LIBOR (FSA Investigation)

Business of the House – in the House of Commons at 12:21 pm on 28th June 2012.

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Photo of George Osborne George Osborne The Chancellor of the Exchequer 12:21 pm, 28th June 2012

I would like to update the House on the Financial Services Authority’s investigation into the manipulation of the setting of the LIBOR and EURIBOR interest rates and the Government’s response. The London interbank offered rate, or LIBOR, and the Euro interbank offered rate, or EURIBOR, are the benchmark reference rates that are fundamental to the workings of the UK, European and international financial markets, including markets in interest rate derivatives contracts. Those contracts might sound exotic but they are the bread and butter of our financial system and are used by businesses and public authorities every day, and they affect the mortgage payments and loan rates of millions of families and hundreds of thousands of firms, large and small.

LIBOR and EURIBOR are by far the most prevalent benchmark reference rates used in euro, US dollar and sterling interest rate derivatives contracts. The outstanding interest rate contracts alone are estimated to be worth $554 trillion. Yesterday, the FSA published notice that Barclays had on numerous occasions acted inappropriately and breached principles 2, 3 and 5 of the FSA’s principles for businesses. As a result, the FSA has imposed a financial penalty of £59.5 million on Barclays. In other words, the FSA reports that this bank, on numerous occasions, did not conduct its business with due skill, care and diligence, that this bank did not take reasonable care to organise its affairs responsibly and effectively, with adequate risk management systems, and that this bank did not observe proper standards of market conduct. As the FSA puts it:

“Barclays’ misconduct…created the risk that the integrity of LIBOR and EURIBOR would be called into question and that confidence in or the stability of the UK financial system would be threatened.”

Barclays are not alone in this. The FSA is continuing to investigate the conduct of a number of other banks in relation to LIBOR, to commit significant resources to its investigations into potential attempts to manipulate LIBOR and to work with its counterparts overseas and with other authorities in the UK.

The investigations concern a number of institutions based both in the UK and overseas, but it is already clear that the FSA’s investigation demonstrates systemic failures at the heart of the financial system at the time. I want to thank Adair Turner and the team at the FSA for a very thorough piece of work, but it prompts three vital questions. First, how were such failures allowed to continue undetected and unchecked, particularly in the two years before the financial crisis, which is when the FSA is clear that the most serious breaches occurred, for which the only motive was greed? Secondly, what changes are needed to our regulatory system in the future to prevent such abuse from occurring again and to make sure that the authorities have every power they need to hold those responsible fully to account? Thirdly, what further investigations are required into the activities at Barclays, what sanctions are available and what questions must the chief executive answer?

First, the FSA report is a shocking indictment of the culture at banks such as Barclays in the run up to the financial crisis. The e-mail exchanges between derivative traders and the LIBOR submitters read like an epitaph to an age of irresponsibility. Through 2005, 2006, and early 2007 we see evidence of systematic greed at the expense of financial integrity and stability. They knew what they were doing:

“Keep it a secret”, one trader told another in February 2007,

“If you breathe a word of this I’m not telling you anything else”.

Yet no one at Barclays prevents them, no one in the tripartite regulatory system knows anything about it and the Government of the day are literally clueless about what is going on.

The FSA is clear that the most serious breaches of its principles for businesses occurred in the years leading up to the financial crisis. Once the crisis is under way, Barclays’ concern switches from the greed of traders to concern from the management about the reputational risk to the firm. To be fair, Barclays itself raised concerns about LIBOR with the FSA in late 2007 and in 2008. Yes, the financial system was experiencing a severe stress and markets were frozen, but it is clear that Barclays—and potentially other banks—were still in flagrant breach of their duty to observe proper standards of market conduct and give citizens and businesses in this country and elsewhere proper transparent information about the true price of money.

Britain’s tripartite system of regulation failed us in war and in peace and the country has paid a very heavy price for that. That brings me to the second question of how we prevent this from happening again. The Government are getting rid of the whole tripartite system. The Financial Services Bill now before Parliament will create a new and far tougher regulatory system. A new Financial Conduct Authority will focus razor-like on market abuse and protecting consumers. We have been reviewing with the FSA and the Bank of England the operation of the LIBOR regime, which was not regulated under the previous Government’s Financial Services and Markets Act 2000. The market is already changing and the role of LIBOR is changing with it. As part of our review into LIBOR and the strength of the financial regulatory—[ Interruption. ] May I just say to the Opposition that I think a little more silence would do, and perhaps an apology for the mess that this Government are trying to clean up? [Interruption.]

Photo of John Bercow John Bercow Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee on the Electoral Commission, Speaker of the House of Commons, Speaker of the House of Commons, Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee on the Electoral Commission

Order. Rather more silence is needed on both sides; the Chancellor is quite justified in making his point. I gently remind the junior Whip on the Treasury Bench that although his oratorical talents might be deployed in the future—we look forward to that with eager anticipation and beads of sweat on our brows—for now his role is to fetch and carry notes and to nod in the appropriate places. Silence is required.

Photo of George Osborne George Osborne The Chancellor of the Exchequer

Mr Speaker, my hon. Friend Greg Hands does far more than that and he is very good at it.

Let me get back to the serious matter in hand. As part of our review into LIBOR and the strength of the financial regulatory architecture, we will examine if there are any gaps in the criminal regime inherited by this Government and we will take the necessary steps to address them. I cannot comment today on possible criminal investigations into individuals involved in this activity. The authorities are exploring every avenue open to them but, shockingly, the scope of the FSA’s criminal powers, granted by the previous Government, does not extend to being able to impose criminal sanctions for manipulation of LIBOR. As part of our review into LIBOR and the strength of the financial regulatory architecture, we are examining whether strengthening the criminal sanctions regime for market abuse and market manipulation is warranted, and if so, we will provide for these powers quickly.

