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Financial Services Bill

Volume 504: debated on Monday 25 January 2010

Consideration of Bill, as amended in Public Bill Committee

[Relevant documents: Third Report from the Joint Committee on Human Rights, on Legislative Scrutiny: Financial Services Bill and the Pre-Budget Report, HC 184.]

New Clause 1

No credit agreement to be enforceable if its total cost exceeds the statutory limit

‘(1) No agreement regulated by the Consumer Credit Act 1974 shall be enforceable if the total cost of credit charged under that agreement or the cost of transactions linked to that agreement exceed the relevant limits set by the OFT pursuant to sections [Quanta of statutory limits] and [Limits on costs of transactions linked to credit agreements].

(2) Where a consumer credit agreement is found to be unlawful by virtue of subsection (1) that agreement and any linked agreement shall be unenforceable and the lender and any agent acting on its behalf shall be liable to:

(a) a fine determined by the OFT in accordance with section [Level of fines]; and

(b) the revocation of the lender’s Consumer Credit Licence.’.—(Rob Marris.)

Brought up, and read the First time.

With this it will be convenient to discuss the following: new clause 2—OFT’s power to set statutory limit—

‘(1) Where the OFT is satisfied that insufficient price competition in a defined credit market is causing or may cause a detriment to consumers the OFT shall set a reasonable limit on the total cost chargeable for credit by lenders in that market.

(2) In setting the limit referred to in subsection (1) the OFT shall consider evidence of:

(a) the degree of price competition in the credit market; and

(b) the level of consumer detriment caused by any identified lack of price competition.

(3) The OFT shall within three months of the date on which this Act or any Part thereof comes into force and thereafter on each anniversary thereof decide whether or not to set a limit on the total cost of credit for any consumer credit market and shall publish that decision and the reasons for it.’.

New clause 3—Quanta of statutory limits—

‘(1) The OFT shall set statutory limits which reasonably reflect the cost of providing credit in a properly functioning competitive credit market.

(2) To reflect variations in the amount of reasonable costs incurred by lenders different statutory limits may be set for loans of different amounts and of different durations.

(3) The OFT may on not less than 14 days’ published notice vary any statutory limits to reflect wider macroeconomic conditions including but not limited to changes in the Bank of England’s base lending rate.’.

New clause 4—Limits on cost of transactions linked to credit agreements—

‘(1) Where the OFT sets a statutory limit for a credit market it may also set limits on cost of transactions linked to such credit agreements which costs are not included in the total charge for credit.

(2) Limits on the cost of transactions linked to credit agreements include:

(a) the cash price of goods which are being offered for sale on credit terms; and

(b) the costs of any related insurance or collection services.

(3) The OFT may set reasonable limits on the cost of transactions linked to credit agreements if it finds evidence that:

(a) the statutory limit is likely to be avoided; or

(b) there is likely to be a consumer detriment which is more than de minimis.’.

New clause 5—Publication of limits—

‘When it sets a statutory limit or sets a limit on the cost of transactions linked to credit agreements the OFT shall take reasonable steps to ensure that such limits are timeously:

(a) published in the London Gazette;

(b) publicised throughout the credit industry;

(c) notified to relevant consumer groups; and

(d) notified to relevant advice agencies.’.

New clause 6—Level of fines—

‘(1) The OFT may impose a fine on any lender who exceeds a statutory limit or a limit on the cost of transactions linked to credit agreements.

(2) A fine imposed by virtue of subsection (1) shall not exceed 5 per cent. of that lender’s annual turnover.

(3) When setting a fine the OFT shall have regard to:

(a) the length of time that the lender has been operating in the market;

(b) the lender’s previous record regarding statutory limits;

(c) the lender’s previous record regarding the cost of transactions linked to credit agreements; and

(d) the annual turnover of the lender in its most recent annual accounts.

(4) A lender upon whom a fine is imposed by the OFT pursuant to this section has the right to appeal to the Secretary of State for Business, Innovation and Skills within 28 days after being notified by the OFT of that fine.’.

New clause 7—Definitions—

‘(1) In the sections [No credit limit to be enforceable if its total cost exceeds the statutory limit], [OFT’s power to set statutory limit], [Quanta of statutory limits], [Limits on cost of transactions linked to credit agreements], [Publication of limits] and [Level of fines] “OFT” means the Office for Fair Trading.

(2) In sections [Quanta of statutory limits] and [Publication of limits] the “statutory limit” means the limit referred to in subsection (1) of section [OFT’s power to set statutory limit].

(3) In sections [Publication of limits] and [Level of fines] “limits on the cost of transactions linked to credit agreements” means the limits referred to in subsection (1) of section [Limits on cost of transactions linked to credit agreements].’.

New clause 14—Store cards and consumer credit agreements—

‘(1) The Consumer Credit Act 1974 shall be amended as follows.

(2) After section 60, insert—

“60A Form and content of retail credit-token agreements

(1) The Secretary of State may make regulations as to the form and content of documents embodying retail credit-token agreements, and the regulations shall contain such provisions as appear to him appropriate including requirements to ensure that—

(a) the rate of interest on the credit to be provided under the agreement for credit (or all the rates on a per annum basis where there is more than one rate of interest) does not prejudice the interests of debtors; or

(b) the agreement for credit includes a seven day cooling off period during which credit would not be available to the debtor.

(2) ‘Retail credit-token’ means a credit-token (which has the meaning given by section 14(1)) which results in the provision of credit under a credit-token agreement provided by a retailer or group of retailers which can only be used for purchases from the retailers concerned.

(3) A ‘retailer’ means a person or business providing goods and services to an individual.

(4) Accordingly, a ‘retail credit-token agreement’ is a regulated agreement.”.

(3) For section 67, substitute—

“67 Cancellable Agreements

(1) A regulated agreement that is not a retail credit-token agreement may be cancelled by the debtor or hirer in accordance with this Part if the antecedent negotiations included oral representations made when in the presence of the debtor or hirer by an individual acting as, or on behalf of the negotiator, unless—

(a) the agreement is secured on land, or is a restricted-use credit agreement to finance the purchase of land or is an agreement for a bridging loan in connection with the purchase of land, or

(b) the unexecuted agreement is signed by the debtor or hirer at premises at which any of the following is carrying on any business (whether on a permanent or temporary basis)—

(i) the creditor or owner;

(ii) any party to a linked transaction (other than the debtor or hirer or a relative of his);

(iii) the negotiator in any in any antecedent negotiations.

(2) A retail credit-token agreement may be cancelled by the debtor in accordance with this Part.”.

(4) For section 68, substitute—

“68 Cooling-off period

The debtor or hirer may serve notice of cancellation of a cancellable agreement between his signing of the unexecuted agreement and—

(a) the end of the fifth day following the day on which he received a copy under section 63(2) or a notice under section 64(1)(b), or

(b) if (by virtue of regulations made under section 64(4)) section 64(1)(b) does not apply, the end of the fourteenth day following the day on which he signed the unexecuted agreement, or

(c) if the cancellable agreement is a retail credit-token agreement, the end of the seventh day following the day on which he signed the unexecuted agreement.”.’.

First, on a personal note, may I express my sadness that the Economic Secretary to the Treasury, my hon. Friend the Member for Dudley, South (Ian Pearson) has announced his intention not to stand in the next general election? That is a particular sadness to me, because he has been a personal friend of mine for 25 years. He will recall that I and many others worked on his successful by-election in what was then Dudley, West in 1994. He has been an outstanding Member of the House and will be sadly missed. The Financial Services Bill is a tribute to his work as a Member of Parliament and as a Minister.

Overall it is a good Bill. It has many good bits, such as those relating to the remuneration of executives, recovery and resolution plans, collective proceedings and the Financial Services Compensation Scheme, but it also has some gaps, which new clauses 1 to 7 seek to address. Nor does it grapple with the concept that some banks are too big to fail, and when we discussed that in Committee the Minister understandably said that he was looking for international agreement. Since then, President Obama has said that the US will go down that route, and I hope that the Government will look at the issue again, because there is still time to add it to the Bill. The Bill also does not address the issue of overdraft costs following the Office of Fair Trading’s unsuccessful court claim, and that should be looked at again.

Nor does the Bill address the repossession of properties that were owned by buy-to-let landlords when the tenants had no idea that the landlord was in difficulty with his or her mortgage. Happily, the issue will—I hope—be resolved by the private Member’s Bill tabled by my hon. Friend the Member for Bolton, South-East (Dr. Iddon).

The fourth gap in the Bill is the question of doorstep lending and the extortionate credit rates that doorstep lenders charge, although they are not entirely alone in doing so. I am grateful to the Centre for Responsible Credit and their excellent officer Damon Gibbons for his assistance on this issue. The problem with doorstep lenders is the huge cost. The debate in this country has become clouded by core considerations about the existence of competitive markets and how those would be affected by the restrictions that would be enabled, although not necessarily introduced, by the new clauses. The concern is that price caps, which the new clauses would allow, could have adverse effects on the credit market. However, we have to consider whether doorstep lending credit markets are competitive. The concern is that they are not competitive and that prices for doorstep lending and other fringe, albeit legitimate, lending are artificially high, allowing those few lenders in the market, who are, of course, taking greater risks, to charge considerably more than would be the case if the market were competitive.

For example, the Centre for Responsible Credit has estimated that Provident Financial has 70 per cent. of the market. Provident Financial disputes that figure, but it is fair to say that it is a dominant player in the market, and the concern is that its dominance has led to an abuse of market position. Under the law at present, Provident Financial and other similar lenders are operating legitimately, but there are grave causes for concern. The cost of doorstep lending from a company such as Provident has gone up as interest rates have come down. That may be because risks have gone up—I understand that—but the Competition Commission has reported that a Provident loan of £100 repaid in 55 weekly instalments carried a total cost in credit of £65 and an annual percentage rate of 177 per cent. in 2006. Today, the same loan would have a cost in credit of £82 and a massive APR of 272.2 per cent. That is an extraordinarily high amount to charge for such a loan, even bearing in mind the additional risks and collection costs that a company such as Provident incurs.

I congratulate my hon. Friend on tabling his new clauses. Does he accept that one of the problems is that people live in complete ignorance of the levels at which they pay for credit? In other parts of the credit industry, we have got much better at demanding that those who sell credit have to explain what the repayment terms are and what problems could arise if someone does not pay the money back. That does not seem to happen in that end of the market to which he refers. Does he accept that?

I agree with my hon. Friend. Often it is a combination of ignorance and desperation, and that is an explosive combination when people want to get money. As the Crowther committee on consumer credit reported in 1971, there is a level of cost for the total package of credit at which it becomes socially harmful to permit such lending to take place. I agree with that assessment from 40 years ago, because genuine social harm is done in extending credit at such high prices to people who, frankly, one would think perhaps ought not to get credit. One really wonders whether people should get credit at 272.2 per cent., even if—I stress this point—it is quite legitimate. My new clauses are an attempt to address that point.

One alternative method of assisting people with bad credit ratings who need credit—I know that this proposal will appeal to my hon. Friend the Member for Stroud (Mr. Drew) and others—is to boost credit unions’ share of the market, which is significantly underdeveloped in the United Kingdom, compared with other countries such as Ireland and Canada. However, it has been suggested by the financial inclusion taskforce that at the current rate of growth, alternative lenders such as credit unions would take 10 years or so to fill the gap that is currently being filled by the doorstep lenders who charge such large amounts of money. Not surprisingly, Provident Financial is a little concerned about the new clauses.

Is the hon. Gentleman proposing that credit unions offer a home credit service to people who are currently serviced by Provident Financial? The Joseph Rowntree Foundation has suggested that the cost of such a service on a not-for-profit basis would lead to an APR of about 120 per cent.

I am well aware of the Rowntree research. The figure is indeed very high—from memory, I think that it is 123 per cent.—because there is a collection issue, which I will come to in a moment.

There are seven new clauses and they come as a package.

The hon. Gentleman did not answer my question. Does he expect credit unions to replicate the service currently offered by Provident Financial?

I am not sure about the word “replicate”. What credit unions do in my constituency, for example, is make themselves available in places such as pubs for people to come and pay the loan, and so on, so there is not necessarily someone visiting them at home, but there is a less formal atmosphere than in a bank. Credit unions could move into doorstep collection as well. For some credit unions, if they replicated the model used by some of the mainstream fringe lenders, if I can put it that way, it is likely that their costs would be lower, because in many cases not only do credit unions have paid staff, but they have volunteers—the credit union to which I belong in Wolverhampton is one of those—which lowers their costs. That is a social input by volunteers to produce what they regard as a better social output—I agree with them on that—namely, lower costs of lending for people who might otherwise have difficulty borrowing money.

To canter through the seven new clauses briefly, new clause 1 would mean that a credit agreement was not enforceable if it breached a cap on the cost of credit. New clause 2 is permissive and would allow a cap to be set on the cost of credit if there were insufficient competition in that market. New clause 3 recognises that there are different fragments of the credit market and would allow different caps to be set for different markets.

New clause 4 would address linked transactions, which is where a lender might issue, say, a token, so that the headline rate of credit might be lower than any cap that had been set, but the borrower has to buy a particular item—for example, a television—from a particular supplier at a particular price, which would circumvent that cap. New clause 4 is intended to prevent such circumvention, by including the cost of any such retail goods in the calculation of the credit price in a linked transaction.

New clause 5 would provide for publicity for any caps that were set. That addresses the issue raised by my hon. Friend the Member for Stroud, which is partly about the ignorance of some borrowers. If the new clauses were accepted by the Government and passed into law, and caps were set because it was found that parts of the market were not competitive, it would still remain a challenge for prospective borrowers to find out whether a cap existed. We as a society find it difficult to reach certain people through the instruments of the state—and often through political parties, I have to say—although loan sharks and legitimate fringe lenders do not seem to have any problem doing so. We need to be inventive about publicising any restrictions on excessive credit costs. New clause 6 would establish a scheme to impose penalties for breaching any caps, and new clause 7 is simply a definitions clause.

Provident Financial has e-mailed several parliamentarians, and that e-mail has been passed to me. Provident did not e-mail me personally. The e-mail states:

“Home credit is the provision of small unsecured loans (typically £100—£500) with manageable, flexible repayments. Repayments are collected each week from the customer’s home by an agent, most of whom are female and live in the communities they serve. Provident Financial agents visit one in twenty homes in the UK each week.”

That bears on the point raised by the hon. Member for Fareham (Mr. Hoban) about replicating the costs. Of course, these collections have to take place, which can increase costs and lead to rates of up to 123 per cent. APR, as the Joseph Rowntree Foundation pointed out. Provident’s e-mail goes on to talk about home credit APRs being higher than for some other products, as we would expect, because smaller sums are lent over a shorter period compared with those of other financial services providers. The cost of weekly home collection is a factor, but the e-mail goes on to say that

“there are no default or extra interest charges”.

In response to concerns about the activities of Provident Financial, my right hon. Friend the Member for Makerfield (Mr. McCartney) tabled early-day motion 379. When I looked this morning, there were 65 signatories to the motion, which expresses concern about the activities of lenders such as Provident Financial. It names Provident, and asks for the Office of Fair Trading to be given a power to cap prices. That is what the new clauses would do. It would be a permissive power; the proposals do not say that a cap must be introduced.

I am not surprised that Provident did not send me a copy of the circular that it sent to some parliamentarians, because, when I looked at it, I found that it appeared to be full of contradictions. Because Provident has got my back up by not contacting me, I am going to go through some of those contradictions. Provident states:

“The cost of credit has risen in all sectors of financial services (including fees and charges for secured and unsecured personal loans, mortgages and credit card lending). Demand for credit is weak. Consumers are being cautious about taking on debt and lenders, in turn, are exercising greater scrutiny over their lending decisions.”

It is almost 40 years since I did my economics A-level, but I would have thought that if the demand for credit was weak, the cost of credit might actually come down. But Provident states:

“Demand for credit is weak”,

as well as saying that the

“cost of credit has risen”.

That seems contradictory, unless there are unwarranted and undesirable frictions on the operation of the credit market.

Provident understandably goes on to quote three conclusions from Professor Elaine Kempson, whom it calls

“the leading UK academic on credit and debt”.

It cites her as concluding in a report in 2005 that:

“An interest rate ceiling could do nothing to reduce high costs associated with lending to people on low incomes who have a high risk of default. Instead, the APR would be reduced by displacing these costs elsewhere, for example in the form of charges for default—the last thing that low-income borrowers would want.”

It surprised me that Provident cited that quote in support of its claims since, in the earlier quote that I read out, it said that

“there are no default or extra interest charges”.

So its professor, as it were, is understandably, properly and credibly saying, “You’ve got to be careful if you bring in a cap, because people might find a way round it by jacking up the price of default,” but Provident quotes her and then says, “We do not have any default or extra interest charges.”

The good Professor Kempson goes on to say:

“It is also likely that more credit would become tied to the purchase of goods and consumers would be faced with high price mark-ups as retailers seek to recover the costs of supplying credit.”

I have referred to my hope that new clause 4 would address that, in terms of linked transactions.

The third of Professor Kempson’s conclusions cited by Provident is that

“there is a danger that lenders would move out of this market altogether, leaving poor people even more prey to unlicensed lenders.”

That is a significant concern of many organisations, commentators, academics and so on. However, Provident, which has been somewhat even-handed, although contradictory, about this, cites recent research by the Financial Inclusion Centre as finding that the use of loan sharks is on the increase, with over 200,000 people taking on illegal credit annually—an increase of 22 per cent. since 2006. This is a sort of parallel universe scenario: one does not necessarily know how many more or how many fewer people would have turned to illegal loan sharks if the situation were different and companies such as Provident did not exist or were restricted by caps on interest rates on their activities. However, there is no cap, very high interests are being charged and an increasing number of people are turning to loan sharks, and that does not suggest a system that is working very well.

Provident also cites a report produced for the Department of Trade and Industry, as it then was, by Policis in August 2004. It stated that the “credit impaired” in France and Germany, where caps are in place, appear more likely to use illegal lenders than in the UK where there are legal credit options for such borrowers. Yet, as I have said, even-handed as ever, Provident also cites research by the Financial Inclusion Centre about the use of loan sharks increasing.

I thought to myself that if Provident can quote a professor, so can I—my guy is German. In 2005, Professor Udo Reifner from the Hamburg Institute for Financial Services published a response to the findings on the effects of the German rate cap—the cap referred to by Policis in its August 2004 report for the DTI. Professor Reifner said:

“In total, at least 9 million people cannot access credit from mainstream banks”

in the United Kingdom

“as opposed to approximately 2.5 million in Germany and between 2.5 million and 4.1 million in France”.

Of course, Germany has a significantly larger population than the UK and France has a population that is almost the same as the UK. On the face of it, their caps have resulted in, or certainly exist in, a system where fewer people have difficulty getting access to mainstream credit.

Provident goes on to say:

“Published figures from Provident Financial’s statutory financial returns show that there has been a steady erosion of margins over the past three years. Profit per customer reduced by 15 per cent. in the three years to December 2008 when Provident’s most recent full year results were announced.”

That seems strange, because when Provident went to the market in October 2009 and issued a bond to raise £250 million of investment to expand its operations—interestingly, the rate it managed to obtain was 8 per cent. rather than 173 per cent.—it told prospective investors:

“The competitive position in the £3bn home credit segment of the market has not changed materially since the Competition Commission concluded its review of the home credit market at the end of 2006.”

So for the purposes of lobbying on prospective legislation such as this Provident says that there has been a steady erosion of margins, but when it goes to the market to get money it says that the market has not changed materially since 2006. There is a bit of a contradiction there.

Overall, there is a long background of concerns about extortionate, as I would call them, or high, as others would call them, interest rates, going back to the Crowther report in 1971. In 1991, the Office of Fair Trading identified the extortionate credit provisions of the Consumer Credit Act 1974, following on from the Crowther report, and said that they were not working. Nothing happened. In 1999, the DTI commissioned research into what improvements could be made, but that report was not published for another three years, until 2002. In 2003, we had a consultation from the DTI on a new unjust credit test and three years after that, in the Consumer Credit Act 2006, we saw the introduction of the unfair credit relationship test as a replacement for the extortionate credit provisions of the 1974 Act.

I hope that the Minister can clarify whether his Department, or any other Department, is monitoring whether the unfair credit relationship provisions introduced in the 2006 Act are working. It has been suggested to me that no such monitoring is taking place. We have a continuing situation in which more financially excluded people are having difficulty getting access to credit in this country than those in France, Germany or parts of the United States of America where they have anti-usury laws. People are paying very high interest rates and we have a market in which demand for credit has fallen but the cost thereof has risen, suggesting that there is not a competitive market for credit for such borrowers. Against that I would contrast the new clauses that I propose, which are permissive and would enable caps to be introduced if it were found that part of a credit market was not working competitively. I urge the Government to take this issue seriously.

Consumer credit is a feature of everyday life. Our society has become increasingly dependent on credit, as we saw in the run-up to the recent financial crisis. The hon. Member for Wolverhampton, South-West (Rob Marris) talked about the credit position in France and Germany, but it is worth pointing out that the UK had higher consumer debt than France and Germany combined. We have seen a cultural change, too. No longer do consumers have to save for new purchases; they can take out a credit card, a store card or a personal loan, or they can withdraw equity from their house. For many people, rising levels of debt were seen as manageable, so long as the economy motored along with low unemployment and rising levels of income. That optimistic outlook, however, was predicated on an end to boom and bust and we can see the cost of that assumption today.

The change to the cultural norm on debt was driven partly by a society that takes on much more debt through home ownership, going to university and so on and partly by the marketing of credit. The Bill tackles that, in part, through banning unsolicited credit card cheques. Those cheques were an indefensible practice that even people in the industry found rather hard to defend.

My new clause 14 considers another aspect of the marketing and availability of credit—store cards. It seeks to address two issues: the rates at which store card debt can be charged and the sales practice surrounding them. We need to distinguish between a store card and a credit card. Store cards are offered for exclusive use in the shops of a particular retailer, whereas a credit card can be used at a wider range of outlets. Of course, some retailers, such as John Lewis and Marks & Spencer, have a credit card rather than just a store card. If one shops at a major department store, one is likely to be offered the chance to take out such a card at the checkout, often in combination with an attractive offer, such as a 10 per cent. discount on that day’s purchases.

It sounds quite attractive, until one looks at the rates charged by store cards. A survey last year by Which? highlighted the high cost of some of the store cards that are available. Argos charged an annual percentage rate of 27.9 per cent., and New Look charged 28.9 per cent., whereas cards issued by retailers such as Ikea, River Island and Topman all cost about 19.9 per cent. According to Which?, the average APR of store cards is about 25.2 per cent., compared with an average for credit cards of about 16.8 per cent. That shows that store cards tend to be relatively more expensive, compared with reasonable alternatives. Even cards at the bottom end of the scale, such as those issued by Ikea and River Island, still charge a higher APR than the average for credit cards.

High rates in conjunction with low minimum payments mean that it can take some time to pay off relatively small amounts charged to a card. For instance, it would take six years to pay off a balance of £100 on an Argos store card, for which the minimum monthly repayment is either £2 or 4 per cent. At the other end of the scale, it would take two years and 10 months to pay off the same balance on the River Island store card, which has a lower interest rate and a higher minimum repayment. It appears, therefore, that high rates of interest make store cards a poor way to borrow, yet there are more than 14.6 million of them in circulation.

In 2006, the Competition Commission, recognising the high cost of credit, announced that any providers offering a card with a rate above 25 per cent. should issue a wealth warning telling customers that there are cheaper ways to borrow. Despite that, however, store cards remain in wide circulation.

We might assume that, on seeing the wealth warning, a rational consumer might decide to shop around for another form of credit before taking out a store card—that such a person would leave his or her goods in the shop and pop down to the bank, or go home and search online for a form of cheaper credit. However, the evidence suggests that things do not always happen that way, as the rational consumer will see the opportunity to reduce the cost of shopping offered by the day-one discount. He or she will take advantage of that discount and then repay the balance straight away, thus avoiding the interest cost.

Of course, if consumers were always that rational, there would be no store card business, because people would simply take advantage of the discount, pay off the balance and walk away. However, despite people’s best intentions, the reality is that the desire for short-term gratification overcomes the rational response. If it did not, retailers would not offer these deals.

My new clause 14 therefore contains two provisions. First, it would give the Office of Fair Trading the power to cap excessive interest rates, where they are not in the interests of the consumer or the debtor. In a way, that mirrors some of the suggestions made by the hon. Member for Wolverhampton, South-West, and I shall return to some of the differences when I address his proposals directly. The new clause would place no obligation on the OFT to use those powers, but it would provide some tools for going beyond the wealth warning approach announced in 2006.

The second element of new clause 14 is the provision that would enable the decision to take out a store card to be decoupled from any requirement to buy from that shop on that day. It would mean that people taking out a store card would have a seven-day cooling off period in which they could not use it. That would enable consumers to shop around for a better rate, and it would also tackle one of the sales practices that incentivises the take-up of cards.

It is worth thinking about what happens when a store card is taken out in a shop. There was an article on store cards in Which? Money magazine last month, for which a researcher went to open a number of store card accounts. In the course of a couple of days, he managed to rack up nearly £3,000 worth of credit, even though his income for that year was about £1,000. The article says that half the companies that he approached rejected his application, so I suppose that we should take some reassurance from that.

Actually what happened is quite instructive. The article states that

“none of the stores we visited verbally warned James about the high interest rates and the low minimum payments on the card and none of them told him that they were unsuitable for borrowing. This could only be found in the smallprint of the terms and conditions given to James…waiting in a queue in a busy shop is not the ideal place in which to read the small print on an application.”

