Mr.
Hoban: I welcome you to the chairmanship of the Committee,
Mr.
Gale. The
hon. Member for Wolverhampton, South-West raised some interesting
points in his amendment. I was going to touch on something similar in
the stand part debate, and if I may, I would like to make some broader
comments about clause
12. The
debate is an important one to have. The hon. Gentleman has done us a
service by raising the issues, including the one about banks that are
too big to fail, and whether there should be a division between
different elements of banking activity—the shorthand is: do we
need a British Glass-Steagall? In our white paper on reforming
financial regulation we said that there was a strong case for dividing
up those activities for a range of reasons. However, we feel that the
best way to do so is not by unilateral action, but by international
consensus.
Meanwhile,
there are measures that we can take to improve regulation to try to
tackle some of the issues that have emerged from the size and
complexity of such institutions. There are ways in which we are able to
impose a higher capital requirement for larger banks, which provides a
bigger buffer if they suffer losses and changes the economics of a
large bank. If we ensure that there is a closer correlation between the
capital requirements and the level of risk that people undertake, we
may see a separation of utility-type functions from higher-risk
activity. Technically,
I think the hon. Gentleman’s amendment may be deficient, which
is a rare statement for me to make—that is a phrase that the
hon. Gentleman uses quite often to talk about me. I am not sure that
his amendment delivers what he seeks, as the case may be that a group
can have a number of authorised persons, and he would not deliver his
outcome of a break-up of banks—they would just have more
authorised persons within a group. However, I do not wish to be
pedantic.
The hon.
Gentleman’s amendment illustrates one of the challenges that we
saw with Lehman Brothers, which is that a single institution can be
very complex, and very difficult to wind up. One will then force a
position either to rescue that institution or let it fail. We saw the
consequences of allowing Lehman to fail. It triggered a fresh wave of
uncertainty in the market and led to a further set of actions to
stabilise the banking system. Also, the administration of Lehman
Brothers’ operation in the UK will, I suspect, be one of the
most expensive administration processes, because of the complexity of
the records, the fact that trading on Lehman’s own account was
on the same ledger as Lehman’s trading for its clients, and
because there were no rules or plan in place to wind up the business in
an orderly fashion. I know that the Financial Services Secretary has
announced some progress on
that. There
are complex issues that we need to think about; we are talking about
complicated operations. The hon. Gentleman suggests that we might break
up “authorised person” into several persons. There are
many different ways in which banks can structure their operations. Some
could be heavily subsidiarised, with different activities in different
subsidiaries. Others could have all their operations within one
subsidiary. What would happen if there was proprietary trading,
commercial lending and retail deposits in one institution? There are
arrangements in place to protect retail deposits, but it may be
difficult to segregate those activities and save them separately from
the rest of the banking activity. That is why it is important that we
look at the plans set out in clause
12. The
Governor of the Bank of England said in October
that “both
the structure and regulation of banking in the UK need reform. Banks
increased both the size and leverage of their balance sheets to levels
that threatened stability of the system as a whole. They remain
extraordinarily dependent on the public sector for support. That was
necessary in the immediate crisis, but is not
sustainable” in
the long term. There are many different regulatory responses that we
can take, and one of them is to have living wills—the resolution
and recovery plans that clause 12
allows. Andrew
Bailey, the chief cashier at the Bank of England, talked about the
range of responses that there could be to complex institutions, and he
identified three elements: regulation, structure and resolution. The
recovery and resolution plans fall within the resolution strand of his
thought. There is widespread international agreement. We talked about
living wills and the need for them in our white paper in July 2009.
There is work going on internationally on how they might work in
practice. The FSA has summarised some of the issues in an appendix to
its discussion paper on the Turner
review. Let
me give some detail on what the plans could entail. The recovery plan
should include: detailed plans of the businesses and subsidiaries that
could be sold to third parties in any contingencies; the extent to
which the business could be de-risked in a relatively short space of
time; and the ability to withstand the failure of the largest
counterparties. How do they safeguard themselves against contagion? One
of the untold stories about Lehman Brothers is that its collapse did
not lead to the widespread contagion and the lock-down in markets that
people might have expected. Recovery is about a business sorting itself
out and moving to a more stable position.
