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LIBOR (FSA Investigation)

Volume 547: debated on Monday 2 July 2012

On Thursday I updated the House on the Financial Services Authority’s investigation into Barclays and the attempted manipulation of the LIBOR market in the years running up to and during the crisis. The House has just heard from the Prime Minister, and I would like to give more details of the steps we are taking.

This morning I spoke to Marcus Agius, who confirmed that he was resigning as chairman of Barclays because of the unacceptable standards of behaviour within the bank. The Treasury Select Committee has called the chief executive of Barclays to account for himself and his bank on Wednesday, and I, like many people here, look forward to hearing his answers.

As I also said last week, every avenue for the possible criminal investigation of individuals involved in the attempted manipulation of LIBOR is being explored, but in the view of its chairman, Lord Turner, the powers given to the FSA do not allow it to pursue criminal sanctions. People in the country rightly ask why it does not have the necessary powers, and those who set up the tripartite system can answer.

People also ask whether the gaping holes in the existing law mean that no action at all is possible. After all, fraud is a crime in ordinary business, so why should it not be in banking? I agree with that sentiment, and I welcome the Serious Fraud Office’s confirmation that it is actively and urgently considering the evidence to see whether criminal charges can be brought, particularly in relation to the Fraud Act 2006 and false accounting. It expects to come to a conclusion by the end of the month, and we encourage it to use every legal option available.

I should like to address three further issues today: what happens to the money we get from the fines; what urgent changes are needed in the regulation of LIBOR and other markets to prevent such abuse occurring again and to ensure that the UK authorities have the powers they need to hold those responsible to account; and the wider issue of what went so badly wrong in the culture of our banking system and the way it was regulated, allowing such fundamental failures of basic standards of conduct to go unchecked and unchallenged. Let me take each issue in turn.

Last week, I said that we wanted to ensure that all future fines paid by the financial services industry should go to the taxpayer. Today, I can confirm that we will propose amendments to the Financial Services Bill in the autumn to make that happen. The new arrangement will apply to fines received from 1 April 2012, so the measure will include the Barclays penalty. From now on, the multi-million pound fines paid by banks and others who break the rules will go to the benefit of the public and not to other banks.

That brings me to the urgent changes needed to the regulation of LIBOR to prevent this from ever happening again and to ensure that in future the authorities have the appropriate powers to prosecute those who engage in market abuse and manipulation. I have today asked Martin Wheatley, the chief executive designate of the Financial Conduct Authority, to review what reforms are required to the current framework for setting and governing LIBOR. This will include looking at whether participation in the setting of LIBOR should become a regulated activity, at the feasibility of using actual trade data to set the benchmark, and at making initial recommendations on the transparency of the processes surrounding the setting and governance of LIBOR.

The review will also look at the adequacy of the UK’s current civil and criminal sanctioning powers, with respect to financial misconduct and market abuse with regard to LIBOR. It will also assess whether those considerations apply to other price-setting mechanisms in financial markets, to ensure that these kinds of abuses cannot occur elsewhere in our financial system. We need to get on with this, and not spend years navel-gazing when we know what has gone wrong. I am therefore pleased to tell the House that Mr Wheatley has agreed to report this summer so that the Financial Services Bill currently before Parliament—or, if necessary, the future legislation on banking reform—can be amended to give our regulators the powers they clearly need.

The review is essential to ensuring that we mend the broken regulatory system—introduced by the last Government—that allowed these abuses to happen, but the manipulation of the most used benchmark interest rate reveals the broader issue of the professional standards and of the culture in some parts of the financial services industry that was allowed to grow up in the years before the crisis and which still needs to change. I do not think that a long, costly public inquiry is the right answer. It would take months to set up and years to report. We know what went wrong, and we cannot wait until 2015 or 2016 to fix it.

In just six months’ time, we will bring forward the banking reform Bill, which will implement the recommendations of Sir John Vickers’ independent commission on banking. The Bill will bring far-reaching, lasting change to the structure of British banks by ring-fencing retail banks from their investment banking arms. Let us see whether we can use that Bill to make any further changes needed to the standards of the banking industry, and to the criminal and civil powers needed to regulate it and hold people to account for their behaviour.

As the Prime Minister said, we propose that Parliament establish an enquiry into professional standards in the banking industry. The Government will in the coming days lay before both Houses a motion to establish a Joint Committee, drawn from the Commons and the Lords. It should be chaired by the Chair of the Treasury Select Committee, my hon. Friend the Member for Chichester (Mr Tyrie). He and his Committee have already been quick off the mark in investigating the issue, and we certainly want their hearings this week to proceed.

I propose that the Joint Committee’s terms of reference should be as follows. Building on the Treasury Select Committee’s work and drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, we should consider what lessons are to be learned from them in relation to transparency, conflicts of interest, culture and the professional standards of the banking industry. I propose that the Committee should be able to call witnesses under oath, including current Members of Parliament and of the House of Lords. I can confirm that we will provide the Committee with the resources that it needs to do the job.