My new clause would give the purchaser, or the person taking out a retail credit-token agreement—as it is described in the new clause—the opportunity to go home and think carefully about whether they want to use the card. It would not close off the provision of credit to those customers, but would give the person taking out the card the opportunity to think carefully about whether they want to pursue that route.

One might ask why I have focused on store cards and not on the personal loans offered by some retailers at the point of sale. That is a valid question and it is worth exploring. There is a difference between a loan and a store card, which is a form of revolving credit, whereby a person enters an arrangement with a retailer that enables them to spend up to a certain amount. There is no fixed repayment schedule and there can be relatively low minimum repayments. In the Which? sample, repayments ranged from 2.5 per cent. or £5 for British Home Stores to 4 per cent. or £4 for companies such as Topman or River Island.

It is possible to take on additional commitments without deliberate thought. Many store cards adopt the low and grow approach to credit—a subject we touched on in our debates in Committee, and which was initiated by the hon. Member for South-East Cornwall (Mr. Breed). People start with a relatively low credit limit and it is then increased.

A personal loan is different. There is a fixed repayment period for a fixed amount, so when a person takes out a loan they make a commitment. They know the repayment level and they know how long the loan will last. It is a well determined, well defined commitment, unlike a store card, for which the agreement is open-ended and there is no fixed repayment period and no fixed amount of borrowing because the credit limit can be increased. The argument that applies to store cards is very different from that which applies to the loans offered by our major retailers. That is why new clause 14 is linked to store cards. The measures set out in my new clause are proportionate and reasonable. They reflect our party’s policy, and it has been our party’s policy since well before the economic crisis.

I am not entirely sure what the new clauses tabled by the hon. Member for Wolverhampton, South-West represent. The hon. Gentleman is, I think, a Parliamentary Private Secretary; he is part of the payroll vote and he is here to support the Government in debates. He should be a loyal supporter, yet it appears to me that his new clauses question settled Government policy, unless they are a teaser—opening the way for the Minister to accept new clauses 1 to 7. Is this a sign of independence of mind finally breaking out? In Committee, when my hon. Friend the Member for Chichester (Mr. Tyrie) tabled a new clause about competition, the Minister thought the proposal should be part of the regulatory objectives of the FSA, but recognised that Government policy was rather different. Perhaps he opened the floodgates for the hon. Member for Wolverhampton, South-West to table all sorts of amendments.

May I come to the defence of my hon. Friend the Member for Wolverhampton, South-West (Rob Marris)? He is always independent-minded, even though he may happen to have a job that some of us would love but never seem to curry favour for. I have always seen him as an independent, forward-thinking and—dare I say it?—concerned Member on the Government side.

There we have it: the hon. Gentleman is queuing up to replace the hon. Member for Wolverhampton, South-West as a PPS, if the latter feels he ought to fall on his sword after moving his new clause.

I have been independent-minded on certain things for a long time and I quite frequently question Government policy—sometimes successfully. Even though I say it myself, I think that a measure of my independent-mindedness, which seems to surprise the hon. Gentleman, is the fact that I was voted Back Bencher of the year in 2008, and someone is not voted Back Bencher of the year by Members of all parties if they are a complete lickspittle.

Although it is good that we have with us a Back Bencher of some independence, surely the hon. Member for Wolverhampton, South-West (Rob Marris) is one thing or another. He is either part of the Government and acting under collective responsibility, or he is an independent Back Bencher—he cannot be both things at the same time. Will my hon. Friend the Member for Fareham (Mr. Hoban) put it to the hon. Gentleman that if he truly wants to be independent, he should leave the Government and make such comments from the Back Benches?

Order. Before the hon. Member for Fareham (Mr. Hoban) responds to the hon. Member for Rochford and Southend, East (James Duddridge), may I simply remind him that, although I appreciate the importance and good nature of these exchanges, we are discussing new clauses relating to the regulation of credit?

Thank you for that guidance, Mr. Speaker. Perhaps I should table a new clause to the Constitutional Reform and Governance Bill setting out the statutory duties of PPSs, rather than considering them in the context of this debate. As ever, I am grateful to you for putting me back on the straight and narrow.

I have some sympathy with new clauses 1 to 7. Those of us who are in comfortable, well-paid jobs, with easy access to credit, will frankly be shocked by the APRs charged on home credit products. The hon. Member for Wolverhampton, South-West cited illustrative examples of the rates, which are indeed high. We could shine a light on other areas that involve high rates, such as pay-day cheques and lending, which involve high rates as a consequence of the relatively short duration of the loans. Such rates are eye-watering when compared with those for store cards, so we need to reflect on that too.

There is a real challenge here, however, because we need to ask whether a price cap would work and what its impact would be. The hon. Gentleman picked apart the briefing that Provident circulated among hon. Members, but it included legitimate concerns, especially those raised by independent bodies. For example, when Policis examined the home credit market in 2004, it looked at the experience of countries in which caps had been imposed. Among its findings was that where there were rate ceilings, the cost of credit became less transparent and there was less latitude for consumers. It also found that the cost of such products switched from the interest rates charged to default rates, which was a point raised by the hon. Gentleman in connection with the comments by Elaine Kempson cited in the Provident briefing.

It might be the case that default charges are not levied by home credit companies when a consumer decides that they are not in a position to pay for a certain week. Indeed, I think that the model followed by several companies assumes that there will be some weeks when people do not pay. However, in other parts of the financial services sector, competition on rates has led to other products being sold to make up the margin. For example, it is argued that a driver of lenders selling payment protection insurance has been that competition on loan rates has led them to try to recover their margin by selling that insurance, which has a relatively high margin.

My fear in such a situation would be companies, were they subject to a rate cap, starting to charge consumers an additional cost for that default. In the same way, some would argue, as the hon. Member for Edmonton (Mr. Love) might when we consider other amendments, that one reason why the penalty charges for unauthorised overdrafts are so high is that they create a form of indirect cross-subsidisation from those who go overdrawn. They subsidise so-called free banking for the rest of us.

The hon. Member for Wolverhampton, South-West was quite critical of the words of Elaine Kempson, but there is some truth in what she says and we need to bear it in mind.

But surely my hon. Friend the Member for Wolverhampton, South-West was saying that there is no competition. It is not that people are queuing up; they are offered loans on the doorstep by others from their community who, supposedly, are genuinely lending money, but there is no educative process and no ability to rationalise and go out to other lenders. The lenders are preying on the most vulnerable. Is it not about time that we in this place tried to do something about it? We have had debates on whether there should be maximum repayment terms, but apparently we got nowhere with that. My hon. Friend is simply trying to put some structure in an operation that is letting people down. What is wrong with that?

The problem is what would the consequences of that structure would be. I do not doubt that the new clauses have been tabled with the best of intentions, reflecting some of the concerns that have been raised, but we need to think carefully about the unforeseen consequences. For example, there may be a switch from high rates to low rates with additional charges. I am not sure that the demand for credit would necessarily be extinguished as a consequence of the proposals. We may not think it is right, but people would still need credit to deal with unexpected variations in income or expenditure, and where would they go if that money was not available from Provident? I will return to that point.

The Policis report suggests that rate caps ended up in a rather odd situation whereby lenders felt it was uneconomic to advance relatively small loans, so either no money was lent to customers or they would be lent a higher amount than was strictly necessary. In Committee, we talked briefly about ending unsolicited increases in credit limits. We need to think about what amounts people would lend. The hon. Member for Wolverhampton, South-West questioned the merits of this argument, but in France and Germany rate caps meant that more people used illegal lenders. That is the evidence from the Policis study.

The hon. Gentleman also implied that the only opponents of rate caps were home credit companies, but let us not forget that in 2005 a coalition including Citizens Advice, AdviceUK, the National Consumer Council, Which? and ABCUL—the Association of British Credit Unions Ltd—all urged the House of Lords to oppose a rate cap. There is a coalition here: it is not just people in the home credit market but a wide range of people with a close interest in this area who are concerned about the impact of a rate cap.

I shall not repeat in full the words of Elaine Kempson—the hon. Member for Wolverhampton, South-West cited them at length—but let us turn to the alternative and what would happen if the rate cap were applied. Elaine Kempson said:

“Finally, there is a danger that lenders would move out of this market altogether, leaving poor people even more prey to unlicensed lenders.”

The hon. Gentleman suggested that credit unions might fill that gap. I am a great supporter of credit unions, which do an excellent job, and I agree that it would be good to see them grow so that they supplied a share of the market comparable with what they are able to supply elsewhere. However, even credit unions have to turn people down. Many people are concerned about the fact that credit unions want a cap on the rates that they charge. Credit unions will not supply the whole demand, and others will move into that space, which I am concerned will be filled by illegal money lenders and loan sharks. As I said in my intervention on the hon. Member for Wolverhampton, South-West, there has been a great deal of discussion about whether there is a sustainable model for not-for-profit home credit. The Joseph Rowntree Foundation suggested that the APR would probably be 123 per cent., so it is an expensive operation.

I agree with much of what the hon. Gentleman has said. Something he has not touched on is the role of the social fund in providing support for people who have difficulty obtaining credit, and who will fall into the hands of the illegal credit sector if we restrict the provision by capping interest rates.

The hon. Gentleman makes an important point. I have not touched on it, nor was I intending to do so. However, a significant increase in the social fund would be required if it were to replace the home credit market. I cannot remember whether the hon. Member for Wolverhampton, South-West cited the amount that Provident Financial raised in its bonds.

If we are going to get the social fund to fill the gap, we are starting to talk about a significant commitment to additional Government spending.

There are alternatives, but I am not sure that they will plug the gap if the people in the home credit market choose to withdraw. It is an expensive business to collect money door to door from consumers on low incomes who want flexibility. Many organisations would not want the reputational risk of working in that arena and charging high rates. I am not persuaded by the arguments of the hon. Member for Wolverhampton, South-West, although I understand where he is coming from. Members on both sides of the House would want a cheaper alternative to home credit, but we have yet to see evidence that one exists. If the home credit people withdrew from the market, some individuals would be picked up by credit unions, community development finance institutions and similar bodies, but many of them would go to loan sharks, and we know the personal costs that can result from their doing so.

The credit market is difficult to get right, and there are real challenges in how we deal with high rates and marketing. We welcome the measures in the Bill, but new clause 14 is a sensible and proportionate solution to the problem of store cards so, with your agreement, Mr. Speaker, I should like to press it to a vote at the appropriate time.

All of us would have a great deal of sympathy with what has been said over the past hour or so, because the provision of small, unsecured loans to vulnerable people or people on very low incomes has been a problem for an extremely long time. It is difficult to see how we can legislate totally for the sort of things that people sometimes knowingly get into when they have no alternative or choice. The truth is that interest rates are often not a particularly good guide to the way in which we try to control the costs. A relatively small amount of money paid back over a relatively short period of time with what appears to be a reasonable fee for doing so translates into an extraordinarily high APR. If someone repays £50 within three months and pays £10 of £15 for the privilege of doing so—perhaps £5 a month—that does not seem very much, but when we do the maths, it translates into a large APR. Rate caps have been under consideration for a long time but are not the only measure by which we can try to control that practice. Administration, door-to-door collection, the lack of security and the potential for default all add to the cost of providing low-level loans.

There may not seem to be many defaults, because the debt is often rolled forward. When somebody is about to default, the existing amount is rolled into another credit agreement. That is the slippery slope that gets people into difficult situations. Perhaps we ought to be more insistent about restricting such roll-overs.

There is not much competition because not many people want to get into the business in a formal, legitimate sense. Much has been said about Provident. In my neck of the woods, I have had no complaints about Provident. Some people swear by the firm; because they have acted sensibly, Provident has been only too pleased to do business with them. Unfortunately, its major competitor, Cattles, failed a year or so ago. It is regrettable that the business was not picked up by another firm, to provide some measure of competition. There was clear evidence that Cattles was doing good business, but the way in which it managed that brought about its failure.

Those whom I have come across who desperately want some emergency money are, in many cases, people whose benefit has not turned up although they were promised it, or who have been denied the opportunity of accessing the social fund. They may talk to their friends and neighbours and get into some arrangement that they did not intend. Credit unions could well provide greater opportunity to access money, but more credit unions are needed, their rules should be more relaxed, and there should be greater depth of business in the communities that they would want to serve. There are not enough credit unions in many parts of the country and the way to access them is not as well known as it should be.

Although I agree that this area needs to be examined, I am deeply concerned that in an effort to protect the relatively small number of people who take on difficult contracts or resort to loan sharks, we might cut off some of the low-level unsecured lending that is well understood by a very large number of people who use it properly and do not default.

We should not forget the growth that has taken place in other types of credit. An early-day motion has been tabled about log book loans, for example. That is an informal sort of credit that needs to be knocked out. We know that pawnbroking has changed, and that household items are now being pawned for small amounts of money. We have heard recently about advertisements which say, “Send us your bits of gold,” for which very poor prices are paid, and about people being desperate enough to sell even family jewellery for relatively small sums. The practice of people accessing small amounts of money when they are in difficulty must be considered holistically, but the proposals we are considering concentrate on one area and may have the unintended consequence of reducing the provision of low-level credit for those who require it and are able to use it successfully.

Turning to store cards, I must say that I hate the things—they should be banned—but I recognise that people ought to have a choice. None the less, the atmosphere in which people make an informed choice is entirely inappropriate. Some large stores almost seem more interested in selling people a store card than in selling them the thing that they went in for, and that is because the card makes the store more money. There is no doubt about that. The 10 per cent. that the business can give away on a purchase is small compared with what it will potentially get from the future use of the card. Putting some control on the use of such cards and fettering it a bit, so that people had cooling-off periods in which to reflect, would help. Perhaps our new financial education body will prompt those issues in people’s minds before they sign up, willy-nilly, to such cards. That would help.

If we are to go down the avenue of choice, so that people are able to exercise it if they wish to, we must make certain that it is an informed choice. Information must be provided prior to signing up, making certain that people understand exactly what they are signing up to, and after signing up, so that people not only have the information that enables them to repay at a rate with which they are comfortable, but understand the underlying costs of their decision to pay a certain rate. For example, they should know that it will take years to pay off the debt through minimum payments or that, despite the small amount of money that they have borrowed, ultimately, they will pay a multiple of that, having chosen a given store card,. There is a lot of merit in restricting such credit, in providing people with information and a cooling-off period for reflection, and in ensuring that they receive some real information about the exact costs of their choice.

This is an interesting area of finance, and the Financial Services Authority and, perhaps, the Office of Fair Trading will have to continue to bear down upon it, because people are finding ever more ingenious ways to provide low amounts of credit. Undoubtedly, there are some unscrupulous firms. I certainly do not put Provident or, indeed, some others in that category, but some unscrupulous individuals deliberately target people who get into difficulty—often, for all the right reasons when they need emergency purchases, not luxuries. Sometimes their purchases are school uniforms, or something for the family, but people often fall foul of such unscrupulous individuals, and we need to try to protect them. However, to deny such credit services to those who use them satisfactorily would be a retrograde step, so I cannot support the new clause tabled by the hon. Member for Wolverhampton, South-West (Rob Marris). If the proposed restrictions on store cards were subject to a vote, I would support them because, although they do not go as far as I would like, they are a step in the right direction.

The proposed changes do not touch upon the widespread practice by store card and, indeed, other credit card organisations of ensuring that the part of the credit with the lowest interest rate is paid off first and the highest interest part is left until last. That practice should be much more widely publicised, and action should be taken against it.

I agree entirely. The segmentation of balances and their treatment for interest and repayment purposes is not well understood. In fact, anybody who is even reasonably financially educated would find it difficult to make a precise distinction between them.

A hard-nosed approach must be taken to the repayment of high-cost credit. I would like the minimum repayment rates to be increased, as well as a clear indication given on the statement of precisely how the amount added as interest is calculated—that could be done easily. The interest element could be made up of two or three different parts so that the card owner would be able to understand how the charge had been calculated and therefore better able to understand how they could manage it in the most effective and economic way. I agree with the hon. Member for Wolverhampton, South-West that a lot more information could be provided on all credit cards and store cards. The new clause is a step in the right direction, although I would prefer it to go a little further.

Let me begin by thanking my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) for his kind comments at the beginning of his speech. His new clauses 1 to 7 would give the Office of Fair Trading the power to set a statutory limit on the total cost chargeable for credit in a particular credit market where it is satisfied that consumers are, or may be, suffering detriment through insufficient price competition. He outlined the purposes of the new clauses very well, as he always does.

I want to say at the outset that the Government share his concerns about low-income and financially vulnerable consumers, who can struggle to obtain cheaper credit from high street banks and building societies. That is why we welcome the review that the OFT is conducting into the high-cost consumer credit sector, which has a particular focus on whether competition in the high-cost credit market is effective in current conditions. The review will examine, among other things, the experience of other countries that have introduced a cap on the cost of credit, which should help to establish the effectiveness of such tools as a form of consumer protection.

My hon. Friend will be aware that this issue has been previously considered, and it has been concluded that such measures could be detrimental to consumers—a view shared by leading consumer groups, as the hon. Member for Fareham (Mr. Hoban) said. My hon. Friend is of independent mind on these matters, and it is always right to take a fresh look at them. I stress to him the independence of the consultants who were commissioned by those at the then Department of Trade and Industry who considered these issues. I would not want there to be any confusion about the role of Elaine Kempson, to whom my hon. Friend referred several times. She is very much an independent person, as Professor of Personal Finance and Social Policy Research at the university of Bristol, and she is a member of the Government’s financial inclusion taskforce. She is an expert on these matters, and it is right that her views are carefully considered.

Government intervention in pricing clearly has the potential to create distortions such as cross-subsidy in related sectors. It could constrain supply and ultimately lead to higher prices for consumers, and damage industry by distorting markets. That is why venturing into this area requires very careful consideration. It is certainly our view that the review will provide important information that we will all want to look at—Government, consumer groups and others.

My hon. Friend has elegantly framed his new clauses so that the price control measures would take effect only when the OFT is satisfied that there is insufficient price competition in the market—perhaps when one supplier is dominant in a number of localities or when all lenders offer much the same product and do not compete on price. However, in such circumstances, the proper solution would usually be to look for measures to increase competition rather than to substitute the judgment of the OFT as to a reasonable price for that of the market.

New clause 2 would require the OFT to assess at annual intervals the adequacy of price competition in defined markets. In competition law, it is notoriously difficult to identify where the boundary lies between competitive and non-competitive pricing, as my hon. Friend well knows, so that would be a complex judgment requiring something akin to an economic market study every year in order to withstand challenge from lenders and other interested parties.

New clause 3 would require the OFT to set limits on the total cost chargeable for credit, which must reasonably reflect the cost of providing credit in a properly functioning market. Again, however, that would be an extremely difficult task given the differing terms on which consumer credit is offered—some lenders offer much more flexibility than others—and the different risk profiles of each lender’s customer base. There is also a real risk that those proposed powers for the OFT could stifle the competition in the credit market and the diversity of products that my hon. Friend wants to see.

There is evidence from countries that have adopted some form of ceiling on the cost of credit that such restrictions can be circumvented through the charging of fees or insurance costs not covered by the regulated amount, and that they can force vulnerable consumers to take up less flexible, less transparent, more expensive or unregulated forms of credit with high charges for missed payments, including from illegal money lenders. I recognise that new clause 4 is intended to reduce the scope for such circumvention, but there are practical difficulties with the approach proposed as it would potentially involve the OFT continuously monitoring the price of thousands of products offered by a number of individual companies.

Doubts about the workability of regulating the price of credit and concerns about the consequences for consumers are the main reasons why the Government have been very cautious about any measures such as those proposed by my hon. Friend. However, I appreciate that he is motivated by the desire to protect vulnerable consumers, and members of all parties recognise the importance of that. Such consumers face restricted choices in accessing credit and sometimes borrow more than they can afford to repay. We have to consider whether there are sensible steps that we can take, which is why we have considered his new clauses carefully.

We share my hon. Friend’s concern, which is why we have already taken a number of measures to give consumers a more informed choice and encourage responsible lending, including greater OFT oversight of high-cost credit lenders and new mandatory OFT guidance on responsible lending. We will introduce a new requirement this year for lenders to provide adequate explanations to borrowers and assess their creditworthiness, and we are also conducting a review of credit and store cards. The consultation on so-called risk-based re-pricing of existing debt, the level of minimum payments, the allocation of payments, the need for further information and unsolicited credit limit increases closed last Tuesday, 19 January.

I have referred to the review that the OFT is currently undertaking of the market for high-cost credit, which is specifically considering competition issues and the effects of introducing restrictions on the cost of credit. We do not believe that it would be appropriate to anticipate the OFT’s conclusions on the working of the market or any recommendations that it may make for further protections for consumers. However, I assure my hon. Friend that we are of course taking a close interest in the review and will want to respond quickly following its completion.

I turn to new clause 14, which also deals with interest rate caps but is focused on store cards and similar retail credit tokens. I appreciate the distinction that the hon. Member for Fareham made between store cards and loans from retailers, about which he made some very interesting points. The power suggested in the new clause is very broad and does not define the circumstances in which an interest rate may be thought to prejudice the interest of debtors.

Many of the concerns that I have described about new clauses 1 to 7 also attach to new clause 14. Constraining interest rates on store cards in this way carries a strong risk that pricing structures will simply be re-engineered to circumvent a cap, meaning that the costs of borrowing become less transparent for consumers, often hidden in contingent charges, which disproportionately fall on the least capable and most vulnerable. As I have said, caps can distort proper competition in the market. The hon. Member for Fareham made many of those points when he referred to new clauses 1 to 7. Similar concerns apply to new clause 14.

That said, the Government recognise that, in the past, competition has not always been effective in the store-card market. That was the conclusion of the Competition Commission’s market investigation, which ended in 2006 and resulted in the introduction of several measures to stimulate competition and ensure transparency for consumers about the costs of store-card borrowing and ancillary products, such as payment protection insurance. As the hon. Member for Fareham knows, those measures came into force in May 2007.

New clause 14 also proposes a seven-day cooling off period for new store-card agreements, whereby consumers could not spend on their card for a week after taking it out. The hon. Member for South-East Cornwall (Mr. Breed) referred to that and said that it ought to be a 14-day period, which Consumer Focus recommends in its response to the consultation that has just closed. The Government recognise the sentiment behind the proposal. We are clear that responsible consumers should make a purchase on credit only after careful consideration, rather than focusing on a promotional offer, which might seem attractive when someone is in the store and not really thinking about the debt that will have to be repaid in future.

However, a cooling-off period could have far-reaching consequences for both store-card providers and retailers, as it risks reducing the utility of the product and increasing point-of-sale costs to such a point that it might render it unviable. That may result in the withdrawal of a valued source of credit for some consumers and damaging consequences for retailers. Arguments need to be carefully weighed in the balance before a judgment is made.

We conducted a consultation exercise, which ended only last Tuesday. Let us look at the evidence and make a judgment on that basis. If it points to the need for a cooling-off period, we would want to introduce it. We are concerned for consumers to take out store cards—or any credit—with their eyes open, and we need to ensure that we are taking appropriate action in all the circumstances. Through the implementation of the consumer credit directive and the OFT’s irresponsible lending guidance, we are introducing new responsible lending requirements to ensure that all regulated credit agreements are responsibly promoted, lending decisions are taken on an informed basis, and consumers are given a proper explanation of the key features of the product and the risks associated with it. Those provisions will bite particularly on store-card providers, who will need to ensure that, when they promote their products at point of sale, their staff are sufficiently well trained and the environment is properly conducive to meeting the new standards. The directive will also provide a new right to withdraw from any regulated credit agreement in the first 14 days.

The Government have received several responses to our consultation on credit and store cards. As I said, the closing date was only last Tuesday. I therefore think it right that we consider all the evidence carefully, issue our response and examine the case for legislation on the basis of it. It would be precipitate to rush to legislate now before we have considered all the submissions that have been made to us.

Although the hon. Member for Fareham suggested, before he heard my response, that he would press new clause 14, I urge him to think again. That seems sensible, given where we are.

Given what I have said—my sympathy for the new clauses that my hon. Friend the Member for Wolverhampton, South-West tabled, but our genuine concerns and the fact that a review is currently under way into competition in the market—I invite him to withdraw the motion.

I thank hon. Members for some thoughtful speeches this afternoon. I am quite happy to take some ribbing from the hon. Member for Fareham (Mr. Hoban) on this topic, because, of course, the Labour party is not as monolithic as he might think. I have been propounding such measures for the two and half years that I have been a Parliamentary Private Secretary. I have never, ever been criticised by a Whip or Minister, and I have won some battles with the Government. He may get a shock, because the prospective Conservative parliamentary candidate for Wolverhampton North-East wants to introduce restrictions—I note that that came about after I tabled the new clause—so both parties are divided on the matter.

The concerns expressed today have been on the workability of any cap. There is an understandable fear that were caps to be introduced, fringe borrowers who currently use legitimate fringe lenders would turn to loan sharks. However, we must be clear that we are talking about a social ill and that some people simply should not be borrowing money. We should bear that in mind. That is what the Crowther committee was referring to in 1971.

It is paradoxical that all three Front Benchers made thoughtful speeches against the new clauses and on the unworkability of caps and so on, but that we already have caps on things such as utilities. We also have a cap on mobile phone roaming rates, for example, which perforce, and by definition, is for some of the more privileged members of our society, namely those who are wealthy and prosperous enough to go abroad on holiday with a mobile phone and make telephone calls. The idea of caps exists in our society, legislation and economy.

