The Chancellor of the Exchequer (Mr George Osborne)
I beg to move, That the Bill be now read a Second time.
It is a pleasure to move Second Reading of the Bill. It is the product of many years of thinking, policy work in opposition, extensive consultation in government and impressive pre-legislative scrutiny in Parliament. I want to thank at the start the Joint Committee on the draft Financial Services Bill, which has made it a better piece of legislation, the Treasury Committee for challenging us to develop clearer lines of accountability in the Bill and the Treasury’s own Bill team, who have worked so hard for the past 20 months to produce the Bill before us.
The genesis of the Bill is obvious—the biggest failure of economic management and banking regulation in our country’s history. Its purpose is clear as well—to dismantle the disastrous tripartite system created 14 years ago and replace it with a structure of financial oversight that supports successful, competitive financial services while protecting the British taxpayer from the risk that those services run.
Of course, the Bill is not the complete answer to what went so spectacularly wrong. It should be seen alongside the Basel reforms to capital and liquidity, the living wills and resolution regimes that have been developed and the reforms to the structure of banking proposed by the Vickers commission. It is not by itself a sufficient response to the mistakes of the past, but it is absolutely necessary.
Let us remember what happened. Over the last decade before the crash, Britain experienced the biggest increase in debt of any major economy in the world. The total of household, corporate, financial and public sector debt in the UK reached a staggering 500% of gross domestic product. Our banks became the most leveraged in the world, and whether it was Northern Rock’s 120% mortgages secured on wholesale funding, Halifax Bank of Scotland’s catastrophic commercial property deals or the Royal Bank of Scotland’s reckless decision to buy ABN AMRO after the markets had frozen, such things did not attract the intervention or, it seemed, the concern of Britain’s tripartite regulatory system.
That system had been established as a by-product of the decision by the new Labour Government to give the Bank of England independent control of monetary policy. Without warning to the Bank, or anyone else, that institution was stripped of its historic responsibility for regulating the banking system, which was given to a new Financial Services Authority. It was a fateful decision, and one that we now know very nearly prompted the resignation of the then Governor of the Bank, the late Eddie George.
The comment 14 years ago by the Conservatives’ then shadow Chancellor, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), during the passage of the Bank of England Bill, which created the tripartite system, was remarkably prescient. If he does not remember it, I will remind him of what he told the House. He warned that
“with the removal of banking control to the Financial Services Authority…it is difficult to see how and whether the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.”—[Official Report, 11 November 1997; Vol. 300, c. 731.]
He was spot on. However, at the time he and the Opposition whom he led through the Division Lobby were lone voices.
Fourteen years later, the general consensus is clear. There were fundamental flaws in the tripartite system right from the start, which are today painfully apparent to the whole world. The first and most serious flaw was that no one in the tripartite system saw it as their job to monitor risks across the whole financial system. The Bank of England focused increasingly on its monetary policy responsibilities; the FSA looked at individual firms, but was more focused on tick-box regulation of individual products than on the prudential health of whole businesses, let alone the financial system; and the Treasury took the fatal decision to run down its financial services division, turning the whole area into an under-resourced backwater in the Department.
The tripartite committee did not meet once in an entire decade, so no one was looking at the whole system or at the staggering build-up of debt in the economy and leverage in the banking system. As Lord Turner said in his review of the regulatory response to the banking crisis:
“The failure to do this analysis and to take action on it was one of the crucial failures of the years running up to the financial crisis.”
Claire Perry (Devizes) (Con)
As my right hon. Friend is setting out what is essentially a political failure, will he enlighten the House on whether the report on one of the great victims of that failure—RBS—names any Members of Parliament as being specifically involved in the problem?
Mr Osborne
Well, the report names Tony Blair, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) and the shadow Chancellor. One of the interesting things is that the shadow Chancellor was, of course, instrumental, as I understand it, in creating the tripartite committee. We will hear in his response a detailed defence of the decisions he took.
Ed Balls (Morley and Outwood) (Lab/Co-op)
Will the Chancellor share with the House the contents of the conversation I had with him in Downing street in December following the publication of that report and following my conversation with the chair of the FSA?
Mr Osborne
It sounds like the right hon. Gentleman cannot remember it himself. No doubt he will use the time allotted to him to tell us about the role he played both as the adviser at the Treasury during the years when the system was created and as City Minister when the ABN AMRO deal was signed off, and about his role in the Cabinet when it decided on its response to those things.
Ed Balls
When I asked the chair of FSA, he said he could have inserted into the footnotes of that 400-page report any number of quotes from the Chancellor, who was at the time in opposition. Will he remind the House of any of his quotes from that period on the dangers of excessive regulation that could have been included in the FSA report?
Mr Osborne
First, the FSA report on RBS is worth reading and stands by itself. The chairman of the FSA chose to put the right hon. Gentleman’s name in it, which clearly irks him. Secondly, in opposition, we not only voted against the creation of the tripartite committee but consistently warned about growing debt in the economy—not just me, but my predecessors as shadow Chancellor. We will see tonight whether the Opposition vote against our proposed arrangements. We made those warnings; we are now proposing reforms to ensure that those sorts of things do not happen again.
Ed Balls
Perhaps the Chancellor should remind the House that the shadow Chancellor at the time also voted against Bank of England independence. In November 2006, the then shadow Financial Secretary, who is now Financial Secretary, said:
“Effective light-touch, risk-based and principles-based regulation is in the interests of the sector globally.”—[Official Report, 28 November 2006; Vol. 453, c. 995.]
Could that quote have been included in the FSA report?
Mr Osborne
I think the key word is “effective”, which is clearly what was lacking. If the right hon. Gentleman wants me to read out the legion of quotes that we have from him as City Minister, how about this one? He said:
“I believe that we are right to avoid prescriptive, heavy-handed regulation in Britain. Indeed, I believe that while it is Bank of England independence that is regularly cited as the Government’s most significant financial reform, the establishment of the FSA has been as important for Britain”,
and that
“It is important the FSA continues to deliver a light-touch and risk-based regulatory approach.”
We have ended up having a ding-dong across the Dispatch Box, but if he is against what we propose to do to change the system he created, will he vote against the Bill tonight?
Ed Balls
The Chancellor also said in June 2006 that this
“regulation has been burdensome, complex and makes cross-border market penetration more difficult.”
In June 2005, he said that
“we need to build our capacity to deliver world-beating goods and services, whether it is complex financial derivatives pioneered in the City of London”.
Are those quotes that could have been included in the FSA report? There are many more.
Mr Osborne
This series of interventions is a little bit self-obsessed, and it reminds everyone of the right hon. Gentleman’s central role—
Mr Osborne
Well, that is a bit like the John Cleese sketch—the right hon. Gentleman started it by creating the biggest banking crisis in this country’s history. We are trying to clear it up. That is what this Bill is about. In all those interventions, we heard not one word about whether he will support what we are doing to clear up the mess he created.
Mr Edward Leigh (Gainsborough) (Con)
Does not the ding-dong of the last four or five minutes illustrate the dangers of political interference in regulation? Once we get back to the subject of the Bank of England, and given that the top 1% of taxpayers provide 28% of total taxes, can we have regulation in the future less by populism on bonuses, salaries and the rest, and more by the raising of the right eyebrow of the Governor of the Bank of England?
