My Lords, we have waited a long time for the legislative response to the financial crisis that began in 2007. The legislative response in the USA to the great crash of 1929, occasioned by rampant speculation in the stock market, was far more rapid. Already, by 1933, the Securities Act and the Glass-Steagall Act were in place. The powerful Securities Exchange Commission was in operation by 1934. The primary purpose of the Securities Act of 1933 was to ensure that buyers of securities received complete and accurate information before making their investments. The purpose of the Glass-Steagall Act was to enforce a separation of investment banks from retail banks and to limit the risks to which the latter were exposed.
A measure of the tardiness of the present legislative response in the UK is the fact that the recommendations of the independent commission on banking are unlikely to be enacted before 2019, by which time the financial environment in which the banks are operating may have changed considerably. We may learn something more about the Government's intentions on Thursday, when the Chancellor is due to give a speech in the Mansion House. We fear that he will have succumbed to the pressures of some intense lobbying by the banks.
The independent commission might have been expected to recommend a clear separation of investment banking and retail banking to create a regime comparable to that of the Glass-Steagall Act. Instead, the commission has proposed that these activities should remain within the same institutions, provided that they are separated by a firewall. This will allow banks to transfer capital between their investment and their retail branches, thereby enabling them to continue to gamble with depositors' money.
The Bill we are discussing today deals with none of the aforementioned issues. It deals instead with the minutiae of the formal relationships between the statutory authorities that are intended to constitute a new financial supervisory framework. It proposes to replace the Monetary Policy Committee with a Financial Policy Committee and to replace the Financial Services Authority with two new bodies, the Prudential Regulation Authority and the Financial Conduct Authority.
Those new bodies are to be clustered under the umbrella of the Bank of England. They are to pass their recommendations to the Governor of the Bank of England, who will be responsible for conveying them to the Treasury and to the Chancellor of the Exchequer. The Bill will confer greatly increased powers on the governor; and a major point of contention between the Chancellor and the shadow Chancellor, which was debated in the House of Commons during Second Reading, is whether the various authorities should be allowed independent access to the Chancellor.
Together with its Explanatory Notes, the Bill comprises 330 pages. Notwithstanding its length, it is devoid of genuine substantive content. It is extraordinary-at least to my mind-that neither the Bill nor its Explanatory Notes contain any mention of the principal leitmotifs of the financial crisis. There is no mention of credit default swaps, which allow players to place bets on the creditworthiness of assets that they do not own. There is no mention of collateralised debt obligations, which were implicated in the demise of Northern Rock. For the rules on short selling, which allows speculators to profit from tumbling asset prices, one is referred to the Financial Services and Markets Act 2000; and there is nothing much to be found there.
There is nothing in the Bill to address the urgent need to bring the trading of financial derivatives under the auspices of an exchange, where they would be recorded and rendered transparent. In the absence of such arrangements, the preponderance of trades in derivatives will continue to be conducted over the counter; and these trades will continue be a dangerous and imponderable aspect of financial activity. There is no mention in the Bill of the Basel accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision, or of the manner in which British banks made extensive use of special purpose entities to evade these rules. These have the deceitful purpose of removing liabilities from the balance sheets and converting them into seeming assets. Doubtless it will be argued that these matters do not fall within the remit of the Bill but they do not appear to lie within the remit of any other Act, existing or proposed. If they are to be left to the discretion of the new regulatory bodies or authorities, we might ask why those authorities have not been given clear cues or promptings in this regard.
The Government's approach in proposing this legislation has been remarkable for its conciliatory and consultative nature. There have been inputs to the draft legislation from the Treasury Select Committee of the House of Commons, from a Joint Committee of both Houses, from the European Union Committee of the House of Lords and from many other bodies besides. There has also been an indication from the Financial Secretary to the Treasury that the Government will be seeking further to amend the Bill in your Lordships' House to strengthen and refine it. All of this seems to speak of a decent diffidence in the face of highly complex and imponderable matters and of a desire to spread the responsibility for getting things right among many of the interested parties. However, this interpretation is belied by the fact that the Government have forced the Bill through the Commons at an indecent pace.
It might seem surly to question the seeming good faith of the Government's approach. However, one's suspicions are readily alerted when one hears from senior Conservatives that a basic intention of the legislation is to avoid damaging the financial services industry. There is therefore a strong suspicion that the dilatory and protracted nature of this legislative process is a consequence of a desire to avoid interference with the profitable workings of the financial sector. If so, we are witnessing the promotion of a factional interest that has been greatly unfavourable to the rest of us.
The legislative response of the Government to global financial services is also remarkable for its insularity. In drafting the Bill, there has been little attempt to adapt the framework for UK financial regulation to the supervisory framework of the European Union. The matter of how the two should fit together is to be dealt with in a memorandum of understanding and the details are to be left to the discretion of a regulator. Nevertheless, there seems to be a belated recognition in government circles that the UK ought to play a more active role in influencing European Union policy. This is in contrast to the attitudes evinced by the Prime Minister, who is keen to veto any provisions of the European Union that might inhibit the City of London. Thus, he has declared his unyielding opposition to a financial transactions tax, despite the fact that the European Parliament has recently voted in favour of such a tax by a substantial majority. A transactions tax would represent a much needed sedative to be administered to the financial markets and its proceeds could be used to stimulate the economy.
Conservative politicians are aware that the British financial sector accounts for 75% of the financial activities of the European Union. No doubt they feel that this justifies the UK asserting its priority and independence in these matters. However, this figure gives a false measure of the importance of the UK's financial sector to the rest of Europe. The appropriate measure is a comparison of the size of the UK's overall economic activities with those of the rest of the European Union. Surely, if the UK proves to be intractable, the rest of Europe may agree to sideline us. The regulatory authorities of the UK have been likened to a caged canary placed in a gold mine for the purpose of giving warnings of impending explosions. However, the toxic gases of financial obfuscation are liable to overcome the bird long before it is able to sing a warning note. We have a right to expect the Government to protect us from the financial services industry. However, it seems that their legislation will not even serve to protect the industry from itself.