I would suggest to the House that we ask the Joint Committee to report by the end of this year. That is enough time to do the job—and do it well—but not so long that it drags on for years. It means, in very practical terms, that we can amend our banking Bill to take on board its recommendations at the beginning of next year. I hope all parties will reflect on this and support the motion we put forward.

The failure to regulate the banks in the boom years cost this country billions of pounds. The behaviour of some in the financial services industry has damaged the reputation of an industry that employs hundreds of thousands of people and is vital to the economic prosperity of the country. We are changing the failed regulation and are reforming the banks; now it is time to deal with the culture that flourished in the age of irresponsibility and to hold those who allowed it to flourish to account. I commend this statement to the House.

Order. Everything will be slowed up, the more noise there is. I do not care what the exhortation is for people to create a wall of noise. That should not and must not happen in this Chamber. If we end up being much slower because people are mindlessly bawling their heads off from either side of the House, we will be slower. I do not think the public will be much impressed by that sort of behaviour from either side of the House.

The systematic lying, concealment and arrogant abuse of power revealed by the FSA report into LIBOR market fixing at Barclays bank is truly shocking. As one member of the Vickers commission said this morning:

“Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what they can get away with.”

Set against the depths of that malpractice, which has now been revealed, and the scale of the challenge we face in reforming and rebuilding trust in British banking, I am afraid that the Government’s decision to reject Labour’s call for an independent and judge-led public inquiry into the culture and practice of banking in our country just will not do. Just as in phone hacking or the Iraq war, so in banking: only with an independent, forensic and open public inquiry—not politicians investigating bankers—can we rebuild trust for the future.

Banks play a vital role in our economy—they lend to businesses, small and large; they help people to save and borrow for mortgages; and many hundreds of thousands of jobs across the UK are dependent on our retail and our global wholesale banking industries—but banking is a profession that depends on trust, and that trust is currently in tatters. The public are rightly baffled and angry about what they learned was happening at Barclays. We have learned that senior bank executives knew about and covered up deliberate market fixing and manipulation of key interest rates. When ordinary people break the law and defraud the taxpayer or the benefit system, they face criminal penalties and jail sentences; the same should apply to bank executives. The public are now rightly asking who they can trust to clear up this mess and sort this industry out.

First, on the issue of criminal penalties, the Chancellor says he will bring forward amendments to the Bill in the House of Lords—amendments that he did not introduce in the House of Commons. Will he confirm that the powers he needs for an FSA investigation to be followed by a criminal investigation are actually on the statute book and that it is the job of the Serious Fraud Office to take forward those investigations, using the powers in the Fraud Act 2006? Will he confirm that section 2 of the 2006 Act already makes it a criminal offence to make “false representation” for personal gain and that it is an offence under section 4 to “abuse” a position of trust for financial gain? Will the Chancellor explain whether such investigations are already under way, and whether it is true that the Serious Fraud Office initially refused to act because of inadequate resources? There is now a real suspicion that the Chancellor’s new conversion to law making is just a smokescreen for the failure of prosecutors to get a grip.

Secondly, on the LIBOR market, we welcome the limited investigation that the Chancellor rather belatedly announced at the weekend. Self-regulation of this market goes back to the 1980s, but will the Chancellor explain why in March, as this scandal started to emerge, the Financial Secretary denied there was an issue and dismissed our calls for investigation and tougher regulation? When he was asked in the Committee whether he had a view on what needed to be done, he replied with one word: “No.” Given how much the Chancellor is now placing his faith in the Bank of England as the leading financial regulator in the future, will he assure us that the Bank did not turn a blind eye to the manipulation of the LIBOR survey?

However, the problems of culture and ethics that have now been uncovered are wider than the LIBOR market. The public are angry, and they rightly ask whether this generation of politicians, regulators and banks can put right the wrongs for which they are paying a heavy price. I say “this generation of politicians” because we must all admit that regulation should have been tougher, and we should all learn the lessons of an open and independent judicial inquiry. For my part—[Interruption.] For my part, I regret—[Interruption.]

Order. What we cannot have are individual Members who feel that their contributions from a sedentary position are somehow in a different category from the sedentary interventions of other Members. We do not need them. What we need is a bit of respectful listening to what is said by the Chancellor and the shadow Chancellor.

For my part, I regret—as do Ministers and central bankers around the world—that we did not see the financial crisis building and take action, but let me ask the Chancellor this question: do he and the Prime Minister regret consistently attacking us in the Labour Government for being too tough in our approach to regulation, saying that it would undermine City effectiveness? That is what they said.

As for the future of regulation more widely, let me ask the Chancellor another question. Having rightly commissioned the Vickers report, does he now regret coming to the House a few weeks ago and saying that he was watering down its recommendations and weakening leverage ratios, and arguing, shockingly in the light of recent events, that complex derivatives—the very derivatives that led to the appalling mis-selling of interest rate swaps to small firms—should be inside the retail bank ring fence, contrary to the recommendation of Sir John Vickers? Surely that is one U-turn that we need from the Chancellor.