Next week, the Government will be publishing a consultation in response to the report on the failure of RBS and will consider the possibility of criminal sanctions for directors of failed banks when there is proven criminal negligence. Under the previous Government’s regime, fines paid to the FSA are used to reduce the annual levy other financial institutions are asked to pay. I am far from convinced that in all cases that is the best use of the money and we are considering amendments to the Financial Services Bill that ensure that fines of this nature go to help the tax-paying public, not the financial industry.

I have also asked my officials to investigate urgently whether that legislation could be applied to the fine imposed on Barclays bank. It is clear that what happened in Barclays, and potentially in other banks, was completely unacceptable and was symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees.

That brings me to my final point. As I have said, a number of individuals are under formal investigation by the FSA, and that number is expected to increase as the investigations continue. The Serious Fraud Office is aware of the matters under investigation and there are ongoing discussions between the FSA and the Serious Fraud Office about the evidence as it develops. The chief executive of Barclays has some very serious questions to answer today. What did he know and when did he know it? Who in Barclays’ management was involved and who therefore should pay the price? It is quite right that the Treasury Committee has asked him to appear urgently to account for himself and his bank, and I congratulate the Chair of the Committee on doing that. We all want to hear his answers. The story of irresponsibility is not over yet.

Our financial services should be a source of economic strength and national pride for this country, but failures in our banks and financial system have cost the country billions and put thousands out of work. Those responsible should be held responsible. We want our financial services to support the creation of jobs and prosperity for millions. This Government are sweeping away the regulatory system that failed. We will protect taxpayers, punish wrongdoing and put right the wrongs of an age of irresponsibility.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury 12:31 pm, 28th June 2012

I start by thanking the Chancellor for advance notice of his statement, which was handed to me at 12.19 pm—two minutes before he delivered it. [Hon. Members: “Where’s Balls?”] As my right hon. Friend the shadow Chancellor is addressing the Local Government Association’s annual conference in Birmingham, I am responding for the Opposition.

Nine months ago, the Leader of the Opposition talked about “irresponsible, predatory capitalism”, of which this is one of the worst cases yet. The public had been assured that the banks had cleaned up their act. Ordinary borrowers and savers were told they could trust the banks again, but these unfolding revelations shine a new light on shocking practices in one of Britain’s most important banks. What should have been an impartial process of reporting independent interest rate statistics became an exercise in cooking the books, cheating the system and fixing the market.

Financial stability and the effective regulation of our banking and wider financial services industry are vital for stability, for consumers to save and for businesses to invest. Getting the balance of regulation right is an important task for the Government, especially when hundreds of thousands of jobs depend on the industry and when all of us and small businesses in all our constituencies rely so much on the financial services sector.

There are three areas in which I have questions for the Chancellor, the first of which is dealing with the people who are responsible. Are those responsible in the banks being held—[ Interruption. ]

Photo of John Bercow John Bercow Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee on the Electoral Commission, Speaker of the House of Commons, Speaker of the House of Commons, Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee on the Electoral Commission

Order. This is an extremely serious matter which warrants serious consideration. Let it be absolutely clear to hon. Members on both sides of the House that if they want to shout out, they will not be called to ask a question on the statement. They should not shout, but if they think they are going to shout and then be called to ask a question, I am afraid they are rather deluded.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

Thank you, Mr Speaker. I could not agree more with you about the importance of this issue.

On dealing with those who are responsible, are those responsible in the banks being held accountable, or will this whole thing just return to business as usual? Are criminal investigations progressing, and which law authorities will be leading the conspiracy and fraud cases that might arise? Has the Chancellor reflected on the consequences for competition and has he considered involving the Office of Fair Trading, the Serious Fraud Office or the City of London police? We need to know who knew what and when, and criminal prosecutions should and must follow against anyone who might have broken the law.

Millions of home owners with variable rate mortgages, small businesses with floating loans and consumers who depend on affordable credit could have lost money because of what amounts to a price-fixing scandal. What support will be available for individuals and small businesses who have potentially lost out because of the market fixing and who contact the Financial Ombudsman Service or the bank directly? Is the FSA also investigating the role of the bank’s auditors in tracking and reporting the manipulation of the figures between the rate submitters and the traders involved? What is happening to ensure that other banks that have manipulated markets in a similar way are brought to justice?

Secondly, what is being done to prevent anything like this from happening again? We raised our concerns with Treasury Ministers about the regulation of LIBOR recently. On 6 March, during a debate on the Financial Services Bill about the set of unregulated financial activities that the Chancellor evidently felt should remain unregulated, the shadow Financial Secretary, my hon. Friend Chris Leslie, asked the Financial Secretary directly about the

“billions of pounds of trades that are subject to the LIBOR rating”––[Official Report, Financial Services Public Bill Committee, 6 March 2012; c. 359.]— and why that might need to be regulated. When asked whether he had a view—any view at all—about ending self-regulation, the Financial Secretary to the Treasury had a one word answer: “No.”

The Chancellor made a conscious decision to exclude LIBOR from the Financial Services Bill in its current form, even when he must have known that a massive FSA investigation into precisely that matter was under way. The reputation of the City of London and our financial services sector is at stake. Instead of Ministers’ saying that the Treasury has no view, surely we need swift action to prevent the market abuse? Will the Chancellor urgently revisit his decision not to regulate LIBOR arrangements and instead amend the Financial Services Bill, which is still before Parliament?

