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By contrast, we have one regulator, and we are building on the advantages of the single regulator by enhancing the FSA's objectives and powers, to ensure that when conducting its supervision of individual banks, it takes into account the systemic risk that may be faced. That new macro-prudential element will enhance its ability to monitor, assess and mitigate risks to the country's financial stability. Of course, that sits alongside its new duties in relation to remuneration and living wills, to which I will return shortly.
As the hon. Member for Croydon, Central (Mr. Pelling) has said, this crisis has also demonstrated the need to ensure that we have international co-operation, and we need to make sure that the Bank of England and the FSA work closely together on that. Clauses 1 to 4 will set up the new Council for Financial Stability, which will be responsible for considering emerging risks to the UK's financial stability and, as he has said, to the global financial system and for ensuring that we can co-ordinate the response by our authorities.
The council will comprise the Governor of the Bank of England, the chair of the FSA and myself. It can draw on external expertise if necessary, but it will put that relationship on to a more formal, transparent and accountable basis. For the past 10 or so years, the relationship has been governed by a memorandum of understanding. I do not think that that is sufficient; it should be formal, based on statute, transparent and accountable. The authorities can then be held to account, and we can have greater parliamentary scrutiny in the House and the other place, as we set out in clause 3. Even though I suspect that the Bill will be going through the House for some weeks yet, we will ensure that the council is established beforehand, so that we can see that it is working and publish its minutes, as proposed.
Clause 5, 7 and 8 will strengthen the FSA's objectives, by providing it with an explicit financial stability objective. When conducting its supervision of individual banks, it needs to take into account overall systemic risk.
As I said, and as hon. Members have mentioned, the crisis has also shown that financial stability is not contained within national boundaries. We need a strong domestic regulatory system, but we also need co-operation. Clause 8 will formalise the FSA's responsibility to work internationally and to promote effective international regulation. It has been doing that already, particularly in relation to the colleges of regulators, which have been established over the past couple of years, to ensure that some of the larger institutions that span several countries are monitored by individual regulators, so that they can see what is going on and understand the risks to which they might be exposed.
The hon. Member for Tatton asked about Jacques de Larosière's report, which will be on the Finance Ministers' agenda when we meet in Brussels on Wednesday. The European Union is trying to establish a new European systemic risk board, which will issue non-binding risk warnings and make recommendations. I believe that that is right and entirely sensible, and we will support it. Of course, that must go hand in hand with some more detailed, micro-prudential proposals on the European supervisory authorities, of which three are proposed to deal with banking securities, insurance and occupational pensions. They will have enhanced roles, but it is very
important that we recognise that some things need to be done at a Europe-wide level. That makes a lot of sense to us. For example, some of our problems with Icelandic authorities would have been more easily resolved if they had come within a regime that allowed us to get hold of the situation before it reached a critical stage. There is a lot to be said for that, but it is important that certain things remain with us because, at the end of the day, in any crisis only national Governments have the resources if a rescue needs to be mounted. That is why one of our red lines is that we cannot have a situation where any of those new authorities can impinge in any way on the fiscal responsibility of member states. It is important not only that that is clearly stated-I believe that it will be-but that the mechanisms in place ensure in reality that the responsibility for any fiscal action lies with member states. That is how it should be; it is not something that can be effected even by the Commission or any of its agencies.
It is important that we get right the regime for who would have the power to declare an emergency. At the end of the day, that must be a matter for the European Council-the people who are elected-rather than for an agency or the Commission. It is also important that direct powers over firms are curtailed, so that such powers exist only where absolutely needed. Individual regulation must be a matter for the member state and for the Government concerned.
Mr. William Cash (Stone) (Con) rose-
Mr. Darling: I did not think for one minute that I would get through a passage on Europe without the hon. Gentleman getting to his feet.
Mr. Cash: I entirely agree with the Chancellor in his prediction. With respect to majority voting and the architecture that has been devised under the regulations, which we will debate again later this week, how is it that he can talk about national supervision, somehow giving an impression that we might be in control, when the real question is whether we are governed by majority voting in all these matters, as a result of which we will not be able to sustain the kind of City of London that we need in relation to GDP, as I said to the Prime Minister the other day? What is the Chancellor's answer to that question?
Mr. Darling: My answer is that in a world where many financial institutions operate in this country and in other European states, as well as in other parts of the world, there has to be greater co-operation. Look, for example, at what has been happening over the past couple of years or so between us, the Swiss authorities, the American authorities and the European Union. It is not in our interest to create a situation where an institution can escape the attention that it needs by going to a place where there is not sufficient supervision, but at the same time operate in countries where it can cause substantial damage. There must be increased co-operation.
