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Financial Services Regulation

Volume 719: debated on Wednesday 16 June 2010


My Lords, with the leave of the House, I shall now repeat in the form of a Statement the Answer given by my right honourable friend the Chancellor of the Exchequer to an Urgent Question asked in another place earlier today. The Statement is as follows.

“Mr Speaker, in 1997 the right honourable Member for Kirkcaldy and Cowdenbeath, as Chancellor, established without any consultation and without telling Parliament the tripartite system to regulate the financial system. In doing so, he removed from the Bank of England its historic role in monitoring overall levels of debt in the economy.

It is well known that the late Eddie George was deeply unhappy with the decision. It is also well known that the tripartite system of financial regulation failed spectacularly in its mission to ensure stability in the financial markets, and the failure of certain banks cost the taxpayer a vast amount of money. Indeed, the British taxpayers funded the largest bank bailout in the world and it was only in Britain that we saw depositors queueing in the high street to get their money back.

The British people rightly ask how this new coalition Government will learn from the mistakes of their predecessor. The coalition agreement commits us to reform the regulatory system for financial services in order to avoid a repeat of the financial crisis. That is precisely what we will do.

First, on the structure of regulation, our plan is to hand over to the Bank of England the responsibility for macro-prudential supervision, which should never have been taken away from it. The tools for macro-prudential supervision are the subject of ongoing international discussions. We are playing a full part in that process at European and G20 level, along with the governor of the Bank and the chairman of the FSA. It is already clear that the tools will include capital requirements that work against the cycle rather than with it.

The coalition Government are also committed to handing to the Bank of England responsibility for the oversight of micro-prudential regulation. It is clear that the central bank needs to have a deeper understanding of what is going on in individual firms. My honourable friend the Financial Secretary will give further details of the institutional arrangements in a parliamentary Statement tomorrow. It is important that the institutions involved correctly follow their own internal procedures before those arrangements are made public, and the governor of the Bank is talking to the Court of the Bank this afternoon.

The coalition Government will also deliver on our promise to establish an independent commission on banking. The previous Government would brook no debate about the future structure of the banks, the relationship between retail and investment banking, how best to protect taxpayers and how to ensure greater competition in an industry that they actively sought to consolidate. The previous Prime Minister did not want anyone to challenge his opinions, but we cannot ignore this debate about the future of banking. Indeed, I want Britain to lead it. So we will establish the commission on banking to investigate these issues and it will be chaired by Sir John Vickers.

John Vickers is a former chief economist at the Bank of England, was one of the first members of the Monetary Policy Committee and is a former chairman of the Office of Fair Trading. He is a man of unquestioned experience, integrity and independence, who approaches this issue with an open mind. I am today placing in the Libraries of both Houses the terms of reference. We await the conclusions of the commission.

Unlike the previous Government, this Government are prepared to confront the difficult challenges of the regulation and structure of the banks. We are prepared to learn the lessons of what went wrong, even if they were not”.

My Lords, that concludes the Statement.

My Lords, I am most grateful to the Minister for repeating as a Statement the Chancellor’s Answer to an Urgent Question in another place. The Government’s proposal that the Bank of England assume responsibility for macro-prudential supervision and oversight of micro-prudential regulation clearly involves major disruptive institutional change in the FSA and the Bank of England. I look forward to examining the details of these institutional changes tomorrow.

The changes clearly diminish the future role of the FSA. The Minister cited the views of the late Governor of the Bank of England on the reforms of 1997. Given the major role played by the noble Lord, Lord Turner, in modern thinking on regulatory reform, will the Minister give the House some insight into the views of the noble Lord on these proposals?

The Independent Commission on Banking announced by the Chancellor could herald the most important change in the structure and operation of the British economy since the war, an even more important change than the big bang. Given this importance, will the Minister tell us more about the composition of the commission? In addition to Sir John Vickers as chair, will the Minister tell us whence the members of the commission will be drawn? I am asking not for names but for some insight into what an independent commission will look like. Does he agree that my noble friend Lord Myners would be an ideal member?

Will the Minister also clarify the relationship between the work of the commission and the Government’s stance at the G20 meeting in Seoul in November? The Minister will recall that the G20 communiqué of September 2009 declared:

“We commit to developing by end-2010 internationally agreed rules to improve both the quantity and quality of bank capital and to discourage excessive leverage”.