Thirdly, a much wider issue is the culture in the City of London. As Bob Diamond said only last year, culture is about

“how people behave when no one is watching,” but people in his organisation thought they could do anything they liked, just to make a fast buck. They thought they would never be held to account and that they were effectively above the law. We cannot allow Britain to become a place where the privileged and the powerful act according to their own set of moral standards. That is why we are calling for the strongest punishment for those who have broken trust and broken the law, tough regulation to prevent such practices in future and a culture change in our banking industry. We must get our economy working for the majority, not just a few at the top. The Government must act.

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The whole House will be both surprised and disappointed that the shadow Chancellor is not here to account for himself today. He was certainly there every single day while these abuses were taking place, as the City Minister responsible for regulating Barclays and other banks. The hon. Lady says that the Government should do this and that. We are doing all those things; the question is why did the Labour Government not do those things when all this was actually happening?

Let me answer the hon. Lady’s specific questions. She asks whether the individuals responsible will be held to account. Absolutely, and the authorities are carrying out investigations into individuals. She asks whether people who have broken the criminal law will be held to account. That is absolutely what the authorities are looking at but as I have said, the FSA’s criminal powers granted by the previous Government do not extend to criminal sanctions for manipulation of LIBOR. [ Interruption. ] Chris Leslie asks, “Why is it unregulated?” It is because he did not regulate it—that is why. We are introducing a major Financial Services Bill, which has been through the House of Commons and is going through the House of Lords, to deal with the abuses that happened under the previous Government.

Secondly, the hon. Lady talked about the regulation of LIBOR. Of course the Government have been reviewing LIBOR while awaiting the publication of this report, which we knew was coming. As I have said, we have considered it carefully and we are looking at criminal sanctions for market manipulation. The hon. Lady did not ask about this, but it is an important point so I shall repeat that we are looking at what can happen to the fines levied on companies under the Act passed by the previous Government. Those fines are used simply to reduce the levy that is paid to the FSA by the rest of the financial sector, so the money paid by Barclays would just go to reduce the levy paid by other banks to the FSA. We are considering changing that, looking at whether that is appropriate in all cases and, specifically, whether the fine that Barclays will pay can go to the general taxpayer, who has suffered so much as a result of the failures of the financial system.

Finally, the hon. Lady talked about a culture change in the City and in banking. I completely agree. That is why the Government have introduced very tough new rules on remuneration and the clawback of remuneration, which is what will happen in this case. It is why we asked John Vickers to look at the whole structure of our banking industry, and the Business Secretary and I are implementing reforms that will ring-fence our retail banks to protect them better. It is why we have before Parliament as I speak the Financial Services Bill, which will sweep away the financial regulatory system that failed this country so badly. The Labour party’s trouble is that it is led by the cheerleaders for the age of irresponsibility, but they have yet to say sorry for it.

Several hon. Members:

rose —

Photo of John Bercow John Bercow Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee on the Electoral Commission, Speaker of the House of Commons, Speaker of the House of Commons, Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee on the Electoral Commission

Order. A very large number of hon. and right hon. Members are seeking to catch my eye, but I remind the House that there is significantly subscribed business to follow, under the auspices of the Backbench Business Committee; therefore, I must appeal for short questions and short answers.

Photo of Andrew Tyrie Andrew Tyrie Chair, Treasury Sub-Committee, Chair, Treasury Committee, Chair, Treasury Committee

What is now left of trust between Parliament and the banks? Barclays and probably other banks were profiting by lying and rigging the markets at a crucial time in the last crisis, when the Government had a right to expect that they would supply the then Chancellor with reliable information on the basis of which to conduct policy. The Treasury Committee will now investigate properly. Under the current legislation, as the Chancellor has pointed out, the Financial Services Authority has no power to bring a criminal prosecution in relation to not only LIBOR, but derivatives. Will the Chancellor undertake now to amend the Financial Services Bill to include derivatives and LIBOR in the legislation before Parliament?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I completely agree with the sentiments that my hon. Friend has expressed. I congratulate him and his Committee on acting swiftly to ask Mr Diamond to come and account for himself. As I said in my statement, we are looking at strengthening the criminal sanctions regime in general for market abuse and market manipulation, not just of LIBOR but in other parts of the market; and next week, as planned, the consultation on potential sanctions for directors of failed banks will be published. Sadly, the Government have been in this situation before with the FSA’s report into the failure of Royal Bank of Scotland, when the authority reported to us that it did not have the powers it would have liked to hold to account those responsible for the failure.

Photo of Alistair Darling Alistair Darling Labour, Edinburgh South West

I am sure that, in his quieter moments, the Chancellor will reflect on the fact that we are kidding ourselves if we think that the UK was the only country where this sort of thing was going on. The American authorities are just as concerned as our authorities. The situation is symptomatic of a culture that prevailed for much of the last decade, when, frankly, anything was allowed to go.

Does the Chancellor accept two things? First, LIBOR now has to have some degree of independent supervision. It cannot be a work of fiction. It is so important, especially at times of financial crisis—in 2008, we were concerned about the financial health of Barclays and other banks—to know exactly what it is costing them to borrow. Secondly, although the FSA may not have criminal powers, I am pretty sure it does have powers to take out of banks and put off the road the people who are responsible for doing this, the people who tolerated it, and those gained from it and condoned it. If that is not done, we have no chance whatsoever to move on in what remains a very important industry for this country.

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The former Chancellor is of course right: there was poor financial regulation in American markets too, and part of the investigation has been conducted jointly with the American authorities—but LIBOR was set in London, which is why it is called LIBOR.

