That was a fascinating speech by my good friend Steve Baker. I cannot compete with his erudition; I have a much smaller speech on a smaller issue.
In 1983, I stood for Parliament on a manifesto that called for the public ownership of large sections of the banking system. It is an irony that large sections of it are now in public ownership, having been put there by people who profoundly disagree with and disbelieve in that process, but who were forced to do so or to let the system collapse. That is interesting. I certainly wish to see public ownership go further, as well as public regulation and accountability, as the risk in banking is being underwritten not by the borrowers but by the Government, by the state and by the citizen, and if risk is not and cannot be transferred, the ownership and accountability should be in public hands as well.
During the Minister’s opening speech, I mentioned audit and the appalling failures of the audit industry during the banking crisis. Mr Tyrie said that more needs to be done, and much more certainly needs to be done. I hope that some component of the Bill, when it is amended, might deal with audit.
There is a need for radical reform of the rules governing audit. The Financial Reporting Council is undertaking a consultation on the new rules that will compel auditors to write what is called a commentary, flagging problems, risks or disagreements with management at audited companies and institutions in clear and comprehensible language so that shareholders can understand. That will be seen as controversial by company management, but will be welcomed by shareholders and, by the same token, by bank depositors and customers.
We should of course remind ourselves that auditors, above all, represent shareholders—or at least they should. In reality, however, they are taken on by managers so power is effectively in the hands of managers and shareholders, or bank depositors, and customers simply have to trust them. When an audit contract comes to an end, auditors are unlikely to be critical of managers for fear of failing to be re-engaged. The inevitable cosy relationship between auditors and managers lies at the heart of what has gone wrong in the banking sector.
If auditors had been doing their job properly and their audit reports had not been so opaque and impenetrable, the financial crisis would not have happened as it did. The fact that banks were gambling with worthless bits of paper based on sub-prime mortgages was the fundamental cause of the banking crisis, and it is not over yet. Auditors did not do their job in relation to the practice of bankers such as those at Northern Rock before and until it collapsed. If they had, we might have prevented that catastrophe.