Financial Services (Banking Reform) Bill

Mark Field Excerpts

Monday 11th March 2013 Commons Chamber

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I would like to begin where the Minister began, with this issue of the British dilemma: the relationship between the size of our financial services industry and the rest of our economy. It is right that it is a very big UK industry. It is a big contributor to taxes, as the Minister said, and it is a major employer. It has a cluster of expertise around it, including law, accountancy, and consultancy services, which are also important contributors to our exports.

There are two views that we can take because of that importance. One is the view, sometimes canvassed, that because of its size we cannot touch it, or only in a minimal way, because if we harm this huge industry it will go to Singapore or the United States; it will go somewhere. But there is another view, which I would like to advance in this debate, that the very size of the industry in relation to the UK economy places a responsibility on us to ensure that that size does not damage the interests of UK taxpayers or the real economy.

We have seen through the crisis that occurred several years ago precisely how damaging failure in that industry can be to the wider economy. I do not have to remind the House about the results of that failure in terms of the bail-outs, the deficits and the decisions about tax and spending, the consequences of which our constituents are living with today and will be living with for many years to come. The approach that we should take to this British dilemma is to say, yes, the industry is valuable and important, but because of its very size we believe in the need for particular measures in the UK to insulate us from wider damage. Simply to stress the size of the industry and to ask for it to be left alone whenever someone comes up with a regulatory proposal is, to put it in the language that bankers would understand, a one-way trade, and a one-way trade is not good enough. We need a two-way trade that protects the interests of taxpayers too.

[Mark Field (Cities of London and Westminster) (Con)]

The right hon. Gentleman was a Minister in the Department for Business, Innovation and Skills at the time of the bail-outs of the banks, which are commonly regarded as a great success. As part and parcel of looking back on the past while also preparing for the future, does he recognise that elements of those bail-outs were not quite the success that they were portrayed as at the time? To get out of the large positions that we still hold in Lloyds Banking Group and RBS with any profit, let alone the large profit that perhaps we should have been negotiating at the outset, seems a long time away. Does he recognise that mistakes were made over the bail-outs which will be with us for many years to come?

[Mr McFadden]

One of the reasons for having this debate is that when the crisis hit in 2007-08 there was no proper resolution mechanism or bail-out regime in place to ensure that bondholders, rather than taxpayers, were on the hook for bank failure. We are having this debate precisely because we did not have the tools in place in legislation to deal with the global crisis when it unfolded. As I have said, what we need is a two-way trade.

[Mark Field]

I do not buy into the argument that the tools were not in place. In reality, it was not that many of the businesses were too big to fail, but that they were too interconnected, which I accept put us in a very different position from that in any previous bail-out. In relation to any insolvency or restructuring, there were and are protocols in place, and they should have been adopted to ensure the best value for the taxpayer in the long term. That did not happen in 2008-09.

[Mr McFadden]

If the hon. Gentleman believes that the tools were in place, I must refer him to the Chancellor, who is constantly saying that his predecessor, my right hon. Friend the Member for Edinburgh South West (Mr Darling), had no alternative when the crisis hit in 2008.

Let me turn to the Bill and some of the issues before us today. There is broad agreement on the need for some kind of structural separation between retail and investment banking. It is important to understand that the point of ring-fencing, as recommended by the Vickers commission, is not to ensure that no retail bank can ever fail—that is impossible—but to make failure, if it does occur, more manageable by insulating the risks and focusing the resolution effort on the essential services that the Government judge it in the public interest to protect: people’s savings, the payments service and simple consumer and SME lending. It would be going too far, and it would be far too rash, to say that that solves the “too big to fail” problem. However, ring-fencing ought to reduce the risks of future failure to taxpayers and the wider economy.

As the hon. Member for Chichester (Mr Tyrie) has said, the parliamentary commission, on which I serve, made two proposals in relation to structural separation. The first was the reserve power to separate individual banks should they try to burrow under, climb over, erode or get through—or any other metaphor that has been used—the fence, and the Government have accepted that recommendation. The second was to have a wider power to enforce separation on the sector as a whole. That second power would be needed precisely because problems in the sector do not come in the neatly wrapped form of one institution. As we saw in 2007-08, contagion is a fact of life in banking; the weakness of one can quickly affect others. Cultural problems in one part of the sector also spread quickly. It is precisely because problems in the industry are often widespread that there is a strong case for taking a reserve power to enforce separation on the sector as a whole, in the event that the sector tries to get around the intention of the Bill.

