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Mr. Darling:
I have had many discussions with the Governor of the Bank over the past couple of years about these things, and I will have many discussions with him in advance of the preparation of the White Paper. In particular, I have talked to him about the role of the Bank. If we further develop the powers that may be necessary to lean against credit cycles, I have made it clear that the Bank of England is the obvious place to go. However, the point that I was making is that currently the power to increase or reduce capital requirements,
which is the most obvious brake one could put on financial institutions, lies with the FSA. I do not want to end up with a situation in which banks do not know whether the FSA governs their capital requirements, or the Bank of England does. The Bank does not want to regulate individual banking institutions and so on. People can hold different views about that, but I want to make sure there is a clear delineation of who is responsible for what, so that we can better hold people to account for what they do.
Gordon Banks (Ochil and South Perthshire) (Lab): With the international implications of the current marketplace, can the Chancellor tell us what discussions he had with international partners before arriving at the content of his statement today?
Mr. Darling: I have, of course, spoken to all my counterparts on several occasions since these problems first arose at the end of 2007. It is interesting that most countries have more regulators than we do. Most of them are trying to streamline the regulatory system—in the United States, for example. Not everybody’s financial industry is in the same position or made up in the same way. What I think the industry and the public want is to make sure that we have a system that is coherent and that works. Above all, we must not lose sight of the fact that no matter what institution and no matter what rules, much of this is ultimately about individual judgment—making the right calls at the right time. That is the problem that occurred in the lead-up to the current situation and that is what we must get right.
John Thurso (Caithness, Sutherland and Easter Ross) (LD): At the beginning of his statement the Chancellor mentioned the importance of competition. Does he accept that the shotgun marriage that he oversaw of Lloyds with HBOS was bad for competition, as well as proving to be a bad deal for both the shareholders and the taxpayer? Will he now do the honourable thing and oversee an amicable divorce?
Mr. Darling: The shareholders of both Lloyds and HBOS voted overwhelmingly, separately, for the merger to take place. The process took about three months. I do not know how the hon. Gentleman describes “shotgun”, or whether he would regard a three-month engagement as being sufficient, but both parties were willing participants in the act and the shareholders of both voted to go along with it.
Andrew Miller (Ellesmere Port and Neston) (Lab): Although there is no direct read-across to other sectors outside financial services, will my right hon. Friend bring his report to the attention of other regulators? It is important that lessons about systemic failure are learned where appropriate, and the FSA can learn from other regulators about how they have done things—for example, setting up better consumer panels.
Mr. Darling:
I know that regulators speak to each other where they have common interests or concerns, and I am sure they will do that. I have said specifically in the White Paper that the FSA and the OFT will work closely together in order to ensure that as we come through the downturn, we have a competitive banking
system. Especially after the consolidation of foreign banks, it is important that we have choice and competition in the future.
Mr. Graham Brady (Altrincham and Sale, West) (Con): The remuneration package agreed for Mr. Stephen Hester at RBS is weighted towards the long term and has clawback provisions in the bonus. Is the Chancellor happy that that is an acceptable package, which reflects the kind of long-term measures for remuneration that he said should be put in place, or does he believe that that specific example would lead to different capital requirements?
Mr. Darling: I am not against bonuses—I meant to take the point up with the hon. Member for Twickenham—in whatever walk of life, if one can reward people for doing something special or for making an extra effort, particularly if it is designed to build the long-term strength of the bank. In the case of RBS, where there is a new management running a bank with a balance sheet that is almost the size of this country’s wealth—on one view, it is the largest bank in the world—it is important that there is an incentive to help taxpayers get their money back.
The hon. Gentleman asks about penalising. It will be for the FSA to look at each case to ensure that there is a bonus structure or a reward structure generally, not just at the top, but throughout the entire system, that it is built for the long term, and that there is clawback—all the conditions that we set out—otherwise it will visit the appropriate penalties. People in banks must be focused on building their banks for the long term, otherwise we will be back exactly where we started.
Ann Clwyd (Cynon Valley) (Lab): I welcome the White Paper, particularly the points made by my right hon. Friend about changing the financial culture of banks. It sounds, therefore, as though he might like to incorporate in future legislation an excellent Bill restricting the pensions of board members of banks that are wholly or partly owned by the taxpayer. Will he consider the matter?
Mr. Darling: I know that my right hon. Friend had a Bill before the House, which she discussed with me. It is important that all parts of the remuneration—pay, bonuses or pensions—are based on reality and what is reasonable, and that they are geared all the time towards helping the bank or similar institution build for the long term, and do not leave it prone to taking short-term risks, which can prove so disastrous.
Sir Peter Tapsell (Louth and Horncastle) (Con): May I remind the right hon. Gentleman that on 11 November 1997 I explained to the then Chancellor over eight columns of Hansard why the tripartite regulation of the banks would not work? May I warn the current Chancellor, with more brevity, that his proposals will not work either? May I modestly suggest that he look at my speech before proceeding to legislation?
Mr. Darling: I will bear that in mind for my holiday reading over the summer. I have the vaguest recollection that I may have looked into the Chamber in the course of one of those columns and looked back out again. I remember those debates quite well.
