Financial Services (Banking Reform) Bill

Frank Dobson Excerpts

Monday 11th March 2013 Commons Chamber

[Frank Dobson (Holborn and St Pancras) (Lab)]

I think everyone in the House would welcome a step forward in trying to gain some control over the excesses of the banking industry, but most Members—at least those who have spoken—seem to be dubious about whether the Bill goes far enough. Following on from the speech by my hon. Friend the Member for Bassetlaw (John Mann), I tend to be what might be described as a “Bassetlaw-ist”. I think we need to go much further than most people are proposing.

We need to start by recognising that the British banking industry is a failure—it was a failure and it remains a failure. Let me remind the House that, of the big four, HSBC lost $27 billion in the crash, while RBS lost $14 billion, Barclays lost $8 billion and Lloyds lost $5 billion. Between them, these masters of the universe lost $54 billion in the crash. It did them harm, but it did a lot more harm to the rest of us. In the recession that has followed their lunacy—matched all round the world by the rest of the world banking industry—British production has lost £700 billion, as a result of the reduction in goods and services that we have produced.

That is what the banks dropped us in. They did it through all sorts of fancy schemes, in an effort to get rich quick, and for quite a long time they did get rich quick. Everybody was told, “You can’t stop us. We know what we’re doing; it’s the market.” Then the market crashed. Under normal rules, if the market crashes, those who crash stay crashed, but that does not happen with banking. That is why we need to change the rules. The banks demanded taxpayers’ money, either to bail them out or offer them guarantees. They said, “You’ve got to do it, otherwise we will bring the temple down and we’ll bring you all down with us.” In other words, “Heads we win, tails you lose” has been the motto of the banking industry.

That is not all that the banks were doing wrong, we now discover. They were also rigging LIBOR—the London interbank offered rate. Individuals in banks were fiddling, and apparently not a single boss knew what was going on. LIBOR was run by the British Bankers Association, which apparently did not know that any fiddles were going on, so obviously “Ignorance is strength”—this year is the centenary of George Orwell’s birth—was the motto of the British banking industry. People have been prosecuted or threatened with prosecution—they have settled to avoid it—in the United States for LIBOR fiddles, but nobody has been prosecuted here. Why is that?

There have been several repeated conspiracies—in fact, dozens and dozens of them—to gain financial advantage by deception, which is a common-law crime, so we do not need an Act of Parliament, but we now know that LIBOR rigging was not the banks’ only wrongdoing. Instead of “The world’s local bank”, HSBC’s motto turns out to be “The world’s local money launderer —helping Mexican drug barons, fighting the United States’ anti-terrorism sanctions”. Lloyds—motto: “Banking worth talking about”—was involved in money laundering to help sanctions-busters. Barclays—“It’s our business to know your business”—was involved in dodgy transactions and busting sanctions against Iran, Libya and Burma. Most of us would think that sanctions against Iran, Gaddafi’s Libya and Burma were quite appropriate.

The banks have also been spending a great deal of time promoting tax dodging. The big four have 1,649 subsidiary companies. For Barclays, HSBC and the Royal Bank of Scotland, a third of those companies are in—where would you guess?—the places where tax is fiddled. They are in tax avoidance places—Lloyds is a bit better, with only 20%.

Up to now, most criticism, both here and in the newspapers and so on, has been of the investment bankers speculating—“It’s a casino. Separate it out; ring fence it; break it up”—on the grounds, apparently, that retail banking has been a really big success, when actually it has an appalling record. It was the retail arms of the big four that did all the PPI fiddles and the IRSA—interest rate swap arrangements—swindles. Indeed, the big four sold 34 million payment protection insurance polices. Between them, they are now having to set aside £14 billion to repay people who were swindled. That is what the money is for—simple stuff: it is a swindle. Between them, the big four are employing 10,000 people to administer the system of repaying the money they swindled. It is almost a banking job creation scheme.

