Financial Services Bill

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Mr. Breed: Germany.
Angela Knight: Yes, and France.
Mr. Breed: We did not go to France. We went to Frankfurt, and it was clearly and wholly opposed there.
Angela Knight: It may be different at the point where they see whether it is a plan. Equally, you will find that many countries will say that the responsibility for all that remains with ourselves. How we wish to articulate is up to us, and whether to intervene or not is for us, not others, to decide.
The Chairman: I don’t think we will discuss other countries. Are there any further questions?
Q205Mr. William Bain (Glasgow, North-East) (Lab): One of the reasons why we got into the situation that we are in is the trading in credit default swaps and collateralised debt obligations. Are you convinced that if the Bill was passed, there would be sufficient tools in the FSA’s toolkit to protect both the taxpayer and the wider economy from the excesses of those transactions, particularly since forms of them are beginning to be reworked in the US?
Angela Knight: I don’t think it really has anything to do with those. The Bill is just sitting in a different place. I suppose you can argue that living wills—recovery and resolution plans—and things such as the Council for Financial Stability have a relationship with that. However, the whole area of credit default swaps and other such instruments is being handled predominantly in work led by Basel, where the capital rules for the world are decided, and through work both in the EU and locally. The Bill is tangential—although it has an impact—to the work that is being done elsewhere. Even if we did not have the Bill, the work could continue. As for the way in which derivatives, as we now understand them, and new derivatives or new financial innovations are constructed, capitalised and made transparent, that is all being done elsewhere. That would all continue regardless of whether the Bill becomes law or not.
Mr. George Mudie (Leeds, East) (Lab): That’s a bit patronising.
Angela Knight: Sorry. It wasn’t meant to be patronising.
Q206Mr. Mudie: Well, it was, but I am sure that your apology is accepted.
You say that these things are all about Basel, but they are very much about the FSA. In fact, at this cosy bankers’ conference that is going on this week, I hear that Paul Volcker said that the practices are continuing and that bankers have learned nothing. That is very relevant to the FSA. If Colin and I were to attend a Treasury Committee meeting and someone from the FSA came before us, I would want to know what the hell they were doing, so I thought it was a very relevant question.
Angela Knight: I am sorry, George; I did not mean to be patronising.
Mr. Mudie: I thought you were throwing your weight about.
Angela Knight: I did not mean to be patronising at all. The responsibilities of the FSA in that area remain and are not changed by the Bill. That is what I meant, not that the FSA does not have a role—of course it does. The point about Basel is, if I may say, quite an important one. We put the Basel committee’s recommendations—the Basel committee only makes recommendations—into law across the EU through directives; in this instance, we are talking about the capital requirements directive. They can be addressed in other ways, but that is the predominant one. For countries outside the EU, though, it is up to their Government or local jurisdictions to decide what they do about capital rules. That is why you get variations. It was certainly the case with the last round of Basel that the UK and most of Europe applied it, but the US, for example, did not. I hope that this time, as changes are made in areas that are of vital importance to us and other parts of the world, those other people who sit around the table also actually make the changes that they agree at the table when they get back home.
Q207Mr. Hoban: May I follow up on that? There is something in the Bill that might tackle the issue of people trading instruments that people feel uncomfortable with or feel are too high risk, namely the powers under clause 14. It gives the FSA powers to suspend permission to carry on regulated activities. That is a tool the FSA could use to stop trading in collateralised debt obligations or to stop Northern Rock issuing 125 per cent. mortgages, as it was doing. Is that a proportionate power to stop some of the abuses that Willie mentioned?
Angela Knight: I see what you mean. I am not entirely sure exactly how the clause is expected to work, so it is quite difficult for me to answer your question. It has the power to stop a firm doing one of its regulated activities, which is a pretty broad power. I suppose you are right that it could say to a bank, “You can no longer lend money on mortgages,” or, “You can no longer provide trading facilities for individuals trading their shares.” I suppose you could do that under this power.
