“that might not even be positive”—

without anything like the three-year period of scrutiny and analysis that this policy has enjoyed.

11 Mar 2013 : Column 44

The proposal would, in effect, legislate for two policies at the same time—ring fencing and full separation. We must legislate for the policy that the Vickers commission proposed. If a future Government were to consider that ring fencing was no longer the right solution—which they would be perfectly entitled to do—they should conduct a full analysis of the case for alternative reforms and, in the light of that analysis, introduce new legislation to Parliament.

In addition, the parliamentary commission has proposed that the exercise of the reverse power by the Prudential Regulation Authority should include safeguards, including a Treasury veto, to ensure that the regulator behaves in a non-discriminatory way. The Government agree that there should be such a veto and will table an amendment to provide for a firm-specific power to require separation while the Bill is before the House. In addition, a further safeguard is available for any bank that believes it has been treated unfairly—namely, recourse to the courts.

One very important point that both the Vickers commission and the parliamentary commission agreed is that, in addition to the enhanced capital requirements on ring-fenced banks, there should be a minimum leverage ratio and that it should apply to unweighted assets of 4.06%, rather than the Basel III standard of 3%.

Let me be clear: this Government support the introduction of a minimum leverage ratio. It provides a simpler measure than risk-weighted assets, the calculation of which can be complex and disputed. Furthermore, it has been established empirically that a rise in the leverage ratio often preceded credit booms in this country and overseas.

The question remaining is about the precise level of the leverage ratio. I referred earlier to the British dilemma of how to maintain an internationally competitive financial sector without imposing risks on domestic taxpayers. This is a case in which that dilemma is, to be frank, most acute. When it comes to capital requirements, international agreements have already established that different countries will have different requirements. The European Union capital requirements directive, CRD4, provides for member states to have discretion to go beyond agreed capital requirements.

In the case of the leverage ratio, the 3% Basel III recommendation was for the requirement to be binding only from 2018, and it is not clear yet whether there will be the flexibility in European law to increase it as Vickers and the parliamentary commission recommend. The Vickers commission did not recommend that the higher leverage ratio should apply before 2019, in order, for reasons that I think we all understand, to minimise the impact on lending in the short term while the economy is still recovering.

Furthermore, during our repeated consultations, concerns have been raised by institutions such as building societies that they could be caught by a 4% leverage ratio despite having a relatively low-risk portfolio of assets, thereby restricting lending to home owners. Moreover, it would lead to assets in Spanish property, for example, being viewed as equal to US Government bonds for the purposes of the calculation. Our view, therefore, is that at this time we should follow the international approach and press for countries to have a power to set a higher ratio from 2018, following a review in 2017.

11 Mar 2013 : Column 45

Having said that, in the interests of transparency, we agree with the recommendation of the Financial Policy Committee that banks should disclose their leverage ratios from 2013. I confirm that they will do so from this year.

John Mann (Bassetlaw) (Lab): Does the Minister perceive there to be a problem for very small building societies, because they are more disadvantaged than large institutions and could be swallowed up, thereby reducing competition in the market rather than increasing it?

Greg Clark: I have taken to heart the need to allow into the market smaller players, whether they be building societies or banks. I will say something about that shortly which I hope will satisfy the hon. Gentleman.

Mr McFadden: I suggest to the Minister that he has just ducked the British dilemma that he set out at the beginning of his speech by saying on the one hand that we have a huge financial services sector, but on the other hand that we are going to go at the speed of the slowest ship out of Basel on the capital and leverage rules. Is not the proper response to having a huge financial services sector relative to our economy to ensure that we have adequate rules to protect the UK taxpayer, rather than always going for the lowest common denominator internationally on such standards?

Greg Clark: I think that the right hon. Gentleman would concede that what Vickers recommended will advantage us and protect the British taxpayer in a number of respects, including through ring-fencing and higher capital requirements. We are already doing those things. He will know that Vickers did not recommend an early increase in the leverage ratio. I have been candid with the House that we would like to see one. However, in line with what Vickers advised and given the discussions that are taking place in other jurisdictions, we think that it is right to have the consideration in 2017, with a view to introducing the higher leverage ratio later.

Mr Love: The Minister said earlier that capital requirements and the leverage ratio were protections for the UK banking sector. However, capital is based on risk-weighted assets, which, as he has accepted, are controversial and, to many people’s minds, do not provide the level of protection that is required. It therefore becomes acutely important that the leverage ratio provides that protection. As has been said, given the size of the UK banking industry, it is critical to prioritise safety and soundness. Those things will be delivered by a higher leverage ratio.

Greg Clark: I do not disagree with the hon. Gentleman’s analysis. A higher leverage ratio is important. However, we have reflected the view of the Vickers commission that a higher leverage ratio is not necessarily required immediately. It is our intention to bring it in following the review in 2017. That is a reasonable time frame. I repeat that it is our intention that there should be a backstop ratio.

The final major difference between the Bill and what was recommended by the parliamentary commission is that it does not include proposals on how creditors,

11 Mar 2013 : Column 46

rather than taxpayers, will be expected to bear the costs in the event of a bank failure. We are working with other European countries to develop a credible and effective bail-in tool as part of the European recovery and resolution directive, reflecting the recommendations of the global Financial Stability Board.

The Irish presidency of the EU has set out plans to make rapid progress towards concluding the recovery and resolution directive. The RRD is due to come into force in 2015 and the bail-in tool by 2018. Given that progress, we have not included clauses on the matter in the Bill, but if agreement cannot be reached, which we do not expect to happen, we will consider tabling amendments later in the Bill’s passage to allow the UK to act alone.

Andrea Leadsom (South Northamptonshire) (Con): Does my right hon. Friend agree with me and Andy Haldane that bank account number portability could make a positive contribution to the prospects of easy resolution in the event of a future bank failure?

Greg Clark: My hon. Friend is a passionate advocate of that, and I think that what I will say about it will please her. I hope that she will be able to contribute to the debates on it in the weeks ahead.

The Government intend to go further on the matter of competition than was suggested in the reports of the two commissions. I strongly believe that the concentrated nature of the UK banking industry is unacceptable. I want to see far greater possibility, and indeed reality, of entry into the market by new banks and building societies. One of the barriers to that has been access to the UK payments system. Potential challengers have to win the permission of incumbents to be able to use the system. The Government will therefore shortly consult on a proposal to make access to the payments system regulated, to ensure that it is available on fair, reasonable and non-discriminatory terms. Subject to the findings of the consultation, the Government will consider tabling amendments to the Bill to give the regulator the necessary powers. I think that would address my hon. Friend’s ambitions.

John Mann: I welcome the Minister’s comments. Will he also table an amendment to recreate the Halifax building society out of the state-owned Lloyds-TSB bank? That would immediately create a major competitor on the high street that would be hugely popular, as it was before it was bought out.

Greg Clark: We want to see greater competition and more entrants. The hon. Gentleman will know that in the case of the banks in which we were in the unfortunate position of having to take a shareholding, the arrangements that govern that shareholding require us to operate at arm’s length of the interests of other shareholders. No doubt he will be able to make his points throughout the passage of the Bill.

John Mann: This is a Bill, and it can become an Act, so the Minister could table a Government amendment to do precisely what I said. Why is he not taking the opportunity to recreate the Halifax building society, which hundreds of thousands—perhaps millions—of consumers across the country would greatly welcome?

11 Mar 2013 : Column 47

Greg Clark: All I would say is that that is not one of the Government’s proposals. We operate at arm’s length, but if the hon. Gentleman is a member of the Bill Committee he will be able to table such an amendment, and I am sure it will be vigorously debated.

I hope that in years to come the Bill will be viewed as a landmark piece of legislation in the history of our economy. I readily concede that a Bill entitled the Financial Services (Banking Reform) Bill does not set the heart racing, but important legislation can have a profound effect on our economy and come to represent a particular approach. That is shown by our familiarity even today with an American Act, the Glass-Steagall Act, the common name for the US Banking Act of 1933. I am modest and realistic enough to hold out no hope or expectation that this Bill will be referred to in 80 years’ time as the Clark-Javid Act, but if the House’s scrutiny is as thorough and constructive as I hope, the names of Vickers and, dare I say, Tyrie might find a place in the history books. The hon. Member for Nottingham East and even myself might get a footnote.

The real test of the Bill is for it to establish once and for all the conditions in which the British banking system can be a global success story for decades to come while contributing to, not detracting from, the prosperity of the British people. I commend the Bill to the House.

4.43 pm

Chris Leslie (Nottingham East) (Lab/Co-op): I am sorry that the Chancellor has not been able to join us for the debate. The Bill may be called the Clark-Javid Act, but it will certainly not be called the Osborne Act given his disappearance.

As the Financial Secretary said, the global financial crisis has cast a long shadow. Our recovery to pre-crisis levels of economic output has still not been achieved because of the drag anchor of the Chancellor’s austerity programme. The high-risk, high-reward culture of worldwide banking systems required a taxpayer bail-out; profits were retained privately in the good times, but losses fell on the shoulders of the public when things turned bad. We cannot allow a repetition of those risks to the taxpayer in future, which is why banks must be reformed in the UK, across the EU and across the globe.

The Bill has its roots in the 2009 G20 Pittsburgh summit when world leaders decided to insist on tougher loss-absorbing capital rules for banks. Britain’s financial services sector is larger than most, and with the greatest financial centre on the planet in the City of London we must take additional steps to guard against the risk of future collapse. The Financial Services Act 2012 sought to address regulatory shortcomings, but the jury is out on whether the Bank of England will be inherently stronger than the Financial Services Authority.

The advent of the FSA in 1998 was a step forward from the dark ages of self-regulation, but that regulatory framework was not capable of policing the extreme risks and dangers of a rapidly expanding global banking sector, interdependent from country to country. We agree with the need to introduce prudential regulation and greater systemic oversight, but that theory has not yet been translated into reality. Although there were regulatory shortcomings, we should be in no doubt that primary culpability rests with the banks, which should not be allowed to get away without reform.

11 Mar 2013 : Column 48

The Vickers Banking Commission concluded that structural firewalls are needed to supplement capital safety buffers, which is undoubtedly true. With this Bill some of the legislative underpinnings for those firewalls will gradually take shape, and to the extent that it enables the ring-fencing of retail from investment banking, we welcome that. However, the Bill merely provides the scaffolding for the basic building blocks that will come at a later date, largely in secondary legislation by Treasury order. It focuses only on structural scaffolding, not on wholesale reform of the standard and culture of the banking sector—something we hope that the cross-party Parliamentary Commission on Banking Standards will help focus on to help fortify the Bill in due course. As the Banking Commission points out, it is perhaps not the beginning of the end of banking reform, but the end of the beginning.

The timing and process for consideration of the Bill, and the programme motion before the House, propose a ridiculously compressed Commons scrutiny process and for the Bill to be out of Committee by 18 April. As I said earlier, that shows total disregard for the parliamentary process and flies in the face of the Banking Commission’s careful recommendations. The Bill is already a cursory framework because it is largely a string of enabling powers for the Treasury to arrange for ring-fencing through secondary legislation. The Government established the Parliamentary Commission on Banking Standards to ensure that recommendations could be added to the Bill. So far, however, we have had only part 1 of that commission’s points about structural questions.

The Government now expect the Commons to consider this partial Bill in Committee without having the final report on standards and culture from the parliamentary commission. That is treating the Commons as though this is merely a tick-box exercise and a part of the process that does not matter, and there is no need to scrutinise the final proposals. Dropping in late additions to the Bill on Report or—more likely—during consideration in the Lords, is not an appropriate way to legislate. As I said, the parliamentary commission recommended a three-month gap between publication of the Bill and commencement of the Committee stage, but the Government rejected that idea.

Mr McFadden: My hon. Friend said, I think, that the timetable was inappropriate. Does he agree that it may also be unwise, given that if the amendments are moved in the other place, the first three speakers in that debate are likely to be the former Conservative Chancellor, the former Chair of the Treasury Committee, and the Archbishop of Canterbury?

Chris Leslie: Recently I have been looking at a number of Thatcher quotes, given that the Prime Minister mentioned TINA—there is no alternative—which hon. Members will remember. Another famous quote from Lady Thatcher was, “Always leave yourself a way out”, and I wonder whether the emollient approach taken by the Financial Secretary is because he realises that when there is inadequate scrutiny in this House, the questions go to the other place and it is likely that the Government will have to back down on some of these matters. Perhaps he is listening to the advice of Baroness Thatcher on some of these issues.

11 Mar 2013 : Column 49

It is not adequate to expect, as the Minister suggested, that we will be able to scrutinise the Bill sufficiently on the Floor of the House on Report. As he knows, with the knives that come into effect during various considerations on Report, one often finds that amendments are put without a full debate. It is a different process from the Commons Committee stage. The programme motion should reflect the right of the Commons to scrutinise the full version of the Bill, and that is not the version we have before the House today. If the Government were serious about this issue, the Chancellor would be here. Clearly, our downgraded Chancellor has downgraded the banking reform Bill.

