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"Changing architecture involves real risks and the burdens of migrating roles",
which I could not have put more succinctly myself. In a supplementary but relevant point, he goes on:
"Besides this, the consumer improvements suggested by the Conservatives do not require splitting the FSA in two."
That was one of the original responses. Here is a clear case for doing more on the consumer front by combining the two agencies that deal with consumer credit. That clear view comes from someone who knows the banking world pretty much inside out and where the precise responsibilities lie. He is saying that the suggestion is unnecessary and not worth the hassle, as it will create
uncertainty and divisions, when what we need at the moment are clear responsibilities under-I very much agree with the hon. Member for Twickenham on this-the leadership of the Bank of England. That was very clearly agreed.
I can well imagine the late Eddie George-some of us risk taking his words in vain today-giving a different impression to different people than he gave to me on the several occasions when the current and previous Chancellors and others were negotiating with him. At the end of that obviously difficult period, I remember him saying that we had come out with a very good role for the Bank of England, with a clear Monetary Policy Committee that was transparent and accountable. He made it plain on each occasion that he still retained the overall responsibility and the lead role for financial stability and for eliminating, in so far as one can, systemic risk.
That is where we were then and I believe that that is where we still are today. Clearly, we are not going to make any impression on the shadow Chancellor, even in the emollient, consultative frame of mind that he has developed on this matter. As I have said, we have one consolation-the extreme unlikelihood of his having the chance to implement what he is proposing.
Let me briefly deal with another important matter-the provisions for the class action for consumers. I remember the issue coming up many times with consumers when I was in the Treasury and many times since: it is simply impossible to take legal action as an individual at the moment. With the best will in the world, the financial ombudsman simply cannot cope with the problem. This is a very important new step. No doubt much of the Bill will be further clarified and amended, but I believe that that is one important change to our arrangements and we should not lose sight of it.
Christopher Fraser (South-West Norfolk) (Con): Does the hon. Gentleman agree that the Bill does too little too late to deal with the fundamental problems of financial regulation, that it does not deal with his point about consumers, and that it provides inadequate protection for those who have been affected by the financial crisis? Does he agree with that point?
Mr. Robinson: I do not, but I will say that the hon. Gentleman has a point, and that it can and, I am sure, will be addressed in Committee. I hope that he will find his just place on the Committee, and that, when he does so, he will ensure that it deals with the matter that he has raised. I can assure him, on the basis of long experience of Public Bill Committees, that such changes can still be introduced at that stage.
Let me return to the only issue on which I think there is currently any fundamental disagreement in the House. I refer to the idea, apparently endorsed by the right hon. Member for West Dorset (Mr. Letwin), that information flows much more easily within a single organisation than between two organisations. I will merely say that that is wishful thinking. If we followed the logic, we would conclude that the best way of eliminating the inevitable tensions and problems between the Chancellor and the Prime Minister would be to abolish one of the roles and make the Prime Minister First Lord of the Treasury, which, indeed, is his designation. That would- apparently, at least-get rid of all the arguments, but of course it would never work.
We need those arguments. They tend to become public, and we need them to be available to the public. We certainly need them to be available to those who will make decisions based on the disputes and differences of opinion that are bound to arise. I have no doubt that exactly the same would apply to the relationship between the Governor of the Bank of England and the chairman of the FSA, in whatever guise. The idea that amalgamating them in a single organisation would get rid of those tensions, arguments and discussions is pure wishful thinking. They will still exist, but rather than emerging into the public domain they will be suppressed, and we shall have the worst of all worlds.
Opposition Members, particularly the shadow Chancellor, should bear in mind the fact that there will be many opportunities for compromise over the exact structure at the end of the day. The Opposition are obsessed with organograms and architecture, as parts of Government often become. Maintaining the FSA intact in terms of its organisation, its authority and its responsibilities would provide them with a simple line-based relationship: a dotted line to the Governor of the Bank of England, and a continuous, heavy black line to the Treasury. That is the sort of relationship that we want. It would emphasise the leadership role of the Governor, and it would avoid what will be a terrible mess when-fortunately in the very distant future, if ever-the Conservative party may have an opportunity to implement its proposals.
