Ian
Pearson: First, in response to the more general points
made by the hon. Member for Fareham about the clause, the moving
picture of regulation and the further development of international
standards, I must say that the current FSA code is a world-leading
example of how a supervisor should tackle remuneration that
incentivises excessive risk taking. Under the Bill, we are
strengthening the FSA’s hands as a regulator to take action
against remuneration policies that encourage excessive risk taking and
ensuring greater accountability of the FSA to the Government in that
area. The hon. Gentleman is right about further international
developments. He referred to the work of the Financial Stability Board;
it is a matter on which discussions are still taking place. As a
result, the FSA will be changing its code to ensure consistency with
the G20 agreement. The plan is that it will review its code in 2010 to
take account of experience gained in implementing it, and in the light
of international developments, which is something that the hon.
Gentleman will want to support.
With regard to
amendment 54 and Government amendment 56, I recognise that there has
been some confusion over the impact and powers given to the FSA under
the clause, but I assure the Committee that it was never the
Government’s intention that the power should be used by the FSA
to invalidate provisions in existing contracts, nor does the clause
include a provision giving the FSA retrospective powers. As the
Committee is aware, the Joint Committee on Human Rights recently
recommended that the lack of retrospective effect should be made clear
in the Bill, and the hon. Gentleman has made a noble attempt to do that
with the
amendment. However,
the specific wording of the hon. Gentleman’s amendment refers to
the date on which the Bill was introduced to Parliament and does not
fully address the concerns that have been raised. Any rules that the
FSA makes and publishes will, of course, be known after that date so
amendment 54 would allow some retroactivity by referring to the date
when the Bill was introduced into Parliament rather than the date on
which the FSA made its
rules. In
contrast, Government amendment 56 provides that any rules the FSA makes
about remuneration may not render void a provision that was already in
an agreement when that rule was made. The hon. Gentleman raised a
broader issue and one that we think is appropriate. He asked whether
the code was equivalent to rules for the purpose of voiding any
contracts. The answer is no. The rules themselves must provide that
continuation of a rule will make a clause void. The code does not, and
there will be new
rules.
Mr.
Hoban: The code is now part of the FSA rulebook, so I am
not sure why it is not regarded as rules for the purpose of the
clause.
Ian
Pearson: I accept that the hon. Gentleman is right. I am
right, too, given my advice, but if I can provide further clarification
during this morning’s debate, I shall certainly do so. The key
point is that the Government amendment is broader and more appropriate
than amendment 54, and I shall clarify the detail with him
shortly.
Mr.
Hoban: I am not quite sure what it is we are broader or
more conciliatory to the banking sector about, but there is a problem
because we need clarity for contractual purposes. There is also tension
because the code, which was introduced in August, is less specific than
the implementation standards. For example, the standards define some
proportions of remuneration that should be deferred, whereas the code
is much more permissive. Greater clarity on that matter would be
welcome. If the formulation of the Bill is not sufficiently clear, once
the Government amendment is made—assuming that the Committee
passes it—will the Government return to the matter on Report?
That would ensure that what people are meant to be complying with is
crystal clear. People are making formal commitments; for example, the
banks have signed up to the Pittsburgh declaration. Many commitments
have been made, and we must ensure that we respect contractual
obligations. Therefore there needs to be some clarity as to what it is
that people are meant to be complying with and what the rules
are.
Ian
Pearson indicated
assent.
Mr.
Hoban: The Minister nods in assent, so I assume that he
will look into that matter again and perhaps table amendments on
Report. With his reassurances and explanation on why amendment 56 is
superior to 54, I beg to ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Amendment
made: 56, in
clause 11, page 9, line 17, at
end
insert— ‘(
) A provision that, at the time the rules are made, is contained in an
agreement made before that time may not be rendered void under
subsection (9)(b) unless it is subsequently amended so as to
contravene a prohibition under subsection
(9)(a).’.— (Ian
Pearson.) This amendment
makes it clear that the general rules about remuneration may not render
void any provision which is already in an agreement when the rules are
made (so long as the provision is not subsequently amended in a way
that contravenes the
rules). Clause
11, as amended, ordered to stand part of the
Bill.
