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I want to make a few remarks about the Bill. As my hon. Friend the Member for Fareham (Mr. Hoban) said, we should remember how all this started, with Northern Rock some 18 months ago, when our banking system began teetering on the edge, as it has continued
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to do ever since. One of the reasons why the Northern Rock fiasco—crisis—came about was that, under the old rules of banking legislation, when the Bank of England offered emergency liquidity, it had to make that known. That was, in itself, a recipe for the disaster that followed.

In future, under the Bill’s miscellaneous provisions, which seems a minor section in which to put an important provision, such emergency liquidity offered by the Bank of England can remain secret. Clearly, although transparency is something to be desired, in a situation that can cause a run on a bank, as happened with Northern Rock, the new rules are much better, and I am glad that the Government have learned the error of their ways, inasmuch as a rescue will be attempted before the public take fright and start to queue around the block at various branches of whichever bank might be in trouble. I welcome that important provision.

I agree with my hon. Friend the Member for Sevenoaks (Mr. Fallon) that, although it is nice to see the Bank of England taking more of the centre stage in the regulation of our banking industry, there is more to be done in that respect. There are still problems with regard to the powers of the FSA and the Bank of England. Clarity of decision making is very important in what we now know to be such a crucial part of our economy. We are not letting banks fail—they are just too important—and someone therefore needs to be exclusively in charge. I hope that that role will be considered in future banking legislation.

Finally, my hon. Friend the Member for Fareham, who speaks from the Front Bench, has played a much bigger role in considering the Bill than I have, and I am very glad about that because he has clearly gone into the detail. I was encouraged when he said that there is now broad agreement that the Government have got largely right their provisions for the SRR and that there is much more happiness in the banking industry and among Conservative Members about how that would take place. If I have one concern about this crisis, it is that when it is over—it will be over, eventually—the City of London remains an important institution for UK plc. Although we are very angry with the banking industry for the trouble that it has led us into, we must be careful in any future legislation to ensure that it remains an important part of our economy in future. We must ensure that the City is open for business and is the most attractive place to do so. It is very tempting to penalise the banking industry for how it has behaved and for what it has done, but, although we obviously have to put right what has gone wrong in our banking industry and give people confidence in it in the future, we must keep sight of the broader picture for the UK. We have a lot of jobs in the financial sector, and we want to continue to attract banks to London with fair and rational provisions that govern how any such similar situation will be dealt with.

2.24 pm

Mr. Mark Field (Cities of London and Westminster) (Con): These are, as the Economic Secretary pointed out, momentous times for this country’s banking and financial services industry, which has, as my hon. Friend the Member for Bromsgrove (Miss Kirkbride) has just said, become an increasingly important element of the
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UK economy over the past two decades. It had importance before, but its status, and, indeed, the knock-on effect of any problems for other important commercial cities and towns in this country, let alone the City of London, should not be underestimated.

I believe that in an ideal world—perhaps it is fair to say that we are not living in an entirely ideal world—it is important that any legislation is not over-rushed. I appreciate that there have been tumultuous events in the financial markets, and I suspect that that will be so for some months to come. However, in so far as anything is foreseeable—I accept that some eventualities are not—we should avoid putting our banking industry into too much of a straitjacket.

I am also the first to accept, however, that the days in which both I and, indeed, my hon. Friend the Member for Fareham (Mr. Hoban) perhaps talked easily about the idea of light-touch regulation are done—at least, for now. I confess that even relatively sophisticated high-net-worth individuals—we have seen what has happened to such investors in one of the world’s largest hedge funds in recent days—have to concede that those days will, I fear, come to an end.

As my hon. Friend the Member for Bromsgrove pointed out, the future for London’s financial centre will not be enhanced by low-regulation arbitrage, vis-├ -vis other financial centres going forward. Clearly, that will not be the spirit of the age for some time to come. I must confess that I am also concerned about the City of London’s future role as a world financial capital. We must be entirely candid about the fact that some permanent damage has been done by recent events—indeed, the same applies to Wall street—and the whole Anglo-American model of financial services will need to be shaken up.

Clearly, the Bill plays an important part in that process, but we must regard this as work in progress in the weeks, months and, indeed, years ahead. That can only be further undermined by some of the unfolding scandals, and I am sure, I fear, that we have not heard the last of them. Nevertheless, I hope that the Government will take some heed of the quiet concerns of many people in the banking world. Many representations have been made to the Government during the consideration of the Bill, but although they broadly express support for the workings of the Bill, there are some concerns about how the compensation system will work.

I should like to reiterate the concerns of my hon. Friend the Member for Sevenoaks (Mr. Fallon), who hit the nail on the head. We must look at the whole issue of competition law. Above all, as we have seen with the banking mergers that have taken place and the lack of independence for some banks, there is concern that competition considerations have been flung aside. We are living in tumultuous and difficult times that are bewildering for the public and for policy makers as well; but equally, we must remember that competition law is enacted not as an added layer of regulation but to protect the consumer.

