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The noble Baroness made a point about the connection between jobs and investment. There is a particular connection between Sheffield Forgemasters and the nuclear industry and we are of course continuing to support collaborative projects such as the nuclear Advanced Manufacturing Research Centre, which is led by Sheffield University, so we remain absolutely sensitive to the job creation priority to which she referred. She also talked about the construction industry.

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In respect of all industries, I go back to where we start on this, which is that we have to keep interest rates low and show that we are getting a grip on the deficit. We also have to provide a basis on which the private sector can lead the economy forward.

The Lord Bishop of Ripon and Leeds: My Lords, I want to ask about the implications of the Statement and the philosophy behind it for the voluntary sector, in particular where that sector provides resources, thus fulfilling exactly the requirements of a big society. What reassurance can the Minister give to those of us who develop local projects, such as those for English as a second or other language, using government money alongside voluntary contributions? We have employed people to develop such projects and it is crucial that that contribution is not now wasted through lack of funding at this stage.

Lord Sassoon: I am grateful to the right reverend Prelate for raising that point. I am not aware of any particular projects referred to in the Statement where the co-mingling of voluntary contributions and public money will be affected. However, I will take that point back, consider it and, if there are projects that fall into that category, refer the relevant departments to him so that he can get a specific response. I take his general point that the Government should continue to encourage projects that involve joint public and private funding, whether from the voluntary sector or from other parts of the private sector.

Lord Higgins: My Lords, does the Minister agree that the debate between the two sides on how quickly cuts should be made is largely false? Those of us who have been involved in expenditure cuts know that frequently there is a long time lag between a decision being taken and its having any effect. To the extent that things can be done quickly with regard to the items mentioned today, that is all to the good, but we must recognise that these cuts are bound to be spread over a long period, however quickly we try to do them. On the need for aggregate demand to increase steadily, is he not concerned that, despite quantitative easing, the increase in the money supply has been virtually nil and, in some cases, negative? That will need to be taken carefully into account if we are to have further growth in the economy.

Lord Sassoon: My Lords, I thank my noble friend Lord Higgins for that. He is right: there is a considerable time lag on many expenditure decisions. That is why it is so important to send a signal to the markets-we have comprehensively done so in today's Statement and in the earlier Statement on the £6 billion-worth of cuts-to show that we are getting on with it. As I explained, the cuts today will save close to £500 million on unaffordable and poor-value-for-money projects in the current year. As to aggregate demand and the money supply, I take his point that the flow of credit to business is critical. I expect my right honourable friend the Chancellor of the Exchequer to refer to that in the Budget next week and to explain how we are driving our policies forward.

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Lord Christopher: My Lords, picking up on the point made by my noble friend Lady Farrington, the Minister indicated that the Government are now heavily relying on private investment in projects that have been dropped. My noble friend mentioned Sheffield Forgemasters, about which we have been given little information, but if you are going to rely on the private sector in that area, you are certainly seeking to whip a dead horse. The private sector has not contributed to any significant degree in the specialist steels required in the nuclear industry, in which I have had a past interest; it was deplorable to me to see how much steel was being imported in order for us even to maintain and expand what we had in the nuclear industry. Does the Minister agree that it is right that the public should know how much the Government expect to expend in importing steel instead of making it, how many jobs might have been created that will not now be created, what will be the loss to the local community because this is not being proceeded with and-to take up the point made by the noble Lord, Lord Higgins-whether this decision makes any sense, as the money was going out not this year or next year but progressively over a considerable period?

Lord Sassoon: I thank the noble Lord, but it would be wrong to call Sheffield Forgemasters a dead horse, which I think I heard him say. Sheffield Forgemasters makes some of the largest forgings-

Lord Christopher: I did not say that. I said that if you were to rely on the private sector to fill the gap that you have now created, you would be flogging a dead horse. History shows that to be a reasonable point of view.

Lord Sassoon: I am grateful for that clarification. However, given that Sheffield Forgemasters is one of the very few firms in the world capable of making the largest forgings required to supply critical components to the civil nuclear industry, there is every expectation that there may be a private sector solution out there. I stress the broader point about jobs: we need to underpin the economy on a firm foundation, where the private sector can go forward and create the jobs that we need, whether in steel or many other industries.