That means that the Seoul meeting will be crucial in settling many of the issues that are included in the terms of reference of the commission, but the commission is due to report, we are told, by September 2011. Is that not 10 months too late? In another place, the Chancellor declared that the Government intend “to lead the debate” in the G20 forum. If that is so, does it not suggest that the Government will need to have made up their mind on a number of key regulatory issues before the commission reports? Will the Minister also tell the House whether Her Majesty’s Government support the G20 commitment to the establishment of internationally agreed rules, given that such rules will, of course, bind Her Majesty’s Government?

In discussing the Urgent Question, the Chancellor of the Exchequer suggested in another place that Her Majesty’s Government will follow the US authorities in requiring that all derivative instruments be traded on markets with central counterparties. Will the Minister confirm that that is indeed the Government’s position?

As we heard from the Minister, the Chancellor the Exchequer, referring to the tools of macro-prudential supervision, told another place:

“It is already clear that the tools will include … requirements that work against the cycle rather than with it”.

Is the Minister aware that Jacques de Larosière, the former head of the IMF, told the Economic Affairs Committee of your Lordships’ House on 10 March last year that the use of such tools of cyclical management is akin to the use of fiscal policy and that they therefore involve a significant transfer of power from the Executive and the legislature to the regulatory authorities, in this case the Bank of England? Given this extraordinary increase in the powers of the Bank of England, will the Government be considering changes to the governance of the Bank? Is it right that the role of chairman and chief executive should be combined in the person of the governor, an arrangement that diminishes the role of the court and seriously limits the public accountability of the Bank?

I am grateful to the noble Lord for his large number of questions. I will attempt to deal with as many as I can.

First, the noble Lord drew attention to the noble Lord, Lord Turner, and asked for his views. That gives me the opportunity to commend the noble Lord, Lord Turner, for the work that he has done to help to frame and lead the debate, after the financial crisis, on what instruments are appropriate in the new world. I should say that both the noble Lord, Lord Turner, as chair of the FSA, and the governor of the Bank have been fully involved in the development of these reform proposals. It is vital that this continues, particularly during the transition period.

The noble Lord then asked about the membership of the commission. I can say that the Government will announce the full membership of the independent commission shortly. Membership will require a well balanced set of skills and experience covering banking, business, competition, consumer issues and regulation. I note that the noble Lord makes a pitch on behalf of the noble Lord, Lord Myners. The noble Lord, Lord Myners, is shaking his head—he does not want to be part of the commission, or perhaps, although he has very many talents, he is too modest to put his name forward now. However, I note the pitch on his behalf.

The noble Lord, Lord Eatwell, then asked a number of questions about the G20. I assure him that, on many aspects of the regulatory architecture going forward, we need to make sure that there are indeed internationally agreed rules and that, by putting in place the structure that we have announced today, we will be able to lead the debate in the G20 and at the European level about the appropriate tools for the Bank of England going forward. Although the noble Lord talked about tools in relation to the banking commission, I think that the relevant question is: what are the appropriate tools for the Bank of England to carry out its new mandate? I certainly agree with him that we should lead the debate on that.

The noble Lord also talked about cyclical management tools. I take it that he agrees that we need a tool-kit that will work against the cycle, rather than the previous set of tools, which amplified the effect of the cycle, and that it is absolutely critical that that tool-kit is in the hands of the Bank of England, which will be charged with responsibility for identifying issues of debt building up in the economy. However, not only will the Bank be charged and enabled to identify the build-up of debt but it will have the tools to deal with that. What was missing before is that no one was in charge of either identifying or dealing with the problems that were arising. In the new structure, the Bank of England will clearly have both the means to identify the problems and the tools to deal with them.

As for matters of bank governance, those I put in the category of institutional arrangements, which we will come back to once there has been a further Statement.

My Lords, I welcome the Minister’s repeat of the response to the Urgent Question in the other place; it is good that we have this information before the Mansion House speech tonight. I also welcome the appointment of Sir John Vickers, a man ideally suited to chair this commission.

