The Government have today laid before the House the Financial Services (Banking Reform) Bill and their response to the Parliamentary Commission on Banking Standards report, which was published on 21 December 2012 following the commission’s pre-legislative scrutiny of a draft Bill.
I thank and pay tribute to the members of both the Independent Commission on Banking and the Parliamentary Commission on Banking Standards. The two commissions, whose membership comprises some of the most distinguished policy makers and formidable intellects in the world, have between them shaped a set of reforms to British banking that will lead the world and set an example to other countries in the seriousness, radicalism and meticulousness of the changes that are proposed.
The Bill published today reflects their painstaking work and the Government have accepted almost all their recommendations. The reforms address what the Chancellor has called the British dilemma—how Britain can be a leading global financial centre with more than its fair share of international trade in financial services while at the same time not exposing ordinary working people in this country to the catastrophic risks of banks failing.
The reforms were and are necessary because the previous regime was tested and failed. UK taxpayers had to bail out the banks with £65 billion of the hard-earned money of ordinary working people, while those who had taken a one-way bet with that money slunk away, losing nothing more than their jobs, and sometimes not even that. The anger that the country feels about what happened must be channelled into change to reset Britain’s banking system. The objective of the Bill—proposed by Vickers and endorsed by the commission—is that any failure of any bank in future should not impose a cost on the taxpayer and not interrupt for a second vital banking services. That is a high ambition, but one that is appropriate for a country with the reputation for financial stability and confidence, which has for centuries been one of Britain’s chief assets in the world.
As is well known, the Bill will erect a ring fence around the core operations of banks headquartered and regulated in the UK. Within that ring fence, banks must be completely insulated from activities such as using depositors’ funds to speculate for the banks’ own benefit in capital markets.
As a result of the commission’s recommendations, the Government are making a number of further changes to the Bill. First, in the acute phrase of my hon. Friend the Member for Chichester (Mr Tyrie), which will permanently enter the lexicon of banking, the ring fence will be “electrified”. The regulator will be given the power to order the full separation of any bank that attempts to undermine the ring fence. Directors of the banks will be personally responsible for ensuring that their banks comply with the ring-fencing rules, and the Prudential Regulatory Authority will conduct an annual review of the operation and adequacy of the ring-fence rules.
Secondly, there are explicit provisions on the face of the Bill for the principal aspects of ring-fencing, including that there should be separate boards of directors, remuneration arrangements, treasury management operations, balance sheet management and human resource management of ring-fenced banks.
Thirdly, the Bill gives us an opportunity to make an historic change in the competitive environment in UK banking. Competition is essential to ensure that customers benefit from innovation and from demanding customer service and efficiency from their banks. That has not always been customers’ experience in the past. As well as bringing in a seven-day automatic account switching service from September this year, the Government will take steps to tackle the cosy arrangement whereby the banks determine how payment systems will be run. Why should it be necessary in 2013 for a cheque to take six days to clear, with the banks and not the customers scooping up the interest on the balances during the delay? Why should a new bank have to beg an incumbent bank for permission to use their payment system? We will therefore require access to payment services that are fair, reasonable and transparent. The commission has rightly emphasised the importance of competition, and I am grateful to it for propelling that drive further, as I am to my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) for what she has done on greater competition in banking, which has been a personal crusade of hers.
The fourth and final change is that more parliamentary scrutiny will be built into the secondary legislation that implements what is a high-level Bill. Drafts of the principal statutory instruments to be made will be made available to the House before Second Reading, and the Government accept the recommendations of the Delegated Powers and Regulatory Reform Committee on the type of scrutiny each should receive.
These are historic reforms, but it is appropriate that, in our country—directly and indirectly, 2 million people work in the industry, it is our biggest export earner, and contributes £1 in every £8 of our tax revenue—we take the steps necessary to restore confidence in, and to, an industry that has fallen so far. There is much scrutiny of the Bill before us, both here and in the House of Lords, and I look forward very much to our discussions during the weeks and months ahead.
