I am delighted to have secured this debate on responsible banking. It is an important issue in my constituency, where many jobs, provided mainly by Halifax Bank of Scotland, are reliant on the banking sector. It almost goes without saying that the debate is timely. Indeed, I should like to pay tribute to the thousands of people who work in the finance sector in Halifax and neighbouring constituencies such as Calder Valley. During these uncertain times, they have kept quiet, complained little and continued to do a superb job at work. They are loyal, dedicated and committed workers who deserve more information and reassurance about the future security of their jobs and the banking sector in Halifax than they are privy to at the moment.
Despite the irresponsibility of HBOS management over the last 12 years, the bank’s position in my constituency would be far worse without the hard work and diligence of its employees. Because of the reliability and devotion shown by employees in my town, I urge the Minister to place on record an assurance that the Government are doing all that they can to guarantee that there will be no compulsory redundancies in the banking sector in Halifax.
The events of the last 12 months have changed the banking sector for ever, not just in this country but around the globe. Many words have been spoken, pamphlets printed and hours of debate held in the House on why the problem arose, what is to be done to prevent it from happening again and how we can help change the direction of banking to take the industry down a more responsible road that embraces the values that many banking bosses failed to embrace during the age of irresponsibility.
During this debate I will outline from my constituency’s perspective how that lack of basic prudence and common sense has caused pain and uncertainty to the people who work in the banking sector and rely on it. Families are supported by it, businesses are dependent on it and the town is built on the Halifax building society. In short, not one voter in my constituency has not been and will not be affected by the poor choice and misdemeanours of a few.
To reflect on some of the events of the last decade, it is surprising only that the banking system did not fall earlier. I applaud the measures that the Government have taken in the past year to address the situation, intervene and save jobs and banks. The banks jumped off the cliffs; thankfully, our Government caught them. Without their swift action, regulatory policies and injections of finance, things would have been a lot worse. However, we now need to shift the agenda from the “spend today, worry tomorrow” attitude to which so many financial institutions have become accustomed to a “responsible lending, responsible borrowing” dialogue between banks, customers and the Government.
The Chancellor recently urged a much-needed change in the culture of our banks, yet that change cannot and will not happen unless we the customers, when we want to buy a house, take out a loan or deposit money, have the necessary and currently lacking confidence in the banking sector. That requires an industry accountable to its members and to customers, not to stock markets and speculators, in which responsibility is paramount and prudence is at the heart of its reformed corporate ethic.
I gained some reassurance from Lord Turner’s recent comments. He envisaged a future situation, once the current mess is cleared up, where the banking sector emerges from the rubble looking very different. I propose that that difference involves integrity, foresight and accountability. Unfortunately, there is a lot of debris to clear up before that can happen. Much more can be done to ensure that that transition is completed. I press the case for more responsible banking, not merely as a short-term fix to overcome the current problems but as a means of ensuring a sustainable, responsible banking system, not just for today or for the next couple of years but for generations to come.
The mistakes that helped bring about the current crisis and the irresponsible way that some banks were run and operated purely for short-term gain have been well documented. Those days may have gone for now, but they remain on record as a reminder of the absolute chaos that caused one of the most intense and unsustainable recessions that this world has ever seen. It is our job as legislators to ensure that they never return. When the Titanic sank, we ensured that no ship ever ran that risk again. When world war two finished, we made peace with our neighbours. However, when it comes to the great depression, it turns out that we were not so good at learning from history after all.
The performance of the former members of the HBOS board who let down so many of their staff and customers was formidable. Their refusal to apologise or grasp their monumental failures was breathtaking. Added to that, the fact that they are cashing in huge pensions while people in my constituency wonder if they will still have a job and be able to feed their families next week speaks volumes. The management team’s priority was banking for profit, profit and more profit. There was no onus on them regarding responsible business, customer care or building a solid banking model, the rock on which the Halifax building society was built. It is true that many of the banking sector’s problems were caused by the global recession, but I feel that many of the troubles in our banking sector occurred despite the global downturn, not because of it.
