Clause 1

Financial Services Bill – in a Public Bill Committee at 10:30 am on 5th January 2010.

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Council for Financial Stability

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 37, in clause 1, page 1, line 12, at end add—

‘(c) where appropriate, direct the relevant authorities to act in accordance with the powers available to them under the relevant legislation.’.

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss the following: Amendment 36, in clause 1, page 2, line 8, after ‘Council’, insert—

‘( ) specify the responsibilities of each member of the Council in protecting or enhancing the stability of the UK financial system;

( ) specify the powers each member of the Council is able to exercise in protecting or enhancing the stability of the system;’.

Amendment 38, in clause 4, page 3, line 31, at end add

‘“the relevant legislation” means for the Financial Services Authority, the Financial Services and Markets Act 2000 and for the Bank of England, the Banking Act 2009.’.

New clause 2—Identification of additional powers needed to fulfil responsibilities for financial stability—

‘The Treasury must lay a report setting out the powers that the Financial Services Authority and the Bank of England need to fulfil their responsibilities for financial stability under the relevant legislation within one year of the commencement of this Act.’.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I also wish you a happy new year, Mr. Gale.

The amendments address a particular aspect of the Council for Financial Stability. I want to confine my remarks to the issue of responsibility and leave the broader issue of the principles underpinning the council  to a stand part debate later. The clause needs relatively little discussion given that the evidence sessions prior to the Christmas recess dwelt at length on the Council for Financial Stability. One of the issues that we touched on and about which the Minister and I exchanged views was his use of the footballing analogy—whether the council was a team, and who was captain and who was the manager. The point that the Minister made was that all players on the team shared responsibility for scoring a goal. The Minister’s principal point was that it was a shared endeavour and that each member of the council was responsible for financial stability. He drew a very rosy picture of the council. However, in the afternoon sitting of that first day, it was clear that the two other parties on the council—the Bank of England and the Financial Services Authority—saw their roles as being different from that which the Minister set out, and I will talk about that as I go through my amendments. They did not have the same sense of shared responsibility that the Minister seemed to have. The FSA defined precisely its powers and responsibilities with regard to financial stability. The Bank of England, while acknowledging that it had a financial stability objective under the Banking Act 2009, felt that its powers to deliver that objective were limited and therefore its responsibility was by implication limited.

I want to explore the issue of responsibility, so I have tabled three amendments and new clause 2, which seeks to develop the argument in more depth. Amendments 37 and 38 give the Council for Financial Stability the power to direct members to fulfil their responsibilities under the Financial Services and Markets Act 2000 in respect of the FSA and under the Banking Act 2009 in respect of the Bank of England. Amendment 36 seeks to clarify the respective powers and responsibilities of each member of the Council for Financial Stability in the statement that the Treasury will prepare about the council. New clause 2 takes the argument a little further down the track by requiring the Government to set out the additional powers that are needed by the Bank of England and the FSA to fulfil their responsibilities for financial stability. That echoes a theme that the Governor has raised in evidence to the Treasury Committee.

Amendment 37 would give the council the power to

“direct the relevant authorities to act in accordance with the powers available to them under the relevant legislation.”

That would take the council from a body that is about co-ordination and consensus to one that has the power to give direction and be more executive in its remit. Amendment 38, for clarity, defines what the relevant legislation is, which is the FSMA for the FSA and the Banking Act 2009 for the Bank of England.

The Minister presents the council as a co-ordinating body, whose responsibility is to get the three bodies that were part of the tripartite agreement to sit down together, but the rather lengthy debate that we had in the evidence session went beyond that. The council’s powers and responsibilities are somewhat opaque, so the amendments try to probe the nature of its powers. What can it do? Is it simply a talking shop, or does it have executive power? The amendments do not tackle the issue of who is in charge, but they are an attempt to answer the question of what the council can do in a crisis to either maintain or restore financial stability. We have seen that, in a way, as the financial crisis developed.

The earliest manifestation of the crisis was Northern Rock. At the start of the saga surrounding that bank, there was some confusion about who had the final responsibility to resolve the problems, which the Government took in the end. As we now understand, there was an expression of interest by Lloyds bank to acquire Northern Rock. However, to make that takeover viable, a support facility was required. The evidence given by the Chancellor to the Treasury Committee was that that was by far the best option. However, that facility was refused at that point; of course, that support was given at a later stage when Northern Rock was nationalised.

The point is not to use hindsight to question the handling of a particular decision, but simply to ensure that we learn the right lessons from that case. It is important therefore that we know what the council is able to do. Is it simply there to talk about some of the problems, or can it reach a conclusion and act? It is important that we understand its capacity to act. We do not want to get to another financial crisis and see the same problems emerge, where everyone suddenly steps back and says, “It’s not my responsibility to sort it out,” and there is a stand-off between the three parties under the Government’s model—the Bank, the FSA and the Treasury.

One of the lessons that we need to learn from the recent events is that the executive capacity to undertake those responsibilities was not there. My amendment 37 seeks to clarify what the council can really do in a moment of crisis to resolve a situation. Is the council there to have a powerful executive role, or simply to co-ordinate and build consensus with, ultimately, the three parties reaching their own conclusion about the right course of action?

Photo of John Howell John Howell Conservative, Henley

Does my hon. Friend share my concern that, having gone to the trouble of putting the council on a statutory basis, the Bill suggests that the council also has a role of its own? Therefore, does he have a feeling for whether we are talking about a tripartite arrangement any more, or about what we might call a quadripartite arrangement, in which case the Bill is even less clear and definite about what the council does and how it fits into the arrangement?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My hon. Friend makes an important point about the substance of the body. Does putting the council on a statutory footing give it any more substance than the informal arrangements that existed before? Tripartite arrangements are already in existence, such as the memorandum of understanding, which took place under this regime—it is a different document but similar in many respects. Where are we heading? The Treasury Committee, looking at the council last year, reached the conclusion that the exercise was cosmetic. We want to understand, by means of the group of amendments around responsibility, and new clause 2, what the substantive change between the existing system and the one proposed by the Government in the Bill is.

The reality is that, in terms of the Government’s response to the regulatory dimension of the financial crisis, the provisions are their flagship measure, the measure that the Government are pinning all their hopes on. We have yet to be persuaded that there has been a step change in the nature of the co-ordination  between the three bodies—the Treasury, the FSA and the Bank of England—as a consequence of part 1 of the Bill. Given the evidence session that we had before Christmas, the Committee has the opportunity to explore what is substantially different now to the previous arrangements.

On amendment 36, I want to make sure that we are clear about the responsibilities of each member of the council

“in protecting or enhancing the stability of the UK financial system”, and that we specify the powers that each member of the council is able to exercise in protecting or enhancing the stability of the system. We need to get across that key point, about which, coming away from the evidence sessions, I felt there was still some uncertainty—some blurring of the edges. We need to be much clearer in the Bill about those respective responsibilities.

As I said in my opening remarks, the Minister used a footballing analogy in his evidence, the essence of which was that the three partners are all ultimately responsible for the results, but will make their contributions in different ways. When pushed on the specifics, the Minister said:

“The Treasury, as the UK’s finance and economics Ministry, has its set of responsibilities”— he did not explain what the responsibilities were—

“the Bank of England has responsibility for monetary policy as an independent central bank; and the FSA has responsibility as an independent financial regulator.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 9, Q15.]

