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14 Oct 2008 : Column 764

As the House is aware, the Government have stepped in on several occasions to protect the stability of the UK’s financial system—in the cases of Northern Rock and Bradford & Bingley—using the powers provided by the Banking (Special Provisions) Act 2008, but that legislation was only ever designed to be temporary, and the need for long-term arrangements to ensure financial stability and protection for depositors in the UK is clear. I am glad that it is widely supported.

The Bill is a central part of the Government’s package to strengthen the UK’s framework in this sphere. The decisive and comprehensive action that we have taken to improve the capitalisation and liquidity of UK banks, on which the Chancellor has made recent statements to the House, is another fundamental element of the package.

I want to emphasise that the Bill is the result of a comprehensive process of consultation, including three consultation documents issued jointly by the Treasury, the Bank and the FSA. We have consulted extensively with key industry players and experts and, of course, we have had valuable input from the Treasury Committee.

One of the criticisms from the Opposition has been that we have not moved quickly enough. People in the industry, however, might say that we were moving too quickly. However, as I understand it, there is an urgent requirement to get legislation on the statute book by the time the temporary provisions in the Banking (Special Provisions) Act 2008 expire.

The Bill provides a permanent addition to the UK framework for financial stability and depositor protection, and the arrangements will provide the UK authorities with a refined and proportionate set of tools to deal with difficulties in the banking sector that can affect depositors and the wider economy. I accept that it is vital to get these proposals right, ensuring that the UK’s framework is sufficiently robust to deal with the future as well as with current challenges. I believe the Bill provides the right framework and range of powers to ensure that, but it can no doubt be improved by debate in Committee.

Mr. William Cash (Stone) (Con): Will the Minister give way?

Ian Pearson: I am quite happy to give way to the hon. Gentleman, although he has not played any part in today’s debate.

Mr. Cash: It is very kind of the Minister to give way. In fact, I have just returned from Brussels in the past hour. As the Chancellor will know, a stream of European proposals are being made, which we have just heard about from our people in Brussels, to do with capital requirements, credit ratings and accountancy standards. Will the Minister ensure that whatever comes out of the proposals as they emerge will be considered seriously in the Bill? In the case of part 7, which affects the governance of the FSA and the Bank of England, will he ensure that the issues are properly considered and are not guillotined or subject to knives?

Ian Pearson: We will always consider proposals from the European Commission and the European Parliament in the appropriate manner.

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Mr. Pelling: Will the Government be cognisant of the fact that however valuable European co-operation has been during this financial crisis, there are also important national interests in terms of any changes to regulation that could compromise the primacy of the City of London in the European financial markets?

Ian Pearson: Yes.

A number of right hon. and hon. Members contributed to the debate. Let me respond directly to a number of the comments that they made. First, I want to address some of the comments made by the right hon. and learned Member for Rushcliffe (Mr. Clarke), the hon. Member for Stratford-on-Avon (Mr. Maples) and my right hon. Friend the Member for Holborn and St. Pancras (Frank Dobson). In their own ways, they all made eloquent contributions—thrashing around, seeking to blame people.

The right hon. and learned Member for Rushcliffe blamed pretty much everyone, but I thank him for his support for the proposals to give the Bank of England a statutory responsibility for financial stability.

My right hon. Friend the Member for Holborn and St. Pancras gave a tongue-lashing to bankers, auditors, credit rating agencies and quite a few other people besides. On his points about credit rating agencies, we support the principles behind the proposed EU registration scheme. We will look to Adair Turner for advice on the regulation of credit rating agencies in the future.

Mr. Kenneth Clarke: I realise that the Minister is new to his portfolio, and I myself have been new to very difficult portfolios at difficult times so I am not certain that I will get a reply to my question. However, I asked about the arm’s length arrangement for managing the Government’s shareholding in the banks that are to be partially nationalised. What can be said to give some substance to the Government’s assurances that there will not be a politicisation of lending policies and other things? Surely it must be possible for someone to let him and us know exactly how that is to be handled. There is a real fear that there will quite strong political input into the rationalisation of the banks, lending policies and so on. So far, that question has not been answered at all.

