Ed Balls
Main Page: Ed Balls (Labour (Co-op) - Morley and Outwood)Department Debates - View all Ed Balls's debates with the HM Treasury
(12 years, 3 months ago)
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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 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.
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.
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.
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 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.
Ed Balls (Morley and Outwood) (Lab/Co-op)
Let me start by striking a rather different tone from that of the Chancellor’s performance in the House this afternoon by setting out where the Opposition agree with what he and the Government are trying to achieve and offering some constructive proposals to tackle the flaws in the legislation before us and help make it a better Bill. Financial stability and the effective regulation of our banking and wider financial services industry are vital for stability, for consumers to save and for businesses to invest. Getting the balance of regulation right is an important task for any Government, especially when hundreds of thousands of jobs depend on the industry. That is a task in which all Governments throughout the world failed during the previous decade.
We can all agree that the irresponsible actions of the banks themselves caused the crisis, but there were major failings in financial regulation, in law, in corporate governance, in procedure and in judgment in America, Asia, throughout Europe and here, too, in Britain. We did not regulate the banks in a tough enough way and stop their gross irresponsibility here in Britain or throughout the world, and after a financial crisis on that global scale we need to learn the right lessons and to put in place the right reforms in order to do what we can to stop such a crisis being repeated.
In that spirit, we welcome aspects of the Bill before us and, in particular, the establishment of the new Financial Policy Committee and the competition and consumer focus of the Financial Conduct Authority, but we are worried that the Bill falls well short of being fit for purpose.
In an excellent report, the Joint Committee that scrutinised the draft Bill stated:
“To be successful reforms will have to change the regulatory culture and philosophy,”
which is
“not something that legislation can guarantee but legislation can influence the culture of a regulator by: setting objectives; allocating and aligning powers and responsibilities; establishing appropriate systems of accountability.”
Despite the changes that the Government made in response to the Joint Committee’s report, the Bill as it stands does not meet the objectives that the Committee set. What the Chancellor proposes in the Bill and in statute is essentially to move from the current tripartite system of regulation to a new quartet system—the Treasury, the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority, with the Monetary Policy Committee sitting alongside—with, at best, opaque structures for decision making and accountability under the Bank of England umbrella, albeit now with not two deputy governors but three, and all with overlapping responsibilities.
Unless we get the detail of that quartet system right, we risk delivering a more complex and less transparent system that is harder for the Chancellor and for Parliament to navigate and understand than the current arrangements. Several of those substantial misgivings have been echoed in recent weeks and days by the Treasury Committee and by many City, business and consumer groups. The responsibilities are confused; there is insufficient accountability in the new, more cumbersome system; there is insufficient focus on consumer protection, financial education and exclusion; and, as the CBI has highlighted, there is no objective for the Financial Policy Committee proactively to support growth and employment.
We intend to work with the Government and the Treasury Committee to amend the Bill in Committee to deal with its many shortcomings. To that end, we will not vote in opposition to the Bill in its entirety on Second Reading today; we will see whether we can make progress in Committee and then decide our Third Reading vote only when we have seen whether we have been able to make the progress and the change that is needed in the Bill.
Kelvin Hopkins (Luton North) (Lab)
Does my right hon. Friend accept that the crisis was caused in very large part by a complete failure of the auditing industry? If the auditors of all those companies and banks had spotted that worthless bits of paper, claimed as assets, were flooding the world, we might not be where we are now. Does he agree that we need to do something fundamental about auditing?
Charlie Elphicke
Does the shadow Chancellor accept that it was a failure of regulation when, to buy a home, people were lent more money than that home was worth? Was it not wrong to have mortgages of more than 100%, and was that not a failure of regulation?
Ed Balls
The problem was the US sub-prime mortgage market, and that the failure of regulation there rippled around the world. There were failures also of lending and regulation at Northern Rock here in Britain. I do not in any way deny that there were failures here in Britain and failures of regulation, but I do not accept that it was solely a UK failure, because it happened in America, France, Germany, Japan and all around—
Ed Balls
I will make some progress and take both interventions in a minute.
I understand why politically the Chancellor is so keen to blame the structure of UK regulation—the tripartite relationship between the Bank, the Treasury and the FSA. He wants to claim that his particular institutional reforms are the solution, but my advice to him is to be very careful indeed, because this was not a peculiarly British crisis; it was a global crisis. It hit countries with tripartite systems of regulation, quartet systems, twin peaks, more powerful central banks, less powerful central banks and statutory and non-statutory regulators alike, and it was not a failure of regulatory structure, but a collective global failure to see the risks inherent in the structure of the global financial services industry.