Mr Osborne
The key issue in our regulatory system that we are seeking to restore is judgment by the regulator, and I will explain how the Bill will enable us to do that. I agree with my hon. Friend that the financial services are an incredibly important industry for this country. They employ more people than any other industry in Britain and, crucially, its proper regulation is not only good for the economy, but essential to prevent taxpayers from being exposed to what they have been exposed to in recent years.
Sir Peter Tapsell (Louth and Horncastle) (Con)
As we are in the mood for recollection, and I am one of those who strongly opposed the tripartite system of supervision when it was introduced, may I say that I very much welcome the Bill? However, the whole strategic object of what we should be doing now is to ensure that we get rid of the shibboleth of the bank that is too big to fail. I doubt whether this admirable Bill, even combined with the Vickers report, will go anywhere near to restoring Glass-Steagall. We will not get rid of banks that are too big to fail until we get back to Glass-Steagall.
Mr Osborne
My right hon. Friend has been entirely consistent in the views he has expressed, and he was right all along about the weaknesses of the tripartite system. On the explicit issue of whether to introduce the actual physical separation of retail and investment banking—in other words, to introduce Glass-Steagall- like legislation in Britain—I asked John Vickers, who everyone accepts was an independent and extremely expert person for the job, to look specifically at this issue with his commissioners. Some of them were probably inclined at the start to believe that physical separation was the right way to go, but when they examined the issues—and they took an enormous amount of evidence—they believed that the same objective of protecting retail customers from the collapse of an investment bank, and giving the authorities of the day greater powers to protect retail customers as they resolved problems in a retail bank, could be achieved through the ring-fencing proposal that the Vickers commission put forward. That would also maintain some of the benefits of one part of the bank being able to support another part in trouble.
The commission explicitly considered the Glass-Steagall issue, but decided that ring-fencing was a better approach. We will introduce legislation that I hope and intend will have pre-legislative scrutiny in the House during the coming Session. I hope that that will be an opportunity for Parliament to examine the issue that my right hon. Friend rightly raised. As a country, we must decide once and for all how to proceed with the structure of our banking industry.
Charlie Elphicke
I hesitate to take the Chancellor back to the FSA report on the failure of RBS, which says that political pressures to be light-touch were partly to blame for the bank’s collapse. What exactly were those political pressures, in his understanding, and what lessons can be drawn from them?
Mr Osborne
My hon. Friend is tempting me back into the fertile territory of the shadow Chancellor’s role in the banking crash, but not least because I do not want to provoke a reaction, I think that I should probably move on to the flaws of the system that the right hon. Gentleman helped to create as Treasury adviser.
Mr Osborne
Maybe we should just exchange our notes; then we could spare the House.
Andrew Bridgen (North West Leicestershire) (Con)
To take the Chancellor back to my experiences in 1997, I was in business, and my bankers at the time were at the Royal Bank of Scotland. Shortly after the general election in which the Labour Government were elected, I had a meeting with my bankers. I expressed my disappointment at the election result, but they were extremely upbeat. I asked them why, and they said, “Labour Governments are never any good at regulating the financial services industry. We’re going to make a lot of money in the banking industry.” Were not those words prophetic?
Mr Osborne
For a while, they did make an awful lot of money. Unfortunately, they then lost an awful lot of money, which is one reason why we are here talking about the legislation.
Before any Minister comes to the House of Commons to ask for an existing regulatory regime to be replaced, it is incumbent on him or her to explain why it is felt to be necessary, so let me explain. Another flaw of the current system is that when the crisis hit in 2007 and 2008, no one knew who was actually in charge. The Treasury Committee of the last Parliament, led by John McFall, said in its report:
“The biggest failings of the Tripartite’s handling of Northern Rock were that it was not clear who was in charge, and, because the Tripartite took a minimalist view of their respective responsibilities, necessary actions fell between three stools.”
The House of Lords Committee, which also did some excellent work on the matter during the last Parliament, said that
“the tripartite authorities in the United Kingdom…failed to maintain financial stability and were found wanting in dealing with the crisis, in part because the roles of the three parties were not well enough defined and it was not clear who was in charge”.
In other words, a whole system of financial regulation had been created by the previous Government, yet no one knew who was in charge.
That led to the third fatal flaw that became apparent. The Government of the day, accountable to Parliament and the public for the use of taxpayers’ money, simply did not have the powers to do what they felt necessary when the crisis hit. My predecessor as Chancellor said in his recent memoir:
“The whole system depended on the chairman of the FSA, the Governor of the Bank and the Chancellor seeing things in exactly the same way. The problem was that in September 2007, we simply did not see things in the same way.”
That, of course, led to the confusion in the autumn of 2007. As he said,
“I could not in practice order the Bank to do what I wanted”,
even when taxpayers’ money was at stake.
On top of all those flaws in the tripartite system, it is not as though customers were being better protected from the mis-selling scandals that have beset the industry for the past 30 years. The payment protection insurance saga happened on its watch. In 2001 alone, firms were forced to pay more than £1 billion-worth of redress to consumers who were mis-sold products.
Those are the flaws of the tripartite system—flaws that cost this country in output more than 10% of our entire gross domestic product, flaws that have led to hundreds of thousands of people losing their jobs, flaws that wiped out the savings of millions of small shareholders, and flaws that saddled an entire country with more than £1 trillion of debt. The British people need to be confident that mistakes have been acknowledged and that lessons have been learned. The legislation that we have put before the House today shows that they have been learned.
Ed Balls
Without wanting to disrupt too much the Chancellor’s political narrative, I ask him to remind the House of the regulatory structure and of who was in charge of regulation during the scandals involving the Bank of Credit and Commerce International, Barings, Equitable Life and Johnson Matthey. Were those scandals all the result of the tripartite structure, or might some of them have preceded it, at a time when the Bank of England had the lead on banking and financial regulation?
Mr Osborne
I would make this important point to the right hon. Gentleman: of course those were failures of regulation, and of course the Bank of England was in charge of banking regulation when they happened, but they were failures of regulation in individual firms—detailed work was done afterwards to find out what went wrong and to try to put it right—not failures across the system. The collapse of Barings did not bring down the whole system, whereas the run on Northern Rock created shockwaves around the world. The decision in 1997 to remove the Bank of England’s macro-prudential role was a fatal mistake.
Mr Osborne
The right hon. Gentleman calls it rubbish, but let me say this: he was instrumental in a way that no one else in the Labour party was in designing the system that I am proposing to dismantle. He is well within his rights to get up and say, “I defend the system that I created. I think that it is the best way of regulating financial services, and what you have come up with is wrong”, but if he believes that, he should have the courage to vote against the Bill tonight. If that is his view, he should get up and say, “I’m going to vote against your approach because I don’t think it’s the right one”, but I do not think that he has the courage to do so, because he is trying to escape his past, rather than defend it.
Ed Balls
I will set out our position in my speech, but the idea that by making the Bank of England independent and adding a second deputy governor with responsibility for macro-prudential financial stability on both the Monetary Policy Committee and the FSA board, the Bank’s role in macro-prudential stability is diminished or removed is plain wrong. The Chancellor should not be allowed to state things that are outwith the facts.
