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As I said in my opening remarks, and as the report certainly makes clear, if any Member of your Lordships' House has a specific suggestion for an ad hoc inquiry into foreign affairs issues, we would be very happy to consider it. As I said in my opening remarks, and as is stated in the report, we are keen to establish more ad hoc committees-one at a time, I may say-which could, it is to be hoped, produce succinct and interesting reports for your Lordships. Perhaps the subject raised by the noble Viscount, Lord Slim, would be a suitable one for that.
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Arrangement of Business
Announcement
3.50 pm
Baroness Anelay of St Johns: My Lords, after the Statement to be repeated by my noble friend Lord Sassoon, the right reverend Prelate the Bishop of Leicester will lead a debate in which my noble friend Lord Wei will make his maiden speech. In anticipation of that, and of many more maiden speeches over the coming weeks, the House may wish to bear in mind the guidance in the Companion that, when a maiden speech is being made and during the following speaker's congratulations, Members of the House are expected to remain in their seats and not leave the Chamber. Those entering the Chamber are expected to remain by the steps of the Throne or below the Bar.
Financial Services Regulation
Statement
3.51 pm
The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, with the leave of the House, I shall now repeat in the form of a Statement the Answer given by my right honourable friend the Chancellor of the Exchequer to an Urgent Question asked in another place earlier today. The Statement is as follows.
"Mr Speaker, in 1997 the right honourable Member for Kirkcaldy and Cowdenbeath, as Chancellor, established without any consultation and without telling Parliament the tripartite system to regulate the financial system. In doing so, he removed from the Bank of England its historic role in monitoring overall levels of debt in the economy.
It is well known that the late Eddie George was deeply unhappy with the decision. It is also well known that the tripartite system of financial regulation failed spectacularly in its mission to ensure stability in the financial markets, and the failure of certain banks cost the taxpayer a vast amount of money. Indeed, the British taxpayers funded the largest bank bailout in the world and it was only in Britain that we saw depositors queueing in the high street to get their money back.
The British people rightly ask how this new coalition Government will learn from the mistakes of their predecessor. The coalition agreement commits us to reform the regulatory system for financial services in order to avoid a repeat of the financial crisis. That is precisely what we will do.
First, on the structure of regulation, our plan is to hand over to the Bank of England the responsibility for macro-prudential supervision, which should never have been taken away from it. The tools for macro-prudential supervision are the subject of ongoing international discussions. We are playing a full part in that process at European and G20 level, along with the governor of the Bank and the chairman of the FSA. It is already clear that the tools will include capital requirements that work against the cycle rather than with it.
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The coalition Government are also committed to handing to the Bank of England responsibility for the oversight of micro-prudential regulation. It is clear that the central bank needs to have a deeper understanding of what is going on in individual firms. My honourable friend the Financial Secretary will give further details of the institutional arrangements in a parliamentary Statement tomorrow. It is important that the institutions involved correctly follow their own internal procedures before those arrangements are made public, and the governor of the Bank is talking to the Court of the Bank this afternoon.
The coalition Government will also deliver on our promise to establish an independent commission on banking. The previous Government would brook no debate about the future structure of the banks, the relationship between retail and investment banking, how best to protect taxpayers and how to ensure greater competition in an industry that they actively sought to consolidate. The previous Prime Minister did not want anyone to challenge his opinions, but we cannot ignore this debate about the future of banking. Indeed, I want Britain to lead it. So we will establish the commission on banking to investigate these issues and it will be chaired by Sir John Vickers.
John Vickers is a former chief economist at the Bank of England, was one of the first members of the Monetary Policy Committee and is a former chairman of the Office of Fair Trading. He is a man of unquestioned experience, integrity and independence, who approaches this issue with an open mind. I am today placing in the Libraries of both Houses the terms of reference. We await the conclusions of the commission.
Unlike the previous Government, this Government are prepared to confront the difficult challenges of the regulation and structure of the banks. We are prepared to learn the lessons of what went wrong, even if they were not".
My Lords, that concludes the Statement.
3.55 pm
Lord Eatwell: My Lords, I am most grateful to the Minister for repeating as a Statement the Chancellor's Answer to an Urgent Question in another place. The Government's proposal that the Bank of England assume responsibility for macro-prudential supervision and oversight of micro-prudential regulation clearly involves major disruptive institutional change in the FSA and the Bank of England. I look forward to examining the details of these institutional changes tomorrow.
The changes clearly diminish the future role of the FSA. The Minister cited the views of the late Governor of the Bank of England on the reforms of 1997. Given the major role played by the noble Lord, Lord Turner, in modern thinking on regulatory reform, will the Minister give the House some insight into the views of the noble Lord on these proposals?
The Independent Commission on Banking announced by the Chancellor could herald the most important change in the structure and operation of the British economy since the war, an even more important change than the big bang. Given this importance, will the
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Will the Minister also clarify the relationship between the work of the commission and the Government's stance at the G20 meeting in Seoul in November? The Minister will recall that the G20 communiqué of September 2009 declared:
"We commit to developing by end-2010 internationally agreed rules to improve both the quantity and quality of bank capital and to discourage excessive leverage".
