bank of England assistance. The matter arose throughout last year, especially when we were dealing with Northern Rock in the autumn. The Bank must publish its balance sheet weekly at the moment, but that proved quite difficult in the autumn. Of course, the Bank published that information, but I am concerned that when we are trying to help an institution to get through a difficult period, the very fact that we are helping that institution can actually be quite damaging to it, as we found with Northern Rock. The Bill seeks to make changes to the situation.

I want to emphasise that we need to find a mechanism that allows the fact that there has been assistance to be dealt with transparently, whether in general terms or when matters with particular institutions are fully resolved. The Bank is reflecting on the matter, but I want to draw the House’s attention to it as it came up in the Treasury Committee time and again. It was a live issue 12 months ago and it could potentially become an issue again at some stage in the future. It is important that we get that right.

As I said, part 5 of the Bill formalises the Bank of England’s role in the oversight of the payment systems. That is important. The FSA regulates the recognised clearing houses, but the Bank of England will have a role in the oversight of the system as a whole.

Let me turn to the special resolution regime, which is key to much of what we are trying to achieve.

The Chancellor referred to the provision of information about what is going on in the banking system, but I can find nowhere in the Bill any statutory requirement to report to Parliament and the House on the conduct of banking, bearing in mind the substantial amounts of public money that are being invested in the schemes the Chancellor is outlining. Will he reflect carefully during the passage of the Bill on whether there should be a requirement for a statutory report about the conduct of our banking system to be laid before the House, perhaps every six months, so that the House can, if necessary, debate it?

I am sure that that point will be raised in Committee. The conduct of banking strikes me as a very wide subject—perhaps the subject of a book rather than a report. I am sure that the right hon. Gentleman, who is clearly making a bid to his Whip to get on to the Committee, might want to raise that point—

indicated dissent.

The right hon. Gentleman shakes his head.

Let me turn to the special resolution regime. The Bill establishes a permanent special resolution regime that provides the authorities with options to deal with banks that get into difficulties and to protect depositors. By sheer coincidence, the provisions can be found in clause 4. We can protect and enhance the stability of the financial systems and public confidence, and we can protect depositors and public funds, and the Bill provides for an accelerated transfer to the private sector and sets up a bridge bank if such a provision is necessary. As I said earlier, the Bill provides powers to modify the insolvency procedure and allows for temporary public ownership.

In most cases, when a bank gets into difficulty the problems can be resolved either through regulatory interventions or voluntary action. The special resolution regime provides a clear regime for failing banks that removes control of the banks from management. It provides overriding powers over shareholders and directors.

The authorities will have clear and distinct roles. The FSA will lead in deciding that a bank is failing, as set out in clause 7. The Bank of England will lead in the operation of the special resolution regime, a provision that is set out in clause 8, but Ministers will retain control of decisions on public finances, as set out in clauses 66 to 70. The Financial Services Compensation Scheme will continue to deliver the payment of compensation.

The FSA will decide whether or not a bank is failing. It will have to consult the Bank and the Treasury before deciding that the conditions have been met. The Bill provides that the Bank of England can decide whether there is a systemic risk and that the Treasury can recommend to the Bank that action might be taken if it has been providing financial support for banks. The Bank then has two options: it can decide to transfer a bank to a third party or can transfer the bank’s assets into what is known as a bridge bank, which is owned, established and controlled by the Bank of England, pending reconstruction. Thereafter, the bank can either be transferred in whole or in part to a private sector bidder as appropriate.

What the Bill does is provide a mechanism that is not there at the moment. That mechanism will allow us to take a bank that is in difficulties out of the hands of its present management and, if it cannot be sold to a third party, either put it into a bridge bank or, if necessary, take it into public ownership.

rose—

rose—

I shall give way first to the shadow Chancellor, and then to the hon. Member for Croydon, Central (Mr. Pelling).

I am grateful to the Chancellor for giving way. One area of disagreement has been about who pulls the trigger on the special resolution regime. As he knows, we think that the Bank of England should have that power, and so too does the Governor of the Bank of England. Did the Governor not in effect demonstrate that he had the de facto power to do that when he prevented Bradford & Bingley from accessing the special liquidity scheme and therefore forced the rest of the tripartite committee to deal with a bank rescue situation? No doubt there was consultation, but he nevertheless had that power. If the Bank of England has that de facto power, would it not be better to put it formally in the Bill, so that it can be properly considered by Parliament?