Q208Mr. Mudie: It would be useful if the FSA had done that and had had the power to say, “You shouldn’t be trading in certain financial instruments,” because that trading was what poisoned the whole financial economy. But there we are. Well done, Mark.
Angela Knight: Yes. What the FSA could do right now is also arguable. Can it say to a financial firm, “If you are going to continue in that particular operation, we require you to hold x or y more capital in order to do so”? You are right: this power does give a bit more to the FSA at the moment, but it has quite a lot of ability to put in place some required checks and balances through its regulatory functions right now.
Q209Mr. Bain: The other point I picked up from your submission was that you were calling for—correct me if I am wrong—individual transactions to be monitored rather than individual firms. Why did you go for that approach?
Angela Knight: I think you mean in the short-selling area.
Mr. Bain: Yes.
Angela Knight: We are not sure that the short-selling clause has actually been written quite as intended. We look forward to further discussion on that. What happened last year was that the FSA stopped short selling taking place in this country at the height of the crisis. Some countries followed suit and some did not. Some that did not put some requirements and others did other requirements, so we had a right mess and muddle. The FSA used powers for market abuse to suspend short selling.
I think the question arises: what is the intention of the Bill? Is it to allow the FSA to suspend trading or stop activity in a certain instrument, or is it to stop certain firms from doing that activity? It would seem to us rather surprising, if, for example, the FSA said, “Firms A, B and C can continue to short sell, but firms X, Y and Z cannot.” That is how the Bill is written. It could alternatively say, “Plc No.1 is having a terrible time, so you can all stop short selling in plc No.1.” It could mean that. We do not really know. We also have a short-selling regime coming from Europe, so whatever happens here needs to tailor in with that. It may be that the wording of the clause is not meeting the intention of the power that it wants to give to the FSA. We need to explore that with the authorities elsewhere.
The Chairman: Just before I call Mr. Love, I remind you that we have four minutes to go.
Q210Mr. Andrew Love (Edmonton) (Lab/Co-op): I am well aware that there are only four minutes left. Mr. Chairman, I apologise for arriving late and missing most of the session.
I want to follow up by asking whether, in principle, you support the idea contained in the Bill that under certain circumstances suspension of short selling is appropriate.
Angela Knight: Yes, we do. We just need to make sure that technically it gives the right result and we do not think it quite does that here.
Q211Mr. Love: Okay. May I move back to living wills? Earlier this week we tried to tease out of the Minister what the costs were likely to be, but because we are only setting up the framework, and the detailed work will go on between the FSA and the industry, we were not able to do that. I want to get an industry view, because you must have had consultations so far with the FSA and probably the Bank as well because it has the resolution part of the procedure. What is the industry view about likely costs, in the context of concerns about whether internationally this is going to be the way forward? Is that going to be particularly onerous on the City of London?
Angela Knight: It certainly could be if living wills are taken to a point in which the different activities that you undertake as, say, a large, universal bank, ultimately have to be separately capitalised with their own separate liquidity. Then it would be an extraordinarily expensive process and one in which we would have done very significant damage to the UK. Other countries would be laughing fit to bust because we would have handed the business to them. It would also be difficult for our customers if they see costs starting to rise.
If, on the other hand, we are looking at sensible plans—and over a period of time we may alter some of the way in which we conduct activities as a consequence—that is just part of the natural development. The costs, therefore, are contained in those relating to updating, monitoring and so forth. It will be substantial; none of this is cheap. There is a huge difference between tens or twenties of millions and getting seriously into the billions. The range is vast.
In the discussions that we have had, there have been very interesting variations. For instance, you can speak to some people in the FSA and others in the Bank of England and they hold what seem to us to be noticeably different views. If we go back to the opening comments about the need for coherence among our tripartite arrangement—or whatever we wish to call it in future—this area is certainly a very important one.
Ordered, That further consideration be now adjourned.—(Mr. Mudie.)
10.25 am
Adjourned till this day at One o’clock.
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Prepared 11 December 2009