HBOS’s biggest mistake was to take its eye off the financial ball. Its slogan during its decade of decadence should have been “Greed is good”. It over-relied on money markets to raise funds to finance its business, short-sold and lent at six times people’s salaries. I could go on. The problems at HBOS can be traced back 12 years to when it demutualised. From that moment, all the things associated with the Halifax building society—reliability, dependability and security—disappeared. For 150 years, the Halifax building society was a safe place for investors and a dependable mortgage broker. Unfortunately, 150 years of reliability have been undone during the last 12 years of irresponsibility.
Will the Minister state the Government’s position on remutualisation? Have they pushed the case for remutualising the Halifax, for the benefit of my constituents who work at the bank and give it their custom? Will he also outline what further plans the Government have, in addition to the measures already taken, for encouraging models of socially responsible banking? There is no better time to act, as the Government have never owned so much of the sector and will never do so again. We need regulation to bring about responsibility. That means creating a banking sector that is accountable to its members and customers rather than stock markets and speculators and that does not rely on money markets. Banks should generate funds from the money that they hold. If more institutions had done so in the last decade, many of the current problems would not have occurred. Ethical policies should be decided by customers, so that they have a sense of ownership of products.
What work is being done to introduce such forward-thinking ideas into other parts of the banking sector? The ideas are not new—indeed, the Co-operative bank already uses such practices—so why are other financial institutions not following suit? During the last decade, when banks such as HBOS were short-changing their customers, the Co-op bank was quietly getting on with its job. Of course, its aim was still to make a profit, but by doing it in a socially responsible way, it has reaped rewards. Profits are up, its customer numbers have expanded and a new super-mutual could be created shortly as a result of the bank’s merger with the Britannia building society. It makes me proud to be a Labour/Co-operative Member of Parliament. Banks such as HSBC have managed to sustain their savings levels. That has contributed to the gratifying position it now finds itself in of being the only institution increasing its lending capacity in a responsible manner.
If one good thing comes from this mess, which was caused by a few poor-thinking individuals and which the Government are taking action to clear up, it will be a progressive, forward-looking and socially-accountable model for the banking system of the 21st century. Responsibility must be put before risk to ensure that the terrible mistakes that have caused so much worry, heartache and distress are never repeated. The Government must ensure that no ship ever sinks again.
I congratulate my hon. Friend the Member for Halifax (Mrs. Riordan) on securing this debate. As she said, there has been a fundamental breakdown of trust in the financial system not just in the UK, but around the world. Governments, regulators and the industry must work together to rebuild that trust, which was once a hallmark of the institution that takes its name from her constituency.
My hon. Friend has raised particular concerns about HBOS, and I pay tribute to the diligence and consistency with which she has pressed the case of her constituents who work for HBOS over the last few months. As she has reminded us, her constituents are right to be proud of the inheritance of the Halifax over many generations. I join her in paying tribute to the hard work of front-line Halifax employees. She asked about compulsory redundancies. I understand that Eric Daniels, the chief executive of Lloyds Banking Group, said that compulsory redundancies are not expected to be required for staffing reductions. I am grateful for the hard work of Yorkshire Forward. It is right that everybody should do what they can to help and Yorkshire Forward has played an important role.
As my hon. Friend said, HBOS expanded quickly and at an inopportune moment in the global markets, making it particularly vulnerable to the credit crunch. It had a large reliance on wholesale funding and large holdings of US asset-backed instruments, which left it vulnerable to a deterioration in market conditions. The House will recall the events that led to the merger between Lloyds TSB and HBOS. The collapse of Lehman Brothers had ramifications around the world. It followed a difficult period for HBOS, which had experienced poor take-up on a rights issue earlier in the year. The HBOS share price dropped over 80 per cent. between October 2007 and October 2008. In September, Lloyds Banking Group announced its interest in merging with HBOS. The Government agreed to amend competition law to allow the financial stability implications of such a merger to be considered alongside the potential effects on competition.
