It is a pleasure to follow the shadow Chancellor, who began by promising us—somewhat uncharacteristically—a speech that would not be partisan or adversarial. I am sure that the House would have been as disappointed as much as surprised had he fulfilled that promise. I shall endeavour to do so for him because, as Chairman of the Joint Committee scrutinising the Bill, I had to adopt a more consensual approach than is sometimes my wont.
I am grateful to the Chancellor for responding so positively to the Joint Committee’s report and taking on board the substance and spirit of most of our recommendations. I hope that we have helped to make the Bill better. This was my first experience of the Joint Committee procedure, and I found it extremely productive, not least because the members, Chairman apart, were all of an immensely high calibre, brought great experience and approached their task in a thoroughly constructive way. However, it is salutary to remind ourselves that the first ever Joint Committee was set up to scrutinise the Financial Services and Markets Bill, which this Bill effectively replaces.
My Committee was conscious that, despite the eminence of our predecessor Committee, it did not diagnose the problems that subsequently ensued—above all the lack of focus on banking supervision and systemic stability. I hope history will not show us to have missed the elephant in the room.
The Bill is essentially about changing the structure of regulation from the tripartite system to a twin peaks model in the light of the recent banking crisis. However, the Committee was struck by the weight of evidence for two things. First, no system of regulation can guarantee that there will never be another banking crisis. Consequently, it is essential to have a process in place to resolve the situation if banks get into problems. I urge the new FCA to make it a priority to see that major banks draw up their living wills as soon as possible. It is also essential to know who is in charge if a serious crisis erupts. We heard from the previous Chancellor that during the last crisis there were serious differences between the Treasury and the Bank of England and no easy way to resolve them. We recommended that, once the Bank has identified that a problem could lead to a call on public funds, the power to exercise responsibility should lie with the Chancellor, even though he may continue to leave that power in the hands of the Governor. I am pleased that the essence of that recommendation has been adopted.
The second point made by many witnesses was that regulatory structure is less important than the culture, focus and philosophy of the regulator, as the shadow Chancellor reminded us. That culture will depend crucially on the leadership, staffing and training of the new regulatory bodies, which are beyond the scope of this Bill. The only way in which legislation can influence the culture and focus is by setting clear objectives, powers and responsibilities, and systems of accountability for each of the new bodies. We made a number of detailed recommendations to clarify those and I am glad that most have been taken on board.
The House will be relieved to hear that I do not propose to go through all 70 recommendations item by item, but the biggest change of culture is from what has been described as box-ticking regulation to discretionary or forward-looking supervision. The Government advocated that change before the Joint Committee was established, but we found it hard to see where in the Bill the approach was given legal backing, especially for the prudential regulation authority. I hope that the Chancellor is confident that regulators will be fully empowered under the legislation to behave in that way.
As our work progressed, the Committee became increasingly aware that, however well drafted, the Bill will have a decreasing impact on how the British financial system operates, as regulations are increasingly being set at a European level. A veritable tsunami of EU regulation is about to wash over the City, so it is vital that the UK exercises the maximum influence on decision making in Brussels. However, the architecture of the regulatory structure being created in Brussels is different from that in the UK. Theirs is based on sectors and ours will be based on prudential and financial conduct. There is a danger that our lobbying input to the EU regulators will be fragmented, divided and weakened as a result. We therefore proposed the establishment of a high level committee, chaired by the Treasury and reporting to the Chancellor, to co-ordinate the UK lobbying effort in Europe of all the bodies created by the Bill, and in international forums such as Basel. I am glad that that recommendation has been adopted in the memorandum of understanding between the various bodies, but it is obviously also important closely to consult financial firms—both British and foreign—that do business in London, Edinburgh and elsewhere in the UK, whose lobbying power also needs to be deployed in Brussels.
I should mention that while I was in Brussels last week on other business I had the opportunity to meet Monsieur Barnier, the commissioner responsible for most of the proposed financial services legislation. I am grateful to him for seeing me. When I told him that many of us on the Committee had been surprised to learn about this tsunami of financial services legislation descending upon us, he rightly said that we should not have been. The measures were in the public domain and followed from the decisions of the College of Commissioners and the Council of Ministers. He is correct. Mea culpa—or nostra culpa: the fault is ours in this House if we pay too little attention to what is brewing across the channel until it is too late. The
European Scrutiny Committee does sterling work, but I wonder whether our procedures need to integrate its work more closely into our process of scrutiny on the Floor of the House, bringing Ministers here to explain our negotiating position at an early stage.