However, I take heart from what my hon. Friend the Economic Secretary said about the OFT bringing out guidance later this year on adequate information for borrowers—that key point was raised by my hon. Friend the Member for Stroud (Mr. Drew) in an intervention. I note that the high-cost credit review, which I believe is due to report in spring, will be looked at carefully by the Government. I hope they reconsider caps on the kind of lending arrangements to which new clauses 1 to 7 refer if the evidence indicates that there are significant problems because of the lack of competition in such markets, which I believe there are, and that the fears that caps will lead people to turn to loan sharks are overblown, as I believe they are. On that basis, with those reassurances from the Government, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 8

Short selling

‘(1) The Financial Services Authority (“the Authority”) must make rules prohibiting persons from engaging in short selling of shares except in one of the following circumstances—

(a) the share price at the time of the transaction was higher than it was at the close of the previous trading day of the market on which the share was listed; or

(b) the short selling was by a person who borrowed the shares, and the beneficial owners of the shares had given prior permission at an annual general meeting for the shares to be lent.

(2) Any person who engages in short selling under the provisions of paragraph 1(a) or (b) must make a declaration of the sale to the Authority on the day of the transaction.

(3) The Authority may set requirements as to the form and content of declarations made under section (2), but the Authority must require that such declarations state—

(a) the number of shares sold;

(b) the price for which they were sold;

(c) any features of the transaction which would confer a financial advantage on the seller in the event of a decrease in the price of the shares; and

(d) the person to whom they were sold.

(4) The Authority must publish on its website all declarations under subsection (2) as soon as possible after they are received, and in any case not more than 24 hours after receipt.

(5) If the Authority is satisfied that a person has contravened the provisions of subsections (1) or (2), it may impose a penalty of such amount as it considers appropriate on—

(a) the person who contravened the provision or requirement, in which case the penalty must not be less than the profit made by the person in question; or

(b) any person who was knowingly concerned in the contravention.

(6) Rules under this section may apply to short selling wholly outside the United Kingdom by persons outside the United Kingdom, but only in so far as the rules relate to shares admitted to trading on a market within the United Kingdom.

(7) For the purposes of this section the cases where a person engages in short selling in relation to shares include any case where—

(a) the person enters into a transaction which relates to shares; and

(b) the effect (or one of the effects) of the transaction is to confer a financial advantage on the person in the event of a decrease in the price or value of the shares.’.—(Mr. Frank Field.)

Brought up, and read the First time.

As you would expect, Madam Deputy Speaker, so as not to detain the House too long, I have sought an answer to the question whether there is widespread support for new clause 8, as drafted, and in particular whether the Liberal Democrats support it. It now appears that they do not, so I will use the new clause as a probing proposal. Lord Vinson is also working on this matter, and when we have listened to the debate, we might come back with a much more narrowly defined proposal when the Bill reaches the other place.

My starting point is those hectic days before the bank collapses, when we saw people piling in, trying to destroy the value of the share capital of some of the best-known company names in the country. We learned that some of those individuals—perhaps many of them—were doing that not with their own shares, but with shares that they were borrowing. They were forcing down the price of the shares, then handing them back when they were much reduced in value to the people who owned them. I was puzzled by that. How could anybody in their right mind lend shares to what appeared to be, if we were to believe the media, financial sharks, only to get the shares back at the end of the day much reduced in value?

The next stage in my enlightenment on this topic was when a pension fund chairman—it is not a large fund, but it is certainly a substantial one—wrote to me to say that he, too, was puzzled by this practice. He had inquired of the custodian of his company’s series of pension funds whether the shares of those funds were being lent out. After an uneasy negotiation with the custodian, he found that they were being lent out without his permission, without the trustees’ permission and certainly without the knowledge of people who thought that their pension savings were safe.

The custodian’s role is key. I have been a Member of Parliament for some time—I was here when Robert Maxwell lifted the shares of many of the pension funds that he felt he owned. We were lax in those days and he found it possible to bully the chairman and trustees to lend him—to put it euphemistically—those shares.

I am glad that my hon. Friend—I shall call him that—mentioned that point. He has managed to put that on the record without my needing to do so, because—as we all know—Robert Maxwell is not now present to answer those charges. At least, we do not think that he is present.

The House took those matters seriously and two things happened. The then Government asked Sir John Cuckney—later Lord Cuckney—to trace the funds that had been lent out and recover them. Sir John went about the task with the diligence one would expect from someone with his rich career. He was so open-minded on the issue that he adopted the American practice of calling in a judge to mediate with those who claimed that they had taken shares in good faith and should not have to pay back any money. After about five months, Sir John’s patience ran out and he called the main recipients of the shares to his office. He said that he would provide lunch, and he effectively locked them up for the day so that they would come up with the funds that the pension funds said that they needed to recover their lost assets. Anyone who knows anything about Sir John’s career will know that he knew where the bodies were buried and, by the end of the day, hundreds of millions of pounds were produced.

The second measure taken—apart from the approval of Sir John Cuckney’s work—was a major pension fund review. The Select Committee was involved—indeed, one of the Clerks at the Table was the Clerk to the inquiry. We proposed many reforms, and the Government accepted many of them. One of them was to establish the position of custodian, so we could not again have a situation in which a forceful character such as Robert Maxwell could bully the chairmen and trustees of company pension schemes to hand over the assets of the pension funds. So the custodian—we thought—would play a key role in ensuring the safety of pension funds.

Once I learned that the horrors of short selling were way beyond what I had imagined them to be, I approached the pensions regulator. Quite a lot of our time in this place is naturally spent picking fights with public and private officials whom we do not think adequately fulfil their role and, sometimes, nowhere near earn the salaries that they are paid. I want to put it on record that I found dealing with the pensions regulator to be a most reassuring task—indeed, so much so that, having conducted a review, the pensions regulator has laid guidance to trustees saying that they now have a duty to ensure that they know about it, if their funds are being lent. That suggests that the single case that I took to the pensions regulator was not a one-off job, but that what had happened was more common than we had dared to imagine.

Worse still, the custodian was a bank. Although the chairman saw after probing that other assets were being given back to the pension fund for the shares and gilts that the custodian bank was borrowing, without the knowledge of the chairman, trustees or members of the fund, the collateral in no way matched the value of what was being taken. For example, taking Government gilts, which, despite all our problems with public debt, are still one of the most pukka gilts in the world, and substituting gilts of equal value from fourth-world countries is not, in my view, an adequate recompense. The same goes for the shares that were borrowed in order to be used in short selling. Although those substitute shares were of the same nominal value, nobody in their right mind would think that the risks attached to them were the same as those attached to the shares that had been lent.

I therefore conclude that the Government’s success in rescuing the banks was much greater than that to which we have paid tribute in this House, in that if the banks had gone under, which was a genuine worry, and the practice that I am describing had been more widespread than a single pension fund—that is, if there had been many more pension funds whose assets had been lent out by a custodian that happened to be a bank—not only would the chaos of not having an acceptable medium of exchange have followed, but the whole house would have come tumbling down.

I also wrote to the Financial Services Authority, which was not quite as anxious to deal with the issue as the pensions regulator. I asked the FSA whether, in doing spot checks, it looked at banks’ balance sheets and at the array of gilts and other assets that it wishes banks to have so that they behave prudently and, should anything untoward happen, so that they have some genuine assets that they can draw on for their depositors, but to my mind a satisfactory conclusion was not reached. The worst scenario, therefore, was where a pension fund was having its shares lent without its knowledge by the custodian—part of one of our major high street banks—and where it was open to the other banks to borrow those assets and perhaps put them on their balance sheets in order to convince the FSA that they were in a healthier condition than they perhaps were. That was the worst scenario, unless one considers that practice to be acceptable; I think that it is not.

I have asked my colleagues for their views on new clause 8, and they feel that it is too restrictive. When I first started out, I thought that short selling itself was wrong and that we should ban it. Perhaps there is a bit of that flavour in new clause 8. I am very interested in the House’s view, albeit not on the details of how one might police short selling. I am obviously interested to hear people’s views on how we can make that method safer. For example, it might be perfectly proper to short sell, if the share price is rising rather than falling. Those are the kinds of locking mechanisms that I hope we can establish.

I want the House specifically to address the question whether we need to consider further—perhaps not here today, but in another place—how we can better protect our constituents’ assets that are wound up in company pension schemes. I have given the House one example. If that were the only example, it would still be worrying, because it relates to a medium-sized fund. However, my guess is that it does not stand alone, and that other funds have had their shares and assets lent without their permission, risking the life savings of the company concerned and the members of that company’s pension scheme.

I wonder whether we need to consider putting a lock on what custodians can do in that regard. The House will see that, among the many measures in the new clause, one of the safeguards is that no pension fund assets can be borrowed unless the chairman and trustees know about it and unless they have consulted the membership—that is, us—if need be. I tried to table some questions to find out what was happening to the House of Commons MPs’ pension fund, but, for some reason, I did not get very far towards getting an answer—I did not get an answer saying that the funds were not being lent, so perhaps that practice extends to our pension funds, just as it does to those of constituents.

I ask these questions in the spirit of inquiring into what the House thinks. Perhaps we can regroup with a much more targeted amendment in the other place, but I urge hon. Members to support the new clause.

I generally agree with the right hon. Member for Birkenhead (Mr. Field); I certainly agree with him far more than I disagree with him. I sometimes wonder whether either of us is sitting on the right side of the House, although I have made up my mind that I prefer to be on the side that I am on.

I prefer to be on this side, but that does not mean that I do not try to find ways of getting agreement across the House.

I completely agree with the right hon. Gentleman, as I often seek to do. I want to agree with him on his new clause, but I do not think that I shall be able to, because it is misguided—it misunderstands the problem and the solution. He gave a hint of that in his speech when he talked a great deal about pension funds. The solution to ensuring that pension funds are properly regulated is to look at pension fund law, not at general provisions on short selling or on market making.

I thank the hon. Gentleman. Given that we have this opportunity to improve the safety of pension funds—perhaps not today, given the way in which the new clause has been drafted, but possibly in another place—is it not appropriate for us to use it?

There might be a suitable peg somewhere in the Bill for such a measure—I have not looked carefully enough to find one—but the new clause uses a machine gun to try to hit one very specific target. It is inappropriate and would cause a lot of collateral damage, as machine guns tend to do when trying to hit only one target.

I shall take a brief look at the new clause—after all, that is what we are discussing. It begins by proposing to prohibit the short selling of shares. Why stop at shares? If one is trying to address the issue of pension fund assets, what about the bond market, what about corporate bonds and what about that range of financial instruments that runs all the way from poor-grade equity to top-tier sovereign risk? Once one has decided that short selling is a “bad thing”, there is no logic to limiting this provision to shares.

When I looked at the new clause a bit more carefully, I noticed that proposed new subsection (1)(a) bans short selling except under certain conditions—for example, in a rising market. That is a curious one-way ticket, and such an approach can only be distortive in any market—if one bans something in one direction and not in another, one will do a lot of damage to the process of trying to find a true price.

Proposed new subsection (1)(b) is even more bizarre, because it says that the only circumstances in which short selling are permitted are where

“the beneficial owners of the shares had given prior permission at an annual general meeting for the shares to be lent.”

That is such a restrictive condition that it would suck all liquidity out of the forward markets, which would be the end of forward markets. Forward markets have been around a good while. There was an effective forward market in rice in ancient Japan, and it is said that there was one in China, so they have been with us for as long as there have been markets.

When examining the clause, one must ask a more basic question: do we want derivatives markets or not? If we decide that we need them, it is logical to try to maximise their liquidity, as that will lead to higher levels of capital formation and more efficient risk allocation, to the benefit of us all. Short selling strengthens the long market; it provides strategic investors with an opportunity to hedge their positions and gives them confidence to take those long positions. An investor will be much more reluctant to buy if the would-be short sellers’ views are not expressed in the market and are distorted by restrictions.

The key question is always that of investor confidence. I took a look at a number of things on the web about what various people have had to say on this matter recently. Troy Paredes, a commissioner on the Securities and Exchange Commission, recently gave an interesting lecture to the Harvard law school forum on corporate governance in which he came to a pretty clear view. In line with what I have just implied, he said:

“Short selling...is tied to investor confidence. Investor confidence depends on investors’ faith in the integrity of markets. Investors expect that securities prices are meaningful in that they reflect the market’s overall assessment of what a company is ‘worth’ by aggregating into a single number the different views of market participants…in promoting market efficiency, short selling can foster investor confidence, as investors can be confident that securities prices reflect both optimistic and contrarian views.”

I could not have put it better—in fact, I could not have put it remotely as well. That is a clear expression of the need to retain short selling.

The risks usually attributed to short selling—the right hon. Member for Birkenhead followed that approach—generally turn out to be something else. They turn out either to be the risk of share price manipulation, which he did not discuss very much, or to be fraud, which he discussed quite a bit, which is why I intervened on him to clarify what was going on in the Maxwell custodial case. Those are, quite rightly, already offences under existing law, and if the law needs tightening in that field—the right hon. Gentleman has suggested that it does—we should pay particular regard to that. We should look carefully to see what further steps should be taken to make share price manipulation and fraud more difficult.

As this clause is about short selling, we are concentrating on practices that take place with respect to shorting the market. The long share market, however, is just as vulnerable to fraud and manipulation. One such practice, which good quality regulation seems substantially to have reduced, at least, was known as “ramping the stock”—talking it up while taking a holding and then selling up, leaving the poor souls who had taken the advice to take the fall in the market afterwards.

The hon. Gentleman has talked about shorting the market, which is one of those expressions that everybody thinks that they know the meaning of. Is not the fundamental problem with this new clause the fact that it would outlaw any selling when the price is falling, assuming that that is short selling?

I think that that is more or less correct. I am not absolutely sure what the effects of the new clause would be, to be frank—I am not absolutely sure that its authors are sure what its effects would be—but I am pretty confident that they would be disastrous. Even as a probing new clause, I do not think that it is near the target that the right hon. Member for Birkenhead mentioned as justification for it.

There is a second, more general justification for the introduction of measures to restrict short selling, which is that it can encourage panics and irrational behaviour. Of course, as I have pointed out, that is just as true in a long market. Is that not what we have always seen in the long markets? These are the booms before the busts—the Mississippi scheme in France in the early 18th century, the South sea bubble, the bubble in share stocks in the interwar years and the bubbles that we have had more recently. To stop the bust, one must find a way of stopping the boom. Stopping the boom is an extremely difficult task, too. In other words, creating market stability is, in my view, probably a very difficult, if not impossible, task that Governments should address with very great care. After all, was it not this Prime Minister who told us about 160 times in this place alone that he had put an end to boom and bust? He gave us the most spectacular boom followed by the most spectacular bust in living memory—at least, apart from in the memory of those who are old enough to remember the late 1920s and early 1930s.

The problem with booms and busts is that they are monetary phenomena. They are normally driven partly by loose monetary conditions, in one way or another. Although this more general issue goes well beyond the remit of the new clause, it is worth pointing out that the Government are trying to do something about it through counter-cyclical capital requirements, for example, and a number of other measures. They are considering the development of macro-prudential tools that are designed to attenuate the virulence of the cycle. That is a very difficult task, however, and they are realising just how difficult it is as they take their ideas forward, not least because the law of unintended consequences usually applies.

There is legislation to bear down on disorderly markets, but of course that is not a ban on short selling, but a ban on all selling and buying. The most common measure—although, again, it has been rarely used—is to close a market temporarily, when it is felt that a meaningful price cannot be established. One of the problems is that it is increasingly difficult to achieve that in a globalised world in which grey markets operate.

There is one last argument for action on short selling for which I have a good deal of conceptual sympathy, but I am afraid that the new clause goes way beyond what is required. In any case, I think that the necessary legislation for emergency action is already on the statute book. I am talking about circumstances in which a disorderly market can trigger a sharp increase in systemic risk and risk a breakdown of the whole economic system. I think that the recent temporary ban on short selling was imposed to prevent that from happening. It was based on the argument that the protection of the wider public good is an objective that overrides all others for a period of time, but was it of any use? With the benefit of hindsight, can we say that we got anything back in return?

The chairman of the Federal Reserve has already said on the record that he would not impose the temporary ban again. The FSA and the Government have been much more circumspect about saying that it did not work, and I shall be interested to hear what the Minister has to say about that in a moment. However, the prevailing view among a good number of insiders—I know a few of them—is that more harm than good was probably done.

In that respect, it is worth looking again at what was said in the lecture to which I referred a moment ago. Troy Paredes covered his back a little, but he is one of the world’s leading experts on this subject and, before new clause 8 is considered seriously for the statute book, we need to consider what such people are saying. He said:

“With the benefit of more but still imperfect information, the decision was made to terminate the ban a few weeks after its implementation. Speaking personally”—

this is him covering his back—

“it became apparent that the ban did not stabilize the markets but did result in inefficiencies and other market dislocations and disruptions. In short, the benefits of the ban did not materialize but the costs clearly did.”

I have not looked in great depth at the specific issue that Dr. Paredes addressed, but it would not surprise me if, having done the cost-benefit analysis for ourselves, we were to reach a very similar conclusion.

The SEC has retained rules that penalise so-called “naked” short selling—that is, when the short seller does not deliver the securities within a short period after the sale transaction date. However, it is worth reminding ourselves that most forward positions in the spot market are covered, and that they are not so-called “naked” short or long positions.

The plain fact is that we have all benefited enormously from the development of forward markets and financial innovation over the past quarter century. That is not a popular view to articulate at the moment, because we have just suffered from a spectacular failure in the markets, part of which is attributable to the derivatives market. If new clause 8 were implemented, the inevitable consequence would be that we would lose the long-term liquidity and benefits that come with these markets. The idea that we could do without those things is not one that we should seriously entertain.

I very much hope that the Government do not support new clause 8, and that the Minister is courageous enough when he replies to explain the merits of short selling, as well as the disadvantages.

As the right hon. Member for Birkenhead (Mr. Field) suggested, we found ourselves in agreement on some of the sentiments. Some of what has gone on over recent years has highlighted a number of practices that may not have been well known or well understood, and he gave the example of the pension fund chairman. As the hon. Member for Chichester (Mr. Tyrie) said, short selling has been part of the functioning market for some time, and it is part of how investors have confidence in the market. The loaning of pension fund shares might be looked at under pension fund administration arrangements. The rules could clearly be tightened up. I suspect people would not necessarily demur from that within the totality of their involvement in the market.

We discussed the merits of the restrictions in clause 13, which would give the FSA powers to prohibit or require disclosure, very much along existing lines—formalising what the FSA did a little while ago. It addresses perceived market abuse, usually a one-off emergency situation and alongside a disclosure regime. It is probably about as far as we would wish to go at any particular time.

Throughout our consideration of the Bill, we have been concerned not to take it that market abuses and other problems were everyday events and that we had to produce reams of draconian legislation. We wanted to ensure that the rules were proportionate and would address certain situations that may arise in the future. The hon. Gentleman said that the alternative would be to close the market in certain things altogether, but if we were for ever doing that it would destroy the whole function of what we are trying to set up.

Although I can understand why the new clause was proposed, and there may be opportunities to reconsider it in another place, at the moment it is too restrictive for us. It could have many dire unintended consequences, so at this stage we cannot support it.

When the right hon. Member for Birkenhead (Mr. Field) introduced new clause 8, I was intrigued by his arguments for its rationale. As he developed his argument from Maxwell and Sir John Cuckney to the role exercised by trustees in determining investment strategy and the use to which investments should be put, he made a strong case for improving the Government’s arrangements for pension funds. However, if the purpose of his new clause was to prevent shares owned by pension funds from being used as a cover for short selling, he should perhaps have tabled a new clause in favour of naked short selling rather than one that restricted covered short selling to certain areas.

If the hon. Gentleman looks at the new clause, he will see that that is what I am advocating. Members should know that their shares are being sold in that way.

But in a way there are two types of short selling. There is naked short selling, when someone does not hold the shares, or has no coverage for selling the shares in the market, and the situation when someone borrows shares and there is some cover to minimise settlement risk. The right hon. Gentleman’s argument was about the governance of pension funds rather than the merits or otherwise of short-selling strategies in the market, and I thought it did not quite get to the point.

As a consequence of interest in short selling, quite a lot of work has been done on the possible impact of various short-selling strategies on the underlying markets, and on whether short selling itself is a legitimate strategy for investment managers. On a couple of occasions during Treasury questions, the Minister has defended short selling as a means of improving liquidity in the market, reducing transaction costs and making markets function more effectively. A number of pension funds benefit from the strategy because they have investments in hedge funds that engage in such activities. At the peak of trading in 2008, pension funds apparently earned about £600,000 a day from the fees that they received in return for lending their stock.

May I give an example about the fees? The pension fund that I mentioned was paid £900 for every £1 million of its stock, which was being lent without its knowledge.

No one is saying that the fees are especially generous, but the funds charge a fee for lending their stock, and that fee is of course used to augment the returns of the underlying pension fund. There is a need to think about the cost-benefit analysis.

Is not the key issue that that situation represents a failure in the corporate governance of the pension fund itself? The responsibility for that inadequate charge, given the risk involved in the transaction, lies squarely with the directors of the pension fund.

My hon. Friend is absolutely right. The argument made by the right hon. Member for Birkenhead seemedto be more about how we improve the governance of pension funds than about the merits or otherwise of short selling. The fact that the trustees did not know what was happening suggests that more due diligence should have been carried out in respect of the nature of their agreement with their investment manager and the custodian.

It is clear that a number of debates are going on. In the contribution made by a very distinguished apostle of short selling, we heard that, in all possible worlds, it is an extraordinary activity that benefits market liquidity and that it should therefore be ungoverned. In the specific case that I have cited, the chairman of the pension fund undertook inquiries before he heard about the introduction of my Bill to ban short selling. There was no failure there, although a general failure might have arisen because the House made such a fuss about the role of the custodian, who was the person who put the lock on any use of assets without the knowledge of the pension fund. There is of course an issue surrounding corporate governance, as the hon. Member for Chichester (Mr. Tyrie) suggested, but the problem is wider than that. I approach this matter with the view that short selling—gambling with people’s futures—is not necessarily a good activity, even if that activity is draped under the guise of liquidity.

I am now a bit more confused about the right hon. Gentleman’s position. Does he wish to improve the corporate governance of pension schemes by ensuring that there are proper arrangements among trustees, custodians and investment managers, or is he opposed to short selling as a matter of principle? His new clause would allow short selling in two cases: if there were improved governance arrangements and if

“the share price at the time of the transaction was higher than it was at the close of the previous trading day”.

I am not entirely clear whether shares could be lent if the short selling was on an uptick even if the custodians had not been given permission. There is confusion even in new clause 8(1)(a) and (b). Would the custodian always need permission to lend, or would that permission be necessary only in certain circumstances? Perhaps the right hon. Gentleman will deal with that point in his winding-up speech.

For the sake of clarification, so that Conservative Members are clear on the matter, it has been implied that somehow we favour an unregulated free-for-all on short selling. I hope it is the position of Conservative Front Benchers—it is certainly mine—that short selling and, for that matter, the long derivatives markets need to operate within a framework of regulation, and that we are not in favour of a market in which share price manipulation and fraud such as we saw in the Maxwell case can flourish.

Indeed. To be clear, that is why the right hon. Gentleman is misguided in tabling amendment 1, which would remove clause 13. That clause sets out a proper framework for the regulation of short selling and will replace the existing regime, which is based on the market abuse directive—many people thought that directive was inappropriate.

The clause will introduce a new framework, which will be part of the Financial Services and Markets Act 2000, to enable the Financial Services Authority to take action in certain cases. That is the right response—a proportionate response to the risk that has been identified. Indeed, when the FSA intervened in September or October to ban short selling for financial institutions, we were supportive.

All those activities need to take place within the proper regulatory framework, and in considering different aspects of short selling and the different approaches that one might take to tackle some of the issues around it, we need to think carefully about what is the right cost-benefit analysis. Is there a legitimate reason to allow short selling? If we were to restrict short selling, what would be the consequences? I have already made it clear that one such consequence would be a reduction in the relatively small amount of income that pension funds get from lending their shares.

In the aftermath of the temporary measures that the FSA introduced last year, it has produced a discussion document that considers short selling and thinks about the potential implications of the restrictions that could be introduced to make short selling more difficult. Interestingly, two of the measures that it suggests reflect measures proposed by the right hon. Gentleman. The first is a prohibition on naked short selling to ensure that it occurs only when cover is in place. Some proponents of a ban argued that it would reduce settlement failures and limit

“the speed and the extent to which a short selling strategy can be executed and thus…act as a brake on more aggressive short selling”.

The other side of the argument—the argument made by those in the market—is that a ban on naked short selling

“would prevent legitimate behaviour which can provide beneficial market impacts.”

For example, a ban on naked short selling

“would stop intraday naked short selling”

and trading. It would

“significantly impair the ability of market makers to function properly, as it is often a necessary part of their role to short sell to meet client demand for a stock.”

There are arguments on both sides, and in the end the FSA discussion paper concluded:

“Although a prohibition on naked short selling…would be less far-reaching than a prohibition on short selling generally”,

it

“would still have net negative impacts.”

That conclusion was borne out by the responses to its consultation process.

The right hon. Gentleman has also introduced a form of the uptick rule, which has been used in the States: people can sell only in a rising market. That has been a feature of the US regime for some 70 years. Again, it was discussed in the context of regulatory reform here in the UK. Interestingly, the Securities and Exchange Commission concluded that it

“should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation”.

It came in for a bit of flak for that—it was before the financial crisis—and some argued that if the SEC had still had its uptick rule, that would have reduced some of the turbulence in the financial markets in the wake of the credit crunch. Having said that, the evidence suggests that those rules provide limited protection against the negative effects of short selling, and the FSA commentary says that at most they act

“temporarily to decelerate share price declines.”