We all have a responsibility to do better in future, to reform our banking industry and to rebuild trust, but we do not believe that another parliamentary inquiry can do the job, just as we rejected that approach in relation to phone-hacking. The Chancellor said today that we did not need more “navel-gazing when we know what has gone wrong.”

How complacent is that? If the Chancellor and the Prime Minister are so confident that their approach is right, why do they not put two options to a vote, and let the House decide? Labour Members will vote for an independent and open public inquiry, not an inadequate and weak plan cobbled together over the course of this morning. The independent inquiry is what our constituents want, and it is the only way to achieve a lasting consensus on reforms for the future.

There was one question that dared not speak its name: who was the City Minister when the LIBOR scandal happened? Who? Put your hand up if you were the City Minister when the LIBOR scandal happened.

The shadow Chancellor was not here on Thursday, so he has had days to think about it, but there was not one word of apology for what happened when he was in charge of regulating the City. He blamed central bankers around the world and he blamed the Opposition of the day, but he did not take personal responsibility for the time he was regulating the City when the LIBOR scandal started, and that is why he will not be listened to seriously until he does. Indeed, we need to know whether he knew anything of what was going on. Did he express any concern about the LIBOR rate? When he was in the Cabinet and Gordon Brown, the right hon. Member for wherever it is, was Prime Minister, was he concerned about the LIBOR rate and Barclays? We shall find out in due course.

Let me now deal with the specific questions asked by the shadow Chancellor. He said that the criminal penalties exist in legislation. As I said, the Serious Fraud Office—which is totally independent of politicians, and rightly so—is looking at the law and seeing what it can do, but Lord Turner himself has said that the Financial Services Authority does not have adequate criminal powers. [Interruption.] Opposition Members are shouting, but let me read to them something a member of their own Front-Bench team has said. Lord Tunnicliffe said this:

“Criminal sanctions are extraordinarily difficult to bring about because of the burden of criminal law. It is fair to say though that you can’t find them in the current legislation. And, yes, OK, it’s our fault. I hope my leaders don’t hear me say that.”

That is a member of the Labour Front-Bench team clearly placing the blame on the late Labour Government, of which the shadow Chancellor was the principal economic adviser. That is the problem with the current law, and we are seeking an urgent review in order to amend it and make sure we can deal with the problem.

The shadow Chancellor talks about our acting belatedly in respect of regulation. He had 13 years in which to regulate properly, yet in the space of two years we are changing the entire system of regulation by getting rid of the FSA and introducing a change to the structure of banking. That is happening because of the recommendations from the committee that we set up under John Vickers, and we have still not heard from the shadow Chancellor whether he supports John Vickers’ proposals. He often gets up and says what is wrong with them—[Interruption.] Well, if he has just welcomed them for the first time, that is very welcome, but he goes out of his way not to do so on other occasions.

The shadow Chancellor then said that, somehow, a parliamentary inquiry would be wrong and that I was complacent to say we knew what had gone wrong. This is what my predecessor, the right hon. Member for Edinburgh South West (Mr Darling), said at the weekend, however:

“We know what went wrong and we don’t need a costly inquiry to tell us”,

so that is not just the view of the current Chancellor.

I hope the shadow Chancellor reconsiders his position. We will have good people from both sides of this House and the House of Lords to consider the matter. We will put the motion to the House. Let us have a serious inquiry, but let us have an inquiry that comes to a conclusion within a measurably short period so that we can amend the law that will be going before the House next year. That is the sensible step to take. In the meantime, the shadow Chancellor should reflect on his role and his responsibility, as the City Minister who let Northern Rock sell those dodgy mortgages, as the City Minister who let RBS explode, and as the City Minister who presided when the LIBOR scandal began.

Unlike the shadow Chancellor, I strongly opposed the tripartite regulation of the banks when that was brought forward by the then Labour Chancellor, as I said in a speech I made in the House in 1997. May I now revert to questions that I put to both the Prime Minister and the Attorney-General—who is still with us in the Chamber—suggesting we should urgently consider introducing the concept of the directing mind as defined in the Dodd-Frank Act in the United States, which would enable English commercial law to be strengthened so that the heads of banks can be held answerable for the actions of rogue subordinates?

My right hon. Friend reminds us that he was absolutely right about the problems that would emerge with the creation of the tripartite regime, and, sadly, his predictions have been borne out by events. He also makes a specific proposal about legal changes and the introduction of the directing mind. We are aware of that idea, and we will look into it. The House can look at it, too, in the inquiry over the next few months.

The Chancellor referred to my quote in a newspaper yesterday. I should just tell him that I was asked specifically about the investigation of individuals, and I made the point that there are authorities, such as the Serious Fraud Office and the Financial Services Authority, who are supposed to be doing that.

