Financial Services Bill

Lord Lawson of Blaby Excerpts

Wednesday 18th July 2012 Lords Chamber

[Lord Peston]

My Lords, I am very sympathetic to the amendment and to what has been said by my noble friends. Unlike them, I am much less optimistic about what can be achieved, if anything. First, I will give the personal side. When I was at school, I was indebted, and have been indebted for the rest of my life, to my teachers for the guidance they gave me on the subjects that were taught in school. My love of English literature and my love of mathematics are two very good examples. However, if someone had said “Now we are going to have a class in finance”, I cannot believe that it would have been other than a turn-off. It would not have been what I went to school for.

Times have changed. I agree with that. However, the other thing is that is amazingly difficult to explain to people even the most elementary examples of financial literacy. To give one example, which is one of my bête noire, I come from a family of gamblers. I know that gambling is a mug’s game because to be a successful gambler, there are only two possibilities. Either one is corrupt and has some inside information or one is claiming—with the bookmaker creaming 10% off the top—that one is 10% cleverer than anybody else around, and there is absolutely no reason to believe that. When I have tried to explain that elementary proposition in financial literacy, I have found it impossible to persuade anybody at all. That is my personal experience. It does not mean that we should not try, but it does mean that there is a genuine question mark over what we can achieve. I am not saying that we should not try, but I am pessimistic.

I turn to the technical side of financial literacy. Perhaps noble Lords have read a brilliant speech given by Andrew Harvey of the Bank of England in 2009. It is on the Bank of England website. My strong advice to noble Lords is to look it up under “Speeches” rather than “Publications”. I wasted a good hour knowing that it was there but unable to find it. It is a brilliant analysis of the behaviour of financial intermediaries—which is after all the essence of financial literacy—and it is based on network analysis, which is a rather esoteric part of mathematics. I will read one paragraph from Andrew Harvey’s lecture, which I strongly recommend.

[Lord Lawson of Blaby]

Andrew Haldane.

[Lord Peston]

Sorry—Andrew Haldane. I am not good on these things. Names are one of my Alzheimer’s problems. Mr Haldane says, in a typically short paragraph of his brilliant lecture:

“This evolution in the topology of the network”—

that is, the network of financial intermediaries—

“meant that sharp discontinuities in the financial system were an accident waiting to happen. The present crisis is the materialisation of that accident”.

Financial literacy means being able to understand those two sentences. I am not a bad mathematician but even I had difficulty with the topology of networks. That is the problem in this area. What you can teach at the level at which the noble Lord, Lord Flight, wants to teach, is very little indeed. As I said, that does not mean that we should not do it, but we should not delude ourselves that we can produce a financially literate population because most people simply do not have the mathematics to understand this kind of work. I cannot believe that anybody could write a non-mathematical explanation of what Andrew Haldane said.

Nothing I have said should stop us from trying—I am not going against the noble Lord, Lord Flight, on this—but financial literacy is not the easiest thing to achieve.

Eurozone

Lord Lawson of Blaby Excerpts

Monday 9th July 2012 Lords Chamber

[Lord Sassoon]

On the question asked by the noble Lord, Lord Harrison, about the cause of the weaker growth in this country, the Office for Budget Responsibility and other commentators have identified the eurozone as a major source of threat to our growth and of weakness. Significant parts of the eurozone are plainly now in recession. I agree with my right honourable friend David Lidington about the need for more Europe in many areas including, particularly, more completion of the single market. That is why it is important that the four-presidency proposal referred to in the Council conclusions at the end of June will include,

“concrete proposals on preserving the … integrity of the Single Market”.

That is critical, as are the many growth initiatives included in those conclusions.

[Lord Lawson of Blaby]

My Lords, we all wish to see a successful European economy, but is my noble friend not aware that the so-called success of the European Council a fortnight ago has already disappeared, the financial markets have put the interest rate on Spanish sovereign debt back to where it was before, nothing was achieved, nothing can be achieved in this way and the sooner that it is realised that this project, however well intentioned, is a terrible mistake, the better?

