Reforming Financial Markets — Statement

Part of the debate – in the House of Lords at 11:52 am on 9th July 2009.

Alert me about debates like this

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury 11:52 am, 9th July 2009

My Lords, I thank the Minister for repeating the Statement made yesterday in another place. We have had the overnight benefit of reading the reviews of those outside Parliament. I do not suppose that the Chancellor will be thrilled with the reception that his proposals have received, but he should not be surprised; the Statement is yet another sign of a Government who are running out of steam.

The Statement does not come close to acknowledging one central fact about the banking crisis: namely, that the regulatory arrangements that the Government set up failed. The Government put banking supervision into the vast experiment of the FSA. The Government believed that a memorandum of understanding would create effective tripartite working. All this failed.

Of course there were many other factors at work in the banking crisis; it was not just a story of regulatory failure, nor was such failure confined to the UK. The inescapable truth, though, is that before 1997 we had a system of banking regulation that by and large worked, and the Government created one that, when put to the test, by and large did not. The Government cannot escape blame for that.

If we had a Prime Minister who could take responsibility for his failings, we might have had a different set of proposals this week, but the Prime Minister cannot admit fault so his Chancellor is equally unable to do so on the Government's behalf. If my party is elected at the next general election, we will not have that inhibition. As my honourable friend George Osborne announced yesterday in another place, we will restore the responsibility for microprudential supervision of banks to the Bank of England, together with other systemically important businesses and activities.

In doing so, the other responsibilities of the FSA will be more focused. There are crucial tasks of consumer protection and oversight of markets, and we need an organisation which is built around the cultures that are needed for those tasks. Leaving the very different microprudential supervision to fight for attention alongside these issues in a large and unwieldy organisation is not the right answer, and we reject the Government's defence of the status quo.

By locating microprudential supervision within the Bank, we can reunite macro and microprudential supervision, which were torn asunder by the Prime Minister in 1997. It is theoretically possible that the 1997 ideas on tripartite authorities could have worked, but the Prime Minister's design simply did not fly.

This set of proposals from the Government pretends that, by renaming an imperfect arrangement and adding a tiny bit of transparency, it will fly. The proposed council for financial stability is just the tripartite arrangements in fancy dress. It may be less harmful than the existing tripartite arrangements, but it does not address the need for macroprudential supervision to have proper tools and linkages to microprudential supervision to work effectively.

The Government are rather late converts to the notion that the FSA has to have a defined role in financial stability if the current structure is maintained. The Government rejected this during the passage of the Banking Act earlier this year. But we now need to move beyond sticking plasters to hold together arrangements which are broken. We do not need the FSA involved in financial stability; we need a fresh start. The Conservatives' proposals would provide this.

There are of course some aspects of the Government's proposals which we can support, even though much in the documentation is still very vague. We have called for a long time for countercyclical regulatory capital and for effective liquidity supervision and regulation. We support increasing the regulatory focus on high-risk firms and activities. We look forward to seeing Sir David Walker's proposals on governance. We support the elimination of unacceptable remuneration practices. We have also long argued for industry-financed support for financial capability. We also support greater powers to deal with market abuse and the conduct of individuals.

However, we must sound a note of caution in all these areas. Financial services are global businesses and there is little natural loyalty to any country. If the UK runs ahead of the international community, as these proposals seem to suggest in some areas, we could be cutting off our nose to spite our face.

Of course, we all feel let down by the banks and want to impose tighter controls over them, but if the result is that the international competitiveness of the UK is harmed or if firms feel driven to leave the UK, then government action will be counted a failure, possibly of massive proportions. Whether we like it or not, financial services are a major part of the UK's GDP and we must act proportionately and carefully.

I do not know whether the paper that came out yesterday is a White Paper or a Green Paper. The Statement is studiously vague. Is this is a statement of intent from the Government which will result in action, or it is merely a statement of views which might result in action? The annexes to the document are much more tentative than the front part, and even where a firm intention is signalled, there is little on timetable.

I hope that the Minister can today set out exactly what the Government intend to do over the next nine months or so. Will he set out for the House what the Government intend to include in legislation and when? The White/Green Paper states that a Bill will be brought forward in the next legislative Session. Precisely what will it cover? Do the Government intend to give it priority in the next Session, because, without priority, it has little or no chance of reaching the statute book? I am sure I do not have to say that, unlike the case of the last Banking Act, the Government cannot rely on these Benches to smooth the passage of the next Bill if its content diverges from our own policies. In the mean time, there are more urgent things for the Government to deal with. These are barely touched on in yesterday's proposals, though referred to tangentially in the Statement.

In Europe, our negotiating position is at best weak. The protections achieved in the proposed European regulatory arrangements do not go anything like far enough to protect our financial services industry from those parts of Europe which have long resented the success of the City of London. We may not even have the protection of qualified majority voting if the Government do not get their act together fairly soon. The Minister has been forthright in this country on the appalling alternative investment funds management draft directive, but how in practice are the Government going to stop this particular juggernaut given that it is being powered and steered by France and Germany?

The Government need to ensure that there is effective co-operation and decisive working at international level, not just within Europe. We cannot go it alone on regulatory changes and the Government in particular need to ensure that the United States is bound into international action. The history of the United States, which did not even implement Basel 2, is not encouraging here. How will the Government ensure that the G8 and G20 move beyond mere words? These are issues that should be pre-occupying the Government, not rearranging the deckchairs of the tripartite authorities.