The right hon. Gentleman raised two points. The regulation and supervision of LIBOR is precisely what we are investigating, although we have to make sure that we are not regulating the LIBOR market as it existed three years ago. That market today is somewhat different and changing quite a lot, so we have to get the regulation right for 2012, not for 2006-07. His second point was on the individuals concerned and the FSA’s powers. I have spoken to Adair Turner and I am absolutely clear that the FSA is pursuing cases against individuals, but it is a prosecuting authority and it would not be appropriate for me to comment about those individuals and ongoing cases.

Photo of David Ruffley David Ruffley Conservative, Bury St Edmunds

Can the Chancellor indicate how widespread the investigation is? How many other British banks are under investigation for market manipulation?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

HSBC and RBS are two of the banks under investigation, but international banks such as UBS and Citigroup are under investigation too, partly for activities conducted in this country.

Photo of Mike Gapes Mike Gapes Labour, Ilford South

The Chancellor referred to the costs and penalties that the general public have suffered. Is there any estimate of how much per head ordinary people in this country have suffered from the activities of a group of corrupt banksters?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

First, I hope the hon. Gentleman does not mind me saying on behalf of the whole House that we very much welcome him to his place. He has the deepest sympathy of the whole House for the tragedy in his family. It is good to see him back here.

There is no estimate of the cost to individuals or consumers, and it would be very difficult to construct one. We are talking about the daily rate set, in the case of these abuses, over a three or four-year period, and it was used to set mortgage rates, loan rates and all sorts of other things. Sometimes the rate was manipulated to be too low and sometimes it was manipulated to be too high compared with the true market price. We do not have an estimate, but it is clear that, as the FSA says, the manipulation contributed to the risk to the entire financial system, which then, in effect, collapsed, not because of that, but as part of the culture we have been talking about, and the country has paid many billions for that.

Photo of Andrew Selous Andrew Selous Conservative, South West Bedfordshire

I agree with what the Chancellor said about the failure of the previous regulatory regime, but as far as the senior management of the banks are concerned, does he agree that ignorance is absolutely no defence? They should have known what was going on.

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I completely agree. One of the things that has shocked the entire country in the aftermath of the financial crisis is how little people appeared to know about what was going on in their banks. That is why it is very important that Mr Diamond accounts for himself and his management and explains what they knew and when they knew it.

Photo of Stuart Bell Stuart Bell Labour, Middlesbrough

May I build on the question put by my right hon. Friend the former Chancellor of the Exchequer about the independence of LIBOR? The Chancellor has not referred to the British Bankers Association, which was involved in 1984 in putting the rate together. Is it appropriate to talk again to the association to see if we can get a true, independent LIBOR?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The BBA is concerned about what has happened and has already instituted a review into the operation of LIBOR. I should like to hear its thoughts on that, but we need to look at the regulation of the rate and its independence. LIBOR is a very important rate that is used to set mortgage and loan rates for pretty much everyone in the country, so we want to make sure that what happened never happens again.

Photo of Claire Perry Claire Perry Conservative, Devizes

When I heard about the situation, it made me think that “light touch” should be substituted with “clueless”. I am extremely concerned about the damage to Britain’s international reputation as a world-leading financial centre. Has the Chancellor had any conversations with his international counterparts to keep them apprised of the investigation, and does he think this is happening in other markets?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The fact of the investigation was something I discussed with Finance Ministers and representatives of other Governments, but I have not spoken with any of them since the FSA report was published yesterday because the issues immediately before us are about Britain and a British bank. As I indicated in my response to my hon. Friend Mr Ruffley, however, a number of international banks were potentially involved, such as UBS and Citigroup, which are not British banks and are in part regulated by overseas authorities. The whole FSA investigation is part of a joint international effort with the US Department of Justice and the Securities and Exchange Commission.

Photo of Dennis Skinner Dennis Skinner Labour, Bolsover

If we are going to study the culture of the banking system and the changes that have taken place over the years, would it not be fair to start from the fact that the late ’80s, with the big bang in the City, is when the culture of the banks changed dramatically? If we are going to lay blame, let’s get the history books right.

There is another scandal with the banks. Now that the Chancellor is in the mood to tame them, what about looking at the question that blind and disabled people are contributing more to reduce the Government’s deficit than all the banks put together? Sort that out as well. As for saying somebody is absent, the Chancellor ought to be explaining why he did not turn up at the BBC and face the music with Paxman.

P

We could move on a little from the 80's big bang, and look at how much this Country held in Gold Reserves. That is until a certain Scottish Labour Chancellor sold most of it off for peanuts. Considering Labour is supposed to stand for the working man, Gordon Brown not only sold this country down the line, he threw miners out of work across Africa. Why dig for it, when you can back your truck up to the Bank of England Cellars. It will be the working man who has to rebuild...

Submitted by Paul Rutherford Continue reading

Photo of George Osborne George Osborne The Chancellor of the Exchequer

It is one thing not to appear on the BBC’s “Newsnight”, and another not to be in the House of Commons to answer to the public and to Parliament for one’s own mistakes during the years of irresponsibility. That is the question the shadow Chancellor will no doubt have to answer today. As for history lessons, let me say this to Mr Skinner: he has never once got up and apologised for the mistakes of the Government he consistently supported over 13 years. It is no good blaming what happened in the 1980s; we are talking about what happened in 2005, 2006, and 2007, when he and his cronies were in charge.

Photo of Desmond Swayne Desmond Swayne Conservative, New Forest West

When I left banking 16 years ago, we were a dull profession, but capable of giving solid advice. When did it go so horribly wrong? When did bankers start treating their customers as punters to be exploited or devoured? Can my right hon. Friend assure the House that his reforms will restore the status quo ante?

