Mr.
Hands: The hon. Gentleman raises some interesting
questions. I think that it is a mixture of all of those. The Financial
Secretary told us earlier that those products will be extremely
complex—I think she described them as “uncharted
territory”. I am suggesting that the UK, as a sovereign issuer
of debt, should be extremely careful before getting into that uncharted
territory. Secondly, I do not believe that the Islamic or Muslim
communities in this country would be the real winners in this or that
those lobbying for it have been purely from those communities. Among
the biggest lobbyists for such issuance have been the banks, and I
believe that that is because the products will be very complex, as the
Financial Secretary has already agreed. The big winners from this kind
of issuance are likely to be my former colleagues who work in
activities related to the Government debt market and in structured
derivatives.
Mr.
Todd: The issue of the regulation of those products will
be pursued separately, because that would be an obligation on the
Financial Services Authority. We are debating the mere availability of
products of this kind within the UK. I leave it to the Financial
Secretary to respond, but I assume that, were they to be available,
they would be regulated in the normal way so as to protect against any
damage to the reputations of both the investors and the wider financial
community. The hon. Gentleman, however, may have other
assumptions.
Mr.
Hands: The hon. Gentleman makes a very good point, but
history shows that it is extremely difficult to regulate structured
note markets, partly because they are so lacking in transparency. It is
difficult to price that kind of thing. Often a structured note could
only be priced by three people in the world: the person at JP Morgan,
the person at Morgan Stanley, and the person at the Union Bank of
Switzerland. I have not been able to study the precise structure of
sharia-compliant instruments, but, in my view, there is an extreme
risk, because the banks are likely to be taking a large amount of money
out of those products. Let me take you back to the example in the
’90s of the federal home loan bank system, Mr.
Cook.
Stewart
Hosie (Dundee, East) (SNP): Does the hon. Gentleman agree
that the vagueness of the regulations and the schedule associated with
them allow very few people, and yet almost anybody, to be involved? The
clause may provide for the involvement of people and for a person to be
able to be specified as a body corporate—a company possibly
formed only for the purposes of raising money through alternative
finance arrangements and maybe independent of the
Treasury.
Mr.
Hands: Absolutely. The hon. Gentleman makes a powerful
point about some of the dangers. As he rightly pointed out, both the
clause and the schedule are extremely vague. It sounds like the sort of
company that might be set up under the regulations would not be
dissimilar to a special-purpose vehicle, the like of which has been in
the news a lot in the past year. Such a vehicle could issue things like
collateralised debt obligations or collateralised mortgage obligations,
a large number of assets are parked into a vehicle and the ensuing cash
flow out of the other side is what the investor gets. To my mind, there
are a lot of similarities between the two
products. With
the federal home loan banks’ issuance in the 1990s, there would
typically be a small issuance—which I think we are likely to be
talking about with these sukuk bonds——of, say, $25
million in principal. I clearly recall being on the trading floor when
one of those $25 million structured notes was issued. The
bank in question, which I worked for, was proud of itself for having
taken a million dollars out of the transaction. That was, and still is,
a very lucrative part of finance, and the bank did incredibly
well. Finance
profits from complexity, especially from instruments of extreme
complexity, where the number of people who can price them can be
counted on one hand. Who were the losers in that? After the ensuing
swap transaction, the federal home loan banks ended up with sub-liable
funding—quite nice funding—of probably liable minus 25,
which was very attractive compared with the plain vanilla bond that the
federal home loan banks could have issued. The real loser was, of
course, the
investor. If
the investor had been in a position the next day to put a call in and
seek evaluation of that bond independently—regrettably, for the
bank concerned, years later that happened—they would have been
surprised to find that the valuation the next day, even before the bond
had settled, was only 96 instead of their principal of 100, because the
bank had taken 4 per cent. out of the transaction. I think that that is
the kind of thing that we have to be extremely careful of with
structured notes. We may say “buyer
beware”—whoever bought that bond should have been
aware—but here we are talking about the issuer being the United
Kingdom Government, which is where my major concerns come in as a
politician rather than as a
banker. We
face a reputational risk if we are the issuer of this kind of financial
instrument. Sukuk bonds are fine in principle and we want to encourage
Islamic finance. As I mentioned earlier, the Government should have an
interest in combining matching investors with issuers. Nevertheless, if
it would lead to reputational risk for the United Kingdom Government as
the issuer of the securities, we need to debate this more clearly. Bear
in mind, sometime afterwards the investment bank, or whatever it is
that sold the security in the first place, will have long disappeared,
but the name left on the piece of paper—that sukuk
bond—will be the United Kingdom Government.