The speech by the right honourable gentleman the Chancellor of the Exchequer is charged with political overtones. It seeks to rewrite history. The Chancellor must rise to the standards and callings of his office and focus more on the future and the strategic issues and challenges rather than making cheap political points. This ill becomes a holder of one of the great offices of state. He must remember that, now the election is over, he has a duty to govern and perform an effective ministerial role and no longer act as a purely political spokesman. We want leadership from this Chancellor of the Exchequer, not soundbites.

A clear error in the Statement is a reference to the support that the taxpayers provided to the banking system, but no reference at all to the fact that the taxpayers now have a gain on the support that they showed to the banking system in excess of £10 billion, a considerable amount of money that could, for instance, be used to capitalise a new bank to support lending to SMEs.

The devil as always is in the detail. One of the problems with the commission is that its report will be too late. As my noble friend Lord Eatwell said, the Seoul meeting of the G20 will be the critical decision-maker on the structure of banking globally, yet this report will come well after Seoul. Surely it is right that there should be an interim report from Sir John Vickers before Seoul, so that we can test the Government’s position in Seoul against the recommendations coming forward from Sir John Vickers and his group.

I have a number of questions, which I raise with some fear that they may not be answered. We are still waiting for answers from the noble Lord, Lord Henley, to questions asked during the Queen’s Speech debate and an answer from the noble Lord, Lord Sassoon, in relation to the debate on competitiveness. It is unfortunate to see that the Treasury is already lagging in terms of response to questions.

Will the Minister explain where macro-prudential regulation morphs into micro-prudential oversight? In the first sentence the Minister says that macro-prudential regulation should never have been taken away from the Bank of England, but in the second sentence he says that the Government are still developing their thinking on macro-prudential supervision.

My Lords, perhaps I may remind noble Lords that, although brief comments and questions from all quarters of the House are allowed, Statements should not be made the occasion for an immediate debate.

I am asking questions, as I have made clear. I am just into the third minute and I beg the House’s indulgence to ask one or two other questions.

One more question. I believe that the Minister should make it clear whether this proposed commission is likely to lead to the breaking up of the British banking system. If so, he should make a clear statement to that effect. Not to do so would be to run the risk of a false market in the securities of our major banks.

I thank the noble Lord, Lord Myners, although I think that he may have forgotten that he is no longer on the Front Bench. He raises a lot of points. I find it remarkable that, on a day when the Chancellor of the Exchequer has made an historic Statement about restoring the role of the Bank of England, the noble Lord seeks to denigrate my right honourable friend’s announcement. This is a remarkable and important Statement, putting the Bank of England back to where it should have been, from where it was removed in 1997. Let us remember that.

Among other things, the noble Lord says that the report of the banking commission will be too late. It will not be too late, but, of course, this work should have started months ago. The previous Government would brook no discussion of the structure of banking, notwithstanding some very clear steers, not least from the report of the Select Committee on Economic Affairs of your Lordships’ House, Banking Supervision and Regulation. I think that the noble Lord, Lord Eatwell, was even a member of the committee and the sub-committee that worked on the report. The report, dated 2 June 2009, states that,

“the tripartite authorities in the United Kingdom … failed to maintain financial stability and were found wanting in dealing with the crisis”.

Among other things, it goes on to state:

“The Committee recommends that the Government”—

that is, the Government in June 2009—

“should as a matter of priority revisit the tripartite supervisory system in the United Kingdom”.

So it ill behoves the former Minister, the noble Lord, Lord Myners, to say that things are too late.

As to questions of reporting, it will be up to the banking commission to decide what it will do by way of interim reports.

My Lords, does the Minister agree that the formation of the independent Monetary Policy Committee was actually a very good move by the previous Chancellor and has provided both a proactive and a reactive ability to set interest rates? Will he therefore reassure us that the structure and remit of that committee is not going to be tampered with? On the other hand, we know—and the Statement reaffirms—that the tripartite system was an absolute disaster. It was a happy merry-go-round between the FSA, the Treasury and the Bank of England in the good times which then became a disastrous “blame-go-round”. With regard to speed, referred to by the noble Lords, Lord Eatwell and Lord Myners, does the Minister remember that when the Northern Rock Bill went through this House, it was pointed out that in 2006 the FSA had noticed that Northern Rock was a problem and had marked it for review in 2009. That is how disastrous the FSA’s role was in this situation, so speed is of the essence. Can the Minister assure us that the measures set out in the Statement will be put in place quickly?