That means that the Seoul meeting will be crucial in settling many of the issues that are included in the terms of reference of the commission, but the commission is due to report, we are told, by September 2011. Is that not 10 months too late? In another place, the Chancellor declared that the Government intend "to lead the debate" in the G20 forum. If that is so, does it not suggest that the Government will need to have made up their mind on a number of key regulatory issues before the commission reports? Will the Minister also tell the House whether Her Majesty's Government support the G20 commitment to the establishment of internationally agreed rules, given that such rules will, of course, bind Her Majesty's Government?
In discussing the Urgent Question, the Chancellor of the Exchequer suggested in another place that Her Majesty's Government will follow the US authorities in requiring that all derivative instruments be traded on markets with central counterparties. Will the Minister confirm that that is indeed the Government's position?
As we heard from the Minister, the Chancellor the Exchequer, referring to the tools of macro-prudential supervision, told another place:
"It is already clear that the tools will include ... requirements that work against the cycle rather than with it".
Is the Minister aware that Jacques de Larosière, the former head of the IMF, told the Economic Affairs Committee of your Lordships' House on 10 March last year that the use of such tools of cyclical management is akin to the use of fiscal policy and that they therefore involve a significant transfer of power from the Executive and the legislature to the regulatory authorities, in this case the Bank of England? Given this extraordinary increase in the powers of the Bank of England, will the Government be considering changes to the governance of the Bank? Is it right that the role of chairman and chief executive should be combined in the person of the governor, an arrangement that diminishes the role of the court and seriously limits the public accountability of the Bank?
4 pm
Lord Sassoon: I am grateful to the noble Lord for his large number of questions. I will attempt to deal with as many as I can.
First, the noble Lord drew attention to the noble Lord, Lord Turner, and asked for his views. That gives me the opportunity to commend the noble Lord, Lord Turner, for the work that he has done to help to frame
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The noble Lord then asked about the membership of the commission. I can say that the Government will announce the full membership of the independent commission shortly. Membership will require a well balanced set of skills and experience covering banking, business, competition, consumer issues and regulation. I note that the noble Lord makes a pitch on behalf of the noble Lord, Lord Myners. The noble Lord, Lord Myners, is shaking his head-he does not want to be part of the commission, or perhaps, although he has very many talents, he is too modest to put his name forward now. However, I note the pitch on his behalf.
The noble Lord, Lord Eatwell, then asked a number of questions about the G20. I assure him that, on many aspects of the regulatory architecture going forward, we need to make sure that there are indeed internationally agreed rules and that, by putting in place the structure that we have announced today, we will be able to lead the debate in the G20 and at the European level about the appropriate tools for the Bank of England going forward. Although the noble Lord talked about tools in relation to the banking commission, I think that the relevant question is: what are the appropriate tools for the Bank of England to carry out its new mandate? I certainly agree with him that we should lead the debate on that.
The noble Lord also talked about cyclical management tools. I take it that he agrees that we need a tool-kit that will work against the cycle, rather than the previous set of tools, which amplified the effect of the cycle, and that it is absolutely critical that that tool-kit is in the hands of the Bank of England, which will be charged with responsibility for identifying issues of debt building up in the economy. However, not only will the Bank be charged and enabled to identify the build-up of debt but it will have the tools to deal with that. What was missing before is that no one was in charge of either identifying or dealing with the problems that were arising. In the new structure, the Bank of England will clearly have both the means to identify the problems and the tools to deal with them.
As for matters of bank governance, those I put in the category of institutional arrangements, which we will come back to once there has been a further Statement.
4.03 pm
Lord Myners: My Lords, I welcome the Minister's repeat of the response to the Urgent Question in the other place; it is good that we have this information before the Mansion House speech tonight. I also welcome the appointment of Sir John Vickers, a man ideally suited to chair this commission.
The speech by the right honourable gentleman the Chancellor of the Exchequer is charged with political overtones. It seeks to rewrite history. The Chancellor must rise to the standards and callings of his office
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A clear error in the Statement is a reference to the support that the taxpayers provided to the banking system, but no reference at all to the fact that the taxpayers now have a gain on the support that they showed to the banking system in excess of £10 billion, a considerable amount of money that could, for instance, be used to capitalise a new bank to support lending to SMEs.
The devil as always is in the detail. One of the problems with the commission is that its report will be too late. As my noble friend Lord Eatwell said, the Seoul meeting of the G20 will be the critical decision-maker on the structure of banking globally, yet this report will come well after Seoul. Surely it is right that there should be an interim report from Sir John Vickers before Seoul, so that we can test the Government's position in Seoul against the recommendations coming forward from Sir John Vickers and his group.