Clause
12Rules
made by FSA about recovery and resolution
plans 11
am Rob
Marris (Wolverhampton, South-West) (Lab): I beg to move
amendment 57, in
clause 12, page 11, line 5, at
end insert ‘or requiring the
authorised person to be broken up into several persons by a date
specified by the
Authority.’. It
is a pleasure to appear before you again, Mr. Benton. Part
of the Bill addresses the world recession and its effects in the UK,
and the regulatory regime in the UK faced with a world crisis. My
starting point in tabling the amendment is that there will be another
crisis in world banking, which will be reflected in the UK. I am not
foolish enough to predict when that crisis will be, but as someone
whose partial background is as a historian, it is clear from looking at
the past and the nature of capitalism, driven by greed and innovation,
and its cyclical nature, whether one takes Kondratiev long waves or
shorter ones, the high likelihood is that at some point in western
capitalism within the next 30 years there will be some kind of banking
crisis.
The Bill goes
some way towards addressing such issues for the future, including the
recovery and resolution plans in clause 12, and the amendment relates
to resolution plans. Paragraph 106 of the explanatory notes,
states: “A
recovery plan aims to reduce the likelihood of failure of a firm by
setting out what the authorised person would do in, or prior to it
becoming subject to, stressed
circumstances”. It
continues: “Action
described in the plan may include the restructuring, scaling back or
sale of certain business lines or assets of the authorised person in
question”. A
resolution plan, in contradistinction to a recovery plan, is to do with
failure. Paragraph 111 of the explanatory notes, states that it
is “action
to be taken in the event of failure of all or any part of the business
occurring, and action to be taken by a firm where failure is
likely.” Paragraph
110 also states that resolution plans allow
for “gradual
implementation, focusing on the largest, most complex and systemically
significant firms in the first instance.”
Proposed new
subsection 139C(8), which my amendment would change,
states: “The
steps that the Authority may take include requiring the resolution plan
to be
revised.” My
amendment would add after “to be
revised”: “or
requiring the authorised person to be broken up into several persons by
a date specified by the
Authority.” It
is about the break-up of big banks. As drafted, the Bill says that if
the authority does not like a resolution plan—a plan that is to
do with failure or its likelihood—it can ask for it to be
revised. Well, whoopee-doo. We could have a big bank failing and the
FSA saying, “You had better revise your failure plan,” or
the “resolution plan”, as it is called in the Bill. That
is not adequate. The size of our financial institutions in the United
Kingdom is the elephant in the room—to use a hackneyed
phrase—in the Bill. They are too big. They need to be broken up.
To use the description of the Governor of the Bank of England when he
spoke in the Lords in December, banks and financial institutions are
“too important to
fail”. I
have a lot of time for the Governor of the Bank of England because he
is, as my hon. Friend the Minister will know, a fellow
Wulfrunian—a Wolverhampton native. For some strange reason, he
does not support Wolverhampton Wanderers football club; he supports
Aston Villa. Apart from that, Mervyn King is not a bad
Wulfrunian—not a bad bloke. He raised the issue of financial
institutions in our country that are too important to
fail. My
amendment is permissive. It would
say: “The
steps that the Authority may take include...requiring the
authorised person to be broken
up”— “the
authority may take” is permissive. The amendment does not seek
to break up big financial institutions in the United Kingdom—at
the moment. If a Government had such a power—let alone used
it—there is a risk that certain financial institutions would
decide to leave the United Kingdom, because of such draconian powers.
That is a concern. There is also the issue of breaking up large
financial institutions—banks—into retail and investment,
or, as the Americans call them, utility and casino banks. That has been
canvassed by the hon. Member for Twickenham, who is a member of the
Committee but has not yet joined us. Breaking up banks in such a way is
simplistic. Hon. members will know my concerns about UK banking in
contradistinction to Canadian banks, which are the most stable in the
world. They were voted the most stable by the World Economic Forum.
They are some of the biggest banks in the world and they do retail and
investment, so that is not necessarily the way to break up big
financial institutions. Although it would be worth looking at, that
alone will not solve
it. Mr.
