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9.2 pm
Mr. Mark Field (Cities of London and Westminster) (Con): For some centuries past the City of London's greatest attraction has been its international reputation as a bastion of commercial certainty and reliability. English law is respected across the globe: countless contracts between parties from far away continents are often drawn up under its jurisdiction. In commercial affairs the City of London is rightly seen as a watchword for justice, neutrality and fairness. Too much, I fear, of what is proposed in this Financial Services Bill flies in the face of this fearless and hard-earned reputation. It threatens to do untold damage to the United Kingdom as a commercial and trading centre.
Even in the face of two world wars, the City of London regarded with the utmost seriousness its international contractual obligations-even to counterparties from those nations with which we were in conflict. We meddle with this proud history at our peril. I am therefore especially alarmed at the plans to give the Financial Services Authority the power, among others, to tear up future contracts that do not comply with its new arbitrary regulations on curbing remuneration and bonuses. The notion that the FSA might in such a way strike out legal contracts will cause grievous harm to the reputation of English law and the national sense of fair play. It also seems likely to fall foul of international-in particular, European Union-obligations on competition policy.
Moreover, these draconian proposals are probably going to be impossible to implement in full. We will then be in the absolute worst of all worlds: putting on to the statute book legislation that gives a clear signal to international trading partners that Britain is no longer such a free or fair place to do business; but also concocting a set of regulations that are, for practical purposes, impossible to enforce.
As ever, there seems to be little consideration of the national interest in what the Government propose in this Bill. Instead, we see short-sighted, tactical positioning. At a time when my own party has made it clear that an incoming Conservative Administration would dismantle the Financial Services Authority, the Treasury now seeks to limit our future room for manoeuvre by empowering it even further.
The Bill also prompts the obvious question that I put to the Chancellor earlier. Given that the threat of closure hangs over the FSA, how on earth will it be able to recruit sufficiently talented new staff to take on its enhanced responsibilities? It is important that the authority and the Treasury properly think through all the practical implications of the Bill. Its unintended consequence will be that institutions are far less likely to wish to do business on these shores, which will be to our collective detriment in the years to come.
The Prime Minister's recent resurrection of the notion and desirability of a Tobin tax at the recent G20 Finance Ministers meeting is further cause for alarm. Promoted as a way of recouping more quickly the taxpayer cash put into banking bail-outs, which at least superficially seems a desirable enough goal, and of rebalancing the economy and helping the poor, as a surcharge on financial services it would in reality fulfil none of those objectives. Unless it were implemented in precisely the same way globally, it would be impossible to put into effect without disastrous consequences for both London and the UK. The United States has already signalled its clear opposition to such a levy, making it more likely that if it were to be applied on these shores, even in a diluted way, business would flee to countries free of the tax or simply engineer new financial instruments to get around it.
Dr. Pugh: The hon. Gentleman seems to object to the FSA being empowered to do something about future remuneration, bonuses and the like in the banking sector. Presumably his party argues that a future Chancellor of the Exchequer ought to have that power. Is he arguing against that as well?
Mr. Field: My objection was to existing contracts being torn up. It was the retrospection that I was objecting to. Ultimately, any regulatory authority should perhaps have quite significant and draconian powers along the lines envisaged elsewhere in the Bill, but my concern is about the longer-term influence of the changes on our stability and competitiveness.
The same principle applies to many other proposals in the Bill that would penalise the financial services in the UK. Unless it were imposed on a global scale, any initiative designed to curb bonus payments, for example, would simply drive from our shores the brightest and best in this important industry. I do not say that as a threat, because I strongly believe that no Government
should be blackmailed by those in any industry into serving its particular interests above all others. However, I cannot help but conclude that in this Bill, the Government are simply grandstanding rather than introducing measures that will really be effective and minimise risk.
It is easier to focus on a single issue such as bonuses than to examine major failings elsewhere. Failings in risk modelling, credit ratings, macro-economic management and elements of regulatory oversight, as well as a number of other contributory factors, created the conditions in which excessive profits were made. As my hon. Friend the Member for Henley (John Howell) said, huge bonuses were the end product of a dysfunctional financial system, not the underlying cause of them.