We heard from central bankers earlier, but Alan Greenspan, the former chair of the US Federal Reserve and architect of the US system, when asked by The New York Times about his and the world’s understanding and management of risk, said:
“The whole intellectual edifice…collapsed”.
He was right. It was not simply a failure of structure, but a flaw in the way regulators understood the financial system, and that is why the British Bankers Association is right in its submission on the Bill to say that
“we consider that successful regulation depends more on regulatory culture, focus and philosophy than structure.”
Harriett Baldwin
On that very point, I should like to understand where the right hon. Gentleman is coming from in his objections to the Bill. What was his philosophy in terms of separating the supervision of banks from the Bank of England, which has day-to-day responsibility for monitoring that canary in the goldmine—their day-to-day funding operations?
Ed Balls
I am going to come on to explain my analysis. I am not sure I fully understood the question, but I might as time passes.
At its heart, the regulatory failure of the global financial crisis was not a failure of one approach to the institutions of regulation, but a failure of understanding and risk assessment which covered central bankers, regulators and Treasuries throughout the world. That line is not in the Conservative party Whips’ briefing, but it is absolutely true none the less.
Ed Balls
In a second.
And yes, it was a failure shared here in the UK, across the Treasury, the FSA, the Bank of England—and I have to say the then Opposition, too.
Let me remind the House that the legislation to give the Bank of England independence, and to shift from self-regulation to statutory regulation after 1997, for the first time established a Bank of England deputy governor with explicit responsibility for systemic financial stability and with an ex officio seat on the FSA board. As the seeds of the crisis were sown in the years before it, neither the FSA nor the Bank of England nor the Treasury rang the alarm bells, despite meeting every month in the tripartite standing committee.
The Chancellor, in a second breath a moment ago, said that we are now rightly taking the Treasury out of making such decisions, having criticised the Treasury for not triggering a crisis meeting that neither the Bank of England nor the FSA asked for—a point that seemed to be deeply confused. That demonstrates not that structures do not matter, but that there is no evidence from Britain or throughout the world that a different and arguably more complex structure, the new quartet structure before us, would have spotted a crisis that neither the Bank of England, the FSA, the Treasury, the Federal Reserve, the European Central Bank nor anybody in a regulatory position of responsibility spotted.
Gordon Birtwistle
Will the right hon. Gentleman explain the regulatory things that went on when the previous Prime Minister pushed Lloyds bank into buying HBOS, which was a catastrophe in itself? How much regulation went on then, and how much discussion went on between the Bank of England and the previous Government before it was pushed through by the previous Prime Minister?
Ed Balls
Those were decisions for the Chancellor and the Prime Minister of the day. I cannot give the hon. Gentleman a blow-by-blow account or any detail of what happened between the FSA, the Treasury and the Bank of England, because at the time I was the Secretary of State for Children, Schools and Families and was dealing with the failure of the test administrators to deliver the standard assessment tests for year sixes at the end of key stage 2.
Alun Cairns (Vale of Glamorgan) (Con)
Is the shadow Chancellor telling us that he accepts absolutely no part, bearing in mind his key role in the Treasury at the time, in the failure of the financial structures in the banking sector in recent years?
Ed Balls
I have apologised to the country and have asked the Chancellor of the Exchequer to do the same. Did this Chancellor ring the alarm bell in the crisis? No, he did not. Did he worry that regulation was insufficiently tough? No; he said in 2006 that financial regulation was
“burdensome, complex and makes cross-border market penetration more difficult”
and that it
“threatens the global competitiveness of the City of London.”
If the hon. Gentleman wants to have a debate about who should apologise and who should accept responsibility, he should look at the evidence and the judgments of the past 10 years. Let us not forget that it was the Conservative party that voted against Bank of England independence and the move from self-regulation of the City by the City to statutory regulation for the first time in this country. It was this Chancellor who personally opposed the rescue of Northern Rock, saying:
“I am not in favour of nationalisation, full stop.”—[Official Report, 19 February 2008; Vol. 472, c. 186.]