I had rather thought that the hon. Gentleman was now not insisting on that point, but he mentioned Bradford & Bingley. There comes a point with the special liquidity scheme when the Governor of the Bank of England has to form a judgment as to whether it is prudent to keep providing an institution with funds if he thinks that it will not get through.

The hon. Gentleman will recall that Bradford & Bingley had difficulties in the summer and autumn. It became obvious—not just to the Bank of England but to us at the Treasury and to the FSA—that the question was whether it would fail on the weekend that it did fail or whether it could struggle through the following week. I took the view, as did the Governor and Lord Turner, that we should not take the risk of trying to run the bank through the week. The hon. Gentleman will know that it is much more difficult to resolve a problem when markets are open, but in any event the FSA came to the view on that particular Saturday—I forget the precise date in September—that Bradford & Bingley no longer met its threshold conditions.

There was never any disagreement between us. I think that there was an inevitability about the fact that Bradford & Bingley was getting into difficulties, but what we did was triggered by the FSA saying on that Saturday morning that it had looked at the matter and decided that the bank no longer met its threshold conditions and that it therefore could not take any deposits from the following Monday. That is why we had to take the action that we took.

What happened with Bradford & Bingley again demonstrates the use of the legislation that we have now, through the special provisions, and which we want to replicate in this Bill. It was possible at least to separate out the bank’s branches which, as the hon. Gentleman will know, were sold to Abbey Santander. That safeguarded the interests of savers although, for reasons that I think that most people will understand, it was not possible to find a buyer for the remaining part of the bank.

I thank the Chancellor for giving way, and my question has to do with the special resolution regime. He has said already that the US may follow the Government’s lead on recapitalisation, but why has he set his mind against the idea of taking bad debts off the balance sheets, as America’s troubled assets relief programme attempts to do? Will the special resolution regime still allow that capability to be used as a public policy tool if it is judged to be appropriate in the future?

The Americans have decided on an approach that is suited to the present position of American institutions. The special liquidity scheme does something similar, with the difference that, instead of the taxpayer taking on what might be called the toxic assets, in our system the risk stays with the banks. The scheme has worked quite well, and I announced last week that I had authorised support worth £200 billion.

I think that the scheme is working, but I refer the hon. Gentleman to the point raised by the shadow Chancellor. In practice—and unfortunately we have had some practice over the past few months—there was no dispute among the three people who had to make the decisions in relation to Bradford & Bingley. It was quite obvious what we had to do, but the model that we have is based on the regulator—the FSA—finally saying that a bank has failed its threshold conditions. Only it can decide that, and that is right, although the Bill makes it clear that there has to be consultation.

There are three options for dealing with a failed bank. We can transfer it to a private sector purchaser or, so that we can decide how best to proceed, to a publicly controlled bridge bank. Also, if necessary, there is temporary ownership as a backstop. There are also powers in part 1—clauses 42 and 11—to allow for partial transfers, as in the case of Bradford and Bingley. That gives the necessary flexibility.

When these difficult judgments are being made, it appears recently that the regulators want a higher tier one capital ratio, and that lies behind the recent capital raising. Is it the ambition to do it all by raising more money, or will some of it be done by reducing the amount of borrowing?

As I said yesterday, certainly in relation to RBS, HBOS and Lloyds, capitalisation was by the Government investing capital in those banks. The other banks have decided to proceed in a variety of ways, as I set out.

Clause 65 of the Bill gives us powers to disapply various pieces of legislation. I want to make it clear that that will be done only in pursuit of the powers necessary to make the Bill work—for example, in relation to the competition regime or to modify insolvency legislation. I dare say that the clause, like other parts of the Bill, will be discussed in Committee, and if there are improvements that we can make, we will do that.

Briefly, part 3 deals with the administration procedure in case it is necessary to provide services from one part of a bank to another part that has been transferred to another party. Part 2 also means that any liquidator who is appointed will have to work with the Financial Services Compensation Scheme to ensure prompt payouts to depositors.

