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Malcolm Bruce (Gordon) (LD): I welcome my right hon. Friend's approach. Does he acknowledge that it is not just the architecture of the regulation but its quality that has conspicuously failed? It may be understandable that the Labour party wants to defend its creation of the FSA, but do Labour Members not acknowledge that it actually failed? For many people, it too often protected the providers of services and not the consumers who were actually investing in them.
Mr Osborne: My right hon. Friend is absolutely right. The overall objective is to move away from a process of regulation that is simply about ticking boxes to one where more judgment is exercised and people start to ask those such as Sir Fred Goodwin, "What are you doing with your bank? Is it right that you are taking over ABN AMRO?", instead of asking him whether he wants a knighthood.
Chris Leslie (Nottingham East) (Lab/Co-op): Can the Chancellor explain who will be responsible under these reformed arrangements for the regulation of derivatives-financial instruments that are obviously sometimes very opaque and complex and could present a major risk to our financial system? Is it the Bank of England, the FSA or the Treasury?
Mr Osborne: The details of the institutional arrangements will be set out in a parliamentary statement tomorrow. As I said, it is right to allow the institutions involved to conduct their internal procedures, such as speaking to the court of the Bank. I know it is a completely novel idea not to bounce every institution in the country into the decisions the Government take, and actually to allow a proper process to take place, but I happen to believe that that is the right approach. The serious issue of the regulation of derivatives is the subject of intense international debate to try to create a better regulated system-or indeed to provide regulation where none existed-and to provide some central clearing operations for derivatives so that we can avoid some of the systemic risks that built up in recent years.
Nadhim Zahawi (Stratford-on-Avon) (Con): Does the Chancellor agree that the previous Government's idea of regulating our banks was to have a midnight cocktail party, where they twisted the arm of the chairman of Lloyds Banking Group to take over HBOS?
Mr Osborne: Indeed, my hon. Friend is right: certainly, if the accounts are true, that was the approach taken by the former Prime Minister. I am not sure whether he did so with the knowledge of the former Chancellor, but I guess that we have to wait for the flurry of memoirs to find out.
Mary Creagh (Wakefield) (Lab): This weekend, there was an advertisement for a pay-day cheque service that had an interest rate at the bottom of the screen of 236%. Given that the Chancellor is about to make changes to the FSA's consumer protection function, does he think that 236% interest is fair, and if it is not, what will he do about it?
The OFT will shortly publish a report on high-cost credit that will address some of these issues, and the hon. Lady is absolutely right to be concerned about them. One of the things that I hope will flow from the institutional arrangements that we
are putting in place is a stronger voice for the consumer to ensure that particularly the most vulnerable people in our society are protected from exploitation.
Claire Perry (Devizes) (Con): Will the Chancellor assure the House and the country that he will never display the sort of complacency so aptly demonstrated by the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), who said in 2007 that we were entering a golden age of prosperity in the City of London?
Mr Osborne: My hon. Friend is right. I was sitting in the Mansion House when the former Prime Minister, with great prophecy, announced that we were embarking in the summer of 2007 on a new golden age for the City of London. Unfortunately, as with everything else that was golden that the previous Prime Minister touched, that turned to lead.
John Mann (Bassetlaw) (Lab): What systemic risks specifically created the collapse of Lehman Brothers, and how does the Chancellor intend to regulate the top 10 large investment banks and protect the British economy against such collapses?
The risks were pretty clear. No arrangements were in place for winding up a large and complex financial firm. That was one concern. No arrangement was in place that would allow a global firm to avoid dying nationally in the way that it did. It was heavily exposed to, for example, the derivatives markets and other things. That had not been spotted either by the British regulator or, of course, the American regulator, which was in the lead. We need to investigate precisely that kind of issue, not just here in Britain, but across the world. That is being done in the international councils on which we sit. But surely, whether with Lehman Brothers, the Royal Bank of Scotland, HBOS or Northern Rock, we must learn the lesson of what went wrong. Again, I find it breathtaking that, at the beginning of the Parliament, the Labour party has set itself against changing the system of regulation. [Hon. Members: "No we haven't."] Labour Members may say that, but that is exactly what the shadow Chancellor did about 53 minutes ago.
Mr Chuka Umunna (Streatham) (Lab): My understanding is that the credit rating agencies are not subject to any proper UK regulation at the moment and that some action is being taken at EU level in that regard. Does the Chancellor see any place in the new arrangements for UK regulation of the credit rating agencies, which, of course, bear a large responsibility for what happened in the sub-prime crisis?