P

The answer to your question is: When Tony Blair and Gordon Brown started cosying up to the Bankers and feeding at the same trough. Ask yourself why Gordon Brown didn't tame the Banks when they...

Submitted by Paul Rutherford Continue reading

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I think the answer to my hon. Friends question is: when he left the industry.

Photo of Pat McFadden Pat McFadden Labour, Wolverhampton South East

The Chancellor concentrated heavily on regulation in his statement. He was less keen to tell the House that throughout the period in question, he and his colleagues were calling for less regulation, not more. Does not the responsibility for wrongdoing really lie with those who did wrong—in this case, the traders in Barclays, and very possibly other banks, who participated in a rotten culture, far removed from the job that we want banks to do, which is supporting savers, home owners and businesses? If it really does come down to regulation, why will the Chancellor not accede to the request made by Opposition Front Benchers and now the Chair of the Treasury Committee to include LIBOR in the Bill that is going through Parliament?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

First of all, when in opposition, we actually objected to the creation of the FSA, the tripartite system of regulation, and taking the Bank of England out of supervision. We voted against that. By the way, I remember—I was the shadow Chancellor at the time—the previous Prime Minister endlessly berating us for voting against that particular piece of legislation.

When it comes to responsibility, of course those involved should be held responsible. I have made that absolutely clear, and that is what the FSA is doing. However, I point out that the Government at the time should be held responsible for the culture that they presided over. As I say, we will take the steps necessary to prevent this happening again, and we are looking at the regulation of the LIBOR market to get it right.

Several hon. Members:

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Photo of Lindsay Hoyle Lindsay Hoyle Deputy Speaker and Chairman of Ways and Means, Chair, Panel of Chairs, Chairman of Ways and Means, Chair, Panel of Chairs

Order. A lot of Members want to speak and I want to get everybody in, but we need brevity in both questions and answers.

Photo of John Thurso John Thurso Chair, Finance and Services Committee, Chair, Finance and Services Committee

This ruling surely confirms that the financial markets, as many of us suspected, have been neither free nor fair, but rather a sewer of systemically amoral dishonesty. Is not the case for separation of retail banking from merchant banking now so overwhelming as to be unanswerable?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I agree with my hon. Friend that we should separate retail banking from investment banking, but the best way to do that is through the ring-fence as proposed by John Vickers. We asked him and his distinguished commission to look at the structure of banks, and explicitly to consider the option that some had proposed of completely separating retail and investment banking. The commission considered and rejected that option, and instead proposed an approach that it thought would be stronger for financial stability, and particularly for the stability of retail banking. That is the ring-fence approach, for which we will now legislate.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

Notwithstanding that Barclays has been hit with a very large fine, it is truly shocking that market manipulation of this sort is not a criminal offence, particularly as the FSA final notice tells us that the abuses went on for three and a half years. I echo the comment made by the Chair of the Treasury Committee and others: we should look again at legislating now, in the Financial Services Bill, particularly as regards the powers of the Financial Conduct Authority—the conduct-of-business authority that will be responsible for this matter—to make sure that it has the powers and the sanctions it needs to deal with this sort of problem.

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I agree with the hon. Gentleman. Of course the Financial Services Bill is before Parliament and there is still some time to go before it completes its passage, so it is a readily available vehicle, but we want to make sure that we get this right, given what went so badly wrong with the previous attempt to regulate the financial services industry.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

While £60 million may sound like a great deal of money to the average man in the street, when it is compared with the size of Barclays’ balance sheet and the potential claims for compensation, does my right hon. Friend not agree that it is a relatively small amount of money? When he is looking at compensation for those who have lost out, will he take care to ensure that Barclays is liable for its own liabilities—that they will not necessarily be shared with other banks and that each bank takes care of its own liabilities?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

Under the current regime, it is up to the FSA to consider whether there is loss, and it is up to individuals who feel that there has been loss to bring their case forward. As I say, the Government have not been able to come up with a round figure for the total impact on the financial services industry and the economy of what went on, and nor has the FSA. If individuals feel that they have been affected, there are channels available to them.

Photo of Chris Bryant Chris Bryant Shadow Minister (Home Affairs)

Is not the truth of the matter that all the political parties were so nervous about financial services business going abroad, because it is so international a business, that we were effectively in thrall to them? Would it not make perfect sense for Mr Diamond, when he appears before the Select Committee, to give evidence on oath?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

It is entirely up to the Treasury Committee to decide how it wishes to conduct its business.

This Government are introducing far-reaching changes to our regulatory system and the structure of our banking system. It is far from clear that that receives the support of the shadow Chancellor. He has gone out of his way to point out what he thinks are the flaws in the Financial Services Bill, and he has gone out of his way at the Dispatch Box to defend the tripartite system that he designed. Chris Bryant talks about all-party consensus; let us have all-party consensus on clearing up the mess that the previous Government presided over.

Photo of Steve Barclay Steve Barclay Conservative, North East Cambridgeshire

First, I declare that before I joined the House, I worked for Barclays—[ Laughter ] and before that, the FSA.

As the Chancellor may recall, I wrote to him on 7 February calling for a change in the way fines were treated, and for an amendment to paragraph 16 of schedule 1 to the Financial Services and Markets Act 2000, so I welcome his announcement that other banks will not profit from the wrongdoing of banks that have breached rules.