Another suggestion is that far more of any remuneration package should be in long-term incentives rather than cash salary. Superficially that is an attractive proposition, but we should not forget that it had very little effect on the fate of either Lehman Brothers or Bear Stearns, two of the banks that have collapsed most spectacularly over the past two years. Both those organisations were famous for rewarding successful employees with large amounts of stock, which either by law or by internal practice proved unmarketable for a considerable period, yet that had little impact on the ultimate demise of both.
The City remains concerned that seeking short-term solutions on bonuses to quell public and media demands could bring down on the industry a raft of new regulations designed more to punish that anything else. It should also be remembered that high remuneration, be it in salary or in bonus, is not such an emotive issue outside Europe. We need to recognise that our regulation and tax policies have to take account of those prevailing in other countries that pose a competitive threat.
Let us not forget the importance of maintaining our focus on the issue that will dictate our economic health for years to come: the colossal sums of taxpayers' money and the immense Government guarantees that continue to underpin the entire financial system. The imperative to start repaying at the earliest opportunity cannot be overstated, yet commercial lending is unlikely to return to anything like normal until the second half of 2011 as toxic assets are gradually removed from banks' balance sheets. I therefore believe that the credit crunch will be with small and medium-sized businesses for some time to come.
To extend beyond £200 billion of quantitative easing puts our medium-term economic prospects at great risk. When can the Bank of England and the Treasury call time on their short-term fix? Amid the euphoria of a narrative that suggests that recovery is well within sight, I fear that we are a considerable way from being out of the woods. The root causes of the global imbalances brought about by the west's financial calamity were the credit/debt bubble, along with the east's aggressive desire to build market share in global trade. China's policy of suppressing its currency to soak up the west's debt in the bond markets further helped hold down interest rates. Yet the resultant over-investment, excess capacity and vast structural debt in the west remains in place. The underlying causes of the credit crunch have not gone away.
Notwithstanding the ruinously expensive bail-outs and capital raising, the losses incurred by banks are probably still not even halfway recovered. Indeed, I fear
that the Government's insurance of toxic assets has provided a dangerously false dawn. There is no incentive-or currently even a requirement-for banks to crystallise non-performing loans; they could not then ignore the losses on their balance sheet. Lloyds banking group, for example, with a huge property portfolio, courtesy of its ill-starred merger just over a year ago with HBOS, sits on an enormous pile of assets worth a fraction of their book value at their boom-time purchase.
The collapse in public confidence in financial institutions and their more esoteric products has met with a strong-armed, sometimes opportunistic political response. Put simply, we need to ensure that management in banks can summarise in simple terms the financial products they wish to sell. To that extent, I agree with the hon. Member for Halton (Derek Twigg)-if a derivatives product cannot be explained on two sides of A4, frankly it should not be marketed. Naturally an unworkably complicated regulatory framework risks seriously hitting the future viability and profitability of the entire industry.
Instead, the well-being of the institutions in the sector-not to mention its customers-depends on the development of a workable regulatory system, based on commercial principles, which will pass muster for decades to come. How else can we persuade those in their 20s to commence a lifetime of prudent saving as a prelude to a financially comfortable retirement? It all comes down to trust. That is an ingredient that no amount of regulation or consumer protection will rapidly restore.
Alongside the promotion of open competition and an end to the heresy that a bank might be too big or interconnected to fail, the best a Government can do is advance a culture of mutuality. We need to inculcate a sense of accountability between individual policyholders and a diverse range of financial institutions. For that reason, I support the potential for Northern Rock to revert to building society status once it has been stabilised financially. Promotion of as diverse as possible a financial services ecosystem should be a goal of future policy. Ethical values should come from individuals rather than resulting from a hostility which, inevitably, will be mounted against any all-powerful regulator. We should not expect too much from regulation. The buck must stop with all of us as consumers.