Andrea Leadsom: The hon. Gentleman has mentioned a few times that the Chancellor is not here. Does he regret that his former boss, the ex-Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), is not here to make a sincere apology to the House for his role in the mess that put us in the place we are in today?

Chris Leslie: I presume that is almost an apology for the anti-regulatory approaches historically taken by the Conservative party. I do not seem to recall Conservative Members ever saying, “Please, more regulation! Let us have it now. This is insufficient; we must regulate far more firmly.” It does not seem that that was ever part of the lexicon in the approach taken by Conservative Members.

Alun Cairns (Vale of Glamorgan) (Con): In the hon. Gentleman’s preamble, he talked about the shifting of powers to the FSA, and I was somewhat taken aback that he called it a step forward. Would he like to repeat the fact that he supported that as a step forward, or would he like to apologise for that move?

Chris Leslie: The Conservative party, I think, voted in favour of the creation of the FSA. I think even the Conservative party recognised at the time that moving from self-regulation—[Interruption.] I apologise if I have got that wrong. It may well have been that it opposed the legislation because it introduced statutory regulation. The state of affairs that existed before was self-regulation—the regulatory environment was not there.

Sir Peter Tapsell (Louth and Horncastle) (Con): In the 1997 debate, I strongly opposed the establishment of the FSA, with its tripartite regulatory structure. I predicted it would be an absolute disaster, and it has been.

Chris Leslie: Without in any way casting aspersions on the motives of the Father of the House in voting against setting up the FSA, I wonder whether he voted against it because its regulatory stance was too weak, or whether he was anxious at the time that its regulatory approach would be overbearing. I suspect that Conservative Members know, in their heart of hearts. Were they really opposing the creation of the FSA because they thought that the strength of the regulatory arrangement would not be sufficient? Is that what they are really saying?

Sir Peter Tapsell: I opposed it, if I remember correctly, because I said that if the Treasury, the Bank of England and the FSA were all involved in regulation, they would

11 Mar 2013 : Column 50

all be quarrelling with each other and passing responsibility on to the other two when things went wrong. Those, I think, were almost the exact words I used, and that is exactly what happened.

Chris Leslie: Hindsight is a wonderful thing. All I say to the Father of the House is that we are now in a situation where we have a new Financial Conduct Authority, the Prudential Regulation Authority, the Financial Policy Committee and the Monetary Policy Committee. The Bank of England is of course still involved, and the Chancellor of the Exchequer will still have a number of powers. He may not have realised it, but the Government’s changes have not exactly simplified the regulatory environment. I digress. That was the Financial Services Act 2012, but we are addressing the Financial Services (Banking Reform) Bill in 2013.

Greg Clark: When I took over my role, I read the Hansard report of the November 1997 debate. I commend it to the hon. Gentleman because it makes it absolutely clear that we opposed the creation of the FSA in the form proposed because we predicted it would be a mess. The then shadow Chancellor, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), said:

“The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”—[Official Report, 11 November 1997; Vol. 300, c. 732.]

That is exactly what happened.

Chris Leslie: Conservatives have a tendency to try and rewrite history, but this really takes the biscuit. If the Minister is seriously saying that he would have preferred to have stayed with a non-statutory regulatory arrangement, which was the option available, he should stand up and admit it. He often asks where the apologies are, but we have accepted that we should have adopted a more prudential approach to regulation than the arrangements in the Financial Services and Markets Act 2000. It is now equally important, however, that Conservative Members recognise that regulation is a good thing, that we need regulation of the financial services sector and that they were wrong to prefer a self-regulatory, non-statutory environment. Until they do that, they will never really confront the demons that still exist within the Conservative party’s philosophy.

Mark Reckless (Rochester and Strood) (Con): Surely, the argument is not about whether regulation is good or bad, but that the tripartite regulation was completely incoherent and led to a mess in the banking sector and the consequent recession that we are all paying for now.

Chris Leslie: I do not know whether the hon. Gentleman is telling the full story of what he truly believes about regulation. To listen to Conservative Members today one would think they were all keen market regulators. Perhaps the Conservative party has transformed—the Cameronian vision we have all been waiting for—but, as I understand it, it still regrets the regulatory encroachment on to the market in these matters.

Andrea Leadsom: Does the hon. Gentleman recall that back in 1995, when Barings went bust, there was not a run on a bank? I remember playing a very small part helping Eddie George, the then Governor, to call round international banks urging them not to allow a

11 Mar 2013 : Column 51

run on the banks in the following weeks. The reason was that he understood that he was entirely accountable for ensuring the integrity of the banking system. Is that not the point? When Labour came into power and created the tripartite system, it simply removed accountability from any one body. We are trying to return it to the Bank of England.

Chris Leslie: We will see what happens under the new Financial Conduct Authority, the Prudential Regulation Authority, the Bank of the England and the Chancellor. It is important that Conservative Members realise that self-regulation failed and that not having that statutory arrangement was no great thing. Eddie George was the Governor who said, “Let’s just trust the chaps at the desks to deal with these issues.” That was how banking reform was regarded during their tenure in office. But this is turning into a history lesson.

Stewart Hosie rose

Chris Leslie: Speaking of history.

Stewart Hosie: Ten minutes ago, before the hon. Gentleman got dragged into a debate about how rubbish the tripartite system was—and it was—he was making a good point about the lack of time for scrutiny of the Bill. Not least, issues such as the one referred to some time ago—capital requirements for small building societies—took some time to emerge. Will he perhaps get away from the history of how rubbish the tripartite system was and continue to make the case for more time for proper scrutiny, so that those in the industry can tell us what they think of the final shape of the Bill?

Chris Leslie: For once, I am grateful to the hon. Gentleman for wanting to focus on the issues; it is important that we have enough time to look at the detail. It is also important to commend the work of the banking standards commission, which has done a phenomenal job so far. I will find today’s report of great use in the short Committee stage, because at least it has taken the rather helpful step of drafting suggested amendments that no doubt the Minister, I and others will be discussing in due course.

The banks have not changed sufficiently. The LIBOR scandal shifted the agenda away from the discussion about excessive risk taking in the financial services sector so that we are now talking almost about anti-corruption measures that need to be put in place. We have had the mis-selling of personal protection insurance and the fleecing of business customers with mis-sold hedging interest rate swap products, while the high-reward bonus season continues to roll on and on, with £600 million of bonuses at RBS sanctioned by the Government, despite a £5 billion loss, to take just one example, so why are they dragging their feet on reform?

Alison McGovern: Conservative Members point to times in history when things changed in banking. While my hon. Friend is talking about culture, is it not important to listen to those who were there at the time, such as the former Chancellor, Lord Lawson? He said of financial deregulation:

11 Mar 2013 : Column 52

“When the Thatcher Government first took office in 1979 it inherited an economy beset by all manner of government controls…We judge these…regulations to be amongst the causes of Britain’s economic weakness and we wished to be rid of them.”

Does this story not go back much further? If we want to look at points in history, we might do well to look at the big bang, which changed the culture.

Chris Leslie: My hon. Friend is entirely right. Ducks go quack, cows go moo and Conservatives hate regulation of the market. It is part of their ingrained DNA.

Stephen Barclay (North East Cambridgeshire) (Con): Will the hon. Gentleman give way?

Chris Leslie: I will make a bit of progress and give way in a minute.

There is not enough in the proposed legislation on the safety of the banking system, not enough to rebuild consumer confidence, not enough to reform the high-risk banking culture and not enough to support growth and create a banking system that serves the needs of our economy. Too often, Ministers sound as though they are acting like shop stewards for banking executives desperate to retain bonuses that are many multiples of their salaries. Instead, Ministers should roll up their sleeves and put the taxpayer, the consumer and the UK economy first.

I want to address some of the issues the Minister raised about the detail of the Bill. First, on banking safety and protections for the taxpayer, Labour believes that a reserve power for full separation is needed, not just the firm-by-firm approach that the Government have conceded. Stopping short on backstop powers will reduce the chances that ring-fencing will succeed. Ministers are ignoring the commission’s conclusions, claiming that it would be wrong to give the regulators full separation powers, but the commission is scathing in its report today, saying:

“The Government has erected a straw man which it has then successfully demolished, because we made no such recommendation”

in the first place.

It is clear that the commission wants a full separation power only after a full review and decision by Government and Parliament—perhaps it was being inadvertently misrepresented by the Treasury—so it would be far more sensible to legislate now, not just if one or two individual banks misbehave, but in case ring-fencing as a whole fails across the sector. Indeed, we see cross-sector failings, as LIBOR illustrates, so it is not enough to have a half-done backstop. Stopping short will deliver only half the backstop measures that we need and will have corporate lawyers across the City rubbing their hands with glee at the prospect of litigation against regulators who might want to intervene on a case-by-case basis. However, given the possible views of the other place, I suspect that the Government will eventually be forced to change their mind.

Let me turn to leverage and the risk-weighting of assets, which has been introduced as an antidote by regulators to the high-risk, high-reward culture that was pervasive in banks before the crisis. However, the risk-weighting process has been partial and, in some cases, self-defining by the banks, and in the EU the zero risk-weighting attributed to some palpably risky sovereign debts has brought the system into some disrepute. The

11 Mar 2013 : Column 53

Basel committee published new evidence in January highlighting the major variants between jurisdictions and banks on this issue. Regulators and the Bank of England need to get a grip of this, but as a counter-balance we also need protections against the over-extended vulnerability of bank balance sheets. That is why the leverage ratio powers need to be clearly set out in the Bill and phased in ahead of the European Union plans for the end of this decade, which is one of the main recommendations and conclusions of the Vickers report.

Mr Love: Vickers was absolutely clear in his evidence to the commission about the need for a higher leverage ratio, as were the current Governor of the Bank of England and the forthcoming Governor. With such evidence presented to the commission, we wonder why the Government simply refuse to listen.

Chris Leslie: My hon. Friend is spot on. A bank’s leverage is the ratio of its assets to its equity capital. Its equity is equal to the value of its assets minus the value of its liabilities. A higher leverage ratio magnifies returns because any growth in the assets will be proportionally greater if equity is thin. The corollary, however, is that any losses are also magnified if leverage is greater. Such a bank’s equity can be wiped out by a smaller shock than would wipe out the equity of a less leveraged institution.

Vickers recommended a 25:1 leverage ratio for systemically important banks—in other words, 4% of equity capital—but the Chancellor has dismissed that proposal. The parliamentary commission says that it is “not convinced” by the Government’s decision to reject Vickers’ recommendation to limit leverage in that way, and that it

“considers it essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3% minimum required under Basel III.”

Jesse Norman (Hereford and South Herefordshire) (Con): Will the hon. Gentleman explain why the average leverage ratio for the banking system, which had been 20 times for the 40 years before 2000, went up to 50 times in the seven years between 2000 and 2007, according to the Independent Commission on Banking? Might that have had something to do with the present shadow Chancellor being the Minister for the City at the time?

Chris Leslie: No. With hindsight it is clear that we need a tough leverage ratio, and I think the hon. Gentleman’s question implies that he accepts that leverage is an important part of the regulatory toolkit. That is why it is wrong that the Bill ignores the recommendations of Vickers, in particular, but I am afraid that the Chancellor seems to have dismissed the recommendations of not only Vickers but the parliamentary commission on this issue. It is not good enough that the Government are leaving this matter out of the Bill, perhaps assuming that the European Union will somehow address it in the next eight or nine years.

Even the incoming Governor of the Bank of England, Mark Carney, pointed to the value of a higher leverage ratio as a backstop for a risk-based capital regime when he gave evidence to the Treasury Select Committee. There are ways of overcoming the impact of such a

11 Mar 2013 : Column 54

measure on a minority of non-plc institutions—I know that some of the bigger building societies, in particular, have expressed their concerns about a crude leverage ratio approach—but that is not a reason not to put a safeguard in place. At the very least, the Government ought to accept the parliamentary commission’s proposal for an annual assessment to be carried out by the Bank of England of the progress of the work to improve risk weightings and the work towards the leverage ratio.

Jesse Norman: Let me put the question to the hon. Gentleman in another way. Does he regard it as slightly ironic that he is now pushing for a leverage ratio that is roughly half the ratio that the Labour Government allowed to occur five years ago?

Chris Leslie: We have to learn the lessons of that global financial crisis, one of which is that leverage has come to the fore as a way of illustrating the over-extended nature of the banking system. I am glad that consensus is breaking out across the Chamber on this point. As the hon. Gentleman knows, he and I have almost been in concert in voting on a variety of amendments, some of which have been inspired by his very own articles. I therefore look forward to him joining us in the Division Lobby—if it comes to that—on the question of the leverage ratio.