On that cautionary note, let me end by saying that I am grateful to have had the opportunity to speak.
7.53 pm
Stephen Hammond (Wimbledon) (Con): Given your erudition, Mr. Deputy Speaker, you will know that it was Gibbon who said:
"History is little more than the register of the crimes, follies and misfortunes of mankind."
That really describes what has happened in the financial and economic arena over the last three or four years, and the Bill that we are discussing is about history: the recent history of the financial crisis, and the way in which we, as a country, reacted to it.
When the global credit markets started to close, initiating the credit crunch that led to a crisis of confidence, it became clear that-in both domestic and international terms-there was no stability in either the regulatory arrangements established by the international community or in those established by the present Prime Minister, then Chancellor of the Exchequer. It can fairly be said that both international and domestic regulatory arrangements failed, but it is clear to us that the greater failure of the domestic arrangements had a greater impact on our economy. There is a huge interrelationship between the financial sector, which has been one of the key drivers of economic growth in our economy, and the financial crisis. We cannot claim that the two are independent of one another.
The origins of the financial crisis surely lie in the poor understanding of financial risk that was created by financial innovation, and the inability to enable both international and domestic regulation to cope with that innovation and reduce the risks in both institutional and systemic terms. The increase in the financial risk led to greater increases in Government debt, corporate leverage and personal borrowing, which in turn led not
only to imbalances in our economic system but to the present crisis in our economy. There is a direct relationship between the crisis in the financial services industry and our economic crisis. We need to understand that the implications of this Bill also involve severe and major implications for our economy.
In a few weeks' time the Government will present their pre-Budget report, and- as was made clear to all who read the newspapers at the weekend-they are determined to leave voters in no doubt that there will be tough choices for the United Kingdom. Yet again, there is talk but very little action. One of the inescapable conclusions must be that, if our economy is to recover, we shall need a thriving financial sector, and, given the crisis experienced by the financial markets, that will undoubtedly involve some changes in regulation. However, if the Government continue to do what they have always done-for which the Bill provides-they will see the results that they have seen before.
The questions for the House, and for the Committee, are these: what will the Bill do, is this reform necessary, and is it the right reform? The Government often accuse others of doing nothing while they do a great many things, but in this instance it is a matter of doing the right thing rather than doing just anything. We must ask ourselves whether the new regulatory system proposed by the Bill will be any more efficacious in dealing with a financial crisis-if there is one-than the previous system, or whether it will be less efficacious than the model set out by my hon. Friend the Member for Tatton (Mr. Osborne).
Members will recall what was said about the tripartite system by the Chairman of the Treasury Committee, the right hon. Member for West Dunbartonshire (John McFall). I saw him this morning, but he is in Europe this evening. He said that it was
"a Rolls Royce when it sits on the shelf, turns into an old banger when it gets on the ground."
The truth of that has been clearly shown by the operation of the system.
The Chancellor of the Exchequer and the hon. Member for Coventry, North-West (Mr. Robinson)-whom I am delighted to follow-made much of the architectural changes referred to by my hon. Friend the Member for Tatton. The Chancellor maintained that architectural changes were not particularly important. However, the first four clauses of the Bill are all about architectural change, to almost no effect. I think it somewhat disingenuous, given that those first four clauses seek to establish a council for financial stability, to claim that architectural change is not important.
The council will replace the existing top-level structure of regulation: the arrangements that embed the joint responsibility for financial stability shared by the FSA, the Treasury and the Bank of England. Those arrangements are governed by the memorandum of understanding referred to by my hon. Friend. The system is very complex. When challenged by the financial crisis, we can only reach the same conclusion as the Treasury Committee, which stated:
"We cannot accept... that the Tripartite System operated 'well'".