It is worth
pointing out that there are not that many triple-A sovereign borrowers
left: the United Kingdom, Germany, France and, despite the problems in
the ’90s that I described, the United States, are all triple-A
sovereign borrowers. It is not impossible for a sovereign borrower to
be downgraded. Fifteen years ago it would have been inconceivable that
Japan could be rated anything lower than triple-A, but it is now a
double-A minus rated sovereign
issuer. 12
noon Mr.
Brooks Newmark (Braintree) (Con): I have listened to my
hon. Friend and it has been hugely instructive, but his examples were,
in many cases, assets that were sub-prime, so the underlying assets
were at risk and the Government were effectively layering their
triple-A security on top of sub-prime assets. What I am not clear about
in what the Government are doing and where their argument is going is
in respect of where the risk lies with the underlying assets such as
with the Federal Homes Association—Fannie Mae, Freddie Mac and
so on—and as we have seen recently in the sub-prime
market.
Mr.
Hands: The answer is twofold. First, at least according to
the Bill and the two clauses with the schedule, it is impossible to
know. It sounds like property might be implied. It says it includes
land, but it is not any clearer than that. It sounds to me as though
almost anything could be put into that vehicle. The bigger risk, in my
view, is that the investor will end up with a pretty raw deal because
the bank is highly likely to take out a large amount of money in the
middle and we could end up with investors who are very angry with the
UK Government, which is something we ought not enter into
lightly. Traditionally,
sovereign issuers such as the UK and the Debt Management Office, have
been very conservative borrowers. There is a good reason for that.
Reputational risk is extremely important in the markets, especially
with an issuer like the UK Government, who are about to start issuing
rather a lot more gilts and other instruments than in the past. It is
vital that we preserve their reputation. The reputation of the UK
Government as an issuer in the sovereign bond market is likely to be at
risk if we go down the road of issuing structured notes in general and
sukuk bonds in particular. The clauses in the schedule in front of us
allow us as a Government not only to issue sukuk, but to issue pretty
much anything, so long as it does not pay a coupon and does not pay
interest. It may even be collateralised on sub-prime assets, which was
another point made. I think we should pause, debate what we are looking
at here and be careful that what we are getting into is in the best
interests of the United
Kingdom.
Kitty
Ussher: I found that extremely interesting and I defer to
the hon. Gentleman’s expertise. I was for some years a
country-risk analyst and sovereign-debt analyst for the Economist
Intelligence Unit, so I am very aware of mistakes that Governments can
make across the world and I can assure him that it is not our intention
to do anything remotely similar to the examples he gave. We have not
decided whether to issue a sovereign sukuk, we will only do so if we
think it is in the overall interests of the UK, including value for
money for the UK
taxpayer. We would not issue something that we knew had a significant
risk premium or had any likelihood of affecting our credit
rating—we would have no interest at all in proceeding down that
route. Mr.
Jeremy Browne (Taunton) (LD): During the speech by the
hon. Member for Hammersmith and Fulham, the Minister intervened to ask
what he meant by the Government having a political motivation, which he
then clarified. Is there a political motivation in what the Government
are seeking to do in this field? Do they see potential diplomatic or
cultural benefits from going down this
path?
Kitty
Ussher: No, not necessarily, and that is not the reason we
are doing it. I was going to come on to our motivation, because it is
important. There are two motivations, one more important than the
other. The first and most important is that entering these uncharted
waters, as I happily said previously, will enshrine the City of London
as an international centre of expertise in issuing sukuk, both
sovereign and
corporate.
Mr.
Hands: Does the hon. Lady at least concede that the
question of whether the City of London takes a lead on Islamic finance
is a different question from that of the UK Government as an issuer of
sukuk
bonds?