John Mann: Before too much consensus breaks out, may I ask my hon. Friend to say a little more about how he envisages the problem of small building societies being addressed? They are saying unambiguously—although privately, of course, for commercial reasons—that their future is imperilled. Is a one-size-fits-all approach the right one? Is that the approach that my hon. Friend would take if he were in power?

Chris Leslie: Of course there are ways of ensuring that the building society sector can be accommodated in the leverage ratio framework. Building societies have a totally different equity structure, as my hon. Friend knows; they do not have the same equity as a plc structure. There are therefore important differences in that sector. In my view, however, it is important that all institutions, large and small, should be subject to safety requirements regarding capital loss absorbency and protection against over-extension in certain risk areas. There are ways and means of dealing with that, but I am annoyed that the Government have not seen fit to put any provisions on the leverage ratio in the Bill.

Neil Carmichael (Stroud) (Con): Does that attitude not call into question the future of the Co-operative bank? What would the shadow Minister say about that?

Chris Leslie: I do not want any of our banks to be in a position of over-extending themselves, putting at risk either their customers or the taxpayer. It is very simple. We need to listen to the carefully thought through advice of the banking standards commission, the Vickers report and others, including the incoming Governor of the Bank of England, on these particular issues. The Government may call it the British dilemma, but it is astonishing that they always seem to be asking the European Union to come to their rescue at some point

11 Mar 2013 : Column 55

with some reform to deal with bail-in or whatever other problems happen to be around later on down the track. That is not adequate.

Let me deal with the issue of derivatives inside the ring fence, as I know that the parliamentary commission has been concerned about it. The Vickers report said that derivatives trading should not be allowed—full stop. The parliamentary commission recognised, however, that there were services on the margins where some simple derivative products might be permitted, but it added that

“allowing ring-fenced banks to sell derivatives other than as an agent creates additional prudential and conduct risks.”

I agree with the commission on that issue. We need clearer protections to prevent abuses within the ring-fenced retail banks where derivatives are sold. That was illustrated, of course, by the mis-selling of some interest rate hedging products to small and medium-sized enterprises. The danger is one of information asymmetry between customer and vendor and the fact that the trade became exceptionally lucrative for the banks. We have to move away from this era of the exploitation of the customer’s lack of knowledge, and the commission was clear about that in the three tests it set.

We have seen one of the drafts of the secondary orders, subsequent to the commission’s recommendations. It is therefore worth comparing that order with the tests that the commission has set. The commission said that there should be adequate safeguards against mis-selling, but as far as I can see, the draft order does not go into any detail about how the Prudential Regulation Authority or the Financial Conduct Authority will enforce anything new. The commission said that there should be a clear definition of simple derivatives, which will be allowed, versus complex derivatives, which will be disallowed, but the draft order seems to define simple derivatives quite widely—in other words, as instruments designed to tackle interest rate risk, exchange rate risk, default risk, liquidity risk or for dealing in assets included in the liquid assets buffer. It would be easier if the Minister set out what would not be allowed rather than what would be allowed in the ring fence.

The third test relates to limits on the proportion of a bank’s balance sheet. The commission thought that was necessary, but the draft order so far leaves out what that percentage should be. There is a space left for a figure before the percentage sign, so perhaps the Minister can give us a sense of what that proportion of the bank’s balance sheet should be. That was one of the commission’s tests, as I said, so we need to secure assurances from the Minister about the Government’s intentions. As Martin Taylor said in his evidence to the commission:

“I can’t see the point of having a fence round the chicken coop, electrifying it to keep the foxes out, and then inviting a family of tame foxes to live inside it.”

That sums up the problem quite neatly. I have already alluded to the bail-in powers. Again, it is disappointing that the Government are relying on future European directives as the means to achieve bail-in rather than building it into the Bill before us. I do not think that the frequent excuse of “We’re waiting for the European Union” will do any longer.

We need also to focus on some of the other issues that should be in the Bill today, particularly rebuilding consumer choice, financial inclusion and a diverse market. The

11 Mar 2013 : Column 56

Bill is silent on all those areas. There is nothing about challenger or new entrant banks; nothing to ensure a universal obligation on banks for basic bank account services. There is also pussyfooting around on switching of bank accounts, about which I know some Government Members are concerned. There is nothing on mutuality, despite the pledge in the coalition agreement to

“foster diversity in financial services, promote mutuals and create a more competitive banking industry”;

and nothing about a fiduciary duty of care for clients and customers. We will table amendments to ensure that high street lenders offer a basic bank account, which is particularly necessary because of the onset of the universal credit. We want a report within six months addressing obstacles to new-entrant challenger banks and current account provision. We also want Parliament to have an opportunity, soon after Royal Assent, to examine the adequacy of customer switching arrangements, and we want the publication of bank data on “lending deserts”, the postcode areas where—as we are finding in our constituencies—some small and medium-sized enterprises and customers find it difficult to gain access to credit. Other tests need to be included in the Bill to fulfil the coalition’s mutuality pledge. We also want a duty to be imposed on directors of ring-fenced banks to operate prudently and to safeguard deposits, and we want them to have a fiduciary duty of care to customers throughout the financial services.

Andrew Bridgen (North West Leicestershire) (Con): The hon. Gentleman has rightly described consumer choice as the main driver of any market. Does he believe that encouraging Lloyds Banking Group to buy HBOS, or intimidating it into doing so, increased or decreased consumer choice in this country?

Chris Leslie: The hon. Gentleman may not have noticed it, but there was a bit of a financial storm going on in the financial services sector at the time. He may think that his constituents who had deposits in Lloyds would have been better off had the bank not been saved in the way that it was, but I do not think that they would have enjoyed the experience of turning up at the cash machines and not being able to get their money out. I think that rescuing the banks was a necessary step at the time, but now we must learn from that crisis, which occurred not just in the United Kingdom but in the United States and throughout the developed world. If Government Members think that they can get away with rewriting history, and that the former Prime Minister uniquely got on a plane, caused the collapse of Lehman Brothers, and then went off to Greece and Spain, they must be living on a different planet.

Andrew Bridgen: Does the hon. Gentleman not remember that Lloyds Banking Group needed to be bailed out only because it was intimidated into taking over HBOS by the last Government?

Chris Leslie: I disagree. I think that there was a high-risk, high-return culture in the banking sector—we saw it in the United States, and we saw it here—which Government Members fuelled through their deregulatory philosophical approach.

Alun Cairns: Will the hon. Gentleman give way?

11 Mar 2013 : Column 57

Chris Leslie: Not at the moment.

We need improvements in the standards and the culture of our banking sector, and Ministers ought to have allowed enough time for them to be discussed in Committee. We will table amendments providing for the establishment of a professional standards body to enhance the approved-persons process. There needs to be a clearer complaints procedure, and a stronger facility for failing banks to be struck off. We need clarity in regard to the professional qualifications and competences that are expected, especially in the wholesale sector, and a code of conduct that is monitored and enforced effectively and applies not just to significant influences in the banking sector but to all bank employees. We need safeguards to secure the independence of board directors overseeing ring-fenced banking activities. The commission has very reasonably recommended a “sibling” rather than a “parent-child” corporate ownership structure.

Jesse Norman: I am trying to follow the hon. Gentleman’s argument, but it has become fatuous. The fact is that the banking system had a leverage ratio of 20 times in 2000, as it had had on 40 previous occasions. Deregulation under the last Government but one had nothing to do with this financial crisis, which was caused by an increase in leverage—an explosion of leverage—under the Labour Government between 2000 and 2007. It is in the Vickers report.

Chris Leslie: If the hon. Gentleman’s analysis is correct, he will no doubt join us in the Division Lobby to institute the recommendations on leverage from the parliamentary commission. Is that his intention? Will he join us in supporting our amendments? I will give way to him if he wishes to answer that question, but I do not think he does. That is a shame, because I know that he feels strongly about these matters, but I can detect the gagging influence of the Treasury Whip as he texts the message “Be careful: Jesse Norman is on his feet again.” Forgive me, Mr Deputy Speaker, I meant to say the hon. Gentleman. The alert has gone out that rebellion is in the air.

We need more protections to deal with standards and culture, and we need to make sure that whistleblowers in the banking sector are given protection. We also need to set up a financial crime unit within the Serious Fraud Office, using some of the resources that are flowing from the fines. We probably also need to deal with the statute of limitations issue, going beyond the three years to give the regulators additional powers.

Stephen Barclay rose

Chris Leslie: I think I ought to make some progress, and I want to talk about the need for the banking system also to enhance our economic prospects, support enterprise and growth, and maintain the supply of credit to the economy. Those are some of the issues that our constituents are concerned about for the future. Nothing in the Bill looks forward at the challenges facing business or the economy more broadly. So we want to see urgent action—ideally in the Budget, but if not in this Bill—that improves the operation of the funding for lending scheme to ensure that lending to small business is prioritised. We called for that last summer when the scheme began, but since then net

11 Mar 2013 : Column 58

lending to business has fallen further and further still. It is very important that we take this moment to improve and adapt the funding for lending scheme in this way. We must recognise that we have had the failure of Project Merlin and we have had credit easing, which was given eight months to do the job. So funding for lending is the third scheme that the Chancellor has tried and we have to make sure that it is changed in a way that makes these things work.

Even if the Government eventually create a fully-formed Bill, we need regular parliamentary oversight of how ring-fencing and the new structures are working. As the Parliamentary Commission on Banking Standards says today:

“The Government’s proposal for the periodic review to be conducted by the regulator is wholly inadequate.”

We also need to have more than the one-and-a-half-hour, rubber-stamping Committees to scrutinise the detailed secondary legislation, which is why we advocate a super-affirmative order-making process to give time for the Treasury Committee and others to examine the technical detail of the changes in respect of the clauses and the orders that flow from them.

We want a Bill that makes banking safe and protects the taxpayer, but this one falls short in several areas. We want a Bill that improves banking standards, enhancing probity and conduct, and reforming the culture of banking, but this Bill contains none of those changes yet. We want a Bill that helps to rebuild consumer trust and choice, supporting more competition, new entrants, mutuality and consumer switching. We want a Bill that creates a banking system that supports jobs and growth, and maintains the supply of credit to the economy. The Opposition will not oppose the Bill on Second Reading today, because reforms are clearly needed, but too many important policy changes are still conspicuous by their absence. After such a big global crisis, and so many scandals and inquiries, the Government have no excuses and they need rapidly to populate this shell of a Bill with some real substance.

Several hon. Members rose

Mr Deputy Speaker (Mr Lindsay Hoyle): Order. I remind Members that there is a 12-minute limit.

5.22 pm

Mr Andrew Tyrie (Chichester) (Con): Last July, immediately after its creation, the Parliamentary Commission on Banking Standards was asked by the House to undertake pre-legislative scrutiny of this Bill. In other words, in addition to fulfilling its terms of reference it was asked to examine the Government’s proposals for the implementation of large parts of the Vickers review. We have worked very hard to do what the House has asked of us, and I particularly wish to thank all my colleagues on the commission; all the commoners are in the Chamber today and although I cannot see any of the five peers up in the Gallery, their work has been not inconsiderable—as has been pointed out, they are a formidable bunch. I also wish to thank the Treasury Committee, which has continued to participate in aspects of this debate in our inquiries and the vast majority of whose members—nine, I believe—are also in the Chamber.

11 Mar 2013 : Column 59

The first report from the Parliamentary Commission on Banking Standards, published in December, welcomed the Government’s decision to implement the Vickers ring fence, but we also argued that the ring fence had to be made much more robust if it was to have a good chance of enduring. We suggested that the level of innovation in financial services, the lobbying power of the banks, and the short memories of regulators and politicians all pointed to the need to reinforce the ring fence. That is why the commission recommended that the ring fence be supported by a reserve power, subject to final Treasury approval, to enable the regulator to impose full separation on a bank that attempted to game the ring fence. The Government have now accepted the merits of that recommendation and the Bill will be amended to provide for the reserve power, which is very welcome news.

In their response to our report, however, the Government did not accept a number of other proposals, so we produced a second report. It was published today and it seeks to do three simple things. First, for the convenience of the House, especially those Members who will serve on the Committee, it provides draft amendments to support all our proposals that might need statutory backing. As far as I know, that is an innovation for a Select Committee or Joint Committee and I hope that it will be of some use and perhaps set a precedent for how such Committees operate. The amendments have been prepared with the help of a former senior parliamentary counsel.

Secondly, an annex juxtaposes our recommendations against the Government’s response to enable the House to see clearly what has been accepted and what has been rejected.

