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Mr. George: I am not part of this benign, cosy discussion. I was terrified when the hon. Member for Stone walked in, thinking that the spokesman for the official Opposition was about to degenerate into a bout of anti-Europeanism. There seems to be a view that some things are done well by the European Union. I am not a high enthusiast—I am more a Euro-acquiescent Member of Parliament—but what the hon. Member for South-West Hertfordshire and the Minister said really irritated me. I am not an economist or financial analyst, but one of the causes of the deep crisis that we are in seems to be the lack of serious regulation across a variety of financial markets. We and the USA—I think we are the more culpable—have almost encouraged a lack of regulation and given the green light to anyone in the City or the financial markets to do pretty much as they desire. Those people, whoever they are, clearly played a pretty significant role in creating the state in which we now find ourselves. I do not agree with those who put all of the blame on them, but they certainly deserve a great deal of it.
Having tried for 25 years to get a system for regulating private securities in place and eventually succeeding, although I never persuaded a Conservative Government to do so, I think that registration indicates a very light touch that will barely function as regulation at all. I simply feel that the three major companies and the other 90-odd mentioned at the back of the excellent briefing paper deserve far more regulation, in the light of what they have done. I do not want the regulation to be so iron clad that it thwarts and emasculates the free market system, but if there is an end lesson to be learnt, it is that states must be far more proactive than they currently appear to be. Perhaps I am wrong—I have disgraced myself once this afternoon, Mr. Williams, and do not want to do so a second time—but I really feel that registration sends out the wrong message.
If one looks at this bundle, which I have grown to eulogise in the couple of days since I was sent it, one will see that what those companies did was virtually criminal. I ask those who have not read the bundle properly to look at the list of failings of which those companies are accused, which include failure of integrity, conflict of interest, lack of quality in methodology, and lack of transparency. If one looks at the comments made about those organisations in the US Congress or googles them, one sees the list of failures of which they are accused. Frankly, the way to deal with such organisations is not with a light touch. It should not be an excessively heavy touch, but it seems to me that it should be somewhere in the middle. To do nothing appears to be one of the options, which is clearly nonsense. I believe that a stronger regulatory system is desirable.
I do not agree with all that The Guardian says, but it has listed the 25 people at the heart of the meltdown, including the Prime Minister and the Leader of the Opposition—no, I am sorry, I misread that. Certainly, Standard & Poor’s ranked prominently among those organisations responsible for the current disaster.
It is important that we recognise that an enormous amount of work has been done by the European Commission—it almost sounds like I am converting, but I am still sceptical—the Council and even the European Parliament. The staff of those institutions have done an excellent job of providing anyone who is prepared to read their findings with an analysis of those credit rating agencies, including their history, how they operate, their alleged code of conduct, the ethical standard within which they purport to operate, their different methodologies and their professional standards, which all came to nothing and failed. Their deficiencies have been starkly revealed and I hope that we are prepared to take a serious interest in what happened in the US. Here are some of the headlines: “Congress mauls bosses of credit rating agencies”; “Ben Bernanke lays credit crunch fiasco squarely on ratings agencies”—carefully avoiding his own responsibility—“Who rates the ratings agencies?”; “Credit agencies ‘broke bond of trust’”; “SEC crackdown on credit rating agencies”, and so on and so forth.
I compliment the Treasury Committee on the work it did in February. The end product of this is surely a painful process of trying to reconstruct as far as is possible the free market system that has been too free, while not shackling it in such a way as to inhibit it—its job is to make money, but there are consequences for the credit rating agencies and the other financial institutions, as the world is now changing.
How do we as a Government, as a Parliament, as a member of the EU, respond? I hope that if there is not the desirable synergy between what the US is doing and what is being done in the European countries, there are at least some complementary and similar activities. The companies we are looking at are largely American with subsidiaries and one would not want them to go hopping around the world to find the easiest regulatory system with which to operate. I hope that the Government are in discussions with other organisations to try to reach a proper mould.
I have looked at what the Government’s view has been, thanks to the document we received. I have seen this kind of work before. I do not want to embarrass anyone sitting to your left or right, Mr. Williams, but I think we were let down by the regulatory agencies and by the organisations that should have probed and anticipated earlier and far more successfully. I hope that those who help get us into the situation in government will not be the ones who will advise Ministers on the way we get out of the system by having a better regulatory framework.
Mr. Gauke: Does the right hon. Gentleman generally take the view that people who get us in a mess are not the right people to get us out of a mess?
I do not in any way wish to be adversarial, as the hon. Gentleman has been very constructive. However, in the first document, I sought the Government’s view and I thought, “Oh yeah, I know what’s coming.” It will be a bit of a sell-out and they are going to persuade the EU and use what powers they have to make the system not as weak as it is possible to be, but far less strong than it ought to be. Oh yes, it says that the Government, in discussions with the Commission, have offered consistent support—it does not look like strong support to me—but then the qualifications go in indicating that Her Majesty’s Government are not supporting a strong solution.