The resolution
plans tie into the special resolution regime set up at the time of the
Banking Act 2009, and they mesh into the responsibilities that the Bank
of England and others have as a consequence of that regime. That
relates to issues such as liquidation, transferring deposits,
introducing a bridge bank, placing banks into temporary public
ownership and deposit protection. However, the plans are at an early
stage, and there are issues that I want to raise with the
Minister. The
discussion paper published last year refers to a pilot project that
began at the end of 2009, in which a small number of banks will produce
draft resolution plans. Can the Minister confirm that the pilot is
under way? Can he tell the Committee which banks are taking part?
Pilots are important because they determine the type of information
that we need in the plans. We do not know what sort of information will
be required. The Bill is drafted broadly to ensure that the FSA has the
power to collect the sort of information required. Until we know the
outcome of the pilot, it is difficult to know precisely what will be
required, what the cost of the plans will be and how much information
will be needed. Also, what will the institutions have to do as a
consequence of the plans?
That goes
back to a slightly different approach to that taken in the amendment
tabled by the hon. Member for Wolverhampton, South-West. Some
institutions have raised the question of whether the plans will force
them to subsidiarise if they are operating as a single entity. Although
the hon. Gentleman’s permissive amendment would make that option
specific, there are questions. An institution might ask, “Will
one of the outcomes of my discussion with the FSA about my plan be a
requirement for me to separate out the activities of different
subsidiaries and to undo some of the group structures that are in
place?” That is a valid question.
One issue
that flows from the pilot—this is not addressed in the impact
assessment, because we are at an early stage—is the cost of the
plans. How voluminous will they be? What will be the level of detail?
How expensive will it be not only to draw them up initially but to keep
them up to date? There is a potentially significant cost that we need
to bear in mind. That affects the competitiveness of banks based in the
UK, compared to others in the global market. That is why it is
important to think about the international
context. Work
is being done internationally to develop the plans, but will the UK
lead the way in their implementation? Have we specifically thought
through the costs and benefits of that? It is worth pointing out that
principle 8 in the Financial Stability Forum’s work on
cross-border co-operation and crisis management says:
“authorities
will strongly encourage firms to maintain contingency plans and
procedures for use in a wind down situation...and regularly review them
to ensure that they remain accurate and
adequate”. The
first words in that quotation are “authorities will strongly
encourage”, but the UK is mandating the preparation of such
plans through the clause. There is concern that the UK is moving faster
than other jurisdictions and about whether that is appropriate. The
British Bankers Association has said:
“It is
a matter for concern that the FSA is being placed under a statutory
duty to make rules for the production of recovery and resolution plans
without there first being agreement on the
fundamental objectives behind the initiative. These statutory provisions
would front run international agreement on the need for, and contents
of,
RRPs.” In
its response to the Committee’s debate, the CBI, which supports
living wills in principle, has said:
“this clause
must be consistent with any international agreement otherwise this
clause should be removed from the face of the Bill before it receives
Royal Assent. Additionally the CBI does not believe that legislation is
required for the FSA to implement these new requirements at the
appropriate
time.” Can
the Minister give some assurances about the pace of development of such
things internationally and about how we are ensuring that the FSA
remains in step with international agreements?
We have
talked about the coverage of the plans in the context of
banks, and the hon. Member for Wolverhampton, South-West, spoke about
them in the context of bank break-ups. However, clause 12 is not
limited to banks, or even deposit takers. The clause gives the FSA
the “power
to make general rules so as to make rules requiring each authorised
person (or each authorised person of a specified description) to
prepare, and keep up-to-date, a recovery
plan.” Although
we have been talking about plans in the context of banks, the
provisions could apply to insurers, asset managers, hedge funds,
independent financial advisers and the insurance brokers on the high
streets in our constituencies. Everyone could be required to have a
recovery and resolution plan; there is no barrier in the Bill
restricting them purely to banks. I am sure that that is a conscious
decision, but we need to understand whether this is the first stage in
a process that will require all institutions to have recovery and
resolution plans, or whether the intention is simply to restrict them
to banks and licensed deposit takers. Clearly, institutions other than
banks, such as building societies and credit unions, hold
customers’ money, and the special resolution regime also applies
to them. It would be helpful to have some clarity on that.