Mr Osborne
The right hon. Gentleman is perfectly entitled to that view, but it is not shared by the Select Committees that have considered the matter, including during the previous Parliament; it is not a view shared in the work by the FSA on what went wrong and the failure to conduct macro-prudential analysis; and it is not a view shared by almost everyone who has looked at the failures of the British regulatory system during the period in question. He is perfectly entitled to his view—I am not surprised that he holds it, given that he was responsible for creating the system—but if it is his view, he should have the courage to vote against our proposals to dismantle it.
Claire Perry
Nor was the view of the right hon. Member for Morley and Outwood (Ed Balls) that of the Governor of the Bank of England, who said:
“All we can do at present…is to write our Financial Stability Report and give speeches.”
The Bank was completely emasculated by the right hon. Gentleman's reforms.
Mr Osborne
My hon. Friend reminds me that in the Mansion House speech in 2009, I think, the Governor, appointed by the previous Government, said that the Bank was being asked to do things that it had not been given the powers and tools to do. It was a striking speech—I cannot remember whether the right hon. Gentleman was there—but the difference between the views expressed by the Chancellor and the Bank Governor in the space of one evening was striking.
I will now go through the details of the Bill and see whether it commands all-party support. I shall go through what we are doing to address the flaws that I have identified in the existing system. First, we are going to establish a new macro-prudential authority in the Bank of England to monitor overall risk and levels of debt in the financial system. Secondly, we are making the Bank of England the single point of accountability for financial stability, ensuring that there is a decisive answer to the question, “Who is in charge?” Thirdly, the Bill ensures that in a crisis, when taxpayers’ money is at stake, the power to act sits with the Chancellor of the day, accountable to Parliament. Fourthly, the legislation creates a strong conduct regulator that is able to give its undivided attention to promoting competition and protecting consumers. Let me take each in turn, and in some detail.
First, the responsibility to monitor risks across the system falls to the new Financial Policy Committee in the Bank of England, established by clause 3 and entrusted with responsibility for the stability of the whole system. Its job will be to identify bubbles as they develop, spot dangerous interconnections, warn about poorly understood financial instruments and take action to stop excessive levels of debt building up before it is too late.
Jonathan Evans (Cardiff North) (Con)
My right hon. Friend will be aware that the risks in the banking sector have been shown by the recent crisis to be rather different from those in the insurance sector, for instance. He will also know that the Joint Committee on the Bill recommended that a member of the Financial Policy Committee should be someone with insurance experience, but that does not appear in the Bill. Perhaps he could explain why not.
Mr Osborne
We do not want to prescribe in the Bill the qualifications of the external members of the Financial Policy Committee. That would be a mistake. However, I would obviously want to ensure that the external members—I will say something about this shortly—have broad and current experience of the financial system. There is an issue, as I will set out, about how this House—and, indeed, the political system—approaches conflicts of interest. In other words, we have to make a trade-off between appointing as external members to such bodies people who actually know what is going on in financial services and, at the same time, wanting to direct conflicts of interest, being careful not to rule out anyone simply because they work in financial services. The Select Committee on the Treasury and the Joint Committee that looked at the Bill have made an important recommendation for us all: to be careful about creating a system in which no one who has current experience of financial services sits on the bodies that regulate individual firms or, more importantly, system-wide risks, and that includes insurance.
Charlie Elphicke
With the tripartite system, of which I believe the shadow Chancellor was the architect, a tick-box culture of regulation grew—a one-size-fits-all approach, and that sort of thing. Will the Chancellor tell the House a bit about how we will get rid of that tick-box culture and move towards a culture of more individual and tailored regulation?
Mr Osborne
The key thing is to empower the regulators both to exercise judgment and then to be able to do something about it. One reason for locating both the macro-prudential role and, when it comes to individual firms, the micro-prudential role in the central bank is the culture in central banks—not just in the Bank of England, but in central banks generally—of exercising judgment and acting on it. I very much want to encourage that. My hon. Friend is right: there was no shortage of regulation, in that sense, in 2006-07. RBS complied with every bit of regulation in its decision to try to take over ABN AMRO; it is just that no one felt empowered to say, “Is this the right thing, for this firm and for the financial system, at a point when the financial markets have already frozen up?”
Rather than wait for this Bill to pass through Parliament, we have gone ahead and created the Financial Policy Committee on an interim and non-statutory basis. It is already meeting regularly to assess risks across the financial system, such as the need for banks to provide for adequate capital before determining the distribution of profits, as well as drawing attention to specific products, such as exchange-traded funds, whose excessive use may be a cause for concern. It has already produced two impressive financial stability reports.
Kerry McCarthy (Bristol East) (Lab)
At the time of the collapse of Barings, I was working at Abbey National Treasury, which was involved in a joint venture trading derivatives with Barings. I was one of those brought in to clear up the mess, for which—I hasten to add—I was not responsible.
It was clear from what happened at Barings that there was a huge gulf between what the traders understood about their trading activities and what the management understood, and an even bigger gulf between the management and the regulators at the Bank of England. The Chancellor has said that the new committee will look at exotic and complex financial instruments, but how can he guarantee that its members will really understand what is happening on the trading floor?
Mr Osborne
That is the task that we are giving them. They must ensure that they have the necessary expertise and resources. The interim committee is looking across the piece—I will deal later with the role of regulating individual firms—but it is interesting that its two financial stability reports highlighted a specific financial instrument, the exchange-traded fund, and expressed concern about its rapid growth. I am not aware that the regulatory system that existed in 2006-07 spotted, for example, the rapid increase in the use of collateralised debt obligations. It did not warn about specific instruments and the growth in their use. The financial stability reports of the committee that we have already set up demonstrate an attention to particular complex market instruments and their potential systemic risks.
Ed Balls
Will the Chancellor explain why, if the key is locating regulation in the central bank, those pressures before 2007 were not spotted by the US Federal Reserve, which was the central banker and the regulator? He is giving a very UK-specific analysis. What about all the other examples of central banks failing to spot these growing problems?
Mr Osborne
There are examples of central banks, such as the Canadian and Spanish central banks, which were much more aggressive in counter-cyclical regulation, and which felt empowered to make the decisions. In the United States—I am sure that the right hon. Gentleman has had conversations about this with the United States Treasury Secretary and the Federal Reserve chairman—things have been taken to the opposite extreme. There is a plethora of regulators—too many different regulators. The single biggest problem in the United States probably occurred in the insurance industry, in the American International Group. There was an insurance regulator based in one particular state and it was not something for which the Federal Reserve had a responsibility. Ben Bernanke has talked about the role of central banks, and I shall say something about his view later.
I think it right for us to create a Financial Policy Committee that is on a statutory footing. I have talked about the importance of its having external independent members who are able to provide market expertise and challenge received opinion, but I believe—and this may be something that we can tease out in Committee—that we should think about how we can get the balance right, and avoid conflicts of interest while also bringing in people with real expertise.
What makes the Financial Policy Committee that the Bill will establish such a radical departure in terms of policy making is that we are not only asking it to assess the risks throughout the financial system, but proposing to give it powerful tools with which to do something about those risks. The Monetary Policy Committee assesses the risks of inflation and whether it will overshoot or undershoot the target, and then alters interest rates as appropriate. The Financial Policy Committee will be given macro-prudential tools with which to hit the financial stability objectives set out in the Bill, and to reduce and remove systemic risks to the stability and resilience of the UK financial system.