On the role of the Governor of the Bank of England, whether he is chairman and chief executive put together, the reality is that every senior banker I have spoken to in the past has said that whenever the Governor of the Bank of England called, they would jump, react and listen—and it worked. I am delighted to hear that powers of supervision are to be granted back to the Bank of England. My only worry is that it will not be like the commission and take place in September 2011. Will the Minister reassure us that these powers are going to be repatriated to the Governor of the Bank of England quickly?

I am grateful to the noble Lord, Lord Bilimoria, for those comments. I can confirm that the MPC has indeed served the country well and that there are no plans to change its remit. I also agree that the word “disaster” is entirely appropriate and that the FSA got itself into a mindset in which there was far too much of a box-ticking approach and too little consideration for the big picture. But to be fair to the authority, when the whole question of Northern Rock blew up, it did then go on to make a candid, frank and rapid assessment of what went wrong.

I note the noble Lord’s point about the need for speed, and I think we should come back to that after my honourable friend the Financial Secretary to the Treasury has set out further details of the institutional arrangements.

My Lords, I congratulate the Government on transferring these responsibilities back to the Bank of England where they ought to have remained all along. I have just two questions, since I think that that is the convention on Statements.

First, my noble friend has referred to a “toolkit” for macroeconomic management. May I ask him yet again to ensure that the Debt Management Office, which was also transferred from the Bank of England to the Treasury, should be taken back into the Bank so that it can take an overall view of the monetary policy aspects of macroeconomic management? Secondly, my noble friend will have seen widespread press reports recently about another commission on banking—a private enterprise commission, so to speak. Have the Government had an opportunity to study its report and form a reaction to it?

I thank the noble Lord, Lord Higgins, and share with him what he says about the Bank of England. It is clear that the macro-prudential toolkit will likely focus on capital liquidity and leverage, and it is for further consideration as to what other tools may be appropriate. On the other work that has been done by the Which? Commission and people in other countries, it should remind us that whether it is in the US, at the European level or by the cross-party Which? Commission here, just about everyone except the previous Government was getting on with looking at the structure of the industry. That emphasises why we should waste no time in getting on with the commission’s work now.

My Lords, no one doubts that at the time the FSA was very poor in its regulatory responsibilities, but does the noble Lord agree that not many others were much better, including the then Governor of the Bank of England? Nobody gave any serious warning of the looming crisis. Now we are told that we are to have a new quango or commission. What evidence is there that the new tools to be given to the Bank of England—tools that could readily have been given to the noble Lord, Lord Turner, and the FSA, which is already in place and seems to be doing a fair job at the moment—will mean that it does any better?

My Lords, I should point out to the noble Lord, Lord Barnett, that the Bank of England was indeed drawing attention in its financial stability reports to the debt crisis and some of the looming debt problems, but did not have the tools to deal with it. In his Mansion House speech in June 2009, the governor himself commented that even under the partially patched up regime that the previous Government put in place,

“it is not entirely clear how the Bank would be able to discharge its new statutory responsibility if we can do no more than issue sermons and organise burials”.

It is all very well having some of the new tools in place, but they need to be in the right hands—those of someone who can bring the responsibilities together.

My Lords, following the question of the noble Lord, Lord Bilimoria, I underline the importance of the Government proceeding with speed in this area. The Minister will be aware that a number of senior staff at the FSA have announced their intention to leave that body and that morale there is extremely low. Can he impress upon the Chancellor of the Exchequer the need to proceed quickly with institutional changes so that the period of uncertainty—and, therefore, the period during which supervision is undertaken with less rigour than we would wish—is minimised?

My Lords, I thank my noble friend Lord Newby for drawing further attention to the fact that we need to deal in an appropriate way with all the personnel issues. The system has failed but there are extremely good officials in the Bank of England, the FSA and elsewhere working on these matters. It is imperative that we act as sensitively as we can to enable them to carry on with their important work, particularly at a time of continuing financial fragility. While there will be a tension with the desire for speed, the need for legislation and so on, we are discussing these points with both the Governor and the chairman and chief executive of the FSA.

