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Mr. Loughton: This is all very interesting, and many of us have heard it many times before, but could the hon. Gentleman suggest how the successor to the Bank of England in this aspect of regulation--the Financial Services Authority--might do a better job, given that it will be an exceptionally bureaucratic, large and expensive organisation, which will take several years to get its act together? How does the hon. Gentleman think that the FSA will make a better fist of it than he claims the Bank of England has done in recent years?

Mr. Vaz: The hon. Gentleman has not heard what I have to say, because he was not a Member of Parliament when I last spoke about BCCI. He has not been able to follow the argument. Clearly, the Bill will enable people who put their faith in British banks, and who therefore deposit their money in British banks, to know that there is an independent regulatory and supervisory authority.

My point is that the collusion between the previous Government and the Governor of the Bank of England, which was not independent, enabled meetings to take place about BCCI, and stopped an independent view being taken of the problems with BCCI. Had there not been that collusion, and had there been independent and proper regulation, BCCI would not have closed.

Mr. Loughton: I take the hon. Gentleman's point. The fact that I was not here when he last spoke about BCCI

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does not mean that I am not aware of what he said. How does he think that the FSA will be more independent of the Chancellor than the Bank of England was?

Mr. Vaz: The FSA is a new organisation which will be concentrating on supervising banks, and it will have the regulatory power to do so. With the greatest respect, I have to say that the involvement of the then Deputy Governor of the Bank of England, now the Governor, and all his officials at the Bank meant that there was not the necessary independence. The Bank did not have the necessary credibility to supervise BCCI properly. The hon. Gentleman has obviously not been listening to what I said. Had there been proper supervision, the mistakes that were made over BCCI would not have occurred.

I welcome the Bill. I know that it will make a great deal of difference, not only to the credibility of the way in which this country supervises its banks but to the thousands of depositors--the 1.2 million account holders--who looked to Britain and to the Bank of England properly to supervise a bank like BCCI. Of course, the Bill has come far too late for the victims, who will have to wait at least 10 years for the liquidation to be completed, but it is not too late for all the others who may be caught in exactly the same situation.

8.14 pm

Dr. Vincent Cable (Twickenham): I want to talk primarily about part III of the Bill, which has attracted very little attention. I suspect that that is because it is less politically sexy, or perhaps it is just too complicated. However, it covers some important matters which need to be debated now, before the Bill goes into Committee. In general, my party supports the Bill, as we favour operational independence for the Bank of England and the idea of statutory uniform regulation. Within that broad framework, however, many questions still need to be answered.

I shall maintain the flow of the debate on the management of monetary policy and take up some of the issues that have not yet been dealt with properly. I tried to intervene in the speech of the hon. Member for Hackney, North and Stoke Newington (Ms Abbott), who has left the Chamber. She perpetuated a fallacy that has been repeated several times. She tried to link the conduct of monetary policy with long-term investment and growth decisions.

The simple fact is that the Bank of England, whether or not it is independent, has responsibility solely for short-term interest rates. Long-term interest rates, which are what really matter for the cost of capital in business and which influence long-term investment decisions, are set not by the Bank of England or the Government but in the markets. Governments can influence them only indirectly.

Long-term interest rates are set in international markets but can be affected by expectations of inflation. It is the ability of an independent central bank to maintain low and stable inflation which gives low long-term interest rates. That is what matters for investment and growth, and that is why the Bill is so important.

On the issue of central bank independence, I have a query about the link between this debate and our eventual entry into economic and monetary union. As the

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Government know, we support their broad approach to EMU, but we are critical of the fact that they have passed up the opportunity for early entry. That will present some tricky transitional problems for an independent Bank of England.

Those problems were graphically outlined in the interviews given by Mr. Duisenberg yesterday in the United Kingdom. He said that other countries in Europe would maintain close scrutiny of the United Kingdom's policy over the next few years should we wish to join EMU. They will scrutinise our policy closely not only in respect of inflation, which has converged very well, or of interest rates, but also of exchange rates.

Whether or not we join the exchange rate mechanism, we will be expected later in this Parliament to maintain exchange rate stability. Given that there is no reference whatsoever to nominal or real exchange rate stability, it is not at all clear from the Bill how the Bank of England will carry out that task and reconcile it with its other task of maintaining low inflation. Some clarification of this problem, which has arisen as a result of delayed entry, needs to be provided.