I turn to an issue that the former Chancellor, Mr Darling, picked up: the ability to take enforcement action against senior managers, particularly at executive level. Lord Turner set out in his RBS report the difficulties of that, in terms of the evidential level required. Can the Chancellor update the House on when a response, in the form of a discussion paper from the Treasury, will be forthcoming? Will it be before the summer recess?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I am grateful to my hon. Friend for sharing his CV with the House. [Interruption.] At least he did not work for the shadow Chancellor. The answer to his question is that we are publishing the consultation next week.

Photo of Helen Goodman Helen Goodman Shadow Minister (Culture, Media and Sport)

The Chancellor has very sensibly said that he will look at how fines are used, but his answer to my hon. Friend Mike Gapes about calculating how much people have lost is somewhat disappointing. Can he not look into whether the fine money can be used to compensate people? Surely he is not expecting every individual to make their own case against a large institution such as Barclays bank?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I am happy to take away, because it has been raised by several Members, the issue of the total impact on the economy and on individuals. I would point out to the hon. Lady that that might be extremely difficult to work out, because the LIBOR rate was manipulated up as well as down. Sometimes the rate was too low for the true market price, and sometimes it was too high. It was manipulated by its derivative trading floor to suit the particular position that the bank had taken on that day, and that is why it is a difficult calculation to make. The FSA has made it clear, however, that that contributed to a risk to the country’s financial stability, and the cost of that is enormous.

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

In January, I set out the case for criminal sanctions against irresponsible management at significant financial institutions, so I welcome the announcement that that will be taken forward. May I push the Chancellor to make those sanctions as firm as can be done responsibly to ensure that those who profit from deep irresponsibility do not face the threat of walking out of the door and spending more time with their money but instead have the full force of the law against them if they do things wrong?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

My hon. Friend was prescient in making his case. He has pointed to something that concerns a number of people: the apparent ability of, for example, authorities in the United States to use criminal sanctions, while the authorities in the UK have not been granted those powers by Parliament. That is precisely what we are looking at.

Photo of Nick Brown Nick Brown Labour, Newcastle upon Tyne East

The Government’s new financial services regulatory architecture puts a lot of power and responsibility on the shoulders of the Governor of the Bank of England, but proposes no change to the relationship between the regulator and Parliament. May I ask the Chancellor to reflect again on the relationship of the House and the other place with the regulator, and how best we can establish a continuing—not adversarial—dialogue with the regulator so that problems, such as the one that he has shockingly reported to the House, can be explored and reflected on in a mature way, and not subjected to party political point scoring?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

Of course, it is important that the regulator, including the Bank of England, is accountable to Parliament for its actions, and has to answer for its actions, while at the same time—and I think that there is cross-party support for this—we maintain the independence of the Monetary Policy Committee and the Governor in his role. The Financial Services Bill includes many new tools to increase accountability to Parliament and to the public. In the White Paper that accompanied publication of the Bill, we set out further changes that we are making in the House of Lords to increase that accountability.

Photo of David Mowat David Mowat Conservative, Warrington South

Had price fixing on that scale taken place in other industries, under competition law, a fine of multiples of turnover could have been levied. Will the Chancellor tell us whether there is any possibility of a further fine, because £60 million is not a great deal to Barclays?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The FSA, which is the appropriate authority, has concluded its work on assessing the fine that Barclays has to pay, but there is also the important question of what happens to the fine. I do not think that other financial institutions or banks benefit from the lower FSA levy as a result. We are therefore looking at precisely that in the Bill, specifically at whether the Barclays fine can go to the taxpayer, rather than to the financial services industry.

Photo of Kevin Brennan Kevin Brennan Shadow Minister (Education)

Further to the words of my right hon. Friend Mr McFadden, may I gently remind the Chancellor that he told Andrew Marr two things on 4 December 2005, when asked what he would have done differently if he was Chancellor? One was about taxes and the other was that

“we need…a lower regulatory environment”.

Why is his hindsight so different from his foresight?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

First, the Opposition voted against the creation of the tripartite regime. Secondly, I remember the joyous occasion, when I was shadow Chancellor, at Mansion House in 2007 of all years, when the former Prime Minister, Mr Brown, told us about the

“new golden age for the City”, and Ed Balls praised the virtues of the light-touch regulatory regime of which he claimed sole authorship, although these days, funnily enough, he does not talk about that very much.

Photo of Therese Coffey Therese Coffey Conservative, Suffolk Coastal

Does my right hon. Friend agree that, as the report by the Economic Affairs Committee showed, under Labour’s failed system, it was unclear who was in charge of regulating the banks? Is it fair to say that, sadly, Labour just dropped the ball on this one?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

It is true that the tripartite regulatory system—and one of the three parts was the Government of the day—failed. That is self-evident, which is why we are making these changes. It is disappointing that they do not command the full support of the Opposition Front Bench, but perhaps Chris Leslie, on his 40th birthday, will reconsider his position now that he has reached a new age of maturity.

Photo of Frank Dobson Frank Dobson Labour, Holborn and St Pancras

Does the Chancellor of the Exchequer agree, in view of the fact that the already overpaid bankers have been revealed to have bolstered their bonuses by corruption and criminal conspiracy, that it is about time that the Government and, in particular, the news media gave far less credence to bankers and their apologists when they come out urging austerity on everyone else?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

Of course, the credibility of the industry has quite rightly taken a hit because of what happened. However, we have a new pay regime so that we can claw back some of that money from the traders and bank chiefs involved, which is a good thing. Secondly—and we are all rightly concerned about what has happened, and we need to change it—we have to change the financial services industry from one that was part of the age of irresponsibility to an industry that employs many hundreds of thousands of people and which creates jobs and prosperity in this country. It is the largest private sector employer. Knowing the right hon. Gentleman’s constituency, it is almost certainly the largest private sector employer there. Yes, we have to hold those responsible to account, but we must also rebuild the industry, because it is absolutely vital to our economy.