On the Chancellor’s broader point, let me say that this inquiry will work only if it is a genuine examination of what went wrong. As I have said before, it went wrong under successive Governments over quite a long period, as well as in the City itself. If the inquiry looks like a partisan exercise in settling scores between the political parties, it will not work. The public may not like bankers, but they do not care much for politicians either. I therefore hope the Chancellor can give us an assurance that this inquiry will not be that sort of exercise, and that it will instead be a genuine inquiry into what went wrong and what needs to be put right.

First, the inquiry should be genuinely cross-party and it will, of course, be up to the Labour party to choose whom it would wish to be on the Committee, both in the Commons and in the Lords. So there will be a choice for the Labour leadership in that respect. Of course, I hope that they would consult my hon. Friend the Chair of the Treasury Committee, but it is ultimately their choice.

Secondly, the Treasury Committee, under its previous Chair, Lord McFall, did some very good work on investigating what went wrong. So the idea that the Select Committee or a Joint Committee is unable to do this work is nonsense. “The run on the Rock” was a very good report, as I think the right hon. Gentleman would concede, and it provided the basis for some of the changes in the Financial Services Bill. I think we can draw also on the expertise in the House of Lords in this area and have a Joint Committee. As I say, I hope that once tempers have cooled today, we will be able to reflect on that and have a joint-party consensus on it.

First, may I assure the House that I will not countenance a partisan inquiry and I would not be prepared to chair one either? I do believe that Parliament—both MPs and the other place—has something to contribute to clearing this mess up; they cannot do it all on their own.

By any standards, the LIBOR scandal, for which 20 banks around the world are now being investigated, is shocking. It has corroded trust in the UK financial services industry and it is a shameful affair. I find it particularly sad that it will have unfairly damaged the reputations of hundreds of thousands of our constituents who work hard and honestly in the financial services industry. The UK’s reputation has been tarnished, but it can be restored and enhanced if we draw the right lessons. The Treasury Committee will continue with its inquiry into what exactly happened. We will be holding the inquiry on Wednesday with the chief executive of Barclays, and we will also probably call the British Bankers Association and the regulators to find out exactly how this all happened.

None the less, the immediate task to be conducted by the Financial Services Authority must be to ensure that we have appropriate sanctions for wrongdoing and a regulator strong enough to give us confidence that wrongdoers will be caught. Does the Chancellor agree that another task, on which the Joint Committee will and should concentrate, must be to learn the lessons of the LIBOR scandal for corporate governance and standards in the banking industry?

I completely agree with all the sentiments exposed by my hon. Friend. He is right to say that this is an incredibly important industry. In many constituencies represented in this House, across the United Kingdom, financial services will be the largest private sector employer. We want to ensure that this industry has a high reputation that Britain can be very proud of. Of course these activities have damaged the credibility of the industry, and that is what the work that we have begun here, and which I hope he continues, will put right.

Order. There is a lot of interest but not much time. I am keen to accommodate as many as possible, but extreme brevity is required. So questions, please, without preamble.

Would the Chancellor of the Exchequer authorise Her Majesty’s Revenue and Customs to examine the personal taxation position of all the people involved in this scandal, because if they are willing to swindle everybody, the chances are that they are trying to swindle the Revenue?

The Chancellor of the Exchequer, hon. Members will be glad to know, under any Government, cannot direct the Revenue towards any individual. It would be a very sorry state in this country if I could direct the Revenue to the tax affairs of individuals, so I am not proposing to do that. However, as I have said at this Dispatch Box, and as others have said, this Government are introducing a general anti-avoidance rule, we are clamping down on stamp duty evasion and we have increased the resources from the budget we inherited from Labour when it comes to tackling tax evasion, and the Revenue is therefore well resourced to do its work.

Last year, the then director of the Serious Fraud Office, Mr Richard Alderman, declined to investigate possible breaches of the Fraud Act 2006 arising from allegations of LIBOR rigging. In the light of that, does the Chancellor of the Exchequer think that the SFO is still fit for purpose?

Yes, I do. My understanding, although I have not spoken to him directly, is that the director of the Serious Fraud Office feels that he is well resourced to undertake the investigations he is undertaking.

Does the Chancellor accept that public confidence in his Government, the Crown Prosecution Service and the police will be totally destroyed if no prosecution results for the bankers who rigged the LIBOR rate? Whatever the specifics of banking legislation, an offence has been committed—conspiracy to defraud—and that is what the police should be investigating in a criminal investigation.