Thirdly, the report examines the arguments made by the Government for rejecting a number of our recommendations. We were able do that on the basis of further evidence gathered from, among others, Sir John Vickers, the Governor of the Bank of England, the deputy governors and the chief executives and chairmen of most of the major banks. We have concluded that much more work is needed to improve the Bill and I shall linger briefly on only two areas. Much of what needs to be said is in the report and I hope that colleagues will find time to read it.

The first area is leverage. The parliamentary commission has not heard a convincing argument for blocking, as the Government seem determined to, the Financial Policy Committee of the Bank of England from setting the leverage ratio. We have concluded that the ratio is likely to be too low—that is, that banks are likely to remain overleveraged—but we also think that that judgment should rest with the financial stability regulator, the Financial Policy Committee, and not with the Chancellor. We argue that the regulator will want to consider long transitional arrangements, particularly for building societies—the Minister mentioned his concerns about this—as some problems particularly apply to those with large mortgage books. In our first report, paragraph 295 and the paragraphs preceding it go into the issue in some detail.

We also argue that the Bank of England should provide an annual assessment to Parliament on risk-weighting. It is clear to anybody who has considered the

11 Mar 2013 : Column 60

composition of risk-weightings and how they are derived, including the fact that they are based on modelling by the banks themselves, that to rely on risk-weighting alone would be a perilous task. It is vital that that should be supported by a robust leverage ratio, as risk-weightings are not a good measure, on their own, of overall balance sheet risk.

The Government have rejected all those suggestions and, frankly, I find it surprising that they cling to the line, which we heard again today, that we should wait for Basel—that is, that we should wait for other countries to decide. As many witnesses have said, it is for us to sort out what is best for Britain. We need to work out what is right for our industry, rather than waiting for a lowest common denominator decision from the Basel group. I was a little disappointed to hear more in that tone from the Government today.

From time to time, the Government even remind us, as they did today, that the transfer of the power to the Financial Policy Committee, if and when it happens in 2018, should occur only after it has been reviewed. In other words, it is possible that the Government might conclude that it should not be transferred at all. I think that would be a grave mistake. Getting leverage right is crucial to the future of the banking industry. With twin peaks in place and the financial policy up and running, it must be right to give that power to the FPC.

A second major outstanding area of disagreement is the Government’s rejection of a second reserve power for industry-wide separation. Our first report made it clear that this should be exercisable only after a fully independent review, after a recommendation from the regulator, and with Treasury approval. Not only did the Government reject the second reserve power, but in their first published response they even rejected the case for an independent review after a few years to assess the effectiveness of the ring fence.

On that last point—the need for a review—when the Chancellor came before the Committee about a fortnight ago, he appeared to be a little more flexible and he said he would consider it, and I noted the more emollient tone that we heard from the Minister today. I very much hope this presages some action on that point. I hope the Chancellor will give very careful consideration to the two points that I have raised here and that we raised in the report, both on leverage and on general separation.

Mr Love: The Chancellor also said to the commission, in response to the second reserve power, that it would be rather undemocratic. How does the chairman of the commission respond to that?

Mr Tyrie: I do not think it is particularly democratic to give the authority directly to the Chancellor of the Exchequer, but I understand what he means if he thinks that Parliament should be given some opportunity to debate the issue. It is possible that some scope for flexibility could be built in to reconcile the point that he is making and the point that the commission is making. What would be unacceptable would be for the legislation to reach the statute book without a power of general separation and without there having been a thoroughgoing independent review. If those are in place, the extent to which Parliament can be involved a second time, and

11 Mar 2013 : Column 61

the extent to which the Chancellor himself should trigger that involvement, is something on which we could show flexibility.

I said that I hoped the Chancellor would think carefully about leverage and general separation, but there are a good number of other issues to which I hope he will give some thought, most of which have, at least briefly, been mentioned so I will not linger on them. I know that other Members want to speak, so I shall cite just three or four.

On derivatives, the Government appear completely at odds with the Vickers review and somewhat at odds with a slightly modified version of the same point that has been put forward by the commission which I chair. I will not delay the House now by going into the detail.

I hope the Chancellor will also consider a point that has scarcely been raised so far today—the need for the imposition of the so-called sibling relationship between the two parts of the ring-fenced bank under a single holding company, rather than the parent-child relationship, which was originally proposed in the Vickers report and which the Government still support. There are good corporate governance grounds and other grounds for supporting that proposal, which won widespread support in evidence that we took on it.

I hope the Chancellor will also think carefully about the way in which individual banks demonstrate whether they should benefit from a PLAC exemption—an exemption from the requirements of primary loss-absorbing capacity. This is a complex area which mainly affects banks headquartered in the UK with large overseas subsidiaries and branches. It is an issue which needs to be approached with considerable care. We thought very carefully about it and came forward with a balanced recommendation. On that, too, so far I have not seen enough flexibility from the Government.

The issues in the Bill are crucial for Britain. The industry is a great one, but it has serious problems. The Bill will address only some of the sector’s structural problems, and there is a lot more to be done. The parliamentary commission expects to produce its final report in May and that will seek to address some of the wider issues, the problems of standards and the culture in banking. We have just had a shocking LIBOR scandal and the wholesale rigging of crucial wholesale markets, and we have seen the equally shocking rip-off of consumers in the payment protection insurance scandal and of small business in the interest rate swap scandal. Those and other revelations, which have included sanctions busting and money laundering, reflect deep-seated problems of standards in banking.

Neither the Bill nor our proposals in May, nor for that matter any global initiatives under way, will solve all those problems. In fact, many of them will perhaps take many years—decades—to address. But something can and should be done, and that is why the Government are right to have made a start with this Bill. I very much hope that they listen to what the commission has said about it, because if they improve it further, along the lines that we have proposed, it can make a substantial contribution to a much stronger banking industry in Britain.

5.36 pm

Mr Pat McFadden (Wolverhampton South East) (Lab): I would like to begin where the Minister began, with this issue of the British dilemma: the relationship between

11 Mar 2013 : Column 62

the size of our financial services industry and the rest of our economy. It is right that it is a very big UK industry. It is a big contributor to taxes, as the Minister said, and it is a major employer. It has a cluster of expertise around it, including law, accountancy, and consultancy services, which are also important contributors to our exports.

There are two views that we can take because of that importance. One is the view, sometimes canvassed, that because of its size we cannot touch it, or only in a minimal way, because if we harm this huge industry it will go to Singapore or the United States; it will go somewhere. But there is another view, which I would like to advance in this debate, that the very size of the industry in relation to the UK economy places a responsibility on us to ensure that that size does not damage the interests of UK taxpayers or the real economy.

We have seen through the crisis that occurred several years ago precisely how damaging failure in that industry can be to the wider economy. I do not have to remind the House about the results of that failure in terms of the bail-outs, the deficits and the decisions about tax and spending, the consequences of which our constituents are living with today and will be living with for many years to come. The approach that we should take to this British dilemma is to say, yes, the industry is valuable and important, but because of its very size we believe in the need for particular measures in the UK to insulate us from wider damage. Simply to stress the size of the industry and to ask for it to be left alone whenever someone comes up with a regulatory proposal is, to put it in the language that bankers would understand, a one-way trade, and a one-way trade is not good enough. We need a two-way trade that protects the interests of taxpayers too.

Mark Field (Cities of London and Westminster) (Con): The right hon. Gentleman was a Minister in the Department for Business, Innovation and Skills at the time of the bail-outs of the banks, which are commonly regarded as a great success. As part and parcel of looking back on the past while also preparing for the future, does he recognise that elements of those bail-outs were not quite the success that they were portrayed as at the time? To get out of the large positions that we still hold in Lloyds Banking Group and RBS with any profit, let alone the large profit that perhaps we should have been negotiating at the outset, seems a long time away. Does he recognise that mistakes were made over the bail-outs which will be with us for many years to come?

Mr McFadden: One of the reasons for having this debate is that when the crisis hit in 2007-08 there was no proper resolution mechanism or bail-out regime in place to ensure that bondholders, rather than taxpayers, were on the hook for bank failure. We are having this debate precisely because we did not have the tools in place in legislation to deal with the global crisis when it unfolded. As I have said, what we need is a two-way trade.

Mark Field: I do not buy into the argument that the tools were not in place. In reality, it was not that many of the businesses were too big to fail, but that they were too interconnected, which I accept put us in a very different position from that in any previous bail-out. In relation to any insolvency or restructuring, there were

11 Mar 2013 : Column 63

and are protocols in place, and they should have been adopted to ensure the best value for the taxpayer in the long term. That did not happen in 2008-09.

Mr McFadden: If the hon. Gentleman believes that the tools were in place, I must refer him to the Chancellor, who is constantly saying that his predecessor, my right hon. Friend the Member for Edinburgh South West (Mr Darling), had no alternative when the crisis hit in 2008.

Let me turn to the Bill and some of the issues before us today. There is broad agreement on the need for some kind of structural separation between retail and investment banking. It is important to understand that the point of ring-fencing, as recommended by the Vickers commission, is not to ensure that no retail bank can ever fail—that is impossible—but to make failure, if it does occur, more manageable by insulating the risks and focusing the resolution effort on the essential services that the Government judge it in the public interest to protect: people’s savings, the payments service and simple consumer and SME lending. It would be going too far, and it would be far too rash, to say that that solves the “too big to fail” problem. However, ring-fencing ought to reduce the risks of future failure to taxpayers and the wider economy.

As the hon. Member for Chichester (Mr Tyrie) has said, the parliamentary commission, on which I serve, made two proposals in relation to structural separation. The first was the reserve power to separate individual banks should they try to burrow under, climb over, erode or get through—or any other metaphor that has been used—the fence, and the Government have accepted that recommendation. The second was to have a wider power to enforce separation on the sector as a whole. That second power would be needed precisely because problems in the sector do not come in the neatly wrapped form of one institution. As we saw in 2007-08, contagion is a fact of life in banking; the weakness of one can quickly affect others. Cultural problems in one part of the sector also spread quickly. It is precisely because problems in the industry are often widespread that there is a strong case for taking a reserve power to enforce separation on the sector as a whole, in the event that the sector tries to get around the intention of the Bill.

Stewart Hosie: I am not yet convinced about the reserve power and have many questions. The three banks that actually collapsed were Northern Rock, Bradford & Bingley and Dunfermline, all narrow mortgage banks. How would the ability to separate investment from retail banking have helped in those circumstances?

Mr McFadden: The hon. Gentleman neglects to mention RBS, a universal bank, which needed major intervention to bail it out.

The Minister has said that he does not want wider separation because the Bank of England does not want it. It is true that the Bank of England has expressed some reservations about the power if it were to be wielded by the regulator. I took the opportunity to ask the Governor about it last week when he appeared before the commission. He replied that

11 Mar 2013 : Column 64

“a provision so important that it affects the entire sector is one that both de facto and de jure will and should be taken by Parliament.”

When I explained to him that it had never been the commission’s recommendation that this be a policy decision taken purely by the regulator, and that all along we had been clear that it was a decision for Government, he said:

“As long as the decision is taken by Government, we would have no objection to that.”

I hope that we will no longer hear Ministers saying that they are rejecting this power because the Bank of England is opposed to it. This should of course be a decision taken by Government. As for the Chancellor’s point that it would be “undemocratic”, what is undemocratic about holding a proper review into legislation passed by this House as the Banking Commission suggests, or about taking a reserve power the exercise of which would involve the parliamentary process of debate and approval? The truth is that it would not be undemocratic at all.

Kelvin Hopkins: Will my right hon. Friend give way?

Mr McFadden: I am afraid that I want to make some more progress.

This is not, as the Minister argued, about introducing two policies at once; it is about introducing a policy and making sure that it is adhered to. As the hon. Member for Wyre Forest (Mark Garnier) said in this House a few weeks ago, the banks have nothing to fear if they adhere to the spirit and letter of the Bill. It need not introduce uncertainty, as some have argued; in fact, it ought to provide certainty that we are serious about the ring fence.

On capital and leverage, it is absolutely true that in the run-up to the crisis banks were over-leveraged, and that is because they held too little capital against the risks that they had. The Vickers commission was very clear about that. It recommended a future leverage ratio of 25:1, which is still quite high in historical terms, while the Government are recommending 33:1 because that is the internationally accepted Basel outcome. Without going into any more detail, I just say to the Minister that this goes back to the one-way trade to which I referred. It is a really important question running through all these reforms. If, every time we rub up against an issue, we say that we cannot damage the industry because it is so big here in the UK and we therefore have to stick to the lowest common denominator of international reforms, we will not be doing our duty to the UK economy or to UK taxpayers. If we have learned anything from the crisis of 2007 and 2008, it ought to be that there is a case for taking particular measures here in the UK precisely because of the size of the sector in relation to our wider economy. That is the basis on which we should judge the correct degree of leverage for the banks that operate in the UK.