Then there are the retail banks’ interest rate swap arrangements. Some 40,000 agreements with small and medium firms are now being reviewed. The idea was sold by the British Bankers Association to

“help insulate business customers against fluctuations in interest rates,”

as the BBA put it, but that is exactly what interest rate swap arrangements did not do. A sample survey shows that 90% of the agreements being reviewed break existing banking regulations, yet small firms were bullied into accepting their terms in order to get a new loan or extend an existing one—if they did not agree, they would not get it.

[Jonathan Edwards]

Does the right hon. Gentleman agree that some instances of products being mis-sold by the retail elements of banks were driven by the investment arms of those entities? Ring-fencing will not go far enough. If we are to stop such abuses by the retail elements of the universal banks, we have to have full separation of investment and retail banking.

[Frank Dobson]

Yes, but if we are to get the changes we need, we also need to change the culture in both sectors.

The banks have never competed with one another, or at least not in trying to get customers. Rather, they have tended to compete by copying one another. When one bank comes up with a wheeze that swindles money, the bosses of the other banks say, “Why are they getting all this money in through this swindle? Can’t we do the swindle as well?” That is presumably how PPI started off at one bank and then went to all the others. Interest rate swap agreements certainly started at one bank and were then taken up by the others, because people in those banks felt they had to compete with the other swindlers down the road.

These people—this collection of money launderers, gun runners, drug money launderers, people who swindle small businesses and people who lose billions in their normal day-to-day business—are still paying themselves huge amounts of money. I know that the Prime Minister has a difficulty with facts, but I did not realise that he had a problem with adjectives, because when the Royal Bank of Scotland announced that it was paying £600 million in bonuses this year, he commended it—this bank of losers —for its restraint. That is not my definition of restraint. “Excess” is probably a better word in the circumstances. Restraint involves cutting the benefits of poor people and the pensions of the police, the nurses and the teachers. Restraint involves capping the pay of public employees. They have certainly been losing out. In 2009, I said that the two banks that were being semi-nationalised should have the normal public sector pay policies applied to them, and I think most people in this country would agree with that.

[Kelvin Hopkins]

I am greatly enjoying my right hon. Friend’s speech, and I agree with every word of it. Does he not find it interesting that Lord Lawson has recently suggested that the Royal Bank of Scotland should be brought completely into public ownership? That would involve only a small amount of money, and we would then have a bank that was publicly accountable and responsible.

[Frank Dobson]

I entirely agree with that. I also agree with my hon. Friend the Member for Bassetlaw that it would be good to see the Halifax building society separated out from Lloyds HBOS, so that what was the country’s leading firm could be relocated and its decisions could once again be made in Halifax, rather than in the City of London.

Let us remember that while the people who are nursing the sick and carrying out operations in hospitals, the people who are teaching our children, the people who are policing our streets and the people who are risking their lives to fight fires are being restricted, HSBC is paying 204 people more than £1 million a year, Barclays is paying 428 people more than £1 million a year and RBS is paying 95 people more than £1 million a year. They are being paid those sums to play with other people’s money. That is all they are doing; if they lose but cannot go broke, they are clearly not playing with their own money. But not everyone at Barclays is getting £1 million a year; 100,000 people working for that bank are paid at a level that entitles them to child tax credit. What is more, it is people such as them all around the country who have been losing their jobs while that collection of losers at the top carry on.

Then we have the Prime Minister and the Chancellor, whose top priority in Europe is to prevent those horrible Europeans from imposing a limit on bankers’ bonuses. We used to be told that if we imposed such limits, the bankers would go elsewhere. We were told that they would go to Switzerland. Well, they will not be doing that since the referendum in that country, because they would now be worse off there than they would be here. Would they perhaps go to the United States? Some of them would have to think very carefully about that, because money launderers can be locked up over there, and that has indeed happened, even to Brits.

What all this boils down to is that the banking industry does not need mild tinkering; it needs a total worldwide transformation. Instead of acting as the back marker in the convoy, we ought to be out there banging a drum and getting a grip on the world banking industry, for the benefit of ordinary people in virtually every part of the world.