Ian Pearson: I might be only 10 days into the job, but I can certainly answer the right hon. and learned Gentleman’s question. The Government have no intention of politicising the lending or other decisions of the banks that have been nationalised or part nationalised. My right hon. Friend the Chancellor will make our position very clear—indeed, I think that in his earlier contribution he made the basis on which we are seeking to set up that arm’s length body very clear when he referred to the Shareholder Executive and the similar circumstances in other nationalised industries.

The hon. Member for Stratford-on-Avon raised an important point about lending. That has been clarified already by my right hon. Friend the Chancellor, but the hon. Gentleman was concerned that there might be a danger of lending returning to the imprudent levels of 2007. I assure him that that will not happen. As I have said, banks that use the recapitalisation scheme will be managed on a fully commercial basis by an arm’s length body, but it is important to recognise that there will also
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be conditionality. Over the next three years, those banks will have to maintain the availability and active marketing of competitively priced lending to homeowners at 2007 levels.

It is important that banks lend responsibly and meet their legal and regulatory obligations. We must not see a return to irresponsible lending practices, but it is right that we insist, as a result of our investment, that competitive mortgages are available in the market. We must also ensure that banks lend responsibly to small businesses.

Recent events are affecting many countries across the world, regardless of their regulatory frameworks. That point was sometimes missed in the contributions made to the debate. This has been, and still is, a world financial crisis: I am sure that we will look to learn the lessons from it, and some of the lessons learned from previous episodes have been incorporated in the Bill.

The FSA has recognised that there were regulatory failings in the case of Northern Rock, and that is why it is implementing an enhanced programme of supervision. As the Chancellor made clear in his remarks opening this debate, the FSA is also conducting reviews of other aspects of regulation, including remuneration. We will look to its findings in due course.

The Government believe that the structure of current arrangements and the allocation of responsibilities within the tripartite system remain fundamentally right, and I note that that view was endorsed by the Treasury Committee. Recent developments have not changed the basic view that it makes sense to provide for a single, integrated regulator covering financial services.

We must remember that, before the FSA was created, there was a dog’s breakfast of regulators. One large financial services group would have to deal with any number of different regulators. I worked for a small company that was regulated by the Investment Management Regulatory Organisation, the Life Assurance and Unit Trust Regulatory Organisation and the Financial Intermediaries, Managers and Brokers Regulatory Association. I do not think that that was satisfactory. The overall structure of the present regulatory framework is the right one, but there is no doubt that it can be improved and that lessons can be learned.

Stewart Hosie: If the tripartite structure is fundamentally right—we know that it has failed—and if the Government’s intention is to maintain the 2007 small and medium enterprise and mortgage lending levels, what guarantee do we have that next year there will not be the same over-exposure to the wholesale market, which has been the cause of some of the problems in the banks that have failed?

Ian Pearson: As I said, these are unprecedented events. Lessons are being learned right across the world about international regulation and the operation of domestic regulatory regimes. It does not make sense to go back to a situation in which regulation of the banking system is separate from regulation of insurance services, for instance. In today’s modern capital markets, it is right that there is a single regulatory structure.

The shadow Chancellor made reference to Equitable Life. Although he is not in his place, and indeed this is not in the Bill, I want to respond by saying that, as the House will be aware, the parliamentary ombudsman
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published a long and complex report in the summer. We are considering her report carefully and we will give our response to the House later this autumn.

Mr. Redwood: I wonder whether the Economic Secretary can answer one of my questions. Should any limit be placed on how much money can be placed at risk on behalf of the taxpayer under these powers?

Ian Pearson: Yes, as my right hon. Friend the Chancellor has said clearly, we will do whatever it takes to bring stability to the banking system. The fact that we have taken this integrated package of actions and reforms has been widely welcomed by the financial community. It is a programme that is being adopted by other countries in Europe and, indeed, partly in the United States, depending on their own circumstances. We believe that it is the right path to take.

Let me turn to the special resolution regime, which has been the subject of much of the debate. It will replace the temporary powers taken in the Banking (Special Provisions) Act 2008. When a bank gets into difficulties, they can be resolved through normal regulatory interventions or voluntary action. However, as we have seen recently, bank failures will sometimes occur and they can damage confidence, disrupt financial markets, harm depositors and generate significant costs to business and the economy as a whole. The objectives of the SRR include protecting and enhancing financial stability and confidence in the banking system, protecting depositors and protecting public funds.