It goes on to argue about the infrastructure costs required to introduce an uptick rule.

It is right to discuss measures that could restrict short selling, but the debate under the auspices of the FSA would suggest that, on balance, the measures proposed by the right hon. Gentleman are detrimental to investors, rather than achieving a net benefit. The extensive work by the FSA would argue for a rejection of new clause 8, but if he is concerned about governance, there are other ways of doing it, and we should not try to restrict short selling through his proposals.

This is the first debate initiated by the right hon. Member for Birkenhead (Mr. Field) in which I have participated. It has been an interesting discussion about what, I am sure, many people outside the Chamber regard as a rather esoteric but nevertheless important subject. If there are concerns about the role of the custodian, I am confused as to why the right hon. Gentleman did not table a new clause specifically to deal with that, because we might want to discuss a number of problems related to that and how that role fared throughout the recession.

The proposals would make a fundamental change to the measures set out in the Bill, as they would move from a situation in which short selling is allowed unless it is banned to one in which it is banned unless it is allowed. When my hon. Friend the Member for Chichester (Mr. Tyrie) and I were in central and eastern Europe, introducing market economy and democracy to those areas back in the ’90s, the distinction between a society in which something was allowed unless banned and one in which something was banned unless allowed was the principal distinction that underpinned the difference between the free markets of the west and the markets that we were trying to eradicate under the old communist system. When we used the word “eradicate”, we meant “eradicate”, not “reduce it to 10 per cent.”

When the Committee discussed the issue, there was a question about the basis on which we were working. There was considerable consensus that regulatory intervention was justified where there were identified market failures, and it was expected to deliver net benefits to the market. That was certainly the presumption in our significant debate about what those market failures might be. The obvious example of abuse was largely covered by the FSA’s existing powers, but there was also the question of the disorderly markets that we have seen in the current crisis, as well as deficiencies in transparency.

I recommend that the right hon. Gentleman read the discussion paper produced by the FSA on short selling, because it covers all those issues in considerable detail and concludes:

“Short selling can generally be expected to increase market efficiency but can have negative impacts. In times of extreme market turbulence and for firms engaged in rights issues these risks are heightened. The fact that short positions are not normally disclosed to the market may also result in market transparency failure. Nevertheless, given that short selling has clear benefits, restrictions on it do appear to come at a cost”.

That cost refers not just to liquidity and the cash cost but to reduced market efficiency.

The extent to which there were problems was not clear, even to the FSA. On transparency, for example, it concluded:

“It is not clear whether a lack of transparency about the level of short selling and the identity of short sellers gives rise to a material market failure.”

Even after doing all that work, there was still a considerable amount of disagreement.

My hon. Friend the Member for Fareham (Mr. Hoban) touched on some of the options that the FSA identified. There are six in all. One of them, which follows the right hon. Gentleman’s line, was to prohibit the short selling of all stocks. Other options were to prohibit naked short selling, prohibit short selling of financial sector stocks, prohibit short selling of companies engaged in rights issues, prohibit short selling by underwriters of rights issues, and finally, prohibit short selling where there is urgent need. It is the last one that we have ended up with in the Bill, although it is the first one towards which the right hon. Gentleman’s new clause is edging.

As stated, there were a number of costs in terms of pricing efficiency, liquidity and forgone profits. One of the issues that needs to be explored further—I have no idea whether the right hon. Gentleman has thought through the implications—is the costs of the scheme. It concerned me in Committee that with the Government’s preferred option, they were rather clutching at straws, given the wide ranges put forward in the impact assessment, which went from £106 million to £1,066 million as the cost of the option that they eventually chose, which is now in the Bill. It would be interesting to see whether there was a quantification, how much wider that might be and what the top end of it might be, if one followed the right hon. Gentleman’s view.

The other issue which it is important to mention is the relationship with the international regime, which has not been touched on so far. There is an admission already by the Treasury that the UK currently has a wider definition of market abuse than many of our European counterparts. Even the FSA admits that market participants have encountered problems and significant costs in having to comply with the variety of different regimes introduced across a number of different jurisdictions. It should be recognised that we need to be seen to have a regime that is applied as widely as possible internationally. We struggled with the clause currently in the Bill, and how that fitted in with the international regime. One of the witnesses who spoke to us concluded— damning with faint praise—that it would probably work out all right because the wording is sufficiently wide that in all probability it will allow anything into it, which is hardly a glowing endorsement.

I find it difficult to see how the new clause would fit in with the approach adopted by other countries. Germany has a ban on naked short selling, but only on specific financial institutions, not generally. In its approach, France has aimed at the short selling of financial sector securities as well. Finland has opted for considering more supervision, rather than any banning. The Czech Republic, being the Czech Republic, has opted for no action whatever on the matter.

The only country that I could find, although there may be others, where there was any semblance of a relationship to what the right hon. Gentleman was hinting at was Belgium, where the whole approach to short selling was linked to good order, integrity and transparency. The rules there were to ensure that sales were covered, but with restrictions on the lending of shares. It is not a regime that has widespread attraction or merit. If we adopted the right hon. Gentleman’s new clause, therefore, we would end up down an alley of regulation where none of our European competitors would want to go. That would leave the UK exposed.

We have had a useful debate, and it is clear that there is substantial support for what the Government are trying to do through clause 13.

Amendment 1 would delete proposed new part 8A of the Financial Services and Markets Act 2000, which aims to provide the FSA with a new power to prohibit, or require disclosure of, short selling. New clause 8 proposes an alternative prohibition. I listened carefully to the arguments put forward by my right hon. Friend the Member for Birkenhead (Mr. Field) who expressed general concerns about short selling, which I believe are shared by people who consider it to be a dangerous and speculative type of financial transaction. He referred to it as gambling, but I cannot agree with him.

It is indisputable that, in certain circumstance, short selling can have adverse impacts, which can endanger financial stability. That is why the Government are committed to ensuring that the FSA has powers to intervene to prevent short selling and require its disclosure where necessary. But it is my view and that of the Government that, in general, short selling has clear beneficial effects for the market.

Short selling is an important source of liquidity, it is a common risk management tool, and it improves pricing efficiency. That is why I believe the targeted approach and the proportionate way we are tackling the issue through clause 13 will allow the benefits of short selling to be claimed by those who use it responsibly, while preventing those who would seek to abuse it from doing so. That is preferable to the blanket prohibitions proposed.

The hon. Member for Chichester (Mr. Tyrie) sought evidence of the efficacy of the recent ban on short selling. As he is aware, the ban was aimed at preventing the short selling of UK financial stocks, other than in permitted circumstances. The FSA monitored compliance with the ban and considers that it achieved its aim. In the future there will be academic studies examining short selling bans in great detail, but in those narrow terms the measures that the FSA introduced were effective in achieving its aims.

As my right hon. Friend the Member for Birkenhead knows, his new clause would prohibit the majority of short selling in shares. First, naked short selling—that is, where the seller sells shares that he does not own, without having borrowed or otherwise set aside any shares to settle the transaction—would be permitted only if the share price at the time of the transaction was higher than the closing price the previous day. Such a prohibition, as we have heard, is known as an up-tick rule, and would allow unrestricted short selling in an advancing market, but would prevent short selling at successively lower prices. There is little evidence that this method does anything other than decelerate a share price decline.

As we heard, the FSA looked at the introduction of an up-tick rule during its 2009 consultation and concluded that the costs that firms would incur to implement such a rule far outweighed the benefits. Respondents to the FSA consultation strongly opposed the introduction of an up-tick rule.

The second prohibition proposed by the new clause would restrict covered short selling, where the short seller has borrowed shares, to circumstances in which the beneficial owners of the shares had given their permission at an AGM for the shares to be lent. I understand the purpose behind my right hon. Friend’s proposal, but this may increase the costs of covered short selling by limiting the extent to which some entities are able to lend their stock and depriving them of low-risk income in the form of lending fees. However, in the Government’s view, it would not act as an effective control over short selling.

The prohibitions proposed by my right hon. Friend would be blunt and inflexible. I appreciate the probing nature of the new clause, and it is important that we have this debate. As they stand, however, the prohibitions would not allow the FSA to impose targeted controls on short selling, by banning short selling in particular financial instruments, or instruments issued by a particular company on a temporary basis. As a result, we consider that they would not adequately assist the FSA in protecting the stability of, and maintaining confidence in, the financial system.

The new clause would require disclosure to the FSA of all short selling, regardless of how small the transaction is. The FSA would be given no discretion to adjust the contents of the declaration, to ensure that the obligations imposed under this provision were proportionate. The Government’s view is that there is no evidence to suggest that requiring such extensive disclosure would produce any benefits to outweigh the extensive costs it would impose on companies.

There is, as I am sure the House is aware, a global regulatory consensus that requiring disclosure of short positions will help to reduce the potential for abusive behaviour and disorderly markets, and I am sure we all agree with that. A great deal of work is taking place to try to secure international agreement on how that can be effectively implemented consistently. We are certainly working hard to ensure a pan-European approach to short selling, and the disclosure regime that is likely to be agreed in Europe is intended to include the disclosure of significant net short positions; a two-tier disclosure model, with private and public disclosure set at different thresholds; the incremental disclosure of changes of position above both thresholds; and an exemption for market makers. It is intended also to apply to positions in all shares, not just shares of financial stocks. I can therefore assure my right hon. Friend that a great deal of work is going on in that regard.

My right hon. Friend also raised the issue that other hon. Members suggested was primarily one of corporate governance. His point was whether trustees of pension funds or, by analogy, directors of companies knew that their stock was being lent. The Financial Services Secretary, Lord Myners, has commissioned an informal review of stock lending, and any further safeguards that might need to be recommended to stock lenders, including pension funds, would be considered as part of that. My right hon. Friend highlighted the point, but other hon. Members responded by saying that boards and trustees are responsible for ensuring that they have corporate governance procedures in place adequately to control the funds and companies with which they deal. I am sure that that is absolutely correct, but in these circumstances the Government and the FSA may wish to issue advice on stock lending, and that is being looked at.

My right hon. Friend mentioned that his proposed change was a probing new clause, and I hope that, having helpfully raised this issue, he will seek to ask leave to withdraw it.

I have learned much from this debate, not least from the disclosure by the hon. Member for Henley (John Howell): I had no idea that he and the hon. Member for Chichester (Mr. Tyrie) were outriders for the free market in eastern Europe. Although that free market may have been beneficial overall, there have in those societies been many permanent losers from the new gospel that they have taken to those countries.

What disturbs me most about the debate is that I have failed to register in all parts of the House that there was—anyway, but even more so after the banking and economic crisis in this country—disquiet about the fact that people can use shares that are not theirs to force down the price of those stocks and perhaps endanger a company’s future; that they can undertake similar activities with the basic things that we need for our everyday lives, such as oil and food; and that somehow those activities will continue. However, my hon. Friend the Minister is right: my proposed change is a probing new clause, and we will have a chance to consider what has been said today before the measure appears in another place.

Before I withdraw the new clause, may I state on the record that, until the debate opened, I did not know that my hon. Friend was not standing at the next election? I am sure that it is good news for him—otherwise he would not have made the decision—but it is bad news for the House.

I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 9

Bank and building society accounts of retail customers

‘(1) It shall be a requirement on banks and building societies that accept deposits from retail customers that they must offer retail customers—

(a) at least one current account in respect of which no charge is made for holding the account when it is in credit; and

(b) at least one savings account in respect of which no charge is made for holding the account when it is in credit, and on which interest is paid to the account holder.

(2) A penalty may be imposed by the Financial Services Authority on a bank or building society which fails to offer accounts in accordance with subsection (1).

(3) The penalty which may be imposed for a first offence under subsection (2) is a penalty not exceeding £100,000.

(4) The penalty which may be imposed for a second or subsequent offence under subsection (2) is an unlimited fine.’.—(Mr. Frank Field.)

Brought up, and read the First time.

With this it will be convenient to discuss new clause 15—Bank charges—

‘(1) The Unfair Terms in Consumer Contract Regulations 1999 (S.I. 1999/2083) is amended as follows.

(2) After Regulation 6(1), insert—

“(1A) Paragraph 2 shall not apply to contracts for the supply of financial services.”.

(3) After Regulation 6(2) insert—

“(3) In so far as it is in plain and intelligible language, the assessment of a term in a contract for financial services shall not relate—

(a) to the definition of the main subject matter of the contract, or

(b) to the adequacy of the main price or remuneration, as against the goods or services supplied in exchange.

(4) Where a term of a contract provides for the charging of a consumer and the circumstances in which that charge can be imposed need not arise during the term of the contract, then such price or remuneration shall not fall within the main price or remuneration for the purposes of paragraph (3).

(5) If, for the purposes of paragraph (3) there is doubt about what represents the main price or remuneration, the interpretation which is most favourable to the consumer shall prevail.”.’.

I shall try my luck with this new clause. Let me set out the stall behind the proposed change, which is not a probing clause but one for which I hope to have sufficient support so that, if the Government do not accept it, we can vote on it.

The current mantra, which one hears too much of, from Presidents, commentators and the media generally, is that we must move to a situation in which no bank is too big to be allowed to fail. I cannot understand that conversation. If we look at this country’s experience, we find that Northern Rock was an honourable bank playing a very important role in its own region, but nobody in their right mind would think that it was of a size that would fit the formula that we hear in the cant being peddled about banking reform. It was a very small player, but the Government rightly thought that, small as it was, it was still too big to be allowed to fail because of the domino effect it would have had on other banks in our financial system and on our economy generally.

So although I do not share the commentators’ views about where we have got banks, I share the banks’ view of where they think they have got us. The banks know that they have got us over a barrel, but we have come up with nothing to control their activities. We know that when the time is ripe—certainly, when the banks judge it to be ripe—they will try to re-establish an equilibrium that is even more favourable to them than the current one. I fear that in that world, particularly given the Supreme Court’s action recently, one move will be to disengage from offering free banking to people who bank with a bank or a building society and have their accounts in surplus. I therefore appeal to the House not to trust the banks’ better judgment, or what they see as being in their own self-interest, but to protect, most importantly, our poorer constituents. Every bank and building society that trades in this area should provide one account for banking purposes and one for savings purposes on which there should be no charges provided they are in surplus. That is my case. I cast the bread on the water and shall see where it gets me.

I wish to speak to new clause 15, and I make no apology for bringing it forward today. It covers important policy issues, and there is significant public concern about the Supreme Court’s recent decision.

This new clause was fully ventilated in Committee and ably moved by the hon. Member for South-East Cornwall (Mr. Breed), so I shall not go over the issue, which is well known, other than to reaffirm that thousands of consumers have been affected by the decision on unauthorised overdraft charges, and to emphasise the mix of public surprise, shock and delayed anger at the Court’s decision, which was to reverse the previous decision of the Court of Appeal and lower courts. That is why there is considerable public concern.

I want to focus on the judgment that two members of the Supreme Court made, allied to the main finding in relation to overdraft charges. One of the judges was quoted as saying:

“Parliament may wish to confer a higher degree of consumer protection by re-visiting its previous decisions”

when drawing up legislation. New clause 15 is an attempt to achieve exactly that. It would respond to genuine concerns among the public and ensure fairness as we move forward after the great disappointment of the Supreme Court decision on existing charges. Many consumers and consumer organisations think that the best and simplest way to do that is to revisit the Unfair Terms in Consumer Contract Regulations 1999. The new clause reflects that, because it would ensure that these charges were clear and transparent, which is an important consideration given the history of the development of this issue. It is also proportionate, which is a critical consideration.

Some people will ask why the Department responsible—the Department for Business, Innovation and Skills—cannot simply issue amended regulations. However, as we heard in Committee, that is complicated by the consultation on a new European Union consumer rights directive, which has been going on for a considerable period, as is usual in such cases. The Minister said that slow progress was being made. However, given that, as was agreed across the Committee, there is little prospect of that mechanism coming into force very soon, it does not answer any of the public, or indeed parliamentary, concerns about the matter. The new clause is a sensible and pragmatic response to what happened at the Supreme Court.

In Committee, the Minister said that he is unsympathetic, at this stage, to following a legislative route and prefers a voluntary approach on the basis that that would be quicker and, perhaps even more important, more flexible in how it addressed not only the particular issue dealt with by the Supreme Court but other changes that may occur in the marketplace. Although I could have some sympathy with that argument, the history of this issue makes it difficult to believe that there is an easy or a quick solution.

The Minister says, rightly, that if voluntary measures fail to deliver, then Government action will follow. However, I question exactly what will happen in such circumstances. Throughout our discussions of this matter, as it has gone through the courts and before it reached legal proceedings, it has been absolutely clear that the two sides have completely failed to agree, and that greater polarisation has occurred as the debate has gone on. On the one side, consumer organisations and the public believe that these charges are totally unfair; on the other side, the banks suggest that this is normal practice to which they remain committed regardless of the public reaction. All that I can see arising from the voluntary mechanism is that we will get into a time-consuming discussion and end up, at best, with a fudge, and I suspect that neither side will be particularly happy with the outcome. The new clause offers a genuine prospect of delivering a quick and effective solution at a time when we have a window of opportunity. It would respond to the public mood and the expectation that change will follow the decision of the Supreme Court.

In Committee, there was a lot of discussion about whether the wording of the new clause was appropriate. The Minister suggested, as he often does, and often correctly, that perhaps those who originated it had not thought through all its implications, and questioned whether there might be some unintended consequences. I was more surprised that he went on to complain that it was so widely drawn that it almost amounted to price regulation; I suspect that that might have been an overreaction. I accept, however, that he put forward a variety of reasons to justify his conclusion that the new clause should not be pursued. He talked in general terms about not intervening in competitive markets and about how competition benefits consumers. We had a long and fruitful discussion, led by the hon. Member for Chichester (Mr. Tyrie), about the idea that we should make financial markets more competitive. I sign up to that. However, much of our discussion of this issue relates to whether market failure is occurring and whether, in those circumstances, regulation is necessary.

I want to return to the issue of unauthorised overdrafts. As we heard in Committee, one of the surprising things in a so-called competitive market is that the charges that the banks impose for unauthorised overdrafts are remarkably similar, so it is pointless for someone to go from one bank to another because they will be treated in pretty much the same way. Someone on a modest income will be charged a very large amount of money for their overdraft compared with what they have in the bank. It is difficult to see how the existing situation benefits consumers. I am therefore unmoved by the argument that competition will deal with the issue.

The Minister suggested that the new clause would have a sweeping impact across the whole financial services sector. However, I remind the House that its terms would restrict the OFT to addressing only the ancillary terms of any contract—it would not have the right to question the so-called value-for-money equation or the price mechanism within those contracts. We must also recognise that the OFT would have to act only when the terms were unfair, and show clearly that in its view they were unfair, before action was taken. I accept that, as the Minister says, the new clause would widen the coverage considerably by taking in large numbers of financial services contracts. However, I submit—I understand that the Minister would want to consult others—that, with the restrictions that I have described, it would provide real protection for consumers in their financial services contracts.

I listened very carefully to the discussion in Committee, and I was not entirely convinced that the new clause before us then would not have provided answers to the decision of the Supreme Court, the concern and anger of consumers and the public and the need for prompt and directed Government action. New clause 15 would do all those things, and I commend it to the Minister and the House.

Unlike the previous new clause tabled by the right hon. Member for Birkenhead (Mr. Field), I have sympathy with the intent behind new clause 9. I believe that customers should be made aware of the charges that they are really paying. That also has a considerable bearing on new clause 15, tabled by the hon. Member for Edmonton (Mr. Love).

I strongly agree with the hon. Gentleman that we should not be in a position in which people do not really know what they are being charged for such a crucial service as banking, or indeed any service. I also agreed with him when he said—murmurs of approval from a sedentary position by the hon. Member for Wolverhampton, South-West (Rob Marris) could be picked up on the microphone system—that we have, if not market failure, market distortion in this respect. That needs to be addressed. It is caused by a lack of information in the market; people do not know what their bank will take off them as their relationship with their bank develops. Even if they do know that when they first receive their terms and conditions, they certainly do not each time the bank sends them new terms and conditions, which they do as frequently as once every six months and certainly once a year.

I am wary of the specific approach taken by the right hon. Member for Birkenhead in new clause 9, because it amounts to direct price regulation. Normally, although not always, that leads to higher costs and less competition in the long run, and therefore consumers lose out. There are countless examples of that having happened in markets. The absolutely crucial task that we need to accomplish—by “we” I mean both Parliament and regulators—is to arrive at a point at which consumers can choose which bank to be with on the basis of the costs that they will really incur in having the service made available to them.

In a nutshell, what is required is that the banks should provide customers with a regular itemised estimate of the total charges and interest payments on their account. The sum should include interest forgone on current account surpluses and on deposits, defined as the difference between any interest earned and base rates. That amount would be very low or zero at the moment, because base rates are low, but those are very unusual circumstances as we recover from the crisis. The sum given should also, of course, include any transaction charges, regular account charges or other charges that are customarily levied. If we ensured that, we would go a long way towards supplying customers with the information they need to choose between various banks.

Let us compare the situation for a moment with what has happened in the insurance market. Some 30 or 40 years ago, people had a relationship with one broker or company and rarely thought of changing each year. These days, they go to a search engine and look up which insurance company will give them the best deal. For a small fee, or sometimes nothing at all, they obtain the information required to get the best possible insurance deal. There is no logical reason why such a service cannot be provided for a market such as reail banking, to enable people to have full transparency on bank charges. However, it requires banks to be forced to supply the necessary information.

I set out such a proposal in a short publication for the Centre for Policy Studies a few years ago. It was taken up by the Office of Fair Trading, which was already on the case, or at least thinking carefully about going in a similar direction. The central problem that we had, which is pertinent to the new clauses, was that financial services legislation and other regulatory arrangements for the conduct of retail bank business do not provide clear leadership on the matter. We are left with a legacy of self-regulation and a bit of a mess where the responsibility falls between three stools. We need leadership from the Financial Services Authority. We need it to be in the lead and responsible for maximising competition in the sector, which is why, although I will not labour the point, it is crucial that financial services legislation should have at its heart an objective to maintain competition. If it had that, the FSA would work closely with the OFT to secure what was required.

It is very important to get across to all those who have bank accounts—virtually all of us these days, or at least a very high proportion—that there is no such thing as “free banking”, which is a misleading term that can only have any currency because people do not know what they are really charged. While we leave the market as distorted as it is, without the information required to enable people to know that, we will continue to have scandals or unacceptable practices of the type that we have encountered in the case of overdraft facilities.

I am even more pleased that the hon. Gentleman has given way if he was about to conclude. I agree totally with him about the importance of information, and that there is no such thing as a free bank account, because banks redistribute resources and charges to present to customers accounts that are free of any charges in a technical sense. However, does he agree that a free bank account in the sense that we are now using is most important to people on the lowest income, who have the least money? They are increasingly forced to use the banking system to undertake many activities that they would previously have covered with cash.

It is important that we ensure that banks do not end up cross-subsidising the more affluent account holders by levying disguised high relative charges on the less well-off. However, I am not an advocate of a system of bank charges that will conceal the true cost from customers. I fear that providing people with a free bank account would have that effect and send completely the wrong message to account holders. If we believe in principle that people need to have free accounts—I am not advocating that, as I have not thought it through carefully enough—it would be better to offer to pay the cost of them directly. If we insist that people have accounts in order to receive benefits, the taxpayer should logically bear that cost, at least in principle. There may be many technical and other reasons why that cannot be done, but logically that should be the position.

There is a further reason for going for transparency rather than regulation. Although I have not worked out how the banks will do it, I am confident that they will take advantage of any regulation, and the additional complexity that that imposes on a pricing system, to find other ways in which to levy disproportionate charges on their clients.

Indeed, the current lack of transparency encourages the banks to produce misleading products. They are often called free banking or free credit products and they litter the letter boxes of millions of people, but they are not free and they carry stings in the tail. They give customers the misleading impression that all banks are the same and that it is therefore not worth moving banks. That is harmful in itself—it should be much easier to move accounts between banks. For all those reasons, we must move to greater transparency.

Although I cannot support new clause 9 or new clause 15, I hope that the message that the debate sends will reach the regulators and that they will press harder to achieve transparency. I hope that if we are shortly sitting on the other side of the Chamber, we will return to what is really required to ensure that banking customers can find out how much they are being charged so that we can have some more competition in the banking market.

Again, we have had a useful exchange and I do not want to prolong matters unduly.

I have some sympathy for new clause 9, but bank charges have been a bone of contention for far longer than the past couple of years or so. As a former bank manager many years ago, I can remember charging people two guineas—that shows how long ago it was—and sometimes five guineas. There was massive cross-subsidy—there always has been. Some poor soul would pay the five guineas, whereas the debt of someone who had worked their account enormously and had a large potential probate in the executor and trustee company was offset, and he would not be charged in case he took his business somewhere else.

There has always been some mysticism about charges—much of it was done by holding a wet finger in the air. When computerisation was introduced, we had all the information about the accounts—the number of cheques, credits and so on—but at the end of the day, the system used to be based on how much we felt we could charge because we wanted to retain the business. I believe that there was far greater competition—genuine competition—then than there is today, and banks genuinely tried to secure new business.

I therefore understand the sentiments behind new clause 9, and that back in those good old days—if they ever were good old days—bank accounts were not essential, but something that people wanted. Owning a bank account was not a requirement for living one’s life, whereas it is today. People cannot really do anything without a bank account and it has become a much greater necessity for those who perhaps 20 or 30 years ago would not have contemplated having one. They did not need one—perhaps they could go to the post office or even a trustee savings banks or pay in cash. However, today, a bank account is necessary.