I will not repeat what is available for us. The document at the bottom of the large bundle shows that we are in the territory, not of strong regulation but of pretty weak legislation. Of course, we will be in control of it. Will the controlling body be the very organisation that allegedly controls the financial sector, as well as these organisations? I hope not, unless there is a complete change of heart and an almost complete change of personnel. There is a long way to go in this unfolding saga. We should be grateful to the European Scrutiny Committee for enlightening those who need enlightenment—I am not a specialist—but frankly, there is a lot still to play for and a lot of risk involved in the solution that is sought.
Finally, I hope we will emerge from this crisis in the foreseeable future, within the next 12 months or so, and that the credit rating agencies, which behaved appallingly and were just short of criminal behaviour, will face competition. Putting their hands up, apologising and saying, “This is what we’re going to do in the future” is not good enough as far as I am concerned. Surely, it is up to the European Union, with all its structures, to develop a system that will give people who are going to utilise credit rating agencies a little more confidence than did the self-serving, misleading tosh that they were presented with? I hope that we in this country will contribute in some way to a much better, de-centralised regulatory system.
It would be impossible for the British Government to agree to the European Union having a centralised function. It would be nonsensical to impose on the centre a regulatory regime, but we have had 25 years of consistent opposition to the principle of strong regulation and work to control the security industry—security, not securities. Furthermore, once the legislation was passed, it was weak, so the civil service got its own way in the end, and a weak system of non-regulation was replaced by a weak system of alleged statutory regulation. That is why I come to this area with a degree of scepticism. So far, despite the strong efforts of the Minister, that scepticism has not been allayed. I know that these sittings are not meant to be too argumentative, especially for those sitting behind the Minister, who have done a good job, but I hope that we will see a little more steel in the system. Hitherto, we appear to have been gently moving towards a system of plastic rather than steel.
5.53 pm
John Hemming: We seem to have a situation in which the horse has bolted and the Czech presidency is in a major rush to slam the stable door. The danger is that we break the jockey’s arm in the process of so doing so. There is a question of whether, in the long term, the proposal will actually achieve what we are setting out to do. One of the underlying problems in finance is that cash is king and everything else is a matter of opinion, and the difficulty is that the opinion is given by auditors or credit rating agencies.
I agree with the right hon. Member for Walsall, South about strong regulation in certain circumstances. The question is how that regulation operates. I take the view that the system of saying, “You must not do this,” for something that is risky, is at times far better than a system that says, “You can do what you want as long as you fill in a lot of forms.” In England, we have moved on from the Financial Services Act 1986 and brought in a system that allows lots of conflicts of interest to develop, but says that that is all right as long as people fill in lots of forms. The American system, however, separated from the investment banks the deposit-taking banks and those protecting ordinary people’s money. That is not something for us to discuss today, but the way in which regulation works is important, and we make a mistake by tending to agree that anyone can do anything that they want as long as they fill in a load of forms.
When it comes to credit rating agencies, the proposals before us on methodology and transparency are important—that is definitely the way to go. There is the underlying problem of a conflict of interest. The fact that the people paying for the credit rating from the agency are the people who want to sell the stock cannot be avoided. According to current ratings, some stocks are trading at about half the issuing value. That shows that there is not a lot of trust in the system at the moment, which is a problem in itself. As I said, cash is king and everything else is a matter of opinion. The opinions are very negative at the moment, which affects many other things.
The difficulty—this is where we come to breaking the jockey’s arm—is that ordinary people have pensions in pension funds that want to balance their risk across the world. If this measure is brought in inappropriately, funds will have to rush to sell certain securities. I am pleased that the Government understand the need for transitional provisions, which will avoid ordinary people losing out on their pension funds. We all know about the problems that have arisen with pension funds. If funds are forced to sell stock just because we have not got the paperwork right, we will not be delivering. It is all right for people like me who are successful in business and can take risks. We need security so that people can rely on their pension doing roughly what they expect when they retire. When they try to get cash from the cash point, the cash must come out and not be stuck in Reykjavik.
Those should be our objectives, and there is a danger is that these measures could undermine them through the law of unintended consequences. My party has supported the measures. It was not me that came up with the phrase “fortress Europe”, but my party. I do not use it to suggest an anti-European perspective, but to indicate that there is a danger that the wording of the proposals could lead to such a situation. That must be avoided because it would cause all sorts of unintended consequences.
It is right to have such regulation and the methodology is right. We need only look at examples such as Madoff, who made off with $50 billion. People ask what his scheme was based on, but I did not understand it because it was magic—it was a Ponzi scheme. The danger is that we have the right answer of going for transparency and a methodology of trying to separate the people negotiating the fee from the credit rating given by the agency, but the Government chuck the baby out with the bathwater. When slamming the stable door shut, sufficient time must be taken to ensure that the jockey’s arm is not there. At the end of the day, the riders are the ordinary people who benefit from the security of the system and of pensions and banks. Those people must be protected, so we must ensure that we do not chuck the baby out with the bathwater.
