With permission, I shall make a statement on the Government's proposals for reforming financial markets. Copies of our proposals are contained in a document that is available in the Vote Office.

The world economy has been hit by a severe financial crisis, which has resulted in the worst economic downturn for well over 60 years. Its origins lie in failures in the banking system around the world. Financial institutions in many countries simply took on too much risk. They became over-reliant on wholesale funding and too exposed to particular products, and irresponsible pay practices made banks take unnecessary risks.

It is also clear that some financial institutions appeared to have little appreciation of what was going on inside their own businesses. However, regulators and Governments too must learn from the events of the last two years, and understand better the risks that come from rapid globalisation in the financial system.

Our economy has a clear need for well-managed, well-functioning banks and financial institutions to perform a vital set of functions, channelling investment and helping people to save and plan for the future. The financial services industry is also a major employer in this country—of over 1 million people—and it will continue to generate wealth for our country in the future.

Our central objective must be to ensure that, as we come through the downturn, we reform and strengthen our financial system and rebuild it for the future, with consumers who are better informed, financial institutions that are better managed, and markets that are better regulated. The proposals that I will set out today build on our previous reforms to provide a new settlement that is open, competitive and effective and able to meet the needs of both business and families; that inspires trust and confidence on the part of businesses and consumers; that ensures robust regulation that reduces the likelihood of failures without preventing innovation; and that provides effective mechanisms for dealing with the failure of financial institutions should they occur.

I want to take steps to help consumers make better informed choices. To ensure that they are given access to free impartial financial advice, we will legislate to introduce a national money guidance service and impose a levy on the financial sector to help fund it. We will also legislate to consolidate Financial Services Authority resources to provide separate independent consumer education, setting up a lead provider of consumer information and personal finance education. Consumers will also get more protection, along with a greater right of redress and access to compensation if things go wrong. We will also improve arrangements for depositor protection, including legislation to pre-fund and expand the role of the Financial Services Compensation Scheme.

Because of the events of the past two years, there are fewer firms in the market providing financial services. It is essential that we retain competitive markets, as they play a key role in providing consumers with value and choice. We want to see greater competition and greater choice for consumers, as well as a bigger role for mutuals and building societies, so the Office of Fair Trading and the FSA will ensure that we maintain competition in the market for financial services. As we come out of this downturn, we need to promote a competitive market that enables new entrants—which may include non-banking institutions—and innovation to benefit consumers and businesses. In that way, we will see better informed consumers who have greater choices in a more competitive market.

We also need banks and financial institutions that are better managed. We need a change of culture in the banks and their boardrooms, with pay practices that are focused on long-term stability, not short-term profit. The FSA now has powers to penalise banks if their pay policies create unnecessary risk and are not focused on the long-term strength of their institutions. From now on, I will require the FSA to report every year on how financial institutions are complying with their new code of practice for remuneration, and how it will deal with firms that do not comply.

Bank boards and institutional investors must also become better equipped to do the job and understand their businesses, with more effective risk management and greater independence of non-executives, who must not be afraid to ask searching questions. Next week, Sir David Walker will report on measures that will deliver improved corporate governance at financial institutions, ahead of his final report in the autumn.

Building on reforms already made, my proposals today will strengthen regulation of the financial system. They will cover three areas: first, new regulatory powers to allow tougher regulation of individual firms; secondly, measures to deal with the potential failure of institutions that could have a significant impact on the economy; and thirdly, a strengthened framework for financial stability to deal with system-wide risks in today’s more complex and global markets. We will continue to work with other countries to deal with what is, at heart, a global problem.

I asked Lord Turner to make recommendations, which the FSA is now implementing, to strengthen the regulatory regime and increase the intensity of supervision. They will strengthen the rules to ensure that banks hold enough capital as a buffer against losses, to introduce a back-stop power ensuring that banks do not over-extend themselves by lending too much when they do not have the strength to do so, and to increase the focus on bank liquidity so that they are able to carry out their business at all times. Those measures will help ensure that financial firms are stronger, more resilient, and better able to serve the needs of our economy.

I will also introduce legislation in the autumn to give the FSA a new statutory objective for financial stability, and extend its powers to ensure that it has the appropriate rules to deal with different risks in individual banks, and tougher powers and penalties against misconduct, and that it can take account of new developments in the financial sector—including expanding regulation where necessary, for example for systemically important hedge funds.

We need to ensure our resolution regime can deal with financial institutions of all sizes, including banks that are very large or complex. As these banks are often global, we also need an international mechanism for resolving large multinational banks, and we will bring forward proposals to G20 Finance Ministers when they meet in London in the autumn.

At home, we can better deal with risks by ensuring that safeguards are in place—for example, by making banks hold capital at a higher level that reflects not only the possibility of failure, but its cost. By introducing higher standards and transparency, the FSA can also improve the functioning of key markets, such as the derivatives markets, so that problems in one institution are less likely to spread through the entire system. The FSA and the Bank of England will make institutions put in place practical resolution plans that can be deployed in the event that they get into difficulties.

There is, of course, a debate to be had about whether Governments should restrict the size of banks or separate different types of banking, as happened in the United States in the 1930s. I believe that that is a simplistic solution, which fails to take into account the complexity of today’s financial system. Small banks as well as large banks can threaten financial stability, as in the case of Northern Rock. Equally, both retail and investment banks, in different parts of the world, have failed in the past year, and it is not only banks that can affect stability, as we saw in the example of the American insurance company AIG. In addition, the approach of one regulator for one category of institution deemed to be systemically important and another regulator for the rest seems to me to miss the point, because what is systemically important can change rapidly, as we have seen in the past two years. Instead, the regulatory system has to recognise and respond to the complexities of individual institutions, and that is what we are doing.

We also need to strengthen the framework for financial stability. That is a question not only of institutional powers and responsibility, but of better understanding what is happening in the markets. No simple fixes—no institutional reform—could have prevented these problems from occurring. There are different institutional frameworks in countries across the world, but no one model has been successful in insulating a country from the current crisis. Although regulatory arrangements were not the cause of the current problems, we need the right institutions to maintain financial stability and we must ensure that they have the right tools to do the job.

The move in this country to a single regulator 12 years ago addressed problems with the previous regime of multiple self-regulators, which did not reflect the changing nature of financial markets, and our approach has been adopted by many other countries. However, 10 years on, the world had moved on again; some of the global problems of the past two years went beyond the scope of existing regulation, while others were simply not given sufficient attention by regulators and central banks. In this country, the authorities have been able, over the past year, to deal quickly and effectively with a number of financial stability issues, such as those relating to the Dunfermline building society and Bradford & Bingley, but further reform is now needed.

We will therefore legislate to set up a new council for financial stability, which will bring together the Bank of England, the FSA and the Treasury. It will not only deal with immediate issues, but will monitor system-wide financial stability and respond to long-term risks as they emerge. That needs to be done on a formal statutory basis. The council will draw on the expertise of the FSA and the Bank, which are and will remain independent of Government, by looking at their regular reports—the financial stability report and the financial risk outlook—and formally responding to their recommendations. In that way, when risks or threats to stability are identified they will be addressed. This body will do that in a way that is transparent and accountable—so that people can see how and why decisions are made—with the regular publication of minutes. The council’s responsibilities will be set out in law, with published terms of reference. In discussion with the Treasury Committee and the House, we will consider how to increase accountability through greater parliamentary scrutiny.

We have already taken significant steps to improve the way in which we monitor and manage risks to the financial system as a whole, through more systematic use of stress testing of financial institutions, for example. The proposals that I am making today will further strengthen our ability to identify and deal with systemic risks, and will ensure that the authorities can be held to account for their actions. We also need to consider what further counter-cyclical measures are needed, in order to allow us to lean against the credit cycle and prevent the build-up of risks that could threaten the stability of the financial system. The principle of leaning against the cycle is easy to agree, but deciding what action to take and when to take it is far more complex. At the moment, there is no clear consensus here or abroad, but I believe that central banks will have an important role to play in that area.

Today’s global market for finance means that new measures can be effective only if they are implemented on a broad international basis, so under our presidency of the G20 we will continue to press for measures to strengthen the international regulatory architecture, building on the proposals agreed in April. In Europe, too, we will argue for enhanced monitoring of system-wide risks, while retaining the crucial link between national regulators and Governments. By working internationally, our efforts can help us deliver more effective supervision of global banks, stronger international standards, and a more responsible global financial services sector.

We intervened to stabilise the banking system, while retaining a clear view that banks are best managed and owned commercially and not by the Government. We intend to return our stakes in the banks to the private sector, in a way that brings best value to the taxpayer, promotes competition and maintains stability, and we will use the proceeds to cut Government debt. We are empowering consumers, supporting better corporate governance and strengthening regulation, so that our financial sector can continue to be an engine of prosperity. I commend this statement to the House.

I thank the Chancellor for his statement, although frankly almost all of it was splashed over the front pages of today’s newspapers. Once again, Parliament comes last, instead of coming first.

Of course, there are some elements of the White Paper that we welcome: the improved consumer advice; David Walker’s report on corporate governance, to which we look forward; a much better resolution regime for failed banks, which is clearly necessary; and the Chancellor’s remarks on pay and bonuses, although he could have set a better example with the pay and bonus package for the chief executive of RBS. However, in most part, this White Paper is a totally inadequate response to what has happened over the last two years.