The key
issues are uncertainty about what the plans will include, the fact that
the FSA appears to be in the lead—that is not necessarily a bad
thing, but we need to understand the balance of the risks—and
what sectors will need to have resolution and recovery
plans.
11.30
am
The
Chairman: Order. Before we proceed, it will not have
escaped the notice of the Committee that we have just embarked on a
clause stand part debate. The rule is that we can have only one, so we
are now entertaining the amendment that has been moved and a clause
stand part debate. There will be no separate clause stand part debate
on the clause.
There
is another point that I would like to make. Before I came to Committee
from an Adjournment debate in which I had participated, I received a
call from the office of the Chairman of Ways and Means, indicating that
there has been a request for a meeting of the Programming Sub-Committee
to be held at 1.30 pm. I have agreed to chair it, if it is
held. I say to the Committee—and the usual channels, who are
present—that if we are going to hold that meeting, it might make
sense to do so at 1 o’clock, immediately after this sitting,
rather than at 1.30 pm, but I will endeavour to assist, whichever is
more convenient to those
involved.
Mr.
Breed: I will include my remarks on clause stand part in
the discussion of the amendment. I understand the reasons why it has
been tabled. It has helped us to raise the issue, which has to be
tackled at some time or another, as the hon. Member for Wolverhampton,
South-West said. However, I do not think that that should be done, for
a variety of reasons, either in this Committee or in the timing,
because international co-operation is vital. Nevertheless, it is quite
right that the big question is whether we can afford to have very large
banks attached to medium-sized countries, with all the associated
risks—of course, we know what has happened in Iceland and
elsewhere—and the issue needs to be tackled. I do not think that
the difficulties will come down the line to us as quickly as the hon.
Gentleman suggested. Nevertheless, that big issue has to be
tackled. I
have been rather lukewarm to recovery and resolution plans in clause
12. I am not certain how they will operate, what their effect will be
on competition, what the overall costs will be and what value they will
have. Often, unexpected and unforeseen—almost impossible to
anticipate—events can cause a
catastrophe. All
the pre-planning in the world and all the recovery and resolution plans
that may be put in place may simply not be able to anticipate exactly
what will befall this sector or, indeed, any other sector. We all know
that risk plans are almost part of the daily life of practically
everything now—in education, science and the police force, for
example, we have to make risk assessments, but too often, the
assessment as perceived does not cover the precise problem that
sometimes arises.
I think that
the whole object is the same. We are going to look through general
rules at some stage, and that is the interesting part. I look at this
in terms of macro and micro. In a macro sense, when we talk about
Glass-Steagall, splitting up investment banks and narrowing banking,
such macro-type decisions must, by necessity, include a considerable
amount of international co- operation. Questions such as how to
split up large groups and how to compartmentalise parts of
international businesses in those large groups are difficult to answer.
Indeed, they will be subject to different regimes, different legal
systems and interpretations and different capital requirements. That
will be a difficult aspect.
The
simplicity that has been referred to and sometimes accepted by my hon.
Friend the Member for Twickenham does not take into account the fact
that, when Glass-Steagall was set up, the banking system was wholly
different from what it is today. The sheer complexities,
internationalisation, interconnectivity and scale are of a
significantly different proportion. Therefore, some sort of beefed-up
Glass-Steagall is not appropriate—we have to look at it
completely differently. However, I understand the context of trying to
reduce businesses to a size where they can be properly regulated and
where they would not cause a systemic risk, which is likely if they are
too important to fail.