Part 4 deals with the FSCS. Clause 156 deals with the issue of pre-funding. My view is that in an ideal world the schemes would be pre-funded because when a claim is made against them, the chances are that it will not be the only claim by the only institution. To have funds available already would clearly be sensible. However, for us to attempt to pre-fund the FSCS in the current climate would exacerbate an already difficult situation. I made that clear in connection with what we did with Bradford & Bingley, and I hope that the House will support me on that.

There is also provision in the Bill in relation to Scottish bank notes. We had extensive discussions with the issuers of Scottish notes and Northern Irish notes. We want to bring the law in Scotland into line with the law in the rest of the United Kingdom so that, put simply, the holder of a Scottish bank note can expect to obtain the full face value of the note in the event of the bank getting into difficulty. That was not the case before; it is now the case. That is why we are making this change. It has the agreement of the Scottish and Northern Irish banks, and I hope that the House will approve it.

There is concern about what the new definition of “authorised bank” in the Bill would imply for future mergers of Scottish banks and whether the legislation would allow the same quota of notes to be issued by a newly merged bank.

If there is any difficulty with that, I will happily look at it, but it is our intention that the notes will still be issued by the banks. If any difficulty is caused as a result of any changes, of course we will look at it.

The final part of the Bill to which I want to draw the attention of the House is clause 214, which provides powers to the Treasury to use public funds to protect depositors. We need to make some changes; the clause would help us to deal with the situation that we have with the Icelandic banks. I can tell the House that negotiations with the Icelandic authorities are continuing, and I hope that we will have something more to say about that in the not-too-distant future.

The Bill is, of necessity, lengthy, but it will provide us with the options that we need on a permanent basis to deal with the situation that we have seen over the past year or so. It is sensible and prudent to have the Bill on the statute book on a permanent basis. I repeat what I have said on many occasions. We will continue to have the special powers at our disposal until February next year. I hope that we will have the Bill enacted to take over from then. We will continue to do whatever it takes to ensure the stability of the financial system. That is absolutely imperative, and I commend the Bill to the House.

Yesterday, of course, we discussed the massive bail-out needed to deal with the near-collapse of the banking system. Today, we will debate how to prevent such a near-collapse from happening again, and how to make sure that such a bail-out is never again required. Let us be clear: when a house is on fire, it is right that all hands go to the pump, which is why we offered our constructive support. However, when the smoke has cleared and we see the debris around us, we are entitled to ask who built the house, who let it catch fire, and how we rebuild it so that it never catches fire again.

The Bill goes some way towards making the changes to our banking laws that are needed to give the Government the power that they need to deal with a bank failure. That is why we support it, and why I made an offer of support to help get the legislation through by the time that the Northern Rock powers expire. However, we believe that the Bill could go further, and I shall go on to explain why.

Giving the Government the power to deal with a banking crisis is one thing, but preventing such a crisis is quite another. The legislation is mainly about dealing with a bank once it has failed. I would have liked to see more far-reaching changes to the management of overall debt levels in the economy, and a strengthening of the Bank of England’s role in that process. However, as I say, the measures in the Bill are welcome, as far as they go. Indeed, we on the Conservative Benches proposed quite a few of them.

As I have previously reminded the House, the hon. Gentleman is on record as saying that no Government could have foreseen the sub-prime mortgage tsunami that has hit the system. If that is right, and if he sticks by what he previously said, I am not sure what point he is now making. We were hit by circumstances that we could not have foreseen, and are dealing with them.

If the hon. Gentleman does not think that a regulatory system has failed when one ends up having to nationalise half the banks in the country, he may not have been paying attention to recent events. I was going to make this point later, but I will make it now—

rose—

Let me answer the point that the hon. Gentleman raised in his intervention. The Prime Minister talks about international co-operation between regulatory systems. Of course, no one is against that, but an international system will not regulate the sale of sub-prime mortgages in Alabama; we will have to rely on the US regulatory system to do that. Nor will an international system prevent the sale of mortgages in this country to people who cannot afford it when house prices turn down. That was part of the problem with Bradford & Bingley, as was the closure of the wholesale markets. Of course we want greater co-operation, but surely the regulatory system that we are hoping to design—not just by means of the Bill, but perhaps through future legislation—would help us to deal with the situation that has developed over the past year and prevent it from happening again. If the hon. Gentleman does not want to prevent it from happening again, that is rather bizarre.