Sir Peter Tapsell
The shadow Chancellor raised the question of both Barings and BCCI, and it underlines the nature of the regulatory problem. The Barings failure was largely a failure of the Singapore regulatory authority. I was closely involved with Singapore as an adviser to the monetary authority at the time. The Government in Singapore were horrified by the fact that a British rogue trader had not been spotted, but it was the responsibility of Singapore to find him.
As for BCCI, which I also knew well in my stockbroking days, its regulator was in Luxembourg, which was the reason why the Bank of England did not spot the problem until too late. That problem will continue. There are considerable limits to what any regulator can ever achieve. In worldwide banking, there will always be people overseas who are up to mischief, and no regulator based in London can ever conceivably know what they are all up to.
Mr Osborne
My right hon. Friend makes a very good point about the international nature of this business. We must try to design a regulatory system that protects the British taxpayer from rogue traders and illegal activity in individual firms that might create broader systemic risks. We must also be alert to broader risks building up in the system—for example, when trying to moderate the impact of a credit boom. This is not just a question of dealing with individual risks and individual firms; it is also a question of dealing with risks across the financial system.
My right hon. Friend is completely right to draw our attention to the need for regulators to work together better internationally. The least well-developed piece of the financial regulatory system, post-crash—the one lesson that has not yet been taken far enough—involves the way in which we can better protect the world from large international businesses that live internationally but die nationally, such as Lehman Brothers. Co-ordinating resolution regimes across the different jurisdictions will be the work of international bodies such as the G20 and the Financial Stability Board in the year ahead.
Stephen Gilbert (St Austell and Newquay) (LD)
My right hon. Friend has talked about the macro-prudential powers that the Bank of England will have, beyond its monetary policy powers, to step in and help to cool down the economy. Those powers will include setting the ratio for the multiples of earnings that can be borrowed to secure a mortgage, which could have serious consequences across the country. However, those regimes have not yet been published or discussed. Can he give me an assurance that, when those macro-prudential powers are published, the House will have a debate on them?
Mr Osborne
Yes, I can give that assurance. This is an important point that I want to flag up so that the House understands what we are collectively embarking on. We are seeking to give the Financial Policy Committee the tools to help to dampen down a credit boom or to help in a credit crunch. As my hon. Friend has said, it will be able to alter the maximum loan-to-value ratios in mortgage lending in order to curb an unsustainable rise in house prices. It will also be able to do the reverse, should we face unwanted house price deflation. It will also, potentially, be able to alter capital requirements for banks, in a counter-cyclical way. I should say that these are just possibilities; they are potential tools that the committee might want to use.
One key feature is that the measures will be independently applied, so there will be no political pressure to, say, keep a housing boom stoked up as an election approaches. Another key feature is that the Financial Policy Committee should act symmetrically—that is the intention of Parliament. Its job will be to act not just to moderate a credit boom but to try to alleviate a credit bust. The precise tools that we give the FPC have yet to be determined, as my hon. Friend has just said. We have sought the advice of the interim organisation that we have created, and it will come to us with proposals for the kind of tools that the permanent body will need. We will then seek the approval of both houses of Parliament through the affirmative resolution procedure—which will of course involve a debate—before we pass those tools over.
I freely accept that we are in largely uncharted policy- making territory, here or anywhere in the world. Many other jurisdictions are considering such measures, but we are ahead of most of them. Surely the experiment of making no attempt to moderate the credit cycle—letting the bubbles grow and burst, then cleaning up afterwards—has been an unmitigated disaster, and we would be failing if we did not look for an alternative approach.
Mr George Mudie (Leeds East) (Lab)
One suggestion from the Treasury Select Committee was that the Chancellor should not send the proposals to a statutory instrument Committee. That would involve a 90-minute discussion and the proposals would not be amendable. He should instead allow the matters to be debated seriously on the Floor of the House. I wonder why he would think it attractive and helpful to send them upstairs where they cannot be amended; that would suggest a foregone conclusion by the governing party that they would be accepted.
Mr Osborne
I would certainly be happy to have a debate about that on the Floor of the House. It is a decision for my colleagues, the usual channels and so forth, but in my opinion the important tools given to this body will have a real impact on our constituents. It will affect the kind of house they are able to afford on their income—the bread and butter of people’s daily lives—and it is important for us all to understand that as we create instruments of policy.
We are seeking to address another flaw in the system by making the Bank of England the single point of accountability when it comes to the prudential regulation of banks, large and complex investment firms, building societies and, as my hon. Friend the Member for Cardiff North (Jonathan Evans) reminded us, significant insurance companies. A new prudential regulation authority will be established within the Bank to perform that major new function.
As the shadow Chancellor pointed out, the Federal Reserve in the US already has responsibility for the prudential regulation of major banks, but not of other financial firms. Let me cite what Ben Bernanke said in what I believe was testimony before Congress:
“The Federal Reserve’s role in banking supervision complements its other responsibilities, especially its role in managing financial crises...During the current crisis, supervisory expertise and information have repeatedly proved invaluable in helping us to address potential systemic risks involving specific financial institutions and markets and to effectively fulfil our role as lender of last resort...The Fed’s prudential supervision benefits, in turn, from the expertise we develop in carrying out other parts of our mission—for example, the knowledge of financial and economic conditions we gather in the formulation of monetary policy.”
I raise this matter because at the heart of the new arrangements we are seeking to establish an understanding that today’s financial markets are so interconnected that the failure of a single firm can bring down the whole system, and risks across the system can bring down many single firms. These feedback loops are what proved so devastating in the crisis.
Some critics of the legislation now accept the need for a macro-prudential Financial Policy Committee, but still doubt whether we should give the Bank responsibility for the micro-prudential regulation of individual firms, too. I would argue that because the interconnections are so great, the FPC could not do its job without knowing what is going on in firms, and a prudential regulator could not do its job without knowing about risks across the system. The best way to combine the insights is to put them both under the aegis of the same institution—the central bank.
I understand that the shadow Chancellor is concerned that our Bill does not create additional lines of communication between the deputy governors of the Bank and the Chancellor, bypassing the Governor, so he might like to explain what he meant. I considered the idea, but rejected it. I think we need to force the Bank of England itself to reconcile its internal differences rather than create additional lines of accountability between the Chancellor and a deputy governor. Perhaps the right hon. Gentleman—[Interruption.] He says, “Dear me”, so perhaps he will explain why he wants to institutionalise a regime in which the No. 2 constantly undermines the No. 1.
The Joint Committee and the Treasury Select Committee have raised what I regard as a far more relevant concern—the accountability of the Bank of England, given its important new responsibilities. We have listened carefully to the recommendations from both Committees and while I do not propose to abolish the court of the Bank of England, I do propose to give it important new powers to hold the executive Bank to account. The Governor and the court of the Bank of England have agreed that a new oversight committee, consisting of the non-executive members of the court, should be created. This group of external independent people will ensure that the Bank discharges its financial oversight responsibilities correctly; it will be able to commission both internal and external reports on the Bank’s policy makers’ handling of particular events and particular periods of policy making. Those reports will be published, with market-sensitive information protected, if necessary.
The Governor is of course, as is the case today, a key figure in the arrangements. It is important that he or she is not only independent of the Government of the day, but seen to be so. The recent experience of reappointing Governors after their first five-year term has expired has not been a very happy one. It has created unnecessary uncertainty and called into question political confidence in the Governor. Although I would hope that this Government would handle the whole thing better than their predecessors did, it makes sense simply to eliminate the possibility of discord entirely, so schedule 2 provides that the next Governor of the Bank of England and his or her successors will serve a single eight-year non-renewable term. That is a sensible reform.
