Financial Services Bill

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The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, †Mr. Joe Benton

† Bain, Mr. William (Glasgow, North-East) (Lab)

Barlow, Ms Celia (Hove) (Lab)

† Breed, Mr. Colin (South-East Cornwall) (LD)

Cable, Dr. Vincent (Twickenham) (LD)

† Duddridge, James (Rochford and Southend, East) (Con)

† Hoban, Mr. Mark (Fareham) (Con)

† Howell, John (Henley) (Con)

† Love, Mr. Andrew (Edmonton) (Lab/Co-op)

Marris, Rob (Wolverhampton, South-West) (Lab)

† Mudie, Mr. George (Leeds, East) (Lab)

Pearson, Ian (Economic Secretary to the Treasury)

Roy, Lindsay (Glenrothes) (Lab)

Todd, Mr. Mark (South Derbyshire) (Lab)

Tyrie, Mr. Andrew (Chichester) (Con)

† Walker, Mr. Charles (Broxbourne) (Con)

Watson, Mr. Tom (West Bromwich, East) (Lab)

Chris Stanton, Eliot Wilson, Committee Clerks

† attended the Committee

Witnesses

Angela Knight CBE, Chief Executive, British Bankers Association

Adrian Coles, Director General, Building Societies Association

Matthew Fell, Director of Company Affairs, Confederation of British Industry

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Public Bill Committee

Thursday 10 December 2009

(Morning)

[Mr. Joe Benton in the Chair]

Financial Services Bill

Written evidence to be reported to the House

FS 07 British Bankers Association

9 am

The Committee deliberated in private.

9.2 am

On resuming—

Q181The Chairman: Good morning. I remind hon. Members and witnesses that we are bound by the Standing Orders and the deadline agreed to on Tuesday. That means that this morning’s session must end at 10.25 am. Obviously, I will not want to interrupt hon. Members or witnesses in the middle of sentences, but I will do so if it becomes necessary.

We will hear evidence from the British Bankers Association, the Building Societies Association and the Confederation of British Industry. I welcome the three witnesses to our meeting this morning and ask them to introduce themselves. I do not think that Angela needs any introduction, but it might be helpful to younger members of the Committee.

Angela Knight: Good morning. My name is Angela Knight. I am the Chief Executive of the British Bankers Association.

Adrian Coles: Good morning. My name is Adrian Coles. I am Director General of the Building Societies Association.

Matthew Fell: Good morning. I am Matthew Fell, a director at the Confederation of British Industry.

Q182Mr. Mark Hoban (Fareham) (Con): The flagship measure in the Bill is the new Council for Financial Stability, the aim of which is apparently to create clarity where there was previously confusion. You may not have had a chance to read the evidence that was given to us on Tuesday, but the Minister was clear that responsibility was shared between the Bank, the Treasury and the Financial Services Authority. In the afternoon session, the FSA said that it had secondary responsibility for financial stability. The Bank acknowledged that the Chancellor was clearly in the lead and said that its own powers in relation to financial stability were limited to the resolution regime and to its responsibility for the payment system. Do you think that the situation is any clearer now than it was at the height of the crisis?

Angela Knight: I shall open with our view. When I read the Bill to start with, I thought that at least it may give us some more clarity, but when I read the evidence

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that was given, I was thoroughly confused. To my mind, it is important that we have clarity in this area. What does clarity mean? It means perhaps two things: that during normal—business as usual—times, there is a proper exchange of information and a no-surprises regime in place, that decisions are made where decisions need to be made and, at times of crisis, somebody is in charge. That does not seem yet to have come through properly.

Adrian Coles: If we go right back to the beginning of the crisis with Northern Rock, there was clear evidence of a lack of communication between the tripartite. If we are going to keep the tripartite arrangement in place, it seems sensible to have a Council for Financial Stability or something similar, and to formalise the communication arrangements between the members of the tripartite, to report on them annually and to have publication of minutes. It is a modest move in the right direction.

Matthew Fell: I think that I agree with that sentiment. In the context of making the existing tripartite set-up work better, this should do two things. It ought to give greater clarity to who is in charge, who ultimately has to be the Chancellor particularly in times of crisis. One of the lessons that we learnt from the crisis was that there was a serious lack of intelligence gathering and sharing, certainly during the broader overview of emerging risks. If it can bring more of that together, it will be helpful. The area of greater clarity that needs to come through is who will take responsibility for actions arising from the analysis that the council undertakes. Who will actually push the buttons once the analysis and discussions take place?

Mr. Hoban: At the moment, we publish a report that identifies risk, but nothing that says who will do anything about it.

Matthew Fell: For me, it will be entirely sensible to understand how the analysis translates into action.

Adrian Coles: One would expect to see that in the minutes. Any organisation taking minutes of a meeting will usually have an action column. Let us hope that this council copies conventional practice.