Baroness Sharp of Guildford: My Lords, perhaps I may press the Minister a little further about the Stonehenge visitor centre. Stonehenge is a world heritage site and attracts the most visitors within the UK. The current visitor centre is a disgrace. Plans have been under way for a long time and it has taken a long time to get the planning permissions in place, which has now just been achieved. Of the money to be spent, only £10 million is coming from Her Majesty's Government; the rest is coming from English Heritage and other private sources. Is it really necessary to cancel this now?

Lord Sassoon: I thank my noble friend Lady Sharp. I was at Stonehenge last year and it is clearly one of the most inspiring sites in this country. However, we have to be realistic about the predicament in which the economy has been left by the previous Government.

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There are certain projects that we simply cannot afford and which do not represent good value for money. The £25 million Stonehenge visitor centre is one that fails the test.

Baroness O'Cathain: Can my noble friend confirm that the Department for Culture, Media and Sport has stated that, if it could get private funding for this, the project would go ahead? This is yet another important area. There is a lot of money sloshing around in the arts world, but it is directed to projects that are not as important as a good visitor centre at Stonehenge. By implication, I am sure that many people thought today that we were going to let Stonehenge crumble way. The stones are wonderful, but we are concerned about access and the visitor centre. It seems an awful lot of money to spend on a visitor centre.

Lord Sassoon: I am grateful to my noble friend Lady O'Cathain for pointing out the pressures within the DCMS budget, as there are within the budgets of other departments. Difficult decisions will have to be made in all departments. This could be a project-I do not know-where there may be a private sector solution.

Banking Reform


2.37 pm

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, with leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Financial Secretary to the Treasury. The Statement is as follows.

"With permission, Mr Speaker, I wish to make a Statement on the Government's plans to reform the institutional framework for financial regulation.

The tripartite system of financial regulation failed spectacularly in its mission to ensure financial stability and that failure cost the economy billions. The British people rightly ask how this Government will stop it happening again. This is why our coalition agreement committed us to reform the regulatory system for financial services in order to avoid a repeat of the financial crisis. Today I would like to set out in detail the changes to the regulatory architecture that will make this possible.

At the heart of the banking crisis was a rapid and unsustainable increase in debt. Our macroeconomic and regulatory system utterly failed to correctly identify the risk this posed, let alone prevent it. No one was controlling levels of debt, and when the crunch came no one knew who was in charge. So we need a macro-prudential regulator that has a more systematic and detailed knowledge of what is happening, not only in individual firms but across the financial system as a whole. Only central banks have the broad macroeconomic and markets understanding, the authority and the knowledge required to make macro-prudential judgments.

We will therefore place the Bank of England in charge of macro-prudential regulation by establishing

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within the Bank a Financial Policy Committee. We will also create two new, focused regulators: a new prudential regulator under the Bank of England, headed by a new Deputy Governor; and a new Consumer Protection and Markets Authority-the CPMA. All the new bodies will be accountable to Parliament and their remit will be clear, so that never again can someone ask who is in charge and get no answer.

First, we will legislate to create the Financial Policy Committeein the Bank of England. It will have the responsibility to look across the economy at the macroeconomic and financial issues that may threaten stability, and it will be given tools to address the risks it identifies. It will have the power to require the new Prudential Regulation Authority to implement its decisions by taking regulatory action with respect to all firms.

The FPC will be accountable to Parliament in two ways: directly, as is the case with the MPC; and also indirectly, through its accountability to the Bank's Court of Directors. The governor will chair the new committee. Its membership will include the deputy governors for monetary policy and financial stability, the new deputy governor for prudential regulation, the chair of the new Consumer Protection and Markets Authority, as well as external members and a Treasury representative. An interim FPC will be set up by this autumn in advance of legislation.

Secondly, we will legislate to create a Prudential Regulation Authority-PRA-as a subsidiary of the Bank of England. It will conduct prudential regulation of sectors such as deposit-takers, insurers and investment banks. The PRA will be chaired by the Governor of the Bank of England, and the new deputy governor for prudential regulation will be the chief executive. The deputy governor for financial stability will also sit on the PRA board.