--- Later in debate ---

[Mr Meacher]

I do agree, and I know that the hon. Gentleman believes that banks have far too much power to create money out of nothing. He and I may not agree on exactly how that can be dealt with, but it certainly needs to be dealt with.

[Frank Dobson]

Does my right hon. Friend agree that one of the characteristics of our banking system is that the banks have invested more money in fancy offices in the City for themselves than in British manufacturing industry?

[Mr Meacher]

That is also true. My right hon. Friend listed some of the huge abuses that have been turned to the private benefit of the bankers and the people at the top, and that is another example.

Our balance of payments problem cannot be allowed to continue. That is integral to our future. If Britain is to achieve what we all want—a long-term recovery with stable growth and full employment—we need a lending system that prioritises manufacturing, construction and export promotion, and allocates credit in accordance with the national interest rather than the private interest of banking executives and traders. The Bill is concerned almost exclusively with limited regulation. All the historical evidence suggests that it is likely to be highly ineffective even on that score, but its real fault is that it does not even address the central issue in the financial sector, which is immensely important and crucial to Britain’s survival. This is a feeble Bill, and the next Government will have to introduce a proper Bill to achieve the necessary regulation.

--- Later in debate ---

[Frank Dobson]

The hon. Gentleman is fairly youthful, so he may not remember the time when most big banks had local bank managers and so had some of the characteristics of the Bank of Dave, in that there was someone local who knew the locality and its businesses. Many people now find that they apply to the bank and the algorithm says no.

[Steve Baker]

My bank manager is named Guy Birkby, and I am sure that he would not wish to be compared with Dave Fishwick because he is an employee of Handelsbanken. I moved my money to Handelsbanken specifically so that I could have a local bank manager who knows me. Indeed, when I ring the bank, people recognise my voice and off we go, and that is a far better way to do business. This particular combination of personal relationship and personal liability—in Dave’s case, not Handelsbanken’s—is a way to re-establish trust. What are the other ways of doing that? They are unlimited liability, which I have discussed, trustee savings banks and mutuals. I am afraid that one of the big flaws of the big bang was that it encouraged this limited liability corporate form where nobody ends up taking the risk and it falls to the taxpayer—it is a disaster.

On ring-fencing, I very much share the comments made by the Father of the House, my right hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell). I am extremely sceptical that ring-fencing will work. I think that the efforts in the Bill are extremely brave, and of course I shall support it, but this is the last brave attempt to prop up the contemporary monetary orthodoxy. I shall come back to that subject after talking about depositor preference. When we combine the ring fence with the particular instance of taxpayer-funded compensation, there is a real problem that the same old incentives are being preserved. Commercial risk is being subsidised by the taxpayer and to deal with the consequences of having encouraged that reckless behaviour at taxpayer expense an attempt will then be made to regulate those risks away—it has not worked before and it will not work now.

On depositor preference, I have learned through my last five or six years of working with academic economics that if there is one subject we cannot resolve it is who owns—or should own—the money in someone’s bank account and what the contractual obligations should be. In other words, if someone’s money is on demand and they can have it back any time, should there be a 100% reserve—it is their property and the bank is safekeeping it—or should it be the bank’s property which it can use to fund itself?

That question is extremely difficult to resolve, but I shall just cite a speech I have used before, in which the Earl of Caithness said:

“The current crisis, like previous ones, emanated from a base of judicial decisions. Prior to 1811, title to the money in depositors’ accounts belonged to the depositor. However, in that year, decisions in Carr v Carr and, in 1848, Foley v Hill gave legal status to the banking practice of removing depositors’ money from their accounts and lending it to others. Since then, title to depositors’ money has transferred from the depositor to the bank at the moment when the deposit is made.”—[Official Report, House of Lords, 5 February 2009; Vol. 707, c. 774-75.]

That goes very much to the point about the money creation process on which the right hon. Member for Oldham West and Royton (Mr Meacher) and I had an exchange. There was a time when this fractional reserve process created money, but that has now become meaningless, as banks are able to lend with almost no restraint. As I explained in my maiden speech, that is the fundamental reason for this massive boom-bust cycle.