[Lord Sassoon]

I certainly agree with my noble friend that we delude ourselves if we think that words coming out of one meeting of European leaders are going to solve all the problems. Part of the problem seems to have been a belief that the crisis can somehow be dealt with by fine words. I believe that in the underlying work— whether on the two pack, the six pack, or the intergovernmental treaty—there is the beginning of a construct of great significance to underpin the eurozone.

Businesses: Tax Liability

Lord Lawson of Blaby Excerpts

Wednesday 13th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, before I get what I might call my noble friend Lady Trumpington’s question, “What on earth are we talking about?”, it might be helpful to give a little background. Landfill tax is payable by landfill site operators per tonne of waste put into their sites. It is sometimes called by the press “the skip tax”.

Recently HMRC responded to concerns expressed by some landfill operators that certain companies were not paying the correct rate of tax and in that process were disadvantaging those companies that were paying the correct rate of tax. There is no new tax policy here. The rates of landfill tax have not changed, but HMRC issued guidance in response to that request. Since the issuance of that guidance, there has been some misinterpretation which HMRC has sought to correct. I appreciate that there may still be some residual concerns, and I am very happy to facilitate a meeting. Because it is an operational matter, I suggest that the person who it would be most helpful to meet is the director at HMRC who is directly responsible, and I will help to set that up.

[Lord Lawson of Blaby]

This Question concerns Customs and Excise. Is the Minister aware that a report published by the Institute of Fiscal Studies last year pointed out that, while some unhealthy foods are subject to the standard rate for VAT, there are many other unhealthy foods which are zero-rated? Would he care to suggest to the Chancellor of the Exchequer that no unhealthy foods should be zero-rated? I am sure that the Chancellor could do with the additional revenue.

[Lord Sassoon]

My Lords, I think that we probably call it Her Majesty’s Revenue and Customs these days. That aside, I will of course pass on my noble friend’s representations on this important matter.

Financial Services Bill

Lord Lawson of Blaby Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Lawson of Blaby]

My Lords, the House will have listened with great attention to what the right reverend Prelate has just said with a mixture of expertise and eloquence. It was certainly unusual in one respect; he must be the first speaker from the Bishops’ Bench, certainly in my time in the House, who has come out as a former derivatives trader. This adds great weight to everything he said.

I hope the Minister will pay particular attention to the area on which the right reverend Prelate has focused, as he has on a number of occasions outside this House, of the arrangements and problems associated with payday lending and the people who require and use it. However, I will not follow him further down that route because other things need to be said about this long, highly complex and important Bill, which I warmly welcome.

Before I turn to the measures in the Bill, there is one thing of fundamental importance that cannot be put into it: the relationship between the Chancellor of the Exchequer of the day and the Governor of the Bank of England. Again, this is of fundamental importance. While it cannot be put into a clause of the Bill, that does not mean that it cannot be institutionalised, and I hope that my noble friend the Minister can reassure me that something will be put in place along the lines of what used to happen in the United States, although I do not know whether it still does. There were regular breakfast meetings between the Secretary of the Treasury and the Chairman of the Federal Reserve. The relationship needs to be institutionalised. Just because they get on well is not good enough. In my judgment, that needs to be done.

I approve of the broad lines of the Bill. The regulatory architecture that it introduces is a big improvement on what it replaces. As my noble friend Lord Sassoon has already pointed out, the so-called tripartite system introduced by Mr Gordon Brown in 1997 proved to be a dysfunctional disaster and did not cause, but certainly contributed to, the severity of the UK banking meltdown in 2008. What was particularly perverse about the Brown structure was that it destroyed and replaced the greatly strengthened system of prudential supervision that as Chancellor I put in place in the Banking Act 1987, with the indispensable assistance of the then Economic Secretary to the Treasury, my noble friend Lord Stewartby. I am glad to see that he is in his place and I hope that he will speak later today. I should like to refer to two specific aspects of the 1987 Act later in my remarks. While the new architecture is a great improvement, it may not be right in every respect. It will need to be monitored carefully to see how it works out in practice, and I trust that the Government will be prepared to modify it in the light of experience. That will almost certainly be necessary.