That seems quite straightforward. We might like some more details about what the Minister feels the Treasury’s responsibilities are, because it is responsible for a wide range of economic policies—which areas of policy contribute to financial stability? Is the Treasury sufficiently clear about the impact of its economic decisions on financial stability?

What about the Bank, which is listed as having

“responsibility for monetary policy as an independent central bank”?

The Bank’s main role in monetary policy is with interest rates. We can argue that interest rates have a key role in determining financial stability. One of the arguments for having an independent central bank is that giving it control over interest rate policy provides a much more stable environment for inflation. We support the need for an independent central bank on the basis of that argument. However, as the economic crisis has demonstrated, simply having low and stable inflation does not mean we have economic stability.

Some would argue that one of the problems that we have seen in recent years is that, because interest rates have been directed at maintaining low inflation—inflation has been low, so interest rates have been low—credit has been underpriced. Credit has been cheap but, because of the change in the global economy, we have also seen increased liquidity, which has meant that more money is around, creating an asset price bubble, which has burst, with dramatic consequences for families across the UK. I am not sure that simply saying that the Bank of England’s responsibility for financial stability flows from its responsibilities for monetary policy is the right answer.  That is why we need to be much clearer in the Bill about the responsibilities that the Bank of England has in maintaining financial stability.

I am sure that the Minister is aware of the speech of Adam Posen, who is an external member of the MPC, given in December last year. He made the point:

“We would be better off if we could prevent asset price booms and busts, and it is clear that monetary policy as currently practiced is not sufficient to do so.”

He seems to be at odds with the Minister’s view that monetary policy is there to help provide financial stability.

The Bank was given the objective of financial stability in the Banking Act 2009. How is the Bank to deliver? John Footman, in his evidence, suggested liquidity insurance coming from the Bank’s activities; oversight of the payments system, under the new responsibilities given under the Banking Act; and the bank resolution regime. Those are the Bank’s powers, as he saw it, in the context of financial stability. Clearly, there was a sense that the powers were not sufficient to deliver financial stability. The Governor of the Bank of England told the Treasury Committee in June:

“it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons”.

There is clearly a gap between the collective responsibility that the Minister believes in when it comes to enhancing or maintaining financial stability, and what the Bank sees as its contribution to that objective. The Minister suggested monetary policy, but Adam Posen suggests that monetary policy, as currently practised, does not deliver. John Footman identified some of the tools available to the Bank to deliver financial stability, but even then the Governor felt that his role was limited to that of being a preacher and to giving sermons, and in need of more powers if he was to be able to fulfil fully the responsibility given to the Bank in the Banking Act for maintaining financial stability.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 10:45 am, 5th January 2010

It would help me understand what the hon. Gentleman is trying to do with his amendments and the direction of travel if he could tell the Committee whether he supports the existence of the Council for Financial Stability, and, if so, what he thinks the council should do.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am in danger of trespassing on to the stand part debate.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. We were going to get to this point, so I might as well say it now. I take a relaxed view on the matter. Members can have a stand part debate at either the beginning or the end of a clause, but not both. Sometimes, for the convenience of the Committee, a more wide-ranging discussion takes place at the start of a clause, and I am perfectly happy about that. The hon. Member for Fareham set out the context of the clause in his opening remarks, and had the issue not arisen now, at the end of his remarks—I am aware of the interest of the hon. Member for Chichester in the matter as well—I would have said that, given the nature of the debates on the selected amendments, the likelihood is that we will not have a stand part debate at the end. If hon. Members wish to use the amendments now, or those in subsequent debates, to range wider, I am perfectly relaxed about it.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Thank you very much, Mr. Gale. I am not quite sure where that leaves me now, other than perhaps having to speak longer on this matter than I had expected. I will conclude my remarks on the amendments, and then make my contribution to the stand part debate, and we will take it from there.

In response to the hon. Member for Wolverhampton, South-West, as will be clear when I speak later, we do not think that this will work, for all the reasons that I am trying to illuminate in the context of responsibilities, and because of the fundamental principle that the existing regulatory regime is bust. It did not work during the financial crisis, and I do not believe that simply putting the tripartite arrangements on a statutory footing will strengthen the regime sufficiently to say that that is the end of the reforms that are needed. That is why my party set out in its white paper “Plan for Sound Banking” that we would make significant reforms to financial regulation, so that the Bank of England would be explicitly both a macro-prudential regulator, building on some of the powers that it has, and a micro-prudential regulator, particularly with regard to the banking sector. We believe that some of the issues that arose during the financial crisis can be resolved only through fundamental structural change. Therefore, we make it clear that we oppose clause 1 in principle.

I am trying to tease out how the Government believe the council will work in practice. We cannot always assume the outcome of the next election, so this may be the structure that we will be lumbered with until we know the outcome, and it is therefore helpful to know precisely what the council will do in practice. I hope that that clarifies the issue for him and other Members.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

My understanding of his party’s policy, which he has repeated, is that it seeks to replace a tripartite regime with a bipartite one, in which the Government continue to have a role, as they must, and the Bank of England has the regulatory responsibility currently lying with the FSA drawn into its compass. The same issue arises as to how a bipartite regime would work as it does for a tripartite regime, and I would welcome it if he expanded on that issue.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The challenge of the tripartite regime concerns the responsibilities that each of the parties has and, as has been demonstrated, there is a significant gap in responsibility. The analogy that I have drawn previously is the assumption that the FSA, the Bank and the Treasury are effectively three circles. One assumed that under an efficient design of the system in the 1997 reforms, each of those three circles touched and there was a right interface between them. The crisis has demonstrated that those three circles did not touch. There were significant gaps between the authorities and what their powers and responsibilities were. Our argument is that it is not an issue about co-ordination but the powers that they have. For example, no one had the power to act as a macro-prudential regulator. Giving back those powers will strengthen the regulatory regime and the stability of the financial crisis. Our aim is to produce a system that, as far as possible, reduces the need for a resolution. We want the right mechanisms and approach to control the flow of credit, to look at the imbalances in the economy and to deliver a solution.  There will be issues around the interaction between the Chancellor of the Exchequer, as the representative of the Government, and the Governor of the Bank of England, but the Bill does not tackle that issue because it does not go far enough in recognising that the fundamental structure is flawed.

Photo of Andrew Love Andrew Love Labour, Edmonton

I note that there will be a division on the principle of clause 1. I am surprised that the opportunity has not been taken to give primacy to the Bank of England for regulatory matters. Will the hon. Gentleman explain why he has been so timid in his amendments?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

If I had known that the hon. Gentleman might have been tempted to support that reform—

Photo of Andrew Love Andrew Love Labour, Edmonton

No, I would not; I am just trying to tease out the rationale.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I could have spent a long time drafting amendments to convert the Bill, which was introduced by a Labour Government at the fag end of their term, to what a Conservative measure would look like if we formed the next Government. However, I wanted to focus the debate on the inadequacies of the Government’s measure and leave the other debate for the other side of a general election. I will make the case for why I think that the Bill is the wrong reform for financial regulation in the UK, why it does not address the failings, and why we need fundamental reform. I am sure that there is still time to table yet more new clauses to enable us to talk about the issues at greater length. The Committee carries on until 4 o’clock next Thursday afternoon, so there is much more that we could talk about. I am happy to table more amendments so that we can have that debate. I suspect that they might rest on the amendment paper uncalled, since we are not sure how far we will get. I have decided, in this debate, to focus on what is in front of us today, on what the Government are trying to do, and on why the Government are failing in their responsibilities to reform financial regulation.