5.58 pm
Angela Eagle: We have had a good question session, followed by a debate about this important but small part of the response to the circumstances that have been reverberating around the international finance system since the beginning of the credit crunch. I am grateful for the opportunity to answer questions and to participate in this short debate. We have explored the role that credit rating agencies can play in the global financial market but, more importantly, we have looked at the proposed regulations. They are only one early step in the journey towards raising the standards of global financial systems and their regulation.
The hon. Member for South-West Hertfordshire said that time flew by. All I can say is that time flies when you are having fun. Everybody in this room will be astonished that it is nearly 6 pm because we have been so concentrated on these important issues. I can only endorse what he said about time flying.
The issue before us is one of balance. The hon. Member for Birmingham, Yardley suggested that we must get the balance right. We must improve the regulation of private institutions such as credit rating agencies, which have come to have such an influence on people’s opinions. We must ensure that they can perform a good service for the global financial system, rather than the service they have provided recently, which my right hon. Friend the Member for Walsall, South described.
It is important that we have safeguards and that we do not regulate to such an extent that people say that credit rating agencies have a stamp of approval, so what they say must be right. We have to remember that credit rating agencies are private sector organisations that do what they do for a fee. It is important to regulate them, but it is also important that investors should carry out other due diligence when making decisions. If they have worries or do not understand what they are buying, perhaps they should not buy. Credit rating agencies and the judgments they reach—and they are judgments—should be taken into account as part of the investment process, rather than becoming the whole of it, which I suspect has happened. There has been an over-reliance on ratings and an under-reliance on other due diligence and checking. When the history of this period is written, I suspect that that will be one of the themes. Perhaps investors should think that the more complex something is, the more due diligence they need to apply, or perhaps they should decide they want more simple investment products. The market will move in that way if that is the opinion of those who work in it.
The hon. Member for South-West Hertfordshire said that he objected to the European Union asserting itself unhelpfully in a global debate. All member states in the EU are affected by credit rating agencies and by the problems that have arisen due to the credit crunch, and not all of them are members of the G20. Therefore, it is not surprising that these issues are raised at ECOFIN nor, when such an obvious and threatening systemic problem emerges, that ECOFIN and member states have concerns. They have expressed those concerns and asked the Commission to come up with a proposal to begin to do something about it, which is what we are debating today. That is entirely appropriate.
It is also important to remember, with respect to the hon. Gentleman’s comments on state regulators and CESR, that CESR is a committee of those regulators, so it is essentially almost the same thing. It is not a supervisor of the regulators, but a committee of member state regulators. In that sense, it is a conduit, or a means of ensuring that work can be taken forward in particular ways, that commands the support of member states, which is important in the EU context. Rather than the French regulator piping up and saying it wants to do something, it is important that it goes through a process that other member states think is reasonable and appropriate.
I hear what the hon. Gentleman said about article 4 and thank him for his acknowledgment that we have removed the worst difficulties involving the wording. We will continue to refine the wording of the regulation as the process carries on.
Are we rushing? The circumstances in the global markets have been difficult, and some people say we have been too slow already. The EU is well known for doing things in a quite cumbersome way. It was the clear view of ECOFIN—not the Czech presidency and not the Commission—in November that we should get on with this. The Commissioners responded, so it seems a bit churlish then to accuse them of rushing. Given where we are, we are trying to get this modest regulation in place in an appropriate and timely fashion.
My right hon. Friend the Member for Walsall, South commented that the measures were too modest. I will not repeat what he said, but he made certain observations—far be it from me to dissent from all of them—about the behaviour of credit rating agencies and the circumstances that have led us here. If this was all that we were doing, I would agree that it was a modest solution, but I hope that I have put the proposal in context and got across the fact that it is a very small part of a series of work streams.
At the November G20 meeting, Finance Ministers were asked to take forward work in five areas: strengthening transparency and accountability; enhancing sound regulation; promoting integrity in financial markets; reinforcing international co-operation; and reforming the international finance institutions. That applies to credit rating agencies and in a range of other contexts. We are considering only one small part of a much larger jigsaw of activity that is being co-ordinated by the Financial Stability Forum and other parts of the G20, which will be discussed at the G20 Finance Ministers’ meeting in March and the leaders’ meeting in the UK in April. It is also right that those member states that are not in the G20 can have input on their areas of concern at ECOFIN and in other forums.
Mr. George: I hope that the Minister will send me an autographed copy of her memoirs when she writes them, because I cannot imagine that she believes the brief that she has delivered. If the proposal is replicated in other areas of the financial system—domestically and internationally—there will be a lot of very happy people on Wall street and in the City, because they will have got away with it. They will have perpetrated one of the greatest calumnies in financial history and walked away with their great bonuses and hardly any admonishment. I take little comfort from this. My criticism is institutional, not personal, and once she has recovered from it—I hope she does not believe it is personal—and when her career finally comes to an end, which I hope is a long way away, I look forward to her telling me what she really meant.
 
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