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Of course there were many other factors at work in the banking crisis; it was not just a story of regulatory failure, nor was such failure confined to the UK. The inescapable truth, though, is that before 1997 we had a system of banking regulation that by and large worked, and the Government created one that, when put to the test, by and large did not. The Government cannot escape blame for that.
If we had a Prime Minister who could take responsibility for his failings, we might have had a different set of proposals this week, but the Prime Minister cannot admit fault so his Chancellor is equally unable to do so on the Government's behalf. If my party is elected at the next general election, we will not have that inhibition. As my honourable friend George Osborne announced yesterday in another place, we will restore the responsibility for microprudential supervision of banks to the Bank of England, together with other systemically important businesses and activities.
In doing so, the other responsibilities of the FSA will be more focused. There are crucial tasks of consumer protection and oversight of markets, and we need an organisation which is built around the cultures that are needed for those tasks. Leaving the very different microprudential supervision to fight for attention alongside these issues in a large and unwieldy organisation is not the right answer, and we reject the Government's defence of the status quo.
By locating microprudential supervision within the Bank, we can reunite macro and microprudential supervision, which were torn asunder by the Prime Minister in 1997. It is theoretically possible that the 1997 ideas on tripartite authorities could have worked, but the Prime Minister's design simply did not fly.
This set of proposals from the Government pretends that, by renaming an imperfect arrangement and adding a tiny bit of transparency, it will fly. The proposed council for financial stability is just the tripartite arrangements in fancy dress. It may be less harmful than the existing tripartite arrangements, but it does not address the need for macroprudential supervision to have proper tools and linkages to microprudential supervision to work effectively.
The Government are rather late converts to the notion that the FSA has to have a defined role in financial stability if the current structure is maintained. The Government rejected this during the passage of the Banking Act earlier this year. But we now need to move beyond sticking plasters to hold together arrangements which are broken. We do not need the FSA involved in financial stability; we need a fresh start. The Conservatives' proposals would provide this.
There are of course some aspects of the Government's proposals which we can support, even though much in the documentation is still very vague. We have called for a long time for countercyclical regulatory capital and for effective liquidity supervision and regulation. We support increasing the regulatory focus on high-risk firms and activities. We look forward to seeing Sir David Walker's proposals on governance. We support the elimination of unacceptable remuneration practices. We have also long argued for industry-financed support for financial capability. We also support greater powers to deal with market abuse and the conduct of individuals.
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However, we must sound a note of caution in all these areas. Financial services are global businesses and there is little natural loyalty to any country. If the UK runs ahead of the international community, as these proposals seem to suggest in some areas, we could be cutting off our nose to spite our face.
Of course, we all feel let down by the banks and want to impose tighter controls over them, but if the result is that the international competitiveness of the UK is harmed or if firms feel driven to leave the UK, then government action will be counted a failure, possibly of massive proportions. Whether we like it or not, financial services are a major part of the UK's GDP and we must act proportionately and carefully.
I do not know whether the paper that came out yesterday is a White Paper or a Green Paper. The Statement is studiously vague. Is this is a statement of intent from the Government which will result in action, or it is merely a statement of views which might result in action? The annexes to the document are much more tentative than the front part, and even where a firm intention is signalled, there is little on the timetable.
I hope that the Minister can today set out exactly what the Government intend to do over the next nine months or so. Will he set out for the House what the Government intend to include in legislation and when? The White/Green Paper states that a Bill will be brought forward in the next legislative Session. Precisely what will it cover? Do the Government intend to give it priority in the next Session, because, without priority, it has little or no chance of reaching the statute book? I am sure I do not have to say that, unlike the case of the last Banking Act, the Government cannot rely on these Benches to smooth the passage of the next Bill if its content diverges from our own policies. In the mean time, there are more urgent things for the Government to deal with. These are barely touched on in yesterday's proposals, though referred to tangentially in the Statement.
In Europe, our negotiating position is at best weak. The protections achieved in the proposed European regulatory arrangements do not go anything like far enough to protect our financial services industry from those parts of Europe which have long resented the success of the City of London. We may not even have the protection of qualified majority voting if the Government do not get their act together fairly soon. The Minister has been forthright in this country on the appalling alternative investment funds management draft directive, but how in practice are the Government going to stop this particular juggernaut given that it is being powered and steered by France and Germany?