The bigger concern of many people is that smaller banking organisations and small organisations in the financial services world run the risk not only of perhaps over-contributing to a compensation fund, but of exiting from a lot of markets in the financial services world, simply because of those competition concerns. All too often, enhanced and enlarged regulation is a big barrier to entry for new competitors in what should be a vibrant field, full of innovation and flair.

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My hon. Friend the Member for Fareham rightly pointed out that some specifics will be considered in another place in January in relation to netting and set-off in the context of clause 48, but I should like to say finally that, although this is billed as temporary legislation, there is no doubt that, as my hon. Friend the Member for Sevenoaks said in his contribution, many of these measures will stay in place for quite some time. That means two things: first, we clearly need to give very great consideration to what we put on to the statute book at this stage—that has happened here and will happen in another place in the next few weeks of the parliamentary Session—but, more importantly, we recognise that this must be work in progress. I hope that the Government will pay great attention to what is being said in the banking and related industries to ensure that, where unforeseen problems arise in relation to the legislation, they are fully and properly dealt with.

2.29 pm

Mr. Charles Walker (Broxbourne) (Con): I am grateful for the opportunity to speak in the debate on the Third Reading of this important Bill, which comes at an important time in this country’s financial history. I, too, am delighted that the Bill will put the Bank of England back at the centre of regulation. There is further to go, but I must confine my remarks to the contents of the Bill.

I note that the Bill proposes an increased regulatory role for the Financial Services Authority. There are still huge concerns among Conservative Members—and, I am sure, among Labour Members—about the suitability of the FSA to deliver on that enhanced role. The FSA seems to have missed all the warning signs leading up to the banking crisis and all the warning signs in the mortgage market, and there has been a simple loss of confidence in its ability to deliver on its important role. A few moments ago, I was talking to my hon. Friend the Member for Sevenoaks (Mr. Fallon) about the need to restore confidence in the regulatory regime. What happened at Northern Rock must not be allowed to happen again, and the Bill goes some way towards ensuring that it will not. My hon. Friend pointed out that the run on the bank happened because, despite assurances from the Government, the FSA and the Bank of England that there was nothing to fear about losing deposits and that those deposits were safe, the public quickly worked out that no one was in charge. As we move forward, we need someone who is seen to be in charge of regulation, so that the buck stops with him or her. I hope that the Bill sets those wheels in motion; if it does not, I am sure that we will revisit the subject in the very near future.

2.31 pm

Mr. Andrew Pelling (Croydon, Central) (Ind): I wish to declare some of my interests. I hope that NatWest will continue to provide me with its overdraft. I am a Royal Bank of Scotland pensioner, prospectively, and I hope that it will be able to pay out on that pension. More importantly, I have an interest in the City, working
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for Tokai Tokyo Securities, which covers some borrowers in the markets, including, now, some of the UK banks.

When one sits down here in solitary at the end of the Chamber, there is a danger of having over-profound thoughts, but I want first to make some more fundamental remarks about the implications of the Bill. Over time, the Government undertook an excellent preparation for the Bill as regards the consultation that went with it. That was a useful process that means that it will be robust in terms of dealing with the crises that will come next year. We would all hope that it will not be necessary to employ this legislation, but it is inevitable that there will be further nationalisations with the oncoming second leg of the financial crisis after Christmas.

The Bill gives additional powers to the Bank of England. It has to be asked, bearing in mind the significant failures in recent years, whether that is the right route to take. I appreciate that we have to work with the institutions that we have, and that there is only so much progress to be made by criticising the Bank and the FSA. However, the Bill represented an opportunity to give the Bank responsibilities for asset prices; obviously, that concern will now be on the downward side rather than on the upward side. The Bill should also have given more support to maintaining the banking department of the Bank of England, which is being wound down, rather extraordinarily at this time of a banking crisis. An opportunity should have been taken—

Madam Deputy Speaker (Sylvia Heal): Order. I remind the hon. Gentleman that passing reference to what is not in the Bill is allowed, but he must now concentrate on what is in it.

Mr. Pelling: I think that I will take this opportunity to desist, Madam Deputy Speaker, because colleagues look keen to move on to the next business of the House.

In conclusion, good work has been done in the Bill to provide the basis of speedy intervention in any future banking crisis. However, I hope that the Government will consider the introduction of the means to set up a bad bank—a solution that could deal with the crises that will be upcoming in the next two months.

Question put and agreed to.

Bill accordingly read the Third time and passed.

Mr. Charles Walker (Broxbourne) (Con): On a point of order, Madam Deputy Speaker. I do not want to try the patience of the Chair, but over the past few weeks I have received many cards from people saying “Season’s Greetings”. Can you confirm that this House is rising for the Christmas recess, not a seasonal recess, and will you join me in wishing all hon. Members a very happy Christmas, as we would wish them happy Diwali, happy Hanukkah, or happy Eid?