Recapitalisation by the Government in October, which included agreements with Lloyds TSB and HBOS, ensured that systemic failure was avoided. It is now clear that if HBOS had not merged with Lloyds, it would have required large financial support and may not have been able to continue as an independent financial institution. If HBOS had been allowed to fail, it would have been catastrophic for depositors, business, families, my hon. Friend’s constituents and for taxpayers. It was right and in the interests of the taxpayer that the Government allowed the financial stability implications of the merger to be considered.
As my hon. Friend has said, we must learn lessons from the financial turbulence of the autumn, including what happened to HBOS. There must be improvements to the regulatory framework and stronger governance arrangements for banks, while we continue to ensure that there is responsible lending to the economy. She said that we need a model for the future with responsibility at its heart. I agree completely. That nails on the head what is required.
I, too, welcome Lord Turner’s proposals. The Financial Services Authority has been consulting on new conduct of business rules that might be introduced before the end of the year. On prudential regulation, new capital adequacy standards are being negotiated internationally. That was a key element of the recent G20 discussions. The FSA is consulting on new liquidity requirements and new arrangements for corporate governance. The Government are committed to a review by David Walker. I will say more about that in a moment.
My hon. Friend knows that I cannot pre-empt announcements that will be made in tomorrow’s Budget. However, I can set out in general terms what the Government want in future from the banking system and therefore from the regulatory regime. The design of regulation must recognise the importance of the financial sector to the economy as a whole. It should reinforce good behaviour and act as a check against bad practices. Rebuilding trust in the financial system will take time; there are no instant remedies or overnight solutions. That will start with an acceptance that mistakes have been made and a willingness to learn from them.
We must be careful not to jettison what works and is effective. We need to walk a fine line between there being sufficient regulation to safeguard the public interest, but not so much that we stem the flow of credit and stifle the innovation that can benefit us all. My hon. Friend has drawn attention to the proud record of the Halifax. It would be wrong to give the impression that everything that was done in the past was wrong. By its nature, banking is about taking risks. We must manage that risk and ensure that the public interest is safeguarded. There is an unwritten compact between the banks and the public. Each needs the other. That relationship is important and it is important that we get it right.
Deregulation of global banking in the 1980s was followed by huge financial innovation in the 1990s. Combined with low interest rates around the world, particularly in the last 10 years, that set the scene for one of the biggest expansions of global credit ever seen. Banks everywhere took on too much risk and worse, they took on risk that many did not properly understand. The boards and shareholders of some banks believed it to be a one-way bet. Times were good and not enough questions were asked. There was no shortage of people who were happy to take advantage of the cheap credit on offer. At the same time, regulators around the world failed to keep up with the growing complexity in the system, which made it hard to spot the risks and harder still to deal with them.
Last autumn, following the collapse of Lehman Brothers and the realisation that some institutions could be allowed to fail, there was a complete breakdown in confidence in the global financial system. That had a big knock-on effect on many institutions, including HBOS. In response, some people have argued for a Glass-Steagall solution in the UK, which is named after the US legislation introduced in 1933 and repealed in 1999. That would divide investment banking from core deposit taking and lending. It would create a divide between what some have categorised as narrow and broad banks. Some have suggested limiting the scale and complexity of banks. I understand the arguments in favour of that approach, which focus on protecting the core banking system from risks to depositors, the taxpayer and wider financial stability.
The complexity of some institutions appears, in some cases, to have contributed to difficulties in the management of risk by banks and supervisors. Leaving aside concerns about competition, difficulties in smaller, simpler institutions can be tackled more easily than in larger, more complex ones, and the failure of a bigger firm is bound to be much more damaging. Those arguments, which have been marshalled by a number of people in recent months, are not without force.