My Lords, as many people next week will face a substantial cut in their standard of living, will the commission deal with the issue of pay and bonuses within the banking industry? If not, who will and when?

The remit of the banking commission has been placed in the Library of the House. Fundamentally, it refers to reducing systemic risk, moral hazard, firm failure and promoting competition. It will be up to the commission, but I am sure it would value any input from the noble Lord, Lord Brooke, or anyone else from this House who wishes to remind it of the linkage between pay and bonuses, or anything else, and the commission’s remit.

My Lords, these Benches send our congratulations to the Chancellor on his decisive action and his strategic leadership in dealing with the consequences of 13 years of a disastrous experiment with financial regulation in this country. For all that the Benches opposite want to airbrush it out of history, we must never let them forget that the experiment which started 13 years ago was one of the worst in the history of our financial system. It is good that our Government are now dealing with it. We shall wait for the detail to emerge and then have a further debate, but would my noble friend remind the noble Lord, Lord Eatwell, in relation to governance—which I am sure would benefit from a review in the context of wider responsibilities—that there has been a separate chairman of the Bank of England since last year, when Sir David Lees was appointed to that position?

I am grateful to my noble friend Lady Noakes for reminding us that all this has gone on for far too long and that the 13 years compares ill with the few days in which the Chancellor of the Exchequer has gripped the problem. I shall certainly relay her remarks on to my right honourable friend. I am also pleased to confirm what my noble friend said about the governance of the Bank.

My Lords, perhaps I may ask the Minister what I hope is a severely practical question: can he do all this without primary legislation?

My Lords, I am grateful for the noble Lord’s question but we should come back to the issue of institutional arrangements once my honourable friend the Financial Secretary has made his Statement tomorrow.

With respect, I am not talking about institutional arrangements. The noble Lord has set out the structure that the Government wish to introduce: can they do so without primary legislation? It is a simple point.

We will put in place as soon as possible an interim financial policy committee. Whether we need legislation and what the nature of that legislation is rather critically depends on the institutional arrangements we are going to put in place. That is something we will come back to when I repeat, no doubt, my right honourable friend’s Statement tomorrow.

My Lords, since this subject is going to come before your Lordships’ House on many occasions, no doubt, in the next year or two, could we make sure that there is a degree of rigour in the choice of the terminology? In this Statement, we read about macro-prudential supervision and micro-prudential regulation. Regulation is not the same as supervision, however, and vice versa. Some of the problems in the past few years have been due to the fact that people who should have been regulating were not. They were supervising but were not in a position to do so. We need to get this straight.

I was chairman of the audit committee of an international bank for many years. I never came across micro-prudential regulation because regulation inherently is not a micro subject. It is the framing of rules which the industry must observe and which individual bodies must observe. It is not a detailed operation; that is left for supervision. This confusion contributed to the fact that it was not always done as it should be.

My Lords, I thank my noble friend Lord Stewartby for pointing out one of the critical parts of the construct we will put in place. I apologise for using the new terminology—I hope he will forgive me—but the macro-prudential regulator also needs to have oversight of the micro-prudential regulation, the supervision of individual firms. That is part of what we will come back to tomorrow.

My Lords, the previous Government passed a financial services Act putting in new arrangements for tripartite regulation. The question remains as my noble friend Lord Richard asked. Do the Government intend to bring in a new Bill, revising the Act now on the statute book? If so, how soon will they bring such legislation? Have they prepared a draft Bill?

My Lords, I thank the noble Lord, Lord Desai, for pressing on this point of legislation. I remind your Lordships that there was, indeed, provision in the Queen’s Speech for legislation. With the changes we are proposing it is safe to assume that primary legislation will be required. It will come forward in this Session. We should talk more about that, however, in relation to the further detailed arrangements.

My Lords, will the Minister share with the House his views on “too big to fail”? Does he not agree that within the capitalist system it is quite reasonable for investment banks to make enormous sums of money when things are good, but quite wrong for the taxpayer to bail them out when things go wrong? Has he any thoughts about how investment banks should be broken up into units small enough to be allowed to fail?

My Lords, I thank my noble friend for that. This goes to the heart of the questions which the banking commission will, I hope, answer for us.