If the Government believed this issue was important, would the Chancellor have not made a statement to the House of Commons today? It should not take an urgent question for Parliament to hear why the Government are taking such a half-hearted approach to banking reform.
In a week when our national banks are facing record-breaking fines for LIBOR manipulation, when the Financial Services Authority is struggling to get a fair deal on payment protection insurance mis-selling for small businesses, whose customers have been mis-sold interest rate hedging products, when we see the bumper bonus season continuing to roll on and on for banking executives as if nothing had happened, and in a week when all this suggests we should be getting serious about real reform, what has the Chancellor said in his seaside speech today? He has fudged the tough stance recommended by the Vickers report, and has stopped short on backstop powers and legislation for the leverage ratio envisaged by the Parliamentary Commission on Banking Standards, a commission that the Chancellor himself agreed to set up last summer.
I have to ask the Minister: why then does it feel as though the Chancellor has to be dragged kicking and screaming towards serious reform? Is it because, despite all the rhetoric and feigned concern, the Government know they face certain defeat in the House of Lords on the sensible recommendations of the parliamentary commission, and so think it best to try to salvage something from what is in reality a strategic retreat? Why will the Minister not legislate for a full reserve power for total separation of retail and investment banking if ring-fencing does not work, something that we called for last year and the commission specifically recommended? Surely it would be sensible to legislate now, not just if one or two individual banks misbehave, but in case ring-fencing fails the sector as a whole. He may think he has found a cunning ploy, but stopping short with only half the backstop powers just means that they are unlikely to be used. Corporate lawyers across the City will be rubbing their hands with glee at the prospect of taking on the regulator on a case-by-case basis. Worse still, why is he ducking the main conclusion of the Vickers report? Specifically, why is he refusing to adopt the commission’s recommendations on the leverage ratio and rein in the over-exposure of banks whose excessive risk-taking caused the problems in the first place?
Should there not be a clause in the Bill so that regulators can restrain such hazardous behaviour? Does the Minister agree that the implementation of the Bill needs a full parliamentary review on a regular basis, with genuine scrutiny of detailed secondary legislation on exactly how ring-fencing will work in practice? If the commission recommends a tougher code of conduct for bankers, proper professional qualifications and a fiduciary duty of care for customers, together with stronger controls on bonuses and remuneration, will he accept its judgment in the Bill?
With the economy flatlining and no plan for growth, why is there nothing in the Bill to improve the funding for lending scheme? We should not still be seeing lending to businesses falling further and further, month after month. The Minister has to realise that the public, the taxpayers and Parliament want to tackle this issue once and for all. The Bill needs further amendment, and if the Government do not have the courage to radically reform the banks, we will.
I had rather hoped for a serious response to a serious matter. When the Bill has its Committee stage, I hope the hon. Gentleman, with whom I am happy to work on the details, will be able to make some more substantial reflections than those he has offered the House today. Frankly, the idea that the Opposition should have the brass neck to table an urgent question on banking reform is almost unbelievable. At no point in 13 years of power did they show a scintilla of urgency in facing up to, never mind solving, the catastrophic absence of banking reform that led to the financial crisis being particularly damaging to this country. The failure of the botched regulatory system they introduced in 1997 has played a large part in the burden that the ordinary working people of this country are still having to shoulder today to bail out the banks. They were in office after the crisis, too. Even then they did nothing urgent apart from hurriedly plunge their heads in the sand to hope that the nightmare would pass.
It has fallen to this Government—as it regularly does, I am afraid—urgently to clear up the chaos in which Labour left the country. It should not have taken so long, but since the Government have been elected—from the beginning of our tenure in 2010—we have set up the Independent Commission on Banking, which has done a superb job, and we have created a separate conduct regulator and a prudential regulator that are now on the statute book. Why did we need to wait for this Government to be elected to do that? Why did Labour not set up a parliamentary commission on banking standards? [Interruption.] Of course, I will answer the pitifully few points that the hon. Gentleman made.
