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However, it is obvious that in our recent events that scheme simply did not work, or was not adequate and was simply overwhelmed. In the Northern Rock and Bradford & Bingley cases, for example, the upper limit had to be abandoned, and people were given indefinite
protection. It became very clear at the beginning of last week when panic was spreading throughout Europe that the one thing people understood was that their deposits were safe in British banks because, at the end of the day, if the banks collapsed, they would be nationalised and people would therefore be protected. Not many people were worried terribly much about the precise details of the deposit protection scheme.
Mr. Angus MacNeil (Na h-Eileanan an Iar) (SNP): The hon. Gentleman mentions banks going to the wall and failing, but does he recall that Nick Leeson spent some years in jail? The big question that a lot of the public are asking is whether the current crop of bankers will get off scot-free. I would like to hear the hon. Gentlemans opinion on that.
Dr. Cable: When people start picking through the entrails of this crisis, it will undoubtedly emerge that there was fraud as well as misjudgment and irresponsibility. I hope that our Serious Fraud Office was not so badly traumatised by its experience of dealing with the Saudi royals that it is not still sufficiently motivated to go after serious fraudsters.
Since we have a deposit protection scheme, it is important that it is properly constructed and credible, and various points have been made about the proposed scheme, which I hope the Chancellor will take on board. For example, there is a problem that has not been resolved to do with people who are temporarily worried about the £50,000 limitor who were worried about the £35,000 limitbecause they are buying homes. I think a Conservative Member mentioned in Prime Ministers questions last week a constituent in Devon who was concerned about that problem, and it is a legitimate issue. How, under the proposed deposit protection scheme, will people be protected who have temporarily very large balances? That is a tricky problem to manage, but it is important.
There is also the separate issue of whether people should be protected on the basis of the brands of the banks that they invest in, as opposed to the institution. I suspect that not many people are aware that Cheltenham & Gloucester is part of Lloyds. We must not just assume that, when calculating whether they should worry about deposit protection, everybody knows which subsidiary of which bank belongs to which brand.
There is another important issue that did not surface much in public debateperhaps because people were not aware of it at the timewhich is that the compensation scheme applies to net, rather than gross, exposure. People who have substantial deposits as well as substantial borrowings do not enjoy as much protection as they might assume. Therefore, there are certain aspects of deposit protection that need to be clarified if proper consumer protection is to exist.
Mr. Osborne: Perhaps my recollection is not accurate on this, in which case I am happy to be corrected, but did the hon. Gentlemans party leader call for a general guarantee of all retail deposits a week or two ago, and is that still Liberal Democrat policy?
Dr. Cable: Our view is that the sensible way to deal with such a panic would be by a common statement from the leaders of the European countries that went rather along the lines of the Merkel statement. That may be the only way in practice to stop generalised panic. It did not happen, and it was not needed, but that would be the kind of recourse that Governments would have to undertake.
Stewart Hosie: The hon. Gentleman said the statement was not needed and there was not panic, but people were moving money all over the place. They were putting money into Irish banks after the Irish gave a whole deposit guarantee. I cannot believe he is suggesting that it was not necessary. My view is that had the Government given such a deposit guarantee earlier, there might not have been as large a devaluation of the banks as there has been over the past two weeks.
Dr. Cable: There was a great deal of anxiety, but there was not an enormous exodus by British retail depositors from the banking system. It reflects very well on the common sense of the British people that they were not tempted to move all their money out to Ireland. Not a great deal happened; there were, of course, great problems in the wholesale market as we know, but in the retail market, although some individuals may have moved their money to Ireland, not many did. The reason for that basic common sense is that people understood that they were fully protected. They were fully protected not only by the deposit protection scheme, but by the certain knowledge that if banks went down, the Government would take them over and protect their deposits. However, had the position escalated and there had been a serious run on retail deposits, the British Government would have been forced to give stronger reassurances of the kind that I have just described.
Mr. John Maples (Stratford-on-Avon) (Con): We are living in extraordinary times now, but looking forward or backwards a little, is not the problem with total protection or the 100 per cent. guarantee of deposits up to £50,000 that it draws in the depositors mind no account of risk at all? That is why people invested in Icesave and Northern Rock. They risked their life savings for an extra 0.5 per cent. a year. To go back to the point about moral hazard, surely there must be some consequence for them if that goes wrong. It is unfair to the well run, more conservative banks that the same guarantee is afforded to people who are prepared to take a risk.
Dr. Cable: The hon. Gentleman is right. In normal times it would have been extraordinary and inexplicable to protect the Icelandic investments without limit. The only reason why the Government did that was the general worry about the banking system and the systemic risk involved. He is quite right about the basic academic principles, but these are indeed extraordinary times and the response was extraordinary.
The shadow Chancellor was right to make the point that while we are discussing special resolutions, special regimes and the like, we need to think ahead to the regulatory system for banking that will evolve in due course. At the moment, it is clear that banking cannot just return to the habits of the pre-crisis period. If somebody has had a massive heart attack and a triple bypass, they cannot just go back to their former lifestyle;
they have to adapt. Part of the adaptation will take the form of stricter capital adequacy rules of the kind that we have discussed.