The third flaw in the current arrangements was the fact that the Chancellor of the day felt he did not have the necessary powers to act in the interests of taxpayers. This is another area where the work of the Joint Committee and the Select Committee have proved invaluable. The Bill makes it clear that the day-to-day responsibility for financial stability lies with the Bank of England. We do not want the Treasury second-guessing that work. Beyond setting the parameters for the regulatory system, the Chancellor should become involved only if there is a material risk to public funds. The responsibility in this regard is made clear in the Bill, and in the memorandum of understanding that we have drawn up with the Bank. The Bill makes it clear that the Governor has a responsibility to inform the Treasury immediately as soon as there is a material risk of circumstances arising in which public funds might reasonably be expected to be used.
The Bill is also rightly clear that the use of public funds is entirely a decision for the Chancellor, as he or she is the person accountable to Parliament, and through Parliament to the public. My predecessor is, again, revealing about the limitations of the current arrangements in his book:
“My frustration was that I could not in practice order the Bank to do what I wanted. Only the Bank of England can put the necessary funds into the banking system…I asked Treasury officials if there was a way of forcing the Governor’s hand. The fact that we had given the Bank independence had a downside as well as an upside.”
Of course my predecessor had, as any Chancellor does, the general power of direction over the Bank that the Bank of England Act 1946 provides, but that general power of direction has never been used, so it is a nuclear option that might blow up anyone who tries to use it. That was the conclusion that my predecessor reluctantly came to.
That is unsatisfactory. The Bank must, of course, be protected from politicians who want to use its balance sheet against the wishes of the Governor simply because those politicians want to avoid using the Government’s balance sheet, but the Bank should not be able to use that as an excuse to withhold its services as an agent from a Government prepared to use its own Government balance sheet. Otherwise, in many situations that becomes, in effect, a veto on an elected Government’s fiscal decision making.
The Bill and the memorandum of understanding give the Chancellor of the day not only the right to be informed when there is a material risk to public funds, but the right to ask the Bank to analyse different options that might be available to deal with the risk, and in the newly added clause 57 the Bill gives the Chancellor a defined power of direction to require the Bank to provide liquidity to a particular firm or to put a particular firm into resolution or to provide liquidity to the general system, provided that the Chancellor does so using the Government’s own balance sheet, and makes that clear.
Ed Balls
Can the Chancellor envisage a situation in which the Governor of the Bank of England may judge not to inform the Chancellor that there is both a material threat to stability and the need for the use of public funds—and if a Governor were to make such a judgment not to inform the Chancellor, would that be his personal judgment?
Mr Osborne
First, the Bank Governor will have a statutory obligation to inform the Chancellor, so they would be failing in their statutory obligations—
Ed Balls
This is important, so I will ask the question again. Can the Chancellor envisage a situation in which the Governor of the Bank of England would choose not to inform the Chancellor because in the Governor’s view there was not a material threat to financial stability, and therefore no need for the use of public funds? And if the Governor chose not to come to the Chancellor in such a situation, would that be the Governor’s own personal judgment—for example, if the deputy governor for financial stability or the head of the Prudential Regulation Authority took a different view?
Mr Osborne
The legislation makes it clear that that is the Bank’s responsibility. Of course, the Governor is chair of the key committees—the Financial Policy Committee and the Prudential Regulation Authority—that would make these judgments, but we have to require the Bank to resolve its internal differences. Obviously the Bank has its own procedures to deal with any dispute, which it will develop, but we have deliberately created boards and committees that have independent members and external oversight. Of course there are three deputy governors, but ultimately—perhaps that is just going to be a point of disagreement between me and the right hon. Gentleman—I do not think it is right to create different lines of accountability from the Bank of England to the Chancellor of the day. The Chancellor has to deal with the Bank, and with the person of the Governor. However much legislation we write and however many clauses we put in place, those who do my job and that of the Governor also have a very important responsibility to get on with each other and to try to make that arrangement work.
Ed Balls
The problem is that in the legislation, in the memorandum of understanding and in the Chancellor’s own answers there is a gap, a hole and an ambiguity. In his speech he referred to the judgment of the Governor, then he talks about the judgment of the Bank and then he says that the Bank must resolve whether the Governor’s view is the same as that of the rest of the Bank. I repeat my question: can the right hon. Gentleman envisage being concerned by a situation in which the Governor chooses not to come to him asking for funds because the Governor believes that there is not a systemic risk, even if it is coming to the Chancellor’s attention that other senior statutory office holders in the Bank have a different view? Can the right hon. Gentleman envisage such a situation, when the Governor chooses, for example —as he said, this is a judgment for the Governor—that the moral hazard overrides the systemic potential threat?
Mr Osborne
As I say, it is the responsibility of the Bank to inform the Government: that is what the legislation and the memorandum of understanding make clear. The Bank, of course, has its own procedures for coming to a view within the Bank. Creating a system where a deputy governor could bypass the Governor and go directly to the Chancellor would be a recipe for division at the Bank. We have to force the Bank to come to a collective view and then deal with the Government of the day.
Ed Balls
This goes absolutely to the heart of the issue. The reality is that if we have a tripartite or quartet system in which the statutory regulator is not the same as the Governor, the head of the PRA or the head of the Financial Services Authority can have a different view and say that in their judgment the threat to the company and to the system is so great that it justifies action, even if the Governor judges that the moral hazard risks from intervention override that threat, and that therefore there should not be a request for public funds. In the current system, the Chancellor would hear from the head of the FSA—from Adair Turner—whereas under the new system and the memorandum of understanding he will not hear, other than from the person of the Governor. My question to the Chancellor is: does he worry about that and about the potential instability and misinformation to him that could come as a result of the memorandum of understanding that he has drafted?
Mr Osborne
The first point I make to the right hon. Gentleman is that the Bank Governor does not come to the Government when he thinks public funds should be used; he does so when—this is set out in the legislation— there is a material risk that public funds may be required. Of course the decision to use public funds would be one for the Chancellor of the day.
The second point that I make is that the problem with the tripartite committee was one set out in my predecessor’s book: in autumn 2007 there were three different views and there was no way of reconciling them—and there was no clarity about who had power and responsibility. What we are talking about here, and what I am explaining, is a new power of direction. Of course any Chancellor would think very carefully before using it, but this power makes it absolutely clear that once there is a material risk to public funds, the Chancellor of the Exchequer has not only a power, as the current person doing the Chancellor’s job has, to authorise the use of public funds—that is what my predecessor did in respect of the Royal Bank of Scotland—but a power of direction to provide liquidity to an individual firm and liquidity to the system. Those were not powers that my predecessor had. Of course, as I will come on to discuss, there are certain constraints and things that have to be done to inform people before they are used, but these are new powers that we are giving so that the Chancellor of the day does have powers, provided that he or she is prepared to use the Government’s own balance sheet.