Does my hon. Friend not agree that it was crazy for the Financial Services Authority and the Bank of England to allow Northern Rock to offer mortgages in excess of 100 per cent. of the value of a property, and sometimes worth up to 125 per cent. of that value? Also, was it not crazy to allow self-certification of income? People could just pick a number, and the banks and building societies would accept it.

I certainly think that we need to learn the lesson that one cannot build an economy on unsustainable levels of personal debt. The Opposition made that point—and, more to the point, so did the Bank of England on various occasions. The International Monetary Fund also said that there were concerns about levels of indebtedness and so on. My hon. Friend’s point is therefore well made.

Did the shadow Chancellor endorse yesterday’s £37 billion intervention, or did he not?

Yes, I did endorse it, from this Dispatch Box. After all, not only must the Government decide how to deal with the crisis, but the Opposition must decide how to respond to it. The decision that I took, and the judgment that my right hon. Friend the Leader of the Opposition made, was that in this time of banking and financial crisis, and faced with the near-collapse of the entire system, we would give our support to the measures that the Government were bringing forward. Indeed—this is a point that some Labour MPs have put to me—I actually talked about recapitalisation before the Chancellor did. We made our suggestions and, as I say, we are very happy to support the specific measures—[Interruption.] The Chief Secretary to the Treasury should appreciate the fact that the Opposition in this country, unlike Oppositions in other countries, have done their best to support the Government in decisions where the Government are rightly taking on public opinion, which might question why very large sums of public money need to go into propping up banks. We have gone on television and radio and tried to explain as well as she has why that is the case.

On the specific measures in the Bill, we proposed quite a few of them ourselves. Last December we urged the Government to give the Bank of England new powers to put failing banks into a special resolution regime. I shall come on to that. For a considerable time we have been urging that the Government raise the level of deposit protection for savers, and I am pleased that that has now been done. We would like to see the system of payments speeded up, and I know that the FSA is considering that. All of us would welcome a faster pay-out system, as it would help build consumer confidence.

With reference to the Bank of England, I would go further than the Government on some of the appointments. I shall come to that later. I am glad that there are clauses in the Bill that take us in the right direction. That is why we have no problem backing Second Reading. Even with the commitment to ensure the Bill’s passage by February, plenty of time is still left for debate and proper scrutiny, and to learn the lessons of what went so disastrously wrong with the regulatory system created by the Government a decade ago.

One thing is clear: we need that system to change. We cannot end up having to do a multi-billion pound bail-out again. When one looks at the work that has been done—for example, some of the internal reports by the FSA, and some of the work by the Treasury Committee, which I commend for its two excellent reports on the subject—it is clear that the FSA comprehensively failed to see the problems in our banking system develop, the Bank of England, by its own admission, took its eye off the ball in respect of financial supervision, and the Treasury encouraged an economy to grow on the back of unsustainable debt.

The Bill’s regulatory impact assessment, usually a fairly dull document when produced by Government Departments, is remarkably candid about the shortcomings of the regulatory system created by the previous Chancellor of the Exchequer. Page 7 states:

“The problems faced by Northern Rock plc in 2007 demonstrated…that the then existing arrangements for dealing with banks in distress did not adequately uphold”

consumer confidence,

“thus exacerbating the threat of financial instability.”

That is the Treasury’s own assessment of the regulatory regime that the Treasury created. In its own words, its arrangements made things worse, not better—they exacerbated the threat of financial instability. That view is shared by the Treasury Committee in its reports. Its various reports point to the systematic failure of the FSA in its duty as a regulator and the fact that the Bank of England was left

“in a no-man’s-land”

by the changes.

The public will draw their own conclusions about who was responsible for the mess. I dare say that the man who oversaw the creation of the regulatory regime will come in for some blame. However, the question before us today is how we put matters right for the future. Let us start with what we would like to see from an ideal regulatory regime and use those principles to judge what is in the Bill and what the Government might propose after Lord Turner’s report.

First, a regulatory regime should protect us from the kind of systemic risk that we have seen in the past month. Secondly, it should ensure that we can identify problems in individual institutions long in advance, such as unstable business models or risky bonus schemes, and deal with them in a way that prevents contagion to the rest of the system. Thirdly, a regulatory system should give the authorities the full powers that they need to step in and deal with banks if neither of the first two conditions is successfully met. We have discovered that if nationalisation is the only lever that we can pull, pretty soon we end up owning half the mortgage business in the country.