There is also
is the micro part, on which we should concentrate more when talking
about recovery and resolution plans. Even in the domestic sense, if we
ignore the international parts of large banking groups, there is a
major complexity in the interconnectivity of subsidiaries and
subsidiaries of subsidiaries. We know that from our evidence session in
the Treasury Committee not that long ago, when we invited the chief
auditor of a large firm of accountants to explain the domestic
arrangements of the various companies within the HSBC
group. He was completely unable to do so. That a chief auditor cannot
explain the interconnectivity, where the notes to accounts now occupy
some 60 pages, as opposed to the accounts themselves occupying about
six pages, demonstrates that the real complexity is such that perhaps
that in itself needs to be tackled to reduce the whole subsidiary
complexity. Such a system
is often used to minimise tax, not to avoid or evade it, and to create
a suite of companies capable of assisting the banks and their clients
to implement ever-increasingly complex transactions between a variety
of the subsidiaries. That ultimately means a significant reduction to
the
taxman. Identifying
such structures and creating simpler ones could be part of the
resolution and recovery plans, so that even understanding the way in
which the huge groups have been put together would be more helpful in
identifying early the problems that will arise. Such action might even
help to refuse certain acquisitions or mergers in the terms in which
they are envisaged. Companies are sometimes brought into a group in
ways that do not assist the understanding of the relationship between
each part of the group. In the micro sense—the domestic
sense—some work can be done, which will be helpful, but in the
macro sense, it is a more difficult
area. The
other aspect that I am worried about is keeping things up to date. We
know that keeping things up to date is a constant problem. Yesterday, I
was part of the tax law rewrite Bill, a 10-year project to rewrite
something that made very little difference to the amount of revenue
that we received. Goodness knows how much 10 years of rewriting and
updating things costs, but let us imagine the costs of rewriting and
updating resolution and recovery plans to respond to the Finance Bill
each year and the way in which the legal framework of other countries
had undertaken mergers, acquisitions or even sales of businesses. That
could be a never-ending process, like the tax law rewrite Bill and
become an extraordinary cost to individuals. I just wonder whether we
will receive value for the money that will be
expended. In
respect of competition and innovation, we do not want to create a
homogeneous system, whereby we just have shades of a certain business
in different financial groups and there is little to choose between
products and how they operate. They are so constricted in the way in
which they have to respond to recovery and resolution plans that it
does not give them the element of innovation or competition that we
want. I have some general concerns such as that, but the clause is
right overall. The rules that will result after discussions with the
Treasury and the Bank of England will be a key part, and perhaps at
that stage and when the international scene is a little clearer, the
more macro aspects of the matter could be considered. However, although
I cannot support the amendment, it has enabled a valuable contribution
to be made to the
debate. John
Howell (Henley) (Con): I, too, thank the hon. Member for
Wolverhampton, South-West for tabling the amendment, which exposes one
of the great weaknesses of the clause and, indeed, the Bill. The
Minister has said on a number of occasions that the Bill will set up
various frameworks, but the difficulty is that those frameworks must be
so wide because all the retrofitting, whether against international
agreements or against the detailed regulations about how the living
wills will work, must be done later.
The problem
with such frameworks is that anything can be put into them, and there
is no clarity about what is going into them at the moment. I understand
fully why the hon. Gentleman wishes to bring more clarity to the Bill.
In that general aim, he has a large amount of support. However, some
practical issues relating to the break-up of corporate structures have
been mentioned. Clearly, that was in the Minister’s mind during
the evidence session.
The Minister
said that the living wills would be a last resort, but he went on to
describe them, colourfully, as a manual for surgery. Surgery involves
cutting bits out, rather than patching things up. Medicine is patching
things up and making the patient better; surgery is the fun bit,
involving taking things out and throwing them away. Unfortunately, he
did not speculate how the living wills might be used. That is a great
shame. Although we do not need speculation, we need more substantial
detail of how they might be used, what they might look like and how
they will be judged.