Ed Balls
The whole point—this is so important, and goes to the heart of one of the debates in the Committee—is that in the historical examples given by the Chancellor, when the then Chancellor wanted to act and others in the regulatory system did not, the Governor of the Bank of England was one of those who did not. In the situation that the Chancellor has now set up—article 20 of the memorandum of understanding states this clearly—there will be a personal relationship between the Chancellor and the Governor. This ‘twin-peaks’ system is a personalised conversation, in that the Chancellor hears the Bank’s view from only one individual. I ask him again: would he be worried if he did not hear a view in such circumstances? Is this really a matter for the Governor’s judgment, as the MOU says, or should the statutory office holders—the head of the Prudential Regulation Authority, the Financial Services Authority and the deputy governor from the Financial Policy Committee—have not only a view but a right for that view to be heard by the Chancellor and then by Parliament? That is my question.
Mr Osborne
We can explore this at greater length in Committee, but I say to the right hon. Gentleman now that we are trying to avoid a situation in which different people in the Bank think they have a direct line to the Chancellor. We are trying to require the Bank to resolve its internal differences, and we are creating various committees, balancing the membership between external and internal members, but we absolutely see a central role for the Governor of the Bank—and I do not make any apologies for that.
I was not in the room when some of these conversations happened in recent years, but as far as I can see, and as has been reported since, it is clear that personal relations between the Bank Governor and some of the very senior members of the Government completely broke down. That is not a situation we want to see in the future, and I think that the person who does my job and the person who does the job of the Governor of the Bank of England have an obligation to get on with each other and maintain the personal relationship; that is a very important part of both our jobs. No amount of legislation or MOU—[Interruption.] The right hon. Member for Morley and Outwood (Ed Balls) says that it is not about getting on with each other. Frankly, it is about working at this very important relationship at the top of our financial system, and not getting into a situation in which those involved are not able to pick up the phone and talk to each other. Yes, of course we are institutionalising the arrangement, creating memorandums of understanding and so on, but I do not want to detract from the fact that there is also a personal responsibility for the Chancellor of the day and for the Bank of England Governor to ensure that they can work together in the national interest.
Mr Geoffrey Robinson (Coventry North West) (Lab)
I hate to intrude on this Socratic dialogue between the Chancellor and my right hon. Friend the Member for Morley and Outwood (Ed Balls), but can the Chancellor not see that in these critical decisions there will be differences? I do not draw a direct comparison with the military, where the Chief of the Defence Staff has a right of appeal or a direct line of communication with the Prime Minister, but in these critical decisions it is not enough for a hard-headed, narrow-minded or too-forceful Government to insist on a point of view. A release valve is needed to reach a balanced judgment, and the No. 2s in all the crucial areas should have the right to come straight to the Chancellor. Good foresight and good judgment are involved in that.
Mr Osborne
The other point that I would make—the Financial Secretary to the Treasury is reminding me of it—is that the Treasury sits on all those committees as a non-voting member. It is in on all the discussions, with a Treasury official sitting in on and understanding the debate.
Mr Osborne
I give way to my hon. Friend the Member for West Suffolk (Matthew Hancock), who has worked in the Bank of England.
Matthew Hancock (West Suffolk) (Con)
Does the Opposition’s proposal not seem to be an attempt to re-create a tripartite structure in which there is more than a relationship between one and one other? We have problems with the concept of “too big to fail”, and the example of Barings has been cited. That bank did not bring the rest of the system down: the directors ended up losing their jobs and the person responsible went to prison. Will the Chancellor consider the scale of that failure, compared with what happened in 2008 when the whole system collapsed?
Mr Osborne
My hon. Friend is absolutely right. There was a failure of regulation with Barings, but the collapse of Barings did not bring down the financial system, either in the City of London or more broadly.
Mark Field (Cities of London and Westminster) (Con)
My right hon. Friend is absolutely right about this. Surely the issue is the clarity of the relationship between the Governor and the Chancellor of the Exchequer in relation to the confusion in the tripartite system. That would not prevent, and should not prevent, any Governor worth his salt from at least making it clear that there were other views within the Bank, albeit that it was his judgment in the advice to the Chancellor. That gets away from some of the confusion about whether we are looking to sweep away an integral part of the tripartite system.
Mr Osborne
My hon. Friend makes an extremely good point. This is all about the Governor’s responsibility to do his or her job in managing the Bank, and about the Bank coming to a collective view. The job of the Chancellor of the day is to manage the relationship with the Governor. For all the virtues of the tripartite system that the shadow Chancellor seems to be extolling, I understand that those at the principal level in the tripartite system did not meet for 10 years; perhaps he can correct me, as he was there.
Ed Balls
The tripartite standing committee met every month at the deputy level, from its inception until the crisis. The responsibility for triggering a full meeting of principals was in the hands of the Governor and the head of the FSA. Throughout that entire period either the systemic regulator, the Bank, or the individual firms regulator, the FSA, could have triggered a meeting, but did not. There were two people who could have triggered that, but in the Chancellor’s world there will be only one trigger. That is my concern.
Mr Osborne
The right hon. Gentleman keeps saying there were two people, but there were three principals in the tripartite committee. It was chaired by the Chancellor of the day—the Chancellor whom he advised—but as I understand it, that Chancellor never convened the tripartite regime at the principal level. [Interruption.] I can tell the shadow Chancellor that under the tripartite regime now—that is still the current arrangement—there are meetings on at least a monthly basis with myself, the Governor of the Bank, the chairman of the FSA and so on. In the tripartite system that the shadow Chancellor saw at first hand, the principals, including the Chancellor of the day, never in 10 years—we are not talking about 10 weeks or 10 months—convened a meeting of the principals. The fact that he says that it was entirely the job of the Governor of the Bank of England or the chairman of the FSA to call a meeting, when the chair was the Chancellor, who could have called a meeting at any time he wanted, is very revealing about what went wrong.
Mark Durkan (Foyle) (SDLP)
Is the power to direct, to which the Chancellor has referred, contingent on the Governor of the Bank of England formally advising the Chancellor of a material risk, or could the Chancellor exercise that power to direct on the basis of his own concerns, which may have been conveyed to him from the industry, Parliament or any other intelligence? The Bank might be loth to advise the Chancellor formally in that way if doing so would trigger the power to direct, because it might want to avoid that, and the wider concerns that it might raise. Once the Bank has had the “Shall we tell the Chancellor?” discussion, what should the Treasury representative do during that discussion and after it?
Mr Osborne
As I have said, when the Bill is passed, the statutory responsibility will be on the Bank of England to inform the Government if there is a material risk that public funds might be used. We are trying to get away from a system in which it is the Treasury’s responsibility to try to regulate the financial system on a day-to-day basis in peacetime. We are giving the responsibility and clear accountability to the Bank of England so that it will trigger the arrangement by informing us of a material risk. As is set out in the legislation, twice-yearly meetings between the Chancellor and the Governor to discuss these things are required, although there could also be further meetings. Once the Bank has informed the Treasury of a material risk, which it will have a statutory responsibility to do, there will be a power of direction. I should just say, for the sake of completeness, that if we wish to keep the details of the use of this power confidential, I or my successors would have to inform, on a confidential basis, the Chairs of the Treasury Committee and the Public Accounts Committee, so that representatives of Parliament were informed.