Then there is the question of resolution and bail-in: in other words, what happens when a bank fails, and who is on the hook for that failure? In 2008, it was the taxpayers, not the bondholders, because a resolution mechanism was not in place in law that could allow for normal insolvency procedures were those to whom the banks owed money to take the risk. A very important part of the reforms is to change that situation. Bail-in is

11 Mar 2013 : Column 65

signed up to by the Government, but, like my hon. Friend the Member for Nottingham East (Chris Leslie), I am very curious as to why the Government are pursuing this through the European resolution and recovery directive. I would have thought, particularly after last week, that the Government might be somewhat nervous about pursuing a major financial services reform through a European directive. I return again to the one-way trade argument. Surely, because of the importance of this industry here in the UK, we should legislate to make sure that bondholders take a future risk and not UK taxpayers, and we should not leave it to the very uncertain process of a European directive negotiation. That might work out fine; there might be spontaneous agreement among the 27 member states. However, I am sure that the Minister agrees that that there is a very real possibility—this is not uncommon—that that would not be the case. I ask him to think again on the bail-in regime and to ensure that a proper UK decision is taken rather than leaving it all to a European directive. I would have thought that Government Members would support such a suggestion.

In conclusion, I want to reiterate the point about time. The parliamentary commission, which was set up by the Chancellor, has spent six months taking in—the chairman, the hon. Member for Chichester has done more totting up than me—60-odd oral evidence sessions and much written evidence. It is simply not good enough for the Minister to say that he will take the Bill out of Committee by the end of April, before we issue our final report. The Opposition supported the establishment of the parliamentary commission after the House had voted on the issue. We expect its recommendations to be properly considered by the Government, not swept out of the way by the timetable. I hope that the Minister will think again, because the structural issues under discussion are not the only issues. Important changes still need to be made to banking culture, standards and corporate governance, so that this very important industry contributes positively to the UK and does not put the economy and taxpayers at risk.

5.51 pm

Sir Peter Tapsell (Louth and Horncastle) (Con): I asked Harold Macmillan what the secret was of making a good speech in the House of Commons and he said, “I once asked David Lloyd George that very question and the answer I got was, ‘Don’t say anything interesting or important in the first five minutes of your speech—just wait for the Chamber to fill.” I am not sure that that will happen this afternoon, which is a pity because I believe that if this Bill finishes up as the Act I hope it will be, it will be the most important Bill of the whole of this Parliament. It may stop the second shoe falling, as it did in 1931, to use the phrase of the time. After the stock market crash of 1929 came the slump and the 1931 crisis.

In 2007-08—but in 2008 in particular—we saw the greatest financial crisis since the 1930s, which resulted in almost a decade of slump that was only solved by Adolf Hitler. If we can get this Bill right and make sure that 2008 is not repeated, it will be an enormous achievement.

Hank Paulson is the former head of Goldman Sachs and was US Treasury Secretary at the time of the 2008 crisis. If hon. Members read his book, they will see that

11 Mar 2013 : Column 66

the critical day was 15 September 2008. He says that everybody who mattered in finance was in his room and that, although he is a big man who was a famous university footballer in his youth, the stress and strain was so great that during the course of the conference he had to leave the room twice to vomit. He writes that on that day capitalism was on the verge of total collapse. I think that people have forgotten the seriousness of that crisis.

I believe that crisis was more important than 9/11. As it happens, I woke up in my club in New York on the morning of 9/11, so taking part in this Second Reading debate means that, during the course of my life, I have been present at two very important events. The fact is that the 2008 crisis ruined the lives of millions of people all over the country. Many of my constituents are suffering real hardship as a result of the measures tt had to be taken to deal with the effects of the crisis, and the same is true right across the world. We really must prevent it from ever happening again, but I fear that there is a real danger that it could happen again.

The high spirits—to put it at its most polite—of investment bankers do not seem to be unabated. Many banks are in a weak state, including, as we heard only three or four days ago, Goldman Sachs itself. Some major European banks are close to bankruptcy. This Bill is a belated but welcome attempt to prevent the banking crisis of 2008 from happening again.

The Opposition spokesman is the hon. Member for Nottingham East (Chris Leslie) and in far-off days I was the hon. Member for Nottingham West, so we have a certain amount in common. Our views on regulation also have a great deal more in common than he has indicated. There is no reason why he should know what my views are on anything—nobody really does and I only do on a day-to-day basis. He should look up a speech that I made on 16 July 1984. I spoke for 40 minutes—in those days, Back Benchers were allowed to make proper speeches—and strongly opposed the deregulation of that time, which, in those days, was called big bang. Deregulation had suddenly became tremendously fashionable. Lady Thatcher, Keith Joseph and all the monetarists were terribly keen on it, but one of the reasons why I resigned from the Opposition Front Bench on which the hon. Gentleman now sits and why I refused to serve in Margaret Thatcher’s Government is that I disagreed with it.

I reread my speech last night and if the hon. Gentleman reads it, he will see that I predicted, very clearly and unbelievably presciently—I was much younger and more alert then, and knew how to put points so much better than I do now—exactly what would happen and the reasons why. I also predicted the tremendous decline in the moral standards of the financial world that would result from the internationalisation and Americanisation of the City of London. That, of course, is what, unfortunately, happened.

In that speech against big bang, I opposed the absorption of high street banks, merchant banks and stockbroker firms—I was a partner in one—into universal banks, free to speculate, on their own account, with the money of depositors and large sums of borrowed money in what is now called leverage, which we and America pronounce differently. I will not go into the arguments about ratios, except to point out that, even as respectable

11 Mar 2013 : Column 67

a hedge fund as Carlyle was dealing on a ratio of 30:1. The leverage situation was one of the causes of this disaster.

At the beginning of this Parliament I described the banks as today’s over-mighty subjects and that is what they are. They have been strongly lobbying the Vickers commission and the Treasury not to deal effectively with the bank that is too big to fail. I take the view that if a bank is too big to fail because of the systemic effect that would have, it is too big to exist at all and should be broken up now. As a start, I strongly support the recent recommendation of the Governor of the Bank of England to break up the Royal Bank of Scotland.

Glass-Steagall imposed an absolute separation between commercial banking and investment banking. It also banned proprietary trading in commercial banking. The essence of Glass-Steagall in 1933, by which Roosevelt managed to save the American banking system, was to root out conflicts of interest, which are the evil at the heart of universal banking. Banks were told that they had to choose between servicing a client and promoting their own short-term interests. Combining the two inevitably creates conflicts of interest that lead to many other problems. That is what Mr Paul Volcker, unquestionably the most distinguished and experienced banker in the world, urged on America in what became known as the Volcker rule and on our Parliamentary Commission on Banking Standards, which has been chaired so ably and brilliantly by my hon. Friend the Member for Chichester (Mr Tyrie).

I read the accounts of what is being said and the questions that are being put at the parliamentary commission with great jealousy, although I do not want to be co-opted to it. Its second report reached me just before lunch, and I chose lunch. However, I will read the report and all the subsequent reports with the greatest possible interest. I find it difficult to understand how anyone who has read the complete account of Mr Volcker’s evidence to my hon. Friend’s commission, as I did at the time that it was published, could fail to be persuaded that we need, in effect, a complete return to Glass-Steagall.

What I mean by a complete return to Glass-Steagall is that we should have none of this nonsense of ring-fencing, which used to be called Chinese walls. It never works. Chinese walls turned out to be papier-mâché. I worked in the City for 40 years and I promise Members that it is impossible to make that work.

Andrew Bridgen: Does the Father of the House remember that it was President Bill Clinton who relaxed the Glass-Steagall rules in return for the American banks lending to sub-prime borrowers? Were not the seeds of the financial crisis sown at that point?

Sir Peter Tapsell: Yes, they were. The American banks turned mortgages for people who could not afford to pay the interest into derivatives disguised as bonds and then sold packets of them—500 or so—all over the world. They could not have done that under Glass-Steagall. That really makes the point, so perhaps I ought to sit down now.

11 Mar 2013 : Column 68

6.2 pm

John Mann (Bassetlaw) (Lab): It is a pleasure to follow the Father of the House and to agree with many of the sentiments he expressed.

I look at the Bill and at the Ministers and my reaction is to ask, “Is this it?” Considering what we have been through and the problems in British and world banking, is this Bill the best that we, as legislators, can do? If that is the case, it is no surprise that we are increasingly derided outside this place.

The Minister should have set the context. I offer him my file detailing the top 50 banks in the world by assets. What unifies those top 50 banks is that every single one, without exception, either has been subject to major convictions for criminal fraud recently or is being investigated for criminal fraud. The Americans have been very good at portraying this as a British problem. They have, perfectly properly, exposed problems and illegalities in British banks. However, their banks are doing the same and worse, as are banks the world over. That sums up the problem. What other industry could have all 50 of its top players committing criminal fraud at the same time while the world’s legislators are happy to do just a bit of poking, a little juggling and a few bits and pieces?

I do not disagree with the bits and pieces, especially if there is strengthening and improvement, but is that all we are going to do? I heard reference to the 1930s and I have heard that time used before as a comparison. We are doing the same thing with the same boldness, but it did not work in the 1930s because 1931 turned into 1933 and into 1939 to 1945. That was the consequence. We therefore need to be significantly bolder in what we are doing. This Parliament, like other legislatures, remains cowed by the bluster and power of investment banking.

There are models that are different from the British model of investment banking. The Chinese have a very different model. We seem to be forgetting how successful that model is. While we are sellotaping our banking system together, they are building a competitive base that will dominate the world economy for generations. It is as if we are the fools at the Chinese emperor’s ball. By using a model of cheap finance, concentrating on raw materials and technological transfer, investing in skills and infrastructure, and planning for the medium term, China is showing how ruthless simplicity creates permanent competitive advantage. That contrasts with the short-term monetary advantage that our investment banking model offers. We play with paper while the Chinese build with concrete. Worse than that, they are developing tomorrow’s building materials, designs and visions.

A simpler, democratic model that similarly contrasts with the British investment banking model is the German model. An example is KfW, which was formed in 1948. Its lending to business in 2011, the last year for which I could find figures, was €70 billion out of a loan portfolio of nearly €500 billion. That is a less risky and less speculative model than our money market, casino model. Just like the Chinese model, which I do not recommend but do admire, the German model is beating ours. The danger is that we are playing yesterday’s games, whereas those countries are playing tomorrow’s games. That is a bit like the 1930s.

We must not be fearful of investment bankers. We should not just create an electric ring fence between retail and investment banking, but should consider

11 Mar 2013 : Column 69

whether the model that we have is fit for purpose. One thing that it certainly is not is competitive. We have allowed a model that does not create competition, and the Bill does nothing about that. There is the hope of the challenger banks, but they have not been very successful and there is more that we could do to help them. Over the past 20 years in this country, we have stripped out competition.

I would like to be able to follow the advice that I was given when I first got a bank account: “Put your money somewhere safe. You won’t get a great deal of interest on it compared with other places, but it’ll be reliable and it’ll help you get a mortgage and buy a house in the future.” It was called a building society. That was only one part of the model, but there were a lot of them all over the country not many years ago. The problem with the Bill is that there could end up being even fewer of them and a greater concentration of the tiny number that there are. Building societies are only one part of the financial services market that I want to see, but they should be a significant part—at least 30%, if that is what consumers want, but consumers have not been given the choice.

There is no real competition. Where is the national interest test for takeovers and mergers? The vast majority of investment banking’s speculative profits over the past 20 years has come from the mania for takeovers and mergers. Germany has such a test, and would anyone try to merge or take over a major conglomerate in China? I do not think so. A national interest test should be in place.

The two state banks should be broken up, and the Halifax building society should be recreated out of them, but we need far more than that. Competition should be created in the marketplace and enforced. If that were to happen, consumers would flock to that model in large numbers. I would like to see a model of tiered risk. I do not believe the idea that we can guarantee every type of saving for ever up to a certain limit—£85,000, or whatever it ends up being in the future—is rational. I would like a real choice between low interest rates and total security for my money, and medium or higher risk. We should give the consumer the choice rather than have the pretence that the state will always be able to provide a bail-out. From the moment such a pretence is created—we have essentially had it since the war in this country—there will by definition always be banks that are too big to fail. The fundamental logic of that cannot be broken.

There are many other bits and pieces that I would like to see. One of the Treasury Ministers ought to be in Europe full time. Whether or not I agree with what the coalition argues, one Minister ought to be negotiating, pre-warning and advising on and helping to create what comes out of Europe. I would like to have the bonus cap and the Government disagree, but the point is that we have not been there at the table, which is where we need to be. That is a fundamental weakness, as it was under the last Government. It would be wise politics to make that change.