The Government have not come forward with more radical proposals because the Prime Minister introduced the regulatory structure we currently work with. They have not had the nerve to recognise the fundamental flaws and are trying to have a cosmetic reform to try to persuade people that they have learned the lessons. The Treasury Committee recognises that the reform is cosmetic. It does not address the fundamental weaknesses. If the hon. Member for Edmonton or other hon. Members on the Treasury Committee wish to table amendments to reflect the output from the Committee’s deliberations, that is fine; we would be prepared to address them. However, I am realistic about how far we are going to get through the Bill. If the Government Whip moved an amendment to the programme motion, so that we could sit for another three or four weeks to discuss the reforms in our white paper, I would be happy to agree to that.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. I think that the hon. Gentleman might find that that is not up to a Government or other Whip, but up to the Programming Sub-Committee and ultimately the House.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful for that guidance, Mr. Gale. If the Programming Sub-Committee felt the need to meet again and proposed that an extension to the timetable be put to the House so that we could debate for much longer, I would be grateful. We argued for more time to be given to the Bill, to enable us to discuss such issues in more detail. Sadly, that was not the view of the House.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester 11:00 am, 5th January 2010

The point about time is particularly relevant. Ten years ago, we were discussing exactly the same issue—I shall come on to this, if I manage to catch your eye, Mr. Gale—in the Committee on the Financial Services and Markets Bill. We tried to open a debate about the arrangements in place relating to systemic risk and financial stability during an evening sitting of the Committee. Our attempts were repeatedly negated by the antics of the Government Whip and by the Minister, who concluded, after a debate on the issue of a little over an hour:

“I gave way extensively...and, if I may say so, a great deal of time has been wasted on this matter.”—[Official Report, Standing Committee A, 13 July 1999; c. 182.]

If the Government had listened to what was said in that debate, I am confident that, although we might still have had a Northern Rock crisis, it would have been much better handled.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to my hon. Friend for that contribution. He is the only member of the Committee who went through the parliamentary process that established the FSA. A number of the issues raised at the time have resonance today. One was how the different bodies were to work together. If more time had been devoted at that point, perhaps, as he said, a different set of circumstances might have resulted, which would have been to the benefit of all of those who have an interest in the strength of the financial services sector and its regulation. Then as now, I suspect, programming and timetabling were a constraint on discussion.

Before the interventions, I was dealing with the issue of how the Bank saw its responsibilities and powers in terms of financial stability. I now want to touch on the FSA’s role, which also came up for discussion in the evidence sessions, when Andrew Whittaker, its general counsel, gave evidence to the Committee.

The FSA’s view was interesting. Again, it diverged from the view taken in the footballing team analogy used by the Minister. Although the FSA recognised that it shared a responsibility, it was clear about the limits of what it could do to deliver that objective. It was also clear about where it was in the hierarchy, when it came to delivering financial stability. Mr. Whittaker said:

“We, for our part, recognise that our role in relation to financial stability is, in some senses, a secondary one to the other authorities” and

“it is inconceivable that we would wish to second-guess the views of the other authorities in that respect.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 28, Q58.]

I thought that a clear statement from Mr. Whittaker about the FSA’s role. It is the economic and business regulator, and the micro-prudential regulator, for the financial services sector. He clearly had a restricted view of what the FSA’s role would be in terms of delivering financial stability. It is entirely consistent with the remit of the FSA for him to see the matter in that light.

We can develop the point. If the FSA as a micro-prudential regulator believes that it has a secondary role, who is responsible for delivering macro-prudential stability? Who is the macro-prudential regulator? Is it the Bank of England, which does not seem to have the powers under the Banking Act 2009 to fulfil that role? The FSA sees itself as the micro-prudential regulator, and as not having that other role.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

What does the hon. Gentleman understand by the terms “macro-prudential regulator” and “micro-prudential regulator”? He has used them several times.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The micro-prudential regulator looks at the financial position of individual entities; that is the role that the FSA has undertaken. It looks at financial risks attached to the entities that it regulates and sets levels of capital, using the capital requirements directive, solvency 2 or other appropriate rules for different parts of the financial services sector. It looks at individual entities and their solvency.

The macro-prudential regulator looks at financial risk across the whole system. It looks at trends—in, say, credit—across the whole system, and is responsible for managing, identifying and acting on those trends. We will have a debate later—under clause 2, I think—about who is responsible for acting when one of the regulatory authorities identifies an issue or a concern. We are looking for a regulator that has responsibility for identifying global trends, and trends in the economy as a whole, and their consequences for financial stability. The regulator would have not only a requirement to identify the trends, but a toolkit to enable it to respond to issues and trends.

The FSA and Lord Turner, in his report, identified a gap between what the Bank and the FSA did. That gap is not addressed by the Bill, but it should be, and that is why our reforms seek to address that gap by giving the Bank of England an explicit role as a macro-prudential regulator.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Would the meltdown of a bank the size of the Royal Bank of Scotland, as an individual entity, be a matter of micro-prudential or macro-prudential regulation?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

There are two very clear strands. I do not think that there is a simple yes-or-no answer to that question. Clearly, in terms of the micro-prudential regulation of RBS, one would expect the regulator to look at the levels of capital and the risk within the business, and to ensure that the capital and risk were aligned. That is very much a micro-prudential role, which the FSA should be undertaking.

Of course, there is a macro-prudential issue too, which involves asking questions such as “What created the circumstances that enabled RBS to grow in the way that it did?” and “What were the wider trends in the economy, including trends relating to the availability of credit in the market as a whole?” That helped fuel RBS and its growth, as it would have helped fuel the growth of the balance sheets of other banks. In the context of RBS, there is another issue: if a bank such as RBS goes through a financial crisis, there is a wider market implication.

Part of the challenge is that if one started to separate out the micro and macro-prudential regulators, there could be an opportunity for a divide between the two, and there could be a lack of clarity on who is responsible for which aspects of activity. That is why we have argued that the Bank of England should act as both the macro-prudential and the micro-prudential regulator. The current system gives the FSA the power to act as the micro-prudential regulator, and gives the Bank of England some powers to look at macro-prudential trends. However, it does not give the Bank a toolkit that is needed to respond to those trends. The current system is therefore deficient in two ways. First, the powers are not there for the Bank of England. Secondly, the structure creates a gap between the FSA and the Bank. In his report, Lord Turner identified that as one of the failures of the regime introduced in 1997.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Is that not exactly what the Council for Financial Stability will do—co-ordinate to avoid that gap becoming a problem?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I suspect that if we went back to the debate on the Financial Services and Markets Act that set up the new regulatory framework—perhaps my hon. Friend the Member for Chichester might be able to illuminate us on this—or on the Bank of England Act 1998, we might find a similar discussion about what structure would be in place to co-ordinate the Bank and the FSA. As a consequence, we see where we are today. The co-ordinating role is not particularly strong. When the Minister responds, he might be able to give us all comfort that this is a much beefed-up body with much clearer responsibilities and powers for the council. So far, we have not seen evidence to suggest a significant improvement on the existing regime.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

The intervention that we just had was exactly the right question, but if we listen to what we were told 10 years ago, the hon. Member for Wolverhampton, South-West might consider whether much has changed. As the then Minister, the right hon. Member for Leicester, West (Ms Hewitt), said:

“As the memorandum of understanding clearly states, managing financial stability is a common objective of the three institutions whose roles and responsibilities are clearly delineated”.—[Official Report, Standing Committee A, 13 July 1999; c. 182.]