My fear about the way in which the new clause is drafted is that, as a former banker, I could provide someone with such an account, but it would unfortunately not be accompanied by a cheque book; the holder would not be able to use a cheque card; there would be no arrangements for direct debits or standing orders; it would probably require a minimum credit balance of £100, but the holder would not have to do anything with it. It would yield minimum interest and, although the holder might not be charged for holding it, they might be charged for setting it up. The likelihood of anyone’s holding one is therefore nil. We would have to be very detailed and prescriptive about the operation of such a bank account. It would therefore be almost a recipe for price regulation, which one would nail to the wall, and everyone would have to follow it. That would destroy the whole concept of competition.

Yet I believe that there needs to be a basic bank account for people with low balances—those who have their wages paid in, and almost all the money goes out again during the month. They need a bank account, otherwise they cannot get paid. We need to find a way in which to implement if not a free account, a low cost account for those people.

There has never been free banking—there is no such thing as a free lunch. However, since the Supreme Court decision, my fear is that the concept of people not being charged—which is not quite the same thing as free banking—will diminish and that many more charges will be levied on accounts.

Does the hon. Gentleman agree that the key piece of information is not only the charge that will be levied, but the difference between the interest earned on base rates and the interest paid on that account to the customer? Until the customer has that information, he will always in a position whereby he can be taken to the cleaners’ by his bank as it varies that rate of interest.

I agree. In a sense it has been allowed to happen because, for many decades, there was a feeling that the relationship between the account holder and the bank was one of good faith; an inherent feeling that the bank would be fair and act in good faith on the customer’s behalf—perhaps even give them some good advice occasionally—and would not take people to the cleaners’ every time they transgressed. When banks did the latter, it came as a great shock.

I suspect that many Members of Parliament have been approached by account holders who complained because they had miscalculated the day on which they would get their salary and drawn a cheque, thereby overdrawing their accounts by £10, £15 or £20. They then found that for that £20 transgression, they were fined £30 and another £20 for the letter informing them of that. In a day or three or four, a transgression of £20 had become £100, which was directly debited from an account. People were not advised that it would be debited; it was done automatically—the money was gone. By the time the letter arrived, the account holder was substantially more overdrawn than they ever anticipated, mainly because of the charges.

That compounding of the problem led to the complaints about charges on top of charges. The banks suddenly found that they could make all sorts of other charges for unauthorised things. Even two or three years ago, I know of someone who complained to a bank after banking with it for 25 years, and was told, “Very sorry, we don’t want you banking with us any more. Would you kindly arrange to close your account in three weeks?” It was amazing. All the person had done was complain, and the bank had written a letter saying, “Hard luck if you don’t like it. If you don’t close your account, we’ll close it for you.” Banks’ behaviour reached the height of arrogance, and people collectively said, “Enough is enough.”

It suddenly became clear that such behaviour was happening everywhere, and the complaints meant that some people were refunded—sometimes after going to the bank and thumping the desk, sometimes with the help of hon. Members. Then the refunding stopped because the complaints were so numerous that it was felt that the matter had to go to court. Many people waited for the verdict, but the case lasted for a long time. At first, the court’s decision appeared to be in the complainants’ favour, but now we know that it was not.

Many people feel that they have been cheated not only once, but twice. They feel cheated because they paid enormously high charges for unauthorised overdrafts—there is a difference between charging people legitimately for the work entailed and penalising them for unauthorised actions—and cheated again because the court ultimately decided for the banks, which were in pretty bad favour anyway.

We have got to a situation in which such good faith as there may have been has been totally dissipated—the public relations for the banks has been a disaster—and we must now get back to a transparent and obvious means of charging.

May I give the hon. Gentleman a small, personal example of how far trust has broken down? My mother has had an account with Lloyds bank for 80 years, and she is considering moving.

I have been banking with what is now HSBC since 1964. It is easy for me to say that it has been good to me because I worked for it for a long time, but I know many who feel the same as the hon. Gentleman’s mother. They feel not only let down, but much worse. The relationship of understanding, good faith and everything else has completely and utterly gone. As I said, people feel cheated. They have paid out money that they should not have paid out. The fact that it was simply taken from them is also a problem. Back in the so-called good old days, we used to advise people that we were going to charge their accounts on a certain date. If they were terribly upset, they could at least come in to the bank before it happened. Now, people are told after their accounts are charged, which is the wrong way round. Some got refunds, but many did not.

Obviously, I support new clause 15, which was tabled by the hon. Member for Edmonton (Mr. Love), because it mirrors a proposal I made in Committee. I have reflected on what the Minister said in Committee. Of course, in some respects, he is right that new clause 15 is slightly more widely drawn, but that is not a bad thing, because it would send exactly the right message. It would mean that unfair charges are not sanctioned whatever they are levied by, be it a bank, insurance company or anything else. If charges are inherently unfair, they should not be sanctioned, and if the measure is widely drawn and captures products other than just bank accounts, that is all well and good. I see no reason whatever why we should allow unfair charges.

It seems that the OFT has put the white flag up, which means that unless something is done in the House, things are not going to change. As I said in Committee, I suspect that even if we passed new clause 15, it would be unlikely to be retrospective, which I think is sad, because people feel hurt and upset. The banks have got some real fence-mending to do. They must do an awful lot more for those people who feel they have abused their position in charging unfairly—extortionate amounts in some cases. The banks must review that, but we cannot make them do so. New clause 15 would at least put the situation back to what we all understood it was, and to what would appear fair to most reasonable people, which is right.

I would like to support some aspects of new clause 9, tabled by the right hon. Member for Birkenhead (Mr. Field), who is temporarily not in the Chamber, but unfortunately, it would be completely circumvented by the banks. If they were asked to do what the clause asks them to do, they would circumvent it, so it would be a complete waste of time. However, as the banks are providing a service which is more of a utility now—having a bank account is a necessity in the daily lives of many who would not normally have had one—we must have a clearly understood, basic bank account, perhaps involving a minimum number of cheques or direct debits or whatever, so that people know that as long as they stay within a certain regime, they will not be charged. The account will not be free, but people will not be charged. There is a necessity for that. The terms and conditions of so many accounts these days run to three or four tightly printed pages, which is unnecessary, and we need them to be clear. We could have a much more basic tariff and a clear description of what an account will provide and what charges people would be expected to pay.

Finally, the real problem has been unauthorised overdrafts. People will ask, “Why should people who properly look after their accounts, make certain that they do not create an unauthorised overdraft and operate their account perfectly satisfactorily, be penalised or pay charges to cover people who do not have a sense of discipline in the operation of their accounts?” I have some sympathy for that. The banks need to be clear what they are going to charge, but customers must recognise that they have a responsibility for ensuring that their account stays within the tariff or agreement, and that should they go outside that, they leave themselves open to charges.

The debates on new clause 9 and new clause 15, which was tabled by the hon. Member for Edmonton (Mr. Love), have been thoughtful. I do not wish to speak for too long, because much that needs to be said about the proposals has been said.

There is a superficial appeal to new clause 9, and to guaranteeing that there will be a free bank account for those who keep their account in credit and those who have a savings account that is in credit. However, the reality is that such accounts would not be free—there is a cost, as the hon. Member for South-East Cornwall (Mr. Breed) has indicated, and the question is who will bear it. In recent years, the cost has been borne by people who have been charged for having an unauthorised overdraft, perhaps with a significant penalty attached, but banks have also sought to build their margins on the sale of other products. All that happened because people use services in relation to their bank accounts that incur costs, which must be met from somewhere.

There is a need to be open and for people to recognise that there are many ways to skin a cat—an account may appear to be free, but the bank will earn income from the account holder to cover the cost from other sources. For example, the interest that a person earns when their current account is in credit might be collected and retained by the bank—the interest that most people get on credit balances is fairly small, even when interest rates are higher than they are now.

The challenge that we face is ensuring that there is transparency about the cost of people’s bank accounts—my hon. Friend the Member for Chichester (Mr. Tyrie) made some important points on that. If we are much clearer about the cost of bank accounts, we will move closer to genuine competition between banks for current accounts. In that case, people would move away from the false perception that their account is free and begin to look at what charges they might incur if, for example, they were to move their account from Lloyds to HSBC. That is a helpful position. We want increased competition in the banking market, as we said in proposals published in July last year. However, we recognise that for there to be competition, people need to be prepared to switch suppliers. The barriers to switching suppliers need to be reduced, and people need to know just how much they are paying in charges. If the right hon. Member for Birkenhead had tabled an amendment that would have increased transparency, I might have been tempted to support it, but I cannot support new clause 9, despite its superficial appeal.

As the hon. Members for Edmonton and for South-East Cornwall have suggested, we have been around the track on new clause 15 before. The Supreme Court’s decision on the case brought by the OFT against some representative banks left us in an uncertain position. It did not really resolve the question whether the charges were unfair. There were three routes available to the OFT—to pursue another court case on some different grounds, as suggested in the judgment; to change statute, which the new clause would provide an opportunity to do; and to reach a voluntary agreement with the banks about the future level of bank charges, which appears to be the one that the OFT has opted for.

No one should be in any doubt that if the voluntary agreement does not work, legislation is an available route. I am not as sceptical as the hon. Member for Edmonton about the prospect of voluntary agreement on this issue—perhaps I am by nature an optimist, or perhaps he is more pessimistic or cynical. It is interesting to note that in the run-up to the Supreme Court judgment at least one bank started to shift its position on bank charges and proposed some lower charges for unauthorised overdrafts, and it also differentiated between cases in which someone had received a service—if a cheque presented had been honoured—and those in which the bank rejected a cheque, which incurred a lower fee because no service had been received. That suggests that the banks may be interested in reaching a voluntary agreement, and we should maintain the pressure on them.

I agree with the hon. Gentleman that there is interest on both sides in reaching agreement. My point is that the two sides are so far apart and their interpretations are so different—and the commercial interests are so palpable—that reaching agreement may prove more difficult.

That is a reasonable view to take. The OFT and the banks will discuss the matter, and both sides need to recognise the pressure to reach a settlement. It is in the interests of banks and consumers to reach that point and to avoid the continuation of the uncertainty that we have seen in the past few years.

The advantage of a voluntary code of conduct is that it allows for an appeal to the banking ombudsman. In general, banks pay attention to that authority, so it would take matters a little further on.

Several people who complained about their charges referred the matter to the Financial Ombudsman Service, but the problem with the judgment reached by the Supreme Court is that the many complaints outstanding with the ombudsman and the county court system were left in limbo. The expectation, or the hope, was that if the OFT had won the case, it would have provided a framework for resolving the backlog of cases.

One concern, which may lead us to conclude that voluntary regulation would not be effective, is that if the market were functioning well, the most competitive banks would have worked out the numbers and would be telling the public that they were more cost-competitive than other banks that might appear to be charging less but that are in fact charging x plus y. The market is not transparent enough, and the incentive on the banks is not strong enough to provide it.

My hon. Friend is right. This is part of the problem that relates to the point that I made on new clause 9. Until there is greater awareness in the market of the charges being imposed by banks and it is easier for customers to swap between banks, it is likely that the charging structure will remain uncompetitive. As part of enhancing competition in the banking market, we need more transparency and more competition. In our White Paper, “From crisis to confidence: plan for sound banking”, we talk about some of the mechanisms that we could use to increase transparency and consider some of the initiatives taken in the US, where mortgage companies are required to produce information on charges in a standardised form that can be uploaded into a website to enable people to compare mortgage providers. A similar remedy might be appropriate in this market.

More work needs to be done in this area. A better functioning market would be an aid to reaching a voluntary agreement, but we should make it clear to participants that legislative solutions are a possibility if they do not make progress. We have also proposed that responsibility for consumer credit should shift from the OFT to a new consumer protection agency, which would bring the regulation of bank accounts within one home—at the moment, there is a split depending on whether an account is in credit or overdrawn. Our reforms would make it easier to bring the control of bank accounts within the remit of one body rather than two, which might make it easier to resolve this issue. Work is needed on both how to achieve a satisfactory resolution of the issue of unfair overdraft charges and how to increase transparency in the market and obtain a better deal for consumers.

New clauses 9 and 15 both touch on aspects of the charges payable by consumers for operating personal current accounts and savings accounts, and indeed for financial services contracts in general. We have had a useful debate with some good comments, especially on the issue of transparency.

New clause 9 would require banks and building societies to offer at least one personal current account and one savings account free of charge for holding the account. New clause 15 would amend the Unfair Terms in Consumer Contracts Regulations 1999, which would allow for the assessment of the fairness of certain charges in financial services contracts. As has been mentioned, we discussed that point in Committee.

As regards free accounts, I understand the desire to preserve the current model of so-called free banking, which suits many customers well. But I question the merits of mandating by putting into legislation “free banking” practices that are already widely available in the market. I am also concerned by the good governance aspect—we should not lightly act to compel any firm to provide free services that may not cover its costs.

I was surprised that the Minister said that free banking suits many customers well. Is not the truth that there is no such thing as free banking? Those people who think that they are getting free banking are getting nothing of the sort and are not being served very well. The real gainers from free banking are, of course, the banks themselves.

I agree, in the sense that the term “free banking” is something of a misnomer, which is why I have referred to “so-called free banking”.

There are currently 17 basic bank accounts available from the major banking providers. They are popular with low-income households, because there is no cost for everyday transactions, and they are all accessible at post office counters. I am proud of the fact that this Labour Government have made a great deal of progress in assisting low-income households and the financially excluded. The work that we have done on basic bank accounts is a major step forward.

I am concerned that forcing banks and building societies to offer so-called free services more generally could create a lot of unintended consequences and potentially have anti-competitive effects. If we restrict the ability to impose charges, incumbent firms will tend to generate revenue through lower interest rates or extra-cost voluntary options that were previously free. They might also restrict associated services and other mechanisms, which would cause consumer detriment. There may be elements of cross-subsidy in the current banking system, but most customers basically pay for the service in one way or another—I agree with the hon. Member for Chichester (Mr. Tyrie) on this point—such as through interest forgone or charges for ancillary services. Some pay currently through withdrawal penalties, overdraft charges, charges for bouncing a payment and so on.

New clause 9 would only ban charges for holding an account. It would create opportunities for circumvention, because it would create uncertainty about the scope for ancillary services and charges associated with the account. Again, many banks and building societies charge for such services as additional statements, stopping payments, using cards and cash machines overseas or issuing a banker’s draft. Such charges may come under challenge if new clause 9 were adopted, thereby potentially creating a lot of unintended consequences.

What I want to say, I suppose, is, “Let’s be realistic.” If some charges are ruled out, new ways of raising revenue will be found. It is conceivable that a charge could be imposed for making a withdrawal or, as happens in business banking, making a cash deposit, or for other types of transactions. Banks and building societies are there to make a profit; they should not be expected to offer a loss-making service. However, it is in the public interest that we should pursue them to ensure that they do their bit to help low-income and vulnerable households, which has indeed been the broad thrust of Government policy.

I recognise that there are transparency issues with charging for personal accounts—we have had a helpful debate on that—which is why the OFT has been investigating the state of the market for personal current accounts. It published interim reports in July 2008 and October 2009, and it is working with the banks to address the complexity and lack of transparency that it has identified. Those points relate principally to unclear charge structures and disproportionate charges in some circumstances. The Government believe that that is the right way to tackle problems in the market, although it is also right that hon. Members should highlight the issue of transparency.

Let me turn to new clause 15, which would amend the Unfair Terms in Consumer Contracts Regulations 1999 and would allow for the assessment of the fairness of certain charges in financial services contracts. However, the fairness assessment would be limited, being confined to circumstances in which fees are potentially payable but would not necessarily arise; in other words, it would be limited to contingent charges. I fully understand the reasoning behind how my hon. Friend the Member for Edmonton (Mr. Love) has structured new clause 15. It would address charges for bouncing a cheque, for example, where a bank customer may or may not exceed an overdraft limit.

New clause 15 would extend contingent charges across the entire financial services sector—we had a debate about that in Committee—and would go well beyond bank lending to include savings and investments, insurance, debit and credit cards, pensions, payment services and other types of consumer financial services. I understand the point made by the hon. Member for South-East Cornwall (Mr. Breed)—that we should not sanction unfair charges, no matter where they occur—but would simply say that the broad structure of new clause 15 has not been fully thought through, in terms of the overall costs and benefits.

I understand that one of the key points behind new clause 15, which stands in the name of my hon. Friend the Member for Edmonton, is to address bank overdraft charges, which were subject to the recent test case by the OFT. He knows that the Supreme Court ruled in that case that the OFT cannot assess whether bank charges for unauthorised overdrafts and unpaid items are unfair under the Unfair Terms in Consumer Contracts Regulations 1999, on the grounds of the adequacy of price as against the service provided.

Does my hon. Friend agree that one of the problems that has bedevilled this discussion is that the Supreme Court only got a technical knock-out over the OFT? It did not determine the fairness of the situation; rather, it determined that the OFT could not make a judgment on that, which, to go by the public response, is making life much more difficult.

I might put it slightly differently. I certainly understand the concerns of consumers who have been affected by the Supreme Court judgment—they do not feel that they have got the remedy to which they felt entitled—which is why the Government have announced that we will take action to work with the OFT, consumer groups and the banks to seek to agree a fairer, simpler and more transparent system of bank charges in future. We have not ruled out further measures if a voluntary approach does not produce results.

We believe that a voluntary solution has many advantages. It can quickly adapt to changes in the marketplace. As my hon. Friend knows, any regulatory solution will need to be carefully thought through and will take more time. We must maintain price competition and avoid unintended consequences if firms compensate for any revenue reduction by developing new types of charges. However, there is a determination on the part of the Government that we should seek progress through the voluntary route.

On the broader point about the regulation of contingent charges across all financial services sectors, as I have indicated, I do not think that the case has been made. It has always been the policy of successive Governments to rely on competition to make prices fair and to intervene only where there is a demonstrable market failure that cannot be fixed by other means.

I will happily give way to the hon. Gentleman, because I disagree with his suggestion that when it comes to taking action in this area the OFT has—I think that I am quoting him—put up the white flag. I strongly deny that. The OFT is on the case. It is not fair to say what he has said, but I will give way if he wants to try to justify it further.

I am delighted to hear that and look forward to hearing what the OFT has to say to demonstrate that it is going into battle again. On competition, part of the problem is that at the moment the competition, such as it is, is between three or four rather similar institutions. We want a much better and more competitive market, with some new entrants and totally different sorts of providers. At the moment, HSBC, Barclays, RBS and Lloyds are all similarly huge, monolithic organisations, with similar charging structures and similar services. If we had a much more competitive market, with new entrants such as Tesco and everybody else, that would help the competition argument, with which I agree, that the Minister is propounding.

I take the hon. Gentleman’s point. We want competition in the banking sector. He is right to point out that although we have had some large, powerful players, in some instances and in certain product offerings there has not been as much competition as the Government would have liked. The OFT has obviously been looking at that, and it will continue to want to examine it closely.

The Minister talks about the knock-on effects of changing the charges, but this is not a debate about whether we have charges or not; it is a debate about the structure of the charges. Do the Government have a view on what that structure should look like?

I am trying to make more than one point here. One of my points is that there still needs to be more transparency in personal accounts. I have also said that so-called free banking could result in additional charges being made elsewhere, and that companies would respond to that. There are differences of opinion between banks on how charges should be structured, but there are also many similarities, as the hon. Member for South-East Cornwall has suggested.

I was trying to make the point that we need to think through some of these proposals in more detail, particularly in regard to the action taken in the wake of the Supreme Court case. As I have said to my hon. Friend the Member for Edmonton, we see merit in a voluntary approach and, at the moment, we are persuaded that that is the best way in which to take these matters forward speedily. In Committee, he mentioned the proposals for a consumer rights directive that are being discussed in Europe. He will also be aware of the Government White Paper, “A Better Deal for Consumers”, in which we said that we want to simplify and rationalise UK consumer rights legislation when implementing that directive.

It will be a matter for the next Parliament, and whoever is in government, to look at this issue and decide the best way in which to navigate through it. We cannot wait for ever and a day for a voluntary approach to succeed, and we cannot wait too long if the consumer rights directive is not going to see the light of day for a considerable period of time, but it will be up to the next Parliament to make those decisions. I fundamentally believe that there is no significant difference between the political parties on this matter. We all want to see the consumer getting a fair deal, and, through these discussions, we need to find the most effective, practical way of delivering that.

In the light of the reassurances that I have been able to give to my right hon. Friend the Member for Birkenhead and my hon. Friend the Member for Edmonton, I hope that my right hon. Friend will seek leave to withdraw his new clause. The Government are mindful of the points that they have made, and these are live issues that will continue to be discussed.

At the outset of the debate, I was hoping that someone would help me to divide the House on this question, and for a moment, I thought that the hon. Member for Chichester was going to do so. However, his early resolution was followed by a retreat from that position. I thought that he had perhaps been teasing me, until he caught me behind your Chair, Mr. Deputy Speaker, and suggested that, given the agreement about what the next moves ought to be, the sensible course of action would be to withdraw the new clause and for us all to meet and to see whether we can pursue these objectives quickly enough to have a proposal ready for debate in another place. Given the constructive discussion that I had behind your Chair, Mr. Deputy Speaker, I beg to ask leave to withdraw the new clause.

Clause, by leave, withdrawn.

New Clause 10

Financial Services Authority regulation of Northern Ireland credit unions

‘(1) The Financial Services and Markets Act 2000 (Exemption) (Amendment) order 2001 is amended as follows.

(2) Omit Articles 3 and 4.’—(Mark Durkan.)

Brought up, and read the First time.

With this it will be convenient to discuss amendment 2, in clause 38, page 50, line 43, at end insert—

‘(2A) Section [Financial Services Authority regulation of Northern Ireland credit unions] shall come into force at the end of the period of six months beginning with the day on which this Act is passed.’.

New clause 10 would extend FSA regulation to credit unions in Northern Ireland. The Bill is a convenient and appropriate legislative vehicle to fulfil a growing demand being made on behalf of the credit unions in Northern Ireland and their many members. That demand has been proposed by the Irish League of Credit Unions, the Ulster Federation of Credit Unions and others. This matter has also been the subject of an extensive inquiry by the Committee for Enterprise, Trade and Investment in the Northern Ireland Assembly, which I chaired at the time of the inquiry. The Committee’s report, which was unanimously adopted by the Assembly, called for the extension of FSA regulation to credit unions in Northern Ireland.

I want to stress that that demand exists not because people have detected problems with the way in which our credit unions are treating their customers, or because there are concerns about their soundness; rather, it is because of the recognition that, although they are strong in terms of their numbers and their savings base, the range of services that they can offer is highly limited compared with their counterparts in Great Britain.

Credit unions in Northern Ireland can offer their members only three services: share accounts, loans and life assurance. Credit unions in Great Britain can offer not only those services but current accounts, internet and phone banking, standing orders for payments such as wages, mortgages, debit cards, direct debits, bill payments, junior savings accounts and child trust funds, as well as home, travel, health and car insurance. All those services are available from credit unions in Great Britain, but not from those in Northern Ireland, even though they are much bigger and stronger.

Credit unions in Northern Ireland have about 400,000 members. The Consumer Council for Northern Ireland estimates that 26 per cent. of the population there belong to a credit union, of which there are 170 in Northern Ireland. In November, the Assembly heard that there were £775 million-worth of savings in the credit unions, and that the loans from credit unions to members totalled £516 million.

The credit unions therefore play a significant role in our community. To enable them to play a bigger and better role in the lives of their members, and to make a much bigger contribution to financial inclusion in Northern Ireland, however, they need to be able to offer a wider range of services. The passport to that is FSA regulation. That is essentially what was established in the inquiry undertaken by the Committee for Enterprise, Trade and Investment. I want to assure the House that that inquiry was extensive. It did not happen quickly; it took evidence on a number of different tiers and it established a strong consensus. That consensus was adopted not only by the Assembly but by the Northern Ireland Executive and by the relevant Department—the Department of Enterprise, Trade and Investment.

The hon. Gentleman makes a very good case for Northern Ireland’s credit unions being brought within the remit of the FSA for the purpose of regulation. What assessment did the Committee that he chaired make of the cost of extending the FSA’s regulatory remit to those credit unions?

We looked at that on two counts. The Committee took evidence from the FSA and the Association of British Credit Unions on their experience in Britain, as well as from credit unions in Northern Ireland. We found that the FSA was more than happy and ready to move to regulating the credit unions in Northern Ireland. The ABCU said that the two different tiers of regulation that the FSA offered to credit unions in Great Britain were regarded as proportionate and comfortable, in terms of the rate of intervention and of the costs levied. The credit unions in Northern Ireland were certainly encouraged by that, and the Committee was encouraged by the evidence that we heard.

Of course, if we moved to having the FSA regulate credit unions in Northern Ireland, the credit union movement there would hope that that would involve a reasonable regional accent, profile or presence. The credit unions have enjoyed a good and close working relationship with the Department of Enterprise, Trade and Investment over the years and they want to build on that.

New clause 10 would, in essence, remove the exemption in the Financial Services and Markets Act 2000 that means that the FSA’s regulatory writ does not apply to credit unions in Northern Ireland and thereby provide the means in primary legislation to allow for FSA regulation. We recognise that the precise issues involved will take further negotiation and liaison, including with the currently devolved Department, for a number of reasons. The first is that the best way of moving forward would probably be for the registration of credit unions to remain as a function of the devolved Department—the credit unions want that, because they wish to retain that sort of relationship with the devolved Administration—but for regulation to fall clearly under the responsibility of the FSA. Obviously, there would need to be a proper memorandum of understanding as to exactly how that interface might work, in order to ensure a smooth junction.

