Financial Services (Banking Reform) Bill

Sajid Javid Excerpts

Monday 11th March 2013 Commons Chamber

[The Economic Secretary to the Treasury (Sajid Javid)]

This has been a thoughtful and considered debate, led by my hon. Friend the Member for Chichester (Mr Tyrie) and his colleagues on the Parliamentary Commission on Banking Standards. I take this opportunity to thank my hon. Friend for his leadership of the parliamentary commission and to thank all the Members of the House and in the other place who have made contributions to that commission.

I congratulate the hon. Member for Eastleigh (Mike Thornton) on an excellent maiden speech, and I welcome him to the House. I, too, spent quite a bit of time in Eastleigh over the past few weeks. I do not think I helped him get to the House, but now that he is here I congratulate him and wish him the very best. From what I heard today, I think he will make a fantastic contribution. Thank you.

We heard a number of pertinent and considered contributions from both sides of the Chamber, and I am pleased to see widespread support throughout the House for the measures that the Government have put forward in the Bill. The support from the Opposition Benches for so many measures is an admission, at least from some Opposition Members, that they got it wrong during their time in office, and that, as my right hon. Friend the Chancellor has said, when the fire alarm was ringing, nobody was listening. That was a point well made by my hon. Friends the Members for Carlisle (John Stevenson) and for North East Cambridgeshire (Stephen Barclay).

Nearly six years ago, we experienced the first run on a high street bank in over 100 years. Five years ago, the previous Government were forced to bail out both RBS and Lloyds, as well as to provide billions in support to the financial system. It was the worst financial crisis in a generation. It happened on their watch and it left this Government with a huge mess to clear up and with the task of restoring trust in the banking system and ensuring that taxpayers are unlikely ever again to have to step in to bail out banks. That is exactly what the Bill is designed to achieve. Ring-fencing will ensure that core services continue to be provided if a bank gets into trouble, and it will ensure that it is those who lend to banks and benefit in the good times who take losses when there are bad times.

This is a crucial Bill for the future of banking in this country, and its seriousness has been reflected today by the Members who contributed—15 right hon. and hon. Members, and the Father of the House, my right hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell), who made a superb contribution. I will attempt to respond to as many of the issues they raised as possible.

As my right hon. Friend the Chancellor has stated before, we have built a strong consensus around ring-fencing as the right structural reform, and others are following our lead. The proposals of Governor Liikanen and the high-level expert group draw heavily on this Government’s proposals and are entirely compatible with the Bill put forward by this Government. A number of Members, including my hon. Friends the Members for Chichester and for Caithness, Sutherland and Easter Ross (John Thurso), and the right hon. Members for Wolverhampton South East (Mr McFadden) and for Oldham West and Royton (Mr Meacher), raised the issue of the “electrification” of the ring-fence, as proposed by the parliamentary commission and accepted by the Government.

It seems clear that the House is in broad agreement with this important addition to the Bill. The Government agree that a power to require an individual group to separate could be a powerful deterrent against attempts to game the ring fence. This power would strengthen the ring fence. The Government will therefore table an amendment while the Bill is before this House to provide for the regulator to have the power, subject to Treasury approval, to require a group to separate.

On a related issue, several hon. Members have raised the proposal of the parliamentary commission that the Bill provide for sector-wide separation to be triggered at some, as yet undetermined, point in the future. The Government do not accept that proposal. The parliamentary commission is, in effect, asking the House to legislate two parallel policies: ring-fencing and full separation. That is despite the conclusion of the ICB, which rejected full separation in favour of ring-fencing, and despite the parliamentary commission producing no evidence in favour of sector-wide separation as an alternative. Indeed, the parliamentary commission accepts that there is no compelling case at present for full separation. That is why it recommends an independent review at some point in the future to consider whether full separation should be implemented.

However, ring-fencing has already been endorsed by a thorough independent review, which undertook public consultation, extensive scrutiny and cost-benefit analysis lasting nearly three years before rejecting full separation. The parliamentary commission’s proposal to legislate for an alternative policy in case we change our view would, in the Government’s opinion, be bad law-making. If in the future a Government were to believe that ring-fencing was no longer appropriate, which they would be perfectly entitled to do, they should conduct a thorough analysis of the evidence, consider the arguments for and against, including perhaps by commissioning an independent review. If they concluded that a different approach was necessary, they should bring forward legislation for Parliament to consider in the light of all the facts.