It was this Chancellor who opposed the rescue of RBS; who negotiated the flawed and foolish Merlin deal; who refuses to enact proposals on transparency for bonuses of more than £1 million; who resists the reform of remuneration committees; who is selling off Northern Rock at a loss, prompting a National Audit Office investigation; and whose decision to cut the deficit too far and too fast has choked off the recovery and led to us borrowing £158 billion more. We will take no lectures on judgment from this Chancellor of the Exchequer.
Charlie Elphicke
A few moments ago, the shadow Chancellor told the House that he had no involvement in the merger of Lloyds and HBOS. Will he confirm that he was not consulted, that his advice was not sought and that he provided no advice in relation to that matter?
Ed Balls
Yes.
I will set out what needs to be done to turn this bad Bill into a good Bill and to put the public interest, not party politics, in the driving seat in financial regulation. I will set out four objectives that should guide this legislation. The first is stability. We must ensure that we have a system of financial regulation that is robust in good times and in bad times. The second is to protect the taxpayer. We must guarantee that the public purse is protected from irresponsible decision making and wider systemic failures. The third is to be on the side of the consumer. There must be effective regulation, more competition and action on financial education and exclusion. The fourth is to support growth and employment. Let me take each objective in turn.
On stability, provisions to improve the structures for financial regulation and financial stability are at the heart of the Bill. As I have said, we support the FPC and we look forward to debating its powers. We are pleased that the Chancellor has today done a U-turn and decided that the Government will take up the recommendation of the Joint Committee that the macro-prudential tools to be used by the FPC should be properly scrutinised by Parliament. I hope that he will ensure that that happens not just when they are introduced, but when they are subsequently changed and updated. We believe that a new scrutiny committee should be established in this House to play that role. We will propose such an amendment.
On the splitting of the PRA and the FCA from the FSA—I know that these acronyms are hard to keep up with, but this is quite a complex system—it is fair to say that there are advantages and disadvantages. The jury is out. The Chancellor’s decision to put all this new and more complex architecture under the umbrella of the Bank of England, and arguably under the personal direction of its Governor, raises serious questions of accountability and clarity in decision making, as has been highlighted by the Treasury Committee and the Joint Committee.
We share the Treasury Committee’s concerns about accountability within the Bank and accountability to Parliament. As the Committee stated,
“the governance of the Bank needs strengthening and…it needs to be more open about its work. The Bank must be held more clearly to account”.
The Committee has proposed that
“the role of the Court of the Bank of England should be substantially enhanced. It should be transformed into a leaner and more expert Supervisory Board, with the power to conduct retrospective reviews of Bank policies and conduct.”
The Chancellor has said that he does not want to go down that road. He has made some moves, but we think that there is further to go to ensure that there is proper accountability. Again, we will propose reforms in Committee.
It is on the issue of crisis management and the processes for deliberation and decision making within the new, more complex structure, that we have misgivings. The Joint Committee was right to state:
“The powers and responsibilities of the Bank of England and the Treasury during a crisis are key.”
However, the Bill and the memorandum of understanding are deeply confused and opaque, as we have just heard from the Chancellor. We welcome the fact that the Chancellor has accepted the Treasury Committee’s recommendation that the Chancellor should be provided with a discretionary power to direct the Bank when there is a material risk to public funds. The British Bankers Association also welcomed that in its submission, but stated that it was
“unclear that the assignment of powers now proposed is consistent with the strategic division of responsibilities envisaged by the Government, including the proposed power of direction over the Bank.”
Article 20 of the memorandum of understanding exposes the hole. I will quote it in full:
“During a potentially fast-moving crisis, it will become especially important to ensure close and effective coordination so as to maintain coherence in the overall crisis management process. At the heart of institutional coordination during a live crisis will be frequent contact between the Chancellor and the Governor. However, the Chancellor and the Governor may agree to establish ad hoc or standing committees at other levels to support this process.”
Under the Bill, there will be three deputy governors at the Bank, a new Financial Policy Committee, two new sub-agencies at the Bank—the PRA and the FCA—and a new quartet of relationships, in which there are separate statutory responsibilities for the Treasury, the FPC, the PRA and the FCA, as well as for the MPC. Will the Chancellor hear any of the views in a crisis, or pre-crisis, from the statutory office holders? Only, according to the MOU, if the Chancellor and the Governor decide that he should. It states that there will be frequent contact just between the Chancellor and the Governor. It is inevitable that there will be a variety of views and dissenting voices, not only at senior levels within the Bank, but between the different statutory agencies, because those agencies have overlapping and, in certain types of crisis, contradictory objectives. Those different statutory responsibilities are being put under one umbrella organisation—the Bank of England.