The Government's reaction to their failed tripartite system is to set up the Council for Financial Stability. That is an architectural change. However, the council will have the same three components and participants
as its predecessor. It is difficult to see, at first analysis, how or why the new council will operate any differently. If we do exactly the same as we have always done, we see the same result. Is this just a rebranding exercise? According to the Treasury website, the detailed terms of reference are currently only available in draft. It is pretty difficult for us to be any clearer about exactly what changes will accrue.
Dr. John Pugh (Southport) (LD): I am a little unclear about what the hon. Gentleman is saying. He seems to be saying two completely different things. He seems to be saying that this is an architectural change of which he disapproves, but he also seems to be agreeing with the hon. Member for Tatton (Mr. Osborne) that it is a purely cosmetic change. It cannot be both, can it?
Stephen Hammond: Well, it is an architectural change, and the Chancellor tried to convince us that it was not particularly important, but- [Interruption.] If the hon. Gentleman listens to my speech, he will discover that I am arguing that it is a purely cosmetic architectural change, because the participants are the same, as is the predecessor organisation. Indeed, because none of the terms of reference has yet been set out, it is difficult to see whether any real change will result.
Christopher Fraser: I think my hon. Friend will agree that the more fundamental point is that the lack of co-ordination among the tripartite authorities contributed to the severity of the financial crisis, and nothing in the Bill addresses that.
Stephen Hammond: I entirely agree.
When the Chancellor talked about the CFS, he argued that the arrangements will increase both transparency and accountability, but any analysis of the Government's proposals reveals that potential to be fairly limited. It is not entirely clear how much transparency will be established by the Bill. Whereas under the tripartite system no minutes were published and there was no report to Parliament, the CFS will publish minutes but with a caveat that a significant proportion will not be suitable for publication. There may or may not be good arguments for not publishing the entire minutes of CFS discussions, but the Government cannot start claiming greater transparency on the one hand, and then take it away with the other. That is, at best, a significant failure.
The Bill establishes the council and gives to one of its participants a huge extension of powers. Given that it has been accepted that the tripartite system failed, why should one of the parties to that failure be given even more significant powers, especially when the Government argued that its existing powers were satisfactory? Can the Government reassure us that this new council is likely to be any more successful in ensuring prudential supervision and stability of the monetary system? Given the limited information the Government have currently laid out, it is difficult for any analysis to be able to conclude that. On that basis, my hon. Friend the Member for Tatton is right to ask the Government to explain why they have not considered abolishing the system and restoring the Bank of England's responsibility for maintaining financial stability.
Mr. Andrew Smith: Instead of focusing on substance, the hon. Gentleman seems to be obsessed with architecture. Does he support the idea of giving the Financial Services Authority an enhanced power to intervene when contracts and incentives encourage irresponsible and destabilising behaviour? Is that not the sort of regulation we need to avoid a repetition of the recent crisis?
Stephen Hammond: I shall come on to a couple of items of substance in relation to clauses 12 and 13 that will address that very point, but Ministers cannot talk about architecture and certain things not happening given the contents of the first four clauses. They need to be clear about the following point. Given that the new CFS is to be established, are the extra powers to be given to the FSA either needed or likely to make the FSA more effective? It is not at all clear that they will make it so.
Clause 12 on recovery and resolution plans-also known as living wills-is broadly welcomed. The Banking Act 2009 sets out the special resolution regime that allows failing banks to be transferred either to a private sector purchaser, temporary public ownership or a bridge bank. The stressful situation addressed in the Bill is less dramatic than the criteria set out in the 2009 Act. However, there is no concise or lucid definition of that stressful situation, and that needs to be provided. The explanatory notes set out-helpfully or not-the recovery plan as one
"which aims to reduce the likelihood of failure".