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[Alison McGovern (Wirral South) (Lab)]

I congratulate the hon. Member for Eastleigh (Mike Thornton) on his maiden speech, which was a really good first contribution. As a former railway person, I know that the town of Eastleigh is extremely important to that industry, but there is no more important a subject for him to make his maiden speech on than this Bill. I offer him my sincere congratulations.

Let me say why I think this Bill matters. By way of setting the scene, I want to explain something from which I think the financial services industry suffers. There has been a recent influx of Members to the Chamber for this debate, although I fear that it is not entirely due to the subject under discussion. Normally, the financial industry is quite a niche subject, which is partly to do with the fact that people often talk in code about financial services. There is a certain language that people are supposed to use when talking about financial services, and I suspect that those who work in the industry feel a bit as though they are part of a special club. They use words that normal people cannot really understand; they repeat their shibboleths and some of them live in their gated community, quite apart from normal society. Well, hands up, Mr Speaker, it takes one to know one; Parliament is just the same in so many ways. If we make things sound complicated, people will think we are really clever, but I think we should learn that democracy and financial services are too important for that.

Unfortunately, the culture in financial services makes scrutiny much harder than it ought to be. We now know that in the 2008 crash, the real risks taken by the banks were hidden, and that happened because of the insider culture. We are yet to hear from the Parliamentary Commission on Banking Standards about the cultural aspects of the financial services crash, so I repeat to Ministers earlier pleas about the timing of that advice. As I have explained, cultural aspects are important for effective scrutiny and good legislation in the future, so can we not ensure that we proceed with the best possible advice from the parliamentary commission? We in this House would probably all agree that we have been sent here to speak up for ordinary people, but what happens in the City’s square mile matters on every high street in Britain. It is not good enough anymore for financial services to be a niche interest in Parliament.

Growing up in the 1980s and 1990s I often felt that Merseyside was being buffeted and shaken in the interests of the City of London. Given the Chancellor’s words over recent months, it has sometimes felt a little like my teenage years on playback. The Chancellor talks about defending the interests of London as a financial centre—for example on leverage ratios—but how much do financial institutions worry about the average British high street?

[Mark Field]

Will the hon. Lady give way?

[Alison McGovern]

Let me finish the point, and then of course I will give way to the Member who represents the square mile.

Let us be honest: some financial institutions do worry about that, and some are very large employers, and I know that many people in the financial services would agree absolutely with my point. However, wage inequality skews influence to insiders at the top.

[Mark Field]

Does the hon. Lady recognise that as well as the hugely important business, which is perhaps based culturally within the square mile in my constituency, a vast number—indeed, the majority—of jobs in UK banking and financial services are based not just outside the City but outside the capital? She will be aware, for example, that not too far from her constituency in the city of Chester, a huge number of employers employ many thousands of people in the financial services.

[Alison McGovern]

That was the point I was trying to make, and I refer the hon. Gentleman to comments made by my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who said that although that is true, it is not enough to say, “We’re a big employer; leave us alone.” The influence of the financial services in the City is greater than that, and that will not do anymore.

Wage inequality in financial institutions skews influence to insiders at the top. This is a classic insider-outsider problem, and we in Parliament must work out how to scrutinise more what goes on in the City. I believe that the Royal Bank of Scotland’s final report makes great play of how it is finally a living wage employer. Well, good for RBS, but it is perhaps a little too late.

On the bonus culture, the Government have said that there could be a perverse incentive in controlling bonuses and that people might be paid more if their bonuses are reduced. That is true if—and only if—they think the following two things: that it might not be better to have more fixed costs and less turbulence, and that we might want to think about the impact of those highly variable costs on incentives; and, secondly, that the overall remuneration of bankers is just fine and the current inequality in the financial services sector is okay. Well, it is not okay. The hon. Member for Cities of London and Westminster (Mark Field), who represents the City, mentioned the many people all over the country who work in financial services, but when I make the point about inequality in the financial services sector, it is those very people, and the money in their pockets, who I am thinking of.

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[Mark Field (Cities of London and Westminster) (Con)]

I shall endeavour not to stray quite so far from the Financial Services (Banking Reform) Bill as the right hon. Member for Holborn and St Pancras (Frank Dobson) has just done.

No one could accuse the Treasury or the coalition of rushing into banking reform; nor, to their credit, has there been anything other than the most comprehensive consultation with—and without—the banking industry here in the UK. I shall not repeat the timeline that other hon. Members have referred to, save to say that I accept the concern expressed by my hon. Friend the Member for Chichester (Mr Tyrie) that the Bill will not be considered directly in tandem with the report of the Parliamentary Commission on Banking Standards.