The hon. Gentleman is right to draw attention to the role of the credit rating agencies. Of course, all sorts of organisations and products received triple A ratings that they should never have received.
That triple A wrapper basically made them immune to investigation by the firms that were buying those products. Certainly, we need to improve the regulation in the domestic sense-here in Britain-but that is also the subject of decision at a European level, and the la Rosière proposals on European supervisory agencies will consider in particular the role and regulation of credit rating agencies.
Sajid Javid (Bromsgrove) (Con): Will my right hon. Friend commit to ensuring far greater scrutiny of EU regulation concerning financial matters than the previous Administration ever did, to make sure that it helps, rather than hinders, our banking system?
Mr Osborne: My hon. Friend makes a very good point that we must get the European regulation right, and the United Kingdom has a particular role as the location of most of the wholesale financial services in Europe. We therefore bring some insights to the table, which not all other members of the European Union can do. I am clear that we must do that. It will be under discussion at the European Council later this week and, I suspect, in pretty much every ECOFIN meeting for the rest of the year.
Given the gravity of the situation in which the last Government have left the finances, does my right hon. Friend the Chancellor agree that it behoves all parties to work together on this? Will he confirm whether he has received any positive contributions from Opposition Members, or whether, as it appears to Conservative Back Benchers, they are now reclined into abject criticism?
Mr Osborne: Well, it was a very good maiden intervention by my hon. Friend. I find it strange that the Labour party does not want to engage in this debate. One would have thought that the Labour party was interested in how banks will be regulated, in how we learn from the mistakes and what went wrong, and in the structure of banking in the future, but the shadow Chancellor has set it against that. However, individual Back-Bench Members of the Labour party will probably be more interested in this than their Front Benchers. Of course, by setting up an independent commission and, indeed, by having the debate in the Treasury Committee and on the Floor of the House, those contributions will be heard.
Toby Perkins (Chesterfield) (Lab): The Chancellor says that he is keen to learn the lessons from the economic problems that happened. Is one of those lessons that he was wrong to say that the Government should have let Northern Rock fold?
Mr Osborne: What I said about Northern Rock was that we should have found a way to have a Bank of England-led reconstruction of that firm. The previous Government then introduced legislation in Parliament that would have allowed that to happen in the future. That is exactly how they proposed to handle future bank failures. [ Interruption. ] The shadow Chancellor says that we voted against it. We did not vote against the Banking Act 2009, by which he introduced the procedures for a Bank-led reconstruction. He continues to shake his head. I seem to remember that I went to his office in the autumn of 2008, pledged my support and delivered on that support.
Nicky Morgan (Loughborough) (Con): As someone who worked with the FSA before I was elected and had to plough through many long consultation papers and then try to help business to understand them, may I perhaps suggest to the Chancellor that the people who are working at the FSA are not the right people to be transferred to the Bank of England and that, in fact, we need people who understand the risks and working in the City of London, rather than those who have just read textbooks about that, as many of the people in the FSA appear to be?
Mr Osborne: Of course, it is important that we have the right people doing regulation. The FSA made mistakes, and it has been very candid about them. Lots of institutions made mistakes in the build-up to the crisis-including, of course, the British Government. The people at the FSA have worked incredibly hard in the past couple of years, and I should put on record my tribute to the work that they have done. As for the institutional arrangements that we will put in place, there will be a parliamentary statement tomorrow.
Steve McCabe (Birmingham, Selly Oak) (Lab): Will the changes that the Chancellor envisages have any impact on the bonus culture at the FSA? I understand that it cost us a record £22 million and reached 84% of its staff last year, at the very time when it was calling for curbs on bank bonuses.
Mr Osborne: I remember that at the time I, too, was surprised by the FSA's decision. If the hon. Gentleman will allow me to say this, those questions are best asked once we have made clear what the new institutional arrangements are. Then we can get on to the pay and rations.
Harriett Baldwin (West Worcestershire) (Con): Does the Chancellor agree that it is surprising to hear Opposition Members talk about Northern Rock as a shining example of micro-regulation, when the FSA's own report into Northern Rock said that the ARROW process gave it far too low a ranking and that that such decisions would have been better taken in the home of the lender of last resort?