Auditing has been mentioned, and another minor point that ought to be in the Bill, on the micro level, concerns compliance officers in banks. They are the office boys—there is no qualification for them and no basis of standards. It would be pretty easy to sort that out and ensure that there is a qualification to be a

11 Mar 2013 : Column 70

compliance officer. We should raise their grade and standard. We should not make a fetish of degrees, but it ought to be a graduate-quality job, which it has not been. That is a fundamental weakness in how banks see themselves and compliance.

A major change that I would like to see concerns tax loopholes. There has been a lot of talk about them, but when it comes to banking the biggest loophole involves the UK Crown dependencies. We have a significant degree of influence over them and they rely on us for their legal system and their defence, but we allow them opaqueness in finance, whether banking, commercial, personal or a combination. No wonder my file is full of cases of money laundering and other criminal corruption that have been found out, and those are only the ones that people have been able to see. That opaqueness should go, and we have the power to do it. Those are the big issues that have not been addressed in the Bill. I implore my party to get on the case and get it amended.

6.15 pm

Mike Thornton (Eastleigh) (LD): Thank you, Mr Speaker, for allowing me to make my maiden speech during this important debate.

Being able to represent the people of my own local area here in the Chamber, with its history and traditions, is an immense privilege and honour. I begin by paying thanks to all those who helped me during the by-election. I thank the whole Liberal Democrat campaign team, whether local, from our headquarters or from around the country, for their tireless work, efficiency and constant cheerfulness, especially considering the weather. Most importantly, I thank the voters of Eastleigh, who have put their faith in me. My first duty is, and always will be, to the members of my constituency, whoever they vote for.

I am surprised, overwhelmed and extremely grateful for the incredibly warm welcome that I have received from you, Mr Speaker, from hon. Members of all parties and from the staff of the House. I must say, I am still trying to absorb all the help and advice they have given me, and I am not exactly sure who has given me what, I am afraid.

Let me pay tribute to my immediate predecessor, Christopher Huhne, whose contributions must not be overshadowed by recent events. He was a dedicated constituency MP, and throughout the constituency I have met thousands of people who are extremely grateful for the help that he has given them. Furthermore, let us not forget his outstanding service as Secretary of State for Energy and Climate Change, driving our transition to a green economy while playing an internationally recognised role in combating climate change.

I was delighted to campaign with Lord Chidgey, the previous Member of Parliament for Eastleigh, a man held in such high regard by my constituents that when I was walking around and knocking on doors with him, after putting thousands and thousands of photos of myself through people’s doors and having been on television and in the newspapers, what did they say when they saw us? “Who’s that chap with Lord Chidgey?” If I can be as well remembered as he is, I will feel that I have done a good job.

Although many hon. Members may feel that they already know my constituency after pounding its streets recently, I ask them to please indulge me by letting me

11 Mar 2013 : Column 71

talk a little bit about it. Before there was Eastleigh there was Bishopstoke, which just happens to be where I live, and I have served as a councillor there for the past six years. Bishopstoke was mentioned in the Domesday Book, and it was to Bishopstoke junction that London and South Western Railway moved its railway works and employees lock, stock and barrel in 1891. Indeed, it was the company that proceeded to change the name of the station and the surrounding area to Eastleigh. Bishopstoke has never forgiven it.

As the years passed, Eastleigh developed as a bustling railway town with a strong industrial identity and a skilled work force. Aside from the railway, Eastleigh played a major role in the development of Britain’s aero industry, and it was at Southampton airport, formerly Eastleigh aerodrome, that the Spitfire was designed and built. Of course, local people remember with much pride and some sadness that its designer, Reginald Mitchell, foreseeing the awful shadow of war, defied his doctors and literally worked himself to death to ensure that the Spitfire would be ready in time to defend our country against the evil of the Nazis.

I am pleased to say that that proud tradition of manufacturing and engineering continues in Eastleigh —at the rail site now operated by Knights Industries, at GE Aviation Systems in Hamble and through the development of high-tech industries including SPL Lasers and Lubetech in Hedge End and Prysmian in Eastleigh town, which I believe our Prime Minister visited during the campaign. These firms demonstrate that the key to a sustainable and balanced economy is to embrace both the old and the new. Eastleigh is fortunate to have a much lower rate of unemployment and youth unemployment than the national average. Indeed, both have dropped recently. Of course, this week is national apprenticeship week, and I celebrate the fact that more than 28,000 apprenticeships have been created across Hampshire since 2010, many of them helped by Eastleigh college, which has a superb reputation.

In Eastleigh new businesses are opening at an increasing rate, with more than 100 starting up last year due to the support and far-sighted approach of our borough council led by Keith House. Despite that success, however, and having spoken to businesses both as a candidate and previously in my professional role, I have found that business after business is struggling to obtain financial support from our banks to enable it to grow and expand its work force. The Business Secretary has worked tirelessly to improve that situation; I am confident he is succeeding but the banks seem too slow to respond. The funding for lending scheme is a superb initiative, but many banks seem to believe that its purpose is to enable them to lend to people they would ordinarily have lent money to, just at a lower interest rate. As Mark Twain said:

“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”

We have seen the start of alternatives such as the extraordinary Bank of Dave, other peer-to-peer lenders, and new banks starting up with a fresh approach. Our traditional banking sector needs to wake up before it finds that its customers have gone elsewhere and that it has joined the penny farthing as an historical curiosity.

Moving on, one of the great privileges of this job is the opportunity to work with local people—the unsung heroes of the voluntary sector. Such people have been

11 Mar 2013 : Column 72

labouring away tirelessly in their own local communities, often without much credit and probably no money. From unpaid parish councillors to street pastors, local groups such as the Pilands Wood community association have transformed the area and created an extraordinary sense of community. I would like to mention all the volunteer organisations that contribute so much, such as One Community, Churches Together in Eastleigh, Eastleigh Basics Bank, Acts of Random Kindness—which I recommend to everybody—and Open Sight. I could go on, and I am sorry for not mentioning all the groups, but I would go well past my 12-minute allocation of time.

My constituency is blessed with some of the best schools and colleges in the country. The Deputy Prime Minister and I were privileged to see the extraordinary partnership between Hamble community sports college and the Dynamo school of gymnastics that delivered an Olympic-class gymnasium. I am eternally grateful for the support that my daughter received from superb teachers and staff at Stoke Park infants and junior schools and Wyvern technology college. Wildern, Crestwood and Toynbee schools have superb reputations, and I believe we have been honoured today by a visit from Eastleigh’s own outstanding Barton Peveril sixth-form college. I also want to mention that a friend of mine who taught at that college is sitting in the Gallery now.

I will leave the House with a parting thought about how fortunate I am to be able to step outside my front door and in minutes be in the beauty of Stoke Park woods or walking down the Lloyd to the water meadows, while at the same time being a 15-minute walk from Eastleigh town with its variety of shops and restaurants.

I thank you, Mr Speaker, for giving me the opportunity to speak, and I thank hon. Members for listening with such courtesy. I suspect that next time I am called I will not be heard in quite such a manner. I look forward to serving my constituency, this House and my country for many years, and consider it an honour and a privilege to be here.

6.23 pm

Alison McGovern (Wirral South) (Lab): I congratulate the hon. Member for Eastleigh (Mike Thornton) on his maiden speech, which was a really good first contribution. As a former railway person, I know that the town of Eastleigh is extremely important in that industry, but there is no more important a subject for him to make his maiden speech on than this Bill. I offer him my sincere congratulations.

Let me say why I think this Bill matters. By way of setting the scene, I want to explain something from which I think the financial services industry suffers. There has been a recent influx of Members to the Chamber for this debate, although I fear that it is not entirely due to the subject under discussion. Normally, the financial industry is quite a niche subject, which is partly to do with the fact that people often talk in code about financial services. There is a certain language that people are supposed to use when talking about financial services, and I suspect that those who work in the industry feel a bit as if they are part of a special club. They use words that normal people cannot really understand; they repeat their shibboleths and some of them live in their gated community, quite apart from normal society. Well, hands up, Mr Speaker, it takes one to know one; Parliament is just the same in so many

11 Mar 2013 : Column 73

ways. If we make things sound complicated, people will think we are really clever, but I think we should learn that democracy and financial services are too important for that.

Unfortunately, the culture in financial services makes scrutiny much harder than it ought to be. We now know that in the 2008 crash, the real risks taken by the banks were hidden, and that happened because of the insider culture. We are yet to hear from the Parliamentary Commission on Banking Standards about the cultural aspects of the financial services crash, so I repeat to Ministers earlier pleas about the timing of that advice. As I have explained, cultural aspects are important for effective scrutiny and good legislation in the future, so can we not ensure that we proceed with the best possible advice from the parliamentary commission? We in this House would probably all agree that we have been sent here to speak up for ordinary people, but what happens in the City’s square mile matters on every high street in Britain. It is not good enough anymore for financial services to be a niche interest in Parliament.

Growing up in the 1980s and 1990s I often felt that Merseyside was being buffeted and shaken in the interests of the City of London. Given the Chancellor’s words over recent months, it has sometimes felt a little like my teenage years on playback. The Chancellor talks about defending the interests of London as a financial centre—for example on leverage ratios—but how much do financial institutions worry about the average British high street?

Mark Field: Will the hon. Lady give way?

Alison McGovern: Let me finish the point, and then of course I will give way to the Member who represents the square mile.

Let us be honest: some financial institutions do worry about that, and some are very large employers, and I know that many people in the financial services would agree absolutely with my point. However, wage inequality skews influence to insiders at the top.

Mark Field: Does the hon. Lady recognise that as well the hugely important business, which is perhaps based culturally within the square mile in my constituency, a vast number—indeed, the majority—of jobs in UK banking and financial services are based not just outside the City but outside the capital? She will be aware, for example, that not too far from her constituency in the City of Chester, a huge number of employers employ many thousands of people in the financial services.

Alison McGovern: That was the point I was trying to make, and I refer the hon. Gentleman to comments made by my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who said that although that is true, it is not enough to say, “We’re a big employer; leave us alone.” The influence of the financial services in the City is greater than that, and that will not do anymore.

Wage inequality in financial institutions skews influence to insiders at the top. This is a classic insider-outsider problem, and we in Parliament must work out how to scrutinise more what goes on in the City. I believe that the Royal Bank of Scotland’s final report makes great play of how it is finally a living wage employer. Well, good for RBS, but it is perhaps a little too late.

11 Mar 2013 : Column 74

On the bonus culture, the Government have said that there could be a perverse incentive in controlling bonuses and that people might be paid more if their bonuses are reduced. That is true if—and only if—they think the following two things: that it might not be better to have more fixed costs and less turbulence, and that we might want to think about the impact of those highly variable costs on incentives; and, secondly, that the overall remuneration of bankers is just fine and the current inequality in the financial services sector is okay. Well, it is not okay. The hon. Member for Cities of London and Westminster (Mark Field), who represents the City, mentioned the many people all over the country who work in financial services, but when I make the point about inequality in the financial services sector, it is those very people, and the money in their pockets, who I am thinking of.

Mr McFadden: On pay and reward, does my hon. Friend agree that it is unfair that the vast majority of financial services workers, who are in ordinary branches of banks and so on and paid normal, average salaries, get tarred with the brush of excess and of salaries way out of kilter with what normal people earn, when in fact that is taking place at the very top of banking and not in the local branch?

Alison McGovern: I could not agree more. It is also not okay that people in regular branches were pressured to sell all kinds of products, which we know happened.

I was very much taken by the contribution made by the Father of the House, the right hon. Member for Louth and Horncastle (Sir Peter Tapsell). Unfortunately, he has left his place. I was going comment on the deregulation of building societies and the big bang back in 1986, but as he has already covered that very well, I will not do so except to say this. On reading Lord Lawson’s account of the impact of the 1980s boom on the real economy, I think he is clear that he thinks he made a mistake. We should listen to the lessons of history. We should also congratulate the right hon. Member for Haltemprice and Howden (Mr Davis), Lord McFall and Baroness Kramer on establishing the New City Network, which is trying to find ways to answer some of the questions I have raised.

To turn to my second point, which is more specific to the Bill, we need to ask ourselves what kind of economy we want. My constituents, unsurprisingly, are interested in having a job to go to, and in having enough money in their pockets to feed their family and have a roof over their heads. They want a Government who do not tell them that they will cut debt to solve the problem, only to see debt rising. Notwithstanding that, the Bill ought to help finance to underpin a growing economy. Will the ring-fence help us do that? That is determined by what we think banks are for. We should say that banks are not just like any other industry: cavalier risks are totally unacceptable, and that is why the ring-fence matters. We need to assure ourselves that we have done enough to provide for business continuity in a real, productive economy.

I am not sure that the ring-fence is necessarily enough to do that, however. What about the examples of straightforward bad lending? What about investment banks with no retail operation, such as Lehman’s in the US? What about retail banks that went under in this

11 Mar 2013 : Column 75

country? How does the ring-fence de-risk in those cases? Then there are the comments from the hon. Member for Chichester (Mr Tyrie) about the industry marking its own exam. That gives rise to the need for reserve powers, which other hon. Members have described well.