Above all, we all need to face up to our complacency. The conventional wisdom of the day, to which I fully signed up in the first half of the last decade, was that financial services would thrive best with light-touch regulation. What a difference half a decade makes! It was also during that period that the present Chancellor fatefully nailed his colours to the mast. Despite clear evidence that we were collectively living well beyond our means during the previous Administration, and amidst growing public and private debt, he decided to stick to the outgoing Labour Government’s spending plans and characterise our fiscal aspiration as “sharing the proceeds of growth.” I regret the fact that as a result, when the crisis hit home, my party was unable to make the orthodox Conservative case that the seeds of that financial destruction had been profligacy and the leverage that was referred to earlier. Instead, the established view was, and continues to be, that regulatory failings—of which there were undisputedly many—and reckless actions by the bankers were the primary, if not the sole, cause of the financial calamity. Hence the persistent demand for more extensive and punitive regulation of the banks, and the constant chatter of hostility towards bankers and all that they do.

My contention remains that the core issue that we need to tackle is global imbalances, many of which are still worryingly in place after a half decade of near stagnation economically. Alongside this, a generation of Britons—as well as Americans and continental Europeans—have lived and continue to live miles beyond their individual and collective means. We are still mortgaging the future of our children and grandchildren.

The Chancellor’s recent declaration that any UK bank failing to adhere to the Vickers safety regime would run the risk of being broken up was an understandably uncompromising response to the Treasury Committee’s demand for an electrified ring fence. Similarly, few could criticise the populist insistence that RBS would have to fund LIBOR—and, presumably, other future mis-selling—penalties from senior executive bonus pools. At a stroke, however, the Treasury has inadvertently imposed a permanent impairment on the value of the UK Government’s still huge stakes in the banking business. Our £66 billion investment in RBS and Lloyds is currently worth two thirds of what we paid for it. Nothing in the Bill will bring forward the date on which we, as taxpayers, will be compensated.

It is often claimed that the banking lobby, here and on Wall street, has used its considerable muscle to water down, undermine or even cast aside moves by politicians and public interest groups to rein in the banking system. Several Members have mentioned that tonight. Ironically, much of the criticism comes from the self-same media outlets that have placed intense pressure on elite politicians to dismantle the proposals for their own industry, as set out in the Leveson report. As a matter of fact, the banks have taken much of what has been proposed on the chin. Many have privately expressed great concern to me about the wisdom and practical application of ring-fencing, but they feel that they have no choice but to accept Vickers virtually in its entirety.

Ironically, existing financial services players could reap the unanticipated benefit that comes from erecting ever more onerous barriers to entry for potential new banks. Sadly, as the hon. Member for Wirral South (Alison McGovern) suggested, the zest of competition has been largely ignored in an effort to make banking safe and to punish banks for their past wrongdoing.

The City of London’s size and global reach continues to make the UK economy especially vulnerable to turbulence in the financial markets. The centrepiece of the Bill’s reforms—the plan to ring-fence domiciled banks’ retail arms from their investment ones—is based on the notion that the less risky retail operations require protection from the so-called casino excesses of investment banking. The aim to reduce the burden on the British taxpayer in the event of banking failure is, of course, a laudable one. Many in the financial fraternity are simply glad that the reforms fell short of a return to a full-blown plan along the lines of Glass-Steagall, to which my right hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell) referred. That was the US legislation that separated commercial and investment banking for almost seven decades until 1999. In addition, the big banks will now need to raise capital and loans equivalent to 20% of the part of their balance sheet for which UK taxpayers would be liable in a crisis.

The coalition Government were swift to accept the Vickers recommendations almost without reservation, giving British banks until 2019 to install their ring fence. However, I fear that the question of the separation of banks’ retail and investment arms has still not been successfully settled here in the UK. Fears have been raised that the Vickers reforms will tie up billions of pounds in additional capital and impose on banks a requirement to overhaul compliance and corporate affairs—a burden that will, I am afraid, have to be met by our constituents, the general public, in higher interest rates and in the sharply reduced amounts that banks are willing to lend.

One of the causes of this paralysing uncertainty that has enveloped the UK’s big banks is the mixed messages coming from the Treasury on the one hand and the central bank on the other over the dual requirements to recapitalise, and thus reduce the risks of future taxpayer bail-outs, while also being ready to lend to credit-starved UK plc as if it were 2006 or 2007 all over again.