For a start, the White Paper contains no serious analysis of what went wrong. I received a copy of it only 20 minutes ago, during Prime Minister’s questions, but the only admission that I can see of any responsibility for what happened is the sentence that states that

“the crisis has shown that aspects of prudential and macro-prudential supervision…were insufficient.”

That is the understatement of the century, given that half the British banking system has had to be nationalised. It also ducks every difficult question that needs to be addressed if we are to protect our society and our economy from a repeat of the mistakes that have caused such trouble. How do we replace the failed tripartite regime? What tools do we need to stop the excessive debt levels that did so much damage to our economy? How do we ensure that we have a banking system that competes across the world, and offers families and small businesses in this country the services that they are currently denied in this credit crunch, without the British taxpayer picking up the bill for the mistakes that are made? None of those difficult questions is properly addressed today; every single one is left to the next Government to deal with. It is more of a white flag than a White Paper—a complete surrender of this Government’s responsibility to fix the system for regulating the City that they created and which so spectacularly failed.

Let me press the Chancellor on some specifics on the conduct and content of regulation. First, on the tripartite regime, he must see how dysfunctional it has become. Institutional jealousies and blurred lines of responsibility mean that everyone gets involved but no one is in charge. Let us remember where this all began—with the arrogant decision from the new Chancellor in 1997, without warning or consultation, and in the teeth of the opposition of the late Eddie George, to remove banking supervision from the Bank of England. My right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), the then Shadow Chancellor, warned from this Dispatch Box that it would leave no one responsible for the liquidity of the banking system or to guard against systemic collapse. Sadly, that prophecy turned out to be all too true. No one was responsible for liquidity. No one was looking at systemic risk. Even the FSA itself admits that it took its eye off prudential supervision. When the crunch came over Northern Rock, no one knew who was in charge. Almost two years later, we still do not know who is in charge. The Chancellor should have come here today to bury the tripartite system, not to praise it. The only thing that stops him is the vanity of the Prime Minister who refuses to admit that he made such a fundamental mistake.

The same applies to the content of regulation. The first half of Lord Turner’s report contains the most damning critique of what went wrong with this Government’s economic policy. He points to the “major and continued macro-imbalances” in the British economy. He says that the failure to spot this was

“one of the crucial failures of the years running up to the financial crisis”,

and he says that the

“vital activity of macro-prudential analysis...fell between two stools”.

What does this White Paper propose to do with that vital activity in future? It puts it between two stools again. After two years of thinking in the Treasury—wait for it—we are going to have a council on financial stability that will bring together the Treasury, the Bank of England and the FSA. I thought that that was what the tripartite regime was supposed to be about all along. We do not need another divided committee. We do not want more divided responsibilities. We need clear lines of accountability that run all the way to Threadneedle street. They do not exist at present.

Instead of clarity, what we get from the Government is confusion. The Governor of the Bank of England appeared before the Select Committee on the Treasury two weeks ago, and he said:

“We were given a statutory responsibility for financial stability in the Banking Act, and the question…to which I have not really received any adequate answer from anywhere, was: what exactly is it that people expect the Bank of England to do?”

We are none the wiser after this White Paper. Perhaps it would have helped if the Chancellor had shown the White Paper in draft to the Governor of the Bank of England two or three weeks ago instead of in recent days.

Is it not absolutely clear that the Bank of England now has to be given not just the responsibility but the tools for macro-prudential regulation? Can the Chancellor confirm that there is not a single new power for the Bank of England in the White Paper? The Bank of England should have the power to call time on debt, as we suggested almost a year ago; it should be able to set counter-cyclical capital rules in conjunction with other countries—and, by the way, that would be a much better use of international co-operation than the current proposals from the European Commission, which are ill conceived and damaging to the UK—and it should have the statutory powers to intervene when the structure of a financial institution threatens the whole economy, so that, in the Governor’s words, it can force its “sermons” to be listened to.

The Bank of England cannot do any of those things unless it has the experience and knowledge of their day-to-day regulation. Let me make it clear to the Chancellor today that the next Conservative Government will abolish the tripartite system, and let me tell Parliament first—unlike his policy—that we will put the Bank of England in charge of the prudential supervision of our banks, our building societies and our other significant financial institutions. We have learned from this crisis the old truth that one cannot separate central banking from the supervision of the financial system and that sound regulation is not just about a checklist of rules but about the authority to exercise judgment and to see the bigger picture.

Sitting alongside a stronger Bank of England we will have a powerful regulator to protect consumers—a regulator with the clout and focus not just to add more health warnings alongside the acres of small print that already come with financial products but to stamp out unfair practices such as mis-sold payment protection insurance and excessive bank charges. We will set out the details of that in our own alternative White Paper later this month. Will not the choice be clear then?

We have today a submission from the Labour party, which will be implemented in full only if it is re-elected, and proposals from the Conservative party. The Labour party wants to stick with the financial system that failed us, which it created. We propose to overhaul that system and put the Bank of England in charge. People will know at the next election that if they want to change the way in which the City and our banks are regulated, they need to change their Government.

The hon. Gentleman seems to be trying to reduce this debate to a football match between the Bank of England and the FSA. It is not a matter of which institutions do what. It is about ensuring that the regulatory system delivers on making sure that it has tougher regulation. The hon. Gentleman argues that the Bank of England should take over the prudential supervision and regulation of what he calls important banks, building societies and insurance companies. That is not a power that the bank is seeking at the moment, but he is entitled to hold that view. I have said on many occasions that we can argue about where to draw the line as to who does supervision of banks, who does supervision of building societies and who does consumer protection, but the key issue is ensuring that regulators can do their jobs properly, that they have the tools to do their jobs and, crucially, that they bring to bear the right judgments whenever problems arise.

The hon. Gentleman will recall that, 10 years ago, one of the reasons why we ended self-regulation was that, quite simply, it did not work. He will recall, too, that in the past there had been criticism of the Bank’s regulation of BCCI and Barings. The fact that there have been mistakes in institutions is not a good reason for saying that we have to tear everything up. I believe that we should build on the strengths of the system that we have. It does not matter where we draw the line—when it comes to a crisis and to identifying problems in the future, we will need the Bank, the FSA and, because a cost will inevitably be involved, the Treasury at the same table.

I believe that the present system of co-ordination between the Bank, the FSA and the Government needs to be strengthened, reformed and put on a proper basis. Why do I say that? When the Bank of England next warns that there is a risk building up or that perhaps there is too much credit flowing, someone needs to react to it and to do something about it. That is why we have to have both the Bank and the FSA at the same table. That is why I believe that the arrangements between the three institutions need to be strengthened and that is why I am making these proposals.

I do not believe that what the hon. Gentleman is proposing—that one can somehow say that some institutions are systemic and some are not—would work. For example, three years ago people would not have argued that Bradford & Bingley, Northern Rock or the Dunfermline building society would have been of systemic importance to this country. However, the truth is that when they got into difficulties they were systemic. That was why we had to do something about them to stop the problems from spreading wider. I do not believe that the divisions that the hon. Gentleman is proposing are workable. I believe that the measures that we have at the moment need to be strengthened and improved to ensure that in future, when these warnings are seen, they can be dealt with and the people who are charged with the responsibility can be held to account.

I agree with the hon. Gentleman that this has international implications—I am grateful to him for recognising that—particularly if one wants to dampen down the availability of credit. In today’s globalised market, we cannot do that in one country alone. We need an international agreement and to ensure that people are working in the same way, and that is why international co-operation is very important.

Finally, I am very sorry that the hon. Gentleman did not get the document on time. I can assure him that I saw a man with both the document and the statement leave the Treasury shortly before half-past 11 this morning. I have no idea how the hon. Gentleman got the statement and not the document.

I acknowledge that there are many things in the paper that can be welcomed—which, indeed, we have advocated in the past—but their implementation has a timeless quality, as if we are on a kind of progression from White Paper to Green Paper to blank paper. Almost all of the important recommendations would happen after the next general election. I know that a couple of weeks ago the Chancellor was advocating that banks prepare living wills; one rather gets the feeling that this is a living will for the Chancellor.

Having advocated macro-prudential regulation of bank reserves for five years or so, I very much welcome the Government’s embracing it. Surely it must be right, however, that in anything that requires an understanding of the overall economy the Bank of England must have a central role—not a unique role, but a central position. That is not clear from the statement.

I welcome, too, the strengthening of consumer protection. We have at last got to the idea of generic independent advice, but it has taken 10 years of campaigning by Citizens Advice and others to get there. I am not clear, however, about how the Government continue to preserve a fragmented system of consumer protection with responsibilities confusingly divided between the FSA and the Office of Fair Trading. Will that be clarified?

I welcome, too, the emphasis on competition. However, does the Chancellor buy the argument of the European Commissioner, Neelie Kroes, who said that, if we are to have real competition in British banking, banks must be broken up and subdivided, and in particular the Lloyds-HBOS merger might have to be unscrambled? Does the Chancellor agree?

