Ian
Pearson: Before I reply to the debate on clause 12 and the
amendment tabled by my hon. Friend the Member for Wolverhampton,
South-West, I would like to expand briefly on my earlier comments about
the difference between the FSA’s current code and the general
rules that the Bill requires it to make in respect of remuneration. As
I said to the hon. Member for Fareham, the current FSA code is part of
the FSA rulebook. However, it is not the case that any breach of an FSA
rule on remuneration will automatically make a contract void. Breach of
a rule will have that effect only if the rule itself provides for that.
The present code does not do that, and will need to be supplemented by
new rules to be made by the FSA under the authority provided in the
Bill, setting out specific prohibitions and expressly stating that
contravention of the provisions will make a contract void. I hope that
that clarifies any confusion that might have
arisen.
At the outset
of his contribution, my hon. Friend the Member for Wolverhampton,
South-West said that the “too big to fail” issue was
being ignored by politicians. I do not believe that to be true as there
has been substantial discussion in the UK and internationally. However,
there could perhaps be more debate, and my hon. Friend has certainly
provided us with the opportunity to do that this morning.
I shall make
a few broader comments on clause 12, before responding specifically to
the amendment. I shall also pick up on some of the comments made by the
hon. Member for South-East Cornwall. I agree that Glass-Steagall-type
provisions that date back to the 1930s are not likely to be relevant,
even if they are beefed up, as he suggested, for today’s
circumstances. There is no easy or simple distinction between what is
sometimes called utility banking and investment banking, and sometimes
pejoratively referred to as casino banking. Experience of the past two
or more years has shown that firms that stay close to their knitting
would not be regarded as performing a utility function, and could get
into trouble just as investment banks got into trouble. It is well
known that the Government do not believe that the case has been made
for a Glass-Steagall split between retail and investment banking
activities.
Mr.
Breed: I entirely agree with the Minister. With
separation, we need to understand that the banks that were not in the
casino sometimes had access to it. Northern Rock was clearly a mortgage
bank, but it funded itself by having access to the casino-type aspects,
which was the real problem. It is not only large banks that clearly do
both—the funding of banking generally has fundamentally changed
and includes this aspect of funding, which is difficult to
reverse.
Ian
Pearson: The hon. Gentleman makes a valid point. The issue
of being “too big to fail” is of central importance, and
I argue strongly that one of the ways in which the Government are
responding is through clause 12 and the proposals on
recovery and resolution plans, which are sometimes referred to as
living wills.
The clause
sets out the consultation arrangements between the UK authorities in
relation to recovery and resolution plans, provides the FSA with
additional enforcement powers relating to the collection of information
and requires the FSA to have regard to international developments in
making rules for recovery and resolution plans. The point about having
regard to international
developments explicitly recognises some of the concerns raised by the
CBI and others. I will say more about that in a
moment. We
made it clear in our White Paper, “Reforming Financial
Markets”, that our strategy for dealing with the systemic risk
posed by the potential failure of individual financial firms includes a
number of strands such as improved market discipline, enhanced
prudential regulation and supervision and strengthened market
infrastructure. Another key element, which is relevant, is the focus on
stronger recovery and resolution arrangements to reduce the likelihood
and impact of banks’ failure. Of course, the Banking Act 2009
has already extended significantly the resolution tools available to
the authorities, principally in relation to banks and building
societies, and firms’ preparation and maintenance of RRPs is
intended to build on that more
generally. We
see recovery and resolution plans as a key tool for institutions and
authorities to mitigate the systemic risk posed by firms and promote
long-term financial stability. As a key new part of the supervisory
toolkit, RRPs will create regulatory incentives for firms to avoid
being systemically risky, because the quality of a firm’s
recovery and resolution plan should have a direct bearing on
supervisors’ overall assessment of the prudential risk posed by
the firm. In short, if a firm’s recovery plan or resolution plan
is not good enough, there will be regulatory consequences. The
Government and the FSA are clear that recovery and resolution plans and
tougher prudential requirements are key elements of a comprehensive
policy to deal with the risk to financial stability posed by
firms. Perhaps
even more fundamentally, we see RRPs as an important means of reducing
the moral hazard arising where firms are perceived as too big to fail
and benefit from an implied safety net of public support. We want
firms, no matter how big or complex they are, to face up to the
potential reality of their failure. Recovery plans will require them to
have realistic plans in place for coping with stressed circumstances,
and resolution plans will enable the authorities to prepare for the use
of their resolution toolkit if recovery is not
possible. Of
course, the FSA already has discretion to make general rules on such
matters, which will be further underpinned by its new financial
stability objective in clause 5. However, clause 12 places an express
duty on the FSA to make rules relating to recovery and resolution
plans, exemplifying our strong commitment to taking forward the
measures. By
setting out in legislation that such rules must cover the firms subject
to part 1 of the Banking Act 2009—banks and building
societies—we are prioritising the types of firm that have needed
most taxpayer support in the past and whose failure has impacted on
depositors and on financial stability most severely. The fact that the
duty covers all banks and building societies recognises, as
demonstrated by events here in the UK during the crisis, that smaller
firms can also have a significant impact on national financial
stability and that their resolution can present its own
difficulties.