In the meantime, half of British banking is now nationalised and may well be for some years. A whole series of policy questions has been thrown up, such as how a semi-nationalised banking system should operate and how to ensure fair competition between institutions. We had that debate when discussing Northern Rock. That was a manageable situation, but now that half the banking system is nationalised, there are severe difficulties. Questions will arise such as how far nationalised banks should get involved in social policy. The issue of repossession will loom large this winter, and we will have to say that it must be dealt with on a non-discriminatory basis, through the court system, not by requiring certain banks to offer different principles simply because they happen to be publicly owned.
A big issue arising from the points that we raised with the Chancellor yesterday is the commitment to maintaining credit at 2007 levels. I got the sense that he was backing away from that slightly, but if it means anything, it might well mean the Government being directly or indirectly involved in the business of trying to manipulate house prices through mortgage lending. That would potentially be a very dangerous departure. Consequent on this debate, we must have a proper discussion about how a semi-nationalised banking system will operate before it reverts to a more commercial basis with a regulatory system operated through the FSA.
Mr. Gerald Howarth: Are not the Government coming at the dilemma from a position that they have already declared? Their policy on social exclusion led them to put pressure on the banks and building societies to lend to people across the country who were not credit-worthy, and to lend them more than they could afford. The Government have form on this issue. Does the hon. Gentleman agree that they will have to prove to us that they are not going to use their position on the boards of banks to pressurise them into pursuing the folly that has led us to the position that we are in?
Dr. Cable: The hon. Gentleman raises an important but different point about the social exclusion agenda and whether it is right to require banks to operate in that way. As I understand the policy that he describes, it applied to all banks, not to some rather than others.
Among the institutions that will be looking nervously at how the nationalised banks operate are the mutuals such as the Nationwide, which can never be accused of being greedy bankers. They do not have shareholders, they have been moderate and they have built up a market share responsibly, but they will now have to compete with state institutions. The ground rules under which the system operates will become extremely important. Like the Chancellor, I anticipate the important discussion about bank regulation that we will need to have. Rather earlier, we will probably need to return to consider how nationalised banks will function in this hybrid system.
Mr. Mark Todd (South Derbyshire) (Lab):
I welcome the Bill, of course, but I express the normal caution about consensual legislation. As we all appear to agree
on the principles, there is a danger of inadequate debate and an inadequate focus on the alternative views about how to approach banking reform.
Unusually, I will therefore say that I have already volunteered to my Whip that I am prepared to sit on the Public Bill Committee. However, that Committee might need to be run somewhat unusually. The clause stand part process, whereby we discuss the general arguments in each clause, may have to be approached rather more permissively than usual. I also hope that we will have a full opportunity to hear from people outside the Committee and reflect carefully on what we hear. I expect that the various lobbying groups of interested parties will want to play a full part in the process leading to the production of the final Act, and I hope that we will have the opportunity of a rather more creative process than the normal, rather dumb Committee format through which I have sat with pain at various times in the past 11 years.
I wish first to focus on the stage before special resolutions in the regime that is being established in the Bill. The right hon. Member for Wokingham (Mr. Redwood) raised the important question of what we should do to prevent banks from getting to the point of facing the extreme measures in the Bill. First, we need a much clearer definition of the FSAs function in that process. There was a useful discussion in the Treasury Committee about the concept of green, amber and red lights. A red light would mean when a bank was in special resolution and an amber light would be when there was anxiety about certain aspects of ongoing business that needed to be focused on and remedied. We need a clearer understanding of how that heightened supervision process will work.
Secondly, we need a clear focus on the communication channels between the FSA and a bank. The FSA will need to highlight to the bank issues of potential instability that are found in the heightened supervision process. Thirdly, there must obviously be explicit expectations of corporate action and how a company will remedy something that the FSA has identified as inadequate.
Fourthly, there is the area of danger that detained the Select Committee. What role should there be, if any, for public communication about the process that a bank is going through? That is an extraordinarily awkward matter. There is a public duty to give investors and depositors at least some information that could be material to their decision whether to continue their association with a company, but there is also the obvious desire not to make that companys circumstances a great deal worse through the public disclosure of difficulties. It would be helpful to have a much sharper focus on the step that immediately precedes special resolutions.
We need clarity of accountability about the trigger. The Bill places the job in the hands of the FSA, but with an obligation to communicate with the other elements of the tripartite authority in that process. I agree with the view that one body must take the decision; I do not like placing accountability in the hands of committees very much. One body ought to be clearly accountable for pulling the trigger on special resolution, but in the accompanying papers that I hope will be produced to allow the Public Bill Committee to consider the Bill in depth we need to design some idea of exactly how the trigger may operate and how the communication channels will be kept open.
