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8.36 pm
Mr. Matthew Carrington (Fulham): First, I declare my interests as in the Register of Members' Interests. I declare also an interest that I understand is still not registrable, which is that my wife works at the London international financial futures exchange. I understand, as I have said, that it is not a registrable interest but it is something that the House will wish to know before I continue.
It has been a good debate because we have seen what is often apparent in the Select Committee on the Treasury and Civil Service--that is, a measure of strong agreement throughout all parties. I welcome that consensus.
We are not discussing a barnstorming report. Nevertheless, it is a worthy report. It highlights important issues that need to be considered but are not capable of instantaneous solution. Nor should they be capable of it.
I do not propose to go through the details contained in the report. That has been done already, and extremely capably, by my hon. Friend the Member for Hazel Grove (Sir T. Arnold), who chairs so excellently the Select Committee, and by the hon. Member for North Durham (Mr. Radice), whose presence in Committee we shall greatly miss. We are pleased that he has transformed himself to another Select Committee--or that is what we understand--but we shall miss his wise advice and contributions to our meetings.
The report is important because we have highlighted the purpose of regulation. I say that because the purpose of regulation is not immediately obvious. Indeed, the purpose is difficult to define. Regulation varies enormously depending on what we are trying to regulate. One of the most obvious purposes of regulation is to stop wrongdoing. It is clear that the purpose of regulators is to catch crooks. That is the easy part of understanding regulation.
With regard to protection of the public, as we heard from my hon. Friend the Member for Gloucester (Mr. French), protecting the public is a complex business. If we try to protect them in the wholesale markets it is necessary to have a certain form of regulation, whereas in the retail market a very different form of regulation is needed. It is possible to say that the Financial Services Act 1986 has worked quite well in wholesale regulation, but perhaps less well in the retail sector. Not only have enormous burdens been put on to the practitioners in the retail sector, but there have been significant failures of regulation, such as the mis-selling of products, which has already been described.
Perhaps one of the major purposes of the regulator, and possibly therefore of regulation, is really to create transparency. It is to enable people to exercise the right of caveat emptor when they are buying a product, and to know what they are buying. Frequently, perhaps
especially in the retail sector--although I know from experience that it happens in the wholesale sector too-- the same product can be packaged so as to make it hard for someone who wishes to buy it to determine from whom to buy it, to the best advantage of the purchaser.
Of course, another purpose of regulation is to avoid crashes, such as that of Barings. Another theme that emerged from our report is that regulation in the banking sector has not been very effective in stopping crashes, and I shall ask in a moment whether that could be improved.
However, the real purpose of regulation is more than all those things: it is to instil confidence in the markets that are being regulated. That was one of the criticisms that came out of our separate report on Lloyd's. The question was not whether Lloyd's is being properly regulated now--although there is no doubt that it was not properly regulated in the past. In some ways, whether it is properly regulated now is not the issue. The issue is whether the people who might place their insurance business with Lloyd's believe that it is being properly regulated. That is the strongest argument for an external rather than an internal regulator for Lloyd's. The question is purely one of confidence.
We have heard about the conflict between the Securities and Investments Board and the self-regulatory organisations. That has led some members of the Select Committee, as well as other hon. Members who are not members of the Committee, to conclude that the SIB should absorb the SROs. In some respects that is a perfectly rational argument, and it is not an argument with a great political element to it. The decision should be made on grounds of practicality and functionality.
Rather as was suggested by my hon. Friend the Member for Carshalton and Wallington (Mr. Forman), I suspect that a system of dynamic conflict between the SIB and the SROs is rather helpful, in that it answers the age-old question: who will regulate the regulator? A regulator's ability to become complacent--and, one must say, corrupt--is substantial. Although none of our regulators has shown any sign of being corrupt, there are examples from all round the world of regulators who have become extremely corrupt, and one does not have to look far, either geographically or back in history, to find them.
There is a great need for somebody who monitors regulators very closely and who, indeed, has a certain amount of conflict over turf with them, so as to ensure that there is a degree of competition.
That leads me on to the role of the Bank of England, especially in the light of the collapses of Barings, of the Bank of Credit and Commerce International and of Johnson Matthey. The question is whether the Bank of England is capable of supervising banks. I do not think that that is an especially political argument. Again, it comes down to practicality, and I would summarise it in a straightforward way.
Do we believe that there is an overlap between the role of the Bank of England, first in its regulation of monetary policy and its management of the Government debt-- an important, traditional and large function of the Bank-- and secondly, in its ability to regulate the money markets and to provide banking supervision?