Andrew Love (Edmonton) (Lab/Co-op): I am following my hon.
Friend’s argument closely. A concern raised by his amendment is
that it places the breaking up of organisations in the Bill. Yet, as I
understand it, the stated intent of the Bill is to set a framework and
leave it to the living wills to decide policy. What arguments does he
deploy to support putting it in the Bill, when the suggestion is that
it be left to the discussions between the FSA and the financial
organisation
itself?
Rob
Marris: My amendment is permissive. It does not say that
big financial institutions should or must be broken up. It says that
the Financial Services Authority may, if there is not an adequate
resolution plan, order that a financial institution be broken up. It is
merely permissive in that sense. If it were to lead to an exodus of
financial institutions from the United Kingdom, I am not sure that
would be a bad thing. It would be a bad thing for people who work for
them, of course. However, we are faced with the fact that, in our
country at the moment, we have spent a huge amount of taxpayers’
money—some of which we might get back, some of which we might
not—bailing out failed large financial institutions. We cannot
afford to keep doing that. This year, the Government’s borrowing
is about £175 billion; it will be of a similar order next year.
That is the result of two things: one is the bailing out of financial
institutions and the second is that the world recession and the
recession in our economy, the effects of which the Government have done
very well to lessen, have been hugely costly. The antics of morally
corrupt people such as Sir Fred Goodwin or Adam Applegarth of Northern
Rock have destabilised our whole system here and similarly across the
Atlantic in the United States of America, and the cupboard is
bare. If
a big financial institution in the United Kingdom were to go bust in
the relatively near future, the taxpayer could not afford to bail it
out. To me, it is not a choice between, “Ah well, do we take on
a bit more debt in the future to bail out a big financial institution
if it goes bust?” or “Do we break it up in the
future?”, but a matter of, “We can’t afford to
bail out big time somebody in the future, so let’s take some
preventive steps now, at least by giving the FSA the power to do
it.” I am not saying that it must do so, but just that we should
take some preventive steps now to consider breaking up the large
financial institutions, as the amendment suggests, because we cannot
afford the
alternative. As
politicians who are considering the Financial Services Bill and members
of society, we need to debate whether the size of the financial
institutions relative to the size of our economy is, in fact, too big.
I am sure that some hon. Members will agree that at some time in the
unspecified future we will again have a financial crisis in the United
Kingdom. That is what happens with big financial institutions because
capitalism driven by greed and innovation can
produce negative as well as beneficial results. If we are to have such
a crisis in the future, let us take preventive measures now. Let us
talk about it
now. For
example, as many of my colleagues on the Government Benches will know,
for trade union activists the time to discuss a redundancy policy of
the company for which they are working is not when the company is
proposing to take redundancies, but when it is not proposing to take
redundancies, because that is when a calm debate can take place. At the
moment, the signs are that the Government’s heroic actions have
stabilised the financial system both in the United Kingdom and more
broadly throughout the world, and that things are starting to calm
down. So now is the time when we should debate the size of financial
institutions in our country and whether there should be a cap on their
size, such as on their capitalisation as a percentage of gross domestic
product or some such formula. I am not fixed about what. The issue is
one on which economists are
fairly evenly divided, but there is a big school of thought in the
western world among economists that the “too important to
fail” issue is being ignored by
politicians. [Mr.
Roger Gale in the
Chair]I
certainly pick up in the United Kingdom that, as politicians, we are
failing in the debate. We are not having it. It takes a Back-Bench
amendment to enable such a debate, and I should be interested to hear
what my hon. Friend the Minister—also from the west
midlands—says about whether the FSA should have permissive
powers. Do the Government propose to have a public or political debate
about whether the size of financial institutions in the United Kingdom
needs to be cut and, if not, why do they not consider that we should
have that debate? If the Minister—as I anticipate he
might—says that the amendment is not right, does he think that a
different change to the Bill would be appropriate to implement such a
power so that its use can be discussed now while matters are calming
down? We cannot avoid such a debate; we either have it now or whoever
of us is left standing, as it were, when the next crisis hits and we
cannot afford to bail out big institutions, will have to discuss the
matter then. I would rather have the debate
now.
11.15
am
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