Madam Deputy Speaker: The hon. Gentleman is correct in as much as this House will be adjourning tomorrow for the Christmas recess. I thank him for his kind remarks on my behalf and on behalf of the other occupants of the Chair.

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Value Added Tax

2.35 pm

Dr. Vincent Cable (Twickenham) (LD): I beg to move,

Let me move on from the end of term spirit to a very serious issue, which is the motion to annul statutory instrument No. 3020 relating to value added tax. There are two reasons to be concerned about the VAT change, and we want to register that fact from the Opposition Benches. Some people do not believe that there should be a fiscal stimulus or think that it would be damaging; I expect the Conservatives to make that case in due course. My approach and that of my colleagues is somewhat different: we have no objection to the principle of a fiscal stimulus, but we think that this is a bad one that is not likely to be effective even on its own terms.

Perhaps I should start with the Chancellor’s own language in the pre-Budget report, when he declared:

and said that he proposed to give back some £12.5 billion to consumers. Our view is that that is not the best and fairest approach, that it will not help everyone, and that it certainly will not give £12.5 billion back to consumers. That is not to say that it is completely hopeless. There is a case for providing a fiscal stimulus through this measure that does not rely on “best” or “fairest” or consumer stimulus. It is a somewhat mechanical approach. What will happen—we can already see it happening—is that this measure will be absorbed in increased retail margins for everything from small shops to Sainsbury’s, Asda and Tesco. Of course, that is putting money into the economy; no doubt if Tesco earns a little bit more profit as a result, that will be reflected in its share price and feed through into pension funds. If the Government had been honest with us and said, “Actually, this has got nothing to do with helping the consumer—it’s all about putting £12.5 billion into the economy in the quickest way we can think of, and it’s marginally better than dropping money from helicopters”, we would find it difficult to quarrel with the logic. However, they have not done that—they have grossly overstated their case, and so we need to have a look at it and at its weaknesses.

The policy makes extraordinarily optimistic assumptions about the course of the economy. It assumes, as was said in the pre-Budget report, that we expect a recovery in 13 months from now. Because of that very optimistic view of the course of the British economy, this measure could have some perverse and negative consequences that were clearly not thought through in the Treasury. As we approach the end of next year, most people will have to look forward to an increase in VAT that may be greater than a return to 17.5 per cent.—to reopen the whole issue of what the Government really intended—as well as an increase in income tax, although it is called national insurance. Most rational consumers will calculate that they face a reduction in real income and adjust their budgets and spending patterns accordingly.

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There is another, more subtle effect at work. Most economic forecasters now expect that next year we will see something that we have not seen for decades, possibly generations—namely deflation, whereby prices fall as they did in the 1930s and at various times in the 19th century. That is now factored into the assumptions of some of the money markets, so the Americans talk about it quite openly.

In a deflationary world, prices fall. When consumers see prices falling, they hold back from spending, so the VAT cut has the perverse effect of encouraging deflationary expectations. That encourages people to spend less, rather than more. Those are two possible perverse consequences of the measure. I am not predicting that that would happen, but before we glibly assume that the VAT cut is simply an injection of consumer spending, I am pointing out factors that could work in the opposite direction.

Secondly, on the impact of consumer behaviour, we need to take into account the fact that we are talking about a very small change. Mr. Steinbr├1/4ck, the German Finance Minister who has often been quoted in the Chamber in the past few weeks, chose a singularly unhelpful example: he asked, rhetorically, whether people would respond to a change in the price of a DVD from £39.90 to £39.10. That is quite a good example, and I can give others: one that I have quoted in the past is the £5 off the £220 flat-screen TV from China. There is also the example of 60p off a £25 meal. One can question how much that is likely to influence the behaviour of a rational consumer.

Mr. James Plaskitt (Warwick and Leamington) (Lab): Will the hon. Gentleman explain why he is opposed to giving a typical household in his constituency a tax break of £300 next year? That is what the VAT reduction does.

Dr. Cable: I shall go on to explain that we would provide the tax cut in a better, fairer and more effective way. My colleagues and I are not opposed to cutting taxes for our constituents; we just think that the tax cut could be done more intelligently and in a more targeted way.

There is another cost factor related to the smallness of the cuts. Many shops are discounting aggressively. In an environment in which shops are cutting prices by 20, 25 or 30 per cent., the effect of the change in VAT is invisible and therefore likely to have very little impact. Before I leave that point, there are a couple of issues that I would like the Government to address. The first is a very specific but important point raised by the British Retail Consortium, which has been thinking ahead and worrying about the effect that the change will have at the end of next year. It has said:

Whatever general arguments we make about the retailing impact, that is a specific technical point that I hope the Government will have taken on board. Of course, the change that the British Retail Consortium suggests would not affect the overall arithmetic.

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