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My hon. Friend makes a good point. The regulators must understand the position and be comfortable with it. Some derivatives will be more risky than others. The regulator will say If you want to trade
in more risky derivatives, you must have a stronger balance sheet. Your balance sheet must, in a sense, be insured against failure by carrying more capital. That too will act as a disincentive to some of the more outrageous financial instruments.
Let me move from the exciting world of investment banking to the world of retail banking. Some of those presentincluding, I am afraid, many Members oppositespeak of the tsunami, the crisis that began in America in the sub-prime market and swept over to the United Kingdom. Let us be perfectly honest: I do not think that Northern Rock trades in the United States, I do not think that Bradford & Bingley trades in the United States, and I am sure that HBOS does not have a mortgage business in the United States, yet those banks, and perhaps others, were offering people outrageous mortgages. They were offering 125 per cent. of a propertys value, and they were offering self-certification. They were saying Pick a number, and we will not challenge you. No wonder we have a home-grown crisis in this country.
I have to ask why on earth the regulator allowed the banks to get away with that. It was not done in secret; there were flaming advertisements all over their branches letting people know what a great deal they would get. If that did not set alarm bells ringing in the FSA, I do not know what would.
Perhaps one of the fundamental reasons why such offers could be made is the fact that rating agencies often provided the necessary securities, especially in the form of inflated ratings. That applied to a large section of mortgages sold as AAA products. In many instances, neither regulators nor senior managers would even think to look at the quality of the securities that were being sold.
I think that the relationship between rating agencies, auditors, banks and accountants has become a little too cosy. There are a few too many long lunches, pats on the back, and matey shooting parties after grouse on large estates in Yorkshire. I am making a serious point: we need to examine these relationships. If there has been a failure in a duty of professionalism, legal action may well need to be taken against the responsible individuals.
This is a banking Billa banking Bill about the regulation of the banking sectorso let me return to that. I make a plea to the Minister, and to all my colleagues, that we examine, collectively, the practices of some of our high street banks at this moment in time. It is simply not acceptable for a person who exceeds his or her overdraft limit at a major high street bank by £1 to be immediately slapped by a charge of £15 a day. If it takes three or four days for the bank to send a letter to such people alerting them to the fact that they are overdrawn by £1, the charge may have increased to £60, £75 or even £90 before that person realises that they have a £1 overdraft.
Such rates of interest are absolutely usurious. Anyone who sold them door to door would be arrested. They would be locked up and, rightly, the key would be
thrown away. The practices of some of our high street retail banks are shocking and shameful, and now that they are being underpinned by the taxpayers, those taxpayersour constituentswill have even less patience with the outrageous and, quite frankly, vicious charges levelled at some of the most vulnerable and least well-off members of society.
Let me make a couple of other points. Banks need to strengthen their balance sheets. They want to obtain cash from wherever they can obtain it, and there is every chance that they will target good and successful businesses in pursuit of that money by raising interest rates to a level that not even a successful business in the good times could possibly hope to meet. So they will sacrifice the long-term viability of that businessthat clientin return for a short-term gain to their balance sheets. I hope that the Minister is aware that that may happen, and will follow developments very closely.
I am sorry that we have come to this stage, but it is absolutely right for the Government to be guaranteeing savers deposits. Let us be in no doubt, however, that this is a massive transfer of wealth from some of the least well-off in society, and I shall now briefly explain why that is the case. We all have many constituentssome Members have more than otherswho earn at or just above the minimum wage. They live day to day and week to week. They do not have savingsor, at least, significant savingsor mortgages, yet they will underpin this bail-out through an inevitable increase in their taxes over the next two or three years. Therefore, we need to be mindfulas I know my hon. Friend the shadow Chancellor isthat some people at the very bottom of the income scale will get very little out of this bail-out, and if we get into Government at the next general election, we must find a way of helping them. In the meantime, I hope the government of the day are also mindful of their plight, and that they find a way of helping them.
Having expressed those few thoughts, I will sit down, but I must first have just one passing swipe, not at the Government, but at the British Bankers AssociationI believe that is what it calls itself. The brief it sent round in advance of this debate was pathetic. It should hang its head in shame; there was not a note of humility anywhere to be found in it. Yes, we need the banks in this country, but they have a lot of ground to make up, because no one trusts them anymore, and as we all know from our time in this place, trust needs to be earned. We must at present have all hands to the pump, therefore, and we will have the forensic examination of this Governments record and policies in the next few months.
Mr. Mark Hoban (Fareham) (Con): People will be surprised that when debating a Bill of such importance to the future of the banking system, our proceedings start to wind up at 25 minutes to 9. It is disappointing that although plenty of Members turn up on the Government Benches to cheer nationalisation, not enough are here to talk about the important measures this Bill contains.
When the Bill was conceived, I do not think anyone would have expected its Second Reading to take place
the day after the Government pumped billions of pounds into the banking system by taking equity stakes in three banks. What happened yesterday does not lessen the need for the Bill, nor should we think the bail-out package and the Bill are enough in themselves to restore long-term stability to financial markets. Other structural changes are needed, and I will turn to them later.