The most fundamental flaw in the tripartite system was not the removal of responsibility for the prudential supervision of the banks from the Bank of England. There is a valid case for that, as I spelt out in my memoirs some 20 years ago. The most fundamental flaw was yoking together in the FSA prudential supervision of the banking system and the conduct of business regulation, in particular consumer protection. Perhaps I may say that I disagree with the noble Lord, Lord Turnbull, on this point, although I agree with some of the other remarks he made. These are two completely separate activities requiring completely different skills, people, cultures and approach. While the intensely detailed, bureaucratic, box-ticking approach may have been appropriate for consumer protection, it was wholly inappropriate for the task of prudential supervision of the banks.

It was also a serious mistake, in my judgment, to separate responsibility for the stability of the banking system as a whole, which was left with the Bank of England, from responsibility for supervising individual banks, which was given to the FSA. While it is true that there is a distinction between the regulatory system as a whole and the day-to-day supervision of individual financial institutions, at the end of the day the system is the sum of the institutions that comprise it, and regulation and supervision need to be intimately linked. Moreover, the grossest excesses of banking imprudence, although economically devastating when they occur, happen probably at most only once in a generation, while consumer abuses such as mis-selling are ever present and politically sensitive. As we saw, they inevitably became the FSA’s principal focus of attention, at the cost of its disastrous neglect of prudential supervision.

The new architecture proposed in this Bill rightly separates these two activities completely, making consumer protection the remit of the new Financial Conduct Authority. However, it is a mistake to give the Bank of England, through the Financial Policy Committee, responsibility for the oversight of the Financial Conduct Authority. It has enough on its plate as it is.

I am also unconvinced by the wisdom of having two separate bodies—the Financial Policy Committee and the new Prudential Regulation Authority—to supervise the system and the individual banks respectively. It is quite true that both these bodies will be within the Bank of England, so there is likely to be constant cross-fertilisation, but the practical effect of having two bodies rather than one will need to be carefully monitored.

The decision to give the Bank of England full responsibility for financial regulation and supervision on top of its responsibility for monetary policy, which may on occasion conflict, places a heavy burden on the Bank in general and the governor in particular. The Government plan to recognise this by having a strong Financial Policy Committee with former practitioners on it and by beefing up the Court of the Bank of England, but I am far from sure that that is enough.

The Banking Act 1987 created inter alia the Board of Banking Supervision, which has already been referred to by the spokesman for the Opposition in this debate. This was charged with supervising the Bank’s conduct of its supervisory responsibilities and was chaired by the governor, but with as part-time members the most effective recently retired bankers that I could find. Moreover, and importantly, if these poachers turned gamekeepers had any concerns about the way in which the Bank was conducting any part of its supervisory responsibilities, they had the power under the Act to insist on a private meeting with the Chancellor, at which they could voice their concerns—a powerful sanction. I urge the Government, even at this late stage, to put in place a body that is more narrowly and expertly focused than the FPC, along the lines of the former Board of Banking Supervision, to supervise the work of the PRA.

Another innovation introduced by the 1987 Act was dialogue between bank supervisors and bank auditors. Until that time, it was illegal for there to be a dialogue between the auditors and the supervisors, as that would have constituted a breach of the auditors’ commitment to client confidentiality. The 1987 Act not only changed that but stated that there had to be a dialogue. Given the extreme and understandable reluctance of auditors publicly to qualify a bank’s accounts as they might qualify the accounts of any ordinary company when they discover something amiss, for fear of causing a run on the bank, it is particularly important that they should privately tip off the supervisory authority. Equally, if the Bank of England has a concern, it is important that it should share it, privately, with the auditors of the bank or banks involved, and ask them to look into it more closely. Regrettably, with the Brown changes, the dialogue demanded by the 1987 Act fell into desuetude.

I am pleased that the Bank of England and the Government have decided to do something about this, and to introduce a code of practice designed to reinstate the dialogue. The Economic Affairs Committee of your Lordships’ House, under the excellent chairmanship of my noble friend Lord MacGregor, looked into this in its report on auditors of March last year. I declare an interest as a member of that committee, which unanimously concluded that in the light of experience a code of practice was not good enough and there should be a statutory requirement for the dialogue to take place. That must be right, and I urge the Government to look at it again.