The hon. Gentleman asked, perfectly reasonably, why we had not given the Bank of England the power to split up the whole banking system. One of the principal reasons for not doing so was that the Governor of the Bank of England, in evidence to the commission, said that he did not want that power. It would seem odd to foist on the Governor a power that he does not want. The hon. Gentleman also asked why we did not adopt the higher backstop ratio. One concern expressed was by building societies worried about being disadvantaged by that. That was a concern we had.
The hon. Gentleman asked about a full review. If he had read closely the statement we published in response to the commission’s report, he would have known that the PRA would conduct a full annual review of the ring-fencing rules, and we will obviously act on any recommendations that it makes. He also asked about further recommendations that might come from the commission, which is chaired by my hon. Friend the Member for Chichester. The hon. Gentleman seems surprised that, having set up the commission, we might be interested in taking seriously its recommendations. I hope it is apparent from our response today that we take its recommendations very seriously, and I look forward to its further recommendations, particularly on competition, which have a great deal to offer. I greatly respect the commission’s work and look forward to making time available when the next report is published to make the necessary changes to the Bill to accommodate the recommendations.
The commission will look carefully at the detail that the Government have published today, but in the meantime I warmly welcome the Government’s acceptance of several of our key proposals, including on electrification of the ring fence.
Last night, journalists were briefed by the Treasury that the Government had also accepted our proposal that an external assessment should be made before the PRA could exercise its reserve power, but there is no mention of that in the Government’s response. Will the Minister confirm that such an assessment will be provided for in the Bill?
Of course. I pay tribute to my hon. Friend and the other members of the commission. It might not be known just how many hours of the day they are working on it, but they are doing a service to the country in doing so. We accept his recommendation. This is a high-level Bill and we have said that we will introduce amendments to reflect the recommendations. When we do that, we will invite him to consider whether they appropriately address his recommendations.
I welcome the change of heart announced by the Chancellor today. It is in contrast to the dismissive noises that came from the Government when our report was published just before Christmas. I am sure that that change of heart had nothing to do with the vision of amendments in the other place being supported by one of the Chancellor’s predecessors, Lord Lawson, a former Cabinet permanent secretary and the new Archbishop of Canterbury.
I would like to ask the Minister why today’s response was silent on the commission’s recommendation for a general reserve power for the sector as a whole. I must correct him: if adopted, such a decision should not be left to the Bank of England, but be taken by the Chancellor.
I am grateful for the right hon. Gentleman’s question, to whom I extend my thanks for serving with distinction on the commission.
I said that the Bank of England did not want a general reserve power, but the right hon. Gentleman made the perfectly valid point that it might not necessarily be a choice for the Bank. It seems to me, however, that the power to break up any individual bank is a very strong one, and quite rightly, as the commission recommended, it would make the ring fence more impenetrable. Nevertheless, to provide for a reserve power in this Bill that would change the whole system would, in effect, be a different policy. I understand the reasons for wanting to do that, as many distinguished members of the commission do, but changing the whole policy would deserve the scrutiny of a Bill of its own—any future Government would be free to introduce such a Bill. To have it as a rider to a Bill designed to implement the Vickers report would be the wrong step forward.
Finally, as for accepting amendments, there are several Members of this House who have served on Bill Committees with me in the past. My demeanour, now and throughout the passage of the Bill, will be to listen to good and sensible suggestions from wherever they come—not to treat this as an exercise in partisanship, but to try to find consensus on the best system for financial regulation in this country.
Is my right hon. Friend confident that the very welcome proposals he has announced will not be swept away by the tsunami of regulations bearing down on us from Europe under the Single Market Act, even though none of those regulations creates a single new opportunity for financial services businesses to trade on the continent and all of them result in the transfer of power from this country to Europe to regulate our most important industry?
My right hon. Friend is right when he talks about our most important industry—certainly in terms of exports and what it contributes to the taxes that pay for public services. It is significant that more euros are traded in this country than across the entire eurozone. For that reason, we need to continue to have access to the single market and to argue—as I and the Chancellor do in ECOFIN after ECOFIN—to ensure that we secure our interests there. That is a constant fight, but I know that I and my right hon. Friend the Chancellor will always take that view when we are in Brussels.