The Serious Fraud Office is absolutely independent of Government, but it will be in no doubt that this House and the Government want to ensure that the law is properly enforced and that if there are legal avenues that it can explore, it should use them. We must accept that the Financial Services Authority, which is also a prosecuting authority in respect of financial crime, does not feel that it was given enough powers to undertake a criminal prosecution, as Lord Turner has said very clearly. That is why I want to give the regulators the powers they need. Instead of spending two or three years getting to that point—a long public inquiry would take a year or two, after which the Government would go away, consult, publish a White Paper and introduce legislation, and it would be 2015 or 2016 before we did anything—I propose that we use the Financial Services Bill that is already before the House and next year’s banking Bill to put things right.

The Chancellor mentioned new legislation on the destination of fines on the banking industry and other financial services providers. I raised the issue with our hon. Friend the Financial Secretary in January and got the answer that in the past 10 years, £377,734,373 was levied in fines across the banking sector—a staggering amount. Does the Chancellor agree that a suitable destination for future fines might be the not-for-profit sector and the debt advice agencies that do such valuable work in all our constituencies?

My hon. Friend is right to point out that under the current arrangements, these fines, including the one that Barclays is paying, will be used to reduce the levy that the rest of the banking industry pays to the Financial Services Authority, so the rest of the banking industry will be the beneficiary of the fines. I do not think that that is right and that is why we are making the changes. We are making them retrospective from the beginning of April to ensure that the fine paid by Barclays will be available to be used for the benefit for the public, and I am sure that we will have a lively debate about how that money should be spent.

I welcome the Chancellor’s commitment to broad-ranging and hard regulation for the British banking system—a position eschewed like the plague by his colleagues when they were in opposition. Will he guarantee that the powers given to the FCA will ensure that it is genuinely what many of my constituents have campaigned for for some time: a banking watchdog, not a lapdog?

I can certainly tell the hon. Lady what we want the new regulators to be. We want them to be tough, independent regulators who hold the banking industry to account. However, it is frankly pretty pathetic for Labour MPs, including former Ministers in the Labour Government, to get up and blame the then Conservative Opposition for what happened when they were in office. Why do they not take some responsibility for what they did?

Order. I repeat that we need brief questions and although I know—[Interruption.] Order. Although I know that the Chancellor is seeking to assist the House, pithy replies would also help.

Does the Chancellor find it odd that the Opposition are calling for Barclays to face a criminal investigation, given that when they were in office they set up a regime that did not make this abuse a criminal offence?

Does the right hon. Gentleman regret diluting the Vickers proposals, under pressure from the banks? In the light of revelations in recent days, will he ensure that the ring fence is strengthened, so that this does not happen again?

We are not diluting the Vickers proposals; we are putting them into law. The House will have the opportunity next year to ring-fence retail banking and separate it from banks’ investment banking arms. When I was the shadow Chancellor, I proposed changes to the structure of banking, and they were completely rejected by the former Prime Minister at this Dispatch Box. We now have an opportunity to change the structure of banking, and I hope that I will have the hon. Gentleman’s support when the law comes before us.

In the early 1990s, we had around 45 major banks; we now have about five. One of the key reasons why there is so little new competition is the lack of ability to switch. Does my right hon. Friend agree that now is the time to look again at the proposals that the Vickers commission made on switching, and to think again about moving to account portability?

My hon. Friend will know, as we discussed this in the Treasury Committee, that the Vickers commission specifically recommended—indeed, insisted on—the ability to change bank account easily, and that from 2013, the banks should have in place a mechanism that enables people to do that within a week. As Vickers said—I agree with him—let us see that that happens; if it does not, we can take alternative measures, but we have in place plans to make it much easier to switch bank accounts from next year.

I welcome what the Chancellor said about the Serious Fraud Office and the responsibility that he has given Martin Wheatley in relation to governance and the setting of LIBOR, and what he said about potentially putting criminal sanctions in the banking reform Bill. I am disappointed that he has not ordered a full public inquiry, but I wish the investigation that he has set up well. Will he confirm to the House that the hon. Member for Chichester (Mr Tyrie) will not be restricted in any way in calling for evidence, under oath, from witnesses from the commercial banks, the central Bank, the regulators, or Ministers at the Treasury at the time of the LIBOR rigging scandal?

I can confirm to the hon. Gentleman that the Committee will not be restricted in any way. It will call whomever it wants. I suggested—but this, of course, will be a matter for the House—that it should call people to give evidence under oath. [Interruption.] As we are getting a question from an Opposition Front Bencher, let me say that the Committee will also be able to call former Government Ministers.

The shadow Chancellor seemed to suggest that the Chancellor was passing the buck to the Bank of England, and that the Bank was somehow conniving in LIBOR lying. Will the Chancellor confirm that the Financial Services Authority, in its investigation, found no evidence to suggest that the Bank of England at any point encouraged banks to low-ball their LIBOR rate?

The FSA’s report is very clear about the interaction between the Bank of England and Barclays. Paragraph 176 says:

“No instruction for Barclays to lower its LIBOR submissions was given”

during the telephone conversation that caused the press interest.

Will the Chancellor once again confirm that progress is being made towards a more responsible banking system, with the separation of high street domestic banking and banks’ so-called casino operations?