The Government need to ensure that there is effective co-operation and decisive working at international level, not just within Europe. We cannot go it alone on regulatory changes and the Government in particular need to ensure that the United States is bound into international action. The history of the United States, which did not even implement Basel 2, is not encouraging here. How will the Government ensure that the G8 and G20 move beyond mere words? These are issues that should be pre-occupying the Government, not rearranging the deckchairs of the tripartite authorities.
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12.01 pm
Lord Newby: My Lords, after the 1992 general election, my noble friend Lord Ashdown, who was then leader of the Liberal Democrats, made a speech in the small town in his constituency called Chard. The late Lord Russell-Johnston did not like it, saying that the Chard speech sounded more like a burnt offering. Whether this is a burnt offering or a damp squib, or whatever the most appropriate analogy, in our view this White Paper fails completely to offer a decisive response to the extraordinary banking crisis through which we have come.
I shall deal with some of the issues in the order that the Minister dealt with them. We agree that there needs to be better consumer advice, but the model that the Government have adopted is fatally flawed. To give the FSA, even before the crisis, responsibility for managing consumer advice rather than going to people like the citizens advice bureau, was nonsense. Now to enshrine that in legislation makes it worse. Secondly, why, if the Government are so keen that consumers should be protected from unnecessary risk, have they instructed RBS to give a proportion of its mortgages at at least 90 per cent loan to value during a period of continuing falling house prices? Is that not just supporting unnecessary risk?
The Government want to see greater competition in the banking sector and we agree, but these proposals will do nothing to bring that about. Why do they not forestall a decision that is likely to be made by the EU, and break up RBS or the Lloyds Banking Group? The Government want to promote mutuals and so do we, but the White Paper suggests that they will set up a working group to look at it. That is just pathetic. Why not, if they are going to break up some of the banking groups, turn parts of them into a mutual? Halifax has a nice ring to it, and so does Northern Rock, but the White Paper contains nothing of any substance in that respect.
We agree with proposals that capital adequacy rules should be tightened up, but the whole question, which the noble Baroness concentrated on, of the management of macroprudential risk and financial stability as a whole is made a greater muddle by the White Paper. We thought when the Banking Bill was going through that the establishment of a financial stability committee in the Bank of England meant that it would be responsible for overall financial stability. We argued that it should in fact be a joint committee with the FSA, but the Government propose that the FSA has its own committee looking at financial stability. In addition to that, they want the Treasury to have its own committee looking at financial stability, called the council for financial stability, chaired by the Chancellor-in effect, a third financial stability committee. That is a greater recipe for disaster than the existing tripartite arrangements.
We on these Benches do not agree with the noble Baroness that simply ripping the heart out of the FSA in terms of its supervision of major financial institutions and returning that to the Bank of England makes best sense. The Bank of England's reputation and track record in dealing with financial and banking crises is not unblemished. But while we do not agree with that,
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The Government have turned their face against even a modified version of the Glass-Steagall Act and hope that they can avoid the problems that that Act sought to deal with by better capital adequacy rules. Given that the major banks are, in effect, underwritten in all their activities at present by the Government, will the Minister give the House a convincing reason why the Government should underwrite the casino banking activities of the major banks, and why a firewall cannot be established between them and the deposit-taking activities, which one can see, at the end of the day, will always require government underwriting? The Statement says that the House, by which no doubt the Chancellor means the House of Commons, would consider how to increase accountability through greater parliamentary scrutiny. Will that include consideration of your Lordships' Economic Affairs Committee having a greater role in this area?
We agree that we need greater international co-operation and we are glad that the Government promote it. We agree that the Minister should take the kind of tough stance he is taking in the EU in respect of the proposed legislation on hedge funds. But when one talks to anyone in the City or any financial institution about the Treasury's activities in Europe, we are always told that they are woefully understaffed and come to the issue late. Despite impressive speeches by the Minister, what is required is a bigger, long-term, intensive staff input at European level to ensure that we do not get into the mess we are now in, with badly prepared proposals coming forward, and that, if we do, we have the resources to lobby effectively. Will he assure the House that those resources will be forthcoming, as they appear not to be in place now?