We need to be clear that some in financial services argue against separation at all—they worry about the cost to the bank. I am afraid that that sounds a little too much like special pleading. Saying that this will hurt lending to the real economy because it passes costs on just sounds like tit-for-tat: “Block our preferred business model and we will punish small and medium-sized enterprises, small business and the average small lender.” Why do they have to do that? I am not sure that one necessarily leads to the other—it is about their business model. How does the Bill help with protection from banking failure in other European countries?

We have heard other hon. Members talk about competition, so I will not dwell on that for too long, but the Government must be clear and Ministers must say exactly what kind of competition they want. Any economics textbook will tell us that three firms are enough for competition, but I think we all think that common sense dictates otherwise. How many new entrants to the market are sufficient? More importantly, what kind of competition do we want?

There is nothing in the Bill about ownership, but perhaps there should be. What are the Government doing to open up banking to more mutuals? Could we look back over our history at what happened to building societies, as my hon. Friend the Member for Bassetlaw (John Mann) mentioned, and see whether there is room for change in that sphere? I have raised before the Financial Services Compensation Scheme and pre-funded deposit insurance. If we compare the EU’s position on making sure that banks commit properly to the UK’s position, I wonder whether Ministers have got that one right.

In conclusion, this is a shell of a Bill and we can do much better. To paraphrase John Donne, financial services is not an industry entire of itself; it is a piece of the continent, a part of the main. We therefore need a greater commitment from the industry that it is prepared to change, and from the Government that they are prepared to legislate to help it do so. The impact of the financial crash on people in my constituency was huge, be that from the threat of losing their house, or losing their job. That is too important for this subject to remain a matter of technical, niche interest. The Government must be much stronger and listen to the voices who are calling for change.

6.36 pm

Mark Garnier (Wyre Forest) (Con): I add my congratulations to the hon. Member for Eastleigh (Mike Thornton) on his maiden speech. I remember when I made my maiden speech: it was the most terrifying event of my life. If he continues with that masterful performance, the good people of Eastleigh will be very well represented in the years to come.

I am grateful to my hon. Friend the Member for Chichester (Mr Tyrie), who is no longer in his place. He started by talking about the members of the Parliamentary Commission on Banking Standards. As one of those

11 Mar 2013 : Column 76

members, it falls on me to pay tribute to the extraordinary work he has done in the past nine months or so, pulling together what is quite a tour de force.

At the heart of this debate lies the balance of interests within banks. Any commercial organisation—or, indeed, any bank—must balance the interests of its shareholders, the interests of its staff, and, importantly, the interests of its customers and the wider society at large. When those interests become unbalanced, we end up with problems. When staff are over-incentivised with bonuses, they will take greater risks at the expense of shareholders. When shareholders see stellar returns, they will fail to provide the governance oversight needed to protect the organisation. When looking after customers is seen as a tricky task in an ever-increasingly competitive world, the customer takes second place to proprietary trading, and is relegated to providing mere liquidity to help the proprietary traders. When those balances of interests become too skewed in favour of staff and shareholders, society loses out altogether, with the banking collapses and the bail-outs we saw, and which we are trying to avoid in the future.

One of the concerns that I have been wrestling with is that of over-regulating our banks. Can we, unwittingly, drive our banks to relocate offshore by supposedly over-regulating them? We need to look closely at the problem. What do we mean by relocating? In part, we are looking at banks changing their domicile, and in part we are looking at the moving of specific operations to different parts of the world. Those are two very different things, and it is important to make sure that we do not confuse them. Setting up a trading desk in Spain, for example, is decided by where the traders want to work. Moving a global bank to Singapore is a very different thing indeed.

First, these banks are huge. One has to asked oneself the question: who would want to have one of them located in their economy? If HSBC went to Singapore, its balance sheet would be over 1,000% of Singapore’s GDP. Not many countries can take a bank of that size, and, of those that could, do they have the same offering that we have here? There would be no question whatever of any implicit guarantee. London offers some key elements that banks need: we speak English, we are in the centre of the global time zone, we have a transparent and well-tested legal system, and, importantly, we have what amounts to a relatively good regulatory system. All those points are absolutely key.

The banks benefit from an implicit guarantee—valued at between £10 billion and £40 billion, depending on where we are in the cycle—that comes as a result of the expectation that the British Government would stand behind a failing bank in exactly the same way that we saw in 2007 and 2008.

Steve Baker (Wycombe) (Con): I am glad that my hon. Friend raises that point. Does he agree that if we subsidise anything, we get more of it, and that this actually subsidises risk taking?

Mark Garnier: Yes, it does, absolutely. I am going to develop that point in a second, if my hon. Friend will bear with me. We need to get rid of this implicit guarantee for exactly that reason and in order to encourage competition, because competition requires a guarantee for all banks, not just the big banks.

11 Mar 2013 : Column 77

If we combined a transparent legal system with a robust and secure regulatory regime, international capital would come to this country—because of that security—and because capital would trust the UK’s legal and regulatory system, it would be prepared to take a slightly lower return. London would provide an environment in which the cost of funding for banks would be lower. That cheaper funding, as a result of regulatory security, should replace the banks’ implicit guarantee and thus result in a lower cost of capital. As a result of that cheaper funding cost, which is reliant on good regulation, we should not fear banks relocating when we introduce regulatory reform. They might complain, but they will ultimately thank us for the strongest regulatory regime in the world.

That also depends, however, on how the Government take forward the Bill. The banking commission has made its early recommendations, and the Government have responded. As we heard from my hon. Friend the Member for Chichester (Mr Tyrie), we are grateful to the Government for listening to some of our recommendations, but they could pay more attention to certain other areas. We want a leverage ratio set at 4% by the Financial Policy Committee, a full reserve power for full industry-wide separation and regular reviews of the effectiveness of the ring fence in order to ensure the most effective and secure regulatory regime in the world. By winning the race to the top, we will ensure cheaper capital funding for our banks and help to preserve our country’s lead position in the financial world.

I turn to the thorny issue of proprietary trading. The term “casino banks” was coined by someone at a time when I suspect they were keener to play to the gallery than necessarily to address the serious issue of what investment banks actually do. It is important to remember that investment banks raise huge amounts of debt and equity capital, generating thousands, if not millions, of jobs in the UK and around the world in commerce and industry—jobs that create wealth and tax receipts for this country—but there is an element within investment banks of proprietary trading. The important thing is to define proprietary trading. Every bank that makes a loan makes it on a proprietary basis, but no one would want to prevent banks from doing that—it is the key to what they do. Pure proprietary trading, however, for the sole purpose of enhancing shareholder returns—with no benefit to the customer or society—has no place in our banks. It fails the balance of interest test and is incredibly difficult to define.

We can recognise the evil type of proprietary trading when we see it, but let us take market marking, for example. It provides a service to customers and liquidity to the markets, and so passes the balance of interest test, but at what point does a residual position on a trading book stop being that which is left over from normal market making activities and start being deliberate directional betting? That inability easily to distinguish between one and the other leads me to believe that, although a Volcker rule would probably be desirable, it would be too difficult to impose in a meaningful way. That is why, reluctantly, I come down on the side of not banning pure proprietary trading. If the Vickers proposals that the Bill implements seek to put a ring fence around the deer park, does it matter what type of predator is kept outside? The consumer will be protected from both the wolves of market makers and the tigers of proprietary trading.

11 Mar 2013 : Column 78

Much of the commission’s work has looked at competition. With a handful of super-huge banks dominating the market, competition is tricky. Long before the commission was set up, however, I spent much time meeting smaller banks, including challenger banks, and those seeking to win new banking licences. It was clear that there was a huge problem with banks being too small to start—the regulatory hurdles facing small banks, such as licence applications and ongoing supervision, distorted the market in favour of the big banks—but the FSA has responded to pressure and had a change of heart. The regulator is moving in the right direction, and I am grateful to the FSA for taking heed of our warnings about new banking application processes and the treatment of asset risk weightings on the balance sheet. The regulator is moving towards greater opportunity for small banks in terms of regulation, which is very important.

There is also the thorny issue of account switching. Later this year, the seven-day switching programme, which is a significant step forward, will be put in place. I strongly believe, however, that the ultimate goal has to be full account number portability. VocaLink, which provides the payment system services, is considering doing for banks what the telecoms regulator did for mobile phones, and it is making good progress. My hon. Friend the Member for South Northamptonshire (Andrea Leadsom) has done a lot of work on this subject, and for four reasons her proposals for full portability are right: first, it will ensure greater competition, as I am sure we will hear later; secondly, the financial system will be more transparent and so provide greater oversight for the FPC, which is charged with ensuring stability in the financial system; thirdly, in the event of a collapsing bank, full portability will make bank resolution far easier and cheaper; and finally, the legacy IT systems in many banks have their foundations in the ’50s and ’60s, with the punch-card system. At some point, the banks will have to massively update their systems, and combining everything makes huge economic sense.

What is the point of banks? Why are we so keen to reform them? Those questions are crucial to the whole debate. Clearly, people need a safe place to deposit their money, to manage their finances and to plan for the future, but banks also provide an incredibly important social and economic function. There has yet to be devised a better way of taking money from where it has accumulated and distributing it to where it is needed. Successful investors and business men need a way to get their money to where it will work for them, and those with an idea but no cash need to be introduced to investors with surplus funds. So far, banks have done that job better than anyone else. No matter what we say, they have a fantastic distribution network, which we must utilise to the fullest extent.

Mr Love: Unfortunately, the banks are not doing a good job of providing loans to small businesses. In particular, those banks in partial public ownership seem to be struggling to do so. Is there any way—a funding-for-lending scheme, for instance—of encouraging more lending from banks to small businesses?

Mark Garnier: The hon. Gentleman is absolutely right. The two of us have spent much time together wrestling with this thorny issue over the past nine months—and

11 Mar 2013 : Column 79

before that on the Treasury Committee. Part of the problem is that, with the risk weighting of assets, a loan to a small business carries the least weighting, because it is deemed to be one of the greatest risks. The world is putting pressure on banks to reduce their balance sheets and become less risky institutions, and the simplest way to do that is to withdraw lending to small and medium-sized enterprises. That is the natural outcome, if we ask them quickly to reduce their balance sheets. Funding-for-lending schemes seek to bypass the risk-weighting element, but none the less it is incredibly difficult to encourage more of what the regulatory regime sees as the riskiest type of lending. It is a problem we have to resolve, however, because, as I said, there is no alternative way of getting money to businesses.

It is incredibly important that the Government never again have to bail out banks when things go wrong. Broadly speaking, the Bill is an enabling Bill. There is much more detail about the nuts and bolts to be introduced in secondary legislation, but it is important that it achieves what it is trying to achieve, which is to ensure that banks can go bust without bringing the system down with them. For a functioning financial market to work properly, it is important that poorly run banks be allowed to fail—but elegantly and non-destructively. The Bill will ensure that, in a crisis, the vital parts of a bank can be resolved in a dignified and stable way and that the British taxpayer will never again be left on the hook to bail out bankers for their foolhardy recklessness. That is why the Government are right to introduce it. They were right not to rush into anything, but to have spent a great deal of time listening to Vickers, Erkki Liikanen in Europe and others, including of course the banking commission. For those reasons, I have no hesitation in supporting the Government fully and look forward to working with them as part of my work on the banking commission.

6.49 pm

Frank Dobson (Holborn and St Pancras) (Lab): I think everyone in the House would welcome a step forward in trying to gain some control over the excesses of the banking industry, but most Members—at least those who have spoken—seem to be dubious about whether the Bill goes far enough. Following on from the speech by my hon. Friend the Member for Bassetlaw (John Mann), I tend to be what might be described as a “Bassetlaw-ist”. I think we need to go much further than most people are proposing.

We need to start by recognising that the British banking industry is a failure—it was a failure and it remains a failure. Let me remind the House that, of the big four, HSBC lost $27 billion in the crash, while RBS lost $14 billion, Barclays lost $8 billion and Lloyds lost $5 billion. Between them, these masters of the universe lost $54 billion in the crash. It did them harm, but it did a lot more harm to the rest of us. In the recession that has followed their lunacy—matched all round the world by the rest of the world banking industry—British production has lost £700 billion, as a result of the reduction in goods and services that we have produced.

That is what the banks dropped us in. They did it through all sorts of fancy schemes, in an effort to get rich quick, and for quite a long time they did get rich

11 Mar 2013 : Column 80

quick. Everybody was told, “You can’t stop us. We know what we’re doing; it’s the market.” Then the market crashed. Under normal rules, if the market crashes, those who crash stay crashed, but that does not happen with banking. That is why we need to change the rules. The banks demanded taxpayers’ money, either to bail them out or offer them guarantees. They said, “You’ve got to do it, otherwise we will bring the temple down and we’ll bring you all down with us.” In other words, “Heads we win, tails you lose” has been the motto of the banking industry.