I try never to have an idea of my own on these matters, so let me come back to what Irving Fisher wrote in 1935, when he brought forward a plan for 100% money. He said:

“The essence of the 100% plan is to make money independent of loans; that is, to divorce the process of creating and destroying money from the business of banking. A purely incidental result would be to make banking safer and more profitable; but by far the most important result would be the prevention of great booms and depressions by ending the chronic inflations and deflations which have ever been the curse of mankind and which have sprung largely from banking.”

So I return to David Fishwick, because he knows instinctively, as a business man, that if he takes somebody’s money on demand deposit he should 100% reserve it, in case they want it back.

By this point, I will have upset my friend Professor Kevin Dowd, who was a tutor to Andy Haldane at the Bank of England. I have had the privilege of meeting both of them to discuss these matters. Kevin is a free banker—he would believe in fractional reserves on demand deposits, without a shadow—but in his banking system there would be no limited liability and no taxpayer-funded deposit insurance, banks would issue their own notes and money, at bottom, would be gold. That commodity backing would limit the banks’ ability to create deposits.

There is also a problem in our banking system with accounting, which is another area where I have introduced a Bill. Since I did so, significant progress has, thank goodness, been made on one aspect—loan loss provisioning, which Members can refer to in the media. However, there is another problem with international financial reporting standards accounting for banks, which is mark-to-market accounting. We have heard today the story of how banks have securitised lending and sold it. In a chronically inflationary banking system where banks lent money into existence and, as we heard from another hon. Member, were encouraged to make bad loans—they were creating money to make bad loans into property—they of course wanted to get this off their books. So they wrapped it up in a bond, insured it with a derivative and sold it. They did not even have to sell it. They just took this instrument, moved it from one accounting book to another and they could then immediately mark its value to market. What does that mean in plain terms? It means that one can take 30 years of cash flows, unrealised, from mortgages not yet paid, and by marking them to market within a bond, around a vehicle that is all these mortgages securitised, one can take bad loans—loans that probably will not be repaid—and take it all as profit in capital today. You can pay yourself a massive bonus out of cash not realised—out of capital.

If hon. Members and the Minister wish to know more about how this works, I hope that they will look at my colleague Gordon Kerr’s book, “The Law of Opposites: Illusory profits in the financial sector”. Gordon has spent many years engineering financial products. In a sense, he is a dissident banker gone good. In that book, he explains how those accounting problems, combined with easy money, create so many of the problems that are, as Fisher said, the curse of mankind today.

At bottom, there will ultimately turn out to be two banking reforms that we should adopt. As I have said before—this is particularly the case for the question of the status of demand deposits, gold as the ultimate backing to money and so on—we will find in the end that the Bill is an honourable and brave attempt to prop up a contemporary monetary orthodoxy that is failing. This is the end of the post-Bretton Woods monetary order through which we have been living. We were told that it was a banking crisis. We learned a little later that it was a debt crisis. In a minute, people will realise that what we use as money is debt, that what the banks deal in is debt and that the vast majority of the money in our accounts was created by somebody else taking a loan. When that is accepted, we will discover that this is a monetary crisis. We will then find that there are two plausible ways to reform money and banking.

We could have 100% reserves on demand deposits and the preservation of state control over money and banking—that is, paper money, fiat money, the central banks planning interest rates, taxpayer backing and so on. That is the sort of plan advocated by my friend Jesús Huerta de Soto as a route to what we really should do, which is get the state out of money and banking. We should have a free banking system, as proposed by my friend Professor Kevin Dowd. He has brought forward a plan called “two days, two weeks, two months”, which would return us to a free banking system backed by gold within that time scale. It would not need regulation and it would be just and moral because people would take responsibility for the things they did.