Several Members referred to the Volcker rule, including my hon. Friend the Member for Wyre Forest (Mark Garnier). While some may support such a measure, after 18 months of consideration, Sir John Vickers did not recommend that the ring fence be supplemented by a ban on proprietary trading. When the parliamentary commission asked him whether a Volcker rule should be introduced on top of his ring fence, he warned that the complexity of such a rule could, by distracting regulators’ focus, actually undermine the ring fence. On top of that, in Europe, Governor Liikanen and his high- level expert group noted how difficult it could be to distinguish between market making and proprietary trading. They also worried about pushing proprietary trading into the shadow banking sector, instead choosing to keep it within the regulated banking sphere. This Government are minded to agree with such an appraisal, and do not therefore see the benefit of a Volcker rule on top of ring-fencing.

We have heard some interesting views on the leverage ratio. Let me be clear. The Government strongly support a robust leverage ratio and are pushing hard for full implementation of the Basel III leverage ratio in the EU via the capital requirements directive. The ICB and the parliamentary commission have both proposed that we increase the minimum leverage ratio above the 3% international standard set out in Basel III. The Government strongly support the idea of a minimum leverage ratio as a backstop to risk-weighted capital requirements. But a higher leverage ratio would become a front-stop, the primary capital constraint on low-risk institutions, including building societies—a point made by the hon. Member for Bassetlaw (John Mann)—and one that could reduce essential lending to households. A front-stop leverage ratio would also create perverse incentives for these institutions to risk-up, because a leverage ratio does not distinguish between the safest assets, such as UK gilts, and the most risky assets. I do not think any hon. Member would like to see policies encouraging our safest banks and building societies, including those that weathered the last crisis quite well, to become more risky. So the Government are not persuaded by the arguments for a higher leverage ratio.

We have also had a number of interesting interventions on primary loss absorbing capacity requirements, not least from the Chairman of the parliamentary commission. The Government are committed to ensuring that banks have the means to absorb losses should they get into trouble, and that those losses fall on those best able to assess the risk that they are taking. The Government agree that the ICB recommendation that ring-fenced banks, and UK-headquartered globally systemically important banks, should be subject to new PLAC standards. That will be 17% of risk-weighted assets for the largest banks. That extra capacity to absorb losses will improve resilience against shocks and mean that, if a bank does fail, it can be resolved without recourse to bank bail-outs.

Some Members questioned who would decide whether banks should issue primary loss absorbing capacity against their overseas activities. The parliamentary commission recognised that the Treasury should have a role in shaping how the regulator applies primary loss absorbing requirements. That is because such decisions will be inextricably bound to the key Treasury objectives of protecting public finances and supporting long-term growth. The Government therefore believe that there is strong merit in the FSA’s suggestion that PLAC instruments and decisions should be made in the context of a firm’s resolution strategy. We will therefore make provision during the passage of the Bill to give effect to that.

Members have also mentioned bail-ins, which were discussed at some length by the right hon. Member for Wolverhampton South East. Bail-in is an important statutory tool that helps to ensure that creditors, rather than taxpayers, expect to bear the costs in the event of bank failure. It is a particularly important tool for systemically important banks, where the impact of insolvency on the wider economy is large.

To ensure that UK banks are not disadvantaged relative to international competitors, and because the task of resolving large cross-border banks is complex and requires close co-operation, it is important that the UK works with other countries to design a consistent bank bail-in tool that can work in relation to the resolution of cross-border institutions. We are therefore working closely with our European partners to develop a credible and effective bail-in tool as part of the European recovery and resolution directive. We are pleased that the Irish presidency has set out its intention to make rapid progress towards conclusion of the RRD. However, if agreement cannot be reached—we expect that it can—we will consider tabling amendments at a later stage in the Bill’s passage to allow the UK to act alone.

We heard many thoughtful interventions on competition matters. We heard from my hon. Friends the Members for Wyre Forest, for Cities of London and Westminster (Mark Field), for Wycombe (Steve Baker) and for South Northamptonshire (Andrea Leadsom). The Government are committed to making changes to encourage greater competition in the banking sector. Many of those do not require legislation to take effect, and we have already acted in a number of ways. The FCA is now tasked, through the Financial Services Act 2012, with a competition objective, as Sir John Vickers, the former head of the Office of Fair Trading, recommended.

While discussing competition, we also heard from a number of Members on what might be called alternative structures for banking. The hon. Member for Bassetlaw suggested that we move to the Chinese model, and the hon. Member for Hayes and Harlington (John McDonnell) suggested that we nationalise the entire banking sector. However well intentioned those proposals, I think that they are wholly misguided.