The second reason is that issues will arise in relation to all the relevant secondary legislation that applies to credit union regulation. We will need to ensure that that is suitably updated and translated to take account of the legal requirements of Northern Ireland too. Thus, along with new clause 10, I have tabled amendment 2, which provides for the commencement of these provisions six months after the Bill is passed and becomes an Act. Before the Minister makes this argument, may I say that I accept that six months might be a bit of a tight time scale for addressing some of those issues? However, I accept that the argument might be made for a wee bit more of a hard shoulder to drive on only in respect of amendment 2. On the substantive issue of amending primary legislation to allow for credit unions in Northern Ireland to be regulated by the FSA, I ask the House to adopt new clause 10 now. Credit unions in Northern Ireland have been seeking this change for some time.

The Economic Secretary is a former Northern Ireland Office Minister, and I wish to pay tribute to him for the work that he did then. He succeeded me as a Minister in a couple of the very many briefs that he was juggling at that time in Northern Ireland and on some of them he was wise enough to follow my advice—on others he disappointed me, but he did so for reasons that he articulated very well at the time. He may recall that at that time credit unions were starting to lobby on this matter and that we had a meeting with his then colleague, who is now the Minister with responsibility for the third sector—that shows how long this has been going on. The matter subsequently became, in this phase of devolution, the subject of an Assembly hearing, in which there was unanimity. Of course, the papers that the Treasury produced on the future of financial services regulation last July included one on the legislative framework for credit unions and industrial and provident societies in Northern Ireland, in which it fully endorsed what the Assembly’s Committee and the Assembly as a whole had recommended.

It would, thus, be strange indeed if we were to have to go back to tell the credit union members in Northern Ireland that although everybody—all the political parties in Northern Ireland, the Assembly, the Minister, the Executive and the Treasury—agrees that the measure is needed, the House of Commons still cannot use this obvious legislative vehicle to remedy the gap. Members of the House may be aware that the Treasury Committee visited Northern Ireland recently to examine the problems of the Presbyterian Mutual Society. Obviously, those are very different from the issues that credit union members want addressed, but this matter did arise in the context of those hearings, because the Committee heard about the twilight zone that has existed in respect of where the FSA does and does not regulate, and who knows what and who shows what in relation to those activities.

The problem was identified as an outstanding gap that needed to be addressed by the credit unions in Northern Ireland being enabled to offer a wider range of services and for them to come under FSA regulation to facilitate that. That approach was identified by the Treasury Committee not only when it visited Belfast last week, but a number of years ago; the approach was identified when the Committee produced its financial inclusion report. The role and potential of credit unions in Northern Ireland was recognised at that stage and attention was drawn to the need to enable credit unions to offer a much wider range of services. It would be perverse if credit unions in Great Britain, which have a much smaller membership base and a much smaller savings base, are facilitated to provide a much wider range of services to their members than the credit unions in Northern Ireland. The Irish League of Credit Unions is part of an all-Ireland league, and the members in Northern Ireland are jealous of not only credit unions in Great Britain, which can provide a much wider range of services, but their counterparts in the south, which can provide even more services again, including on pensions, wills and community investment.

New clause 10 is tabled not only in my name or those of my party colleagues, but in those of the hon. Member for North Down (Lady Hermon), of the Ulster Unionist party, and of the hon. Members for East Antrim (Sammy Wilson), for Belfast, North (Mr. Dodds) and for Upper Bann (David Simpson), of the Democratic Unionist party. I can assure the House that it is supported by all the other parties in the Northern Ireland Assembly too. On an evening when there is a lot of uncertainty about the future of our devolved institutions in Northern Ireland, when all sorts of brinkmanship is going on and when many lectures will be given about what is in the true public interest and how we must be responsible and reasonable and use political processes to look after people’s democratic interests and to focus on the real social and economic agenda, it would be good if this House gave a very positive signal to all the parties in Northern Ireland by supporting new clause 10.

I followed the arguments made by the hon. Member for Foyle (Mark Durkan) closely and I liked his metaphor about the twilight zone, because the Minister and I have discussed the Presbyterian Mutual Society and just where it sits in the regulatory framework. If the hon. Member for Foyle is arguing that the same twilight zone applies to credit unions, he has an important case to make about rationalising the regulation of credit unions and putting credit unions in Northern Ireland on a common footing with those in Britain. The fact that he has been able to demonstrate cross-party support for his initiative, not just by the signatories to his new clause, but by the unanimous report from the Assembly, indicates to me that there is a consensus.

The Minister may have some more thoughts about the timetable point that the hon. Gentleman raised, but my concern relates to the separation between the registration of credit unions by DETI and the ongoing supervision and regulation by the FSA. The Minister will be more familiar with this because of his previous role, but the hon. Member for Foyle ought to bear in mind that in other circumstances the FSA acts as both the body that authorises an individual’s registration of a regulated firm and ensures that they meet all the tests on being an authorised person, and the body that conducts the ongoing regulation and supervision of that institution. I am not sure how the divide that he suggested between DETI and the FSA would work in practice, although that is probably my only reservation.

Even as it stands at the minute, with the registration and regulatory functions attached to the FSA in Great Britain, they are technically two different functions carried out by separate people, albeit within one organisation. They are separate functions and the one thing that the credit unions in Northern Ireland would like is continuity in the devolved relationship. That is why people like the idea of the registration function—but only the registration function—remaining with the Department and all the regulation going to the FSA.

Let me give the hon. Gentleman an example that we debated in Committee and will touch on later. If the regulator believes that the activities carried out by a credit union are inappropriate or in serious breach of the rules, who will withdraw the permission from the credit union? Will it be the FSA, as would be the case if it was registered with and regulated by the FSA, or will it be the Department in Northern Ireland? We need to tease out some issues if we are to make this change, and I am not sure that I understand how it would work in practice, notwithstanding the widespread support in the Assembly and among all political parties for the hon. Gentleman’s proposals.

I had a credit union in my constituency, which got into trouble some years ago and, sadly, went into liquidation about a year ago. During the time of its difficulties, my constituents could refer to the ombudsman to take up any concerns that they had and when the credit union went into liquidation, there was a compensation scheme. Indeed, I was a small shareholder in that credit union and received prompt compensation. It is those features of regulation by the Financial Services Authority that it is critical for us to extend to members in Northern Ireland.

As was mentioned earlier, the Treasury Committee, of which I am a member, visited Northern Ireland a week ago today. We were there primarily to look at the Presbyterian Mutual Society, but we touched on regulatory and other issues related to credit unions. The debate so far has summed up some of the ambiguities between registration and regulation. That is a feature in Northern Ireland where the local Department, DETI, is responsible for registration. In our discussions in Northern Ireland, people were at pains to point out that the law does not state as clearly as I suspect everyone would like the connection between registration and regulation. We were there to address those issues and our report will come out in the next few weeks.

On credit unions, it is important that we recognise the wider issues involved. Of course, we have to solve the problem of registration and regulation. It has been answered in the context of Great Britain because it comes within the ambit, overall, of the FSA to carry out both functions. As someone who takes an interest in this, I have to say that the FSA has been effective at regulating the diverse credit union movement in England and Wales and has, indeed, been able to ensure that depositors are protected and that the problems that have arisen are taken up. Indeed, it has sponsored bringing credit unions together when that is a more acceptable solution to the difficulties that they might otherwise get into. There are major advantages to extending such regulation of credit unions to the Northern Ireland membership.

It is particularly important, too, to remember that although credit union membership in Great Britain is very low—less than 1 per cent.—in Northern Ireland it is very significant indeed. There is a much longer history of credit union involvement in Northern Ireland and the number of members is significantly greater, yet they do not have as many protections as members in Great Britain. That needs to be remedied.

As has been mentioned, the extension of the services that credit unions can provide into some of the more basic financial services—credit cards and various other things that have been mentioned—is critical if credit unions are to provide a 21st-century service and are to be allowed to compete with other financial service organisations. I think that I can be confident that, if that were to happen in Northern Ireland, they would be able to compete in a way that the credit union movement in Britain is not, as yet, ready to complete.

For all those reasons—to ensure that the credit unions have those protections, that we clear up this confusion, that everybody is certain that regulation is extended to credit unions, and that we extend the services that they provide so that they can build on their membership and on providing a proper service to many disadvantaged communities across Northern Ireland—I commend the new clause to the House.

May I say, first of all, that it was a privilege to serve as a Minister in the Northern Ireland Office for some two and a half years? I thoroughly enjoyed the role, and I would like people to think that I performed it in an effective and diligent manner. I am sorry if I did not always agree with my hon. Friend the Member for Foyle (Mark Durkan), but I made the best decisions, as I saw them, for the people of Northern Ireland.

My hon. Friend is right to point out the importance of the credit union movement in Northern Ireland. As he is aware, at the time of the Financial Services and Markets Act 2000, Northern Ireland credit unions opted out of the arrangements. That is why they have been exempt since 2001. I want to try to be as sympathetic and helpful to my hon. Friend as I can, but I think I need to make a few points to outline some of the difficulties with his new clause.

The new clause is intended to revoke the exemption from FSA regulation that credit unions in Northern Ireland currently enjoy. On a purely technical level, the new clause would not work as intended since it revokes provisions that amended the original FSMA exemption order rather than revoking the exemption itself.

Let me say two more things. First, the transfer of regulatory functions of Northern Ireland credit unions to the FSA is considerably more complex than the removal of paragraph 24A of the schedule to the exemption order. There would have to be changes to Northern Ireland legislation, and because the rules on Northern Ireland credit unions are different to those that govern Great Britain credit unions, there would have to be some significant changes to the FSA’s handbook, too.

As my hon. Friend the Member for Foyle mentioned, issues surrounding the interaction between the registration regime, which he still wants DETI to perform, and regulation, which would be the responsibility of the FSA, would also need to be considered and resolved. He mentioned the work of the Assembly Committee and I would certainly like to pay tribute to him in his role as Chairman of that committee. It has produced a very good report. However, I am advised that the relevant Northern Ireland Department, DETI, sees no need for the proposed amendment or new clause because it intends to consult on changes to Northern Ireland credit union legislation later this year—very shortly, I understand. The policy objective of permitting Northern Ireland credit unions to offer additional services to match those available from credit unions in Great Britain will also require amendment to several pieces of legislation in Great Britain.

I want to be sympathetic, and I appreciate the argument that says, “If you’ve got a bus coming along, why not jump on it? You don’t know when the next one will be.” However, my concern is that doing what the new clause proposes would be difficult. There has not been a statutory public consultation in Northern Ireland, even though it was always made very clear to me in my time there that such a consultation should be carried out for every significant issue. It is one thing to have an Assembly Committee—the equivalent of a Select Committee in the UK—with a consensual view on matters, but it is another thing entirely to hold a statutory public consultation before legislation is introduced.

However, if the Government were to receive from the Northern Ireland Executive a request to move forward that was fully backed by the Assembly—and if the FSA agreed that that would be appropriate, and if the Northern Ireland Executive and Assembly tabled any legislative consent motion that might be required—we would want to look at it.

There are a great many legislative intricacies when it comes to allowing the FSA to handle the proposed changes in Northern Ireland as well as in Great Britain. Despite the common agreement on the matter, my suspicion is that too much work probably remains to be done sorting out the nuts and bolts of those intricacies for the proposal to be included in this Bill, although something might be ready in time for a future Finance Bill.

As I said, I will try to be as helpful as I can. I recognise that the credit union movement in Northern Ireland strongly wants to be regulated by the FSA, and I am sure that any public consultation in Northern Ireland would demonstrate that. If there is a way to do what the new clause proposes more speedily in this Bill, we will look at it. However, I suspect that the difficulties involved mean that the process might take a little longer than my hon. Friend the Member for Foyle would like.

The Minister has said that he wants to be sympathetic and helpful, and of course that is a euphemism for “No,” or “Not now.” However, I want to pick up on a couple of the points that he made. He said that the Northern Ireland Executive would have to indicate its approval before any proposal could be implemented, yet the hon. Member for East Antrim (Sammy Wilson), whose name appears on the new clause, is Northern Ireland’s Minister of Finance and Personnel. When he was agreeing with me and saying he wanted to support the new clause, he told me so in the company of the Minister of Enterprise, Trade and Investment, who is in the responsible Department, so there seems to be support and will at that level.

I am sure that the Minister is right to suggest that people in that Department are very conscious that putting in place the detailed arrangements—for setting out the precise interface between registration and regulation, and for ensuring that the relevant secondary legislation and other instruments are appropriate and fully in line with the legal requirements in Northern Ireland—may take some time. However, I stress that there is a compelling consensus on the need to establish, as both a principle and a fact, that the position in respect of primary legislation has changed. That would at least give some force and pace to the need to resolve and clarify these other issues.

People have waited for this for a long time. Everyone has said they agree that the change should happen, but an element of urgency should have been added after all that we learned from the financial crisis and the other questions that arose in respect of deposit guarantee protection and so on. Yet still it appears that the proposal will get a long finger, and that we will be told to look for some other legislation that would be appropriate.

It would help if the Minister could give us a wee bit more of an indication that a signal from the Executive and the Assembly would be well received. For instance, the Assembly Committee last week again endorsed this new clause, and made a point of saying so specifically. It engaged the Department on that basis, and it has encouraged us to pursue the new clause in this debate, so there would be no question of delay in any legislative consent motion.

If we got the necessary motions through the Assembly, I hope that the Minister would be able to tell us that we were on a real mission and that we would not have to wait for a further Bill. If that were to happen, I would certainly work with colleagues, and with him, to try to take forward an issue that is a huge frustration for the many members of credit unions.

As I said, I want to be as helpful as I can. If the Government were to receive a formal notification from the Northern Ireland Executive, clearly backed by the Assembly, to the effect that it did not feel there was a need to consult, and if agreement could be reached with the FSA on the level of detail needed to enable the change to be made with confidence that the other elements could be accommodated, by all means let us have a look at it. We do not have a lot of time left, but if my hon. Friend the Member for Foyle can get those messages from the Northern Ireland Executive and Assembly back to us as a Government, we will of course try and look at them and do what we can.

I thank the Minister for that indication, which I take to be a bit more positive than what he said previously. We will try to get our skates on at our end if the Minister can continue to be accommodating and encouraging at his.

I want to make it clear that this problem is not of anybody’s intentional making. It was created by people who wanted to be helpful. Mo Mowlam deliberately used the Northern Ireland Act 1988 to include the Credit Unions (Northern Ireland) Order 1985 in the scope of devolution. The order was quite restrictive in its own right, but that was what was devolved, not credit unions.

The Minister said that Northern Ireland credit unions asked to be exempted from the Financial Services and Markets Act 2000. Essentially, a sensitivity was created to the effect that it would have been encroaching on the territory of devolution for the regulatory function to reside with the FSA. People now have a different understanding of these issues, but the most important thing is that they want to know that there is a sense of urgency about this matter among all of us in government—whether that be here in this House, or in the Executive or the Assembly.

I take the Minister’s remarks as a very good cue for us to move fast on this matter. We need to be firm and secure an outcome that has been long awaited, but there is more work to do and I want the matter to be taken forward later in the Bill. Accordingly, I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 11

Bank of England to have regard to CFS in delivering financial stability

‘(1) The Bank of England Act 1998 is amended as follows.

(2) In section 2A(2), after “Treasury”, insert “the Council for Financial Stability”.’.—(Mr. Hoban.)

Brought up, and read the First time.

With this it will be convenient to discuss the following: new clause 12—Power of the Bank of England to require information

‘(1) The Banking Act 2009 is amended as follows.

(2) In section 238, at end insert—

“(238A) (1) The Bank of England may by notice in writing require a person to provide information—

(a) which the Bank thinks will help it pursue its financial stability objective set out in section 238 above, or

(b) which the Bank requires in relation to recovery and resolution plans, as set out in section 139 of Financial Services and Markets Act 2000.

(2) In particular, a notice may require a person to notify the Bank if events of a specified kind occur.

(3) A notice may require information to be provided—

(a) in a specified form or manner;

(b) at a specified time;

(c) in respect of a specified period.

(4) The Bank may disclose information obtained by virtue of this section to—

(a) The Treasury;

(b) The FSA;

(c) An authority in a country or territory outside the United Kingdom which exercises functions similar to those of the Treasury, the Bank of England or the FSA in relation to financial stability.

(5) Subsection (4)—

(a) overrides a contractual or other requirement to keep information in confidence, and

(b) is without prejudice to any other power to disclose information.

(6) The Treasury may by regulations permit the disclosure of information obtained by virtue of this section to a specified person.

(7) The Bank may publish information obtained by virtue of this section.

(8) The Treasury may make regulations about the manner and extent of publication under subsection (7).

(9) Regulations under this section—

(a) shall be made by statutory instrument, and

(b) shall be subject to annulment in pursuance of a resolution of either House of Parliament.

(10) It is an offence—

(a) to fail without reasonable excuse to comply with a requirement under this section;

(b) knowingly or recklessly to give false information in pursuance of this section.

(11) A person guilty of an offence is liable—

(a) on summary conviction, to a fine not exceeding the statutory maximum, or

(b) on conviction on indictment, to a fine.”.’.

Amendment 3, page 1, line 3, leave out clause 1.

Amendment 6, in clause 3, page 3, line 16, at end insert—

‘(4) Where a matter has been omitted from either the annual report or the minutes published under section 2(4), where the action involves financial assistance as defined in section 257 of the Banking Act 2009, a report should be laid before Parliament when the conditions under (3) above no longer apply.’.

Amendment 5, in clause 5, page 4, line 9, at end insert—

‘(d) proceedings of the Council for Financial Stability as set out in section 2.’.

Amendment 4, page 4, line 10, after ‘Treasury’, insert—

‘and the Bank of England’.

Amendment 8, in clause 8, page 6, line 17, at end insert—

‘(3A) (a) In discharging the duty under subsection (1) the Authority must produce an annual report setting out progress made, and the report should include information about, among other things—

(i) compliance in the UK with the principles set out in (3)(a) above;

(ii) comparable progress made in other countries; and

(iii) the impact of any significant divergence between the information set out in 3A(a)(i) and 3A(a)(ii) above.

(b) The Authority must lay a copy of the report before Parliament.’.

This group of new clauses and amendments deals with the provisions set out in the first four clauses for the new council for financial stability.

The Minister and I went round this loop a few times and at some length in Committee. I will not repeat the length, but I may repeat some of the arguments. The Bill puts on a statutory footing the standing committee of the tripartite authorities that sought to bring together the Bank of England, the FSA and the Treasury in a single body. Its remit was to be

“the principal forum for agreeing policy and, where appropriate, coordinating or agreeing action between the three authorities. It is also an important channel for exchanging information on threats to UK financial stability.”

The body put in place as a consequence of the reforms the Government announced in 1997 has been subject to a lot of scrutiny over the past few years. Its operations were the subject of much work by the Treasury Committee, which said in its report:

“We cannot accept… that the Tripartite system worked ‘well’ in this crisis.”

There is widespread agreement that the tripartite authorities did not work well together in the run-up to the crisis, and some fundamental reform is needed.

There are two approaches one could adopt. The first is to say that the system needs to be swept away and there needs to be wholesale reform of financial regulation, and that the structural failures—between the Bank and the FSA, for example—are such that the Bank needs to take on additional responsibility as a macro-micro potential regulator. We need to reform what is left of the Financial Services Authority. That is the view we take on the Conservative Benches, but the Government take another view. Their belief is that the structure still works and all we need to do is to put the committee on a statutory basis. That is the thrust of the first four clauses.

During the evidence sessions, the Minister said that

“we could have done better.”––[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 10, Q16.]

That is a mild understatement, typical of the Minister. In Committee, he made a much more vigorous defence of the merits of the standing committee and why it should be put on a statutory basis, instead of introducing the wholesale reform we proposed. His argument was that the committee worked well during the crisis. He cited four instances and said that no retail depositor had lost money. When it became apparent that the authorities did not have all the appropriate tools to resolve bank failure, the Government had passed new legislation—the Banking (Special Provisions) Act 2008, which the Minister and I dealt with in Committee.

If the tripartite authorities had worked well before the crisis, those arrangements would have been in place, because it is clear from the war games between the Bank and the FSA, when they looked at what would happen in a crisis, that one of the missing tools was the appropriate resolution tool. The fact that the authorities felt the need to put in those tools after the crisis arose was not necessarily a sign of the success of the tripartite arrangements but rather recognition of their failure.

The Minister said that the Government had used the powers to rescue failing banks and that the world’s financial system stabilised as a consequence. However, although we can see what the outcomes of the tripartite committee have been, not much light has been cast on its inner workings since the crisis started.

Some of the committee’s failings are quite deep-seated. In Committee, my hon. Friend the Member for Chichester (Mr. Tyrie) asked the Minister how many times the committee had met before the crisis. The Minister tried to duck the issue; indeed, he succeeded, but we know the answer. The committee met only once and that was via a telephone call at the request of Hank Paulson, the then US Treasury Secretary.

It is beyond belief that the body meant to co-ordinate risk and response did not actually get together. I do not understand why it did not, but the Bill rectifies that situation. It requires that the committee meet quarterly, but just in case the principals do not want to get together they can of course send their deputies instead. There is no guarantee that the committee will function properly if it is put on a statutory basis. It is a very Labour approach—“Something needs to be done so let’s pass a law.” There is a real challenge here.

Given that the committee was the forum for discussing financial issues, and given the warnings published during the run-up to the financial crisis, we would have thought it had plenty to talk about. The Bank of England’s financial stability report for 2004 said:

“The questions are whether risk is being priced properly, and to what extent the search for yield is leading to excessive leverage”—

a prescient warning of some of the problems emerging in the financial market, which would eventually lead to the crash, yet the committee did not meet to talk about those questions. I do not know what discussions there have been between the three parties, but clearly none of them got together in a room to talk about things. In the run-up to the crisis, the committee failed to look properly at the risks.

The financial crisis demonstrated the problem of who was in charge. Who in the tripartite committee ensured that things were dealt with and that the authorities co-ordinated their work properly? We know that the authorities failed to co-ordinate over the emergency funding needed to provide a private sector purchaser for Northern Rock. Even when the committee was being established and the arrangements were being put in place, questions were being asked about what would happen in a crisis. In 1999, when the Financial Services and Markets Bill was wending its way through the House, my hon. Friend the Member for Chichester asked:

“If a single bank crisis develops into a systemic crisis, who is responsible then?”—[Official Report, Standing Committee A, 13 July 1999; c. 174.]

When the Treasury Committee asked the Governor of the Bank of England who was in charge, he came back with a question that may have been in part rhetorical:

“What do you mean by ‘in charge’?”

That demonstrates some of the fundamental failures of the committee.

We have a standing committee tainted by its failure to prevent or anticipate the crisis, and tainted by its failure to co-ordinate before or during the first stage of the crisis. In Committee, the Minister said:

“I do not pretend that there was not room for improvement—indeed, lessons have been learned.”––[Official Report, Financial Services Public Bill Committee, 5 January 2010; c. 226.]

That sounds encouraging, but if there are lessons to be learned we would expect far-reaching reforms to financial regulation. We would expect the committee to be restructured, to be more dynamic and forward-looking in its work and to be much more decisive and clear about who is in charge.

We are not much further forward as a consequence of that process. The old memorandum of understanding for the standing committee said:

“It is the principal forum for agreeing policy and, where appropriate, coordinating or agreeing action between the three authorities. It is also an important channel for exchanging information on threats to UK financial stability.”

The Bill says:

“The Council must…keep under review matters affecting the stability of the UK financial system, and…co-ordinate any action taken…for the purpose of protecting or enhancing the stability of that system.”

All we seem to have done is to reshuffle the words, but the remit is exactly the same. That does not fool anybody. The Treasury Committee described the changes as “largely cosmetic”. In a way, the Minister nodded to that argument when he said:

“What we are doing through the Council for Financial Stability is formalising arrangements that have already been in existence.”[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 5, Q4.]

I am not entirely sure whether that was the warm endorsement of a new structure that we were looking for to give us confidence. We know that earlier this month the council has already met without legislative support. It has broadly the same remit, with a re-jigging of the wording. However perhaps it will be more decisive. Perhaps it will demonstrate the leadership we are looking for. The Treasury Committee report “Run on the Rock” said:

“The Tripartite authorities did not seem to have a clear leadership structure. We recommend that the creation of such an authoritative structure, must be part of the reforms for handling future financial crisis.”

Given that the establishment of the council means that the tripartite relationship will be put on a statutory basis, is my hon. Friend any clearer—he might recall that I have raised this question before—about how many people are in the relationship? Is it now three or four?

I will come on to the number of people in a second because I am not sure that those in the relationship know quite how fully engaged in it they are.

My hon. Friend the Member for Chichester will remember the Public Bill Committee evidence session in which he asked probing questions of Andrew Whittaker, the general counsel for the Financial Services Authority, and John Footman, who gave evidence on behalf of the Bank of England. It was clear that there was a disagreement about responsibility. The Minister had suggested that this was some sort of endeavour in which everyone shared full responsibility for the body, but Mr. Whittaker suggested that the FSA had a secondary role to play in delivering financial stability, which was not quite the same thing that the Minister said. John Footman of the Bank of England suggested that the prime responsibility rested with the Chancellor because he was accountable to Parliament.

We have a confused situation, in that the Government suggest that this is a shared enterprise in which everyone has responsibility, but once we get below the surface and probe the three parties of the new body, we find that the only person who seems to believe in the principle of equality of responsibility is the Minister, and the Bank of England and the FSA believe that they have a different role. That is disappointing, because we would have hoped that one outcome of this process, given the previous lack of leadership, would be clear lines of responsibility. We have tried to get more clarity from the Government at various times throughout the passage of the Bill about who will be responsible for what. We now have a further opportunity to add clarity to the Bill, but if the Minister feels unable to agree with our proposals, he could accept amendment 3, which would strike out clause 1 and send the clear signal that we do not think that this structure will be fit for purpose.