Ed Balls
In a second. I will make the argument and the hon. Gentleman can then ask a question.
Senior and responsible figures who hold statutory offices will get to put their views to the Chancellor only if they are on one of the ad hoc or standing committees, which do not yet exist. It seems as though the Governor will decide whether they should exist at all and who should attend them. My advice to the Chancellor is that one cannot just rely on Treasury officials or gossip by the water pump. Unlike many of the Back Benchers who have intervened, I am not seeking to play a party political game; I want him to change the Bill. [Laughter.] Honestly. This is a deeply confused and highly dangerous ambiguity.
Ed Balls
I will give way in a minute. Let me just make the argument, and then the hon. Gentleman, with all his experience of crisis resolution meetings at the Bank, can share his intervention with us.
In the run-up to a crisis or during a crisis itself, having such a high degree of ambiguity in the structure and placing such a concentration of power and access to the Chancellor in the person of the Governor would be highly unstable. If the deputy governor and head of the PRA—a statutory individual, but not the Governor—the head of the FCA or the majority on the FPC believed that there would be a systemic risk from one troubled company without support from public money, the Chancellor must know about it, and in time so must Parliament. They must know about it whether or not the Governor agreed. Whether or not the Governor believed that there was or might be a risk, and whether or not he believed that the moral hazard outweighed the risk, the Chancellor must know about it.
If the Chancellor wants a personalised, twin-peak system with all the responsibilities and accountabilities of the Bank of England located in just one person, the Governor, as is set out in the memorandum of understanding that he has negotiated with the Bank and as it seemed he did at times during his speech, the Bill is flawed. The new system will be unstable and the taxpayer will potentially be more exposed. All the statutory architecture of the FPC, the PRA and the FCA will be for the birds.
If, instead, the new committees and agencies are to have a separate statutory identity with clear and separate purposes that may sometimes conflict, and with leaders who must be properly heard, that must be clarified in the Bill. That was what the Chancellor seemed to suggest at other times in his speech, and the Bill seems to suggest it in places. It must be clarified not just in the memorandum of understanding but in statute.
The Bill sets out clearly the statutory identities of the FCA, the PRA and the FPC, which seems to suggest that the Chancellor intends to move from the tripartite system to a quartet system under the umbrella of the Bank of England—the Treasury, the FPC, the PRA and the FCA. If so, he should say so clearly in the memorandum of understanding and in legislation, for reasons of accountability, financial stability and effective decision making in a crisis. We will table amendments to that effect in Committee.
Matthew Hancock
I know that the right hon. Gentleman is desperate to defend the tripartite structure that he designed—
Matthew Hancock
It is not, by far.
The accusation that the right hon. Gentleman makes undermines his point that the Bill sets out a quadripartite system. It sets out a bipartite system, involving the Governor of the Bank of England and the Chancellor. The fact that it will be delivered through the person of the Governor, who has to manage his own institution with appropriate accountability to court, means that it is a binary system rather than a tripartite one. It will therefore be better at resolving crises at the rushed times when they occur.
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.
Mr Brian Binley (Northampton South) (Con)
The shadow Chancellor is telling us something illuminating—that if a Chancellor does not want to listen, no system will have any impact at all. Under the last Government, siren voices started in 2002, and the then Chancellor refused to listen. We had a systemic deficit problem, and again he did not want to listen. The shadow Chancellor has been through all this, so would he advise the current Chancellor to listen more than the last Chancellor did during the crisis?
Ed Balls
My very clear advice to the Chancellor is that when he gives people a clear statutory responsibility for a particular function and legislates for three deputy governors who are the heads of individual agencies, he should also design his crisis resolution and decision-making procedures so that his experts are in the room and he can hear the array of their views. The idea that it is better for the Chancellor to require the Bank to resolve such issues internally and come to him with one voice—one Governor, one decision maker—is a flawed structure of regulation. The point, however, is that that is not what the Bill intends. It intends for the FCA and PRA to be important institutions, in which case the Chancellor should get them in the room.
Mr Robinson
Does my right hon. Friend agree that the further decision to install the Governor for eight years will make the inherent difficulty of dealing with only one person more difficult?