Thirdly, a new Consumer Protection and Markets Authority will take on the FSA's responsibility for consumer protection and conduct regulation. The CPMA will regulate the conduct of all firms, both retail and wholesale-including those regulated prudentially by the PRA-and will take a proactive role as a strong consumer champion. It will have a strong mandate for ensuring that financial services and markets are transparent in their operation so that everyone, from someone buying car insurance to a trader at a large bank, can have confidence in their dealings and know that they will get the protection they need if something goes wrong.

The CPMA will regulate the conduct of every financial service business, whether it trades on the high street or trades in high finance. We need to ensure that this body has a tougher, more proactive approach to regulating conduct, and its primary objective will be promoting confidence in financial services and markets.

The CPMA will maintain the FSA's existing responsibility for the Financial Ombudsman Service and oversee the newly created Consumer Financial Education Body, which will play a key role in improving financial capability. The CPMA will also have responsibility for the Financial Services Compensation Scheme, but given the important role that it plays in crises, it will work closely with the FPC and the PRA.

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We will also fulfil the commitment in the coalition agreement to create a single agency to take on the work of tackling serious economic crime that is currently dispersed across a number of government departments and agencies.

Before we set up these new bodies in their permanent form, we will conduct a full and comprehensive consultation process and publish a detailed policy document for public consultation before the Summer Recess. Our goal is radically to improve financial regulation in the UK, strengthening the prudential regime by placing it in the Bank of England and delivering the best possible protection for consumers.

During the period of transition to the new regime, the Government will also be guided by the following four principles: minimising uncertainty and transitional costs for firms; maintaining high-quality, focused regulation during the transition; balancing swift implementation with proper scrutiny and consultation; and providing as much clarity and certainty as possible for FSA, Bank and other staff affected during transition. In order to do this, we will ensure the passage of the necessary primary legislation within two years.

I am delighted that Hector Sants, the current CEO of the FSA, has agreed to stay on to lead the transition and become the CEO of the PRA. He will be supported by Andrew Bailey from the Bank of England as his deputy in the new regulator. This is a strong team to ensure a smooth transition.

The financial crisis has cost taxpayers dearly. The regulatory system needs radical reform to make the sector more stable and stronger. The last Government could not do this because they were caught up in a structure designed by the former Chancellor and Prime Minister. The fundamental flaws in its architecture contributed to the failure in the banking sector and ultimately undermined economic stability. The continuing financial and economic uncertainty across the eurozone strengthens the urgency with which we must equip ourselves with better tools and arrangements to tackle any future financial instability. We have already paid a high price for the previous Government's failings, and we must do all we can to prevent this happening again. I commend the Statement to the House".

My Lords, that concludes the Statement.

2.45 pm

Lord Eatwell: My Lords, I am once again grateful to the noble Lord for having repeated the Statement made by the Financial Secretary in another place. It is a very useful Statement, since it reveals beyond all reasonable doubt the degree of influence that the Liberal Democrat wing of the coalition has on the development of policy in this area-it is nil.

To assess the importance of this massive institutional upheaval, it is worth reflecting on the earlier upheaval that accompanied the creation of the Financial Services Authority 13 years ago. I was at that time a member of the board of the old Securities and Futures Authority. I later sat on the regulatory decisions committee of the new FSA. I can assure your Lordships that with the best will in the world, and with the talented leadership of Sir Howard Davies, regulatory enforcement was

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none the less seriously impaired by the transition process itself. Putting together complex institutions with different organisational structures, different pay grades and different employment and management practices, inevitably tends to take the eye off the ball. It took more than two years for the new structure at the FSA to become what could be called fully operational.

There must be a real fear that the same will happen again-at a far more critical time. The DNA of the Bank of England and of the FSA are quite different. The Bank makes one important decision every month; the FSA makes a hundred decisions a day. Has a comprehensive risk assessment been made of the negative impact of the upheaval itself? If so, will the Government publish that risk assessment? Is it planned to unify the employment and management practices of the Bank of England and the new subsidiary? Given that the FSA and the Bank have very different structures-the FSA has a chairman and a chief executive, the Bank has but a governor-what is to be the governance structure of the new organisation? What is the estimated cost to the taxpayer of the creation of the new institutions?