I will raise two other matters before I leave the subject of bank auditing, which is so important to the task of bank supervision. First, I mentioned the reluctance of auditors to use the nuclear weapon of qualifying a bank’s accounts, which may be one reason why they did nothing at all about major banks, which, in the event, turned out to be insolvent and had to be bailed out at great expense to the taxpayer and at massive economic cost. It might be worth considering a system in which, instead of the present all or nothing system, bank accounts are graded in the way in which the ratings agencies grade financial instruments.

Secondly, it is clear that the change in accounting standards from UK GAAP, which I admit was not perfect, to IFRS is a change from prudence to box-ticking, which has been particularly malign in the case of the banks. This is true not least when it comes to provisioning. Linked with that, IFRS has also enabled banks to this very day to conceal substantial bad debts, the failure to face up to which is a significant cause of their reluctance to lend to small businesses, which badly need it at present. To accept IFRS blindly, with all its faults, simply because other countries do, is not good enough.

The Bill before us today is not, of course, the only Bill this Session to implement the lessons of the disastrous banking meltdown of 2008. As my noble friend Lord Sassoon has reminded us, we have also been promised a banking reform bill to implement the recommendations of the Vickers commission and in particular to enforce the separation of investment banking from retail banking by the so-called ring-fence. I welcome this, which I have long called for.

However, one reason why we need this split has not perhaps been sufficiently recognised: that is, that bank supervision is an extremely difficult and complex task, given the unprecedented complexity of modem banking. A system in which the failure of an investment bank does not threaten the core banking system means that the regulators and supervisors can concentrate on the health of the core banking system, a less complex and more practical task. My fear, however, is that the ring-fence will not prove impermeable or wholly effective. Bankers, despite the greed and folly that many of them evinced during the Goodwin-Brown era, are clever people, and they will find ways round it. Moreover, what we are talking about here is, at bottom, a matter of banking culture.

Earlier this year, the FSA published a report on HBOS—Halifax Bank of Scotland—which has not received the attention that it merited. Finding that the bank was “guilty of serious misconduct”, it ascribes this to a culture,

“of optimism at the expense of prudence”.

That is a nice euphemism for reckless gambling.

Culture matters and the plain fact is that the prudent culture of retail bankers and the adventurous culture of investment bankers are diametrically opposed. With the best will in the world, it is hard to see how two quite different and opposed cultures can co-exist within the same corporate entity. There needs to be complete structural separation, not just a ring-fence.

Finally, I turn briefly from the structure to the content of bank regulation and supervision. Progress is being made on the subject of capital ratios and capital adequacy—indeed, with the economy in its present condition, there is an overwhelming case for allowing the banks to go more slowly towards achieving the desired higher capital ratios. Here, I entirely agree with the noble Lord, Lord Turnbull.

However, there has been no comparable progress in dealing with the problem, which is at least as important, of bank leverage.

[Baroness Garden of Frognal]

My Lords, I apologise for intervening on my noble friend—

[Lord Lucas]

My Lords, this is a Second Reading. We are a self-regulating House. Whips have no business telling us what to do. We are listening to my noble friend with great fascination and I hope that he takes another 10 minutes.

[Lord Lawson of Blaby]

My Lords, I am grateful for that. This is a very important and complex Bill, and we should be able to speak if we are not waffling—and I hope that I have not been waffling—at adequate length. However, I assure the House that I shall not take another 10 minutes.

No banking system is likely to be stable if it is financed by a mountain of loan capital on an exiguous equity base. Yet that is what we now have. I suspect that this is unlikely to change unless there are two supporting changes.

First, the bank regulators and supervisors should at least strongly discourage if not actually forbid the remuneration of bankers on the basis of the rate of return on bank equity. Secondly, there needs to be a fundamental change in the tax system as it applies to banks, or at least banks that conduct ring-fenced activities, à la Vickers. At present, a bank that finances itself by raising loan capital finds that the interest paid on that capital is tax-deductible, whereas the dividends paid on equity capital are not, so there is a clear tax incentive in the system for the banks to capitalise themselves on the smallest possible sliver of equity—the very reverse of what is needed in the interests of stability. That should be changed. Interest on the bank’s loan capital should no longer be tax-deductible. The quid pro quo might well be the abolition of the blunt instrument of the bank levy.