Is that not exactly what we will be told by the Government in just a moment?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to my hon. Friend for that comment, which is part of the problem. We have been here before. We are trying to put a fresh coat of gloss over the failings of the existing system, which is where the fundamental flaw is. The proposals in the Bill do not address the fundamental problem of co-ordination. We can be reassured by putting it on a statutory footing and by a fresh Minister making the same reassurances, but this part of the Bill does not demonstrate to me that the Government have learnt lessons from the financial crisis and the way in which the structure of financial regulation in the UK has worked over the past decade. It is the wrong answer to the question about how we learn the right lessons from the financial crisis.

Photo of Andrew Love Andrew Love Labour, Edmonton

Talking about fundamental problems in the very uncertain times in which we live, how does the hon. Gentleman respond to the very considerable City concern that this will lead to the big bang change that the Opposition are suggesting of giving potential authority to the Bank of England and creating further uncertainty, which may lead to instability at a time when we need the maximum stability and the least uncertainty?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman’s intervention is interesting; it suggests two things to me. The first is that Government Back Benchers recognise that there is not an argument to be made in support of the existing regime. The Chancellor on Second Reading focused not on why our proposals were wrong in principle but on the implementation risk. I would have thought that the Government would be more confident about the regulatory regime that they introduced in the late ’90s and more robust in its defence. It demonstrates a tacit recognition that the system failed, but for political reasons the Government feel unable to make the fundamental reforms needed in this country. The second point is about the implementation risk—there was a risk in the implementation of any change in any project. The right thing to do is to ensure that implementation is planned, well-thought-through and detailed, which is the work that we are undertaking now, to ensure that the implementation risk is as low as possible. Fundamentally, if the Government think that the main argument is about implementation, that demonstrates a lack of confidence in the regulatory regime that they established.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Happy new year to you, Mr. Gale, and to all members of the Committee.

I want to pick up on what the hon. Gentleman says. As I will explain in my remarks when I respond to the debate, it is clearly the Government’s position that the tripartite system has worked but it could be improved. It has been tested in extraordinary circumstances but, as he knows, no retail depositors lost out. We took effective action over Northern Rock; we took unprecedented action in recapitalising the banks. The system of co-ordination, which existed and is being improved upon as part of the Bill, has been fire-tested as part of what has gone on in the world economy. We are not defensive at all. There are strong arguments why that is the case.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 11:15 am, 5th January 2010

I find the Minister’s comments remarkable. His list of so-called successes was all about how the mess was cleared up once the bubble had burst—nothing about how the system had tackled the issues that gave rise to the financial crisis and nothing that explained why the tripartite system worked so well in the run-up to the financial crisis or how it reduced the risks. The list was all about what happened once the bubble had burst—nothing about prevention, but all about cure.

The Minister needs to reflect: taxpayers have given indemnities and guarantees, as well as direct investment in the banking system; people have lost their jobs; and we have seen a destruction of wealth in this country as a consequence of the financial crisis. The regulatory system should have played a significant role in minimising the  creation of that financial crisis, but all the Minister can talk about is what happened to clear up the mess, rather than what change will take place to prevent such a problem from emerging in the first place.

The emphasis is wrong, which is why the changes we outline are focused around getting the structure of regulation right, so that we can identify problems as they emerge, much earlier on. Someone would be tasked with the responsibility of responding to the issues, so that people have the powers they need to tackle such issues as they emerge. The reforms in the Bill do not go anywhere near achieving that goal; they are a gloss on a fundamentally flawed regulatory structure. Simply to praise that structure by reference to what it did to sort out the mess it created is not a strong argument in favour of the retention of the existing tripartite regime.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am happy to expand on my arguments when I make my contribution to the debate, but again the hon. Gentleman seems to want to pretend—as the Conservative party has on previous occasions—that the problem is just one of UK financial regulation. He knows that the financial crisis was global, and all regulators around the world had to respond to it. All regimes were tested and none was found to be perfect but, I repeat, in difficult circumstances the tripartite authorities and the system we introduced played a part in ensuring that we got through the incredibly difficult financial situation in the best possible shape.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister should reflect on his argument—“a global financial crisis” is a great Government line. Let us not forget that the regulatory structure that the Government set up in 1997 regulated one of the world’s two global financial centres. In a global crisis, to what extent does London’s role as a global financial centre feed into that system? Did we get the regulatory regime right in the UK in the late ’90s? The answer, clearly, is, no, we did not get it right. There were some fundamental failures in the structure of regulation, leading to the crisis. Those failures may well have made the crisis in the UK worse than it would have been had there been a better structure in place.

The Government’s failure to accept that the system failed reflects badly on them, because most regulatory regimes are reflecting on and learning the lessons of the financial crisis, with a number of new restrictions, more responsibilities flowing back to central banks and people looking at the structure of financial regulation in the States. Yet the Government seem to be the only ones to have the view that the system is all working fine. All we need to do is to provide a new gloss on the co-ordinating arrangements and it will be fine. A real failure of the Government is to accept some of the flaws in the structure and that the case for reform goes beyond simply putting the tripartite arrangements on a statutory footing.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. I accept entire responsibility for the fact that this debate has broadened. The quality of the debate is fascinating, but there is a fundamental difference between a stand part debate and a Second Reading debate and we are moving towards the latter rather than the former.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Thank you, Mr. Gale. Let me return to my amendments and new clause 2. I will try not repeat myself when we come to the stand part debate.

Before this exchange on the principle of the Government’s proposed reforms and whether they are adequate to address some of the issues that emerged during the financial crisis, I was talking about the need to be clear about the allocation of responsibilities for the powers to the various tripartite authorities. The FSA stated in both its oral and written evidence to the Committee that it saw itself as having a secondary role, and the Bank was also clear about the powers that it had to contribute to financial stability. However, if we have a Council for Financial Stability and a Bank with an objective for financial stability—we will discuss giving the FSA a statutory objective for financial stability later—what are the tools needed to deliver those objectives?

The evidence sessions and the tools that I understand are available to the various tripartite authorities suggest that, under the current regime, responsibility is exercised through co-ordination. We do not, however, have the accountability that we need and there is a lack of clarity about the tools that the different parties will have to help deliver financial stability. What will those tools be and who will be responsible for them?

John Footman said during his evidence that

“we are still at the stage of thinking about the kinds of tools that would be used.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 30, Q64.]

That lack of clarity creates confusion about who will do what and who will ultimately be accountable. I do not want to see a recurrence of what we have seen in the current financial crisis where, at a moment of crisis, people are allowed to wriggle off the hook and not face up to their fundamental responsibilities. That is why we need to be clear about the council’s responsibilities.