What exactly needs to be specified in that recovery plan? What exactly must an "authorised person" do? Proposed new subsection 139B of the Financial Services and Markets Act 2000 lists a lot of intentions, but very little specifics. That lack of detail is likely to undermine the good intentions behind the resolution plans.
There is provision for both the Treasury and the Bank of England to notify the FSA if they wish to indicate that a plan is unsatisfactory and recommend action, yet the FSA does not have to undertake that action. I raised that point earlier in an intervention on the Chancellor, and I acknowledge his point to me, which was, "We're the Treasury so we're all-encompassing and all-powerful, and as we're standing behind this, the FSA will have to take account of it." If that is the Chancellor's intention, however, why does the Bill not state that? The fact that it does not and that the FSA can ignore the warnings about inadequate regimes reveals an inherent contradiction in the Bill.
Clause 12 gives rise to two further questions. How easy will it be for complex financial organisations to comply with resolution plans? The FSA has already said it expects there to be some clashes and that it would simplify structures when a living will appears to be unworkable. I hope that the Minister will be able to reassure us in his winding-up speech on the definition of "unworkable" in this context, and about exactly what powers the FSA will have-and will need to have-to implement the resolution plans. I am sure the Minister is aware that the group finance director of Barclays has already indicated that it has a very complex structure of international subsidiaries and branches. In practice, how will the FSA simplify that organisation to make a resolution plan work? I am sure the Minister has the answer to that.
The Minister also knows that the G20 believes that there is a consensus emerging on the benefit of resolution plans. I do not think there is any dispute that they are a good idea, and the likelihood is that we will see some co-ordinated international actions on such plans in the very near future. Therefore, in what ways do the Government intend to take notice of that co-ordinated action proposed by the G20? Do they intend to leave this clause in place? Do they intend to say that it will become a sunset clause, so that anything proposed from the G20 can change it, or do they intend to ignore whatever the G20 might try to set out in the framework?
Clause 13 deals with short selling. As I am one of the Members who in a previous life worked in the financial markets, it is probably right that I resist the temptation to talk about any of the clauses on remuneration. There is an entirely erroneous myth that short selling is relatively new to financial markets, but prior to the change in the method of paying for bargains in the 1990s, the market had many operators who were known as account traders. These were exactly the same people as those who short sell nowadays; they bought stock they did not have the funds to pay for, and they sold stock they did not own. The 1990s marked the onset of hedge funds and the ability to "short", the use of derivatives, contracts for difference and so forth, and therefore short selling has become more widespread. However, do the Government accept the point of the Liberal spokesman, the hon. Member for Twickenham (Dr. Cable), which goes to the essence of this? It is that the FSA already has powers to introduce emergency restrictions to prevent the creation, or increase of, net short positions. It also has powers to demand the daily disclosure of net short positions. Those powers were granted under section 118 of the Financial Services and Markets Act 2000. Therefore, this Bill is doing two things. It is extending the sunset clause on the powers to act on market abuse, but the power to act on short selling could be separated from the power to act on general market abuse. The Chancellor had some words to say on the Bill and the powers granted to the FSA on short selling. However, he will know that the British Bankers Association has said:
"The placement of generalised rules on short selling into MAR"-
"wrongly associates all forms of short selling with abuse."
I am certainly not the only person who has interpreted these provisions as placing, despite the separation, the short selling rules in the general market abuse rules.
There may or may not be a case for tighter regulation, but has not the FSA already got these powers? What extra powers are needed? Do the Government accept that short selling is not intrinsically a market abuse? Short selling enables financial firms to offer hedging and market-making facilities-indeed, it allows essential market liquidity. Making liquidity in both the London markets and the international markets means that markets function. We have seen that when markets seize up that has direct economic repercussions. Do the Government accept that short selling is a tool that is not intrinsically wrong or an abuse, but just a financial tool? What is wrong or abusive is how it is used in some circumstances.
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