In conclusion, I warmly welcome the Bill, but there is much still to be done.

Eurozone

Lord Lawson of Blaby Excerpts

Thursday 17th May 2012 Lords Chamber

[Lord Sassoon]

My Lords, as I explained, there are no requests for further assistance on the table at the moment, so it would be entirely hypothetical to discuss what our further commitments might be. However, as I have said, as of July this year, the permanent European stability mechanism comes in. The UK is not party to the agreement to establish that mechanism and there will be no further commitments from the UK under the European financial stability mechanism from July this year. The IMF does not support the eurozone or any other currency union. It is there to support individual countries, and any assistance is considered country by country on the merits of each case.

[Lord Lawson of Blaby]

My Lords, my noble friend the Minister is causing some of us a little concern. Why did he not answer the Question on the Order Paper with a simple no?

[Lord Sassoon]

Because it is a complicated Question, which deserved a somewhat fuller Answer.

Environment: Green Growth

Lord Lawson of Blaby Excerpts

Wednesday 16th May 2012 Lords Chamber

[Lord Sassoon]

My Lords, the private residence capital gains tax relief means that most people are not liable for capital gains tax on their main residences. If access to that relief were linked to energy efficiency improvements, not only would it override the broad policy aim of that relief—that people are encouraged to save for their house—but what about the large number of people who do not necessarily have the funds to be able to improve the efficiency of their homes? Is it really the position of the Opposition that capital gains tax relief on people’s main residences would be taken away if they were not able to afford efficiency improvements? That is certainly not the policy of this Government.

[Lord Lawson of Blaby]

My Lords, will my noble friend slightly contain his green enthusiasm? Is he aware that the Green Alliance’s headline for the paper to which the noble Baroness referred is “Save tax relief for low-carbon savings and investments”? It is arguing—it may be the view of the Opposition—that all reliefs for savings, investor start-up and business should be abolished except for those devoted to greenery, which should be increased. Will my noble friend confirm that that is not the policy of Her Majesty’s Government?

[Lord Sassoon]

My Lords, I can indeed confirm that that is not the policy of Her Majesty’s Government.

Economy: Credit Easing Policy

Lord Lawson of Blaby Excerpts

Thursday 26th April 2012 Lords Chamber

[Lord Sassoon]

My Lords, I fear that I will not be able to do justice to all the six questions that I thought I detected, but let me try to deal with one or two. First, we should distinguish between credit easing, which is the policy announced by the Chancellor and made manifest in the national loan guarantee scheme, and quantitative easing, which is the responsibility of the Bank of England. As to quantitative easing, if the noble Lord, Lord Barnett, had asked me I would have answered that the Bank of England’s own assessment is that under quantitative easing the economy has benefited by between 1.5 to 2 per cent. One can therefore draw inferences from that for what a more limited scheme targeted at small businesses will achieve.

As to the question of the levels of investment in the economy, that is set out in the latest report from the Office for Budget Responsibility. It is therefore its independent figures, not mine, which point out that the fall-off in levels of business investment and the expected sharp recovery very much follow the pattern seen in the recession of the early 1990s. It is territory that we have been in before and the Government believe that we should respond in the ways that we have. As to the evidence that the national loan guarantee scheme is gaining traction, Barclays has already issued a £1.5 billion bond backed by the scheme, and Lloyds has issued $1.4 billion since the scheme started on 20 March. So it is indeed, unlike some of the schemes introduced by the previous Government, up and running and having an effect.

[Lord Lawson of Blaby]

My Lords, is my noble friend aware of the very recently published unanimous report of the Economic Affairs Committee of this House on development aid which urged the Government to abandon the wholly arbitrary target of allocating 0.7 per cent of GDP for development aid? Is he further aware that if the Government were to accept this all-party recommendation there would be scope for expediting carefully chosen public investment plans, to the great benefit of the economy and without infringing the Government’s overall public expenditure plans?