This is not the first time that a monetary order has come to an end. By some calculations, in the 20th century there were about eight global monetary orders. The thing that is remarkable about the post-Bretton Woods order is not that it is ending but that it has lasted so long. I am afraid that I agree that this Bill is not enough, but it makes some progress and I hope that it will be the last attempt to prop up a contemporary banking system that cannot last.

[Kelvin Hopkins (Luton North) (Lab)]

That was a fascinating speech by my good friend the hon. Member for Wycombe (Steve Baker). I cannot compete with his erudition; I have a much smaller speech on a smaller issue.

In 1983, I stood for Parliament on a manifesto that called for the public ownership of large sections of the banking system. It is an irony that large sections of it are now in public ownership, having been put there by people who profoundly disagree with and disbelieve in that process, but who were forced to do so or to let the system collapse. That is interesting. I certainly wish to see public ownership go further, as well as public regulation and accountability, as the risk in banking is being underwritten not by the borrowers but by the Government, by the state and by the citizen, and if risk is not and cannot be transferred, the ownership and accountability should be in public hands as well.

During the Minister’s opening speech, I mentioned audit and the appalling failures of the audit industry during the banking crisis. The hon. Member for Chichester (Mr Tyrie) said that more needs to be done, and much more certainly needs to be done. I hope that some component of the Bill, when it is amended, might deal with audit.

There is a need for radical reform of the rules governing audit. The Financial Reporting Council is undertaking a consultation on the new rules that will compel auditors to write what is called a commentary, flagging problems, risks or disagreements with management at audited companies and institutions in clear and comprehensible language so that shareholders can understand. That will be seen as controversial by company management, but will be welcomed by shareholders and, by the same token, by bank depositors and customers.

We should of course remind ourselves that auditors, above all, represent shareholders—or at least they should. In reality, however, they are taken on by managers so power is effectively in the hands of managers and shareholders, or bank depositors, and customers simply have to trust them. When an audit contract comes to an end, auditors are unlikely to be critical of managers for fear of failing to be re-engaged. The inevitable cosy relationship between auditors and managers lies at the heart of what has gone wrong in the banking sector.

If auditors had been doing their job properly and their audit reports had not been so opaque and impenetrable, the financial crisis would not have happened as it did. The fact that banks were gambling with worthless bits of paper based on sub-prime mortgages was the fundamental cause of the banking crisis, and it is not over yet. Auditors did not do their job in relation to the practice of bankers such as those at Northern Rock before and until it collapsed. If they had, we might have prevented that catastrophe.

[Frank Dobson]

Does my hon. Friend agree that it is a trifle irksome to listen to the radio or watch television and to hear someone from PricewaterhouseCoopers telling us what we ought to do for the future when PricewaterhouseCoopers audited Northern Rock and did not spot anything going wrong, or to hear about the famous Ernst and Young ITEM Club when the biggest item in the firm’s history is that it did not spot that Lehman Brothers were broke?

[Kelvin Hopkins]

I thank my right hon. Friend for that intervention, and I am just about to mention those great companies.

As if to reinforce the case for radical reform, on 22 February the Competition Commission published a report that was deeply critical of PricewaterhouseCoopers, Ernst and Young, Deloitte and KPMG—the big four—for a deep “misalignment” with shareholder interests. The commission made it clear that auditors and company executives had acted as a cabal to their mutual benefit and to the exclusion of the interests of investors. Under the definition of investors, we can include depositors and retail customers in the banking sector.

The commission concluded that the relationship between auditors and management has been too cosy and must be overhauled. The big four audit nearly 90% of all blue chip companies. One suggested remedy has been for the mandatory rotation of tendering so that after, for example, five years or so an audit company would have to relocate to other companies and could not be re-engaged. The companies engaging auditors would then be required to ask new auditors to compete for business. That would go some way towards breaking the unhealthy link between auditors and the companies they are supposed to be auditing.

Whatever new rules might be introduced, it is vital that auditors are compelled to ensure that their loyalties are to shareholders, depositors and customers and not to banking and company managers. Auditors failed to raise the alarm before the financial crisis and that must never happen again.