Fourthly, a regulatory regime should protect the consumer from being treated unfairly or being mis-sold products. In all this, we should not lose sight of consumer protection. Fifthly and last of all—this will be the most difficult balance for us to get right in the coming months—a regulatory system should be proportionate and fair. At the end of this, we do not want the City of London simply to go to New York. We must remember that financial services are still, for all the press that they attract at the moment, our largest and most important industry, and they employ people not just in the City of London, but in Edinburgh, Leeds, Bristol, Birmingham, Cardiff and Manchester, and in every single constituency in this country.

Has my hon. Friend made any estimate of the chronic deficiency in money coming into the Treasury coffers that will result from these banks and other financial institutions now either breaking even or making a loss, and the number of people who will lose their jobs throughout the country, including in cities where major insurance companies are located? There will be a huge loss of Treasury revenue. Has he estimated how big that loss will be?

My hon. Friend raises an interesting point that the House will have to deal with in the next year, which is that we have basically created a revenue regime that assumes successful and profitable financial services. We rely heavily on corporation tax receipts from the City and we rely on income tax receipts from wealthy individuals, and as well as coming into this economic downturn with a structural budget deficit because tax revenues were not matching spending, we face another kind of structural deficit, which is that the way that we have collected taxes means that the revenue streams that we have depended on and that the Treasury has put in its long-term forecasts, will, I suspect, not be there. That will be the case not simply through this current economic downturn, when tax receipts fall and spending rises, as always happens in an economic downturn, but for the foreseeable future. The cash cow of the City will not be there and that will pose some difficult questions for the Chancellor of the Exchequer and perhaps those who come after him. That is something that we could debate on another occasion, but my hon. Friend makes a good point.

I want now to go through some of the details of the legislation, as the Chancellor did, and to deal with the central measure, the special resolution regime. I positively welcome the fact that the Government are giving themselves powers, or what they call tools, other than nationalisation or part-nationalisation, to deal with a bank failure. There are the new powers to create a bridge bank or facilitate a private sector purchase, which again the Government rightly say is the one solution most likely to maintain financial stability, provide continuity of banking services and protect public funds. Of course, there are also the important powers—extraordinarily, the current law did not allow us to do this—to put a bank into insolvency. It is correct that those matters should be addressed in this legislation.

It is important for the House to understand that, when we are discussing the special resolution regime, we are talking about extraordinary powers to seize private property and to dismiss privately entered into contracts and loans, potentially wiping out the savings and investments of millions of small shareholders who have ordinary shares in banks, many of whom are the employees of those banks, working in the bank branches and the call centres. We can only contemplate the use of such powers because of the central role that banks and financial institutions play in our economy, and that justifies not just the bail-out yesterday, paid for by the taxpayer, but the extraordinary powers that the Bill grants.

However, much rests on the circumstances in which the new powers would be exercised, and in particular there is an interesting debate to be had over the power to set aside the claims of creditors. We should remember that in all the different actions that the Chancellor has taken—Northern Rock and Bradford & Bingley, and the action that he took yesterday—to my knowledge, he has never set aside the legal claims of the majority of the creditors. In what circumstances would he in future wipe out the creditors? What would the threat be that would force him to do that? The very fact that the threat is on the face of the Bill is something that, for example, the banking industry is concerned about. In commenting on the Bill, the British Bankers Association puts it like this:

“without appropriate safeguards, interference in creditor rights would undermine the competitiveness of UK financial services firms and inflict serious damage on the role of London as an international financial centre.”

As I say, there must always be a balance between the interests of the taxpayer, protecting the stability of the system, and maintaining the competitiveness of the City of London, but if there is concern about the powers—they were not used in the extraordinary circumstances of recent weeks—it might be good to hear from the Government about the kind of scenario in which they might be used, and that might be set out in the code of conduct, which I am glad that the Chancellor promised we would be able to have sight of at some point in Committee before we discussed the particular issues around the special resolution regime.

My hon. Friend is making some very sensible observations on what a regulatory structure should do. However, should such a structure not also act at a much earlier stage, before a bank is greatly overstretched and in trouble? It should say privately to such a bank, “We expect you to rein in your lending, raise more capital, cut your dividend or cut your costs because we think that your balance sheet is getting too bloated.”