Iceland is a good example. It is not in the European Union, though it wishes to join at some stage, I believe, but it is in the European economic area. One of the Icelandic banks was operating in London with its headquarters in Iceland, but we did not have sufficient levers to head off some of the problems because we did
not have the powers to do so. It could well be in Britain's interest in the future to be able to use the leverage of European supervision to try to ensure that we are not adversely affected by what we regard as a failure of regulation or insufficient regulation in another country.
It is a fact of life that the financial services industry is about as mobile as it is possible to get. The last couple of years have demonstrated that, if anyone had any doubt about it. That means that it is in our interest to ensure that there is adequate supervision at a European-wide level, but I am clear that if an institution gets into difficulties and, for example, has to raise capital from a Government because it cannot raise it on the markets, that matter will very much be the responsibility of the individual state.
Where the hon. Gentleman and I part company on this occasion is that he has an aversion to most things European. He does not accept that the world has moved on. It is now a much more complex place. That means that we have to decide on those areas where it is in our national interest to work with our European partners and those areas where we and other member states rightly say, "No, this is a matter for which, at the end of the day, each nation state has to be responsible."
Mr. Mark Todd (South Derbyshire) (Lab): I agree with all of that peroration but enter the cautionary remark that the venture of some European leaders into attempting the regulation of hedge funds and private equity is not an entirely reassuring model if one is looking for European regulation of the wider financial sector.
Mr. Darling: I am clear that we should accept those areas where it is in our interest to co-operate, but there may be other areas where that is not the case. There is a general point to be made in relation to Europe. Ten or 15 years ago, people talked about the competition between London, Paris, Frankfurt and so on. The decision that we have to make now in Europe is whether we want a world-class financial centre in Europe. The competition is now coming from different parts of the world.
It is in Europe's interest that London, principally, and the UK financial services industry is properly supervised and regulated and is in a position to carry on attracting business and doing business throughout the world. That means that we will need co-operation within Europe, with the American regulators, with the Swiss regulators and with regulators all around the world. The red line, as far as I am concerned, is that if we are talking about a national Government having to provide capital, that must be a matter for that Government. It would not be right for everyone else to visit on one Government something that may have severe financial consequences.
My hon. Friend mentions the directive on hedge funds that is going through the system. Of course there are areas where we must ensure proper supervision and regulation, but there are some people who would like to stop the business entirely. I cannot agree with that.
Mr. Pelling:
The Chancellor raised the European issue too early in his speech. Surely we should have our eyes open and be aware that Frankfurt and Paris will see an opportunity to challenge London's primacy on the European markets. More importantly, unless the red lines are robust, is there not a danger of mission
creep from regulators in Europe? The combination of a dirigiste approach to regulation and the past history of the FSA of putting through a lot of irrelevant regulation which, in the end, did not save us from the crisis, could mean that we have a tremendous burden of more micro-level issues than the rather grander macro issues which, as the right hon. Gentleman says, are important for European regulatory co-operation?
Mr. Darling: I agree with much of what the hon. Gentleman says. There is always a risk that we end up with national regulators and international regulators, with one set of regulations on top of another, and no clarity about who is responsible for what. There is sometimes a belief that if enough regulations are passed, the problem will be solved. Far from it-that might even create a few problems. That is why it is important to be clear about what needs to be done internationally.
For example, by proposing that we set up colleges of regulators, we cede some of our authority by saying that we will work with Americans and with regulators in the far east, but we do that because it is in our interests. We do not want a situation to arise where only one regulator has a partial view of what is going on in one particular institution. If it comes a cropper, all of us will have to pick up the pieces. It is important to bear in mind what the hon. Gentleman says, but this country has argued for constructive co-operation for a considerable time, although when my right hon. Friend the Prime Minister first raised it in the early 1990s, there were not many takers because people did not think there was a problem. As we have seen in the past couple of years, there most certainly is a problem which needs to be sorted. That case is made.
Mr. Graham Stuart (Beverley and Holderness) (Con) rose-
Mr. Darling: I shall give way to the hon. Gentleman, then I shall move on to a different topic.
Mr. Stuart: Does the Chancellor see a problem with vesting regulation in the European level, rather than co-operating on regulation at the European level, when, as he rightly says, the financial costs of any failure of regulation will fall wholly on the nation state?
Mr. Darling: I would put it this way: there is much to be said for co-operation. Many of the financial institutions in this country would say that it would be very useful to have a common rule book. Then they would not have to have a different regime for Britain, France, Germany and so on. In such a case, co-operation is essential, and I would like to see that. The problem probably arises not in normal times, but when there is a crisis. Then we must be clear about who and what triggers that emergency and who decides what needs to be done. At that point, particularly when it comes to fiscal consequences, which is essentially a matter for national Governments, they must be clear that it is they who make the decision.
As I have said to hon. Members in the past, we naturally look at these matters from our point of view, and sometimes look at it only in terms of what we would do if we were on the receiving end. I can easily envisage a situation some time in the future when we will want Europe, if it can, to put pressure on a regulator
in another part of the European Union to do something about one of its banks. That could have a knock-on effect on us. The point is that co-operation is needed, but we must be clear who is responsible for what.