I am a member of the commission, and we will of course examine the detail included in the Bill. The right hon. Gentleman’s reasons for not including a reserve power require further explanation. The Chancellor said that our commission ought not to unpick the consensus. We have taken evidence from a wide range of people—academics, bankers and others—who have all supported our recommendations on electrifying the ring fence. Will the Minister again give serious consideration to the recommendations that we have made?
I do take seriously those recommendations, but this is not a difference between just the Government and the commission. The shadow Chancellor himself said only a little while ago that
“there is no need to break up institutions but there has got to be clear separation.”
I think people across all parts of the House have come to the same view on this, but I am respectful of the conclusions that the hon. Gentleman has reached.
If break-up and segregation may be necessary for a bank in a future crisis, why do the Government not understand that they may need those techniques to deal with the inherited, still very serious banking crisis that we are living through, which is preventing the financing of a full recovery? Will the Government look at what they can learn from their studies to sort out the problem of RBS today, which is our biggest obstacle to recovery?
My right hon. Friend makes a forceful point. The legislation is about the future. It is quite right that it should proceed with consideration and that we should not introduce things that might have unintended consequences without adequate consideration in this House. The Government are obviously the major shareholder in RBS. It is important that RBS should be returned as swiftly as possible to private hands. The current situation is far from ideal, and I know that my right hon. Friend shares our ambition on that.
It is right that the taxpayer should never again be on the hook for the bad decisions taken by investment banks or the bad regulation that allowed them to be taken. I therefore welcome the ring-fencing and the provision to separate a given bank if necessary. However, I am not yet convinced of the need for the reserve power to separate any bank. Does the Minister envisage any circumstances under which the Government might include the reserve provision to separate a bank in this or future legislation?
I confess that I did not quite understand whether the hon. Gentleman’s point was that he objects to the power to separate any particular bank or the general point, but we can talk about it afterwards. It is important that the regulator—the Bank of England—should have the ability to address a bank that breaches the rules and that does not respect the integrity of the ring fence with consequences, those consequences being full separation.
Does my right hon. Friend agree that consumers and businesses want the existing banking sector to receive the hot blast of competition and that, in order for that competition and choice to exist, we need a regulatory regime that will allow in new entrants, especially those that specialise in community-based banking and in lending to small businesses and social enterprises? Might not one such new entrant emerge from the break-up of the state-controlled RBS?
My hon. Friend and I completely agree about the need for more competition in the banking sector. It is one of the features of the banking crisis that it has resulted in a concentration in the number of banks. Frankly, there were never enough in the first place, and we need urgently to see more new entrant banks of all types coming in. We are working with the existing regulatory authorities and, through amendments to the Bill, we will transform the state of competition in the banking sector. I very much hope to see an infusion of new energy and talent into the banking system in this country.
Given that we have the highest high street lending rates in the European Union, along with the lowest high street saving rates, why is not the Minister proposing the break-up of Lloyds TSB in addition to that of RBS? That would immediately create proper competition in the banking sector.
As I am sure that the hon. Gentleman would acknowledge, the Government have promoted the sale of Northern Rock to Virgin, for example, to try to encourage new entrants, and he will see more of that in the future. On interest rates, those that are being paid on mortgages and small business loans at the moment are very much lower than they would have been had we not taken the necessary action on the economy to keep them competitive.
The British Bankers Association has said this morning that the electrification of the ring fence might cause some uncertainty in the City. Does my right hon. Friend agree that the only banks that need to be worried about the future are those that game the ring fence and try to burrow underneath it?
My hon. Friend is absolutely right. Any bank can have complete certainty that it will not be subject to being broken up if it respects the ring fence. Indeed, given the standing of the City of London, it is important that we all have confidence and trust in the British banking system, on which the credibility of that standing depends. The reforms recommended by Sir John Vickers and his commission will achieve precisely that.
We have addressed that point. Obviously, it is the behaviour of any particular bank that will cause problems, and the sanctions against such behaviour are clear. If a bank breaches the ring fence that has been established, it will be split up. That is as clear as day to the directors of every bank, who, by the way, will now have a personal responsibility to respect the ring fence.