The Bill presents both an opportunity and a threat. It presents an opportunity to strengthen confidence in the UK as a place for banks, their customers and investors to do business, in the knowledge that there is a proper framework for dealing with failure so that deals do not need to be cobbled together overnight, and that the right measures are in place to help the financial services sector emerge from this crisis wiser and stronger. The threat comes from the need to ensure that sufficient safeguards are in place to reassure people that the far-reaching powers in the Bill are the last resort and not an easy substitute for effective regulation. Without proper safeguards in place, we could have a situation where the cost of capital to banks increases and that increase is passed on to their customers. There are concerns that some of the Bills clausesparticularly clauses 42 and 43create such uncertainty about straightforward matters such as netting off transactions that they could add to the costs of doing business in London.
The Bill grants powers to the tripartite authorities to intervene to save a bank with actions ranging from partial transfer of its operations to another bank to nationalisation, but the safeguards governing the use of those powers will be contained in a code of practice that is yet to be published in draft form. Until the code of practice and the regulations are published, banks and others will be anxious that the powers will undermine the legal framework our financial services sector depends upon, and legal uncertainty brings risks and costs.
I am grateful to the Minister and the Chancellor for reiterating their commitment to ensuring that the code of practice is published before we debate the relevant clauses in Committee. That is welcome not just in the House but outside. We will co-operate with the Government to get the Bill through, but we need to ensure that it strikes the right balance by tackling failure quickly and effectively without putting the wider interests of the economy at risk.
Before I make some broad points about the Bill, I shall reflect on the themes that have emerged in this evenings speeches. My right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), my hon. Friends the Members for Sevenoaks (Mr. Fallon) and for Stratford-on-Avon (Mr. Maples), my right hon. Friend the Member for Wokingham (Mr. Redwood), the hon. Member for Croydon, Central (Mr. Pelling) and my hon. Friends the Members for Henley (John Howell) and for Broxbourne (Mr. Walker) all made important speeches about the fate of the banking sector.
From the Labour Benches, the right hon. Member for West Dunbartonshire (John McFall), the Chairman of the Treasury Committee, outlined some of his concerns following its inquiry into the draft legislation. The Committee has produced two powerful reports, which will help to inform the Committee stage. The hon. Members for South Derbyshire (Mr. Todd) and for Edinburgh, North and Leith (Mark Lazarowicz) spoke about their concerns, and the latter particularly reflected
on the impact on his constituents of the changes to the ownership of Scottish banks.
The right hon. Member for Holborn and St. Pancras (Frank Dobson) gave a virtuoso performance, which made those of us who were not in the House in the early 90s think about the sort of speeches that we might have been able to hear as daily occurrences rather than on a special occasion such as tonight. I wonder how he must have coped in the Cabinet when the then Prime Minister Tony Blair and his colleagues willingly embraced big business, and how he must have held his nose when talking about some of the reforms that contributed to the problems that caused the crisis in todays banking sector.
Some themes emerged clearly from the debate, one of which was the need for prompt payment from the Financial Services Compensation Scheme to reassure bank customers. It is unfortunate that the Government were unable to bring forward legislation relating to the scheme earlier, because that would have given consumers more confidence. Another theme has been the need to avoid similar crises in future through further reforms to the regulatory system. The Bill is quite narrow, and more work is needed to put in place the right institutional mechanism and arrangements to prevent the recurrence of asset price bubbles in future.
A number of my right hon. and hon. Friends expressed concern about the reforms to the financial regulation system introduced in 1997 by the Labour Governments then Chancellor, now the Prime Minister. There is a sense that to avoid future crises, we need to strengthen the role of the Bank of England in the regulatory system. We have particular ideas about that, and I shall touch on them later. Several hon. Members highlighted the challenge that arises when the Bank of England focuses on controlling inflation through interest rates. What mechanism can it use to try to control asset price inflation? I shall refer later to a mechanism that should provide a new weapon in the armoury to ensure that there are controls over asset prices in future.
Several Members mentioned the long gestation period of the Bill. It was in January that the first consultation took place, and there was a further round of consultation in July. The Bill was published and received its First Reading last week. One almost senses from some people that the need for the Bill popped out only last summer with the problems of Northern Rock. The reality is that prior to that both the Governor of the Bank of England and the then chairman of the FSA, Sir Callum McCarthy, said that there needed to be a proper review of the arrangements in the UK for dealing with bank failure, so the issue is not just a recent one. It should have been on the Governments agenda for some time, and it is disappointing that it has taken so long to get to this Bill. Of course, we do not intend to impede its progress, and we want to ensure that it is on the statute book when the Banking (Special Provisions) Act 2008 expires in February next year.