Finally, we agree that the Government should return our stake in the banks to the private sector in a way that brings best value to the taxpayer, promotes competition and maintains stability, but will he assure the House that the Government will not rush to get these banks back into the private sector? Does he accept that in most places where banks have been brought under public ownership such as Sweden, the States and elsewhere, it has tended to be 10 years before they returned to the private sector? Will he assure us that they will not be sold on the cheap in order to deal with any short-term financial problems of the Government instead of ensuring that the taxpayer gets a long-term benefit rather than a disbenefit from their period in public ownership?
12.08 pm
Lord Myners: My Lords, I welcome the contributions from the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby. The framework set out by my right honourable friend the Chancellor of the Exchequer yesterday in his speech in the other place and in the document that we published yesterday afternoon is a strong one, which draws on the competencies and strengths of the Bank of England, the Financial Services Authority and the Treasury. In its development, we consulted extensively over a long period of time with a
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The noble Baroness refers us back to the structure before 1997. Let me respond to that, and let me also respond in a moment on the structure before 1986. Before 1997, we had a proliferation of largely self-regulating entities. I was in the financial services sector myself at the time. The company which I led was a member of or regulated by more than four separate bodies in the United Kingdom: the SIB, the FSA, the PIA, IMRO, the DTI, the Bank of England and many others. That surely cannot be an appropriate model to which we should aspire to return. Indeed, it is clear that the world is moving towards increased consolidation of financial supervision into a single body, reflective of the fact that businesses are increasingly organising themselves across multiple business lines.
The noble Lord, Lord Newby, reminds us that the history of banking supervision prior to 1997 was not without its blemishes. One remembers BCCI and Barings. The noble Lord, Lord Lawson, whom I see in his place today, reminded us earlier this week about Johnson Matthey. Before that, in the early 1970s, when I first came to work in the City, we had the secondary banking crisis. There is no evidence that we should, as the noble Baroness suggests, go back to a system that was somehow perfect and which would address current failures in supervision, which are not isolated to the United Kingdom. We have seen significant banking failures in the United States of America, Switzerland and Germany and many other jurisdictions where there are radically different structures.
At the heart of my right honourable friend's proposal yesterday is a clear message about judgments and behaviours. The solution to severely reducing any possibility of a repeat of the experience of the past two years must lie in behaviours, judgments and social factors, rather than architecture. The noble Baroness has failed to appreciate the importance of the council for financial stability. The heart of this radical and powerful proposal will be in transparency and accountability. This will bring together the complementary skills of the Bank of England, in macroeconomic analysis, and the Financial Services Authority, in its familiarity with the institutions that it supervises-a familiarity which, as we know, will now be tested against far higher standards as a consequence of the enhanced supervisory programme introduced by the noble Lord, Lord Turner, and the board of the Financial Services Authority.
At the heart of that will be clear and open reporting of the views expressed. The governor has talked about giving sermons to an empty church. His sermons, his encyclicals, will now be widely reported. In particular, to address comments from some observers, the Bank of England will in future make it very clear what actions it believes should be taken in the light of its analysis of the macroeconomic situation. So that will be not only a sermon that tells us about sins, failings, and shortcomings, but one which gives us hope and guidance, by pointing out the actions that should be taken. In the event that the FSA does not respond constructively and positively, that will be a matter of record. That is of considerable importance.
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I wrestle with the noble Baroness's comment-I believe that I cite her correctly-that we do not need the FSA involved in financial stability. That is an extraordinary statement, if that reflects the view of the party opposite. I said that I would take us back to 1986. I do so in part because of the debate about Glass-Steagall, which I fully anticipate that the noble Lord, Lord Lawson, will speak to shortly. Prior to 1986, we had a form of Glass-Steagall in this country, but we brought that to an end with what is colloquially known as big bang. Big bang removed the barriers that existed, separating much of the activity that takes place under the heading of investment banking from retail and commercial banking. From recollection, the party opposite was in power at that time.