About 650 people work for Lloyds TSB in Southend, with a similar number working for RBS. In addition, there are about 20 branches, each employing 10 individuals. Does my right hon. Friend agree that this banking reform is just as much about helping the banking industry in the whole of the United Kingdom as it is about the square mile of the City or Canary Wharf?
My hon. Friend is absolutely right. One of the real tragedies, and one of the things that makes me most angry about the declining reputation of banking in recent years, is that the reputations of many hundreds of thousands of people who work in banks up and down the country and who have chosen banking as a career because of its associations with probity and respect in the community have been besmirched by the actions of a very small number of people. Our purpose in restoring the reputation of financial services in this country is also to allow those people to go to the pub without being teased and ribbed because they work in a bank, which is something that should never have happened to them.
My constituents want banks to serve industry and our community, not themselves. May I try the Minister yet again on the question of full reserve powers? Why should the evidence of one institution hold sway over that expert commission?
It is the hon. Lady’s objective that banks should serve businesses and their customers, and that is precisely what Sir John Vickers has in mind. That is the purpose of the exercise, and it is exactly what I want to achieve. Any ring-fenced bank that strays from that purpose and neglects its core customers—its retail depositors and the other people who bank with it—by taking their money and playing with it in the casino will be broken up.
I will certainly pass on my hon. Friend’s comments to my right hon. Friend the Chancellor. What we are saying when it comes to the regulation of payment systems is that, through the Bill, we will set up a regulatory responsibility to promote competition on the part of the regulator of payment systems. One thing regulators will want to look at is how they can quickly make accounts portable between customers. That, however, is only one of the innovations that could be made. I mentioned in my response to the urgent question the requirement to speed up the clearing of cheques. My hon. Friend will recall that the Payments Council once introduced a statement—almost ex cathedra—to the effect that cheques would be abolished in future. What kind of contempt for the consumer does that show? It should not happen again, and it will not happen again.
As a result of the chaos of the previous Government, we almost ended up nationalising the banks. I want to see our banks back in the private sector; I want to see them competitive; I want to see them making money, providing jobs and getting credit to businesses and consumers.
The Financial Services Authority says that one reason why RBS failed was the political pressure put on the regulator to ignore the risks banks were taking. It named the shadow Chancellor as one of the three politicians responsible for that. What checks and balances are in place now to ensure that that does not happen again, and has my right hon. Friend had an apology from the shadow Chancellor?
One of the principal innovations was to get rid of the shadow Chancellor who was then in a position to interfere. The reason we are setting up the system and giving powers to the Bank of England and the regulator is to make it very clear that any bank that breaches the rules can forget about lobbying Ministers. The banks will be responsible to the Bank of England, which will enforce the law that I hope this House will see fit to pass.
Let me take the Minister back to the question posed by my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who is a member of the banking commission. In simple language, what possible reason do the Government have for not accepting the commission’s recommendation to take that reserve power? After all, only banks that do not conform with the Government’s wishes would have anything to fear from the reserve power. Why not go on and take that power?
I have explained on a number of occasions why we have not done so. One reason is that the regulator does not want that power, and a second reason is that it seems to us more appropriate that individual banks feel the consequences of their breach. The system itself does not have a mind to breach the rules; it is individual banks that do so. It is thus appropriate for the sanctions to apply to individual banks.
In addition to the electrification of the ring fence, has the Minister considered adding a bit of barbed wire on top? We should look at depositor preference, so that deposits rank above the bondholders to give extra security. What are the Government’s thoughts on that at the moment?
The Minister is absolutely right to say that the reputation of our banks has never been lower. We hope that we will start to see the important changes we need. One reason for that reputation is the experience that many small businesses had with interest rate swap agreements. While many welcome the FSA announcement on that, there are still some concerns about whether people will really consider that they have had justice at the end of the process. Will the Minister confirm what representations he has made to the FSA about what it should find during the deliberations, and will he give us any assurances that the interest rate swap problems we have had in the past will not reappear in future?