My hon. Friend is right: we are proceeding with a change to the structure of British banking, in which we will ring-fence the retail banks from their investment banking arms. [Interruption.] There will be plenty of opportunity for Labour ex-Ministers such as the shadow Chancellor to appear before the Committee, if he is worried about that. We will introduce a Bill, which will go through Parliament next year. In answer to the point about a public inquiry, why spend three or four years before getting to legislation? Why do we not use the opportunity to get it right now, and amend the Bill that will be before Parliament?

With hedge funds providing up to 50% of all the money that goes into the Tory party political coffers, can we be sure that those criminal penalties that are referred to can extend to any or all of those Tory MPs mentioned in The Independent on Sunday yesterday?

I do not think that that question deserves an answer. The inquiry will do its job, and I hope it will do so on a cross-party basis.

With Friday’s FSA report into the inappropriate selling of base rate swap products, does the Chancellor believe that the culture behind that latest scandal should also be part of the inquiry?

The Joint Committee will look more broadly at the culture in the banking industry, but the very specific point that my hon. Friend makes is about a mis-sold retail product. What I want to do, and what I am sure our constituents would want us to do, is make sure that the compensation is paid out as quickly as possible. I do not want any inquiry to delay that. We want to make sure that small businesses, in particular, which are having cash-flow problems because of the products that they were mis-sold, get the compensation they need. I do not want to impede that process.

Does the Chancellor identify shortcomings in existing anti-fraud legislation, apart from the costs of pursuing an investigation and a prosecution? Will he confirm to the House that there will be no constraints on either investigation or prosecution costs?

Does my right hon. Friend agree with the view expressed a few years ago that

“nothing should be done to put at risk a light-touch, risk-based regulatory regime”?

Is this not further evidence of the wishful thinking that is all too prevalent on the Opposition Benches?

My hon. Friend is right. I remember sitting at the Mansion House listening to the former Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), telling us in 2007 about the golden age of the City, just before the City imploded.

Does the Chancellor recognise that many of us observed for a number of years that the competition between the Front Benches in the House seemed to be based on saying, “Our touch is lighter than yours”? The public believe that Parliament and parties have indulged the banksterism that is now all too apparent. The failure and inadequacy of legislation were a failure by Parliament, not just of Government. Is an inquiry that will be a Whips’ stitch-up, with fairly narrow terms of reference, really an adequate response to the public concerns out there?

In the end, the conclusion of the inquiry will command the confidence of the House only if it is a unanimous report. The Labour party will be able to choose its members. If it is a divided report along partisan lines, people will see that. I hope the joint inquiry comes forward with a unanimous report. As I say, that would be the way to proceed. A public inquiry would take months to establish and a year or two years to report; in Northern Ireland we have had inquiries that have gone on even longer. There would then be a Government response, a Government White Paper and Government legislation. We would be standing here in 2016 or 2017 dealing with a scandal that had happened a decade earlier.

As my right hon. Friend sets out the task of restoring trust and integrity to the banking system in the light of the appalling revelations at Barclays, he will be aware that we all have constituents who are decent people working in those institutions, who have been badly let down by some of the leaders in the sector, not least the 4,000 people who work for JP Morgan in Bournemouth. May I invite my right hon. Friend the Chancellor to use this opportunity at the Dispatch Box today to recommit the position of this Government—that we are committed to a vibrant banking sector that contributes so much to the economy of the United Kingdom?

I can tell my hon. Friend that we are absolutely committed to a vibrant banking sector. I have gone out of my way in these exchanges to draw attention to the fact that this is an incredibly important sector to the British economy. The fact that an American bank employs 4,000 people in Bournemouth reminds us that this sector is not just in the square mile of the City of London or in Canary Wharf. This industry employs many hundreds of thousands of people around the country. It is the largest private sector employer in the country, and of course it has a huge impact on the rest of the economy, which is why it must now be properly regulated.

The Chancellor keeps repeating his intention to follow the Vickers recommendation of ring-fencing retail and investment banking, but in the light of this scandal will he not accept that simple ring-fencing is not enough because any firewalls will soon be circumvented, which is why we need nothing less than the full legal separation of retail and investment banking?

There are people who share the hon. Lady’s view, but we specifically asked John Vickers and his commission, whose membership was drawn from people who had expertise in the consumer industry, banking and elsewhere, to consider whether we should physically separate the banks as she suggests. They explicitly addressed that issue and came to the conclusion that ring-fencing was a better approach, and one of the reasons why they did so is that ring-fencing might provide more stability for the retail arm, as it would be able to draw on the resources of the investment bank. They specifically looked at that and came to the conclusion that having a retail ring fence was better than separating the banks.

Order. I inform hon. Members that there is very important business after this statement and I will therefore be unable to fit everyone in. I plan to let the statement run for another 10 minutes or so, so short questions and short, direct answers would help enormously.