We need to scrutinise some areas of the Bill further, because they remain unclear, and not only because we await draft regulations or the code of practice. For example, the Public Bill Committee will need properly to address issues associated with the Financial Services Compensation Scheme. Conservative Members believe that the scheme should not be pre-funded. The Bill gives the power to set up a pre-funded scheme, but we
believe that setting up such a scheme is against the interests of consumers and the financial services sector as a whole. We also need to address issues associated with how customers should be covered. Will they be covered for £50,000 per brand or per bank? The FSA is consulting on those issues, but it is important that hon. Members have the opportunity to debate them in Committee.
The Bill refers to the need to pay depositors as soon as possible and, again, the FSA is consulting on how that might be brought about. Hon. Members should debate that issue during the passage of this Bill. We also need to work out how we balance the need for depositors to be paid promptly, within seven days of a banks being taken into the special resolution regime, and the need to mitigate the losses that could be faced by other types of creditor, including those who provide debt and other forms of capital to the bankobviously, that capital is then lent on to businesses and households. We need to resolve that tension.
The Bill is about just one element of the changes we need to put in place to restore the stability of the financial sector and the economy as a whole. The Bill focuses primarily on how to deal with a failing bank. It also legislates for the changes that strengthen the Bank of Englands governance and establishes the financial stability committee. One or two hon. Members, including the hon. Member for South Derbyshire, discussed the Treasury Committees findings in that area, which were critical of the arrangements in the Bill. I am sure that if he gets his wish and serves on the Public Bill Committee, he and others will wish to debate that fully.
The Bill could have been the means to put long-term reforms in place. For example, the Conservatives believe that it is vital to strengthen the independence of the Bank of England, and we want the Governor and the members of the Monetary Policy Committee to be appointed for a longer single term, rather than for up to two terms. Such an approach would put beyond doubt any prospect that reappointment could influence the decisions of MPC members or the Governor and his deputies. We think that it is important to strengthen, rather than weaken, the independence of the Bank of England. Unlike the Liberal Democrats, we are not going to ditch the independence of the Bank when the going gets tough.
The Conservatives believe that the Bank of Englands role in regulation could be strengthened too. That issue has been discussed by my hon. and right hon. Friends. When the Prime Minister broke the link between the Bank of England and the supervision of individual banks, he created a system that focused on the risks to individual banks and not on the risk to the market. By breaking that link, debt was allowed to grow uncontrollably across the system, and we are paying the price for that today. To avoid repeating that mistake again, we believe that the Bank should write an open letter to the FSA, setting out its understanding of market risks and requiring the FSA to respond. Through that process we would establish a mechanism that would lead to banks increasing their capital to protect themselves from the risk of default. That is a way of trying to regulate the debt that is in the market and, thus, to control asset price inflation. The Prime Minister himself recognised the importance of these measures when he spoke yesterday. He said:
In future regulatory systems there will be both greater attention to issues of solvency and liquidity and probably a pro-cyclical attitude where in a period of growth you have got to lay aside more for the possibility that there will be contractions.
Some of us might call that fixing the roof when the sun is shining, and it is a far cry from the Prime Ministers mantra of no return to boom and bust. He now recognises the existence of contractions, having spent 10 years trying to deny the existence of the economic cycle. Reality has now caught up with the Prime Minister. Changes to the capital rules are not only a matter for UK regulation: the rules in Basel II should be altered to reflect that priority.
There are changes too that we need to make to the FSA to strengthen it, so that it can be more effective in the regulation of the financial services sector, including improving the mix and experience of staff so that the regulator is able to challenge regulated businesses more effectively to avoid some of the problems of its supervision of Northern Rock. As my hon. Friend the Member for Sevenoaks pointed out, given the increased availability of more sophisticated financial products in the retail market and the increase in opportunities for people to borrow, we need to improve the financial education of people in this country so that they have a greater appreciation of the risks of financial products and can plan for their own financial circumstances with greater confidence. That would help to avoid the present situation in which, at a moment of economic uncertainty, the UK has £1.4 trillion of personal debt.
The Bill cannot be seen in isolation. It must be seen as part of a wider plan to restore confidence in financial markets and in the wider economy. There must be other reforms to strengthen the regulatory system to prevent problems from arising in the future. The Prime Minister put in place a framework that helped to create the age of irresponsibilityit allowed debt to grow to an unsustainable level and taxpayers are paying the price for that today. We need to reform that framework if we are to return to the financial stability this country needs. This Bill addresses how to deal with the failure of a bank, but we need a regime that prevents that failure from happening. If we are to avoid asking taxpayers to pay for future problems, then this Bill is only the start of rebuilding confidence in the financial system and not the final word.
The Economic Secretary to the Treasury (Ian Pearson): I welcome the strong cross-party support for the Bill and I look forward to future stages, during which Members will have the opportunity to examine its provisions more closely and to improve it. I will try to reply fully to the key points made in the debate, but I hope that hon. Members who have contributed12 Back Benchers in allwill not be disappointed if I cannot mention all their names.
These are challenging times for financial markets and economies across the world. The Bill is one important part of a package of action and reform to improve the UKs system for ensuring financial stability and protecting depositors. Over the past year, the Government have been working with the Bank of England and the Financial Services Authority to tackle these issues in the UK and also at international level.
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