The hon. Gentleman raises a very important point. I met the Federation of Small Businesses and the Bully-Banks organisation and I conveyed their concerns to the FSA, which the hon. Gentleman knows is set up to be the independent regulator. I think most people were relieved that the FSA proposals of last week will result in compensation for the affected businesses within a rapid time frame. What happened is totally unacceptable, and is another feature of the scandalous decline in reputation that the banks have suffered. Small businesses in particular have a right to regard their bank manager as someone who acts in their interests, rather than someone who flogs them dodgy products that they do not need in the first place. That is a breach of trust in banking. I am absolutely insistent that the FSA should conclude this process, giving full recompense to those who have been mis-sold products.
The retail ring fence is a good idea, but the real game-changer for banking will be the introduction of full bank account number portability, because it will break open the oligopoly banks. Does my right hon. Friend agree that it is also important for the Payments Council no longer to be controlled by the big banks? Breaking open competition and introducing new challenger banks is of key importance.
I thank my hon. Friend for the effort that she has devoted to promoting this agenda. It seems to me that if there is to be genuine competition, people should have a choice of banks, and it should be easy, not difficult, for them to make changes. I hope that the work that my hon. Friend is doing will be reflected in the policies that we are enshrining in the Bill, and I look forward to detailed discussions with her about how that may be possible.
If the public are to have confidence in the new system, they need to know that lawyers or bankers will not be able to circumvent the ring-fencing regime. Can the Minister come up with a better justification for the Government’s not taking a full reserve power for full separation, in order to protect the public, than those that he has produced so far?
The hon. Gentleman is right: we need to protect the ring fence from the ingenuity of the lawyers who are sometimes in the vicinity. The history of financial regulation shows that banks have been able to discover ways of circumventing the rules, which is why we have given the regulator robust powers to insist on the full separation into retail and investment of any bank that makes any attempt to breach those rules.
I think it important for the responsibility exercised by remuneration committees in particular to have regard to the experience of ordinary working people up and down the country. I see no reason why the way in which bonuses are thought about in boardrooms in the City should be any different from the way in which they are thought about in any other industry.
I welcome the Minister’s statement, which confirmed the Government’s policy on ring-fencing the banks and its extension to electrification. Does the Minister agree that some of the products or derivatives of investment banks—particularly fixed-rate mortgages—can offer certainty and security to retail customers, and that we need an intelligent debate about the issue?
My hon. Friend is right, but I think we have already had the intelligent debate. The Government asked the commission to look into that issue in particular and to make recommendations, and the commission expressed the interim view that it was reasonable—as my hon. Friend says—for simple derivatives to be provided from within a ring-fenced bank. However, it wants to reflect further on whether any of its inquiries into the culture of banking may have implications for that. We will await its conclusions.
Following the bank mergers, many regional banks and building societies have gone, and we have lost the investments that they would have made at local level. Will the Minister explain how the Bill will enable areas such as Yorkshire to benefit, and can he assure us that it will not be just the south-east that benefits from the increase in the number of banks?
The hon. Lady makes an excellent point. I should like very much to see banks in our great regional cities, as used to be the case: banks that can take deposits from local people and, knowing what local investment opportunities they have in the area, can establish a connection. So far it has been very difficult for new banks to obtain banking licences within a reasonable period, and to satisfy the regulatory requirements. We are doing all that we can to lower the barriers to entry, so that we can achieve exactly what the hon. Lady has described.
I welcome the proposal, as well as the fact that we are taking on the bully banks on interest rate swaps and clearing up the big banks, which have had grave deficiencies for a considerable time. Does the Minister agree that the Bill will also make it easier to create the local, regional banks that we need to provide the competition, access to finance and community trust we are trying to establish in places such as the north-east, where we are proposing a bank for that region?
My hon. Friend is right about that, and it may interest the hon. Member for Kingston upon Hull North (Diana Johnson) to know of the example that he and I were discussing in Newcastle recently. We were looking at ways in which we can make it possible for there to be a north-eastern or Tyneside bank that can specialise in the north-eastern economy.