That is not all that the banks were doing wrong, we now discover. They were also rigging LIBOR—the London interbank offered rate. Individuals in banks were fiddling, and apparently not a single boss knew what was going on. LIBOR was run by the British Bankers Association, which apparently did not know that any fiddles were going on, so obviously “Ignorance is strength”—this year is the centenary of George Orwell’s birth—was the motto of the British banking industry. People have been prosecuted or threatened with prosecution—they have settled to avoid it—in the United States for LIBOR fiddles, but nobody has been prosecuted here. Why is that?

There have been several repeated conspiracies—in fact, dozens and dozens of them—to gain financial advantage by deception, which is a common-law crime, so we do not need an Act of Parliament, but we now know that LIBOR rigging was not the banks’ only wrongdoing. Instead of “The world’s local bank”, HSBC’s motto turns out to be “The world’s local money launderer —helping Mexican drug barons, fighting the United States’ anti-terrorism sanctions”. Lloyds—motto: “Banking worth talking about”—was involved in money laundering to help sanctions-busters. Barclays—“It’s our business to know your business”—was involved in dodgy transactions and busting sanctions against Iran, Libya and Burma. Most of us would think that sanctions against Iran, Gaddafi’s Libya and Burma were quite appropriate.

The banks have also been spending a great deal of time promoting tax dodging. The big four have 1,649 subsidiary companies. For Barclays, HSBC and the Royal Bank of Scotland, a third of those companies are in—where would you guess?—the places where tax is fiddled. They are in tax avoidance places—Lloyds is a bit better, with only 20%.

Up to now, most criticism, both here and in the newspapers and so on, has been of the investment bankers speculating—“It’s a casino. Separate it out; ring-fence it; break it up”—on the grounds, apparently, that retail banking has been a really big success, when actually it has an appalling record. It was the retail arms of the big four that did all the PPI fiddles and the IRSA—interest rate swap arrangements—swindles. Indeed, the big four sold 34 million payment protection insurance polices. Between them, they are now having to set aside £14 billion to repay people who were swindled. That is what the money is for—simple stuff: it is a swindle. Between them, the big four are employing 10,000 people to administer the system of repaying the money they swindled. It is almost a banking job creation scheme.

Then there are the retail banks’ interest rate swap arrangements. Some 40,000 agreements with small and medium firms are now being reviewed. The idea was sold by the British Bankers Association to

“help insulate business customers against fluctuations in interest rates,”

11 Mar 2013 : Column 81

as the BBA put it, but that is exactly what interest rate swap arrangements did not do. A sample survey shows that 90% of the agreements being reviewed break existing banking regulations, yet small firms were bullied into accepting their terms in order to get a new loan or extend an existing one—if they did not agree, they would not get it.

Jonathan Edwards: Does the right hon. Gentleman agree that some instances of products being mis-sold by the retail elements of banks were driven by the investment arms of those entities? Ring-fencing will not go far enough. If we are to stop such abuses by the retail elements of the universal banks, we have to have full separation of investment and retail banking.

Frank Dobson: Yes, but if we are to get the changes we need, we also need to change the culture in both sectors.

The banks have never competed with one another, or at least not in trying to get customers. Rather, they have tended to compete by copying one another. When one bank comes up with a wheeze that swindles money, the bosses of the other banks say, “Why are they getting all this money in through this swindle? Can’t we do the swindle as well?” That is presumably how PPI started off at one bank and then went to all the others. Interest rate swap agreements certainly started at one bank and were then taken up by the others, because people in those banks felt they had to compete with the other swindlers down the road.

These people—this collection of money launderers, gun runners, drug money launderers, people who swindle small businesses and people who lose billions in their normal day-to-day business—are still paying themselves huge amounts of money. I know that the Prime Minister has a difficulty with facts, but I did not realise that he had a problem with adjectives, because when the Royal Bank of Scotland announced that it was paying £600 million in bonuses this year, he commended it—this bank of losers —for its restraint. That is not my definition of restraint. “Excess” is probably a better word in the circumstances. Restraint involves cutting the benefits of poor people and the pensions of the police, the nurses and the teachers. Restraint involves capping the pay of public employees. They have certainly been losing out. In 2009, I said that the two banks that were being semi-nationalised should have the normal public sector pay policies applied to them, and I think most people in this country would agree with that.

Kelvin Hopkins: I am greatly enjoying my right hon. Friend’s speech, and I agree with every word of it. Does he not find it interesting that Lord Lawson has recently suggested that the Royal Bank of Scotland should be brought completely into public ownership? That would involve only a small amount of money, and we would then have a bank that was publicly accountable and responsible.

Frank Dobson: I entirely agree with that. I also agree with my hon. Friend the Member for Bassetlaw that it would be good to see the Halifax building society separated out from Lloyds HBOS, so that what was the country’s leading firm could be relocated and its decisions could once again be made in Halifax, rather than in the City of London.

11 Mar 2013 : Column 82

Let us remember that while the people who are nursing the sick and carrying out operations in hospitals, the people who are teaching our children, the people who are policing our streets and the people who are risking their lives to fight fires are being restricted, HSBC is paying 204 people more than £1 million a year, Barclays is paying 428 people more than £1 million a year and RBS is paying 95 people more than £1 million a year. They are being paid those sums to play with other people’s money. That is all they are doing; if they lose but cannot go broke, they are clearly not playing with their own money. But not everyone at Barclays is getting £1 million a year; 100,000 people working for that bank are paid at a level that entitles them to child tax credit. What is more, it is people such as them all around the country who have been losing their jobs while that collection of losers at the top carry on.

Then we have the Prime Minister and the Chancellor, whose top priority in Europe is to prevent those horrible Europeans from imposing a limit on bankers’ bonuses. We used to be told that if we imposed such limits, the bankers would go elsewhere. We were told that they would go to Switzerland. Well, they will not be doing that since the referendum in that country, because they would now be worse off there than they would be here. Would they perhaps go to the United States? Some of them would have to think very carefully about that, because money launderers can be locked up over there, and that has indeed happened, even to Brits.

What all this boils down to is that the banking industry does not need mild tinkering; it needs a total worldwide transformation. Instead of acting as the back marker in the convoy, we ought to be out there banging a drum and getting a grip on the world banking industry, for the benefit of ordinary people in virtually every part of the world.

7.3 pm

Mark Field (Cities of London and Westminster) (Con): I shall endeavour not to stray quite so far from the Financial Services (Banking Reform) Bill as the right hon. Member for Holborn and St Pancras (Frank Dobson) has just done.

No one could accuse the Treasury or the coalition of rushing into banking reform; nor, to their credit, has there been anything other than the most comprehensive consultation with—and without—the banking industry here in the UK. I shall not repeat the timeline that other hon. Members have referred to, save to say that I accept the concern expressed by my hon. Friend the Member for Chichester (Mr Tyrie) that the Bill will not be considered directly in tandem with the report of the Parliamentary Commission on Banking Standards.

Above all, we all need to face up to our complacency. The conventional wisdom of the day, to which I fully signed up in the first half of the last decade, was that financial services would thrive best with light-touch regulation. What a difference half a decade makes! It was also during that period that the present Chancellor fatefully nailed his colours to the mast. Despite clear evidence that we were collectively living well beyond our means during the previous Administration, and amidst growing public and private debt, he decided to stick to the outgoing Labour Government’s spending plans and characterise our fiscal aspiration as “sharing the proceeds of growth.” I regret the fact that as a result, when the

11 Mar 2013 : Column 83

crisis hit home, my party was unable to make the orthodox Conservative case that the seeds of that financial destruction had been profligacy and the leverage that was referred to earlier. Instead, the established view was, and continues to be, that regulatory failings—of which there were undisputedly many—and reckless actions by the bankers were the primary, if not the sole, cause of the financial calamity. Hence the persistent demand for more extensive and punitive regulation of the banks, and the constant chatter of hostility towards bankers and all that they do.

My contention remains that the core issue that we need to tackle is global imbalances, many of which are still worryingly in place after a half decade of near stagnation economically. Alongside this, a generation of Britons—as well as Americans and continental Europeans—have lived and continue to live miles beyond their individual and collective means. We are still mortgaging the future of our children and grandchildren.

The Chancellor’s recent declaration that any UK bank failing to adhere to the Vickers safety regime would run the risk of being broken up was an understandably uncompromising response to the Treasury Committee’s demand for an electrified ring fence. Similarly, few could criticise the populist insistence that RBS would have to fund LIBOR—and, presumably, other future mis-selling—penalties from senior executive bonus pools. At a stroke, however, the Treasury has inadvertently imposed a permanent impairment on the value of the UK Government’s still huge stakes in the banking business. Our £66 billion investment in RBS and Lloyds is currently worth two thirds of what we paid for it. Nothing in the Bill will bring forward the date on which we, as taxpayers, will be compensated.

It is often claimed that the banking lobby, here and on Wall street, has used its considerable muscle to water down, undermine or even cast aside moves by politicians and public interest groups to rein in the banking system. Several Members have mentioned that tonight. Ironically, much of the criticism comes from the self-same media outlets that have placed intense pressure on elite politicians to dismantle the proposals for their own industry, as set out in the Leveson report. As a matter of fact, the banks have taken much of what has been proposed on the chin. Many have privately expressed great concern to me about the wisdom and practical application of ring-fencing, but they feel that they have no choice but to accept Vickers virtually in its entirety.

Ironically, existing financial services players could reap the unanticipated benefit that comes from erecting ever more onerous barriers to entry for potential new banks. Sadly, as the hon. Member for Wirral South (Alison McGovern) suggested, the zest of competition has been largely ignored in an effort to make banking safe and to punish banks for their past wrongdoing.

The City of London’s size and global reach continues to make the UK economy especially vulnerable to turbulence in the financial markets. The centrepiece of the Bill’s reforms—the plan to ring-fence domiciled banks’ retail arms from their investment ones—is based on the notion that the less risky retail operations require protection from the so-called casino excesses of investment banking. The aim to reduce the burden on the British taxpayer in the event of banking failure is, of course, a

11 Mar 2013 : Column 84

laudable one. Many in the financial fraternity are simply glad that the reforms fell short of a return to a full-blown plan along the lines of Glass-Steagall, to which my right hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell) referred. That was the US legislation that separated commercial and investment banking for almost seven decades until 1999. In addition, the big banks will now need to raise capital and loans equivalent to 20% of the part of their balance sheet for which UK taxpayers would be liable in a crisis.

The coalition Government were swift to accept the Vickers recommendations almost without reservation, giving British banks until 2019 to install their ring fence. However, I fear that the question of the separation of banks’ retail and investment arms has still not been successfully settled here in the UK. Fears have been raised that the Vickers reforms will tie up billions of pounds in additional capital and impose on banks a requirement to overhaul compliance and corporate affairs—a burden that will, I am afraid, have to be met by our constituents, the general public, in higher interest rates and in the sharply reduced amounts that banks are willing to lend.

One of the causes of this paralysing uncertainty that has enveloped the UK’s big banks is the mixed messages coming from the Treasury on the one hand and the central bank on the other over the dual requirements to recapitalise, and thus reduce the risks of future taxpayer bail-outs, while also being ready to lend to credit-starved UK plc as if it were 2006 or 2007 all over again.

Meanwhile, at EU level, the Liikanen report has recommended to the European Commission a similar, Vickers-style ring-fencing of retail banking from investment banking. This has given a small crumb of comfort that the UK might not be going down this path alone. However, I fear that the Liikanen proposals are sufficiently different from the Vickers proposals to heap further uncertainty on financial services here in the City.

Since there is likely to be precious little consensus between the EU, the UK and the US authorities any time soon as to whether the structure of banking is best under Liikanen, Vickers or indeed Volcker, how should banks realistically now prepare? Once again, I fear that the cost of all that uncertainty will be borne by the consumer and the wider economy, not to mention heavy job losses throughout the financial services industry. In this regard, it is important to nail the understandable public misconception, also heard here tonight, that it has been “business as usual” in the City since 2008. It would be fair to say that particularly over the past two years, volumes of business have collapsed, state financial support has been largely withdrawn and there has been and will continue to be a huge jobs cull. If we couple that with falling salaries and bonuses for the vast majority of workers, it means bad news all round, as Treasury receipts from financial services have plunged to what I suspect will be a new norm for the future.

Aside from the issue of commercial uncertainty, there are, I believe, question marks over whether the ring fence will actually work. The Bill’s template is based on a somewhat simplistic and outdated division between what amounts to wholesale and retail banking. There are numerous transmission mechanisms between the two that make a hard-and-fast split between high street and casino investment banking very difficult to achieve.