Ed Balls
I understand my hon. Friend’s point, but to be honest I do not have strong views on that. The reality is that there was not cross-party support or support more widely in civic society for Bank of England independence when we established it. The Conservatives voted against it. In those circumstances, it would have been difficult for the then Government to pass legislation for one eight-year term—there would have been a lot of opposition to the idea of giving one unelected individual such power for an eight-year term. This Bill moves us not only from a four-year to an eight-year term, but gives one individual massively more power than they ever had. That is what concerns me.
Matthew Hancock
I am very grateful to the right hon. Gentleman for giving way again. Does not his argument—that we cannot have an umbrella regulator under which inevitable tensions are resolved, and that we must instead have separate organisations—show exactly the thinking that led to the problems in the tripartite system, under which responsibilities were segregated and separated and problems fell between stools? The FSA and the Bank were told that one was to look at the regulation of individual banks and the other at the macro-economy, and never the twain shall meet. That is precisely the problem that needs to be addressed.
Ed Balls
The Chancellor referred to his years of thinking about this legislation. I am afraid that his former adviser demonstrates the kind of muddled thinking that has got the Chancellor into this difficulty.
I am not saying that the tripartite system is the best one. I am quite happy to go along with the shift to the quartet system—I can see the advantages of the FPC and the split of the FCA and the PRA. I am not worried because individual statutory agencies will be under the umbrella of the Bank of England; I am worried because the deputy governor and head of the PRA, who has a clear responsibility, is not part of the decision-making process. That is what I am worried about. I want the MOU to say that at the heart of the system—in pre-crisis and crisis—there will be a “clear view” group, in which the Governor and his key deputies, who will have separate and sometimes contradictory statutory responsibilities, come together with the Chancellor to make the decision.
Even if the Chancellor—this is not an ad hominem point—has the umbrella of the Bank of England and the quartet system, he should want to hear from the person whom he appoints on a very large salary and in law to be the head of the PRA. What I do not understand is why that would not be written into the MOU. Actually, I sort of do understand. There is a history in the Bank of England of the Bank equalling the Governor of the Bank—of wanting to personalise the appointment—as the Chancellor has described. However, we cannot personalise something as complex as the proposed system. It is not just that the system is complicated; there are also tensions and differences of view.
My right hon. Friend the Member for Edinburgh South West (Mr Darling) is quite right that it is hard to operate a tripartite system in which there are different views, but those differences will not be avoided by burying them under the table and pretending they do not exist. Had that happened at key moments in the previous crisis, the wrong decisions would have been taken.
Charlie Elphicke
I thank the shadow Chancellor for giving way once more. The Chancellor’s plan is for the financial and prudential regulation buck always to stop with the Bank of England. The shadow Chancellor has concerns about moral hazard on the part of the Governor, which suggests that he is not as strong a fan of the independence of the Bank as he has previously made out. Should we not trust a Governor of the Bank of England to work effectively with the Chancellor?
Ed Balls
The hon. Gentleman does not understand that the buck does not stop with the Governor of the Bank of England, but with the Chancellor of the Exchequer, who, in the end, is the guarantor of the public purse and taxpayers’ money, and of the wider stability of the system.
If the Governor comes to the Chancellor and says, “In my view, and based on the views of my deputies, our collective view is to intervene,” the Chancellor has the power to do so. Rightly, the Chancellor has given himself the power in the Bill to override the Governor if the latter says we should not act. The concerning situation, which I am trying to explain—the hon. Gentleman does not quite get it—is that there will be different views within the overarching Bank of England, because it will be huge, with different, overlapping and sometimes contradictory statutory responsibilities for systemic stability, prudential regulation of individual firms and managing risks to consumers, let alone monetary policies.
In those circumstances, my strong advice to the Chancellor, with whom the buck stops, is that he should not allow the decision to be made in the Bank of England. He should not allow the Governor to say, “I know you want to act and that you want to us to act. Thanks very much, but I’m the Governor, and I don’t think we should.” We should not allow the Governor to tell the Chancellor, “The Bank does not propose action.” I would not put myself in that position.
The idea that such a situation is okay because the Chancellor will have heard before the meeting—from Treasury officials or on the grapevine—what those other office holders want is unbelievably naive. We are talking about the Bank of England’s legislative responsibilities and the statutory power of the office holder. In that key meeting of only the Chancellor and the Governor, the Chancellor cannot say, “I’m sorry, Governor, but other people take a different view from you.” That is not how it works.