During the evidence sittings, my hon. Friend the Member for Henley asked the Minister whether the council is a black box. The Minister replied that

“we have a Council for Financial Stability with clear terms of reference and pursuing through discussion and co-ordination an agenda that ensures that the council can work effectively as a body...It is not a black box.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 13, Q26.]

We do not, however, have clarity on the council’s responsibilities, which is why amendment 36 seeks to open up that box. It will specify who on the CFS is responsible for what and what the respective powers are. It also addresses one of the Treasury Committee’s concerns. It stated that

“Merely rebranding the Tripartite Standing Committee will achieve little by itself”, which is absolutely right.

Although amendments 36 and 38 seek to ensure that existing responsibilities and powers are clarified, new clause 2 goes a step further. It would require the Treasury to

“lay a report setting out the powers that the Financial Services Authority and the Bank of England need to fulfil their responsibilities for financial stability...within one year of the commencement of this Act.”

The new clause would try to ensure that the Government’s concerns about what the Bank of England is able to do are allayed and, given that we have allocated the new powers to the Bank and the FSA, that there is time for a  proper debate about making sure that those institutions have what they need in their toolkits to enable them to go that extra step in delivering financial stability.

We had a debate at some length on the Banking Bill—I do not wish to rerun it—about how financial stability is defined, and I think that the conclusion was that it is difficult to define such things. We know when financial stability does not exist, but it is hard to know when it does. Some would argue that we had a prolonged period of financial stability in the run-up to the financial crisis, but the causes of that instability were being built up as we were going along. I want to ensure that we know what the various parts of the new committee are doing. The Governor of the Bank of England put it this way:

“what exactly is it that people expect the Bank of England to do?”

We talked earlier about the views of Adam Posen, that monetary policy is not the right way to control asset price boom and bust. In that same speech in December he said:

“I oppose...taking asset prices directly into account when setting monetary policy (as opposed to noting their effect on forecasts of consumption, investment, et al). I oppose so doing for a very simple reason: trying to manage asset prices, let alone pop bubbles, with monetary policy instruments will not work.”

If monetary policy is not the tool that the Bank will use to deliver its financial stability objective, what tools—powers—will be available? Paul Tucker gave a speech in October 2009 in which he outlined some of the Bank’s thinking in that area. He mentioned capital requirements, risk weighting and the importance of the relative interconnectedness of financial institutions. He also said something that is an important aspect of the debate that we need to have on financial stability:

“a vital issue is whether we are ready, today, collectively to back an approach based on our judgments rather than on enforcing a book of detailed rules. If we are to tolerate supervisors where necessary substituting their judgment for that of managers and boards, then commentators, appeal tribunals and even parliamentarians will need to give supervisors the benefit of the doubt occasionally. Of course, such judgments need to be grounded and reasoned.”

He argues that regulators need to be able to exercise judgment in the application of the tools, and we need to expect regulators to make some difficult decisions when applying the tools. However, one needs to know what the tools are when applying the judgment.

In its discussion paper in November, the Bank described macro-prudential regulation as the missing link in the policy framework. There is something that the Bank needs to have, in addition to monetary policy, to enable it to act as a macro-prudential regulator. Interest rate policy, which is geared towards controlling inflation, would not deal with asset bubbles. What tools, therefore, does the Bank of England need to deal with that? If the Bank does not have the tools it needs, how will it deliver the financial stability objective? The Bill is silent on what additional tools the Bank—or indeed the FSA—will need to act as a macro-prudential regulator. That gap needs to be addressed, and new clause 2 gives a legal structure for doing that. The Government should bring forward a report identifying where the gaps are and what powers are needed for that crucial link, to fill the gap that exists in the toolkit that either the Bank or the FSA is able to exercise. New clause 2 is important as it imposes a statutory requirement to look ahead at the tools that are emerging through discussions at international  and national level on macro-prudential regulation and ensure that the regulators have all the tools and powers that they need to enable them to contribute towards financial stability. My concern about how the structure is set out in clause 1 is that it gives collective responsibility to the Treasury, the Bank and the FSA without actually knowing precisely where the limits of those responsibilities are, and what powers they have to contribute to deliver that objective of financial stability. My amendments and new clause in this group help clarify those powers and responsibilities, but also recognise that there needs to be more work to ensure that the regulators have all the tools they need to help deliver the financial stability objective that the Bank already has, and the FSA is being given in clause 5.

Mr. Gale, the stand part debate—

Photo of Roger Gale Roger Gale Conservative, North Thanet 11:30 am, 5th January 2010

I thought that we had had some of that already.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I know; that is why I was very wary in the comment I made earlier. I will try to bear in mind that we have had quite a big chunk of that debate.

I return to the point raised by my hon. Friend the Member for Chichester, which was debated during the course of the Financial Services and Markets Act. At the time, the then shadow Chancellor, my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) warned the House of Commons:

“With the removal of banking control to the Financial Services Authority...it is difficult to see how and whether the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.”—[Official Report, 11 November 1997; Vol. 300, c. 731.]

The argument my hon. Friend made at the time—I think this crisis demonstrates it—is that the reforms introduced by the Government in 1997 created a structural weakness in the system that has now been clearly identified. The Minister believes that the council will address that structural weakness. I do not believe that it is sufficiently radical to achieve that. The Minister, in his interventions, was very robust in his defence of the existing strategy. Let me remind him what he said in Committee when asked about the tripartite arrangements. He said:

“We could have done better.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 10, Q16.]

The Treasury Committee, in its report on the tripartite system, was very clear about that:

“We cannot accept, as some witnesses have suggested, that the Tripartite system operated ‘well’ in this crisis. In terms of information exchange between the Tripartite authorities, the system might have ensured that all Tripartite authorities were fully informed. However, for a run on the bank to have occurred in the United Kingdom is unacceptable, and represents a significant failure of the Tripartite system. If the system worked so ‘well’, the Tripartite authorities should take a closer look at the people side of this operation.”

Photo of Mark Todd Mark Todd Labour, South Derbyshire

I have long argued that an obsession with structure perhaps takes us away from discussion of the performance of the actual players in the structure. I wonder whether the hon. Gentleman can develop the argument a little further on the balance between changing the structure and addressing the poor performance of  the FSA in regulating, for example, Northern Rock—the case that he raised. I think he would accept that the FSA’s own internal audit exercise demonstrated very substantial failure in straightforward performance of its duties given under the law.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman is absolutely right. There are two strands here that we need to recognise. First, the argument I am making here is that there was a structural failure that led to some problems falling into the gap between the Bank and the FSA. There are co-ordination issues that we need to resolve and there are structural reforms that we can make to address those issues. The hon. Gentleman is right to make the next point that, once the structure is right, how do the bodies responsible under it regulate individual institutions? We saw failures in supervision in the FSA’s handling of Northern Rock. I commend the FSA for being as open as it has been about its failings in that respect. It has done a good job of understanding where its supervisory approach failed and has taken steps to reform that approach. It recognises the problem. We cannot say that simply structural change will resolve the problems; there needs to be another approach, which is why I felt that Paul Tucker’s comments were very important too.