Perhaps it is worth illustrating the confusion about the new structure, never mind the old one. When John Footman was asked whether anyone in particular had a lead role, he replied that the Bill

“is an attempt to answer that question”.

When Andrew Whittaker heard that, he said:

“They treat each other as equals”,

which I would have thought would make it difficult for anyone to have a lead role.

Mr. Footman said:

“it is an attempt to bring together bodies whose powers are different, but which interact with one another.”

When I asked,

“Do you think it is possible for somebody in a secondary role and somebody in the same committee in a lead role to have equal roles?”,

John Footman replied:

“I am confused about roles.”––[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 38, Q95 and Q97-99.]

My hon. Friend does the House a service by reminding us of those exchanges during our evidence session because we saw the creation of a sense of confusion. The problem was exacerbated by the fact that the Minister had been robust about shared responsibility during our morning sitting, but it had all rather fallen apart by the afternoon.

Let me add to the quotes that my hon. Friend has cited. Andrew Whittaker said:

“We, for our part, recognise that our role in relation to financial stability is, in some senses, a secondary one to the other authorities. If there were to be a disagreement as to what would be needed for financial stability, it is inconceivable that we would wish to second-guess the views of the other authorities in that respect.”

When I asked Mr. Footman,

“Do you think that there is someone who is first among equals in the three-way committee?”,

he said:

“The obvious answer is that only one person in that committee is directly accountable to Parliament, and that is the Chancellor.”––[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 28-29, Q58 and Q62.]

There is confusion about the roles, and I do not think that the Minister allayed it when we probed the matter in Committee.

I thank my hon. Friend for giving way again—he is being very generous.

All those quotes are absolutely relevant, but surely the most damning quote of all is that from Adrian Coles of the Building Societies Association, who said that the proposal was a “modest measure” and that

“Of itself it is not going to prevent the next bubble, it is not going to prevent the next banking crisis”––[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 71, Q183.]

That really says it all.

The quotes that my hon. Friends and I have cited—there is a feast of quotes—demonstrate the fundamental failure of the architecture that the Government are putting in place through the Bill. Two of the three authorities that form the tripartite body demonstrate a lack of confidence in the arrangements, and the evidence from Mr. Coles shows that even those who are regulated by a part of the structure—the FSA in his case—lack confidence that the outcome will be any better than that under the standing committee. We need to address that problem, and new clauses 11 and 12 are an attempt to do that by drawing together the parties to the arrangement more closely.

In new clause 11 we reflect on the fact that the Banking Act 2009 gave the Bank of England responsibility for financial stability, although the Governor argues that it was given responsibility without powers, which is addressed by new clause 12. It is clear that when the Bank of England undertakes its role of maintaining and enhancing financial stability, it should have some regard to the council for financial stability when devising its strategy, and that is what new clause 11 would achieve.

Mr. Footman responded in the Public Bill Committee’s evidence session to the Governor of the Bank of England’s evidence to the Treasury Committee in which concern was expressed about the lack of powers to implement financial stability objectives. When I asked Mr. Footman what additional powers he thought the Bank needed, he identified the need for the Bank to have the power to collect information, saying:

“Our slight discomfort with the Bill is because the process of collecting all the information is entirely with the FSA. With the best will in the world, operating through someone else to get something that you need is less efficient than trying to do it directly. For that reason, at various points we have asked for the Bank to have a direct power to get information from the financial institutions, consistent with the statutory powers that it has.”

He continued:

“On the special resolution authority role, we do not have an information power, and we would like to have one directly.”––[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 48, Q138.]

Under the Bill, the Bank is entitled to receive resolution plans as part of the living will procedures, but it will not have the power to request information from relevant institutions with regard to recovery and resolution plans. That is why new clause 12 would give the Bank of England, through amendment to the Banking Act 2009, new powers to request information, either in pursuit of its financial stability objective, or in relation to recovery and resolution plans. It would ensure that that linkage was there.

I have already discussed amendment 3, which would delete clause 1. It signals our unhappiness with the arrangements that the Government have put in place.

The Bill also sets out how we will be able to hold accountable the council for financial stability. One way to do that is publish the annual report, as set out in clause 3. There is a carve-out for commercially sensitive information—I understand the reason for that—and subsection (3) states:

“The copy of the annual report laid before Parliament may omit… anything in the report relating to any action to be taken by any of the relevant authorities the purpose of which may be impeded or frustrated by being included in the report laid before Parliament”.

We recognise the risk that would emerge if sensitive information were disclosed to Parliament. That may undermine confidence in financial markets—we accept that—but my amendment 6 would ensure that, once the need for confidentiality had passed, that information was laid before Parliament.

The proposal was prompted by the disclosure last November of the fact that emergency loans totalling £61.6 billion had been made to RBS and HBOS the preceding autumn, although that was not made known through the usual mechanism of informing the Chairmen of the Treasury and the Public Accounts Committees. It emerged as a consequence of evidence given by the Governor of the Bank of England to the Treasury Committee and the notes to the prospectus issued by Lloyds to support its rights issue.

We need to strike a careful balance between confidentiality and ensuring that Parliament and taxpayers know how taxpayers’ money has been spent—the Minister and I have had conversations about that at a number of points—but it is worth reiterating that taxpayers should know what is happening to the money that is being spent when it is appropriate for that to be known.

Clause 5 gives the FSA a new objective—a financial stability objective. During the passage of the 2009 Act, we asked whether the FSA needed a financial stability objective comparable to that in relation to the Bank of England. The answer was, “No, it is already implicit in its responsibilities for market confidence.” However, the Government have now decided that we must make explicit what is implicit.

In determining that strategy, the FSA should ensure that it has regard to the work of the council for financial stability. It seems odd to give the FSA the duty to set up the new council on a statutory basis, but for there to be no linkage between the FSA’s work on financial stability and the role of the council. That is the basis of my amendment 5.

Again, if we are to persist with the Government’s notion that there is equal responsibility among all members of the new council, one would have thought that the FSA—the “Authority” in clause 5—should consult not only the Treasury, but the Bank of England, given that it collects data on the macro economy, analyses some of the risks and publishes the outcome of the review of risks in the financial stability report. One would have thought it sensible to ensure that the FSA consulted the Bank in that respect when determining its financial stability strategy.

Amendment 8 would require the FSA to produce an annual report when discharging its duty under clause 8, which is entitled “Promotion of international regulation and supervision”. The report would set out the range of measures agreed and dealt with at global level, as well as how they were being implemented in the UK, comparing implementation in the UK with that elsewhere in the world. It would also ensure that there was some discussion of the consequences of any divergence from the globally agreed measures and of how the FSA had chosen to implement them.

That will be a growing issue for the financial services sector and for regulators in the future. A number of initiatives are being dealt with at global level now, where implementation is carried out at either European or national level. The part of the Bill that deals with remuneration contains a framework for the FSA to deliver rules that reflect the agreements reached at the G20, but from talking to people in the financial services sector I know about the concern over divergence in how those rules are being interpreted here in the UK and implemented elsewhere in the world. It is helpful to have clarity on how those divergences occur.

However, that is not to say that we should act only where there is international agreement, and given the size of the UK’s financial services sector relative to its economy, there may be areas where we want to take unilateral action to implement some of those global agreements in advance of consensus on how they will be implemented.

We seem to be leading the way on living wills and the FSA is doing a lot of work to consider the impact of resolution and recovery plans on a sample of banks. The FSA’s work may not only inform its implementation of those plans, but perhaps lead it to go ahead faster than the international consensus. That may be a reasonable thing to do.

We have highlighted other issues concerning how to resolve the tension arising from integrated banks where retail and high-risk activities take place within the same entity. We argued in our White Paper that we have a significant concern about those matters, but that they could be resolved only at global level. The tax on the liabilities in banks that President Obama proposed last week is a measure that could be implemented only on a global level. If it was not, banks would simply opt to go to a low-tax or no-tax jurisdiction, rather than pay a high tax on their liabilities. That is another matter in which global consensus and agreement may be needed before a country would take action.

It is important, particularly given the increasing concerns about the impact of those reforms on competitiveness, to ensure that there is a vehicle for flushing out some of those issues and ensuring that there is proper formal consideration as between what we are doing here in the UK and what is happening elsewhere in the world. My amendment 6 would provide a vehicle for that to happen.

To conclude, in a way we seek to be helpful by tying the arrangements more closely together. We also tried to be helpful in Committee, but the Minister did not seem to be very keen on our proposals.

Fundamentally, a weakness exists that these reforms do not address. That is why we tabled amendment 3, which would simply strike out clause 1. We argue strongly that the Government’s reforms are cosmetic, as the Treasury Committee said. They will leave in place the chaos and confusion over who is in charge, as shown by the evidence given in the oral evidence sessions at the start of consideration in Committee. The Government have simply failed to learn from the mistakes made in the run-up to the previous financial crisis. Unless we have significant reform, there will be a risk of those mistakes repeating themselves.

My hon. Friend the Member for Fareham (Mr. Hoban) is a generous man to go to such lengths to try to improve clause 1 and indeed subsequent clauses. I have taken a shine to amendment 3—it is time to have done with it altogether and to begin again on a completely different base.

As my hon. Friend rightly pointed out, we had a lengthy debate in Committee about the nature and role of the council for financial stability. For me, it comes down to two central questions. First, is the tripartite system, which is given a statutory footing by clause 1, the right regulatory arrangement for the financial sector? He covered many of those issues to show how and why it failed. At the very least, the Minister will agree that there is doubt about whether that is the right vehicle for the future. Secondly, even if we accepted that the tripartite system was the right mechanism for the future, there is a question as to whether the clause and the creation of the council are an adequate response that takes us any further forward.

Having anticipated that the first question was likely to be covered extensively by other hon. Members, I should like to deal with the second question,. Several speeches ranged over the extent of the changes brought about by the Bill, but I still think that one of the most relevant questions was posed by my hon. Friend the Member for Fareham, by others and by many witnesses who gave evidence. Is what is proposed in clause 1 and subsequent clauses a fundamental or a cosmetic change? The Minister tried to argue that it was a fundamental change, but I was not quite convinced that there was much evidence to support that view, or that the measure would make a substantial difference in future. One would hope that the quotation from Adrian Cole of the Building Societies Association that I cited in an intervention would be the clause’s epitaph:

“Of itself it is not going to prevent the next bubble, it is not going to prevent the next banking crisis”.––[Official Report, Financial Services Public Bill Committee, 10 December; c. 71, Q3.]

Something that we did not do in as much detail as we could have done was treat the problems that the clause is trying to address as lessons learned, because only then can we see whether it measures up to its aspirations. How does it deal with the problems and weaknesses of the tripartite arrangement in the Bill? The hon. Member for Wolverhampton, South-West (Rob Marris), who is sadly not in the Chamber, made an interesting point when he said that if we get the diagnosis wrong, we will get the treatment wrong. There were a lot of medical analogies in Committee: the Minister clearly preferred surgery, whereas I preferred medicine—he obviously likes to chop things up.

The problem is that the diagnosis has been made by others, and the treatment bears little relationship to the disease. If I can continue the medical analogy, the clause proposes a particular line of treatment when we have no idea of the drugs that are going to be issued. It is illogical to define a financial structure before we define the tools that are needed to get it right. The FSA, both in its evidence, and in its additional memorandum, confirmed that there was still much work to be done on defining the toolkit.

I had a stab at grouping the main concerns that arose in the evidence sessions and in our subsequent Committee sittings about the faults of the previous system, and how the clause deals with them. Lack of leadership was something that came up many times, both on its own, and in answer to the question, “If it all goes wrong, who is sacked?” In that respect, there appears to be no change between the old system and the new. There was a major criticism of the fact that there was a need in the old system for stronger powers to be taken to deal with the crisis. Again, there is little change: there are changes in the Bill to the FSA’s powers, but there are few changes in the council, and certainly no additional powers.

Another criticism was levelled at the essence of trying to achieve co-ordination by avoiding duplication if that means that the relevant bodies do not interfere enough. I am not sure whether there is any change in the clause—it depends on how well the new arrangements achieve co-ordination which, by its very nature, is a rather woolly subject and it is difficult to find examples. Another criticism of the old system concerned the lack of transparency, which has changed only through the introduction of minutes and some historic reports in the new system—I shall come on to that. Most crucially, there was a need for better flows of information, as my hon. Friend the Member for Fareham said.

I do not think that there is much change from the old system to the new, and there is no more new evidence flowing to the council than flowed to the old tripartite system. I shall deal with the question of leadership, even though it has been addressed by other hon. Members, because we still need to separate two things: the question of who leads the council and who leads the financial regulation system. Those are different things—it is clear from the Bill and the draft terms of reference that the Treasury provides the leadership of the council, but when it comes to leadership of the regulatory system we are back to the description provided by my hon. Friend of shared enterprises with no one in charge, with a gaping regulatory hole on leadership.

I remain sceptical about whether the clause introduces anything new, and believe that amendment 3 is the best axe to take to it, because there are no changes in the powers. The council will take no decisions, as it co-ordinates, but there is nothing in the Bill to give us confidence that it will co-ordinate better than under the old tripartite arrangement. In the evidence sessions, the Minister described that as a significant improvement, but I am not sure that it is, as the only real change is the fact that it now has legal status. The question on which I kept trying to obtain an answer was, “Where is the additionality between the old and the new systems?” If it is just that the tripartite arrangement has been put on a statutory basis, I struggle to understand how that rises above everything else and suddenly sorts out all the problems. As far as I can see, it provides nothing except a statutory basis.

The question of additionality has still not been answered. We still need to ask what tangible thing the formalisation of meeting arrangements, which is what this comes down to, brings to the party. That is why I asked how many people there are in this relationship. Creating a statutory status for the council raises the question what role it plays in relation to the other three bodies, and whether the co-ordinating role gives it a personality beyond that.

On the issue of stronger powers, there are virtually no powers at all. The Minister said that, through the council, arrangements were being formalised. When I went through the evidence, it seemed that that left three things for the Bill to do—first, to formalise meeting arrangements; secondly, to aim to be more transparent; and thirdly, to aim to achieve a clearer line of accountability to Parliament.

The transparency aspect is almost exclusively covered by the provision relating to minutes. I know that the Minister and I have been through this before, but that is so hedged by contingencies, not just about commerciality, but about the effect on stability—which is so wide that it could incorporate, for example, criticism of the Chancellor or Government policy—that I do not believe that the minutes will say anything. The main activity is in any case being conducted not by the council, but by its deputies. According to the draft terms of reference, the minutes will not be published because they are classified as a working party, which is a convenient way of making sure that we never get to see anything. Will the Minister explain why that is necessary and be more exact about what they will have to do?

Why are the minutes to be so heavily redacted? How will they treat a threat to the stability of the financial system? When all those elements are taken out, what are we left with? The reference to anything that might pose a threat to stability is so wide that it could include almost anything, so I do not regard those minutes as at all transparent.

According to the House of Commons Library research paper, there is no change in the advice on how the flow of information would be improved and it identifies no significant additions to the Bank’s financial stability report or the FSA’s financial risk outlook, so is there any new evidence on which the new council will make its assessments? That is crucial. If it is to do something better, it must look at what new evidence it can have in order to overcome the problems that were caused by not reading the evidence or by gaps in the evidence available before.

In Committee, my hon. Friend the Member for Chichester (Mr. Tyrie) pointed out one example of that. Under the old system, the tripartite committee collected no liquidity data. He asked how the formalisation of old arrangements would guarantee collection of the necessary data. I am not sure that we ever got an answer to that.

The Minister gave the game away in Committee. In question 5, at column 6, he said that the real purpose of the new council was to give confidence to people outside who look at these things that the issue was being grasped and looked at with great thoroughness. That seems to indicate that the measure is not much more than a public relations job. Given the role of improving confidence among those outside the council looking in, it takes the biscuit that the Minister does not believe that people will see through the whole thing and notice that the new council is yet another example of the emperor’s new clothes.

I return briefly to my first question. Is the tripartite arrangement codified by the clause the right architecture? That has been answered fully in the negative by my hon. Friend the Member for Fareham. In Committee, my hon. Friend the Member for Chichester said that we were not kidding anyone from the outset, and that 10 years ago, when the tripartite arrangements were put in place, he had been among the voices saying that it would not work. That is why, try as I might to the emulate the spirit of generosity shown in his new clauses and amendments by my hon. Friend the Member for Fareham, I still come down to wanting to wield the axe contained in amendment 3.

I spoke on Second Reading, and nothing that I have seen makes any alteration to the view that I expressed in relation to the problem that I have raised continuously with the Chancellor of the Exchequer and the Prime Minister about the distinction between national supervision, which is just a figure of speech, and national control.

I do not need to go into this in great detail because it can all be summarised very simply. We are losing national control over our financial services, which makes nonsense of Second Reading, Committee and Report. I am astonished that less attention is given to this than it merits. In the context of parliamentary sovereignty and the necessity for us to determine the manner in which we are governed, which in turn affects the manner in which the Financial Services Authority interacts with the Bank of England, and the completely pointless exercise of the council for financial stability, the whole architecture is overarched not only by the banking supervisory authorities that are being created by a series of legislative changes in the European Union using, I think, the ordinary legislative procedure, but by the fact that we have effectively walked away from our responsibilities. I am absolutely astonished by the fact that we can go through these proceedings, in what is an almost empty House, without at least acknowledging that we are throwing away the ability to run our affairs and putting the City of London in great peril because of the duties that the Bill imposes.

The clause on the council for financial stability says:

“Among other things”—

as if it is a kind of option—

“the duty”.

Duty means “shall”, which in turn means enforceable by a court, subject of course to the European Court of Justice, because these matters are being handed over to the supervisory authorities and everything that flows from de Larosière right the way through to the financial regulations that the European Scrutiny Committee insisted be debated. By the way, I am extremely glad that our Front Benchers actually opposed those regulations, thank God, because at least that gives us some future purchase on our ability to retrieve some of the mess that has been created.

Exactly how all that will work out remains to be seen, but under the clause on financial stability, the duty requires the council to “co-ordinate”. That is not the same as co-operate, because “co-ordinate” means a legal obligation to implement the laws, not, in the broad context in which it is normally understood, to co-operate. The council is required to

“co-ordinate any action taken by the relevant authorities to promote international financial regulation and supervision”.

Great. Supervision, as I have said, is subsidiary to national control, but the critical words are,

“the duty…to co-ordinate any action…to promote international financial regulation”.

Are we seriously mad? I may think that some members of the Government are, without mentioning them by name, but it is absolutely astonishing that we should allow that measure to go through on the pretext that, somehow or other, it will improve the stability of the UK financial system.

It is invidious to go through the Bill for this purpose, but over and over again we find that we are faced with a requirement to accept a subsidiary role in financial regulation. My hon. Friend the Member for Fareham (Mr. Hoban), on the Front Bench, will understand me when I say that he and I have had a few words about that in the past, but I generally agree that we need proper fiscal responsibility, as I said in last week’s debates over and over again. This Government are fiscally irresponsible, but the proposed institutional arrangements are to be subjected to the decision-making processes of the European Union and the European Court of Justice, as I said on Second Reading. It is therefore no answer to say, as the Chancellor tried to say to me on the Icelandic banks situation, “Oh well, it gives us some kind of leverage,” when, in fact, we are to use the European Union to try to redress the balance if other countries want to do to us things that we do not like. Do we have no self-respect anymore? Do we not believe that we can run our own affairs?

This is not just a cri de coeur; it is about the practical workings of the City of London, which are being put under intense pressure and threat and, indeed, put into abeyance. When the crunch comes and the legislation has made its way through the European Parliament, the milk-and-water, pathetic, third-rate, abject surrender to this process, which has been going on for several months and which I wrote about, if I may presume to say so, Madam Deputy Speaker, in the Financial Times way back in February last year—

Order. I think that I would actually prefer it if the hon. Gentleman related his concerns to the new clauses and amendments that we are discussing instead of referring to articles that he has written.

Then I merely say, Madam Deputy Speaker, that new clause 11 would insert after the word “Treasury” the words,

“the Council for Financial Stability”,

and that that makes my point. The council for financial stability contained in these clauses is part and parcel of a proposal that Conservative Members are putting forward to try to put greater sense into the arrangements proposed in the Bill.

I am deeply concerned about the imposition of international financial regulation and supervision on to the United Kingdom. We will pay a very heavy price for it. As with appeasement in the 1930s, I do not think that people yet appreciate just how significant all this is. When the Bill refers to

“international financial regulation and supervision”,

that means

“regulation and supervision by an international body or organisation of the financial systems operating in different countries or territories”,

and “relevant authorities” means the Treasury, the FSA and the Bank of England. I am not convinced that putting the council for financial stability into this equation will necessarily be able to override the total loss of the control on which I think the British people would expect us to insist as regards the banking system of the United Kingdom and the central banking associated with it, which has been increasingly divorced from us since the time of the Maastricht treaty.

Having served on the Committees that considered the Bills that became the Banking Act 1986 and the Financial Services Act 1989, and having witnessed the manner and the extent to which we have now completely abdicated our responsibilities, I am not surprised that we are debating this matter. I think that that abdication will come home to roost. We will find that we want to do things, and we will be told that we cannot do them and that if we do, sanctions will be imposed on us—although if the stability and growth pact is anything to go by, nobody will apply them. This Bill is nonsense, the Committee stage was nonsense, and the Report stage is compounding nonsense into farce. It is a very great pity that we are handing over the running of our financial services to other people, but those are my views and that is all I have to say.

This debate has followed a well-trodden path on which we trampled extensively during the Bill’s Second Reading and mercilessly during the Committee proceedings, and I feel that we are going to do so again in the remaining time available. It is therefore with a certain sense of ennui that I rehearse the Government’s arguments as to why we believe that the existing tripartite framework is the right model. My sense of ennui is lightened only by the fact that as we have gone on through these debates, I have begun to be excited by my realisation that I know even less now than I did before about what the Opposition would do if they came to power.

When it comes to the issue of who is in charge, we have clear answers, but I do not believe the Opposition do. They need to explain who will be in charge—will it be the Governor of the Bank of England? Will it be the Chancellor of the Exchequer? Simply proposing to move around the deckchairs by getting rid of the FSA and transferring its powers to the Bank of England does not answer the question of who is in charge, and it does not substitute for the fact that what is most important is the exercise of judgment.

Our answer to the question of who is in charge is very clear. Each of the tripartite authorities has its responsibilities and tools for financial stability, and the key thing is that their analyses, including of long-term systemic risks and approaches, are effectively aligned and co-ordinated. That is what the council for financial stability will be about. It will be chaired by the Chancellor, who is ultimately accountable to Parliament, unlike some of the Opposition’s proposals. Its role will not be to take binding decisions or to impose its will on an independent central bank and financial services regulator, but to work together with them to deliver financial stability objectives.

I am disappointed, but not surprised, that the hon. Member for Fareham (Mr. Hoban) persists in his views. He has not explained to the House who would be in charge and what his party’s policies are. I have set out in detail—at boring length in Committee—the actions that we have taken to protect depositors, the taxpayer and the financial stability of the system as a whole. The authorities have worked closely together to develop a new policy toolkit for dealing with bank failures and instability, and they have implemented often radical solutions to unprecedented difficulties while successfully avoiding a meltdown. It has been an incredible time for all those involved in the endeavour.

I remain of the view that not everything has been perfect, hence some of the improvements in the Bill. We have heard the Opposition say a lot that we should get rid of the powers of the FSA and ensure that the Bank of England has them. Of course, I accept that many different institutional frameworks exist in different countries, and there is no perfect architecture. I ask the House to accept that no single model of financial regulation has been successful in fully insulating any country against the crisis. Fundamentally, my position and that of the Government is that what the regulators actually do, and the judgments that they exercise, matter as much as, if not more than, the institutional framework within which they operate.

Before I give way to the hon. Gentleman, I say to him that changing the institutional system and moving specific responsibilities from one body to another will not in itself make a blind bit of difference, other than to cause significant disruption at a time when attention should surely be focused on practical, workable solutions on regulatory performance and decision making. His idea of regulation seems to be based on constructing some sort of new Maginot line of financial services regulation. In a global financial system, it is sometimes helpful to have discussion internationally and to co-ordinate regulatory action on a global or pan-European basis. The policies that he argues for do not reflect the modern reality of how the world does its business.

The Economic Secretary has mentioned the Maginot line, which fits in well with my reference to appeasement, because the Maginot line was broken almost immediately afterwards.

The real question is, “Who is in control?” Does the Economic Secretary accept that, when he talks about jurisdiction, the European Union and the European Court of Justice will have jurisdiction? When he talks about supervision, as the Chancellor does, and when he uses the ridiculous language of who is in charge, does he realise that being in charge is not the same as being in control? Does he accept that, since the 1690s, the whole United Kingdom has been based on the assumption that we ultimately control our economy—the Bank of England Act 1946 was based on that—and that he is surrendering that control?

Conservative Members continually ask, “Who is in charge?” They do not have an answer. As I have said, we are clear that each authority has its own responsibilities.

The FSA, as the independent financial regulator, is responsible for authorising and supervising financial firms and markets. It triggers the special resolution regime. The Bank of England, as an independent central bank, is responsible for providing liquidity assistance to the banking system. It has oversight of inter-bank payment systems and it is the resolution authority under the special resolution regime. The Treasury, as the UK’s finance and economics Ministry, is responsible for the overall institutional structure of financial regulation and the legislation that governs it. It is ultimately accountable to Parliament and responsible for decisions that have an impact on the public finances.