We must bear in mind the Banks absolute responsibility for financial stability, which is defined in the Billthat is welcomeand the risk of regulatory forbearance. Those of us who read the FSAs internal audit report on Northern Rock would certainly hesitate to give a full-hearted endorsement of the FSAs powers in this matter. The risk of regulatory forbearance at least means that other people should be allowed to say something. He has now left the Chamber, but my right hon. Friend the Member for West Dunbartonshire (John McFall), the Chair of the Treasury Committee, made valuable points about that.
I do not want to repeat what my right hon. Friend said about the financial stability committees function, but I share the view that the Bill presents a confusing picture of exactly what the committee will be supposed to do. Critically, will it be an Executive body, as the Monetary Policy Committee effectively isthe MPC has the power to raise and lower interest rates in our countryor is it a non-Executive body that is in place to advise the Governor in some respect? If so, how appropriate is it that the Governor will chair it? That issue needs to be developed, so that we have a clear understanding of how decisions will be made in that body and what it is responsible for. Without wishing to complain about individuals, all on the Treasury Committee had doubts about whether the court, in its current form and with its current membership, provides the appropriate group of people to populate the financial stability committee. Therefore, welcome suggestions have been made for radical reform of the courts numbers and, implicitly, its membership.
My view is that the committee requires a membership that is external to the UK, because it would be inappropriate for key players in the UK marketplace to be members of the financial stability committee. We can usefully gain from experience elsewhere. The Bank has its own committee, one of whose members is an ex-governor of a Swedish bank, who is almost certainly providing insights into the Scandinavian banking crisis of about 20 years ago. Having an external reference point is a useful model. I find, as others do, the Chancellors reference to the comparison with the MPC inappropriate, given that the models are obviously, as I have said, completely different.
Finally, let me turn to the role of the Financial Services Compensation Scheme. I have said in this Chamber that I share some anxiety at politicians freeloading into taxpayer guarantees of depositors. I share the concern raised in an intervention on the hon. Member for Twickenham (Dr. Cable) about the moral hazard issues involved. We need to educate our citizens about their risks and responsibilities in making deposits. One thing that came through to me loud and clear in the discussion of the Northern Rock crisis was that few people had the faintest idea what level of guarantee the FSCS applied to deposits anyway. There should be a clear obligation that when one makes a deposit in a financial institution, one is crystal clear about both the level of guarantee provided by the FSCS and the terms under which it may operate. Thus, any discussion about late payments and how quickly one would get ones money back should a circumstances arise should also be explicit.
Secondly, if the coverage falls outside the FSCS in some wayfor example, if one chooses to invest in an Icelandic bank through a British outletit should be crystal clear to the depositor what risk they are undertaking,
so that they are well informed. I found shameful the absence of any proper information that banks were obliged to give to depositors as to the remaining risk, which we hope is very low, that lies with them when they agree to make a deposit. There should also be clear guidelines on the speed at which a deposit is paid back to the depositor. All of us on the Treasury Committee found unpersuasive the banking industrys arguments as to the difficulties that it would have in resolving some of the issues associated with datafor example, the number of accounts that people might hold and the conflicts between them. A clear target should be set.
I shall conclude by making three brief remarks. First, unlike in the case of the urgent actions that we have taken recently, we must ensure that the actions that we take in our legislation and regulation give the correct motivations for beneficial actions; that is the moral hazard argument. I remain a firm adherent to that, convenient though it may be for politicians to resile from it. We cannot seek to protect our citizens utterly from every aspect of their decision makingwe sometimes give the impression that we can do so, and that is an extraordinarily dangerous impression to give. The design of the supervision before a special resolution regime must be focused on that goal, but so must the reform of the regulatory framework that we shall discuss in due course.
Secondly, we must prepare ourselves for a new world of much greater caution, less innovation, lower lending and lower levels of growth. Sometimes those who have heralded their prescience about the problems we face have perhaps not grasped the purchase that we had from the risks that we had taken; there was a period of extraordinary above-average growth across virtually the whole world. In these new circumstances, we must prepare ourselves for much sterner times. Innovations will be tested much more robustly before being accepted and we may well find it harder to employ all our citizens. I am delighted with the actions that the Government have taken, but I am certainly not of the view that with one leap we are free from the difficulties we facemuch lies ahead of us.
Thirdly, we must carefully consider the design of the boundaries between the state and the financial sector, given this new role of active ownership to which we have committed ourselves. Obvious issues of competition must be addressed, and there are difficulties in defining what the state, which has unusual advantages in the marketplace, should be permitted to do. We are working those out by the seat of our pants. We have to work harder on the definitions, because we will have this role for some years to come. We need robust ideas, in principle, of how those definitions should work, and they should then be designed, in practice, with the sector. I share the view that the industry is crucial to the future of our country. We risk designing away one of the critical lifebloods of the UK economythat would be an easy reaction. The Bill does not do that, but I have heard siren voices from elsewhere that would certainly achieve it. We should seek to avoid that risk.
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