John
Howell: The Minister will be aware of the Building
Societies Association’s argument that many building societies
are small. The BSA questions the proportionality of the measure for
such firms. Does he agree that it would be much better to discuss the
matter with a cost-benefit analysis covering
them?
Ian
Pearson: I will say something about that in a moment, but
I wanted to address the wider issue of
scope. We
anticipate that the scope of recovery and resolution plans will be
expanded to other types of firm. The Government intend to make an order
setting out the timetable after consulting with the Financial Services
Authority. By taking that approach, we are enabling the FSA to comply
with the duty to make rules in a risk-based and proportionate manner. I
will say something more on that in a
moment. 12
noon The
Bill’s provisions do not prescribe the content of recovery and
resolution plans. That will be set out in rules, which the FSA will
draft based on the evidence gathered from its ongoing pilot project and
taking into account the ongoing international work. In response to the
point raised by the hon. Member for Fareham, I do not think that it
would be appropriate to disclose who is taking part in the pilot
project. However, I can say to him that there is a sample of banks, and
we expect the outcomes of the pilot work to be known by the third
quarter of
2010. The
pilot will contribute to addressing some of the wider policy
considerations on the cost of recovery and resolution plans—that
point was raised by the hon. Member for Henley—and their
potential impact on firms’ business models and profitability,
and deal with questions on restructuring. Before making the rules, the
FSA will be obliged to consult and publish a full cost-benefit analysis
in the normal way. I hope that that reassures the hon.
Gentleman. In
this context, I stress that while we are clear that there will be some
cost to firms from the preparation and maintenance of such plans, there
can be no doubt that, following the events of the last 18 months,
firms, particularly those that are systemically significant, must bear
a fair share of the cost of increased financial stability, which will
include the cost of preparing recovery and resolution
plans. I
also want to say a little more about the international dimension. We
all understand that our financial services industry operates in a
global and inter-connected environment. That is why the Bill explicitly
states that in making its rules on recovery and resolution plans the
FSA must have regard to international developments in that area. There
is a growing international consensus that such plans—be they
called recovery and resolution plans, living wills, wind-down plans or
even funeral plans, as I have heard in some cases—are a vital
tool in dealing with the systemic risk posed by firms, not least large,
complex, cross-border firms. The G20’s communiquÃ(c) on 7
November explicitly called
for “the
rapid development of internationally consistent, firm-specific recovery
and resolution plans and tools by
end-2010”. The
work that we are doing in the UK, through the legislation that we are
discussing today, needs to be seen in that
context. Through
the pilot programme and our close work in international forums such as
the Financial Stability Board, we are taking a leading international
role. We want to ensure that the financial services sector in the UK is
stable and can fulfil its role of supporting the real economy, which is
why we have been leading that ambitious pilot programme that will
support and inform our own
domestic legislation and European and international work streams in that
area. I take the point that has been made by the CBI and others that it
needs to be seen in an international context. I believe that the Bill
makes explicit reference to allow that to happen, and it is certainly
our policy intention that that should be the
case. Mr.
Hoban: If by the time we get to the end of 2010 there is
no international consensus about living wills and detailed guidance
drawn up at a global level, does the Minister believe that the benefits
of living wills are such—in terms of the stability that it
brings to the UK—that it would be worth proceeding with a
variant of those in the absence of an international
consensus?