My frustration with the Bill and with some of the documentation that led to it--for example, the Large report--is that it is very much concerned with institutions and procedures. I recall an anecdote involving the former Prime Minister, James Callaghan. He spent a long time with civil servants who were describing a complex administrative reorganisation. With some frustration he said, "I can see the harness, but where is the horse?" The horse in this debate is the basic philosophy which will govern the regulation of the financial sector. It is not clear what the Government's thinking is, and we should be grateful for some guidance.

We could caricature two possible ways forward. The first is that regulation proceeds in a permissive way which respects the flow of markets: in the retail market, it observes the principle of caveat emptor; in the wholesale market, it allows competition between institutions and allows bankruptcy for banks and other institutions. We know the dangers of that approach. Emptors are ripped off by vendors, as the hon. Member for Leicester, East (Mr. Vaz) has just described. If institutions are allowed to collapse, there is a danger of a collective, systemic collapse. That is why we do not endorse a totally permissive approach.

However, it is possible to steer too far in the other direction. An over-regulated system presents its own problems of inflexibility and stifling initiative. We have seen examples in east Asia in recent months of the dangers of an over-regulated banking system, which perpetuates bad lending. We hope that the system of regulation that emerges from the new institutional arrangement is flexible and market oriented, which will allow more competition.

If we are to be satisfied that the Government's proposals are the way forward, they must address various issues. The first, which has not been answered, was raised by the hon. Member for Louth and Horncastle(Sir P. Tapsell). What does the lender of last resort facility mean? At what point does the Bank of England intervene and according to what criteria? That is all buried in the

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memorandum of understanding. Whether the central bank intervenes too frequently or not at all is of enormous importance.

We also need clarification on the cost of regulation. The Bill says that the cost will rise from £30 million to £50 million as a result of the FSA inheriting the overheads of the Bank of England. However, there are other estimates. Coopers and Lybrand, which is a reputable organisation, has talked about a £200 million a year cost for regulation. I have no way of knowing whether that estimate is correct, but there may be a ballooning cost. If that happens, it will have a considerable effect on the operational efficiency of financial institutions, particularly small boutique institutions serving private clients as investors. Many such organisations could not afford the cost of monitoring complex regulation, and would be driven out of business, leaving large institutions to dominate. We need answers to such questions.

Another issue that needs to be addressed is perhaps best covered by the dreadful word globalisation. To his credit, the Chief Secretary acknowledged the extent to which we are dealing with internationally integrated financial markets. He is the only contributor to the debate to have mentioned the international dimension. The Large report is entirely about regulation in one country and does not refer to international aspects. We are dealing with a highly integrated market. That involves not just the links between different banks. Any investor can now lock into electronic systems and take a broker in the United States as well as here. National systems of regulation increasingly make little sense.

We must have clarity on how the international dimensions will be handled. The Chief Secretary made passing reference to that, but he did not mention that probably one of the most important international institutions at present is the Bank for International Settlements, which prevents collective collapse in the banking system. It is not clear from what has been said so far whether that will remain the responsibility of the Bank of England or be transferred to the new regulator.

What will happen to our participation in the International Organisation of Securities Commissions, which is another key international institution designed to prevent collective collapse in the securities markets? There is an important international dimension to regulation which has not been properly covered.

My final point relates to a specific aspect of financial markets that affects ordinary individuals more than any other--mortgages. We have heard about the impact of interest rates, but the Bill is important in another sense. There have been big changes in the home loans market. Banks have become building societies, and building societies have become banks. One of the main structural changes in the past year is the disappearance of large numbers of mutually owned institutions. That is a matter of great concern for many Labour Members and for me.

Representations have been made to the Economic Secretary to get her to have a fresh look at the system of regulation that she inherited under the Building Societies Act 1997. I know that the issue may be more appropriate to the legislation that will succeed the Bill, but there is some urgency, because mutual institutions may have disappeared before the next batch of legislation comes forward. Will the Government be receptive to an amendment to the Bill to allow stricter regulations on mutual conversions?

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I received a fax this morning containing an internet guide to carpetbagging, which illustrates the extent to which abuses are taking place, permitting the asset stripping of institutions. The situation needs to be addressed urgently. I wonder whether the Government would be prepared to use the Bill as a vehicle for that.

The Bill provides a good structure, which we support in principle. However, as in so many other cases, everything depends on the small print. We shall criticise those aspects of the Bill with which we disagree.

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