The big issue, as the Chancellor rightly emphasised, is the major question about the banks that are too big to fail, too big to supervise and too big for the taxpayer to underwrite. He correctly said that small banks as well as big banks can go wrong—that is absolutely right—but is there not a fundamental problem that when very large interconnected banks try to be the biggest investment bank in the world, the exposure to the British taxpayer is then wholly unacceptable? Therefore, these banks have to be subdivided for that reason.

The Chancellor is looking over the distant horizon at necessary reforms, but may I suggest to him that key problems exist today? The publicly owned banks are not responding to the borrowing needs of sound British companies, and the bonus culture is being reinstated in publicly owned banks that are owned by the taxpayer. There is a complete lack of direction, and I suspect that a central reason for that is that the Government are so desperate to get the publicly owned banks back into the private sector quickly that too little attention is being given to defining the public interest.

I suspect that the White Paper will be received in the City with a great sigh of relief. It is yet another indication that we are getting back to business as usual.

On the last point, I think that most hon. Members agree that we need to toughen up the regulatory system significantly. We need to make changes, but we must not lose sight of the fact that this is an industry that employs over 1 million people in this country, more than half of them outside the south-east of England. It is important that we do not give the impression that we would rather be shot of it, because it is quite important. In the past nine years, it has contributed more than £250 billion in tax revenues—quite a useful sum. When it recovers, I hope that it will continue to make a contribution in the future.

The hon. Gentleman asked about selling. If he looks at the White Paper he will see that we make it clear that we will sell when we think that the time is appropriate. We do not have an artificial time scale and we are not under any pressure to sell, but it will not have escaped his notice that just at the moment the shares in the two banks that we own are worth slightly less than we paid for them. He therefore need have no fear of being confronted with a quick sale: we will do what is right to achieve the best value for the taxpayer.

On lending, I agree with the hon. Gentleman that it is important to try to get credit flowing in the economy again. That is a key part of what we are doing. Mortgage lending and the availability of lending for mortgages have increased but more needs to be done in certain sectors of business lending, such as to small and medium-sized enterprises, and especially to the medium-sized ones. For example, I welcome today’s announcement by Prudential of a fund worth £1.5 billion specifically geared to medium-sized companies. That is an example of a non-bank bringing together pension funds, local authorities and its own funds to make money directly available to medium-sized firms, and it is a useful step in the right direction.

The hon. Gentleman made some broader points, and one of them had to do with the “too big to fail” argument. I understand where he is coming from, but I said in my statement that we must take into account the cost to the taxpayer as well as the wider effects of failure, and that we must regulate accordingly. However, there is a flaw in his argument—I heard him being asked about this on the “Today” programme at 10 past 7—and it is that he seems to back off from the consequences of telling a large bank that it is too big. In response to that, the bank might say, “We’re too big, so we’ll go somewhere else.” Alternatively, dividing such a bank into lots of different companies, as was the case with Lehman Brothers, does not solve the problem. When Lehman Brothers went down, the whole shooting match went down, not just one aspect of it.

The hon. Gentleman made a wider point about macro-prudential supervision. In my statement, I said that given what central banks do, and what the Bank of England in particular does, I anticipated that such supervision would have a wider role, as we work through the present circumstances. The Bank of England is the obvious place for it, but I come back to the point that I made to the shadow Chancellor: wherever the lines of responsibility are drawn, we need a regulator who is able to look at the wider prudential supervision of the system, and the wider financial stability. We also need a regulator who will drill down to the nuts and bolts of every single company.

Whether people like it or not, there is no country in the world whose treasury does not have to be at the table. We know all to clearly that either the law has to be changed or there is a fiscal cost, so three people have to sit around the table regardless of how the regulatory cake is divided. That is something that the shadow Chancellor will not face up to.

rose—

Order. There are 23 Members seeking to catch my eye and, as ever, I would like to accommodate as many as I can. However, I am looking to each right hon. or hon. Member to ask one brief supplementary question—and of course to the Chancellor of the Exchequer to provide an economical reply.

The Treasury Committee has made a detailed examination of the banking crisis. It found nothing wrong with the architecture of the tripartite authority, but a lot wrong with the warnings given by the Bank of England and the FSA, which were too weak. I therefore welcome and the establishment of the proposed council for financial stability. We need it to have strength and grit, and I am looking for reassurance from the Chancellor in that regard.

At the core of the matter is the restoration of trust and confidence. Will my right hon. Friend support the establishment of a banking commission, with a membership of lay people and not those representing narrow City interests? That would ensure that the future of the financial sector served the wider needs of society and individuals, and not just the City’s narrow needs.

I am grateful to my right hon. Friend for his comments. I believe that the reforms that we are making to the relationship between the FSA, the Bank of England and the Treasury will make it much better. The relationship will be on a formal footing, with people able to see exactly what has been discussed and decided. When later questions arise about what happened in response to a particular warning or a concern that has been expressed, people will be able to see what was done. I think that that will make a big difference.

I agree with my right hon. Friend’s general point about ensuring that banking serves the wider community because, after all, financial services are a means to an end. Those wider questions need to be addressed, and I know that the Treasury Committee has looked at them. That is something that I would support.

The Chancellor seems to have trebled the confusion over responsibility for financial stability by spreading it between the Bank of England, the FSA and the new council for financial stability. Will he explain what powers the new council will have? Page 138 of the White Paper seems to give it three new statutory duties just to discuss risk.

The Bank of England has a statutory duty in relation to financial stability as well as monetary policy. The hon. Gentleman will know that the Banking Act 2009 gave it powers to deal with a bank that has failed. The FSA deals with the individual supervision of banks, and I announced today that it can now have different rules for different individual banks. That is quite an important change, especially with regard to the matters raised by the Liberal Democrat spokesman, the hon. Member for Twickenham (Dr. Cable). We have one body looking at the overall system, and one looking at the particular. They need to work together and, as I said, whether one likes it or not, the Treasury needs to be at the table because of the fiscal consequences of any action that might have to be taken.

The hon. Gentleman asks who is responsible for doing what, but that depends on what is required. It is obviously for the Bank of England to act on monetary policy, for the Treasury to act on fiscal policy, and for the FSA to deal with an individual regulatory requirement.

I particularly welcome the proposals for stronger consumer protection, with an improved advice service and a stronger Financial Services Compensation Scheme. The FSCS has been the one organisation to come out of the crisis with real credit after a good performance. How does my right hon. Friend intend to strengthen it?

We need to arrange that the FSCS is pre-funded. We say in the White Paper that that cannot be done immediately, and certainly not at the present time when so much is at stake. It will be better in the long term, however, if the FSCS is pre-funded, as then it will have money in the event that something goes wrong.

Does the Chancellor recognise that the City of London has become the financial capital of the world—to the immense benefit of this country—partly because we have always had a system of prudential supervision that was strong, flexible, unified and not rigidly bureaucratic? As my hon. Friend the shadow Chancellor pointed out—and as was predicted by those on the Conservative Benches at the time—that was undermined by the tripartite system. Why, then, is the right hon. Gentleman handing power over to countries with financial systems that have been less successful than ours? Most of our partners on the continent have much more rigidly bureaucratic regulation of their financial systems. Is it not wrong to hand ultimate power over our system to them?

As a general principle, I agree with the right hon. Gentleman’s last point. His thesis falls down, however, when one realises that the City of London’s reputation and size as a world financial centre have grown over the past 10 years, so his argument that it all somehow went wrong in 1997 does not seem to add up.

Where I probably do disagree with the right hon. Gentleman is that, although I believe that the relationship between national regulators and Governments is very important, we are talking about a global crisis. Part of the problem is that banks that trade across the world have got into trouble, and that needs more international co-operation. It also means that we need to work with Europe, and that is where the Conservative party is making a huge mistake. If it gets into bed with some weird and odd people in Europe, it will have no influence whatsoever over issues that do matter to the City of London.

The Canadian banking system is pretty solid, with very large banks that are not divided between the retail and investment sectors. Canada has fewer banking regulations than the UK or USA, yet no Canadian bank has failed or been bailed out. Will my right hon. Friend say what lessons he has learned from the stability of the Canadian banking system?

Over the years Canada has, in many ways, followed the model that we have been moving to, trying to streamline the regulatory system. I remind the House that 10 years ago there were eight or nine different regulators—self-regulating bodies—and also that the Bank of England never, ever regulated all financial institutions. It was frequently the case that a bank would be regulated by three or four different institutions. That made no sense whatsoever and the Canadians recognised that. Everyone should reflect on that.

Does the Chancellor agree that there are two distinct roles to be carried out, one being the detailed supervision of the rules, best carried out by the FSA, and the other the overall financial strategic control of banks? If the latter role is to be carried out by the Bank of England, will he ensure that the Bank is properly resourced?

I entirely agree. The hon. Gentleman has put very briefly the point that I was putting to the hon. Member for Sevenoaks (Mr. Fallon). Yes, of course the Bank needs to be resourced to do the job.

Sir Fred Goodwin famously did not have a recognised banking qualification. Should chief executives be expected to have one?

The FSA has a responsibility to make sure that people who are charged with running banks are qualified to do so. That was recognised by Lord Adair Turner’s report.