There is role clarity and there are different responsibilities, but we are all in it together. That is why the council for financial stability needs to sit down and go through the problems. The hon. Member for Stone (Mr. Cash) should welcome that, and Opposition Front Benchers should recognise that it is in the United Kingdom’s best long-term interests. I cannot find many people who are particularly sympathetic to the idea of creating the immense disruption that would ensue if the Conservative party’s proposals to fold the FSA into the Bank of England were supported.

Let me consider the amendments and new clauses. I think that the hon. Member for Fareham has tried to provide a focus for debate rather than help the Government —that is clear from amendment 3. Amendments 4 and 5 and new clause 11 relate to the way in which the authorities will work together to achieve their shared goal of financial stability. Amendment 4 would change matters to require the FSA to consult the Bank of England as well as the Treasury. In our view, it is unnecessary. The draft terms of reference for the council for financial stability already specifically require it to consider the financial stability strategies of the Bank of England and the FSA. New clause 11 is intended to have a similar effect to amendment 4, and the same arguments apply.

On the Bank of England’s financial stability strategy, it is required to prepare such a strategy under section 2A of the Bank of England Act 1998, as amended by the Banking Act 2009. The hon. Member for Fareham said that new clause 11 would make a difference, but we believe that it is defectively drafted. To have the effect that he seeks, it should refer to subsection (3) of section 2A of the 1998 Act. Regardless of its technical deficiencies, I make the same point as I did about amendment 4—it is simply unnecessary.

Amendment 5 would require the FSA to have regard to proceedings for the council for financial stability when considering its financial stability objective. Again, it is unnecessary—I shall mention one or two amendments that I believe to be unhelpful, too. However, in the case of amendment 5, the FSA will clearly take account of the discussions in the council when considering how best to meet its objective of contributing to financial stability.

I do not think there is anything to be gained by adding the “proceedings of the Council” to the list of matters to which the FSA must have regard in proposed new section 3A of the Financial Markets and Services Act 2000, which clause 5 would insert. Schedule 2(26) to the Bill already amends section 354 of the 2000 Act on the FSA’s duty of co-operation, and we believe that that is more than sufficient.

In new clause 12, the hon. Member for Fareham proposes new section 238A to the Banking Act 2009 to give the Bank of England the power to require any person with any information it believes necessary either in pursuit of its financial stability objective or to meet its responsibilities in respect of its recovery and resolution plans. Again, this is not a new issue—in fact, we debated the matter at some length in Committee and during the passage of the 2009 Act. The proposal is neither necessary nor desirable.

For the record, if the Bank believes it needs access to information in connection with its responsibility for financial stability, it can ask the FSA to provide the required information. The FSA does not hold the information, but it would be able to collect it and provide it to the Bank. There is absolutely no need for the Bank to have its own direct powers to gather information from firms. As I think the hon. Gentleman is well aware, the protocol between the Bank and the FSA covers, among other things, how such flows of information will be managed between the two authorities. I welcome that as a good example of the Bank and the FSA working together on financial stability issues, which addresses some of the concerns that he quoted in his remarks.

In the evidence-taking session in Committee, John Footman of the Bank of England pressed for the Bank to be given the power to collect information from financial services institutions. He said that going through the FSA was not appropriate and not good enough. Why is the Treasury rejecting that request from the Bank of England for more powers?

I have already explained why such a power is unnecessary. The FSA can provide the information already. I am also concerned that the proposals might give rise to a system of parallel regulators, which is highly undesirable. They could create confusion for firms regarding who is responsible for supervising them and lead to the duplication of burdens, because both authorities could go to the same firm for the same information at different times. There are some powerful arguments why new clause 12 would be unhelpful.

I agree with my hon. Friend on the specifics of new clause 12, but the principle that the FSA is obliged to share information that is relevant to financial stability with the Bank is governed currently only by the protocol between the two bodies. I must admit that I have strong sympathy with the view that that should be strengthened in law.

I have mentioned the protocol, as my hon. Friend knows. Clearly, the Bank needs to have the information it requires to perform its duties and responsibilities, but I do not think there is a massive point of principle.

On amendment 8, the FSA is already required to submit an annual report. The new international duty proposed in the Bill is a new function for the FSA and the reporting requirement would apply automatically to it. Again, I do not believe that the amendment is necessary.

Amendment 6 concerns information about financial assistance, as defined in section 257 of the Banking Act 2009. We believe that there are already appropriate reporting mechanisms in place—

Debate interrupted (Programme Order, 30 November 2009).

The Deputy Speaker put forthwith the Question already proposed from the Chair (Standing Order No. 83E), That the clause be read a Second time.

Question negatived.

The Deputy Speaker then put forthwith the Questions necessary for the disposal of the business to be concluded at that time (Standing Order No. 83E).

New Clause 14

Store cards and consumer credit agreements

‘(1) The Consumer Credit Act 1974 shall be amended as follows.

(2) After section 60, insert—

“60A Form and content of retail credit-token agreements

(1) The Secretary of State may make regulations as to the form and content of documents embodying retail credit-token agreements, and the regulations shall contain such provisions as appear to him appropriate including requirements to ensure that—

(a) the rate of interest on the credit to be provided under the agreement for credit (or all the rates on a per annum basis where there is more than one rate of interest) does not prejudice the interests of debtors; or

(b) the agreement for credit includes a seven day cooling off period during which credit would not be available to the debtor.

(2) ‘Retail credit-token’ means a credit-token (which has the meaning given by section 14(1)) which results in the provision of credit under a credit-token agreement provided by a retailer or group of retailers which can only be used for purchases from the retailers concerned.

(3) A ‘retailer’ means a person or business providing goods and services to an individual.

(4) Accordingly, a ‘retail credit-token agreement’ is a regulated agreement.”.

(3) For section 67, substitute—

“67 Cancellable Agreements

(1) A regulated agreement that is not a retail credit-token agreement may be cancelled by the debtor or hirer in accordance with this Part if the antecedent negotiations included oral representations made when in the presence of the debtor or hirer by an individual acting as, or on behalf of the negotiator, unless—

(a) the agreement is secured on land, or is a restricted-use credit agreement to finance the purchase of land or is an agreement for a bridging loan in connection with the purchase of land, or

(b) the unexecuted agreement is signed by the debtor or hirer at premises at which any of the following is carrying on any business (whether on a permanent or temporary basis)—

(i) the creditor or owner;

(ii) any party to a linked transaction (other than the debtor or hirer or a relative of his);

(iii) the negotiator in any in any antecedent negotiations.

(2) A retail credit-token agreement may be cancelled by the debtor in accordance with this Part.”.

(4) For section 68, substitute—

“68 Cooling-off period

The debtor or hirer may serve notice of cancellation of a cancellable agreement between his signing of the unexecuted agreement and—

(a) the end of the fifth day following the day on which he received a copy under section 63(2) or a notice under section 64(1)(b), or

(b) if (by virtue of regulations made under section 64(4)) section 64(1)(b) does not apply, the end of the fourteenth day following the day on which he signed the unexecuted agreement, or

(c) if the cancellable agreement is a retail credit-token agreement, the end of the seventh day following the day on which he signed the unexecuted agreement.”.’.—(Mr. Hoban.)

Brought up.

Question put, That the clause be added to the Bill:—

Amendment proposed: 3, in page 1, line 3, leave out clause 1.—(Mr. Hoban.)

Question put, That the amendment be made.

Third Reading

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

We have had an interesting debate on Report. I am grateful to everyone who took part in it, and to the members of all parties who have contributed to the debate as the Bill has passed through the House. In particular, I should like to thank those hon. Members who served on the Public Bill Committee, and I am grateful for the overall constructive approach that all sides adopted in those sittings, even when there was disagreement.

In Committee, we had the opportunity to review and discuss in depth the Bill’s specific measures. That process was instrumental in teasing out further details on how we envisage that the Bill’s measures will operate. I know that that process was very much welcomed by a number of the outside bodies that follow our proceedings closely.

I want to take this opportunity to remind the House of the context in which the Government are introducing this piece of legislation. Over the past couple of years, the global economy has been tested in ways that few would ever have anticipated. The origins of the crisis lie firmly in the financial sector. We have a duty, indeed an unprecedented opportunity, to review our financial landscape and ensure that the lessons of the crisis are learned by shareholders, corporate investors, management, regulators and Governments alike. We need to make absolutely sure that in future any crises will not only be less damaging but less likely altogether.

The causes of the crisis were complex, and there is no single remedy for all of them at once. We need a package of measures that address the wide variety of aspects affecting the industry, from the way it is regulated and its corporate governance, to the way it treats its consumers. That is why the Bill contains such a diverse range of provisions. The Government believe that, together, those measures will help bring a real change in emphasis, in the way we consider and address systemic risk, and in the way we protect consumers.

I am grateful to hon. Members for their probing and questioning over the past few weeks in Committee. I know there were some questions about the practical effects of some of the measures. I hope I was able to bring further clarity, and with it reassurance, to the Committee.

Specifically, I know that the Committee had concerns about the proposed new powers of the FSA on remuneration rules. The Government were happy to remove any ambiguity, and following a recommendation from the Joint Committee on Human Rights, we tabled an amendment to make it clear that any FSA rules making contractual provisions void when they breach a prohibition on remuneration will apply only to contract provisions that are agreed after the rules in question have come into force. We are not proposing—as I think some were concerned—that the powers should be in any way retrospective.

Similarly, I understand that there was some confusion about the scope of the short selling power. We had the opportunity to debate short selling today. I hope the confirmation that any prohibition would apply to identified financial instruments, or ban short selling in specified cases rather than by certain firms, will reassure hon. Members. It is not the case that one firm might be banned from short selling a stock when another was able to do so. I am happy to reaffirm that.

Overall, I was encouraged by the willingness of the Opposition to support the principle of many of the Bill’s provisions. Many of the questions relating to the recovery and resolution plans sought to ascertain what they might look like in practice, rather than challenge the intention of the plans, which is to reduce the impact and likelihood of firms failing. Only recently, we heard contributions to the “too big to fail” debate.

I pay tribute to the hon. Member for Fareham (Mr. Hoban) for the thorough way in which he led for the Opposition. He was keen to find out what the court rules might look like in relation to collective proceedings. I sympathise with his desire to engage on the greater detail, although I hope the House appreciates that such a level of granularity is best determined by experts in the fields, and is a matter for other channels. Those aspects will, of course, be subject to consultation.

We have discussed the shape of institutional arrangements at considerable length. I said a few moments ago that it was a well-trodden path—if not an excessively trampled one. It is an important issue, but as I have been at pains to stress on several occasions, I do not think structure is the issue. The crisis was a global one, affecting countries regardless of their institutional frameworks. What matters most is not who does the job, but that the job is done effectively, and that the institutional framework is clear and coherent. That is why the Bill focuses on making the existing arrangements work better by strengthening them further—for example, by introducing the council for financial stability, which will operate on a more formal, transparent and accountable basis than the previous arrangements, should the Bill pass into law.

It is clear that the arrangements have not received universal approval, but the Government are clear that we need the authorities to focus on reducing risk and strengthening the resilience of the financial system, and—at the risk of repeating myself—not having to deal with the disruption and uncertainty that would be caused by unnecessary institutional upheaval. I think that we need to be very clear about the real risks that would be involved in that.

Hand in hand with that, we propose to give the FSA a financial stability objective. While many have interpreted that as an erosion of the FSA’s consumer protection objective, or vice versa, I believe that the objectives are in fact complementary. It is unlikely that one would succeed without the other—both are necessary.

The Bill will enhance the powers and responsibilities of the FSA, embed a structure to monitor financial stability in the UK and abroad, and give regulators additional powers in relation to remuneration in the financial services sector. It was a shame that we did not have the opportunity to debate some amendments relating to those proposals today, but the measures were considered substantively in Committee. Importantly, the Bill will also ensure that banks and building societies address the likelihood and impact of their failure by drawing up contingency recovery and resolution plans.

In parallel, the Bill includes provisions that will enable the creation of a brand new independent consumer financial education body to enhance education and awareness. It will establish new and more effective routes to redress and compensation for consumers where there has been widespread detriment. Again, although we were unable to discuss those issues on Report, we discussed the proposals extensively in Committee, and they have been widely welcomed by consumer groups.

The proposals represent the Government’s considered response to some of the key lessons learned during this crisis. The Bill entrenches a new strategy to ensure the protection of financial stability and wide-ranging reforms to the financial services industry. We want to ensure that the industry on which our economy relies so much emerges on a more robust footing. This vital Bill will help to build a new environment in which a financial services industry based on both stability and prosperity can thrive. That is no small task. I am most grateful for the thoughtful and thorough scrutiny that the House and the Public Bill Committee have given the Bill, and I commend it to the House.

I echo the Minister in commending all those who have participated in the scrutiny of the Bill, both on Report and in Committee. One of the strengths of the Public Bill Committee—I referred to this at the conclusion of its proceedings—was that it was assisted by the presence of several hon. Members from both sides of the House who were able to bring their expertise from serving on the Treasury Committee to bear on the matters in the Bill.

Those Members were not the only people who contributed to the Public Bill Committee, however, and I am grateful to my hon. Friends who served on it for the time that they put into developing their ideas. The hon. Member for Wolverhampton, South-West (Rob Marris), of course, was a prodigious commentator on the Bill. I was sorry that the hon. Member for Twickenham (Dr. Cable) did not join us in the Public Bill Committee, even though he was a member, but his colleague, the hon. Member for South-East Cornwall (Mr. Breed), did a good job of setting out several of the arguments.

It would be remiss of me if I did not say a few words about the Minister. This is our fifth Bill since October 2008, and among his hallmarks are his willingness to engage in debates and to give good answers to questions that are posed, and his understanding of the content of Bills, which goes beyond that occasionally displayed by Members on both sides of the House. I understand that he has decided to step down after the next election, whenever that comes, and I wish him well in whatever he chooses to do.

The Bill is a strange combination. We did not oppose its Second Reading, and when I glanced just now at its contents, I realised how much of it we support. I would divide the measures into three categories: the welcome, the cosmetic and the misconceived. There are more measures in the welcome category than in the other two and important proposals will enhance consumer protection, but one challenge that the financial services sector faces as it seeks to rebuild confidence in it following the financial crisis of the past two or three years is how to encourage consumers to engage with the Bill.

Many measures that focus on the consumer will help to encourage consumers to engage. Three distinct areas are involved in that, the first of which is the establishment of the consumer finance education body. One challenge that we all recognise is the need to increase people’s confidence in discussing financial products with independent financial advisers, banks and insurance companies. A huge deficit in people’s financial understanding needs to be dealt with.

We will not necessarily all agree exactly about how that deficit should be repaired—the hon. Member for South Derbyshire (Mr. Todd) has his own views on how effective those measures will be and how best to target the work of the new consumer finance education body—but we are all clear that the work that the FSA has already established in the pilot projects needs to continue. On a visit to Gateshead, I saw for myself the importance of the work done by Age Concern and Help the Aged as part of the pilot project.

The second group of measures aimed at improving the lot of consumers is the action taken on banning credit card cheques. Sending out unsolicited credit card cheques has been one of the most indefensible practices in the consumer credit industry over a long period. In Committee, I told hon. Members that my wife had received some credit card cheques before Christmas. The industry, knowing that such cheques were to be banned, was still sending them out. I had rather hoped that the pre-Christmas mailshot would be the last that she received including such cheques, but I was disappointed, as in the past 10 days or so they have been offered to her in another mailshot from her credit card company. Clearly, the consumer credit sector is having a last hurrah.

The next batch of measures that protects consumers, which we welcome, is the arrangements on collective proceedings orders and consumer redress schemes. The point of contention, perhaps, between me and the Minister is straightforward: the measures have been included in the Bill, but they came as a surprise to the industry despite the fact that they were trailed in the consumer White Paper.

The industry was not clear about how the measures would work in practice. The scrutiny process achieved some clarity on the fact that generic court rules would be designed, then Treasury regulations introduced to modify those rules to ensure that they were appropriate for financial services claims. That process is now understood and welcomed, but the industry will want to engage with it in some detail over the coming months, as the Minister might expect.

Another important area, which we touched on occasionally in Committee, is what we do when a number of people have experience of buying a particular product involving a systemic case of mis-selling—for example, when a number of products with the same fault have been put on the market.

Currently, such cases are dealt with by the Financial Ombudsman Service. I think that the procedure is unsatisfactory, both for FOS and the industry. The reforms set out in the Bill will insert a new section 404 in the Financial Services and Markets Act 2000 to create consumer redress schemes, which is an important move forward. I am sure that there is more we can do on safeguards to ensure that they work properly, especially where there is some doubt about the application of law or of FSA regulations. Improvements can be made to ensure that the proposals are welcomed not only by consumer groups, but by the industry.

We also welcome measures on remuneration, the framework for short selling, which we debated earlier, and living wills. Our financial regulation White Paper, issued last year, outlined our support for living wills. That is an important part of the resolution regime introduced in the Banking Act 2009.

There are cosmetic changes on financial stability and the Bank of England. When the hon. Member for Wallasey (Angela Eagle) was Exchequer Secretary, she was keen to point out that the FSA already had the implicit objective of financial stability. The Minister believes that by making that objective explicit it has greater salience, but we shall see what happens and how behaviour changes as a consequence. The duty to co-operate with international bodies was a matter of interest for my hon. Friend the Member for Stone (Mr. Cash). The FSA already does so much of that that it is difficult to see what more can be achieved.

Some measures in the Bill are misconceived. The Minister referred to the well-trodden path in the first four clauses. We trod it well in Committee, both in our evidence sessions and in our debates. Indeed, the issues were reprised this evening, and they are the source of fundamental disagreement between the Minister and me. We set out clearly in our White Paper our plans to give increased powers to the Bank of England on micro and macro-prudential stability, and what we are going to do to give new powers to the Consumer Protection Agency. If I go on for too long, Mr. Speaker, you will rule me out of order for a Third Reading speech, so I shall save my remarks for another occasion, if the opportunity presents itself.

There are important lessons to be learned from the financial crisis, and the Bill deals with some of them. However, the financial services sector must recognise that it is not just policy makers and legislators who need to make reforms, but that it, too, must engage. I am sure that we will return to these issues again, because as the financial crisis unfolds—the Bill is good at future-proofing, with measures on living wills, for example, on which we are creating a framework for the FSA, and measures on remuneration, which create another framework for it—there will be opportunities to identify new issues, which may require legislation, as a result of the duty to co-operate with international financial institutions.

This is a helpful Bill that improves the opportunities for consumer protection and education. It makes important changes to the framework to help to ensure that if there is another banking crisis a proper resolution is in place. There are things in it that we support; there are some things that we think are purely cosmetic; and there are some things that are misconceived. However, the process that it has undergone over the past couple of months has helped to illuminate its workings and set out the challenges to which we all need to rise.

Order. Before we proceed, a moment ago, three hon. Members were seeking to catch my eye. We have less than 12 minutes to accommodate them all. I should like to do so, but Members can do the arithmetic themselves.

I shall not detain the Chamber long, Mr. Speaker.

The Bill was born of the need to learn lessons, and it must be said that many of those things were not spotted by the original regulatory and supervisory system. It introduces some sensible measures, most of which we can wholeheartedly support, and our work has certainly been assisted by the witness sessions. We could not support the official Opposition’s amendment to abolish the council for financial stability. Overall, there is a need for a tripartite system. It did not work last time, but that does not mean that it cannot work. We would like to stiffen it up even more, but perhaps in the light of events, we have the opportunity to give it greater transparency and authority. We were able to support the granting of additional powers for the FSA. I heard what the hon. Member for Fareham (Mr. Hoban) said about the Bank of England, but it would experience some difficult conflicts of interest if it was given significant new powers on financial stability.

Recovery and resolution plans will need to be fleshed out—their cost, how they will be updated and how they will apply. Whether we break up some of the big banks will have a major effect on them. We support the collective proceedings, but they are wide ranging and cause concern to the industry. Some tweaking is needed so that they get the necessary support.

I welcome the fact that we will get rid of credit card cheques. I am disappointed that we could not also get rid of unsolicited credit limits, but I assume that will be considered fairly soon, hopefully after a review. It would be a similar and complementary measure. The financial education body will be extremely useful. Much more consumer education is needed if people are to understand what they are buying, how they are paying for it, and their rights and responsibilities.

Finally, as the Minister, like me, has decided not to stand again, may I say that I have much enjoyed his company? His courtesy, kindness and good humour greatly assisted our Committee proceedings.

I, too, enjoyed serving on the Committee that considered the Bill, and shall say some nice words about the Minister. He has worked incredibly hard over the past two years—some people have worked him too hard. He has announced that he is leaving the House at the next election. I know that he has a great many friends on both sides of the Chamber, and I am sure he will find a berth very quickly in the private sector, where his talents will be put to good and, I hope, profitable use. So I say farewell to the Minister, at least from the perspective of seeing him at the Government Dispatch Box.

A witness who appeared before our Committee said that the banks made entirely the right decisions based on the totally wrong assumptions. If the Bill starts to redress that imbalance in decision making, it will be a good thing. I am not entirely sure that the council for financial stability will be a wild success. I remain to be convinced about that, because ultimately, if we want banks to be responsible, we need responsible management and responsible shareholders who want long-term returns on their investment, not short-term returns.

Perhaps I may add, without trying Mr. Speaker’s patience, that we need fewer people called Fred the Shred running our banks. We need more people called Brian the Boring running our banks—good, old-fashioned, boring bankers who can make the numbers add up at the end of the month. That is what the British public want—a lot of boring bankers. I said that very slowly.

Consumer financial education sounds very boring, but my word, it is important. If something sounds too good to be true, it is too good to be true. Many banks have taken advantage of people who lack financial sophistication, and that is not to the banks’ credit. One of the reasons we are in this mess is that many people have over-extended themselves, not because they are greedy but because they have been persuaded by their banks that they can afford to take that debt on board. Educating the customers of banks and financial institutions is crucial. We do not want to do that only when they walk through the doors of those establishments as adults. We need to start educating them at school at an early age. For that reason, if for no other, I am entirely happy to support the Bill. I am sure it is just one building block of a very large house that we will all need to build.

I declare an interest as a reformed and very boring banker. Although there is a need for education, what confidence does my hon. Friend have in the Government to give that education to young schoolchildren? I worry about the children of Southend. They need to be educated in financial management, but I would not want to send them along to the Government in general, despite the good things that my hon. Friend said about the Minister. I would not want to send them along to a Government who have run up debt and spent, spent, spent.

I want to be charitable this evening, because I believe that there will be a change of Government in three to four months, and that is a good thing. The democratic wheel turns and other people get their turn in Parliament; and then in 10 years’ time we will all be hated and I imagine that the other lot will get their turn. In agreeing with my hon. Friend, however, I think it very important that children in Southend and Broxbourne understand from a very early age, the importance of finances, and understand that how they manage their finances will have a major impact on their life. With that, I shall sit down and allow others to take part.

I, too, pay tribute to the Minister. He is an intellectual. I know that that can in some places be a dirty word, and I hope that his Whips will not hold that against him for the remaining time that he is a Member. However, it is always a great pleasure to sit on a Committee with a Minister who has the intellectual capabilities to understand and to run arguments, so I thank him very much for that.

During the course of the Bill’s proceedings, I, too, have found it fascinating and a great privilege to serve with distinguished members of the Treasury Committee and distinguished Members of this House. I cannot help feeling a little disappointed by the Bill’s eccentricities, but only one or two items of principle divide us. The item of major principle which has divided us is the Bill’s reaffirmation of the tripartite arrangement. I am absolutely devastated that we lost the vote on the amendment that would have removed clause 1, because that would have been a fitting end to the endless speeches on the subject from me and my colleagues. The Bill takes an ostrich-like approach, in which the tripartite arrangement is still seen to be resilient and a good thing; and it is a Bill in which the creation of a body that is almost identical to its predecessor is still seen as a major step forward.

There is symmetry in the new system, however. The biggest criticism of the old system was a lack of leadership, and the biggest criticism of the new system is a lack of leadership. Even that, however, provided Government Members with a golden opportunity to practise in Committee the skills that they will undoubtedly need in opposition of calling for us to explain our policies. I hope that those skills stand them in good stead.

We have created some confusion by marginalising and blurring the responsibilities of the Bank of England while allowing the Financial Services Authority to stray from simple regulation into politics. The Bill is high on PR but low on change, and I still struggle to see the real additionality to it. The other issue about which I felt frustrated was the enormous lack of detail, particularly on costings. It came out in relation to living wills, for which the impact assessment provides no costings, and in relation to short selling. That aspect of the Bill was pulled back remarkably today into a sensible state, but the ranges of available costings are too wide to be useful.

Other Members have spoken of the good work that the Bill promises on improving public education in finance, but there was still some confusion about its relationship with what the private sector already does. The relevant clauses left so much open and provided such a vague framework that, in the opinion of one witness,

“the wording is sufficiently wide that in all probability we will be able to come up with appropriate regulations that fit within whatever comes”––[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 110, Q48.]

We would not like that to be a regular feature of any Bill.

There are backstops all over the place, such as the consumer redress measures. They are headline grabbing, we are not sure when they will be used, and there is no consistency or real understanding of the potential to introduce US-style litigation to UK courts. One witness was prompted to say that

“just about everything of substance is passed to a secondary legislative process through regulations… It does not seem to be the way to proceed.”––[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 78, Q14.]

I entirely agree with that. Having regulations, even in draft, alongside the Bill would have helped enormously in giving us a greater understanding and depth of discussion, which at times we have had to skirt around.

Question put and agreed to.

Bill accordingly read the Third time and passed.