In the past 18 months, we have seen that risks to the financial system no longer arise mainly through depositors. The channels of contagion are more varied and complex than they used to be. The failure of Lehman Brothers had a massive impact on markets even though it was not a significant deposit taker. The consequences of that collapse around the world were much more severe than was expected. Banks of all sizes have encountered difficulties, and it is not clear that larger banks are more likely to fail than small ones—or the other way around. Narrower banks have seen at least as many difficulties as broad ones, so dividing commercial and investment banks on the basis of ownership would not address counter-party risk exposures between banks, and therefore would not address the issues raised by the current disruption in the market. Neither would it insulate pure deposit-taking institutions from the failure of an investment bank.
I do not think that there is a simple solution. Resolving the tensions will, no doubt, be difficult, which is why there should be a new compact between people and banks, particularly between banks and their customers. People need to have confidence that their savings will be safe when they deposit them in a bank, just as people always had confidence in the Halifax building society, as my hon. Friend has said. When banks use those deposits for loans to home buyers and businesses, they must ensure that the original depositors can be paid back.
The compact must be built on responsibility, fairness and choice. There must be shared responsibility between the banks, the regulators and the customers, and I join my hon. Friend in placing a great deal of emphasis on that responsibility aspect. Secondly, there must be fairness, with banks and financial institutions that operate to benefit customers, businesses and the wider economy, and not just their shareholders or even just their shareholders and employees. There must also be choice, with properly regulated banking markets founded on competition, openness and efficiency. Banks are commercial organisations, but they also provide an essential service. No Government should try to remove risk taking from the system, and we certainly would not wish to do that, but Governments must act to protect people when excessive risk taking threatens us all.
Banks, and particularly their boards, need to recognise that their duty to shareholders is best fulfilled by acting in the interests of their customers and, not just some, but all of their employees. Bank boards need to focus not on short-term profits, but on long-term wealth creation, which is best served by meeting the needs of all their customers. To do that properly, boards need the right information, skills and experience, and an ability to take a broader view. That is why we have asked David Walker to review banks’ corporate governance and to make recommendations to strengthen the oversight of bank boards. His interim report is due this summer.
The Government have also been focused on maintaining the flow of credit to the economy during the financial crisis. That is one of the most important aspects of the economy’s operation that needs to be safeguarded. In the pre-Budget report, before Christmas, we announced the creation of a new lending panel to monitor lending to businesses and households and to drive up standards of industry practice in taking decisions on lending. As part of that new monitoring task, the Bank of England is publishing a monthly “Trends in Lending” report, the first issue of which was published this morning. The report draws on a new collection of data, covering all the major UK lenders, and sets out, in the public domain, data on the extent of lending being achieved.
Let me pick up on my hon. Friend’s points about mortgage lending before I finish. The Government put in place statutory regulation of first charge mortgages by the Financial Services Authority in 2004. The regime requires lenders to lend responsibly, treat their customers fairly and regard repossession as a last resort. To pick up on her point about a practice that developed in the industry before problems arose, the Government have asked the FSA to consider how new mortgages for more than 100 per cent. of house value should now be treated. The FSA has stated that it will publish, in September, a paper on mortgage regulation that will consider product regulation, including maximum loan-to-value and loan-to-income caps. However, the steps that we took to regulate the mortgage market have undoubtedly averted a still greater problem than would otherwise have arisen. That action has certainly been vindicated by events.
We must all work together to ensure that we learn lessons from what has become apparent over the past 18 months. We need to ensure that the regulatory framework protects taxpayers and others from excessive risk taking, while promoting growth and innovation that are in the interests of consumers. We also need to look at where improvements can be made to banks’ corporate governance—the Walker review will make recommendations on that. We need to do all that in a way that supports the flow of credit to consumers and businesses.
I am grateful to my hon. Friend for raising these important issues in this debate. There is undoubtedly more work and more thinking to be done, but she is right to pay tribute to the work of those living in her constituency, and I hope that they will be able to serve not only their immediate area, but the whole country, in the years ahead, as they have done with such success in the past.