A moment ago the Chancellor said—I pretty much quote—“I expect the Bank to have a wider role in all this.” Only a few days ago the Governor came before the Treasury Committee and said that he had not been consulted at all about the White Paper or even seen a draft. When did the Chancellor first show a draft of the document to the Governor of the Bank, and why did he not consult him fully earlier?

I have had many discussions with the Governor of the Bank over the past couple of years about these things, and I will have many discussions with him in advance of the preparation of the White Paper. In particular, I have talked to him about the role of the Bank. If we further develop the powers that may be necessary to lean against credit cycles, I have made it clear that the Bank of England is the obvious place to go. However, the point that I was making is that currently the power to increase or reduce capital requirements, which is the most obvious brake one could put on financial institutions, lies with the FSA. I do not want to end up with a situation in which banks do not know whether the FSA governs their capital requirements, or the Bank of England does. The Bank does not want to regulate individual banking institutions and so on. People can hold different views about that, but I want to make sure there is a clear delineation of who is responsible for what, so that we can better hold people to account for what they do.

With the international implications of the current marketplace, can the Chancellor tell us what discussions he had with international partners before arriving at the content of his statement today?

I have, of course, spoken to all my counterparts on several occasions since these problems first arose at the end of 2007. It is interesting that most countries have more regulators than we do. Most of them are trying to streamline the regulatory system—in the United States, for example. Not everybody’s financial industry is in the same position or made up in the same way. What I think the industry and the public want is to make sure that we have a system that is coherent and that works. Above all, we must not lose sight of the fact that no matter what institution and no matter what rules, much of this is ultimately about individual judgment—making the right calls at the right time. That is the problem that occurred in the lead-up to the current situation and that is what we must get right.

At the beginning of his statement the Chancellor mentioned the importance of competition. Does he accept that the shotgun marriage that he oversaw of Lloyds with HBOS was bad for competition, as well as proving to be a bad deal for both the shareholders and the taxpayer? Will he now do the honourable thing and oversee an amicable divorce?

The shareholders of both Lloyds and HBOS voted overwhelmingly, separately, for the merger to take place. The process took about three months. I do not know how the hon. Gentleman describes “shotgun”, or whether he would regard a three-month engagement as being sufficient, but both parties were willing participants in the act and the shareholders of both voted to go along with it.

Although there is no direct read-across to other sectors outside financial services, will my right hon. Friend bring his report to the attention of other regulators? It is important that lessons about systemic failure are learned where appropriate, and the FSA can learn from other regulators about how they have done things—for example, setting up better consumer panels.

I know that regulators speak to each other where they have common interests or concerns, and I am sure they will do that. I have said specifically in the White Paper that the FSA and the OFT will work closely together in order to ensure that as we come through the downturn, we have a competitive banking system. Especially after the consolidation of foreign banks, it is important that we have choice and competition in the future.

The remuneration package agreed for Mr. Stephen Hester at RBS is weighted towards the long term and has clawback provisions in the bonus. Is the Chancellor happy that that is an acceptable package, which reflects the kind of long-term measures for remuneration that he said should be put in place, or does he believe that that specific example would lead to different capital requirements?

I am not against bonuses—I meant to take the point up with the hon. Member for Twickenham—in whatever walk of life, if one can reward people for doing something special or for making an extra effort, particularly if it is designed to build the long-term strength of the bank. In the case of RBS, where there is a new management running a bank with a balance sheet that is almost the size of this country’s wealth—on one view, it is the largest bank in the world—it is important that there is an incentive to help taxpayers get their money back.

The hon. Gentleman asks about penalising. It will be for the FSA to look at each case to ensure that there is a bonus structure or a reward structure generally, not just at the top, but throughout the entire system, that it is built for the long term, and that there is clawback—all the conditions that we set out—otherwise it will visit the appropriate penalties. People in banks must be focused on building their banks for the long term, otherwise we will be back exactly where we started.

I welcome the White Paper, particularly the points made by my right hon. Friend about changing the financial culture of banks. It sounds, therefore, as though he might like to incorporate in future legislation an excellent Bill restricting the pensions of board members of banks that are wholly or partly owned by the taxpayer. Will he consider the matter?

I know that my right hon. Friend had a Bill before the House, which she discussed with me. It is important that all parts of the remuneration—pay, bonuses or pensions—are based on reality and what is reasonable, and that they are geared all the time towards helping the bank or similar institution build for the long term, and do not leave it prone to taking short-term risks, which can prove so disastrous.

May I remind the right hon. Gentleman that on 11 November 1997 I explained to the then Chancellor over eight columns of Hansard why the tripartite regulation of the banks would not work? May I warn the current Chancellor, with more brevity, that his proposals will not work either? May I modestly suggest that he look at my speech before proceeding to legislation?

I will bear that in mind for my holiday reading over the summer. I have the vaguest recollection that I may have looked into the Chamber in the course of one of those columns and looked back out again. I remember those debates quite well.

As the hon. Gentleman knows, the problem that we had 10 years ago was that the Bank of England never regulated all aspects of financial services. It regulated the banks, but throughout the 1990s it was obvious that many banks had many other interests, such as insurance, that were regulated by other bodies. Such duplication and complication did no one any good. Indeed, the entire self-regulatory regime was pretty discredited by the mid-1990s. As I said to the shadow Chancellor, we can argue for ever and a day about where we draw the line. When the bank or the FSA is doing something, what matters, as the hon. Member for Gosport (Sir Peter Viggers) put it so succinctly, is that a distinction is made between the general supervision of the system, the financial stability, and an organisation that says to each individual, “This is what you should be doing”, drilling down into the nuts and bolts of it. The structure that we have is right. It needs to be strengthened and built on, and that is why I make my proposals today.

Chapter 9 of “Reforming financial markets” touches on the future regulation of credit unions in Northern Ireland. Does the Chancellor accept that for change to work, the FSA will have to have a strong and active regional interface, which we have not had before? Does he accept that that applies equally to the wider banking market in Northern Ireland, which has very different features from the banking market on this island? If the future arrangements for industrial and provident societies are to work, can we afford to leave the savers of the Presbyterian Mutual Society as casualties by the wayside?

I am aware of the problems relating to that society, and arrangements are being made to examine what happened and what might be done, but we have to be aware of the implications that there might be for institutions in other parts of the UK.

Does the Chancellor agree with the Governor of the Bank of England’s assessment that it was not clear how the Bank would discharge its new responsibilities if it could not go beyond issuing sermons? Or did the Governor say that simply because the Chancellor had not shown him a copy of the paper that he brought to the House today?

The proposals that I put before the House today mean that when the Bank sounds a warning or expresses concern through its financial stability report, there is now a mechanism to make sure that those recommendations do not just lie on a shelf, but have to be addressed and dealt with. That is a major step forward.

As two of the main causes of the economic breakdown and the credit crunch were the mass-proliferation of toxic credit derivatives and the gross recklessness of the investment arms of the banks, does my right hon. Friend not think it necessary to prohibit, or at least require official approval of, potentially risky derivatives? Given the eye-watering cost of bailing out the banks, how can he justify continuing to give state underpinning to the casino investment banks, rather than limiting that underpinning to the traditional commercial banks?

On the latter point, the answer is quite simply that investment banks are systemically important, as we have seen in this country and in America. As we saw in America prior to the banking collapse in October, simply letting them go has potentially disastrous consequences. Indeed, it was the collapse of some of those American banks that immediately precipitated the problems. On the wider point, banks need to be properly regulated, but if my right hon. Friend is getting to a point where he can say that there should be some sort of veto from the regulators, I would say to him that that might be more difficult. It is better to have a system that regulates risk within institutions, rather than one that is wider than that.

I have no doubt that the measures that the Chancellor announced today are worthy of our careful consideration, but the bottom line in reality for many of our constituents is that medium and small businesses are still not gaining the help that is necessary to make them sustainable and profitable. Will the measures assist in getting money to where it is needed?

The need to get lending going—particularly for small and medium-sized enterprises, but for others, too—is urgent. Measures are already in place to try to ensure that that happens. I know that concerns are being expressed in the different parts of the country and different sectors where that is not happening sufficiently. That is why I welcome the announcement today by Prudential that it intends to lend to medium-sized companies. The SME sector is of particular concern, simply because of its size and the number of people whom it employs, not just in Northern Ireland but in the rest of the country, too. We have to step up our efforts to make sure that we get that lending going.

I apologise for missing the Chancellor’s first few remarks in his statement. May I compliment him on resisting the seductive structural arguments coming from the Opposition parties, both with regard to splitting up the activities of banks and with regard to doing away with the tripartite system, a move recommended so strongly by the Opposition? Does he not share my surprise at the ease with which a few kind words from the Governor of the Bank of England have persuaded the shadow Chancellor to hand back to the Bank those responsibilities that it previously discharged with such abysmal incompetence, and more? Does the Chancellor not agree with me that the likely consequence of doing what the shadow Chancellor proposes will be that we end up with not just bad regulation, but probably a ruined monetary policy system, too?