The SRR provides the authorities with a range of tools to meet those objectives, including the transfer of a bank or its business to a private sector purchaser, to a bridge bank—which I know was welcomed by the hon. Member for Dundee, East (Stewart Hosie)—and temporary public ownership. Further, a new bank administration procedure is to be put in place to support partial transfers of a bank’s business. The Bill also creates a new insolvency process for banks that can be used where appropriate to enable prompt FSCS payments to eligible depositors and also provides for the winding-up of the bank’s affairs.

By setting out a clear and credible statutory resolution regime to address failing banks, which removes control from the bank’s management, the Bill provides a strong incentive for banks and their directors to take action to prevent their businesses from getting into difficulties.

We can debate in Committee in greater detail some of the issues raised such as the trigger mechanism and the role of the Bank of England, but I note what the shadow Chancellor has said—that although he is raising concerns, he does not want to resist the overall thrust of the Government’s conclusions.

Mr. Graham Stuart (Beverley and Holderness) (Con): I failed to follow the rationale for the Government’s decision not to count as national debt the bank debts that they are taking on to their books. Perhaps he could explain that, for the benefit of the House.

Ian Pearson: If the hon. Gentleman is fortunate enough to serve on the Public Bill Committee, I am sure he will find that we can get into the details of the issue then.

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A number of hon. Members raised the issue of partial transfers. The Government listened to many of the representations that have been made on this matter. I refer hon. Members to clauses 43, 55 and 42, which provide safeguards. I emphasise again that we recognise the importance that market participants attach to those safeguards. That is why I have announced the creation of an expert liaison group to ensure that all available industry expertise is brought on board.

In recognition of the views of industry and the Opposition, it has been agreed in principle by the usual channels that we will make sure that we consider the special resolution regime later on in our deliberations on the Bill, including in Committee. That should allow sufficient time to ensure that a draft code on part 1 is available. It will also enable us to be clear about the general principles behind some of the secondary legislation associated with clauses in parts 1 to 3 of the Bill.

We are taking action to strengthen the authorities’ institutional arrangements, primarily through announcing the Bank of England’s role in respect of financial stability. The Bank will have a new statutory objective relating to financial stability, and I note that that was welcomed by a number of right hon. and hon. Members. Again, we can discuss the detail in due course.

Mr. Todd: Will my hon. Friend reflect carefully on the reservations that the Treasury Committee expressed about the format of the financial stability committee? That format was criticised not just by us, but by some of the witnesses from whom we heard in our inquiry. There was confusion about where precisely accountability would lie, and about the division between executive and non-executive authority.

Ian Pearson: I am sure that we can debate that issue in Committee. However, I would not like my hon. Friend to think that the Government did not give the issue extensive consideration when we came up with our proposals.

In summary, the Banking Bill will be a permanent piece of legislation that will provide a set of measures to enhance the UK’s framework for financial stability, now and for the future. The Bill is a key element of enhancements to the UK framework for financial stability and depositor protection, but it is only a part of the story; the Government have also taken action in other areas. As the House will be aware, the Chancellor yesterday announced a £37 billion bank recapitalisation package. In addition, we have extended the special liquidity scheme to £200 billion, and are providing up to £250 billion in bank debt guarantees.

We are not out of the woods yet, but we have a map, and we have friends who have joined us on the path. We still face a difficult journey, but I believe that we are moving in the right direction. It is important that we get the legislation right, so that it complements the strong, decisive action that has been taken by the Chancellor and the Prime Minister. I am determined that Parliament should have adequate time extensively to scrutinise and debate the provisions. We will work with the House, and in the other place, to gain Royal Assent for this crucial legislation in a timely manner.

Question put and agreed to.

Bill accordingly read a Second time.

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Banking Bill (programme)

Motion made, and Question put forthwith, pursuant to Standing Order No. 83A(6) (Programme motions),

Question agreed to.

BANKING Bill (Carry-Over)

Motion made, and Question put forthwith, pursuant to Standing Order No. 80A(1)(a) (Carry-over of bills),

Question agreed to.

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