My hon. Friend makes a very good observation. Let me make a broader observation, if I may. She has enormous experience of the financial services. There are Members on the Opposition Benches with real experience as well, including the hon. Member for Leeds West (Rachel Reeves), who used to work in the Bank of England. I would like that experience to be brought to bear in the process over the next year. We
have decided not to resolve the issues in the Treasury, in the Department for Business, Innovation and Skills and in No. 10 Downing street, as we could have done. We have decided to have an open commission to which all Members can contribute and with which they can all engage. I think that is a better way to make policy.
Barry Gardiner (Brent North) (Lab): Has the Chancellor taken the opportunity to review the Official Report of the Committee stages of the Financial Services and Markets Act 2000 when the FSA was being set up? If so, does he recall that the constant cry from the Conservative Benches in those days was for lighter-touch regulation? Will he take the opportunity to say unequivocally to the City that, as far as his party is concerned, the era of lighter-touch regulation is over?
Mr Osborne: My right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) was clear about the risks of creating the tripartite system when he was the shadow Chancellor who opposed that legislation. When it comes to light-touch regulation, let me quote what the former Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath, said in 2006:
"I will be honest with you, many who advised me, including not a few newspapers, favoured a regulatory crackdown. I believe that we were right not to go down that road".
Guy Opperman (Hexham) (Con): Does the Chancellor agree that the Opposition, who sold the gold so wisely and then bought euros, prophesied a golden age and then brought the economy, like a ship, on to the rocks, are not qualified to give us financial advice and seem to have such a poor memory?
Jacob Rees-Mogg (North East Somerset) (Con): May I declare an interest, as I am regulated by the Financial Services Authority? Does the Chancellor agree that boom and bust is part of the human condition, we will never get away from it, and the best that regulation can do is ameliorate extremes, not stop boom and bust altogether?
Mr Osborne: I am not sure whether the Labour party in opposition will keep its promise to abolish boom and bust, but it proved pretty disastrous in government. All of us welcome the fact that my hon. Friend will no longer be regulated by the FSA, and instead will be regulated by the Whips Office.
Jeremy Lefroy (Stafford) (Con): Despite some high-profile casualties, does my right hon. Friend recognise the importance of building societies and mutuals to the financial services sector? What steps does he propose to take to encourage that sector to increase?
Mr Osborne: My hon. Friend is right that building societies and mutuals have an important role to play in the future. We want to strengthen them and support those who want to create mutuals. We will set out the details of how we will do that in the next few weeks.
The ballot for the election of the Chair will be held in the Division Lobbies from 9 am to 11 am on Tuesday 22 June. Nominations may be submitted in the Lower Table Office from 10 am to 5 pm on the day before the ballot, Monday 21 June.
The ballot for the election of the members of the Committee will be held in the Division Lobbies from 10 am to 12 noon on Tuesday 29 June. Nominations may be submitted in the Lower Table Office from 10 am to 5 pm on the day before the ballot, Monday 28 June.
That this House notes the need for a clear deficit reduction plan, and that such a plan must have at its heart measures to foster growth and create the conditions for a strong business-led recovery; believes Government has a crucial role to play in fostering economic growth and in creating a better-balanced economy; supports strategic decisions to back key sectors such as digital, life sciences, low carbon manufacturing and civil nuclear power; congratulates the previous Government for supporting businesses through the downturn and laying the foundations for the UK to be globally competitive as the country makes the transition to a low carbon economy; expresses serious concern that the Government's decisions risk removing key support for business and industry at a critical moment in the economic cycle; further believes that cutting investment allowances will pull away vital support for manufacturers seeking to invest and grow; further notes that the Government's scaling back of the regional development agencies at a time when recovery is fragile will impact on investment vital for regional economies; and regrets the coalition Government's decision to place a question mark over a number of vital industrial support decisions taken by the previous Government.
Let me make it clear at the beginning of the debate what I said during our initial exchanges at oral questions a couple of weeks ago-deficit reduction is important and I do not say that every decision to reduce expenditure is wrong. The Secretary of State and I both fought the recent election on policies to reduce the deficit. But the Opposition believe that this must be done in a way that supports economic growth, and not in a way that undermines it. It is critical to our future that fiscal consolidation is done in a way that supports rather than undermines growth.
On the timing of deficit reduction, I am still saying what the Secretary of State and I were both saying back at the time of the election, but he is now saying something very different. Just a week before polling day he said that
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