I take the view that I have held consistently for the past 10 years. It was right to give the Bank independence to deal with monetary policy. That will stay; I do not think that anyone wants to reopen that decision. It is right, because of its responsibilities, that it should have a view on financial stability. When it comes to the whole question of macro-prudential supervision, if one were to give more powers, the Bank would be the obvious place to go. I honestly do not see the advantages of saying that the Bank should also start to involve itself with the hundreds of different banks, building societies, insurance companies and other financial institutions, because all that that would do is simply move a large chunk of the Financial Services Authority into the Bank, and I do not think that that institutional change would benefit people at present. I would rather build on what we have, and identify the problems that we have.

I repeat a point that cannot be made often enough: institutions are important, and so are the tools to do the job, but at the end of the day, we are talking about a matter of judgment. Frankly, yes, the FSA got things wrong with Northern Rock, and the Bank of England, in the ’80s and ’90s, made mistakes of judgment. We have to concentrate on trying to make sure not only that we have the institutions and the tools, but that people understand what they are doing.

What caveats and terms and conditions did the Chancellor attach to the provision of the vast sums of public money that were used to bail out our failing banks? Did the banks comply, and if they did not, what sanctions did he put in place?

I am not sure whether the hon. Lady was present at the many debates and statements that we have had on that subject, but earlier this year, I set out at some length—I think on a number of occasions—the measures being put in place. The hon. Member for Louth and Horncastle (Sir Peter Tapsell), who recommended reading Hansard over the summer, has left the Chamber, but if I am to read his speech, she might want to look at some of mine.

I thank the Chancellor for advance notice of the statement. I welcome the fact that he spoke of systemic risk, and the fact that there is a chapter in the document about derivatives markets. However, in essence, the four points are simply to call for an EU directive, to work towards “a roadmap delivering…improvements”, to support “international efforts” and to support “the principle of greater transparency”. When will we have real plans to deal with that aspect of systemic risk? When will the markets have access to proper pre-trade and post-trade information, and when will the markets have access to proper, secure pricing data? When will the analysts have all the information that they need properly to identify the risks that such products pose?

The hon. Gentleman makes a very fair point. We need an open, transparent market, so that people can see what is going on with their derivative products. We can fix some of those issues in this country, through FSA requirements, but some of them need European agreement because they are governed by directives, whether we like it or not. Given the relationship with the United States and the interrelationship with the markets, there are other wider international implications, too. However, on the general proposition that we ought to have more openness, so that people can see what is going on, and crucially so that perhaps some of the people running the banks know what is going on, the more that that happens, the better it will be.

On that point, there is an overriding need for clarity and certainty in financial regulation, so why are the Government apparently contemplating handing over many of the rule-making and supervisory functions to three new EU financial authorities, so that instead of a tripartite system at home, we have a new hexagonal system of financial regulation, with a bigger hole in the middle, less certainty, less accountability, and more confusion when things go wrong? Is that really what the Government intend?

No, but we need to recognise—I was going to say “whether the right hon. Gentleman likes it or not”, but I know that he does not—that Europe and the European Union have some influence on the way in which financial markets operate, in relation to directives, capital ratios and so on. The point that I made to the right hon. Member for Hitchin and Harpenden (Mr. Lilley) was that the British Government have to work to fight for the British interest. That is why it is far better if one is able to work with the mainstream political parties, rather than people who are out to lunch.

The Chancellor made no mention of the credit rating agencies, but they are the canaries of risk in the system and they got it spectacularly wrong in the previous crisis. Is he looking at providing any guidance or a framework for credit rating agencies and, in particular, at tackling the potential conflict that exists because the entities that are assessed pay the agencies’ fees?

The hon. Lady is right. The Financial Stability Board, which the International Monetary Fund set up, is looking at the issue, because credit rating agencies are mostly American and they operate throughout the world. We have to have international agreement, and in Europe steps are being taken rather more quickly to try to ensure that agencies are properly regulated. She is right that they can be hugely influential, but I have always made the point that a credit rating agency’s advice should be one factor influencing people’s decisions. It should not comprise their total judgment, because it cannot.

Does the Chancellor accept that his statement, “whether we like it or not”, in relation to the European Union is rubbish and as outrageous as anything we have heard from him for months? Will he accept, very simply, that we can make our own decisions in this House; that those matters do affect every single man, woman and child in this country, and the City of London; and that, for us simply to have to accept that all decisions must come from the jurisdiction of the European Union, to which the so-called national supervision will be subject, is a complete outrage that will lead to all the difficulties, all over again, that we saw with the stability and growth pact and all the other economic paradigms with which the European Union has come forward? His statement is complete rubbish. He knows it. Why does he not just pack it in?

I know that the hon. Gentleman is obsessed with all things European, and I wonder how he and quite a large number of his colleagues are ever going to be able to make a rational decision about anything in relation to Europe—[Interruption.]

Order. The hon. Gentleman has asked a question of the Chancellor, who is replying.

All I say to the hon. Gentleman is that we are part of the European Union, which is an important market to us, and that that means that we should be an active partner in it, fighting the British corner. It means also that we have to be prepared to speak to people in Europe, rather than pretend that they do not exist.

On a point of order, Madam Deputy Speaker. About 350 passengers, some of them my constituents, on the cruise ship the Marco Polo, which is now berthed in Invergordon, have symptoms of norovirus, the vomiting bug. NHS Highland is considering moving passengers to London on dozens of coaches—a 10-hour journey without sufficient toilet facilities—or on a train. Passengers generally want the ship to return to Tilbury as soon as possible; most are being cared for properly, in their cabins, and NHS Highland could put nurses and doctors on board the ship to help. How can we in this House ensure that the matter is dealt with properly and in the best interests of our constituents, the passengers?

I am sorry to hear what the hon. Member has to say, but it is not a point of order for the Chair. Nevertheless, he has been able to express his concerns about many of his constituents.

I beg to move,

That leave be given to bring in a Bill to make provision for residents of care homes to keep domestic pets in certain circumstances; and for connected purposes.

In addition to the subject of the title of the Bill, I propose to discuss sheltered accommodation. I am pleased to be able to present this Bill today and delighted to have received so much cross-party support for what it outlines from colleagues, including the shadow spokesmen for animal welfare and for elderly people. The issue touches every constituency throughout the UK and, given a growing elderly population, will need to be addressed.

Superficially, the issue appears to be about animal welfare, and I should say that I have been involved in animal welfare organisations for even longer than I have been a member of the Labour party, which is 40 years. Indeed, Alexander Solzhenitsyn once made the relevant connection, saying:

“Nowadays we don't think much of a man’s love for an animal; we laugh at people who are attached to cats. But if we stop loving animals, aren’t we bound to stop loving humans too?”

Separate from that, however, I see the issue as one about the right of elderly people to live their lives as they wish, without too much well meant regulation of every detail from the moment that they leave independent accommodation to the moment that they move to sheltered accommodation or care.

The problem is simply stated: when people move into sheltered accommodation or into care, there is no consistent policy allowing them to take a pet with them. As a direct result, in the most recent year for which statistics are available, 38,000 healthy pets had to be put down and a further 100,000 had to be given up by their owners. Many of those pets will have been put down after an attempt to re-home them.

Moving home is stressful for anyone. Moving from one’s long-standing home into sheltered or care environments is often traumatic, as one separates oneself from independent life. If we add to that having to part from one’s pet and, even, having to order it to be put down, we add distress and guilt, and there is a very clear case for Parliament to help in avoiding that if it can.

Practice varies enormously throughout Britain, but there are numerous examples of successful schemes that allow pets to remain with their owners, and that should be the norm for sheltered housing. The fact that one is now living in a warden-aided flat should not remove one’s right to make the choice to keep a pet. Pets provide an important source of physical, emotional and social support for many older people, and there is extensive evidence of improved cardiovascular and mental health and other health benefits from the relationship with a familiar animal. It mitigates the loneliness of many people in old age and provides an avenue for nurturing, caring and taking responsibility for others, and maintains the sense of still feeling useful.

I have discovered that many older people find that when it is time to move into care, there are wildly different practices throughout the country, making for a postcode lottery if one wants to keep an animal. There are no legal obligations on residential homes in that respect, and that is in stark contrast to other countries, including the USA, Germany, Greece, France and Switzerland, all of which have introduced legislation to ensure that older people have the right to keep or maintain contact with animals, whether those people live independently in the community, in sheltered accommodation or in long-term homes.

As far back as 1970, France legislated for pets to be allowed in all public and private housing, provided that the pet is properly cared for and not causing a nuisance. In 1983, the USA passed a national law permitting older and disabled people to keep pets in housing that received federal funding. The Society for Companion Animal Studies, supported by the Pet Food Manufacturers’ Association, both of which have been extremely helpful in preparing the Bill, has published research to assess the scale of the problem in the UK. It found that 65 per cent. of care homes have no formal written policy whatever. Of those that do, 29 per cent. permit pet ownership, but more than half—54 per cent.—specifically exclude cats and dogs.

I know from correspondence from constituents that there are genuine concerns about pets going with their owners into shared or nursing care accommodation relating to pets not mixing well and about adequate exercise for dogs; responsibility for the payment of veterinary care when it becomes necessary; and the fact that older residents might be frightened of or allergic to animals. I am not arguing for a blanket policy, stating that every pet, from an anaconda to a Rottweiler, has to be admitted; I am arguing for a basic presumption that pets be permitted—subject to appropriate discussion about all the eventualities that can arise, and provided that they do not cause a nuisance to other residents.