Photo of Tony Baldry Tony Baldry The Second Church Estates Commissioner

The City of London and its integrity are crucial to our country’s welfare. Does my right hon. Friend agree that this rather sorry, sad state of affairs is a wake-up call for every individual and institution in the City of London which, collectively, has to rediscover and reassert that sense of integrity?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I completely agree with my hon. Friend. As I said, this is an incredibly important industry for our future, despite the problems that the banking sector in particular has caused in our recent past. It is important that we do not taint the entire financial services industry with what went wrong. That industry includes insurance companies and all sorts of other businesses that were not involved, but the banks themselves, as the most prominent institutions in the industry, have a huge responsibility to change their culture and image with the rest of the country.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

What we are looking at essentially is daily daylight robbery, with a culture that said, “Anything goes, but nobody knows”. In light of what we do know, would it not be a dereliction to introduce the Financial Services Bill without specifically addressing LIBOR and looking again at the data competence of the regulators? Without wishing to draw the Chancellor on what criminal charges might be brought, does he believe that the forfeiture committee should look at the cases of other bankers who may be implicated?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The part of the country that the hon. Gentleman represents has been affected perhaps more than any other by what went wrong in financial services. Northern Ireland has suffered enormously from the failure of banks in the UK and in the Republic, and it has paid perhaps a heavier price than anyone else, so he speaks with authority and passion on this. Let me make it absolutely clear: we are going to deal with the regulation of LIBOR, and we will choose the most appropriate vehicle. The Financial Services Bill has been introduced in the House, so it is a convenient vehicle but, as I said, let us introduce the right regulation and get this right after its having gone spectacularly wrong in the past. As for the forfeiture committee, it is completely independent of the politicians of the day, he will be glad to know. No doubt, its members will have heard what he said.

Photo of Paul Uppal Paul Uppal Conservative, Wolverhampton South West

Continuing the “Newsnight” theme, last night Lord Myners, when asked about the previous Government’s role, shrugged his shoulders and said that this was nothing to do with them. Does my right hon. Friend agree that although Opposition Members are anxious to distance themselves from banking involvement, the anything-goes culture was driven by light-touch regulation, and that if we are to make progress, those who sit on green benches or on trading desks must ultimately take responsibility for their involvement?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

My hon. Friend makes a good point, which is that those responsible in government at the time have to apologise and account for their own role before they will be listened to when speaking about their plans for the future. At present they do not seem willing to do that.

Photo of Derek Twigg Derek Twigg Labour, Halton

I must check up on what Barclays says about customer care, following the debate today. In view of what the Chancellor told the House today, do he and the Governor of the Bank of England have full confidence in the senior management of Barclays?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

What I have said is that the chief executive of Barclays has some very serious questions to answer about who knew what when, and who in the management knew that.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

All our constituents will be outraged but perhaps not surprised by yet another scandal rocking the foundations of part of a functioning liberal democracy. A fine on the bank is all very well; that just hits the shareholders. The directors of that company have, at the very least, failed in their fiduciary duties to those shareholders and may have done or sanctioned an awful lot worse. What sort of sanctions should be taken against directors who preside over such terrible practice?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The Government whom the hon. Gentleman and I both support have introduced clawback so that the bonuses that were given to executives, traders and others in the banks can be clawed back if necessary. That did not previously exist. We are looking specifically at the responsibilities of directors of failed banks. The consultation on that will be published next week as a result of the FSA inquiry into what went wrong at RBS, and as I say, we are responding to today’s report by looking at the regulation of LIBOR, at the criminal sanctions that are available for prosecution, and at what happens to the fine, so that it is the people of Bristol who benefit from the fine that is paid, rather than other banks in the City of London.

Photo of Andrew Love Andrew Love Labour, Edmonton

This inquiry was started by the US authorities. The fines that have been imposed, which have been mentioned by many Members, were four times as large in the United States as they are in the United Kingdom. The US authorities also imposed stringent conditions on the operations of Barclays in this area. When will we get robust regulation in this country? When will the FSA send out e-mails entitled, “You’re nicked, big boy”?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

It sounds like one of the e-mail exchanges that the traders were engaging in at the time, if one reads the report. The US authorities are rightly involved, because much of the manipulation happened with the US dollar market so it is perfectly understandable why they would want to be involved. I have raised this question. Perhaps it is an issue that the Select Committee would also want to consider—why in the US there seem to be more powers available to the authorities than in the UK, and what we can do in this House to make that change here so that the UK authorities have the full range of powers available to them.

Photo of David Burrowes David Burrowes Conservative, Enfield, Southgate

It is right that the focus of attention should not be just on the greedy bankers drinking Bollinger and the like, but on constituents—victims who have had their businesses and homes trashed as a result of this scandal. As they are the victims of gross irresponsibility, is it not time for some basic responsibility, with the chief executive of Barclays stepping down and the shadow Chancellor saying sorry?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

As I say, the chief executive of Barclays needs to account for his actions, and the Treasury Committee provides the platform where he can do that, and as I said, the shadow Chancellor needs to account for his actions too.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Across the House there is agreement on the need for better regulation of investment banks, but does the Chancellor think regulation on its own, however well designed, will be enough to deal with the rotten culture at the heart of our investment banking, which this episode has revealed? Does it not need a change in leadership to change that culture fundamentally, going forward?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

Where I would agree with the hon. Gentleman is that regulation cannot do everything and we need the right culture of management in the banks, but there is also a job for the regulators here. One of the purposes of the Financial Services Bill is to put the Bank of England in charge and allow the regulator to exercise more judgment. As I have said before in the House, the Royal Bank of Scotland ticked every single box when it came to its takeover of ABN AMRO, yet many people were asking at the end of 2007, “Is that a sensible transaction?” We need the regulators to be empowered to make judgment calls, not just to check whether every line of the regulation has been complied with.