One issue, which cropped up in the exchange between the Minister and me about prevention as opposed to cure, was about how we ensure that the regulators learn the lessons about how we prevent these crises from emerging in future. What does it need to look at and to do to minimise the reoccurrence of another asset price bubble? How does it change its approach in order to understand what is going on within an institution and to be willing to challenge the business model and say, “Should you really be in this part of the mortgage market?” and “Should you be trading in this financial instrument?” What are the consequences of particular financial instruments for the stability of a bank? How does a regulator become much more proactive and judgmental than it has been in the past?

Prior to Christmas, we debated the FSA’s new enforcement penalties; yes, it can take action when a breach has occurred, which will stop the activity, and there is a penalty for the breach, but, acting ahead of that enforcement process, what do we do to prevent detriment to consumers in the meantime? That is a difficult judgment for a regulator to make. When does it intervene to stop something happening before it has gone through the disciplinary process? The same principle applies to the approach that a regulator needs to take in this new climate in which there is greater acceptance of regulators acting more proactively in advance of a problem—acting as the bubble grows rather then waiting until it has burst. That is about an approach rather then just structure.

The hon. Gentleman is right; there are two strands here. The Bill deals with structure—a legal framework established by Parliament—but the question then is, how do we get the regulator to change its approach? That is a more difficult thing to bring about through statute.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

The other aspect that the hon. Gentleman may want to dwell on is the contribution of the underlying assumptions that most of the players made within this scenario. We now look on them with great regret but  they nevertheless drove many of the players to take a more aloof position towards the financial services sector: the belief that it would somehow largely regulate itself and that the risks of collapse had dissipated so far that we did not need to give them considerable attention. That is another part, which, again, is nothing to do with the structures but part of the underlying ethos of whatever structures we choose to develop.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman again makes an important point. If he casts his mind back to the penultimate question of the evidence session, Simon Gleeson from Clifford Chance was asked if he thought that banks had done well through this. He said yes; he thought that they had. However, of course, a flawed assumption had underpinned their work. That flawed assumption was shared not just by banks, but by regulators, Government and so on. People did believe that markets worked rationally, and that individual actors in markets were rational. That dictated an approach to regulation that said, “The market will sort it out.”

One of the insights into economics developed over the past 20 or 30 years is the recognition that people are not always rational in how they act on economic issues. That insight has come from psychology as well as economics. It is expressed in a popular form in “Nudge”, the book by Thaler and Sunstein about behavioural economics, which they apply to policy prescriptions. Some people in markets do not necessarily act in a rational fashion all the time. In her book “Fool’s Gold”, Gillian Tett talks about the development of the credit default swap market. It struck me that JP Morgan, seen as the originator of the CDS, did not trade in them as aggressively as its competitors. JP Morgan argued that it understood the attached risks, unlike its competitors, who saw them as a lucrative market that they had to be in; they felt that they had to trade in those instruments because they would make great profits with apparently low levels of risk. History tells us that the approach adopted by JP Morgan was perhaps correct. That was a situation where rationality was superseded by the desire to make lots of money, to follow the rest of the market, to follow the herd. We should not assume that financial markets are economically rational, when we know from other aspects of our life that we are not always economically rational.

Rob Marrisrose—

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

That clearly struck a chord with the hon. Member for Wolverhampton, South-West.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

With all gentility to the hon. Gentleman, some of us socialists recognised 40 years ago that markets are not rational.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not entirely sure that I agree. Socialists said, “Markets are not rational, but the Government are. We should have central planning; by controlling the commanding heights of the economy, we can dictate how markets and the economy will work.”

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

That is communists, not socialists.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Attlee Government believed in central planning. I am not sure that Attlee or Harold Wilson got round to five-year plans, but there was a strong sense of economic planning, which was underpinned by a belief in rationality—a belief that Governments knew better than markets. That was very much the theory of the day. In different political guises, we have all come to that belief regarding economic rationality. It indicates different strands of response to the financial crisis; it indicates that changes are needed in structural regulation, and in the approach to regulation, which is harder to legislate for. We also need to think again about the ways in which we as individuals act in markets.

Photo of Andrew Love Andrew Love Labour, Edmonton

The hon. Gentleman speaks, naturally, about the response that we must have to the financial crisis. I sympathise with his concerns about the tripartite arrangement and how we go about strengthening it. I am concerned about the touching faith that he and other Opposition Members seem to have in the idea that the central bank should always undertake the regulatory function. Most authorities worldwide use the central bank for that purpose, but they all failed in exactly the same way, and some failed to an even greater extent than we did. Why does the hon. Gentleman have such touching faith in the idea that using the central bank will solve the problem?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 11:45 am, 5th January 2010

I am in danger of straying beyond the narrow confines of clause 1, but one way of avoiding some of the fractures that we have seen over the past three years is to draw together in the Bank of England the authority to act as a macro-prudential and a micro-prudential regulator, and to ensure that the two roles interlock so that the insights of one can inform the other.

It is interesting that someone whom I do not normally quote with approval—Jacques de Larosière—said that a central bank should act as a micro-prudential regulator. His experience as the governor of the Banque de France and the chairman of the Commission Bancaire was that their daily interactions in the market had highlighted some of the problems facing individual banks, which helped them to save a number of banks from collapse.

There is therefore a growing trend to move financial regulation back towards central banks—the UK is not just an isolated example—because the responsibilities and opportunities that the central bank would have as the micro-prudential regulator of the banking system would have synergistic benefits. There are synergies there that provide a better model for regulation than the existing model.

It is important that we understand risks. I go back to the point made by Lord Turner in his recent report about the co-ordination of macro and micro-prudential analysis. He said:

“The FSA focused too much on the supervision of individual institutions, and insufficiently on wider sectoral and system-wide risks...The vital activity of macro-prudential analysis...fell between two stools.”

As people have looked at the financial crisis, evidence has built up showing that the tripartite structure introduced in the Government’s reform of financial regulation in the late ’90s did not work well or, to use the Minister’s words, could have worked better.

The proposals in the Bill are not, however, sufficiently radical to tackle that underlying problem. The Government have put the standing committee on a statutory footing. They say that the committee

“serves as a forum for discussion and coordination of the activities of the authorities to protect financial stability”, but simply having a talking shop did not deliver financial stability in the run-up to the financial crisis. Why will putting it on a statutory footing now make things any better?

When we look below the surface, it is evident that the council and the committee will be fundamentally the same and will have the same remits. The memorandum of understanding for the standing committee says:

“It is the principal forum for agreeing policy and, where appropriate, coordinating or agreeing action between the three authorities. It is also an important channel for exchanging information on threats to UK financial stability.”

Under the new regime in the Bill,

“The council must...keep under review matters affecting the stability of the UK financial system, and...co-ordinate any action taken...for the purpose of protecting or enhancing the stability of that system.”

There does not seem to be much difference between the two, which is why I think the reform is largely cosmetic and has not really grasped the initiative. That, I think, is also why it has attracted quite a lot of criticism from within and without the House. The Treasury Committee said:

“Merely rebranding the Tripartite Standing Committee will achieve little by itself; what is required is an improvement in cooperation amongst its members, and a simplification and clarification of responsibilities for each of its members.”

The clause does not deliver that clarification of responsibilities. As the evidence-taking sitting demonstrated, there is a gulf in the understanding of responsibilities between the Treasury, the FSA and the Bank.