Shall I move on, Madam Deputy Speaker? [Hon. Members: “Hear, hear!”] That is a very important argument to which we will return in Committee.
On Europe, that problem of complexity is mentioned in the Treasury Committee report, which states that there is
“a risk that the single UK regulatory voice in some cases is weakened by the fact that two or more organisations will share the representational role in the various international regulatory committees.”
The Chancellor has proposed a new committee, which is welcome, but I urge him to look harder at that arrangement. The Opposition will table amendments on that in Committee.
Let me move on quickly, because it is important to get other things on the record on Second Reading. As I have said, on consumers, the Opposition welcome the recognition of the need for a single regulator for all retail financial services, but we will highlight a number of concerns in Committee. In particular, we want to ensure that the FCA has the powers it needs to require providers of financial services to understand its fiduciary duties.
On disciplinary action, the Joint Committee has recommended a requirement to consult before disclosing the fact that a warning notice has been issued. We think the Government are wrong to reject that recommendation. That transparency should be in the Bill.
The Joint Committee has also recommended that the FCA should be given concurrent powers alongside the Office of Fair Trading to make market investigation references to the Competition Commission. We do not understand why the Treasury has rejected that.
We are also disappointed that the Government have not used the Bill to bring forward the Vickers recommendation for a review of progress on competition. We propose having one in 2013, rather than in 2015, as Vickers proposed, not least because the Lloyds divestiture has so far not produced the strong, effective challenger that we sought.
The Chancellor says that he is in favour of financial education in schools and the Prime Minister says he is reviewing it, but they vetoed that proposal when a Bill was before the House. There is cross-party support on financial education. The all-party parliamentary group on financial education for young people is the largest such group and will propose an amendment for statutory financial education in schools for all young people.
The Opposition are worried that the Government are allowing the banks to go backwards on financial exclusion, with charges for basic bank accounts being increased in the case of Barclays, and with new charges on basic bank account holders using automated teller machines in RBS and Lloyds. We want to strengthen the obligation on the banks to produce a universal service for all retail banks. My hon. Friend the Member for Walthamstow (Stella Creasy) will no doubt push us to ensure that the Government agree to our amendments to give new powers to the FCA to restrain the ability of firms to charge ultra-high interest rates for prolonged periods.
On growth and employment, the CBI was right to say in its submission that
“the Bill should ensure that the new regulatory authorities have a specific objective to focus on—and support—economic growth.”
As it points out, the macro-economic tools used by the FPC could by their nature have a significant impact. The CBI says that the FPC should be required in statute to act
“in a way that is consistent with promoting the medium and long-term growth of the economy”.
The Joint Committee also proposed a strengthening of the growth obligation for the FPC, and we will propose amendments to that effect. I hope that the Government will look at this issue again, because it is important, not least for the supply of credit to small and growing businesses. Even the British Bankers Association says:
“We would suggest that the legislation underpinning the FPC should specify that its objective is to maintain a sustainable supply of credit to the economy”.
Bank of England figures show a £10 billion fall in lending to small businesses, and in November the Chancellor said that his new credit easing scheme would relieve constraints in the supply of bank lending in the short term. The short term is becoming the long term, because there is still no sign of that credit easing scheme. No wonder, with small business lending down and bonuses high, the Merlin deal is looking rather tawdry. At least the Chancellor has recognised that executive pay needs to be covered in the Bill, but as the Institute of Chartered Accountants said in its briefing,
“at the moment the Bill is drafted too broadly to be effective in encouraging proportional executive pay.”
We will look at amendments in Committee and tomorrow the House will have the chance to debate the Opposition’s call for a repeat of the bank bonus tax to provide 100,000 jobs for young people.
This is a badly drafted Bill. On stability, there are gaping holes in decision making and accountability. On protecting taxpayers, there are flaws in the advice the Chancellor will receive. For consumers, there are flaws in the powers for referral to the Competition Commission and a worrying lack of action on financial education and exclusion. On growth and employment, there is a gaping gap that must be filled. We will not oppose Second Reading, but we want big changes in Committee. Otherwise, to protect stability, taxpayers, consumers, growth and jobs, we will have to vote against the Bill on Third Reading.