Reforming Financial Markets — Statement

Part of the debate – in the House of Lords at 12:01 pm on 9 July 2009.

Alert me about debates like this

Photo of Lord Newby Lord Newby Spokesperson for the Treasury 12:01, 9 July 2009

My Lords, after the 1992 general election, my noble friend Lord Ashdown, who was then leader of the Liberal Democrats, made a speech in the small town in his constituency called Chard. The late Lord Russell-Johnston did not like it, saying that the Chard speech sounded more like a burnt offering. Whether this is a burnt offering or a damp squib, or whatever the most appropriate analogy, in our view this White Paper fails completely to offer a decisive response to the extraordinary banking crisis through which we have come.

I shall deal with some of the issues in the order that the Minister dealt with them. We agree that there needs to be better consumer advice, but the model that the Government have adopted is fatally flawed. To give the FSA, even before the crisis, responsibility for managing consumer advice rather than going to people like the citizens advice bureau, was nonsense. Now to enshrine that in legislation makes it worse. Secondly, why, if the Government are so keen that consumers should be protected from unnecessary risk, have they instructed RBS to give a proportion of its mortgages at at least 90 per cent loan to value during a period of continuing falling house prices? Is that not just supporting unnecessary risk?

The Government want to see greater competition in the banking sector and we agree, but these proposals will do nothing to bring that about. Why do they not forestall a decision that is likely to be made by the EU, and break up RBS or the Lloyds Banking Group? The Government want to promote mutuals and so do we, but the White Paper suggests that they will set up a working group to look at it. That is just pathetic. Why not, if they are going to break up some of the banking groups, turn parts of them into a mutual? Halifax has a nice ring to it, and so does Northern Rock, but the White Paper contains nothing of any substance in that respect.

We agree with proposals that capital adequacy rules should be tightened up, but the whole question, which the noble Baroness concentrated on, of the management of macroprudential risk and financial stability as a whole is made a greater muddle by the White Paper. We thought when the Banking Bill was going through that the establishment of a financial stability committee in the Bank of England meant that it would be responsible for overall financial stability. We argued that it should in fact be a joint committee with the FSA, but the Government propose that the FSA has its own committee looking at financial stability. In addition to that, they want the Treasury to have its own committee looking at financial stability, called the Council for Financial Stability, chaired by the Chancellor—in effect, a third financial stability committee. That is a greater recipe for disaster than the existing tripartite arrangements.

We on these Benches do not agree with the noble Baroness that simply ripping the heart out of the FSA in terms of its supervision of major financial institutions and returning that to the Bank of England makes best sense. The Bank of England's reputation and track record in dealing with financial and banking crises is not unblemished. But while we do not agree with that, we believe that these proposals setting up three financial stability bodies will lead to greater rather than less muddle.

The Government have turned their face against even a modified version of the Glass-Steagall Act and hope that they can avoid the problems that that Act sought to deal with by better capital adequacy rules. Given that the major banks are, in effect, underwritten in all their activities at present by the Government, will the Minister give the House a convincing reason why the Government should underwrite the casino banking activities of the major banks, and why a firewall cannot be established between them and the deposit-taking activities, which one can see, at the end of the day, will always require government underwriting? The Statement says that the House, by which no doubt the Chancellor means the House of Commons, would consider how to increase accountability through greater parliamentary scrutiny. Will that include consideration of your Lordships' Economic Affairs Committee having a greater role in this area?

We agree that we need greater international co-operation and we are glad that the Government promote it. We agree that the Minister should take the kind of tough stance he is taking in the EU in respect of the proposed legislation on hedge funds. But when one talks to anyone in the City or any financial institution about the Treasury's activities in Europe, we are always told that they are woefully understaffed and come to the issue late. Despite impressive speeches by the Minister, what is required is a bigger, long-term, intensive staff input at European level to ensure that we do not get into the mess we are now in, with badly prepared proposals coming forward, and that, if we do, we have the resources to lobby effectively. Will he assure the House that those resources will be forthcoming, as they appear not to be in place now?

Finally, we agree that the Government should return our stake in the banks to the private sector in a way that brings best value to the taxpayer, promotes competition and maintains stability, but will he assure the House that the Government will not rush to get these banks back into the private sector? Does he accept that in most places where banks have been brought under public ownership such as Sweden, the States and elsewhere, it has tended to be 10 years before they returned to the private sector? Will he assure us that they will not be sold on the cheap in order to deal with any short-term financial problems of the Government instead of ensuring that the taxpayer gets a long-term benefit rather than a disbenefit from their period in public ownership?