The Association of British Insurers said:

“It is less clear whether the CFS will result in a more joined-up approach by the Bank of England and the FSA. This is needed if significant improvements to the regulatory structure are to be achieved. What is not clear from the Government’s proposals is how the proposed CFS would actually operate or what powers it would have to require the FSA and Bank of England to pursue particular policies (or how any such power to require the Bank and the FSA to undertake certain courses of action is compatible with the independence of these institutions)”.

Fundamentally, the external comment is to ask how the provision will be any better than the previous arrangement. What is different? The only difference seems to be the statutory basis in the Bill.

There is a requirement in clause 2 for the principals to meet. We need better communication between the members. In the previous regime the principals met only once, and that was by telephone, at the behest of Hank Paulson. How can we guarantee that once the crisis is over the arrangement will not fall into disrepair? The problem with the clause, and the reason why we shall oppose it, is that the Government have not learned lessons from the financial crisis. They are simply rebadging the tripartite committee in a way that demonstrates that they have  not really understood some fundamental flaws in the regulatory structure that created the financial crisis. There is still a lack of clarity about responsibilities and powers. We do not believe that there is a clear understanding of the additional powers that are needed to help deliver the financial stability objective. The clause is driven by political expediency, not by a genuine learning of the lessons of the financial crisis. That is why we oppose it.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

I welcome you back to the Chair for the new year, Mr. Gale.

I will briefly expand on the remarks that I made in interventions on the hon. Member for Fareham. I have a great deal more sympathy with his amendments than with the underlying argument that he made in the clause stand part debate. The Government need to do more to define the roles, responsibilities and tools that may be available to the various members of the tripartite group. The hon. Gentleman’s amendments invite a rather sharper definition of those functions than we have had until now. I look forward to the Minister’s response, in which he will no doubt want to add rather more flesh to the bare bones of the Bill. I must admit that I share the view of the Select Committee that, without that, the establishment of the body in law is little more than an exercise in rebranding what already exists.

However, I do not feel that an obsession with the structural model of regulation is the correct target for our attention. That was the thrust of much of what was said. As I suggested, there were several other factors that made dealing with the crisis a great deal harder. The structure perhaps did not help, but I do not think that it was at the root of our failure. First, there were underlying assumptions that, to be quite honest, most of us had. I put up my own hand and say that my assumptions were flawed; probably being rather sharply at the free-market end of my party, I did not feel that heavy-handed and detailed regulation should be our focus. I certainly was not alone in that, either in this House, or, as we have found, among the key players in the sector, both regulators and participants. The assumption that the market would deal with problems and that the lightest possible touch was what was required has been found wanting.

The hon. Member for Fareham developed the point about rational behaviour. I think that generally speaking, people behaved rationally, but they did so within the moral compass available to them, using the data that they had and the information that they drew from that data. I do not think that their judgments were essentially irrational; they acted in their interests—sometimes their own personal interests—and the interests of the institutions in which they worked, although perhaps to a lesser extent in some cases. However, I did not think that their behaviour was irrational.

Secondly, there was a difficulty with the data available and with how people interpreted that data, which made performing their transactions in a relatively low-risk environment much less likely than we would have wished it to be. The failure to impose capital adequacy and liquidity obligations on businesses flowed from the assumptions about the market’s ability to self-correct and about what was important in measuring the safety of such businesses. We have learned from that. The first two issues have to do with the cultural assumptions that lay behind our actions and those of the market, and the  data that people chose to use to measure what they were doing; those data were the foundations of much of their decision making.

Thirdly—this is allied to the previous point—there was poor transparency as regards much of what was happening in the marketplace, and there was ridiculous self-confidence in the idea that not fully knowing what one was trading was not a particularly material problem. There was poor transparency allied with a lack of inquisitiveness, so that if one was sold something that one did not fully understand, one did not seek to find out more; that was another key element. We are learning all those things—we have learned hard, and we have not been alone in that. However, those things have little to do with the precise structure of how we have chosen to regulate the sector.

My last point is about the performance of the duties of the various players. The hon. Member for Fareham correctly gave credit to the FSA for publishing its internal audit of its handling of Northern Rock. I read it pretty much in its entirety, and it was quite a staggering statement of poor practice, not just for a regulator, but for a body running an organisation. It held important meetings with people whom it was supposed to be regulating, without keeping any proper record of what had happened. One would not have to be performing an important function such as regulating a bank to find that an inappropriate way of carrying out a function.

Fundamentally poor-quality work was carried out by the FSA in relation to Northern Rock. We have to assume that that was typical, and that work of that kind was endemic within the FSA at the time. Its performance was shown to be poor in the case of Northern Rock, and no one has produced any evidence to suggest that that was the only institution where the FSA had a rather poor grasp of what was happening. It is likely that that was the FSA’s typical behaviour when managing its relationships with banks, and that it was by good fortune that other dramatic events had not taken place previously.

I suppose that that goes back to one of the fundamental reasons why I have been involved in public policy—I am a practical person. Often, people spend a great deal of time debating the principles and structures of how to do things, without necessarily engaging with the solid base of ensuring that something is done right.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 12:00 pm, 5th January 2010

Is not part of the challenge we face the fact that we in Parliament will determine the legislative structure? That is the way the FSA has been set up. We set the perimeters of its activity and its objectives, but ultimately the responsibility for implementing regulation on a day-to-day basis rests solely with the FSA. Our challenge as legislators is that our remit is limited to structure, although we might make broad declarations about approach. The responsibility for implementation and for understanding the approach rests with the FSA or the regulator.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

I can agree only in part. It is our duty—here I take a collective view of us as public policy makers—and certainly the duty of the Government to direct the regulator to perform its duties in a particular way and audit the performance of those functions. One of the  difficulties that arose when looking at the performance of the FSA was that the problem had been going on for some considerable time without any proper oversight or challenge within the FSA.

Perhaps one of the most telling parts of the document related to the failure of internal challenge. One team of people performing functions within Northern Rock had not been challenged in any significant way by anyone within the FSA. The internal scrutiny within the organisation was incredibly poor. I am a member of the Treasury Committee, and we have had people from the FSA in front of us from time to time; the issue is perhaps one that we should have taken a more detailed interest in. It certainly should have been a matter that the responsible Department pursued, in order to test how well the FSA was carrying out its extremely material duties.

The hon. Member for Fareham does not persuade me with the suggestion that simply transferring many functions to the Bank of England would set the matter right. We would do better to use the shock of the learning process from practical events over the past two years. Changing the seats in which people work will probably be immaterial to the performance of those duties. I have noted the Bank of England’s significant lack of enthusiasm for reabsorbing detailed regulatory responsibility for banking. However, the fact that it does not want to do something does not mean that we should not do it. If it is the right thing to do, fair enough. However, I am yet to be convinced that fundamental structural change should be our concern.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

Part of the Bank of England’s reluctance—if that is what it is—is that it feels that sometimes conflicts of interest arise in the way in which it deals with banks if, on the one hand, it supervises and regulates and, on the other hand, wants to work with them in respect of the general apparatus of financial transactions. At times, that creates conflicts of interest that it has to resolve.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

That is certainly true and I assume that the Opposition’s proposals attempt to deal with those conflicts. The other discomfort is that the Bank probably has some sympathy with the argument I presented, which is that such activity is not innately better done by it than by some other body specifically tasked with the function of supervision and regulation.