Photo of Clive Efford Clive Efford Shadow Minister (Culture, Media and Sport)

I agree with everything that the Chancellor said in his statement, but following that, all he has done is try to heap responsibility on the Opposition Front-Bench team, rather than dealing with the bankers who are at the heart of the problem. We all know that lighter-touch regulation would have come in had he been Chancellor at the same time. That is not the point. The point is that people out there are angry. Those people are thieves and criminals, and they have made beggars of many of our constituents, who want to know what this Government are going to do about it. Can the Chancellor say whether the financial regulatory Bill before the House deals with all the issues that have been raised as a result of the report from the FSA yesterday? If not, what is he going to do about it?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

I will tell the hon. Gentleman what this Government are doing. First, we are getting rid of the tripartite system that failed. Secondly, we are changing—[Interruption.] I will tell hon. Members what failed—the regulation of financial services. The hon. Gentleman’s constituents and mine and everyone else are paying a very heavy price for that, so we are changing the regulator, changing the structure of banks in order to have ring-fenced retail banks—

Photo of Clive Efford Clive Efford Shadow Minister (Culture, Media and Sport)

No. The right hon. Gentleman is doing nothing. It is business as usual.

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The hon. Gentleman voted for 13 years for a Government who failed this country. We are changing the regulation, changing the structure of banking—[Interruption.] and we are dealing with this latest abuse— [Interruption.]

Photo of Lindsay Hoyle Lindsay Hoyle Deputy Speaker and Chairman of Ways and Means, Chair, Panel of Chairs, Chairman of Ways and Means, Chair, Panel of Chairs

Order. We have heard the question. The hon. Gentleman should have the courtesy to listen to the answer, even if he does not like it. There is no need to get so excited—

Photo of Clive Efford Clive Efford Shadow Minister (Culture, Media and Sport)

Plenty of people out there are excited.

Photo of Jeremy Lefroy Jeremy Lefroy Conservative, Stafford

The prices of many important international commodities are set in London, such as cocoa and robusta coffee, and tens of millions of smallholder farmers and poor people around the world depend on these. Is my right hon. Friend confident that the kind of problems that we have seen with LIBOR are not spreading to such markets, which are so important for people around the world?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

Of course we should be vigilant in the supervision of all markets. Although there have been many complaints of the kind that my hon. Friend makes, every investigation here and, as far as I am aware, in other jurisdictions has not found the kind of market manipulation in those commodity markets as we see in LIBOR.

Photo of Jonathan Edwards Jonathan Edwards Shadow PC Spokesperson (Treasury), Shadow PC Spokesperson (Business, Innovation and Skills), Shadow PC Spokesperson (Transport), Shadow PC Spokesperson (Communities and Local Government), Shadow PC Spokesperson (Culture, Media and Sport), Shadow PC Spokesperson (Wales), Shadow PC Spokesperson (Wales)

In Iceland bankers have been prosecuted, as well as those politicians who presided over the 2008 financial crash, including the then Prime Minister, on charges of gross negligence. What lessons has the Chancellor learned from Iceland on how to hold politicians and bankers to account for their actions?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The hon. Gentleman really is tempting me. As we do not see so much of the previous Prime Minister, perhaps we should send him off to Iceland, where I think he would be particularly welcome.

Photo of Bob Blackman Bob Blackman Conservative, Harrow East

It is clearly vital that we rebuild confidence in the banking system after this further scandal, but there are questions to ask about what compliance regime was going on in Barclays during the mid-2000s and in every other bank. Does my right hon. Friend agree that no matter what the regulations are, it is now vital that the banks come out with a clear, transparent and independent compliance regime to make sure that people who disobey the rules are caught very quickly?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

My hon. Friend is right that the compliance regime is absolutely the first line of defence in the financial services industry. To be fair, Barclays did raise concerns about the LIBOR market operation in late 2007 and early 2008. I think that we can draw a distinction, as the FSA does, between what was going on in 2005-06 and early 2007 and what happened once the crisis hit. He is absolutely right that the compliance regime is vital, and if there are any banks listening to what has happened today that are not looking carefully at their compliance regimes and ensuring they are up to scratch, I think that they are being pretty foolish.

Photo of Ben Gummer Ben Gummer Conservative, Ipswich

The Chancellor will know that concerns about the setting of LIBOR go back some time. A paper circulated by New York university’s Stern business school in 2008 raised the issue of the manipulation of LIBOR. Indeed, in that year the panel changed the criteria for and composition of the setting of LIBOR because of concerns about the fairness of the rate. What investigation will he undertake about the concerns raised at the time, whether they were picked up by the FSA, whether the American authorities passed any concerns to the Treasury and the FSA and, if so, what was done about them?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

My hon. Friend is right that concerns were raised in late 2007 and in 2008 once the markets had frozen and become very illiquid. Barclays raised its concerns with the FSA, which is why the report draws a distinction between the situation before the summer of 2007 and the situation after, because different things were going on. In 2007-08 Barclays, and potentially other banks, were concerned about their reputation and the high cost of funding they were being charged, so he is right to draw that distinction. The FSA began investigating the complaints in 2009, as set out in the report. He asks a good question on whether any evidence was passed to the authorities by international bodies or other Governments. That is not in the report, so I am happy to get back to him on whether there was anything specific.