Angela Knight: On the question as to whether it should or should not be written into the Bill, as we understand it more will be made clear through the terms of reference, and draft terms of reference have already been published. I think that we said in our written evidence to this Committee that what is required is the particular contribution of each of the authorities sitting around the council—how they interact, their duplication, possible conflict to be avoided—and also the point I made earlier about who is in charge. So I think that in essence you can either say, “There is a published draft terms of reference that has set all this out,” or you write something in the Bill. If you write something in the Bill, that means that, should there be a desire to re-order the responsibilities, should they change for various reasons, or that you want someone else to make the decision, you cannot do that, because it is in the Bill. But equally so, if you put it in the terms of reference, the terms of reference can change all over the place.

If we think back through the last two years or so—I do not think that any of us would ever wish to have any sort of replication of that, and hopefully that will never

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take place again—one thing that is absolutely essential is that in a crisis someone has to take charge. If indeed there is ultimately public money involved, we need to know that it is this person, and that is the reason why. While it is debatable, I think I come down in favour of writing it in the Bill.

Q183Mr. Charles Walker (Broxbourne) (Con): Surely if there is a crisis, the Chancellor would take charge. I thought the idea of the Council for Financial Stability was to stop a crisis occurring. How is the council going to work with your various member organisations to ensure we do not end up in hugely leveraged positions, borrowing vast amounts of money that we have no hope of paying back if the pyramid starts to crumble? That is what I thought the Council for Financial Stability would be doing with your members.

Angela Knight: Yes, well, that is another reason why I answered the question as I did in the first instance. I am more confused now, having read the evidence earlier, than I was when I originally looked at the Bill. Irrespective of what the legislation may include or how it is phrased, it is the interaction and the prevention that has to be the vital area. I would say this, though. There is not some sort of discrete pot called financial stability that is separate from, say, monetary policy, which in turn is separate from fiscal policy. The three are intertwined and I look forward to some thinking being done in that area, otherwise there will be an assumption that financial stability can only be done by a “something” for financial stability and that it is separate from the other two levers.

There is an obvious example, if you like, when a bubble is created, whether it is a housing bubble or similar. You can usually address a bubble in three ways. One is by taxing it, the other is by using interest rates to deflate it, and the third is by addressing those who say “lend into it”, and that is what I mean about them being interconnected. I appreciate this Bill is about establishing things, but before we get too far along the path, we need to have some very clear thinking about how these three things—stability, monetary policy and fiscal policy—intertwine and are interconnected.

Adrian Coles: Yes, I would agree with that, but the Council for Financial Stability, as I said earlier, is a modest measure that will contribute to the debate that Angela has just spoken about. Of itself it is not going to prevent the next bubble, it is not going to prevent the next banking crisis, but it might make a modest contribution towards that objective.

Matthew Fell: I would agree with the previous remarks. The one additional thought that I would add, that goes directly to your question about working with the various organisations that we represent, would be the importance of having a proper mix and spread right across the breadth of the financial services community, and that it is not biased towards one component part of it.

Q184Mr. Walker: I suppose what I am driving at is that if you want to try to secure financial stability, you have got to have a better understanding of the financial instruments being traded. It was the case with Leeson, wasn’t it, that the board of Barings—Leeson wasn’t actually doing anything complicated—just did not understand what its trading floor was doing? The lessons of that do not seem to have been learned. I would hope

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that, as new financial instruments are modelled and brought to market, there is a far greater understanding among your members, senior board members and the FSA as to where the risk lies, so that they have an idea of what is going on.

Angela Knight: Yes, I think that is a very important point. Leeson, with Barings, is not necessarily a terribly good example, because I think there was a bit of fraud in there—in fact, quite a lot of fraud. So in one respect I would almost park it. Nevertheless, the fundamental point about the complexity of financial instruments—not only how they impact, but how they are interconnected—is a vital issue. That is being addressed elsewhere. It will connect into financial stability, but it is being addressed elsewhere through the regulatory framework, which is a mixture of transparency; capital and the application of capital to risk; risk controls; and utilising some risk set-off techniques, such as central counterparties for certain types of derivatives.

The industry is innovative and that innovation, you can quite easily argue, has created some instruments that we look back on with some debate and some serious concern. However, it has also created instruments which, through their innovation, have provided significant benefits as well. If you are saying to me, must we as an industry actually address the reality of what is being developed in a much clearer, coherent and careful way in future, then the answer from the industry is “Yes, we understand that.” The balance between innovation and risk is now in a very different place from two or three years ago.

Adrian Coles: I have one extra point. I agree with what Angela said. In a sense, is this being addressed in the components of the CFS? The FSA certainly has much more technical expertise to understand market developments—as I experience it, in the building society sector—than it had two years ago. It is staffed up on technical expertise, so it can understand what is happening in the markets. Hopefully, that will make a contribution towards financial stability.

Angela Knight: We need to staff it up more. There has long been too hard an interface between those who work in the industry and those who work in regulation. We need to get a better way of getting people into, and of course out of, the regulator, because that way you have people who have up-to-date knowledge of the market. There is an example of a body that seems to do that quite well in this country, and that is the Takeover Panel. Maybe there is something in the way that it has managed to undertake that bringing into, and letting go back into, the market that needs to be learned, certainly at senior levels, and particularly in some of the wholesale areas, as far as the FSA is concerned.

Adrian Coles: That is happening in the FSA. It needs to happen more.

Angela Knight: Absolutely.

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Prepared 11 December 2009