I have a number of questions, which I raise with some fear that they may not be answered. We are still waiting for answers from the noble Lord, Lord Henley, to questions asked during the Queen's Speech debate and an answer from the noble Lord, Lord Sassoon, in relation to the debate on competitiveness. It is unfortunate to see that the Treasury is already lagging in terms of response to questions.
Will the Minister explain where macro-prudential regulation morphs into micro-prudential oversight? In the first sentence the Minister says that macro-prudential regulation should never have been taken away from the Bank of England, but in the second sentence he says that the Government are still developing their thinking on macro-prudential supervision.
Lord De Mauley: My Lords, perhaps I may remind noble Lords that, although brief comments and questions from all quarters of the House are allowed, Statements should not be made the occasion for an immediate debate.
Lord Myners: I am asking questions, as I have made clear. I am just into the third minute and I beg the House's indulgence to ask one or two other questions.
A noble Lord: Just one more question.
Lord Myners: One more question. I believe that the Minister should make it clear whether this proposed commission is likely to lead to the breaking up of the British banking system. If so, he should make a clear statement to that effect. Not to do so would be to run the risk of a false market in the securities of our major banks.
Lord Sassoon: I thank the noble Lord, Lord Myners, although I think that he may have forgotten that he is no longer on the Front Bench. He raises a lot of
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Among other things, the noble Lord says that the report of the banking commission will be too late. It will not be too late, but, of course, this work should have started months ago. The previous Government would brook no discussion of the structure of banking, notwithstanding some very clear steers, not least from the report of the Select Committee on Economic Affairs of your Lordships' House, Banking Supervision and Regulation. I think that the noble Lord, Lord Eatwell, was even a member of the committee and the sub-committee that worked on the report. The report, dated 2 June 2009, states that,
- "the tripartite authorities in the United Kingdom ... failed to maintain financial stability and were found wanting in dealing with the crisis".
Among other things, it goes on to state:
"The Committee recommends that the Government"-
that is, the Government in June 2009-
So it ill behoves the former Minister, the noble Lord, Lord Myners, to say that things are too late.
As to questions of reporting, it will be up to the banking commission to decide what it will do by way of interim reports.
Lord Bilimoria: My Lords, does the Minister agree that the formation of the independent Monetary Policy Committee was actually a very good move by the previous Chancellor and has provided both a proactive and a reactive ability to set interest rates? Will he therefore reassure us that the structure and remit of that committee is not going to be tampered with? On the other hand, we know-and the Statement reaffirms-that the tripartite system was an absolute disaster. It was a happy merry-go-round between the FSA, the Treasury and the Bank of England in the good times which then became a disastrous "blame-go-round". With regard to speed, referred to by the noble Lords, Lord Eatwell and Lord Myners, does the Minister remember that when the Northern Rock Bill went through this House, it was pointed out that in 2006 the FSA had noticed that Northern Rock was a problem and had marked it for review in 2009. That is how disastrous the FSA's role was in this situation, so speed is of the essence. Can the Minister assure us that the measures set out in the Statement will be put in place quickly?
On the role of the Governor of the Bank of England, whether he is chairman and chief executive put together, the reality is that every senior banker I have spoken to in the past has said that whenever the Governor of the Bank of England called, they would jump, react and listen-and it worked. I am delighted to hear that powers of supervision are to be granted back to the
16 Jun 2010 : Column 990
Lord Sassoon: I am grateful to the noble Lord, Lord Bilimoria, for those comments. I can confirm that the MPC has indeed served the country well and that there are no plans to change its remit. I also agree that the word "disaster" is entirely appropriate and that the FSA got itself into a mindset in which there was far too much of a box-ticking approach and too little consideration for the big picture. But to be fair to the authority, when the whole question of Northern Rock blew up, it did then go on to make a candid, frank and rapid assessment of what went wrong.
I note the noble Lord's point about the need for speed, and I think we should come back to that after my honourable friend the Financial Secretary to the Treasury has set out further details of the institutional arrangements.
Lord Higgins: My Lords, I congratulate the Government on transferring these responsibilities back to the Bank of England where they ought to have remained all along. I have just two questions, since I think that that is the convention on Statements.
First, my noble friend has referred to a "toolkit" for macroeconomic management. May I ask him yet again to ensure that the Debt Management Office, which was also transferred from the Bank of England to the Treasury, should be taken back into the Bank so that it can take an overall view of the monetary policy aspects of macroeconomic management? Secondly, my noble friend will have seen widespread press reports recently about another commission on banking-a private enterprise commission, so to speak. Have the Government had an opportunity to study its report and form a reaction to it?
Lord Sassoon: I thank the noble Lord, Lord Higgins, and share with him what he says about the Bank of England. It is clear that the macro-prudential toolkit will likely focus on capital liquidity and leverage, and it is for further consideration as to what other tools may be appropriate. On the other work that has been done by the Which? Commission and people in other countries, it should remind us that whether it is in the US, at the European level or by the cross-party Which? Commission here, just about everyone except the previous Government was getting on with looking at the structure of the industry. That emphasises why we should waste no time in getting on with the commission's work now.
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