The fourth and final flaw in the system that we are trying to address is that customers and consumers too often get a raw deal from the regulation of financial services. The disappearance from the high street of names such as HBOS and Bradford & Bingley has inevitably reduced competition in an industry that was becoming more and more consolidated even before the crash. The existing regulator’s dual prudential and consumer remit means that it cannot give consumer interests its undivided attention. In response to the Vickers commission and the Joint Committee, the new authority will have an explicit responsibility to promote competition. We have listened to the Joint Committee and announced that we will also bring the regulation of consumer credit into the authority’s remit so that, for the first time, the regulation of all retail financial services will be under one roof, and things like payday loans will be subject to tougher regulation.
Stella Creasy (Walthamstow) (Lab/Co-op)
The banks that have gone from my high street have been replaced by high-cost credit companies that offer exorbitant rates of interest. I know that the Financial Conduct Authority will have powers over competition. Does the Chancellor accept the argument, made by many Opposition Members, that price inevitably reflects competition, so it is absolutely right that the FCA should look to regulate the price of those products and finally tackle the legal loan sharks?
Mr Osborne
The Department for Business, Innovation and Skills has commissioned a review of the cost of credit, but I think that the Bill takes a significant step on that, partly because of the Joint Committee’s recommendations, because the regulation of all retail financial services will now come under the remit of the FCA. It will have the power to ban specific products, to name and shame particular firms and to publish details of misleading promotions, so there will be considerable new powers that were not previously available. On the hon. Lady’s specific concern about the price of credit, that is something the Government are looking at. Of course we are also looking at the recommendations of the FSA’s recent report on RBS—I do not wish to reopen that issue—in relation to legislation on the sanctions available for bank directors who fail in their role.
The Bill is an important piece of legislation. I believe that it replaces the confused and dysfunctional system that presided over the biggest banking crisis in our modern history. It creates clear lines of accountability by putting the Bank of England in charge of monitoring and dealing with debt levels in our economy. However, no amount of new clauses, powers or institutions can substitute for something for which Parliament cannot legislate: judgment. There were thousands of pages of financial regulation in existence in 2007, but that did not stop the queues forming outside Northern Rock or prevent RBS from making its final, fatal, bid for ABN AMRO. I hope that we have learned that financial stability depends not simply on a checklist of regulation, but on individuals within our regulators feeling empowered to trust their judgment, and our giving them the power to act on it. By putting our central bank in charge of monitoring overall levels of risk and the soundness of individual firms, we are trusting in its judgment. By giving the elected Government of the day the power of direction in a crisis, we are trusting in their judgment, and that of Parliament, to which they are accountable.
Britain has paid a higher price than most for what went so badly wrong in our banking system. The errors of the economic policy that led to such a boom have cost every taxpayer dear. Today we show that we are learning the lessons and passing on to our successors a better system than the one we inherited. I commend the Bill to the House.
Ed Balls
I made it very clear that I was not defending any particular regulatory structure. I do not think the crisis was caused by institutional structures in particular, because other countries with different structures had a crisis as well. We will seek to support the Government in reforming and strengthening the system of financial regulation, including through the addition of the FPC and the new powers of the PRA and FCA. However, all those individual agencies are being given statutory authority in the Bill.
The Bill cannot be setting out a binary or twin-peak system, because there will be the Treasury and the Governor of the Bank of England, then underneath him there will be a deputy governor who is also the head of the PRA, another who is also on the Financial Stability Committee, the head of the FSA—also a statutory office holder—and another deputy governor on the Monetary Policy Committee. The Bill is designed to bring in not a twin-peak system but a quartet system, which will be more complex than a tripartite one.
There may be very good arguments for having a quartet system and for splitting the FSA into the PRA and the FCA, and I support the FPC, but the system will be more complex, not simpler. The Chancellor is trying to fudge the matter by giving the impression in the memorandum of understanding that it will be not a quartet system but a twin-peak system, because things will be sorted out between him and the Governor.
That is not an ad hominem point. Other Chancellors and Ministers from Governments through the ages have known very well that there is an inevitable conflict in financial regulation between the regulator, examining systemic risks from individual firms, and the guardians of the system, who worry about potential systemic risks on the one hand and moral hazard on the other. The Chancellor’s role is as the guardian of the public purse and wider financial stability, so there are different points of view.
My advice to the Chancellor is that to try to subsume all those points of view into a separate institution away from him, without transparency and with multiple and overlapping roles for different statutory office holders, but then say, “I’m only going to deal with the Governor,” is ahistorical, deeply foolish and flawed. If the Chancellor changes and clarifies the Bill, we will be pleased, but at the moment it is a terrible fudge.
Mr George Osborne
I hear the right hon. Gentleman’s criticism of our proposals, but what is his response to what my predecessor says? He has written:
“The whole system depended on the chairman of the FSA, the Governor of the Bank and the Chancellor seeing things in exactly the same way. The problem was that, in September 2007, we simply did not see things in the same way.”
My predecessor, who went through the banking crisis, says that he was dealing with a system in which differences of opinion were not accommodated. The system could not adapt to them, and there was no power of override. What is the shadow Chancellor’s response to my predecessor’s criticism?
Ed Balls
My response to the current Chancellor, who has not yet dealt with such a crisis, is “Welcome to the real world.” In reality, there will be times, as there have been, when the regulator, and potentially the deputy governor for systemic stability, will say, “We are really worried about the potential read-across from this particular large institution to the financial system more widely.” However, the Governor will say that for reasons of moral hazard and the desire not to set false precedent, he does not believe funds should be provided.
As the Chancellor has said, it is really hard when there is a disagreement between the regulator and the prudential systemic overseer or the Governor. The Chancellor has elected to take the power to make the decision in those circumstances. I agree with that strengthening of his powers, but—
Ed Balls
The Chancellor does not listen. He wants to play this game so much that he does not hear. I agree with the increase in his powers. He is right to take them, but he cannot use them unless the Governor comes to him and says, “I fear a crisis may be building,” having made a judgment about moral hazard outwith the views of the heads of the PRA, the FCA and the FPC.
In the structure set out in the Bill, the statutory office holders will be formally kept out of the room under the Chancellor’s own memorandum of understanding, which is foolish. I understand why it has happened—it will be easier to negotiate. In all the years when previous Chancellors wanted clarity, it was hard to negotiate. However, negotiating the wrong clarity in a way that keeps information away from the Chancellor is not stabilising and in the public interest but destabilising, opaque and against the public interest. The Chancellor should take some advice from people who have seen that not working and ensure that he hears the views of the people to whom he is giving statutory responsibility in the Bill. That is my very strong advice, and I hope he will listen to it.
The Financial Secretary to the Treasury (Mr Mark Hoban)
This has been a thoughtful debate. We have had 21 speeches, led by the Chairman of the Joint Committee, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), who was supported by his colleagues on the Committee, including my hon. Friends the Members for Bury St Edmunds (Mr Ruffley) and for Warrington South (David Mowat), the right hon. Member for Newcastle upon Tyne East (Mr Brown) and the hon. Member for Leeds East (Mr Mudie).
We have also heard from my hon. Friends the Members for St Austell and Newquay (Stephen Gilbert), for West Suffolk (Matthew Hancock), for Wyre Forest (Mark Garnier), for Cities of London and Westminster (Mark Field), for North East Cambridgeshire (Stephen Barclay), for Vale of Glamorgan (Alun Cairns), for Macclesfield (David Rutley), for Thurrock (Jackie Doyle-Price), for Wycombe (Steve Baker) and for North East Somerset (Jacob Rees-Mogg). There were some thoughtful speeches from Opposition Members, too, of which I would highlight those made by the hon. Members for Islwyn (Chris Evans) and for Foyle (Mark Durkan).