Regulation creates barriers to entry and promotes the large and bureaucratic over the small and innovative. A competitive free market can be promoted only by the re-establishment of less concentration among all institutions in the financial sphere. Ultimately, that means allowing companies-even huge players like Lehman Brothers-to fail. The interests of depositors and retail investors should be protected from such an eventuality, but not the bondholders. Protection of the latter is one reason for the problem not going away any time soon.
A healthy, competitive and innovative capitalist system requires risk-taking, which is why shareholders and bondholders should not naturally expect such blanket protection. The trouble is that too much of the current debate on banking regulation, as shown by the Bill, focuses on how we should have stopped the last crash. That has not been helped by a Government whose recent economic policy pronouncements are governed less by the national interest and more by a scorched earth policy, designed to limit the room for manoeuvre for years to come of any incoming Government.
We would do better to turn our attention to how best to create a future global financial system that will be trusted by today's children investing in the decades ahead in anticipation of a long, secure retirement income.
9.14 pm
Ms Sally Keeble (Northampton, North) (Lab): I welcome the chance to speak after the hon. Member for Cities of London and Westminster (Mr. Field) who obviously has the interests of the financial services sector at the heart of his constituency. In my constituency, we have part of Nationwide, and Barclaycard is next door, so I also have a strong financial services lobby. All of us of course also have constituents who are entirely dependent on the maintenance of a secure financial system, both for their own jobs and for financial services, such as pensions and mortgages. For that reason, although this Bill is phenomenally technical, it goes to the heart of what our constituents want to see happen, and that is why it is right that the Government should include it in their legislative programme.
The Government have to introduce the measures that they think right, and I agree with the separation of the Bank of England and the FSA, as set out in the Bill. The Government should not look to the pending election and ask "What are the policies of the Opposition?" and, depending on the answer, do nothing or do what they say. The Government should persist with the course of action that they think fit.
The origins of the debate, dating back to 1997, were mentioned at the outset. That was when the supervision of the banks was taken away from the Bank of England. It has been talked about as if that was the only thing that happened on that occasion, but it was not. The key factor was the Bank of England being given independence and control over the setting of interest rates. That was a phenomenally powerful tool to give the Bank, which had previously been jealously preserved by the Chancellor. It was a profound decision that affected all our constituents. Giving those powers to the Bank of England was a dramatic move and one that proved to be extremely successful. Control over interest rates was the key to controlling inflation, which at the time was public financial enemy No. 1. It made perfect sense to transfer that power, and the FSA was then set up to deal with the regulatory issues.
Over the years, we have had debates about what was done, and questions were asked about the wisdom of some of the moves. I have been on the Treasury Committee for four years, so I came in at the tail end of some of those debates. It was when things were starting to get a bit bumpy, because we had big debates about asset prices, especially property. Most of those debates, and the pressure put on the Governor, came from Members of Parliament, especially my hon. Friend the Member for Edmonton (Mr. Love). I did not tell him that I intended to mention him, but as I am flattering him, I hope that he will not mind. He repeatedly pressed that issue.
We also had a lot of discussion about the dislocation of the bank's rate from the interest rates as all of our constituents experienced them, especially over the past 18 months to two years. There were strong debates about the difference between the consumer prices index and the retail prices index, and why the public did not
agree with the Governor's view of the rate of inflation. Many of those issues were a start in considering whether the system as set up in 1997 would hold for the next 10 or 20 years.
In fact, quite often over the past few years, the Select Committee almost got to the point of spotting what would lead to the collapse. When we looked at some financial products-we looked at collateralised debt obligations, or CDOs, but not CDOs squared-questions were asked about their construction, what they meant, what underpinned them, what their creditworthiness was, and so on. However, we did not push as hard as was perhaps needed to see what was happening. The Governor certainly never warned of exactly what was happening. I noticed that although the hon. Member for Tatton (Mr. Osborne) referred to asset prices, he did not read out any clear warning from the Governor- or, indeed, from anyone else-about the scale of the collapse that was coming down the line; and indeed, the FSA chair and chief exec at the time did not warn about it either.
