Financial Services Bill

William Bain Excerpts

Monday 6th February 2012 Commons Chamber

[Mr William Bain (Glasgow North East) (Lab)]

This Bill makes certain changes to the supervision of the banking and wider financial services sector, and Opposition Members can give guarded support to them, but it falls far short of taking the much-needed action to regulate payday lenders and the total cost of credit, to secure growth and jobs as goals of the new regulatory bodies, and to make the necessary reforms in the banking sector’s excessive pay and remuneration, which was one of the key factors driving the financial crisis in the first place.

A growing body of research, from the OECD to White House economists, shows that societies with a smaller gap between the richest and the poorest achieve higher long-term growth. This Bill could have taken real steps to tackle inequality and the culture of high bonuses and pay in the financial services sector by implementing in full the recommendations of the High Pay Commission to put an employee representative on the remuneration committee of firms in the banking sector, to require the publication of the pay ratios between highly paid financial services staff and those on average wages, to ensure that all publicly listed companies in the sector produce fair pay reports, and to establish a permanent body to monitor high pay.

The High Pay Commission recently discovered that in Barclays, between 2009 and last year its top executives’ pay was 75 times that of its staff on average pay, and the ratio in Lloyds Banking Group was precisely the same. Since 1979 the pay of the top Barclays executive has gone up by 4,899%, to £4.365 million last year.

There appears to be a growing mood on the political right, particularly in the United States, to take the view that those issues do not matter, but in Britain they do, and the Government could have done far more in the Bill to show that they stand with the 99%, rather than with the top 1%.

The Bill could also have secured more justice for the young and poor in our society by introducing a tax on bank bonuses for the next two years—the first step in tackling the youth unemployment crisis, the scale of which the excellent report by the Association of Chief Executives of Voluntary Organisations exposed this morning. Youth unemployment costs the economy £10.7 billion, and the loss in tax revenues amounts to £2.2 billion per year. How disappointing that the Bill has not taken the first step to end that injustice today.

The Bill also wastes a golden opportunity to introduce controls on payday lenders and to impose caps on the total costs of credit. Shelter published research last month which found that almost 1 million people have taken out a payday loan to help pay their rent or mortgage in the past year, and that almost 7 million people rely on credit to meet their housing costs. The Bill could have limited the number of loans that a borrower might take out at any one time or on a repeat basis, as Consumer Focus recommended two years ago. Campbell Robb, the chief executive of Shelter, said on 4 January:

“Turning to short-term payday loans to help pay for the cost of housing is totally unsustainable. It can quickly lead to debts snowballing out of control and can lead to eviction or repossession and ultimately homelessness.”

On the structural changes to the supervisory framework for financial services, the Bill provides greater clarity through clause 57, so, in the event of a major crisis affecting the financial system, the Chancellor of the Exchequer will have the power to issue to the Bank of England directions on support for the financial system, including the use of Government funds. That is important in emphasising political accountability to this House.

The Bill is important to the people of Scotland. The financial services sector amounts to 7% of Scottish GDP, employs 150,000 people in Scotland and contributes £7 billion to the Scottish economy. Scotland has the headquarters of RBS, Clydesdale bank and Tesco bank, and it remains a key location for Lloyds Banking Group and other financial institutions. The future regulation of the sector is therefore critical in the momentous decision that the people of Scotland will soon make on their constitutional future.

The benefits of Scotland’s full participation in the UK financial system were keenly felt in 2008. The report of the Independent Commission on Banking made it clear that the total financial support, including loans and guarantees, provided to the banking sector throughout the United Kingdom during the crisis was of the order of £1.2 trillion. Two of the major beneficiaries of that support were banks based in Edinburgh.

There is a noticeable lack of clarity in the Scottish Government’s views on the Bill. It is unclear what their proposals for separation would mean for the protection of savings deposits in Scotland. There is a complete absence of detail on who the prudential regulator of banks based in Scotland would be if Scotland voted for separation and on the ability of the banking sector to sustain the levels of lending to Scottish businesses. The Scottish National party has said that it would still wish to receive the benefits of the Bank of England’s support for a separate Scottish financial system, but it has not been forthcoming on whether it would accept a continuing remit for the new Financial Policy Committee in the regulation of the banking sector.

Cross-border financial regulation is good for Scotland and for the UK as a whole. Our system would be weaker on all sides if RBS was split and regulated under one set of rules and institutions in Scotland and under another set of institutions here, along with the other major banks in the UK. Under its preferred post-separation model of establishing a currency union with the United Kingdom, with the Bank of England as lender of last resort, the SNP has not come clean on whether there would be a Scottish central bank, what its functions would be, what its relations with the Bank of England would be, or how banks in Scotland would be regulated in future. Would the SNP seek to regulate the banks and the financial services sector within Scotland, or would it leave that with the Bank of England? If it does plan to have a separate regulatory structure, what form would it take? There is a plethora of unanswered questions, and it is time that the people of Scotland had the answers from the Scottish Government.

The Bill has some satisfactory elements, but overall it does not meet the scale of the challenge of establishing a more socially responsible financial services sector. If it is to command support in the country, the Government will have to be open to amendments in Committee to restore confidence to the banks and credibility to the regulatory structure across the United Kingdom.