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7.29 pm
Mr. Giles Radice (North Durham): I start by paying tribute to the hon. Member for Hazel Grove (Sir T. Arnold), who chaired the Select Committee in an admirable fashion and produced a report that was broadly agreed--except for our arguments over the relationship between the SIB and the SROs. I thank the hon. Gentleman for his good work and I wish him luck in his continuing chairmanship.
The Select Committee has played a valuable role. Some of us came to the subject with open minds: in my case, it was an open mind perhaps tinged with ignorance. I have certainly learnt a good deal during our 46 sittings. We took a massive amount of written evidence, which seemed to go on and on; we sometimes felt that it would never end. The Select Committee has given the general public a great opportunity to see what is happening in the City and to argue out the case. It has given the institutions a chance to discuss matters in public and it has given the regulators a chance to argue their own corner; they certainly did a fair amount of that during our sittings.
We produced a broadly agreed report; there was a difference of emphasis, but the report is extremely useful. It is useful for the Government--I know that there are some differences of emphasis within Government Departments about what should happen and we have been helpful to them on that. The report is useful for Labour because, if after the next general election we should be in
government, it will provide a mine of information that was not previously available on which to base our Government policy.
The City and financial services are of great importance to the economy and to the general public--given how much of our money is managed in the City of London and how many of the products produced by the financial services industry are used by members of the public. It is therefore essential that the general public have confidence in the effectiveness, openness and honesty of the institutions and firms operating in that sector. That is the case for regulation--for having the markets regulated.
One has to ensure that the regulation does not interfere to such a degree that it piles costs on to firms. But there is a counter-argument which is just as important--I would say more important. Unless the public have confidence in the institutions and firms, we lose out as an economy. The public have been worried about one or two sectors, which has affected business. There is a strong case for good, high-quality regulation.
Ms Diane Abbott (Hackney, North and Stoke Newington):
Does my hon. Friend agree that another reason for carefully studying financial regulation is that we now have a much wider and less sophisticated consumer base of financial services products than we did a generation ago? Many more people are purchasing mortgages and private pensions--many more unsophisticated people are purchasing financial services products and they therefore need the best and most effective form of regulation that we can provide.
Mr. Radice:
I agree with my hon. Friend, whose keen questioning of witnesses I have always valued. She certainly made that point clearly during our sittings.
I shall now turn to what I might call the North Warwickshire point. I congratulate my hon. Friend the Member for North Warwickshire (Mr. O'Brien) on his promotion to the Front Bench, which is well deserved. He moved an amendment that was referred to by the hon. Member for Hazel Grove, which represents the nub of the argument between the two sides--inasmuch as there was an argument, this was it.
We all agreed that there was a problem involving the regulators fighting among themselves--they did so publicly in front of us, so we could hardly avoid drawing that conclusion. There was a problem involving confused responsibilities--some of the witnesses said that. There was a problem about who was responsible for the regulation--a responsibility that has changed over the period. The title SRO is now a misnomer as they are no longer self-regulatory organisations, but have increasingly become--we propose that they should become even more so--organisations containing a majority of public interest members. They are no longer organisations that simply represent the industry professionally--which is, perhaps, how they were originally conceived.
The SROs have changed and the proposal that the Labour party supports--we turned it over in our minds over a long period and were uncertain about which was the best model--is one where the SROs are, in the words of my hon. Friend's amendment, folded into the SIB. We are not envisaging a massive, bureaucratic organisation-- on the contrary, there would be two departments: one
responsible for retail and the other responsible for wholesale. Our model would keep some of the best aspects of the SROs such as professional involvement; we need experts who know how the markets work. Such involvement should still be guaranteed, but we would eliminate the unnecessary duplication that occurs at present through the SIB and the SROs. By eliminating duplication, we could reduce costs.
That structure provides a better model and, through our search for consensus, we made a nod towards the possibility of creating that model. In the full body of the report we said that if the regulators could not come together more effectively than in the past, the case for the model that I have proposed today and that my hon. Friend suggested in Committee will be much stronger. In essence, assuming the general election is 18 months away, the intervening time will provide a good testing period to discover whether the two are moving closer together.
Mr. Malcolm Bruce (Gordon):
The period is unlikely to be longer.
Mr. Radice:
But the period might be shorter, which is the point that I am making. Those 18 months will provide a good testing period in which people such as my hon. Friend the Member for Edinburgh, Central (Mr. Darling) will be able to test to discover whether the organisations are coming closer together and whether the model proposed in the amendment is the best one. The intervening time will provide a good testing period for the regulators.
We produced a separate report and investigation on Lloyd's, although we mentioned the subject in the body of the main report. It was a great experience for me and for many of my colleagues who heard the witnesses who appeared in front of us. I think that one must conclude, as the Committee did, that Lloyd's represented a massive self-regulation failure. That is why the Committee was persuaded that there should be an independent external regulator who is answerable to the Treasury. There can be no practical argument against that case. The Government, even in their dying days, should accept that argument-- as I hope that any future Labour Government would. It is a helpful and a sensible move that would help to restore the worldwide reputation of Lloyd's, which has taken a considerable battering in the past 10 years.
My last point refers back to the comments of the hon. Member for Hazel Grove. I have learnt a lot from my service on the Select Committee. I was not a member of the Committee at the time of the collapse of Johnson Matthey, but I chaired the sub-committee that examined the collapse of the Bank of Credit and Commerce International, because the then Chairman, as a chartered accountant, had a vested interest and did not wish to become involved. I examined the BCCI case very carefully and I concluded that it represented a supervision failure on the part of the Bank of England. I was not convinced then that the Bank's supervisory role should be separated from its monetary responsibilities, although we laid down some clear proposals to improve the Bank's supervisory capacity and abilities--some of which it followed and others of which it did not.
We then saw the collapse of Barings. Most people who considered it objectively would conclude that the Bank of England did not do a very good job supervising Barings. Quite a lot of evidence in the Singapore report--which
makes very interesting reading--points to that interpretation. I am not embarking upon a witch-hunt against the Bank of England, but we must have more effective supervision.
In the report, the Committee asks: is the Bank sufficiently divorced from the culture of the banking industry? Some might say, although I do not believe that it does, that that conflicts with the next question: does the Bank have the necessary expertise to be an effective regulator? One of the problems with Barings and BCCI was that the Bank of England did not know enough about the market that it was supposed to supervise. We have asked those questions, but as yet we have not reached any conclusions about them.
I have now changed my mind; I have been swayed by experience and by recent events and I am now in favour of a separate body. When the Committee visited Frankfurt, we talked to officials from the Bundesbank who argued very strongly that the bank's reputation as a monetary body was more powerful because it was not responsible for bank supervision. Therefore, if mistakes were made in the supervision area, they would not affect the bank's monetary position. I think that that is quite a strong argument and the Bank of England, which is now trying to develop its role in monetary affairs, should consider it very seriously.
Ms Abbott:
Does my hon. Friend agree that, apart from the points that he mentioned, there are three problems with the Bank of England as a supervisor? First, it is wedded to a hands-off, laissez faire form of supervision. Specifically, it conducts much less on-site examination than the supervisors that we visited in America and in Europe. There is too much stress on the personal character of the people leading the institution as opposed to the detail of checks and balances.
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