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

I shall come on to a couple of items of substance in relation to clauses 12 and 13 that will address that very point, but Ministers cannot talk about architecture and certain things not happening given the contents of the first four clauses. They need to be clear about the following point. Given that the new CFS is to be established, are the extra powers to be given to the FSA either needed or likely to make the FSA more effective? It is not at all clear that they will make it so.

Clause 12 on recovery and resolution plans-also known as living wills-is broadly welcomed. The Banking Act 2009 sets out the special resolution regime that allows failing banks to be transferred either to a private sector purchaser, temporary public ownership or a bridge bank. The stressful situation addressed in the Bill is less dramatic than the criteria set out in the 2009 Act. However, there is no concise or lucid definition of that stressful situation, and that needs to be provided. The explanatory notes set out-helpfully or not-the recovery plan as one

"which aims to reduce the likelihood of failure".

What exactly needs to be specified in that recovery plan? What exactly must an "authorised person" do? Proposed new subsection 139B of the Financial Services and Markets Act 2000 lists a lot of intentions, but very little specifics. That lack of detail is likely to undermine the good intentions behind the resolution plans.

There is provision for both the Treasury and the Bank of England to notify the FSA if they wish to indicate that a plan is unsatisfactory and recommend action, yet the FSA does not have to undertake that action. I raised that point earlier in an intervention on the Chancellor, and I acknowledge his point to me, which was, "We're the Treasury so we're all-encompassing and all-powerful, and as we're standing behind this, the FSA will have to take account of it." If that is the Chancellor's intention, however, why does the Bill not state that? The fact that it does not and that the FSA can ignore the warnings about inadequate regimes reveals an inherent contradiction in the Bill.

Clause 12 gives rise to two further questions. How easy will it be for complex financial organisations to comply with resolution plans? The FSA has already said it expects there to be some clashes and that it would simplify structures when a living will appears to be unworkable. I hope that the Minister will be able to reassure us in his winding-up speech on the definition of "unworkable" in this context, and about exactly what powers the FSA will have-and will need to have-to implement the resolution plans. I am sure the Minister is aware that the group finance director of Barclays has already indicated that it has a very complex structure of international subsidiaries and branches. In practice, how will the FSA simplify that organisation to make a resolution plan work? I am sure the Minister has the answer to that.

The Minister also knows that the G20 believes that there is a consensus emerging on the benefit of resolution plans. I do not think there is any dispute that they are a good idea, and the likelihood is that we will see some co-ordinated international actions on such plans in the very near future. Therefore, in what ways do the Government intend to take notice of that co-ordinated action proposed by the G20? Do they intend to leave this clause in place? Do they intend to say that it will become a sunset clause, so that anything proposed from the G20 can change it, or do they intend to ignore whatever the G20 might try to set out in the framework?

Clause 13 deals with short selling. As I am one of the Members who in a previous life worked in the financial markets, it is probably right that I resist the temptation to talk about any of the clauses on remuneration. There is an entirely erroneous myth that short selling is relatively new to financial markets, but prior to the change in the method of paying for bargains in the 1990s, the market had many operators who were known as account traders. These were exactly the same people as those who short sell nowadays; they bought stock they did not have the funds to pay for, and they sold stock they did not own. The 1990s marked the onset of hedge funds and the ability to "short", the use of derivatives, contracts for difference and so forth, and therefore short selling has become more widespread. However, do the Government accept the point of the Liberal spokesman, Dr. Cable, which goes to the essence of this? It is that the FSA already has powers to introduce emergency restrictions to prevent the creation, or increase of, net short positions. It also has powers to demand the daily disclosure of net short positions. Those powers were granted under section 118 of the Financial Services and Markets Act 2000. Therefore, this Bill is doing two things. It is extending the sunset clause on the powers to act on market abuse, but the power to act on short selling could be separated from the power to act on general market abuse. The Chancellor had some words to say on the Bill and the powers granted to the FSA on short selling. However, he will know that the British Bankers Association has said:

"The placement of generalised rules on short selling into MAR"- market abuse rules-

"wrongly associates all forms of short selling with abuse."

I am certainly not the only person who has interpreted these provisions as placing, despite the separation, the short selling rules in the general market abuse rules.

There may or may not be a case for tighter regulation, but has not the FSA already got these powers? What extra powers are needed? Do the Government accept that short selling is not intrinsically a market abuse? Short selling enables financial firms to offer hedging and market-making facilities-indeed, it allows essential market liquidity. Making liquidity in both the London markets and the international markets means that markets function. We have seen that when markets seize up that has direct economic repercussions. Do the Government accept that short selling is a tool that is not intrinsically wrong or an abuse, but just a financial tool? What is wrong or abusive is how it is used in some circumstances.

Is what the Government are doing in this Bill merely an admission that the FSA has failed to use its existing powers? A lot of market participants take that view of the Bill and think that there is no need for a general extension of those powers. The FSA's statement of September 2008 was extensive and inclusive, and the necessary powers appear to be in place. The Minister must be clear tonight as to why these proposed powers are necessary. I am grateful to have had the opportunity to make a few brief remarks. Unlike the hon. Member for Coventry, North-West, I am grateful that I will not be on the Committee, but it will explore a number of these issues.

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