Banking: Toxic Debt — Question

– in the House of Lords at 2:37 pm on 17th March 2009.

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Photo of Baroness Miller of Hendon Baroness Miller of Hendon Conservative 2:37 pm, 17th March 2009

To ask Her Majesty's Government what steps they are taking to avoid large-scale toxic debt being created or purchased by United Kingdom banks and other financial institutions and providers of credit.

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, the Government have asked Sir David Walker to undertake a review of corporate governance of UK banks. The review will cover a number of issues, including board management of risk and bank remuneration policies.

The Chancellor has asked the noble Lord, Lord Turner, the chairman of the FSA, to make recommendations for strengthening UK and international regulation. The review will be published on 18 March.

At the November G20 summit, leaders agreed an action plan to strengthen the global financial regulation, including enhancing risk management by firms. G20 Finance Ministers agreed further steps to strengthen regulation at their meeting on Saturday.

Photo of Baroness Miller of Hendon Baroness Miller of Hendon Conservative

My Lords, I thank the Minister for that detailed reply. What representations have Her Majesty's Government made to the OFT regarding the complete failure in any case to exercise its powers of enforcement over financial institutions which engage in "irresponsible lending"? Is the Minister now aware that this power was added to the Consumer Credit Act 2006 following my representations throughout the passage of that Bill?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, I thank the noble Baroness, Lady Miller, for her question. I am not as well informed on the OFT matter as I should be and I will make it my duty to ensure that I am. However, the primary responsibility for reckless lending must rest with the management, boards of directors and shareholders of the institutions which made these reckless loans. We are strengthening governance and accountability, and we are doing so within a framework of enhanced regulation, about which we will no doubt hear more from the noble Lord, Lord Turner, later this week.

Photo of Lord Peston Lord Peston Labour

My Lords, one matter puzzles me. How were these toxic assets bundled in the first place and how were they marketed? It seems to me that everybody is assuming that this was all down to the incompetence of the bankers. I am not convinced that that was the whole story. I find it impossible to believe that any of this happened with no fraudulent behaviour whatever. The Americans are certainly exploring the fraud and criminal activities that took place. Why have Her Majesty's Government not gone down that road and set up a full-scale inquiry into fraudulent behaviour in this area?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, my noble friend asks an interesting and important question. I believe that the primary fault here must lie with those who were instrumental in creating and rating complex derivative-based products, but there is also a serious element of caveat emptor on the part of the purchasers of those products, which in many cases were other banks, insurance companies or pension funds. If there was criminal behaviour, that must clearly be pursued, and the primary responsibility for that will lie either with the Financial Services Authority or the Serious Fraud Office. To the extent that there is any evidence of fraudulent or criminal activity, I know that the Government will endorse a vigorous pursuit of those inquiries and a successful conclusion of matters in the courts.

Photo of Lord Tebbit Lord Tebbit Conservative

My Lords, how have the auditors managed to stay out of the firing line? Many people bought shares in these banks on the basis of the published accounts that had been certified as accurate by the auditors. Will the Government look at audit practice and at there being so few large firms of auditors with large clients, which makes them vulnerable to pressure from the clients?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, in some ways, in classic business theory, the fact that there are few providers and many purchasers ought to provide oligopolistic powers to auditors. In practice, the auditing profession has been rather good at placing responsibility for accounts on directors: the audit certificate is deemed fair and reasonable on the basis of assurances given to auditors by directors. One cannot distinguish and separate out entirely responsibilities here, but the auditing and accounting profession clearly has questions to answer. I am very pleased that the communiqué from the OECD Finance Ministers meeting last weekend identified the need to get to grips with accounting issues, particularly around off-balance sheet items and derivative exposures, which are at the core of many of these accounting problems.

Photo of Lord Newby Lord Newby Spokesperson for the Treasury

My Lords, if Barclays seeks insurance for some of its toxic assets, what conditions will the Government seek to apply? For example, will they seek to secure a guarantee from Barclays that it will stop undertaking highly complex, but highly profitable, tax avoidance schemes?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, on 19 January the Government laid out clearly the conditions that would apply to participation in the asset protection scheme, which Lloyds Banking Group and the Royal Bank of Scotland have entered into. Barclays has not made an application to participate in that scheme, but if it did, the same conditions would apply. UKFI, the entity which holds the Government's investments in Lloyds and the Royal Bank of Scotland, has written to those banks, asking for a full explanation of their involvement in structured products and tax avoidance. The Chancellor of the Exchequer made a Statement yesterday about an action that he is taking on the taxation of banks' profits, where clearly creative work has been going on.

Photo of Lord Lawson of Blaby Lord Lawson of Blaby Conservative

My Lords, is the noble Lord aware that my noble friend Lord Tebbit asked a very good question indeed, which his waffle about the OECD, if I may respectfully say so, had nothing to do with? When Johnson Matthey Bankers went bankrupt a quarter of a century ago, I authorised the Bank of England to sue the auditors. It did so and won. Why are the Government not doing the same with the companies that they have had to bail out?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, in that the Lloyds banking group and Royal Bank of Scotland, to which I assume the noble Lord refers primarily, continue to be listed companies, such an action should be initiated by the shareholders or boards of directors of those two banks.