As the hon. Gentleman knows, the problem that we had 10 years ago was that the Bank of England never regulated all aspects of financial services. It regulated the banks, but throughout the 1990s it was obvious that many banks had many other interests, such as insurance, that were regulated by other bodies. Such duplication and complication did no one any good. Indeed, the entire self-regulatory regime was pretty discredited by the mid-1990s. As I said to the shadow Chancellor, we can argue for ever and a day about where we draw the line. When the bank or the FSA is doing something, what matters, as the hon. Member for Gosport (Sir Peter Viggers) put it so succinctly, is that a distinction is made between the general supervision of the system, the financial stability, and an organisation that says to each individual, “This is what you should be doing”, drilling down into the nuts and bolts of it. The structure that we have is right. It needs to be strengthened and built on, and that is why I make my proposals today.
Mark Durkan (Foyle) (SDLP): Chapter 9 of “Reforming financial markets” touches on the future regulation of credit unions in Northern Ireland. Does the Chancellor accept that for change to work, the FSA will have to have a strong and active regional interface, which we have not had before? Does he accept that that applies equally to the wider banking market in Northern Ireland, which has very different features from the banking market on this island? If the future arrangements for industrial and provident societies are to work, can we afford to leave the savers of the Presbyterian Mutual Society as casualties by the wayside?
Mr. Darling: I am aware of the problems relating to that society, and arrangements are being made to examine what happened and what might be done, but we have to be aware of the implications that there might be for institutions in other parts of the UK.
Mr. Desmond Swayne (New Forest, West) (Con): Does the Chancellor agree with the Governor of the Bank of England’s assessment that it was not clear how the Bank would discharge its new responsibilities if it could not go beyond issuing sermons? Or did the Governor say that simply because the Chancellor had not shown him a copy of the paper that he brought to the House today?
Mr. Darling: The proposals that I put before the House today mean that when the Bank sounds a warning or expresses concern through its financial stability report, there is now a mechanism to make sure that those recommendations do not just lie on a shelf, but have to be addressed and dealt with. That is a major step forward.
Mr. Michael Meacher (Oldham, West and Royton) (Lab):
As two of the main causes of the economic breakdown and the credit crunch were the mass-proliferation of toxic credit derivatives and the gross recklessness of the investment arms of the banks, does my right hon. Friend not think it necessary to prohibit, or at least require official approval of, potentially risky derivatives? Given the eye-watering cost of bailing out the banks, how can he justify continuing to give state
underpinning to the casino investment banks, rather than limiting that underpinning to the traditional commercial banks?
Mr. Darling: On the latter point, the answer is quite simply that investment banks are systemically important, as we have seen in this country and in America. As we saw in America prior to the banking collapse in October, simply letting them go has potentially disastrous consequences. Indeed, it was the collapse of some of those American banks that immediately precipitated the problems. On the wider point, banks need to be properly regulated, but if my right hon. Friend is getting to a point where he can say that there should be some sort of veto from the regulators, I would say to him that that might be more difficult. It is better to have a system that regulates risk within institutions, rather than one that is wider than that.
Dr. William McCrea (South Antrim) (DUP): I have no doubt that the measures that the Chancellor announced today are worthy of our careful consideration, but the bottom line in reality for many of our constituents is that medium and small businesses are still not gaining the help that is necessary to make them sustainable and profitable. Will the measures assist in getting money to where it is needed?
Mr. Darling: The need to get lending going—particularly for small and medium-sized enterprises, but for others, too—is urgent. Measures are already in place to try to ensure that that happens. I know that concerns are being expressed in the different parts of the country and different sectors where that is not happening sufficiently. That is why I welcome the announcement today by Prudential that it intends to lend to medium-sized companies. The SME sector is of particular concern, simply because of its size and the number of people whom it employs, not just in Northern Ireland but in the rest of the country, too. We have to step up our efforts to make sure that we get that lending going.
Mr. Geoffrey Robinson (Coventry, North-West) (Lab): I apologise for missing the Chancellor’s first few remarks in his statement. May I compliment him on resisting the seductive structural arguments coming from the Opposition parties, both with regard to splitting up the activities of banks and with regard to doing away with the tripartite system, a move recommended so strongly by the Opposition? Does he not share my surprise at the ease with which a few kind words from the Governor of the Bank of England have persuaded the shadow Chancellor to hand back to the Bank those responsibilities that it previously discharged with such abysmal incompetence, and more? Does the Chancellor not agree with me that the likely consequence of doing what the shadow Chancellor proposes will be that we end up with not just bad regulation, but probably a ruined monetary policy system, too?
Mr. Darling:
I take the view that I have held consistently for the past 10 years. It was right to give the Bank independence to deal with monetary policy. That will stay; I do not think that anyone wants to reopen that decision. It is right, because of its responsibilities, that it should have a view on financial stability. When it comes to the whole question of macro-prudential supervision,
if one were to give more powers, the Bank would be the obvious place to go. I honestly do not see the advantages of saying that the Bank should also start to involve itself with the hundreds of different banks, building societies, insurance companies and other financial institutions, because all that that would do is simply move a large chunk of the Financial Services Authority into the Bank, and I do not think that that institutional change would benefit people at present. I would rather build on what we have, and identify the problems that we have.