Another important angle from which to assess these institutional proposals is their congruence with the objectives of financial policy. Again, it is worth while looking back to the creation of the tripartite structure. The Chancellor of the Exchequer said yesterday that,

I am sure that the Minister will acknowledge that this statement is rather less than accurate. Will he confirm that, on the day that Lehman Brothers collapsed, around 100 staff were working in the financial stability division of the Bank of England? Will he also confirm that their task was to analyse and manage the stability of the financial markets?

My point, however, is not to pick over the entrails; it is, rather, to emphasise that prior to the crisis, nobody in the Bank, the FSA, the Treasury, the Basel committees or the Federal Reserve was paying sufficient attention to the issue of systemic risk. Now it is universally agreed that macro-prudential regulation and supervision must be a fundamental task of the authorities, and that new macro tools are needed. It is equally agreed that this must require close co-ordination between all aspects, macro and micro, of the regulatory process. However, the nature of that co-ordination must of necessity be a function of the policy to be pursued. Unfortunately, the Government have not as yet presented their policies for macro-prudential regulation. They have not decided what the new tools to be wielded by the authorities will be. In restructuring the institutions before they know what they want them to do, and how they want them to do it, are they not putting the cart before the horse?

I wonder whether the noble Lord will indulge me by allowing me to refer to some other matters raised in the Mansion House speech that he and I discussed yesterday and which are relevant to the future of banking in this country. I refer to the membership of the new Independent Commission on Banking. The noble Lord told us yesterday that the membership,

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In the Mansion House speech last night, the Chancellor announced the membership of the commission. In addition to Sir John Vickers, it comprises an outstanding economic journalist, a former head of Barclays Bank, a former utilities regulator with long, recent experience of the insurance industry, and the man who led the team at JP Morgan that created credit derivatives, one of the main toxic instruments of the recent crisis. They are all distinguished and competent people with wide experience but there is nobody from any business other than financial services-not a single person with recent high-level experience of industry, and hence of the relationship between industry and finance; somebody, for example, from the Engineering Employers' Federation who has experience of small and medium-sized industry and its financial needs. There is not really a single person with experience of the consumer interest, although I acknowledge that Miss Spottiswoode has been part of the Which? inquiry. Will the Chancellor be making further appointments to the commission to redress the current imbalance?

I return to the main point. The Government have failed to demonstrate the necessity of the extraordinary concentration of powers in one institution announced today. Monetary and fiscal policy will be united once again-not in the hands of elected Ministers, but instead in the hands of unelected officials of the Bank of England. Will the Minister confirm that that is not what he described yesterday as a restoration of powers? It is a major enhancement of powers to levels never experienced in this country before. Britain will now have the most centralised, monolithic financial management structure in the world.

To create this structure will require the replacement, or at least substantial amendment, of the Financial Services and Markets Act. Will the Government follow the good practice of their predecessor and establish a pre-legislative scrutiny committee for the requisite Bill? And when are we likely to have sight of the Bill? This side of the House is as committed as are the Government to the need for regulatory structures that sustain stable and secure financial services for British industry and British families. We remain to be convinced that the proposed upheaval is either necessary or sufficient to achieve that goal.

2.52 pm

Lord Sassoon: My Lords, I thank the noble Lord, Lord Eatwell. It feels as if I am having four tutorials in a week, when one was what I was brought up to do. Let me try to take as many of the points as I can.

The noble Lord stresses the transition arrangements. These are very serious issues which we have been thinking a lot about, and my right honourable friend the Chancellor stressed that in his Mansion House speech. I would draw a sharp distinction, though, between what we are doing now and the task that Sir Howard Davies took on originally. He was trying to get somewhere between 10 and 20 bodies together to create the FSA, while here we have principally the

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Bank and the FSA; and as we explained, the transition will be managed by Hector Sants, who has very generously agreed to stay on and see the transition through. He will be managing that in conjunction with Andrew Bailey of the Bank of England. So I think that the transition will be in the hands of a very strong management team.

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