The question
of how they will be judged touches on the amendment as well. Subsection
(5) of proposed new section 139B says that the plans must be
“satisfactory”, but we never understand what
“satisfactory” is or how it will be judged. We know whose
opinion will be taken into account in judging whether a plan is
satisfactory, but there are no rules or benchmarks. There is nothing
that one would expect of a corporate entity in terms of measuring what
is
done. Despite
everything that has happened, it is slightly naive to believe that
companies do not undertake their own risk modelling. Indeed, the FSA
already requires some contingency planning. We need to understand the
difference between what companies already do and the FSA already
requires and what the Bill will deliver. To use another phrase that has
come out throughout debates on the Bill, I am trying to tease out what
additionality the Bill will bring. In relation to the break-up of banks
and other financial institutions, that may well be the best solution,
but emphasising that with an amendment to the Bill skews it the wrong
way.
We also need
to recognise that corporate structures are not static. Companies are
always evolving their structures for different commercial reasons. A
lot of emphasis has been put on the structure of that, for a number of
reasons. I saw one thing mentioned once in a fleeting reference that
was never picked up again but is incredibly important. In any corporate
structuring or restructuring in the financial services sector,
reputational risk is an overriding consideration. We talk openly about
financial risk, but nobody has mentioned reputational risk and the idea
of protecting it.
Any
suggestion of insider trading is an easy way to trash one’s
reputation. In the recent case of the Australian Securities and
Investments Commission v. Citigroup, we saw how the idea of
insider trading is being taken to an extreme. Citigroup acted for one
company in a takeover battle for another company. There were Chinese
walls between the two teams on the takeover and the proprietary trading
team at Citigroup, which wanted to trade in the shares of the company
being acquired. The issue that raged at that time was whether a general
aside between two members of the same firm was sufficient to indicate
that the bank’s subsequent sale of the shares on its own behalf
was evidence of insider trading.
I do not want
to blow the issue out of proportion, but it is important; it is one of
the issues that is taken into account in putting together or changing a
corporate structure and one of the complex issues mentioned by my hon.
Friend the Member for Fareham that need to be taken into
account. 11.45
am The
logistics need to be explored in further detail. The Institute of
Chartered Accountants has made much of the logistical problem of
gathering information and undertaking analysis and of whether the plans
will be updated periodically or whether they will be rolling plans,
which is what I suspect many of them will turn out to be, because
situations change frequently in the light of new acquisitions and the
addition of new businesses.
The hon.
Member for South-East Cornwall, who speaks for the Liberal Democrats,
said that we must ensure that we do not reduce the financial services
sector to the lowest common denominator. We do not want uniform
business models, which increase risk because there is only one model
operating in the market. That forces out innovation, and that is not in
the interests of the consumer, the taxpayer or the economy as a
whole.
Through
living wills, we are trying to model stressed situations. I put that in
the plural because people will need to model not just a single stressed
situation, but a variety of stressed situations. Those situations may
have very different outcomes; some may require the break-up of the bank
or parts of it, while others may not. We need to be careful about how
we approach the issue so that we achieve proportionality and identity
problems and what we are doing to solve them. That would be made
clearer if there was far more in the clause about what we
are trying to achieve and how we will go about it.
The cost of
the proposals is relevant and has been mentioned several times. There
is no costing in the impact assessment and, therefore, no comparison of
the cost here and in other countries. I am quite surprised by that
because banks are already required to provide contingency plans and
they already do a lot of their own modelling. It would not have been
beyond the wit of the Treasury to have come up with a range of costs,
because it loves ranges. The impact assessment for the next clause, on
short selling, includes a range of benefits that starts at £106
million and goes up to £1,066 million. The Treasury loves
ranges, so it could surely have come up with a range to give some
indication of the costs in this case. That is yet another example of
how providing only a framework, and a loose framework at that, leads to
people asking more questions, rather than moving us towards a regime
that leads to a resolution.
The hon.
Member for Wolverhampton, South-West is right that the future will hold
more banking crises. I cannot remember the exact figure, but the
International Monetary Fund produced an assessment early in the last
decade pointing out that there were well over 50 banking
crises—I think that the figure was nearer 70—in the last
30 years of the last century. Those crises all followed a similar
pattern to the recent crisis, and we need to ask more
generally—not just in this Committee—why that was not
spotted and why the lessons were not learned from previous crises. If
living wills help in the future that will be great, but there is such
imprecision in the clause that I am not sure that it adds much to our
understanding of how they will work in
practice.
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