Care providers would be understandably and rightly concerned if an extra burden was placed on them. However, evidence from experience is that an intelligent policy allowing animals actually reduces the burden on staff; residents who would otherwise make frequent demands on staff time often focus on their companion animals for much of the day.

Best practice guidelines are available for any authority that changes its policy. Wandsworth council has been proactive on the issue; its previous policy effectively ruled out pets in its accommodation, but its current policy makes the keeping of pets normally permissible. The feedback has been entirely positive. The council has told me that it would be glad to advise other authorities that might be considering a similar change. Organisations such as Help the Aged, Age Concern, Pathway and the Anchor Housing Trust have recommended guidelines that can help.

The Cinnamon Trust has gone beyond that and produced a comprehensive publication of pet-friendly homes; it gives ratings to the top 500 establishments visited by the trust’s assessors. I was delighted to visit Elm House nursing home in my constituency of Broxtowe. It has a five-star rating for the criterion “Welcoming any owner and their pet with caring, friendly staff”. I saw the dramatic effects that the home’s cat, budgerigar and visiting pets have on the lives and reactions of long-term residents with physical and mental disabilities.

The Cinnamon Trust also has a national network of more than 10,000 community service volunteers who provide practical help when day-to-day care is an issue. Volunteers from another group, Canine Concern, bring in formerly homeless dogs that they have adopted as individual pets to visit patients. The animals are a positive therapy in recovery; as the National Institute for Health and Clinical Excellence has recognised, that can often be the case.

In preparing the Bill, I have been helped by many colleagues with personal experiences. My hon. Friend the Member for Colne Valley (Kali Mountford) tells me that her mother was allowed a visit from her dog only once after she went into care, and would have liked so much to have had more contact with her companion from the years before. My hon. Friend the Member for Sheffield, Heeley (Meg Munn) was a social services manager in an area where one Sue Ryder home regularly brought in a much-loved cat to cheer up the residents.

My Bill will address a problem that remains general. Today I met Brenda Eustace, an elderly resident in London who was unable to find a home willing to take her small pet dog and who, as a result, could not go into care. We need to end the postcode lottery and to come to the aid of elderly people faced with this trauma. I commend the Bill to the House.

Question put and agreed to.

Ordered,

That Dr. Nick Palmer, Miss Ann Widdecombe, Mr. Ian Cawsey, Mr. David Blunkett, Meg Munn, Andrew Rosindell, Mrs. Linda Riordan, Paul Flynn, Mr. Denis MacShane, Mr. Roger Gale, Ann Clwyd and Judy Mallaber present the Bill.

Dr. Nick Palmer accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 16 October and to be printed (Bill 129).

I beg to move amendment 1, page 11, line 32, at end insert—

‘(4) The Treasury shall, no later than the date of the Pre-Budget Report 2009, bring forward plans to replace Air Passenger Duty with a per-plane tax.’.

Let me start by outlining the Opposition’s overall approach to air passenger duty. We believe, and have said repeatedly, that the duty should be levied on a per-plane basis, not a per-passenger basis. That allows a stronger link with emissions and other environmental impacts; after all, we are talking about what is, or should be, an environmental tax. Furthermore, levying on a per-plane basis allows the possibility of including freight and corporate aircraft, which have environmental impacts that can be as severe as those of commercial airliners, as well as transfer passengers, who are currently exempt from APD.

We also note the Government’s proposals for huge increases in APD this November and next. We regret that at a time of big rises in APD, the Government have not, thanks to their ineptitude, found the time or inclination to reform air passenger duty in its entirety. Instead, the only real reform—the new division of the world into four bands, based on the location of a country’s capital city—is a botched job, drawn up by someone in the Treasury armed only with a drawing compass and no common sense. I shall return to the Government’s four-zone plan.

Does the hon. Gentleman agree that those arbitrary zones have created a number of unfair anomalies? Most notably, people travelling to the Caribbean will have to pay a higher tax than those travelling further—to Hawaii, say, or to other areas around the west coast of the US. People in this country feel angry about that.

I thank the hon. Lady for that intervention, and she is absolutely right. I have had considerable correspondence on the issue and have met a Jamaican delegation, including the Jamaican Prime Minister, that came to see us at the all-party Caribbean group. What the hon. Lady has mentioned is a real and serious concern among people in the Caribbean, especially those who fly to and from the islands visiting friends and relatives—the VFR flight community, as it is known. I shall come to some of the anomalies in the system, but I can say now that the Caribbean is probably the biggest loser from the Government’s four-zone plan.

If a per-passenger duty were imposed on cars, it would be paid four times if four people using a car pool system went in a car together, but only once if a single person used a car; we might end up with four cars, rather than one, on the road. That is the parallel, and it makes nonsense of the Government’s position.

My hon. Friend is right. That is why our amendment 1, a much more logical and environmentally friendly alternative, would mean that air passenger duty was charged on a per-plane basis. The per-plane duty would also see the early demise of the brave new quadripartite world that the Government have described in schedule 5.

I understand the environmental arguments that the hon. Gentleman is putting forward. However, can he tell us of any studies of which he is aware, or which the Conservative party has commissioned, that show the economic impact of proposals for a plane duty on regional airports and what a plane tax would do to the air cargo industry?

I thank the hon. Gentleman for that intervention. He raises two very reasonable questions, which the Government considered in their response to their consultation. Unfortunately, their response did not put forward any reasonable arguments against a move to charging on a per-plane basis. On regional airports, a lot depends on how we would assess the per-plane tax and how the administration would be run. I believe that a system could be designed that did not discriminate against regional airports.

The studies carried out by Manchester airport and other parts of the industry show that it would be extremely difficult for the major regional airports to attract long-haul passenger flights if this were done on a per-plane basis. They also show—I am speaking from memory—that 80 per cent. of freight business in regional airports would go into deficit and would, in effect, be unable to trade for a profit. Will the hon. Gentleman consider that?

I thank the hon. Gentleman for that intervention. I am perfectly willing to look at any papers that have been produced by anybody on this subject. I just think it is a pity that the Government failed in their own consultation to give proper consideration to those questions.

Let me try to explain why the Government have not seen fit to opt for a per-plane duty. At the beginning of last year, they appeared to agree with the Opposition that taxing per plane would be a better option to penalise flights that run near-empty and a better means of recognising that the plane causes the emissions, not the people. A per-plane tax might also allow tax incentives to be given for more environmentally friendly planes, which could never easily happen with a per-passenger tax. The Government then got into problems of their own making on questions of definition and administration, so the 2008 pre-Budget report ran up the white flag. Nevertheless, when they originally launched their consultation in January 2008, the policy was absolutely clear. According to the consultation document, they would

“replace air passenger duty with a duty payable per plane rather than per passenger.”

In case of doubt, the document went on:

“This reform will take place on 1 November 2009, and has the objective of sending a better environmental signal, and ensuring that aviation makes a greater contribution to covering its environmental costs, while ensuring that a fair level of revenue continues to be raised from the sector in order to support public services.”

The document described as a “principle” the need to provide

“incentives for the more efficient use of planes by taxing similarly sized aircraft the same, no matter how full the plane”.

We entirely agree with those sentiments as laid out by the Government last year. The Finance Act 2008 provided for certain powers to proceed in that direction. This time a year ago, Ministers again committed to a per-plane tax, with only the final details open to change—yet six months later, the change was total.

The Government’s U-turn was set out in a document entitled “Aviation duty: response to consultation”, which was published with the pre-Budget report last November. It makes for interesting reading, and offers sorry excuses where they are provided at all. We can agree that member states’ decision in October to include aviation in the EU emissions trading scheme was a significant development, but the Government have acknowledged the ongoing case for a UK tax along the lines of the ETS. So the response document was left claiming that the U-turn in November was

“consistent with the Government’s objectives to provide additional support to businesses and individuals in the short-term and maintain action on climate change”.

It was certainly not consistent with the Government’s previous environmental analysis, but one might infer from the talk about supporting business that it was welcome within the industry. However, one struggles to see how. Every airline and every travel company has condemned the proposed changes; meanwhile, environmental groups attack the abandonment of the per-plane alternative.

I hope that this intervention is factually accurate. I have been told that in 2006—which is, after all, in the lifetime of this Parliament—the head of the Conservative transport policy review called for air passenger duty to be increased to £20 for short-haul flights and to £100 for long-haul flights. How does the hon. Gentleman reconcile that position with the position that he is taking, or is this a reasonably recent conversion on the part of the Conservatives?

There has been no conversion at all. That was the view of a transport policy group, but for as long as I can recall being involved in these matters it has been the official policy of the Conservative party to back a per-plane tax.

Let us look at the extent of the proposed changes in air passenger duty in clause 17 and schedule 5 to try to understand the scale of the Government’s proposals, because there is a link with the failure to move towards the per-plane tax. Because the Government had budgeted for raising revenue from freight and corporate and other aircraft, and from transfer passengers, and that business did not deliver on that revenue, there was a huge shortfall that had to be made up in the air passenger duty figures—hence the huge increases outlined in schedule 5 and clause 17.