I repeat a point that cannot be made often enough: institutions are important, and so are the tools to do the job, but at the end of the day, we are talking about a matter of judgment. Frankly, yes, the FSA got things wrong with Northern Rock, and the Bank of England, in the ’80s and ’90s, made mistakes of judgment. We have to concentrate on trying to make sure not only that we have the institutions and the tools, but that people understand what they are doing.
Angela Watkinson (Upminster) (Con): What caveats and terms and conditions did the Chancellor attach to the provision of the vast sums of public money that were used to bail out our failing banks? Did the banks comply, and if they did not, what sanctions did he put in place?
Mr. Darling: I am not sure whether the hon. Lady was present at the many debates and statements that we have had on that subject, but earlier this year, I set out at some length—I think on a number of occasions—the measures being put in place. The hon. Member for Louth and Horncastle (Sir Peter Tapsell), who recommended reading Hansard over the summer, has left the Chamber, but if I am to read his speech, she might want to look at some of mine.
Stewart Hosie (Dundee, East) (SNP): I thank the Chancellor for advance notice of the statement. I welcome the fact that he spoke of systemic risk, and the fact that there is a chapter in the document about derivatives markets. However, in essence, the four points are simply to call for an EU directive, to work towards “a roadmap delivering...improvements”, to support “international efforts” and to support “the principle of greater transparency”. When will we have real plans to deal with that aspect of systemic risk? When will the markets have access to proper pre-trade and post-trade information, and when will the markets have access to proper, secure pricing data? When will the analysts have all the information that they need properly to identify the risks that such products pose?
Mr. Darling:
The hon. Gentleman makes a very fair point. We need an open, transparent market, so that people can see what is going on with their derivative products. We can fix some of those issues in this country, through FSA requirements, but some of them need European agreement because they are governed by directives, whether we like it or not. Given the relationship with the United States and the interrelationship with the markets, there are other wider international implications, too. However, on the general proposition that we ought to have more openness, so that people can see what is going on, and crucially so that perhaps some of the
people running the banks know what is going on, the more that that happens, the better it will be.
Mr. David Heathcoat-Amory (Wells) (Con): On that point, there is an overriding need for clarity and certainty in financial regulation, so why are the Government apparently contemplating handing over many of the rule-making and supervisory functions to three new EU financial authorities, so that instead of a tripartite system at home, we have a new hexagonal system of financial regulation, with a bigger hole in the middle, less certainty, less accountability, and more confusion when things go wrong? Is that really what the Government intend?
Mr. Darling: No, but we need to recognise—I was going to say “whether the right hon. Gentleman likes it or not”, but I know that he does not—that Europe and the European Union have some influence on the way in which financial markets operate, in relation to directives, capital ratios and so on. The point that I made to the right hon. Member for Hitchin and Harpenden (Mr. Lilley) was that the British Government have to work to fight for the British interest. That is why it is far better if one is able to work with the mainstream political parties, rather than people who are out to lunch.
Susan Kramer (Richmond Park) (LD): The Chancellor made no mention of the credit rating agencies, but they are the canaries of risk in the system and they got it spectacularly wrong in the previous crisis. Is he looking at providing any guidance or a framework for credit rating agencies and, in particular, at tackling the potential conflict that exists because the entities that are assessed pay the agencies’ fees?
Mr. Darling: The hon. Lady is right. The Financial Stability Board, which the International Monetary Fund set up, is looking at the issue, because credit rating agencies are mostly American and they operate throughout the world. We have to have international agreement, and in Europe steps are being taken rather more quickly to try to ensure that agencies are properly regulated. She is right that they can be hugely influential, but I have always made the point that a credit rating agency’s advice should be one factor influencing people’s decisions. It should not comprise their total judgment, because it cannot.
Mr. William Cash (Stone) (Con): Does the Chancellor accept that his statement, “whether we like it or not”, in relation to the European Union is rubbish and as outrageous as anything we have heard from him for months? Will he accept, very simply, that we can make our own decisions in this House; that those matters do affect every single man, woman and child in this country, and the City of London; and that, for us simply to have to accept that all decisions must come from the jurisdiction of the European Union, to which the so-called national supervision will be subject, is a complete outrage that will lead to all the difficulties, all over again, that we saw with the stability and growth pact and all the other economic paradigms with which the European Union has come forward? His statement is complete rubbish. He knows it. Why does he not just pack it in?
Mr. Darling: I know that the hon. Gentleman is obsessed with all things European, and I wonder how he and quite a large number of his colleagues are ever going to be able to make a rational decision about anything in relation to Europe— [ Interruption. ]
Madam Deputy Speaker (Sylvia Heal): Order. The hon. Gentleman has asked a question of the Chancellor, who is replying.
Mr. Darling: All I say to the hon. Gentleman is that we are part of the European Union, which is an important market to us, and that that means that we should be an active partner in it, fighting the British corner. It means also that we have to be prepared to speak to people in Europe, rather than pretend that they do not exist.
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