Meanwhile, at EU level, the Liikanen report has recommended to the European Commission a similar, Vickers-style ring-fencing of retail banking from investment banking. This has given a small crumb of comfort that the UK might not be going down this path alone. However, I fear that the Liikanen proposals are sufficiently different from the Vickers proposals to heap further uncertainty on financial services here in the City.

Since there is likely to be precious little consensus between the EU, the UK and the US authorities any time soon as to whether the structure of banking is best under Liikanen, Vickers or indeed Volcker, how should banks realistically now prepare? Once again, I fear that the cost of all that uncertainty will be borne by the consumer and the wider economy, not to mention heavy job losses throughout the financial services industry. In this regard, it is important to nail the understandable public misconception, also heard here tonight, that it has been “business as usual” in the City since 2008. It would be fair to say that particularly over the past two years, volumes of business have collapsed, state financial support has been largely withdrawn and there has been and will continue to be a huge jobs cull. If we couple that with falling salaries and bonuses for the vast majority of workers, it means bad news all round, as Treasury receipts from financial services have plunged to what I suspect will be a new norm for the future.

Aside from the issue of commercial uncertainty, there are, I believe, question marks over whether the ring fence will actually work. The Bill’s template is based on a somewhat simplistic and outdated division between what amounts to wholesale and retail banking. There are numerous transmission mechanisms between the two that make a hard-and-fast split between high street and casino investment banking very difficult to achieve.

Historically, the City of London has repeatedly benefited from arbitrage with Wall street, from the withholding tax under President Kennedy over 50 years ago, which precipitated the creation of the eurodollar and eurobond markets, right through to the “big bang” in the mid-1980s and the effects of Sarbanes-Oxley in 2002 in the aftermath of the Enron and WorldCom collapses. If the UK is to prevent its competitors from benefiting from unilateral action along the lines set out by Vickers, it must continue to press for international agreement on the future landscape of the financial services world.

There is, in my view, a danger that the UK and EU regulators will somehow look at the Bill’s ring-fencing as a panacea, and will sell it as such to the general public. Instead, in the light of the pitfalls of the ring-fence options, it might prove more effective to look at an alternative dual system when it comes to ordinary deposit accounts. This would allow those who desire a risk-free place to store their money to place it in savings banks, while those happier to take a risk—unprotected, of course, by any Government guarantee—could have an account with a fractional reserve bank, as used to be the case in the UK until the mid-1980s.

Tighter regulation, newfangled restrictions and imploring banks to behave ethically as set out in this Bill and future legislation will no doubt do little to restore the City’s reputation for integrity. I fear that the spate of mis-selling scandals still has a hell of a long way to run, especially as, in fairness, 20:20 hindsight now deems that almost any novel financial product created and marketed by our banks since 2000 will be regarded as having been mis-sold against consumers’ interests.

[Mr Love]

If I may characterise the hon. Gentleman’s argument, it seems to be that a race to the bottom in terms of regulatory cover will be to the advantage of the City of London. Many, however, including the witnesses who gave evidence to the parliamentary commission, have said that there should be a race to the top to provide safety and security, which will attract investors to London. Why does he not accept that argument?

[Mark Field]

I am afraid that the hon. Gentleman has mischaracterised what I was trying to say. What I would say is this: we do not know—we cannot be sure, so it is better to approach the problem by trying to organise international agreements rather than by “a race to the bottom”, as he puts it. I do not believe that either. Much of the evidence taken by the parliamentary commission has played an important part in ongoing thoughts about the whole landscape of international financial services for the future. It is wrong to mischaracterise what I said, but there are risks and, given the importance of the financial services industry, whether we like it or not, we need to ensure that we go into this with our eyes fully open.

If Governments of any political colour continue to take ultimate responsibility when consumers purchase products from our banks, a whole set of unhealthy and perverse incentives will continue to plague our financial services industry. It is imperative to remember that regulation is often the sworn enemy of competition—one of the other avowed goals in the Bill. Public confidence and ethical foundations will slowly and surely be restored in financial services only when the landscape becomes far more competitive. That means, in my view—whether we like it or not—that consumers of financial products need to take a far greater level of responsibility. No amount of banking reform or new regulation will otherwise create the conditions for free-flowing capital to build the successful businesses of the future, let alone restore the reputation of our nation’s most important invisible export, which is and remains financial and business services.