For the reasons the Chancellor has set out, I very much agree that the long path back to trust in banking and financial services is served by a banking Bill, but will he take on board some of the concerns expressed just now by the hon. Member for Brighton, Pavilion (Caroline Lucas)? Many feel that the LIBOR scandal might be a turning point. In addition to looking at ring-fencing, is he open-minded enough at least to consider the prospect of a fully fledged separation of casino or investment banking from retail banking?

I say to my hon. Friend, whose constituency expertise and personal expertise I have a great deal of time and respect for, that one of the purposes of asking John Vickers to do this work was to resolve the issue for our country. We brought together a commission with broad experience. It specifically looked at this issue and came to the conclusion that a ring fence was better than actual separation. I think that we should stick with its recommendations in order to give the industry some stability.

If tomorrow morning the elected Treasury Committee comes up with its own terms of reference, as it is appointed by Parliament to do, will the Chancellor accept them or ride roughshod over them?

It is for the House of Commons and the House of Lords to pass a motion, so ultimately it is a matter for the House.

At the heart of this matter is a culture that has seen bankers go from trusted advisers to salesmen and clients go from valued clients to marks. Given that culture, is it not right that the Committee be asked to interview the Vickers commission again to see whether, in its view, ring-fencing is adequate following these events?

It would be entirely up to the Committee to call whomever it would want to call, and it might well want to speak to John Vickers, who has enormous expertise in this area.

I think that the Chancellor has done his announcement a disservice by setting it up as a continuation of his obsession with placing every act of wrongdoing by every banker at the door of the previous Government. Does he not accept that what the public want is something that gets to the heart of the rotten culture exposed by the FSA report last week, rather than the partisan way in which he set out today’s announcement?

I agree with the right hon. Gentleman that we want to get to the heart of the cultural problems, but when the shadow Chancellor responds to a statement and blames it all on the party that was in opposition at the time, it is perfectly reasonable for me to point out who was in government. That is a perfectly reasonable response in the cut and thrust of this House, but I completely agree with the sentiment he expresses, which is that we should try to proceed on a cross-party basis. I hope that his Front Benchers will think about supporting the joint inquiry—they will of course be able to choose its Labour members—because I think that that it is the correct way forward to give us answers for next year.

Does the Chancellor agree with me, and indeed with Plato, that good people do not need laws to tell them how to act responsibly, and that bad people will find a way around such laws? We really should bear that wisdom in mind when it comes to determining the outcome of the inquiry that has been announced.

I am tempted to say that we should find an Aristotelian mean, where we do not completely destroy the industry with one inquiry after another, but instead have a sensible inquiry that gets to the right answer, amends the law appropriately and enables us to have a sensible financial services industry that avoids the scandals that we are dealing with today.

One of the most controversial episodes in the recent history of the City was big bang in 1986. Notwithstanding the many good qualities and good intentions of the hon. Member for Chichester (Mr Tyrie), the fact is that in 1986 he was a special adviser to the then Chancellor of the Exchequer, who was overseeing big bang. Does the Chancellor agree that the hon. Gentleman will find it difficult to demonstrate the necessary independence?

My hon. Friend the Member for Chichester (Mr Tyrie) is more than capable of demonstrating his independence, and I remind the House that thanks to the reforms of this Government he was elected to his post by the entire House of Commons.

I have just received a heartbreaking letter from a 72-year-old pensioner who is being pursued through the courts for a disputed and modest tax claim. How can it be right that those telling lies for eye-popping sums are not ending up in court?

The Serious Fraud Office is independent of the Government, but it is pursuing every avenue to see whether it can bring criminal prosecutions in this case. This is, however, a matter for the SFO, which is going to come back to us by the end of the month to tell us whether it can do so, and it will have heard what the House has said today. We also want to ensure that in future the regulators have the criminal sanctions that they need, and that is why we seek these investigations to change the law now, rather than waiting four or five years to do so.

How can it be right, and in line with the Government’s credibility on wanting to clean up the banking system, when those who were responsible and in management at the time of these criminal activities—both the Prime Minister and the Chancellor have today accepted that criminal activities were going on—remain in post, such as Mr Bob Diamond?

As the Prime Minister said and I repeat, Mr Diamond has to account for himself before the Treasury Committee this week, and I congratulate the Committee on doing that. The chairman of Barclays has resigned, but it is not the job of the Chancellor of the Exchequer to hire and fire the bank chiefs at this Dispatch Box. I am not sure that we want to go down that path; it is much better for the shareholders to do it, the board to do it, and they will have the appearance before the Committee of Mr Diamond to go on.

Further to the question from my hon. Friend the Member for Bracknell (Dr Lee), will the Chancellor look again at my Financial Institutions (Reform) Bill, which would transfer commercial risk back to the banking sector and end the incentives that have created the culture of recklessness and rule-breaking that is ruining the City?

