Financial Services Bill

Part of the debate – in the House of Commons at 7:53 pm on 30th November 2009.

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Photo of Stephen Hammond Stephen Hammond Shadow Minister (Transport) 7:53 pm, 30th November 2009

Given your erudition, Mr. Deputy Speaker, you will know that it was Gibbon who said:

"History is little more than the register of the crimes, follies and misfortunes of mankind."

That really describes what has happened in the financial and economic arena over the last three or four years, and the Bill that we are discussing is about history: the recent history of the financial crisis, and the way in which we, as a country, reacted to it.

When the global credit markets started to close, initiating the credit crunch that led to a crisis of confidence, it became clear that-in both domestic and international terms-there was no stability in either the regulatory arrangements established by the international community or in those established by the present Prime Minister, then Chancellor of the Exchequer. It can fairly be said that both international and domestic regulatory arrangements failed, but it is clear to us that the greater failure of the domestic arrangements had a greater impact on our economy. There is a huge interrelationship between the financial sector, which has been one of the key drivers of economic growth in our economy, and the financial crisis. We cannot claim that the two are independent of one another.

The origins of the financial crisis surely lie in the poor understanding of financial risk that was created by financial innovation, and the inability to enable both international and domestic regulation to cope with that innovation and reduce the risks in both institutional and systemic terms. The increase in the financial risk led to greater increases in Government debt, corporate leverage and personal borrowing, which in turn led not only to imbalances in our economic system but to the present crisis in our economy. There is a direct relationship between the crisis in the financial services industry and our economic crisis. We need to understand that the implications of this Bill also involve severe and major implications for our economy.

In a few weeks' time the Government will present their pre-Budget report, and- as was made clear to all who read the newspapers at the weekend-they are determined to leave voters in no doubt that there will be tough choices for the United Kingdom. Yet again, there is talk but very little action. One of the inescapable conclusions must be that, if our economy is to recover, we shall need a thriving financial sector, and, given the crisis experienced by the financial markets, that will undoubtedly involve some changes in regulation. However, if the Government continue to do what they have always done-for which the Bill provides-they will see the results that they have seen before.

The questions for the House, and for the Committee, are these: what will the Bill do, is this reform necessary, and is it the right reform? The Government often accuse others of doing nothing while they do a great many things, but in this instance it is a matter of doing the right thing rather than doing just anything. We must ask ourselves whether the new regulatory system proposed by the Bill will be any more efficacious in dealing with a financial crisis-if there is one-than the previous system, or whether it will be less efficacious than the model set out by my hon. Friend Mr. Osborne.

Members will recall what was said about the tripartite system by the Chairman of the Treasury Committee, John McFall. I saw him this morning, but he is in Europe this evening. He said that it was

"a Rolls Royce when it sits on the shelf, turns into an old banger when it gets on the ground."

The truth of that has been clearly shown by the operation of the system.

The Chancellor of the Exchequer and Mr. Robinson-whom I am delighted to follow-made much of the architectural changes referred to by my hon. Friend the Member for Tatton. The Chancellor maintained that architectural changes were not particularly important. However, the first four clauses of the Bill are all about architectural change, to almost no effect. I think it somewhat disingenuous, given that those first four clauses seek to establish a council for financial stability, to claim that architectural change is not important.

The council will replace the existing top-level structure of regulation: the arrangements that embed the joint responsibility for financial stability shared by the FSA, the Treasury and the Bank of England. Those arrangements are governed by the memorandum of understanding referred to by my hon. Friend. The system is very complex. When challenged by the financial crisis, we can only reach the same conclusion as the Treasury Committee, which stated:

"We cannot accept... that the Tripartite System operated 'well'".

The Government's reaction to their failed tripartite system is to set up the Council for Financial Stability. That is an architectural change. However, the council will have the same three components and participants as its predecessor. It is difficult to see, at first analysis, how or why the new council will operate any differently. If we do exactly the same as we have always done, we see the same result. Is this just a rebranding exercise? According to the Treasury website, the detailed terms of reference are currently only available in draft. It is pretty difficult for us to be any clearer about exactly what changes will accrue.

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