Ian
Pearson: I do not believe that there will be an absence of
an international consensus. Indeed, at a higher level, agreement has
already been reached on the usefulness of such tools. What needs to go
on now are more detailed discussions about the content of recovery and
resolution plans. That is the task for the next few months. Our pilot
work is really feeding into the international discussions that will
take place on the matter. As was said in the communiquÃ(c), we need
some internationally consistent approaches to the implementation of the
plans in the future, but I do not anticipate problems in getting a
significant level of international agreement that such things are
necessary for financial stability and should be
introduced.
With regard
to the amendment tabled by my hon. Friend the Member for Wolverhampton,
South-West, I certainly understand his intention behind it. I do not
support the idea of breaking up by a certain deadline. The amendment is
not necessary and I shall set out briefly the reasons why. We are not
legislating for additional powers for the FSA to force firms to
restructure their operations as a result of their recovery and
resolution plans. My hon. Friend will be aware that the FSA already has
plans, as part of its toolkit of disciplinary measures, to require firm
restructuring. The Bill obliges the FSA to take appropriate action if
it considers that a recovery or resolution plan fails to make
satisfactory provision. The FSA can apply the whole range of its
current set of tools, including disciplinary measures, when it
considers that a recovery or a resolution plan is inadequate. It can
use those tools to achieve significant changes in an authorised firm,
which could include structural
changes. The
tools at the FSA’s disposal include offsetting measures, such as
discretionary capital add-ons or so-called own initiative variation of
permission powers, which ultimately can include the withdrawal of part
IV permissions. The FSA therefore already has powers that may achieve
structural changes. My hon. Friend will also be aware of the
international debate on whether additional new powers would be
necessary and desirable, and what would be the appropriate body to
exercise them. Its pilot work will again be helpful in that regard, as
will the progress that is taking place on the international template
that has been developed by the Financial Stability Board. We should not
be proceeding ahead of clear evidence and international agreement with
regard to additional new powers, which could have significant
implications for the competitiveness of the UK. It is important that we
continue to lead and participate in
the international debate about what additional powers might be required
for the future. The amendment is not necessary or desirable at this
stage, and I hope that I have convinced my hon. Friend of
that. Rob
Marris: This has been an interesting debate. We have heard
some thoughtful speeches and the discussion has been of a higher level
than took place earlier on some of the minutiae. Two main themes have
come through, one of which was the international dimension of the size
of major banks and so on. The other was the complexity of the
structures of many such institutions, with different models not a
shared model. Indeed, as the hon. Member for South-East Cornwall said,
most people cannot understand the structure of some
banks. I
certainly agree that there is a strong international dimension. I take
my hat off to the Government for making, through clause 12, the
resolution and recovery plans part of the armoury of defence for us in
the United Kingdom, and for introducing and discussing them at an
international level. I am glad that more international debate is going
on than I had realised and, from what my hon. Friend the Minister said,
more domestic debate. If banks go down again, they could bring us all
down with them because we cannot afford to bail them out, and the
evidence is that what I regard as a pretty important issue is not
getting through a whole lot to the average
politician. On
the recovery and resolution plan, the Minister says that in a sense we
do not want to get ahead of ourselves on international discussions. I
say to my hon. Friend the Minister, “What if those international
discussions lead to a position where internationally they are saying
that there should be such powers to break up very large financial
institutions?” I suspect that the United States might come to
that conclusion. They have already started to do that in some ways in
terms of breakdown. My amendment is only permissive.
I get a sense
from some of this debate that the recovery and resolution plans in
clause 12, which I seek to amend, have an echo of sitting on the
Titanic debating how many lifeboats we have, whether the staff are
trained in putting people into lifeboats and how good the lookouts are,
rather than the fact that the Titanic is a bit too big and should not
be putting to sea at all. Despite the assurances about the level of
domestic and international debates, I am concerned that we could get
into a situation, which has happened before, and it happens to people
in their personal lives and in the body politic, that when the pain
goes away we do not go to the doctor—particularly true of men,
of course—and when things calm down, we collectively take our
eye off the ball, both domestically and internationally. I therefore I
urge the Treasury to keep its eye on the ball, even with things
quietening
down. I
am heartened by the fact that the Minister intimated that the
FSA’s existing powers could lead to a requirement by the FSA for
a financial institution to undertake structural changes, and I take
such changes to include in certain extreme circumstances the breaking
up of that institution. On that basis, and with that reassurance from
the Minister, I beg to ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Clause 12
ordered to stand part of the Bill.
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