[John Mann]

It ill befits the Minister, when an hon. Member makes a point on three occasions, not to manage to listen to it. Perhaps he would care to consider the point I made: I dismissed the Chinese model and recommended the German model.

[Sajid Javid]

Well, let us talk about the German model. As someone who worked for a German bank for 10 years, I think I might know a little more about the German model than the hon. Gentleman does. The German model was the one that had to nationalise Commerzbank and other banks in the regional sector, and the largest bank in Germany was not without its own problems, such as the LIBOR scandal. He suggests the German model, but I do not really understand what the difference is.

[John Mann]

The difference between the German model and the model the Minister has at the moment is that the German model is lending to business.

[Sajid Javid]

I think that the hon. Gentleman needs to do some homework on the German model.

Let me turn to switching. The Vickers commission made a number of recommendations on competition, one of which was for a seven-day switching service. That will go live in September this year. It will be free to use and will come with a guarantee to protect customers against financial loss in the event of any errors occurring during the switching process. A number of Members, not least my hon. Friend the Member for South Northamptonshire, made interesting points on full account number portability. The Government have always kept an open mind in that debate, arguing that the seven-day switching service should be allowed a good run. If it does not deliver the expected consumer benefits, more radical options will of course be looked at, including full account number portability.

The structural reforms proposed in the Bill will of course aid competition. As the Bank of England’s executive director for financial stability, Anthony Haldane, said to the parliamentary commission, one of the biggest challenges we face on competition concerns is that banks are perceived as being too big to fail. The banking sector reforms made through the measures in this Bill are designed to address precisely that issue.

[Andrea Leadsom]

Does my hon. Friend agree, though, that the big banks will lobby extremely hard against greater competition, particularly full bank account number portability, and does he undertake to resist their lobbying attempts?

[Sajid Javid]

My hon. Friend makes a good point. The contents of the entire Bill show how the Government have already resisted the attempts of many in the banking lobby.

My right hon. Friend the Chancellor—this will also interest my hon. Friend—has, as she will know, announced a consultation on bringing the payment system into regulation. We will make sure that new players in the market can access the payment system in a fair and transparent way and that they serve the needs of consumers, not those of established banks. Members may want to note that we will launch this consultation soon after the Budget. I am sure that my hon. Friend will want to make representations on full account portability to the consultation.

Several hon. Members talked about RBS. The Government believe that RBS’s future is as a major UK bank with the majority of its businesses in the UK as regards personal, SME and corporate banking. United Kingdom Financial Investments Ltd continues to be responsible for managing the Government’s shareholding in RBS on a commercial and arm’s-length basis and for developing and executing a strategy for disposing of the investment in an orderly and active way. UKFI continues to look at a full range of options for disposing of the investment, and RBS should emerge as a stronger and safer bank able to maintain lending to businesses and consumers that can, in time, be returned to full private sector ownership.

The Bill before us ensures that a future Government can keep bank branches going and cash machines operating while letting investment arms fail. It ensures that taxpayers will not fork out for the mistakes of others. Put simply, it deals with exactly the issues that are of concern to most of the UK public after the recent crisis. Financial services are a vital part of our economy, as evidenced by points well made by my hon. Friend the Member for Cities of London and Westminster, and they employ over 1 million people across the country. Let us not forget that the total tax take of the financial sector, including the income tax paid by its employees, adds up to over £60 billion—money that we rely on to fund our vital public services. It is crucial that we make sure that the British public again begin to trust the industry, that banks continue to serve families and businesses, and that the sector becomes what my right hon. Friend the Chancellor has described as a

“financial industry that is strong, successful and inspires the pride of all those who work for it.”

Question put and agreed to.

Bill accordingly read a Second time.

Financial Services (Banking Reform) Bill (Programme)

Motion made, and Question put forthwith (Standing Order No. 83A(7)),

That the following provisions shall apply to the Financial Services (Banking Reform) Bill:

Committal

1. The Bill shall be committed to a Public Bill Committee.

Proceedings in Public Bill Committee

2. Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 18 April 2013.

3. The Public Bill Committee shall have leave to sit twice on the first day on which it meets.

Consideration and Third Reading

4. Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.

5. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.

6. Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.

Other proceedings

7. Any other proceedings on the Bill (including any proceedings on consideration of Lords Amendments or on any further messages from the Lords) may be programmed.—(Greg Clark.)