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?
Mr.
George: I remember the electorate chose 10 years ago that
those who had got us into the mess were not going to get us out of it.
I do not wish to move on to the
next five years. That is beyond my capability. I do not accept the
argument that those who give bad advice should survive and be rewarded
with not even a pension, but bonuses. Often the very people who
are culpable are then there to proffer advice,
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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