When the collapse came, those of us on the Select Committee virtually had a ringside seat. The tripartite authority was caught out, albeit not because of anything inherent in its structure, but because of the speed and scale of the collapse. People could see the asset price bubbles and the complex financial products, although nobody quite knew what was in those products. Indeed, at one Committee meeting I remember people talking about how they would unwrap a layer to see what was under them, find that there was nothing at all and then pass them on as quickly as they could, before they ended up on their books.
Mr. Mark Field: Although I share the hon. Lady's view that the tripartite system in itself was not the main cause of everything collapsing, does she share the Opposition's concern that the Treasury turned a blind eye and did not warn anyone, in the way that probably none of us in politics did, because the money pouring in from the City was obviously attractive and because financial services brought huge income into the Treasury's coffers? The core question is: where did responsibility lie? However, when that question was asked of the Governor of the Bank of England, answer came there none.
Ms Keeble: I completely agree. There have been issues about what happened. The question that I was working towards is: how do we put it right? Everybody agrees that things went wrong, and everybody agrees that when the crisis came, the tripartite authority did not manage to resolve the issue in a very clever fashion. We heard all the accounts and all the evidence is there in the reports. The primary issue was not so much that the people involved were having a bust-up, but that the speed, scale and unexpectedness of the collapse caught everybody by surprise. In particular, as soon as the collapse hit the public and they started the run on Northern Rock, a domino effect could have moved quickly through our financial services, had the Government not also moved quickly, which they did. They did so after the collapse of Lehman Brothers as well.
Given what happened, how do we put things right? I do not see that as a huge party political dividing line; I see it as a matter of trying to work out a sensible way
to deal with what was a huge problem. However, just to say, "The relationships are dysfunctional; therefore we have to abolish or change everything," as the hon. Member for Tatton did, is not something that I buy into. That was the bottom line of his arguments, and I simply do not accept them. A number of issues have to be dealt with or thought through before we start talking about dismantling the FSA-or rather, not so much dismantling it, but tacking it wholesale on to the Bank of England.
First, there are serious conflicts of interest in having an organisation that uses the monetary policy tools that the Governor now has at his disposal, including quantitative easing, and that also supervises the banks. We could create Chinese walls and separations within the organisation, but given the importance of the subject and the order of the issues being dealt with, it is much better for those different functions to be more clearly separated.
The second thing-it has grown out of the crisis and we have all had to learn about it-is that the public are now much more demanding about scrutiny and transparency. The hon. Member for Twickenham (Dr. Cable) talked about the banks' obligations on lending rates, which have not been restored to what they were. I do not think that the public are going to accept that one organisation, although it has responsibilities to report to different organisations, is likely to have the most wonderful culture of openness and scrutiny by the general public. I do not think that it will provide the kind of openness that the public will demand for the next 10 to 20 years.
I always remember the time when the Governor came before the Select Committee to talk about what was happening with Northern Rock. He spoke in terms of, "If only the Bank had been able to carry out a covert operation". I had visions of somebody with a big bag of cash running out of the Bank of England towards Northern Rock, and I wondered how on earth that could be done in the modern day and age. Just recently, of course, the Bank has managed to carry out such operations, which is quite remarkable. It is interesting that the debate then starts to be about where the public accountability, scrutiny and answering lies for what the Bank and others are doing with public funds. We need a structure that will allow us to answer those questions. Splitting the FSA into separate organisations will not help; it already has a culture of openness that will help it to provide better answers.
Placing all the functions into just the Bank creates the problem that it might become too big an organisation. We have all talked about being too big and too important to fail and all the rest of it, but having one body deciding quantitative easing, interest rates, the education of the public, bank supervision, old Uncle Tom Cobleigh and all involves too many functions for one organisation.
Most importantly-this explains my question to the hon. Member for Tatton, and both the Governor and the FSA said this-the issue is not just about who sits where but about what they do. Although there has been much discussion about reorganising structures, we also need to discuss the new tools that can be used to fix the current problems. It is much better to improve the structures we already have and focus on getting tools-other than the capital ratios that everybody has talked about a great deal-to try to tackle the problems we are going to face over the next 10 to 20 years.
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