[Lord Sassoon]

My Lords, I think that we are straying a little bit but my noble friend has, of course, ultimately tied it back to the Question. Of course, if lots of other things were changed in government policy then we could free up money for all sorts of other good things. The Government have no intention—notwithstanding the excellent report from your Lordships’ committee—of changing their policy on development aid.

Banking: Accounting Standards

Lord Lawson of Blaby Excerpts

Monday 19th March 2012 Lords Chamber

[Lord Sassoon]

My Lords, having a look at accounting standards in relation to banks is certainly significant. I would not go as far as saying that IFRS had a fundamental role in relation to the financial crisis. There is not significant evidence of that although, as I have had it rather neatly described, you could perhaps describe accounting standards as an accomplice after the fact rather than as being responsible. There are issues that very much need to be looked at. The review that the IASB is doing, very much with the encouragement of the G20, of the financial instruments standard known as IFRS 9, the work that the Financial Reporting Council is doing, which I have referred to, the inquiries coming out of your Lordships’ committee and the most recent hearing last week will all contribute to an important ongoing debate.

[Lord Lawson of Blaby]

My Lords, is my noble friend the Minister aware that my noble friend Lord Flight is on to a very important point? It is quite clear that accounting standards have created a major reduction in stability in the banking sector. They had a major part to play, and IFRS has simply made this worse. Has my noble friend the Minister read the Hansard report of the debate in the Grand Committee of Wednesday last week, in which these matters were among those discussed? If not, will he please do so and will he also listen to what Mr Andy Haldane, the director of banking stability at the Bank of England, which is responsible for these matters, has had to say on them?

[Lord Sassoon]

My Lords, I have not read every word that was said in the Committee last week, but I have certainly read the very interesting remarks of my noble friend Lord Lawson of Blaby and the very challenging seven proposals that he made, many of which the Government are already acting on in the structure of banking and regulation. I do not dismiss this issue at all, but there is a tension between the transparency and other requirements of investors on the one hand and the requirements of prudential regulators on the other. There are very difficult issues of conflicting objectives here, which it may be impossible for one set of figures fully to reconcile. However, I take my noble friend’s suggestions very much to heart.

EU: Economic and Financial Issues

Lord Lawson of Blaby Excerpts

Monday 12th March 2012 Lords Chamber

[Lord Sassoon]

My Lords, I really cannot add anything to the previous discussions we have had on a number of occasions. It is nice to have the question asked by a different noble Lord this time, but I cannot add anything to what has been said before.

[Lord Lawson of Blaby]

My Lords, reverting to the original Question, would it not be extraordinarily hypocritical and rather puzzling to the British people if we were to sign a fiscal compact to which we had not the slightest intention of being party?

[Lord Sassoon]

Absolutely. I completely agree with my noble friend.

Budget Deficit

Lord Lawson of Blaby Excerpts

Wednesday 15th February 2012 Lords Chamber

[Lord Sassoon]

My Lords, I shall try to deal with at least some of the noble Lord’s supplementary questions. First, there is a process of exchanging and discussing numbers between the OBR and the Treasury under the memorandum of understanding. The details of all communications between the OBR and Ministers will be published in due course on the OBR’s website, as they were in the run-up to last year’s Budget.

Secondly, on the question of the deficit reduction plan, it is interesting to look at the recent IFS green budget, which does a comparison between the coalition plans and the relatively sober Alistair Darling plans rather than the Ed Balls plans. The comparison shows that up to 2016-17 the cumulative impact of Mr Darling’s policy would have been that debt under a Labour Government was £201 billion higher than it will be under the forecast for the coalition Government. As the markets have made clear this week, if we listened to suggestions about making increased spending commitments now, our interest rates would go sky high and our industry would be crippled. We are sticking to our plans, but the private sector will contribute to significant infrastructure investment of the sort that both the noble Lord, Lord Barnett, and I would welcome.

[Lord Lawson of Blaby]

My Lords, is it not the case that the noble Lord, Lord Barnett, despite his great experience, needs even at his age to learn a little patience? Is it not the case that if there were some short cut to resuming growth, the Government would take it?

[Lord Sassoon]

My Lords, it is indeed the case. If my noble friend had such a short cut, I am sure he would have told the House what it was.