My Lords, I rise to move manuscript Amendment 35AB and speak to manuscript Amendment 110ZA, which is associated with it. First, I apologise to the Committee for introducing a manuscript amendment and, indeed, for introducing a manuscript amendment to replace a manuscript amendment. It displays the serious defects in my own drafting abilities and I hope to do better in future. I apologise for that but it is a testimony to the flexibility of your Lordships' House that we are able to consider these amendments now, which are designed to give the Committee the opportunity to address a very important matter that, as we know, has arisen in the last few days. It would be foolish to pretend that these amendments have not been brought forward as a result of the revelations of the LIBOR scandal in the last few days. However, it is valuable to give the Committee the opportunity to debate these issues in a concrete way and with a concrete proposal on which it can opine.
The consequences of this scandal are so serious and so far-reaching that their implications for this Bill are immediate. Fortunately, we had not reached what might be deemed the relevant part of the Bill that should be amended to take account of what we now know-something that, a week ago, we did not know. We now know that the setting of benchmark prices is a fundamental element in the efficient operation and stability of financial markets as a whole-that is, of the generation of systemic risk as defined in the operating principles of the FPC-and that the process of setting one of the most important benchmark prices in world, the dollar LIBOR, has been severely compromised.
At the heart of the stability objective of the FPC is the integrity of markets. If markets have no fundamental integrity, then any stability objective is otiose. That is why Amendment 35AB links the FPC's objectives to the integrity objective elsewhere in the Bill. This is made clear in the objectives of the Financial Conduct Authority, remembering of course that under this legislation the FCA is given responsibility for the regulation of markets. Its strategic objective requires that markets should "function well". But more importantly, its integrity objective includes the "soundness, stability and resilience" of markets and,
"transparency of the price formation process in those markets".
To those two objectives the first part of amendment 110ZA adds,
"the procedures for establishing benchmark market prices being in the best interests of society as a whole", hence incorporating LIBOR-style operations and imposing a goal of social efficiency, defined in terms of the best interests of society as a whole, which is a standard shorthand used in economic analysis.
So far, so good. We have got the FPC concerned with integrity and we have defined the integrity objective to include the setting of benchmark prices. But still left hanging in the air is the question of what does integrity-vital for the FPC and for the FCA-really mean? Perhaps last week we all thought we knew. Now, in the light of the shocking revelations of the last few days, we are not so sure. To ensure that the integrity of markets is comprehensively investigated within the context of how financial markets are operating today, the amendment requires an independent inquiry into the,
"culture, governance and professional integrity of the banking and financial services industry", as set out in the latter part of Amendment 110ZA.
If this independent inquiry does its job, then the FPC can make its contribution to the general stability objective of the Bank, and the FCA can pursue its statutory objective of maintaining the integrity of Britain's financial markets, secure in the knowledge that the definition of integrity rests on firmly considered ground.
That is why Amendments 35AB and 110ZA are indissolubly linked together. I should make it clear that the inquiry proposed in these amendments in no way detracts from the other proposed inquiries led by Martin Wheatley and Andrew Tyrie announced by the Treasury yesterday. They have their particular contribution to make, but the financial services industry is too big, too complex, too far-reaching, and too important for there not to be a full independent judicial inquiry as proposed in this amendment. An inquiry will secure the effective operation of this Bill, and the industry deserves it.
Of course I recognise that a full judicial inquiry will take time, but the issue of urgency can be dealt with by sequencing the inquiry. Interim reports can cover matters deemed most urgent, such as material for the banking Bill that we will be dealing with next year; I understand that the Government have already designated it as a carryover measure, so it is going to be quite late next year. We can also set a time limit on the final report under the terms of the Inquiries Act.
I should also say something about the cost of an independent inquiry, a matter that greatly exercised the noble Lord, Lord Sassoon, yesterday. Given the billions lost in the banking crisis, the material losses to every family and business in this country, we surely can afford a judicial inquiry to get this matter right.
There are two fundamental reasons why a public inquiry is needed. First, the terms of reference of the Tyrie inquiry, if I may call it that, are far too narrowly drawn. I commented yesterday that the terms of reference of the proposed parliamentary inquiry were far too narrow to achieve the ultimate goal of restoring public confidence. The noble Lord, Lord Sassoon, disagreed, but my reading of the terms of reference was confirmed yesterday by Mr Tyrie himself. He told the BBC that it is a ring-fenced job, which is not about,
"trying to work out how to reform the whole banking industry", but is instead looking specifically at but one question: the LIBOR scandal.
A ring-fenced job is not enough. As the noble Lord, Lord Sassoon, commented yesterday with such clarity, referring to the Bill and to prospective legislation on the Vickers proposals, the inquiries announced in the Chancellor's Statement,
"plug the gaps through one or both of the pieces of legislation that are or will shortly be before Parliament".
He also said:
"Through the inquiries that are going on, we will look at what needs to be done to plug gaps in the financial services legislation".-[Hansard, 2/7/12; col. 528-9.]
I agree completely with the noble Lord. We can reasonably hope that those limited inquiries will plug the gaps, but plugging the gaps is not enough. We need the wide powers and forensic judgment of an independent judicial inquiry run by people with experience of taking evidence under oath and with the personal independence to make proposals that swim against conventional wisdom and established opinion.
The procedure proposed by the Government will not do. It will not provide a sound foundation for the operation of the financial services industry or for the effective working of the FPC or the FCA in the Bill. That is the first fundamental reason: the narrowness of the terms of reference of the other inquiries.
The second fundamental reason why a public enquiry is needed is that we must take the future of this most vital of British industries out of the cockpit of party politics. We have already seen in the past 24 hours what can happen within the party-political arena. It is simply not right for the future of Britain's most important industry to become a party-political football. Indeed, despite the tempests of the past 24 hours, calm voices from across the political spectrum have called for a proper, independent inquiry. They include Mr David Davis MP, from the Conservatives, the noble Lord, Lord Carlile, from the Liberal Democrats and the noble Baroness, Lady Neuberger, from the Cross Benches.
The amendments do not restrict the narrow inquiry by Martin Wheatley nor, if deemed appropriate by Parliament, do they restrict Mr Tyrie from doing his ring-fenced job. They provide an opportunity which occurs but once in a generation to set up financial industries under a new, firm foundation of market integrity. They provide one of the crucial building blocks of an operational framework within which the FPC and the FCA can manage the systemic stability of markets. Most important of all, through the device of an independent inquiry, they create the forum within which the public can reforge its trust in the financial services industry and the financial services industry can demonstrate its commitment to the service of the people of Britain, who have given it such voluminous and expensive support.
We on this side of the House fully understand that a public inquiry may lead to some criticism of the policies adopted by previous Governments, including Governments formed by the party of which I am a member. We will just have to take that on the chin. This matter is too important to allow such issues to be decisive. We must learn from what has happened, and the way to learn is to have the fullest information possible. That is why an independent judicial inquiry is necessary. I beg to move.