I welcome the noble Baroness's strong endorsements for the proposals made in connection with capital, liquidity, strengthening governance and addressing issues about remuneration, and her support-support reiterated by the noble Lord, Lord Newby-for education and steps to improve consumer information. She said that there would be dangers if we ran ahead of other countries in the steps that we were taking. My right honourable friend was clear that we are working at the heart of the G20 and EU to ensure that we take other countries with us. We will run ahead of other countries if that is defined as leading the debate, setting the standards and insisting on change, but we will not become detached from other countries to a point where it would disadvantage British businesses and British retail customers of our banks.
The noble Baroness asked what we would do over the next nine months. We will consult, engage, lead the debate and take forward programmes to set higher standards around issues such as accounting, derivatives and central clearing parties, and to participate fully in the debate about macroprudential supervision. The legislation we propose to bring forward is detailed clearly in annexe A of the paper; it will focus on the establishment of the council, and we will give it priority in our legislative programme. In parallel, we will work hard to help our partners in Europe understand the flaws and misunderstandings in the current draft directive on the alternative investment management industry. We are already working to make progress on that. I assure the noble Lord, Lord Newby, that in my judgment the FSA has appropriate support and resource in place here.
I welcome the strong statements of the noble Lord, Lord Newby, in support of consumer empowerment. I assure him that we have not given any instruction to the RBS about making loans in respect of 90 per cent of loan to value. We leave that matter in the hands of those at the Royal Bank of Scotland. They are the competent people, under Sir Philip Hampton and Mr Stephen Hester, to make those decisions.
I have already spoken about Glass-Steagall. The noble Lord, Lord Newby, said that it was assumed that reference to "the House" was to the other place; in that, he is of course correct because I was reading my right honourable friend's Statement. However, I certainly expect the appropriate committees of this House to take an active interest in the reports and minutes of the council for financial stability.
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I assure the noble Lord, Lord Newby, that it is not the Government's intention to rush to sell shares in the Lloyds Banking Group and the royal bank. We are clear that the taxpayer has taken significant risk, made a large investment and expects to be appropriately rewarded for that. I have no doubt that it will be. At the time that we made those investments, I said that I was confident that the taxpayer would make a large profit. My confidence in that is greater now than when I made that statement. We will make the sales when we think it is appropriate to do so; when we get a fair reward; and when it contributes to competition and sustaining the significant improvement in financial stability, which my right honourable friend has already achieved with his strong and confident actions.
12.20 pm
Lord Lawson of Blaby: My Lords, the Chancellor's Statement, which the Minister kindly repeated, represents an inadequate, complacent and muddled response to what is undoubtedly a very complex, but also very important, problem. I do not want to dwell on the past, but since this has come up I have to say that the Minister inadvertently misled the House. Conduct of business regulation and prudential supervision of the banking system are two quite separate activities. Both have their place and both are very important. It was the conduct of business regulation of the financial sector that was divided pre-1997. Prudential supervision of the banking system, which is at the heart of the matter, was greatly strengthened by the Banking Act 1987, which I put through. It was not divided at all. It was weakened by the present Prime Minister in 1997, and that is one of the reasons for all the subsequent problems.
The noble Lord expected me to say something about Glass-Steagall and I will not disappoint him. Does he recall that on 24 June the Governor of the Bank of England, giving evidence to the Treasury Committee in another place, revealed that, culpably, the Government had not consulted him on the proposals that they were working on? He also explicitly drew the committee's attention to, and agreed with, the remarks of Paul Volcker, the former chairman of the United States Federal Reserve system and now an adviser to President Obama, who said that commercial banks,
- "be engaged in substantial risk-prone proprietary trading and speculative activities that may also raise questions of virtually unmanageable conflicts of interest".
In the Statement repeated by the noble Lord, he described this separation as "simplistic". Is he really saying that the views of the highly experienced Mr Volcker and the Governor of the Bank of England are simplistic?
Lord Myners: My Lords, whether I inadvertently misled the House is a matter of judgment. For the avoidance of doubt, I make my view clear that legislation taken through Parliament when the noble Lord, Lord Lawson, was Chancellor of the Exchequer delivered a significant improvement in the prudential supervision of a more broadly defined banking sector than had previously been the case. The views of the governor
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