Is there a transfer of knowledge between the Bank's management of the various money markets? In other words, by being an active member and participant in the
markets, is the Bank of England able to understand problems arising in the other participants in those markets? Can it see problems arising before they become serious, and can it judge the ability of the management with which it is dealing in other institutions? Can that then feed into its appraisal of those banks and its decisions as to whether they are being properly run?
None of that can possibly be a substitute for the Bank's ability to go in and do a proper audit and inspection of the banks, but it may have access to additional information to which a separate regulator would not have access. If that overlap exists, it is important that it be retained. And the question whether the overlap exists in practice is capable of being determined by a proper inquiry. Possibly the Arthur Andersen inquiry will establish that.
If the answer is that there is a benefit, the Bank of England should retain its supervision of banks. If not, the answer is probably that it should lose that supervisory role. However, I add one caveat, because my experience, having in the long-distant past worked for an American bank that was regulated by the American banking system, is that that system of regulation, which is separate from the American equivalent of the Bank of England, was very bureaucratic and intense, yet not very effective, as has been shown by the number of bank collapses throughout the United States.
Before anyone suggests that a change in the way in which we supervise the banks would, by definition, produce a better system of supervision, we should look hard at the experience in other countries, because it may not necessarily support that conclusion.
The Committee is still in the throes of examining the causes and consequences of the Barings collapse. One of the questions that we need to consider closely is whether the Bank of England can co-operate properly with banking supervisors in other financial centres. One of the big difficulties that we as a Parliament face, and which the Bank of England will also face, is the growing problem of competitive regulation between financial centres.
Mr. Alistair Darling (Edinburgh, Central):
I start by acknowledging the work of the Treasury and Civil Service Select Committee, which has been praised by every hon. Member who has spoken--[Hon. Members: "They are all on it."] Surely there must be at least one Member present, other than me, who is not a member of that Select Committee. I can praise the Committee genuinely, as I am not a member. In particular, I can acknowledge the way in which the hon. Member for Hazel Grove (Sir T. Arnold) introduced the Committee's report.
I also pay tribute to my hon. Friend the Member for North Durham (Mr. Radice). It would be wrong for me not to acknowledge his work on the present report and on previous reports of the Select Committee. I have always
found his contributions helpful, and equally helpful is the advice that he is prepared to give his colleagues behind the scenes. Of course, my hon. Friend is not leaving us altogether; as is common knowledge, he is moving to another Committee. I am sure that the House will acknowledge his work.
I would like also to acknowledge the work of my hon. Friend the Member for North Warwickshire (Mr. O'Brien), to whom reference was made in just about every speech tonight. My hon. Friend did so well on the Select Committee that he was put in the Opposition's Treasury Front-Bench team and, as a result, cannot say anything tonight. He is here with us tonight, and I can assure the House that he has been saying plenty sotto voce during the debate.
Most hon. Members who have spoken have made the point that the financial services industry is of immense importance to this country. It has been said that that was not fully appreciated 10 to 15 years ago. The industry-- broadly defined--employs nearly 2.5 million people, and not just in the City of London. Clearly, the City of London--as the hon. Member for Carshalton and Wallington (Mr. Forman) said--is one of the three main financial centres in the world, and it is unquestionably the major centre in our time zone.
Although we are mindful of the competition from other European centres, London does have a pre-eminent status, and the critical mass is here. It is home to more than 500 foreign banks, and many other institutions from outside the United Kingdom are in London because of its importance in the world. It is very important that no Government should do anything that would discourage people from coming to London and remaining in London. We should do everything that we can to continue to encourage London and to build its reputation. This is an industry we are very good at operating and, for that reason, it must be encouraged.
The industry is not just based in London. Many towns and cities in this country depend on the industry for employment. I represent the constituency of Edinburgh, Central, and Scotland is now Europe's fourth-largest financial centre in terms of funds under management. The industry is important to this country not only as a wealth creator but as a service provider. My hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) made a series of interventions which, taken together, amounted to a speech. She made the valid point that, unlike in the past, most people now have some contact with the industry in terms of buying products.
I shall return later to the question of regulation of the retail end of the market. It is crucial that people have the confidence to deal with the retail end of the market, which will grow more important as more and more people want to make provision for themselves and their families. We want to promote saving and we want to encourage people to save. Therefore, it is important that people are able to make informed choices between products and between product advisers. It is important that there should be as much diversity as possible, so people can get the sort of products they need.
Clearly our discussion tonight has been about the nature of regulation and what it is meant to achieve. One of the objects of regulation must be to ensure that the public interest is met, whereby people who want to buy long-term products are put in the position where it is more
likely that they will buy the right sort of product, and less likely that they will make a mistake. I use those words advisedly, because I should acknowledge at the outset that it is not possible to have a foolproof system of regulation. Nobody is asking for that, and arguing for such a system would waste everyone's time.
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