The Chancellor said in his statement that he had asked Mr Wheatley whether participation in the setting of LIBOR should become a regulated activity. Does the Chancellor accept that public confidence in the British Bankers Association has completely ruptured, and that for the public it is a question not of whether, but of when, we take that responsibility away from it?

I completely agree with the hon. Gentleman that confidence in the process of setting LIBOR has been damaged—of course—by these revelations. That is precisely why, if I may say to him, I want to get on with it: that is why I have asked Mr Wheatley to do his report in the next couple of months, not even by the end of the year—so that we have the opportunity in October of amending, just before it becomes law, the Financial Services Bill. The hon. Gentleman is an expert on public inquiries, and I am sure he will agree that a public inquiry would take years to get to that point. Let us get to that point this autumn.

I fully support greater transparency in banking and, in particular, punishing those who have done wrong, but can the Chancellor from the Dispatch Box today reassure my constituents who, as part of their pensions, hold shares in banks that the Government, or the inquiry, will take no action that unnecessarily undermines the value of those pensions?

We would not want to take actions that unnecessarily undermined the value of anything, so my hon. Friend has that assurance.

After the nationwide disturbances last year, a student was given a six-month sentence for stealing a pack of water bottles. What punishment does the Chancellor believe would be appropriate for bankers who have stolen millions of pounds from investors through rigging interest rates?

I completely understand and sympathise with the sentiment that the hon. Gentleman is expressing: people suffer criminal penalties for offences involving much, much smaller sums of money—a fraction of the sums that we are talking about. The Serious Fraud Office, which is independent of the Government, is looking at the matter. Let us wait to hear what it has to say. It is looking at what laws are available to let it do that. I am sure that he would not want the Government of the day to undertake the criminal prosecutions themselves.

What powers and sanctions will the parliamentary Committee of inquiry have should witnesses refuse to attend, refuse to answer questions or mislead the Committee?

Parliamentary Committees have a whole set of powers available to them. Ultimately, as I understand it—the Parliamentary Secretary to the Treasury might correct me if I am wrong—the House itself can call witnesses to Parliament through a vote. That power is available to us—[Interruption.] That is absolutely the case. [Interruption.] What I find astonishing is Opposition Front Benchers’ lack of confidence in Parliament—in the House of Commons, in the House of Lords—to do this job. Looking at how they treated Parliament over 13 years, perhaps that is not surprising. I have confidence in Members from both sides of the House to do the job being asked of them.

Interest rate swaps have been mis-sold. They are complex derivatives. Does the Chancellor still think it right that they are inside the retail banking ring fence?

We are not proposing to put complex derivative products inside the retail ring fence; that is not part of our proposals. As I say, we are coming forward with plans to implement the Vickers reforms and I hope that the hon. Lady welcomes that.

We have had regrets but no apology from Opposition Front Benchers. What our constituents really want is action. May I commend the Chancellor for taking action to set up a swift parliamentary inquiry? Will he make sure that the proceeds from any fines go to the taxpayer, not the banks?

I thank my hon. Friend. I say again that I came to the House just last Thursday and said that I would look to see what I could do on the fines. I have now come forward, a few days later, and said that we are going to take those fines—including the fines that Barclays will pay—and make sure that they are put to the public benefit, not to the benefit of the financial services industry. We are acting extremely swiftly on this. As I said, I would have thought that it was in everyone’s interests that we get on and deal with the matter in the coming months.

Since there is clear evidence of a conspiracy, going on for years, to defraud over LIBOR, will the Chancellor now transfer responsibility for the interest rate market away from the incestuous control of the British Bankers Association to the Financial Services Authority or the Bank of England, including the power to bring criminal charges on evidence of market abuse?

The right hon. Gentleman asks two very good questions, as did the hon. Member for West Bromwich East (Mr Watson), about who should oversee the setting of LIBOR and what criminal sanctions should exist for the manipulation of that market. That is precisely what we are going to investigate over the next couple of months in Mr Wheatley’s inquiry. That will enable us in September and October to change the law; the Bill has been going through Parliament and can become law this autumn. I hope that I have the right hon. Gentleman’s support for getting on with this and getting the powers on the statute book.

If it is found, following the Joint Committee inquiry, that manipulation of interest rates damaged small businesses or mortgage holders, will my right hon. Friend consider forcing the banks to reimburse fully those individual small businesses and mortgage holders?

Of course, if harm is proved to individuals or to businesses the whole question of compensation will arise, and we have the compensation regime to address that. As I said in the House on Thursday, it is difficult to establish whether that is the case because people were trying to manipulate the rate up and down on different days to suit their derivative trading book, so there were times when the rate was too low and times when it was too high compared with the fair market rate, and so the question of how much people lost out will be difficult to establish.

Order. I am sorry that I am going to have to end the statement there. We have taken questions from 39 Back Benchers in 47 minutes. I appreciate that it is a very important issue, but we have very pressing business that we need to move on to, and of course this matter will come back to the House again.