Kitty
Ussher: Of course, and it is because the City of London
already has a comparative advantage in this area and because deals
originating from all over the world are being done through London in
this area in the entirely private sector that we wish to give a fillip
to that, to the greatest extent that we can, by making the very clear
PR and economic point that this is something that the UK Government
recognise as important. We want to send out a marker that we wish it to
continue.
There is also
an extremely important point here about the learning curve that we are
rightly being forced to climb to see whether this is in the national
interest. We are uncovering little issues here and there around the tax
and regulation system that affect not only a potential UK sovereign
issuance, but also the corporate issuances that routinely take place.
We feel that by working with the industry to address each of these
issues as they arise, we will create a more conducive atmosphere for
entirely private sector activity that leads to more jobs and greater
prosperity in the City of
London.
Mr.
Hands: The Minister mentioned that she was an analyst of
sovereign risk, so perhaps she might think back to the origins of most
of the important markets in London at the moment, such as the euro bond
market. All those are now centred in London and do extremely well. In
none of those cases was the UK Government the very first issuer of a
new product. Surely, she must see that we can easily separate the
future of the City of London from the role of HMG as a
borrower.
Kitty
Ussher: Of course, an enormous number of things happen in
the City of London that have not been done by Government, and we
welcome that. But there are other examples of innovative practices that
have started off in the public sector, such as methods of trading, for
example, IT systems. The point I would
make to the hon. Gentleman, and more generally to his party, is that we
feel—and there seems to be an extremely broad consensus out
there—that the road we are currently travelling, which may or
may not eventually lead to a sovereign sukuk issuance, is likely to
help entrench London as the world’s leading place for Islamic
finance. Given that a number of Islamic countries are currently
perceived as emerging markets, and so developing quite rapidly their
ability to issue corporate sukuk, we think there is huge potential here
to be tapped by London, and now is the time to do it, when our actions
could potentially
help.
Mr.
Hands: I thank the Minister again for giving way. She is
being generous. Surely she must see that it will not enhance the
City’s reputation at all if the bond issuance goes wrong and
investors end up out of pocket because the banks have taken too much
out of it. If investors have instruments priced at 98 or 99p in the
pound the next day, that is likely to do great damage to the reputation
of the City of London and that of the
Government.
Kitty
Ussher: By definition, if a policy goes wrong, it is not a
good thing for the Government who have proposed that policy. That is
why we have not made a final decision. We will only do this if it is in
the broad interests of the British economy and the taxpayer and
demonstrates sufficient value for money. If we feel that, once
launched, a sovereign sukuk would not be able to attract a return that
was in our interest, we would not proceed. We have not got to that
point yet, and we need to get as far as we can before making that final
judgment. I have an enormous number of points to deal with, and would
like to make
progress. I
said that there were two main motivations for proceeding in this way,
and that the first and main motivation was the boost we felt it would
give to jobs and prosperity in the City of London. The secondary
motivation is that we feel it may indirectly help the development of
Islamic retail products—for example, sharia-compliant high
street savings accounts—if the outlet on the high street were
able easily to invest in sharia-compliant Treasury bills, therefore
ensuring that the entire investment chain is sharia
compliant.
That would be
an indirect effect, based only on anecdotal evidence, but it fits with
our broader policy objective of ensuring that nobody in this country
should be denied access to conventional financial
products—savings, insurance and so on—simply because of
their faith. It is about having a level playing field for the
relatively small number of people who currently feel excluded because
of their faith, which is by no means all Muslims, it is important to
say. I hope that that answers the hon. Member for Taunton’s
question. It is not our intention to attract a different class of
investor, or—although there may be spin-off effects—to
curry favour with a certain sector of society or certain countries
around the world. We have two aims and the first and most important is
economic, for the City of
London. On
the time scale, as the hon. Member for Fareham made clear, we published
on 2 June the response to a consultation which did not include a final
decision on whether to proceed. There are a number of issues that have
not yet been resolved and some of the questions raised today involve
issues that have not yet been resolved,
so while it is important to take the power in the legislation that is
before us, we will not proceed until we have been able to discuss these
issues more widely. The final regulations that are brought in, if
indeed we decide to proceed—and I think this answers another
point that was raised—will be subject to affirmative procedure
and so will be debated at that
point. | 