I shall deal with some of the issues that have been raised in the debate, and first with Europe, which hon. Members on both sides raised several times. It is absolutely right to ensure that, at a time when Europe is becoming increasingly important in determining the regulatory framework, we engage in the debate about Europe. We took on board the Joint Committee’s comments, and it is fair to say that the regulators and the Treasury already co-operate effectively on influencing the shape of European regulation, but it is also important that we get the regulation right to enable the FSA’s successor bodies to supervise firms based in the UK.
That is why, in the debate about capital requirements directive 4, for example, we seek to achieve a single rule book through high common minimum standards of capital, and to give the supervisors in the UK the flexibility to go further in imposing high levels of capital if they think it appropriate, given the structure and nature of banking in the UK. That will also enable them to introduce the reforms proposed by Sir John Vickers and his commission.
Several hon. Members raised the issue of the Financial Policy Committee, so let me explain why we have set it up. It is a fundamental part of the architecture, it ensures that there is a body tasked with identifying risk to financial stability and, crucially, it remedies a flaw in the architecture that the previous Government set up, giving it the power to tackle those risks.
Those powers are important. We talked about the macro-prudential tools that the FPC will have, but it will also be able to give advice on where the regulatory perimeter should be in order to tackle issues such as shadow banking. It is also worth pointing out, in response to a comment made two or three times this evening, that its objective is symmetrical: it is about financial stability and considering the impact of its decisions on the prospects for growth in the economy. That symmetry is absolutely important, and we have gone a long way to address the concerns that have been raised today.
As well as the FPC, we will also see a move to unite key parts of micro and macro-prudential supervision in the Bank of England, joining it to the Bank’s existing responsibilities for stability and monetary policy and removing a structural flaw that helped such disastrously unsustainable levels of risk to build up in the run-up to the financial crisis.
The reforms answer the question posed during that crisis: “Who is in charge?” There is currently confusion over who is in charge in a financial crisis, and that cannot continue. The Treasury Committee, the Joint Committee, the Governor and the previous Chancellor of the Exchequer all recognise that. The Government will end that confusion. The Bill makes it clear that as soon as there is a material risk to taxpayers’ money, the Chancellor will have targeted power to direct the Bank to take action. The responsibility for each part of that action is clear, whether it is with the PRA in triggering the use of the special resolution regime or with the Bank in the day-to-day responsibility for crisis management. As soon as there is a threat to public money, the Bank must notify the Chancellor of the Exchequer. That happens when there might be a risk. It does not prejudge what the decision should be. I think that that deals with the point that the shadow Chancellor raised early in his speech.
On consumer protection, the old regulatory structure not only failed to maintain financial stability, but let down consumers. As the FSA’s report into RBS made clear, the remit given to the FSA by the previous Government was too broad, covering both prudential and conduct-of-business regulations. Those require different cultures, experience and expertise. That is shown most acutely by the FSA’s failure to prevent the payment protection insurance mis-selling scandal. With prudential supervision at the Bank of England, we will have a regulator that is focused on conduct issues and driven by consumer protection, market integrity and promoting effective competition.
The FCA will be more proactive, transparent and accountable. It will have new powers to deliver better consumer outcomes, including the power to ban toxic products. It will promote effective competition so that consumers get a better deal. My hon. Friend the Member for North East Cambridgeshire talked about the risk appetite of the FCA. Let me make it clear that it will be much more likely to intervene to tackle consumer detriment than it has been in the past. That is an important advance that will protect consumers.
Across the House, there has been widespread concern about consumer credit. That matter has been debated this evening. The hon. Member for Walthamstow (Stella Creasy) took a narrow view about what one can do to protect consumers and focused on the total cost cap. Like my hon. Friends the Members for St Austell and Newquay and for Thurrock, I think that we need a broader range of powers to ensure that there is proper consumer protection for those who take out loans. There should be the same level of protection that people take for granted when they buy an insurance policy or take out a mortgage. The Bill gives us the power to transfer the regulation of consumer credit from the Office of Fair Trading to the FCA, giving a better deal for borrowers.
As my right hon. Friend the Member for Hitchin and Harpenden and others have said, our reforms are as much about the style of regulation as about the structure. They are about culture, focus and philosophy. A key failure of Labour’s regulatory system was its focus on tick-box regulation. The financial crisis demonstrated the inadequacies of that approach to bank regulation. That approach also helps to explain failures of conduct regulation, such as with PPI. Judgment and discretion will be at the heart of prudential and conduct supervision. We expect the PRA and FCA to be pro-active, to challenge and to intervene.
I believe that we will see a significant change in conduct regulation and prudential regulation, moving away from the detailed prescriptive rules of the past to giving the regulators the power and authority to intervene, exercise their judgment and spot problems as they emerge, rather than waiting to resolve them once the crisis has broken. That will tackle the broken system that we inherited. That style and structure of regulation let down consumers who were sold toxic products, taxpayers who paid the bill for the banking crisis, and those who relied on banks to finance their business or to enable them to buy a home. Our reforms will change the structure and style of regulation.
The Bank of England and the PRA will have clear responsibility for the stability of banks, insurers and the financial sector. The FCA will have the power to ban the sale of toxic products and to name and shame those who have let consumers down. The FPC, the PRA and the FCA will exercise the judgment and discretion that are needed to supervise financial services better across the UK. The Bill will help mend our financial system to benefit families, businesses and the taxpayer. I commend it to the House.
Question put and agreed to.
Bill accordingly read a Second time.
Financial Services Bill (Programme)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the Financial Services Bill:
Committal
1. The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
2. Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Tuesday 20 March 2012.
3. The Public Bill Committee shall have leave to sit twice on the first day on which it meets.
Consideration and Third Reading
4. Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.
5. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
6. Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.
Other proceedings
7. Any other proceedings on the Bill (including any proceedings on consideration of Lords Amendments or on any further messages from the Lords) may be programmed.—(Bill Wiggin.)
Question agreed to.
Business of the House
Motion made, and Question put forthwith (Standing Order No. 15),
That, at this day’s sitting, the Second Reading of the Consumer Insurance (Disclosure and Representations) Bill [Lords] may be proceeded with, though opposed, until any hour and Standing Order No. 41A (Deferred divisions) shall not apply.—(Bill Wiggin.)
Question agreed to.
Financial Services Bill (Money)
Queen’s Recommendation signified.
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purposes of any Act resulting from the Financial Services Bill, it is expedient to authorise—
(1) the payment out of money provided by Parliament of—
(a) any expenditure incurred under or by virtue of the Act by a Minister of the Crown or government department (apart from any expenditure to be met from the National Loans Fund), and
(b) any increase attributable to the Act in the sums payable under any other Act out of money so provided, and
(2) the payment out of the National Loans Fund of any increase attributable to the Act in the sums so payable under any other Act.—(Bill Wiggin.)
Question agreed to.
Financial Services Bill (Carry-over)
Motion made, and Question put forthwith (Standing Order No. 80A(1)(a)),
That if, at the conclusion of this Session of Parliament, proceedings on the Financial Services Bill have not been completed, they shall be resumed in the next Session.—(Bill Wiggin.)
Question agreed to.