I shall deal briefly with other parts of the Bill, which may or may not be of interest to the House. Clauses 14 to 17 give the FSA greater disciplinary powers to suspend individuals and firms for misconduct. In clause 13 we are introducing a power to give the FSA power to ban short selling. The ban that was imposed in September 2008 was based on the market abuse directive. It is better that it should be based on the Financial Services and Markets Act 2000, which is what we are doing.
Stephen Hammond (Wimbledon) (Con): The Chancellor is right that that is being done through the FSMA, but the powers on short selling are being vested in the general market abuse rules in that Act, implying that any short selling is a market abuse.
Mr. Darling: The Bill does not say that, and that is not my view. When the ban on short selling was introduced last year, I made the point that we were not saying that short selling was bad per se. However, in the particular circumstances and at that time, when financial stability was a big problem, action needed to be taken.
Clause 30 gives the FSA greater powers to gather information, and clause 11 allows the FSA to take powers on remuneration and, if necessary, to prohibit certain remuneration practices. They are based on the important principle that we should avoid the situation whereby the remuneration practices of firms lead to people being rewarded for doing things that eventually bring down the institutions in which they work. That is something that we and, certainly, the institutions should not forget. If too many people in a bank engage in what is, frankly, speculative trading, they run the risk of bringing down their institution. There is a clear public interest in that situation, because there would be consequences for the public purse if such practice were not properly regulated.
That part of the Bill is very important. It includes powers to implement the agreements that we reached in the G20 and those that we finally reached in Pittsburgh a few weeks ago, and it gives the FSA the powers that it needs not just to prevent such irresponsible pay, which has proved so damaging, but to implement Sir David Walker's proposals on disclosure. On that point, I can tell the House that we will table regulations on disclosure to go with the Bill.
Sir David made a number of recommendations, but I think that we go further than he suggested. We want to consult on regulations for narrower disclosure bands than he proposed, starting with salary packages below the £1 million floor that he suggested. We will consult on that idea, but most people are convinced that far more disclosure is important, because they will then be able to see precise remuneration practices.
Ms Keeble:
There has been some discussion about whether the Equality and Human Rights Commission will be able to look at disclosure and the studies of remuneration to see whether there is discrimination on
pay banding. Will my right hon. Friend support that idea as part of an attempt to address the position of women in the City?
Mr. Darling: I understand that the commission would certainly be able to look at that issue, and I am sure that no one in this House wants to see discrimination. People should be judged and rewarded on their merit, and that is precisely the point, because rather too many people were not judged and rewarded on their merit. Indeed, some rewarding structures seem to have had completely the opposite effect, and I am sure that there would be no difficulty with the commission doing what my hon. Friend suggests, should it wish to do so.
Clause 12 gives the FSA powers to ensure that there are resolution procedures for the larger banks and some building societies-procedures commonly referred to as living wills. It is very important that larger institutions have plans so that, if they get into difficulty, people are clear, before that difficulty arises, about what the institutions would do. That measure will help the regulators better understand what are, in some cases, complex structures-structures that have been put together for tax reasons.
The regulators will also know the resolution options that might be applied, and they will be able to consider the obstacles to such resolutions, including, for example, complexity. If large institutions get into trouble, it will be clear which regulators will take responsibility, which countries will take responsibility and how the firms will be disengaged, so that those parts that are important for financial stability are stabilised, investors' and depositors' interests are maintained and credible measures are taken to deal with any difficulties that might be encountered. That is a very important part of the Bill. The clauses may be small in number, but they will have a very real effect, I hope, on the future. We have to reduce not only the probability of a firm's failure, but the impact of that failure, should it occur.
Stephen Hammond: The Chancellor is absolutely right: that is a very important part of the Bill. However, will he explain why the Bank and the Treasury have the power to make recommendations, and to recommend action, on those plans to prevent such a crisis from occurring, yet the SFA does not have to undertake to implement the actions proposed by either the Bank or the Treasury?
Mr. Darling: I think that the hon. Gentleman meant to say the FSA; the SFA is the Scottish Football Association. At the end of the day, the FSA would have responsibility in those circumstances, but it would obviously consider what the Bank and the Treasury had to say. Unless the FSA had very good reasons, it would be very difficult for it to turn down any helpful suggestions from either body, not least from the Treasury, as the Treasury, if the worst came to the worst, would have to provide the funds. However, it would not be quite the problem that the hon. Gentleman makes out. None the less, the introduction of resolution regimes is very important. The hon. Member for Twickenham (Dr. Cable) will no doubt again advance the cause of breaking up such banks from the start, but, as I have said before, I do not think that that is right. There is a far better way of dealing with the situation.
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