Currently, there are two levels of APD. Roughly speaking, there is one rate for flying to a UK or other EU destination and another rate for flying elsewhere. As part of the climb-down, the pre-Budget report proposed replacing those two rates with four rates, making all flights more expensive but with the really big duty increases imposed on long-haul flights. The existing two-band regime becomes the four-band version laid out in schedule 5 and new schedule 5A, with all rates significantly higher than at present. Under the status quo, the first band is currently £10 per passenger for economy and £20 for all other classes. The long-haul band, which includes all the territories in parts 2, 3 and 4 under the new schedule, is £40 and £80 respectively—for economy class, on the one hand, and all other classes, including, interestingly, premium economy, on the other.

The four new bands start with part 1, which is similar to the existing short-haul band, with rates going up in November 2009 by 10 per cent. to £11 and £22. It now includes the Maghreb countries and Russia west of the Urals. New part 2 territories include north America, Egypt, the middle east, eastern Russia—that is, east of the Urals—and Pakistan. From November 2009, those rates will be £45 and £90—a 12.5 per cent. rise on the status quo. Returning to the point raised by the hon. Member for Brent, East (Sarah Teather), part 3, which includes the Caribbean, will be banded at £50 and £100—a 25 per cent. rise on the status quo. That band also includes India, China, Japan and much of Latin America. The rates for part 4—it is not actually defined as such but covers all the territories not in parts 1 to 3, including Australasia, Argentina, Chile, Bolivia, Peru, some other smaller south American countries and the Falkland Islands—will be £55 and £110: a huge 37.5 per cent. increase on the status quo.

Even more importantly, the Government are programming further big rises—far bigger than those this coming November—for November 2010. Part 1 charges will go up to £12 and £24, part 2 charges will go up to £60 and £120, part 3 charges will go up to £75 and £150, and part 4 charges will go up to £85 and £170. Those are huge increases. Air passengers from the UK will be cursing Labour’s economic mismanagement and the fact that owing to the Government’s botched reforms and failure to opt for a per-plane duty, all aviation except commercial passenger aircraft will be exempt from APD. In the next 18 months, for economy class passengers, those flying to popular destinations such as France or Spain will face a 20 per cent. tax hike, those flying to Florida will face a 50 per cent. increase, those flying to the Caribbean and India will face an 87.5 per cent. increase, and those flying to Australia will face a whopping 113 per cent. increase—a more than doubling of the tax take.

People who travel to India and the Caribbean often do so because they have family living abroad—they are not necessarily going on expensive holidays. That is not to say that people do not go on holiday to those destinations, but a large proportion of those travelling there do so for family reasons—to attend weddings or funerals, or merely to see grandparents.

The hon. Lady makes a very fair point. That is why many of those routes are called VFR routes, standing for “visiting friends and relatives”. They are important for that reason. Of course, tourism is very important to the Caribbean and somewhat important to India, but we should not lose sight of the fact that for many people in our communities in this country, those are important routes for family or personal reasons as well.

Many will ask whether the increases—rates are being as much as doubled in some cases—are really an environmental tax, or whether they are simply a stealth tax with the most tangential link to emissions. Let us examine for a moment some of the peculiarities of the Government’s new four-band regime. The existing two bands—Europe and all other countries—at least make some kind of sense and possess simplicity. The new bandings have no justification at all, as they are based on the distance of a country’s capital city from London. The world is divided into four bands, of capital cities up to 2,000 miles away, up to 4,000 miles away, up to 6,000 miles away and beyond 6,000 miles away.

Does the hon. Gentleman agree that if so-called green taxes are to have public acceptability, they must be clearly based on environmental arguments rather than being crude revenue-raising devices?

The hon. Lady makes precisely my point, perhaps somewhat more succinctly than I am making it. By not creating an environmental tax but instead introducing an arbitrary and discriminatory schedule, the Government are making a huge mistake.

I have one final point about south Asia. Flights to Kashmir, if there were such things—it is quite possible that there could be in future, or that there could be charter flights—would leave the airline concerned having to make the intensely political decision as to whether its destination was in band 2, as part of Pakistan, or band 3, as part of India.

The schedule sets out a crazy scheme. Destinations such as the Caribbean, India, Bangladesh and Sri Lanka are some of the biggest routes for VFR passengers, many of whom have said that the Government are introducing deliberate discrimination against the Commonwealth. As has been mentioned, their approach has provoked uproar in the Caribbean. The Jamaican Prime Minister, Bruce Golding, whom I have mentioned, and Tourism Minister Ed Bartlett made a special visit to the UK purely about this one issue during the Committee stage, to urge against the Government’s new four-zone banding scheme. They pointed out that there was no environmental or economic reason why flights to the Caribbean should be taxed 25 per cent. higher than those to Florida, or to the US or Canadian west coast.

Interestingly, the new 787 Dreamliner will be able to fly directly from London to Hawaii, yet those flights, which would be some 7,200 miles, will attract 25 per cent. less APD than flights to Kingston, Jamaica, which, at 4,693 miles, are 50 per cent. shorter in distance. As I understand it, 60,000 members of the UK Caribbean diaspora have signed a petition against the Government’s plans, which are an extremely unpopular measure.

We debated this matter a little in the Public Bill Committee. The last but one Exchequer Secretary, the hon. Member for Wallasey (Angela Eagle), did not seem to understand what hurt and upset her comments about the Caribbean would cause. She said in response to my speech:

“He mentioned Caribbean communities. We are aware of their circumstances and we are listening to their representations. Clearly, it mainly involves the anomaly of Hawaii.”

I mentioned Hawaii merely because that is the most extreme version of the anomaly, but the anomaly is not Hawaii, but the four-zone schedule covering the whole world. Anyone who has a sizeable Caribbean community in their constituency—I have one of the largest—will know that the Caribbean tourism market, even ignoring VFR flights for a moment, competes mainly with Florida. The Caribbean will now be taxed at 25 per cent. more than its US competitor. Those who visit friends and family in the Caribbean will be similarly clobbered.

To return to the hon. Member for Wallasey and her shaky geography, she explained how we managed to have a position whereby Russia was divided into two zones. I asked her why we could not simply divide the US, for example, into two zones. She said:

“Well, clearly the US is a slightly different issue as its main land mass is much shorter than Russia’s. If one includes Honolulu, it gets slightly longer.”

That is extraordinary, as it implies that Honolulu is somehow on the main US land mass. She said:

“If one did it on a line between Boston and Honolulu the split would be somewhere in the middle of the Ocean.”––[Official Report, Finance Public Bill Committee, 2 June 2009; c. 166-167.]

I was thinking of getting out a globe, if we were allowed visual aids in Committee, to show that the halfway point between Boston and Honolulu was nowhere near any ocean, but right in the middle of the United States.

Is it not the case that if one starts at Greenwich—very close to where we are today—the far extreme of the United States at the end of Alaska and the far extreme of Russia are almost exactly the same distance away?

The hon. Gentleman makes a very good point. Interestingly, both those territories are in part 2, but logically they should be in part 4 because, by definition, they are the furthest points from Greenwich. Yet the Government are saying that they are as close as Egypt. That is some of the craziness involved in the schedule.

We also need to examine the environmental arguments for having a per-plane duty, which is the point of the amendment. The reaction of environmental groups to the abandonment of that policy has been mixed. Many welcomed the headline rises in APD, which they thought would combat excessive use of aviation, but, like us, decried the abandoned attempt to find a per-plane methodology. Friends of the Earth responded:

“The rises in APD are welcome, but should be seen in the context of the abandoning of per-plane aviation duty.”

Greenpeace stated:

“Plans to tax flights instead of people would have encouraged the industry to fill their planes instead of flying half-empty jet liners around the world…Once again the aviation industry has been given a free pass at a time when its contribution to climate change is rising.”

Nobody was satisfied with the Government’s climbdown.

Why have the Government rejected the per-plane tax? To return to the Exchequer Secretary before last, the hon. Member for Wallasey, she told the Public Bill Committee:

“We had hoped to proceed with the per-plane tax, but we decided against it for a fair number of reasons…It was not thought to be the best time to shift from one tax to a completely redesigned one, given the uncertainty in the economy.”

She added:

“we wanted to avoid the disruption and costs associated with a transition to a new tax right in the middle of a period of economic uncertainty that did not exist when the original change was announced.”—[Official Report, Finance Public Bill Committee, 2 June 2009; c. 164.]

Those are curious justifications, because to return to the point made by the hon. Member for Manchester, Blackley (Graham Stringer), apart from the state of the economy, no detail at all given was of why the per-plane duty had been rejected. In fact, the Government said that they had suspended the move because of the change in the global economy, but of course the credit crunch began many months before the original consultation was even launched.

When the Government were thinking about embarking on a per-plane duty, in the early months of 2008, the economic difficulties were already happening. The Northern Rock crisis had already taken place, some months earlier. The consequences of their decision are dire. The move to a per-plane tax, which would bring in most other forms of aviation, was slated to raise much more in revenue and be a genuinely environmental tax, but the Government choked in the middle of last year and were left to make up the revenue shortfall by clobbering air passengers. The result is what we are considering—the huge hikes in clause 17 and schedules 5 and 5A.

The reason for the climbdown is that the Government were too busy elsewhere to drive through the necessary reforms once they had started the process. It is difficult to sell to the general public a big increase—a huge increase, in the case that we are considering—in air passenger duty without reforming the system to make it a genuinely environmental tax.

We want the following to be done. First, we want the duty to be linked to the pollutant—the plane—rather than directly to the passenger. Secondly, empty or near-empty aircraft should be taxed at the same rate as full ones. Thirdly, the tax should logically be extended to transfer passengers, who fly in and out of a UK airport. There is no logic to a system whereby the only passengers who fly in and out of the UK tax-free are those who do not live, work or visit here. Fourthly, the Government’s four-band system must be axed. It is arbitrary and discriminates against important UK partners such as India and the Caribbean for no good economic or environmental reason. Fifthly, other forms of polluting aviation need to be brought into the air duty regime, notably corporate jets, parcel services and other freight. Finally, the tax should encourage a move to cleaner aircraft. Ironically, higher APD will probably make that less likely as airlines become even more cash-strapped, and less able to invest because more of their money goes towards APD.

Most of all, we argue that if there is to be a big hike in the tax take from the sector, now is the time not to postpone reform but to make it happen.

I want to speak specifically about the effects of the ill-thought-out proposal for air passenger duty on flights to the Caribbean—a region with which this country has long-standing historic ties. Here and now in the 21st century there are big populations of Caribbean origin in our great cities and communities, who are looking to what we shall say and do about this matter.

Before I consider in more detail the problems with the APD proposals, I stress that I entirely accept the environmental argument for some sort of taxation on the sector. The environment is a huge issue in my constituency: I probably get more letters about the environment and climate change than about any other matter. For our children, it is vital that we in the House have the courage to make the right decisions for the future.

Climate change is also a big issue in the Caribbean, which has experienced hurricanes more regularly in the past two years than ever before. There is no question but that that is a consequence of climate change, which has also led to rising seas throughout the region—a real threat to a series of small island states. Of course, the environment is the Caribbean’s biggest asset.

I am committed to fighting climate change and bearing down on carbon emissions, and so is the Caribbean. It is in the Caribbean’s self-interest to do that. However, precisely because I am committed to combating climate change and to my Government’s taking serious action on climate change and carbon emissions, I want any proposal for APD to be based fairly and squarely on genuine environmental arguments, not to be a mere device for raising revenue.

The Caribbean has historic ties to this country, and it is particularly hard hit by the proposed four-zone system. Perhaps when Treasury Ministers and the fabled Treasury civil servant with a compass were working out the system, the Foreign Office said, “Well, I wouldn’t worry too much about the Caribbean; it’s a middle-income region and it can take the hit.” In my time in Parliament, I have heard time and again from Foreign Office officials that the Caribbean is a middle-income region and that the focus of UK attention should therefore be much poorer countries.

My hon. Friend is making a good point, which has reached the nub of the issue. The Opposition have overstated their case by attacking the whole concept, but I hope that my hon. Friend agrees that the Government need to reconsider the anomalies in the system, which penalise some countries, such as those in the Caribbean—we have heard about others—in a logically ridiculous and unfair way.

I entirely agree. The system that the Government propose does not bear examination. I repeat that the sums may be relatively small for those travelling club class to a top resort on the north coast of Jamaica, but they are large sums for my constituents, who perhaps save for a year or two out of tiny incomes. I cannot for the life of me understand why the Government would want to penalise minority communities in our big cities from the Caribbean and Asia in that way, because people will find the sums involved onerous and hard to afford.

The hon. Lady is giving a very good speech and I absolutely agree with the points that she is making. The briefing that the Caribbean Council has sent to all MPs says that a family of four travelling economy to the Caribbean—not club class, as she suggested—will pay £300 extra in 2010. That is a substantial amount of money.

We have to look at the incomes that people are earning. We are largely talking about people who are in low-paid public sector jobs or other low-paid sectors of the economy, and for them £300 is a lot of money. Having to find £300 extra to see their aunties or grandparents at Christmas or attend a wedding or funeral will cause real pain for families in my constituency, as well as people in Birmingham, Manchester and other places.

The other thing to say is that sometimes an arbitrary distinction is made between tourism and travel by friends and relatives. Jamaica could not sustain itself without the money spent by relatives who go home regularly and, for example, give money for school fees or invest. The economic consequences for the Caribbean are therefore serious.

As the House has heard, the system also seems to be wholly arbitrary; it really is a case of a Treasury civil servant with a compass. It means that people will pay more air passenger duty going to the Caribbean than they will going to Hawaii. It scarcely makes sense to have the whole of north America in the same zone, when America stretches from the Pacific to the Atlantic.

The hon. Lady is making a powerful speech. Is not one of the unintended consequences of the measure that people will fly to Miami and then change planes to fly down to the Caribbean? That will mean taking two flights and causing much more pollution, so I am not sure that the Government have thought the measure through.

Absolutely. As someone who flies to Jamaica most years, I can tell Ministers that travel agents will recommend, particularly to families visiting relatives, that the cheapest way would be to take a cheap flight to Miami and then take another flight onwards. That will not help with emissions; in fact, it will make things worse. That is another indication that Ministers need to look at the proposal again.

The proposal has already caused much unhappiness in Caribbean countries—we have heard about the Prime Minister of Jamaica and other regional leaders who are concerned—and among the Caribbean community here. I have received many letters from people who have been made aware of the issue and are concerned. They cannot believe that a British Government are seeking to penalise people from the Caribbean in that way. However, I would like to put on record my thanks to the Chancellor of the Exchequer, who met a small group of us earlier this week to discuss the issue. I am glad that the Government are at least listening.

In conclusion, the Caribbean has historic ties with this country and important community links. To go forward with the air passenger duty in its current form would send an unfortunate signal to those in the Caribbean community about the respect and concern that the Government have for them. It is not too late to revisit the proposal. All of us in this House understand the environmental reasons behind it, but I hope that enough has been said in this debate to make the Government understand that the four-zone system is widely seen as unfair and not seriously based on environmental considerations, and that it will have disproportionate effects on key supporters and Commonwealth countries, including India and Pakistan, as well as those in the Caribbean. For the sake of my constituents, the Caribbean community in this country and Caribbean leaders, who have gone to enormous trouble to make their case, I urge Ministers to reconsider the proposal.

Thank you for giving me an opportunity to speak to amendment 1 and all the issues that are thrown up as a consequence, Madam Deputy Speaker. I congratulate the hon. Member for Hammersmith and Fulham (Mr. Hands) on the intelligent way in which he set out the arguments. I also congratulate the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) on making in such a compelling fashion the case that I, too, wish to make.

There are two main arguments that I wish briefly to explore. The first is about the desirability, in the view of my party, of having a system of aviation taxation based on each plane that travels, rather than on each customer who travels. It is worth momentarily setting the context for that policy preference. Aviation in the United Kingdom is an increasingly large contributor to the overall output of carbon dioxide. Six per cent. of the UK’s total carbon dioxide emissions now results from aviation, and that figure is rising rapidly—far faster than, for example, the contributions made by other forms of transport or by buildings to overall CO₂ emissions. There is therefore an important issue to address. How can we try to ensure that the projection of rapidly increasing CO₂ emissions is limited, rather than rising inexorably in the years and decades ahead? Most people accept that CO₂ emissions resulting from aviation are likely to grow as a proportion of CO₂ emissions overall. The key is to try to ensure that they grow more slowly and make up a lower percentage of overall emissions than they would otherwise.

For that reason, our desire as a party is to try to find a system that allows people to fly—we realise that in many circumstances, although not all, people need to fly for work or leisure—but that ensures it is done as efficiently as possible. I thought that the analogy drawn by the hon. Member for Wellingborough (Mr. Bone) was a good one—perhaps it is sometimes easy to think of such matters in quite straightforward terms. A car with four people in it is obviously a much more efficient way of transporting four people from A to B than four cars each with one person in. It is for that reason—a reason that is, I admit, partly to do with congestion, but partly to do with helping the environment—that some councils have explored the possibility of reserving lanes for cars with two or more passengers, because we need to be more efficient and intelligent in using CO₂-emitting fuels.

On the same principle, it would clearly be desirable to have planes filled to capacity, or at least to give airlines the incentive to fill them to capacity where possible. The issue is therefore about incentivising those companies, partly to make their planes fuller but partly not to continue with this strange system whereby planes are flown around empty in order to get them to different destinations—that may sometimes be necessary, but it is reasonable to try to incentivise airlines to do it as little as possible—and partly also to introduce more fuel-efficient planes. I recognise that the Government’s policy will create those incentives. However, having a per plane duty rather than a per passenger duty will create even greater incentives than the Government’s system.

The hon. Gentleman also made the point that we should try to ensure that we do not create perverse incentives for customers to avoid the system that the Government are putting in place by taking a short-haul flight and then a long-haul flight, or vice versa. One always needs to consider when looking at such systems whether people will find ways around them that may be economically advantageous to them, but which will undermine the basic environmental policy that the Government are seeking to promote. That is the background to the issue.