The intellectual argument has not been made thoroughly enough to persuade me. With that in mind, I want to listen carefully to what the Minister says in response to the amendments that have been tabled, as opposed to on the more general discussion that we have usefully had on the alternative approaches to regulation. The Government have a great deal more to do in defining how their chosen regulatory framework—the tripartite system—will work, how the individual players within that tripartite structure will function, and how confidence can be displayed to the world that the system will deliver, with greater assurance, a lower-risk environment than the one that we have seen over the past two years.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

We are discussing the most important clause in the Bill; there is no doubt about that. It is the centrepiece of the measures in the Bill that are designed to try to prevent a repetition of the catastrophe of 2007-08, and especially of the run on the Rock.

The Government have been forced to conclude that there is a need for fundamental reform as a result of that specific crisis. At the heart of the crisis was the inadequacy of the regulatory structure, which was placed on the statute book almost exactly a decade ago. The Minister is an intelligent and thoughtful man, but he seems to be in a state of complete denial. He said that the tripartite system worked. He is in a group of one—or perhaps I should say three—if he believes for one moment that the tripartite system worked well. Even if they say so publicly, privately, members of the tripartite tell us that it was a catastrophe.

The Minister’s suggestion that the run on the Rock was caused by foreigners is patently absurd. The failure of the wholesale markets had an international dimension and, to a substantial degree, an international origin. What we had was not just the failure of a bank as a consequence of the failure of the wholesale markets, but a near-failure of the whole banking system. The failure of Northern Rock generated risks to the broader banking system. The management of those risks lies squarely with the tripartite arrangement, which failed. That is why we need to come back again to look at the measures that were put on the statute book 10 years ago. They simply failed. We have had a decisive judgment from loads of people about the failure of the system. I am flabbergasted that the Minister does not, as they say in modern jargon, concede and move on. The British Bankers Association said:

“no one entity had clear power to take the lead”—

I promise not to go on and on with these quotations, Mr. Gale, but there are so many that I should give just a few. Professor Willem Buiter, one of the country’s outstanding monetary economists and one of the first appointees to the Monetary Policy Committee, where he did an outstanding job, said:

“The Tripartite arrangement between the Treasury, the Financial Services Authority and the Bank of England, for dealing with financial inability is flawed. Responsibility for this design flaw must be laid at the door of the man who created the arrangement—the former Chancellor and current Prime Minister, Gordon Brown. The Treasury, as the dominant partner in the arrangement, also bears primary responsibility for the way in which the Tripartite arrangement performed operationally.”

That is pretty vigorous stuff, but if we feel that the jury is still out, what about an all-party Select Committee? I was not serving on the Treasury Committee at the time, so I cannot be fitted for the responsibility of tabling any of the questions that were asked. Paragraph 283 of the Committee’s report “The run on the Rock” says:

“When we questioned the Tripartite authorities as to who was in charge, the Governor’s first reply was ‘What do you mean by “in charge”? Would you like to define that?’. When we further questioned him as to who was responsible, he replied ‘We are each responsible for the various responsibilities that we have been given under the [Memorandum of Understanding].’”

What kind of arrangement was that? There was some really excellent stuff in the rest of paragraph 283, but I will not go further. However, in paragraph 284, the Committee was led to conclude:

“the Tripartite authorities did not seem to have a clear leadership structure. We recommend that the creation of such an authoritative structure must be part of the reforms for handling future financial crises”.

And so the quotations go on.

It could reasonably be argued that all of that can be said with the advantage of hindsight, but it did not require hindsight to spot the risk, and others spotted it 10 years ago in the equivalent of this Committee. I was one of them, as were Howard Flight and my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), who was not on the Committee, although he spoke about the issue on the Floor of the House.

Of course, it is easy to put down markers in opposition. Then when things go wrong, one’s number can come up like the numbers on a roulette wheel. If we look carefully at the detail of the Opposition’s points, however, it is clear that that is not what was going on. We went straight to the heart of what was wrong with the system at its inception.

I tried repeatedly to raise some of the points that are being made today. I tried, but failed, to get the Government to focus on the manifest flaw in their new system for managing systemic risk and ensuring financial stability. I repeatedly asked who was in charge. When I say “repeatedly”, I mean on at least three occasions in six months on the Floor of the House or in Committee.

The key issue is whether the existing flaws are being removed in the Bill. The existing system requires the tripartite committee to work on the basis of a memorandum of understating. As several hon. Members have said, however, the Bill does little more than put the committee on a statutory footing. It is becoming increasingly clear that little will change as a result, and the hon. Member for South Derbyshire said pretty much the same a moment ago. He challenged the alternatives that might be put in place, and I might come to that if I am allowed to stray from clause 1 for a moment.

Let us go back for a moment to those three points in 1999. My first point was that the FSA’s responsibility for systemic risk should be added to the legislation as an objective of the FSA and put on the statute book. That is now—finally, belatedly, 10 years later—being done, in clause 5 of the Bill, which we shall discuss later.

Secondly, as I have already mentioned, I pointed out that no one seemed to be in charge under the memorandum of understanding as drafted at the time, and it remained in that form. As I said at the time—for “bank”, read “Northern Rock”—

“If a single bank crisis develops into a systemic crisis, who is responsible then?”—[Official Report, Standing Committee A, 13 July 1999; c. 174.]

The memorandum of understanding required the responsibility to be shared. It is still being shared in pretty much the same way. I challenged whether those arrangements were sustainable and argued that, for the tripartite to be effective, a formal and reasonably transparent structure was needed, with papers, minutes and, where practical, something available in the public domain, to show that the job was being done. My hon. Friend the Member for Henley might well say more about that, I gather, if he manages to catch your eye, Mr. Gale.

At the time when I was making those points, others—many others—were making them outside the Committee. The Joint Committee under Lord Burns had looked at the Financial Services and Markets Bill in 1999 and had come to pretty much the same conclusion. By the end of that year I had made up my mind that the new system  was an accident waiting to happen and that the system, with its three-way division of responsibilities, would create deep problems. I said that the system was wholly untested and might be found wanting. I said that the problem with the memorandum was the division of responsibility between the three groups. It was the FSA’s job to spot something early on, when trouble might arise in a particular firm, but it was the Bank’s responsibility to suggest and put in place a support operation and the Chancellor’s job to explain everything to Parliament. I explained at the time that the system would not work and would be a mess—and so it has proved.

I have already pointed out that we had very little time to look into the matter in 1999. The scrutiny of such a crucial part of the Bill in 1999 was an object lesson in how not to do line-by-line scrutiny. The only substantive response from the Minister—the right hon. Member for Leicester, West (Ms Hewitt)—was pretty perfunctory and gave the impression that none of those issues mattered at all:

“The questions raised by Opposition Members at considerable length are nothing like as difficult as has been suggested.”

She went on to say something that I have already quoted:

“As the memorandum of understanding clearly states, managing financial responsibility is a common objective of the three institutions whose roles and responsibilities are clearly delineated in that memorandum.”—[Official Report, Standing Committee A, 13 July 1999; c. 182.]

That is just what we have been hearing, is it not? It is what we are getting from the Government on the new measure. As I have also mentioned, the Minister then concluded that we were all wasting time, a response which, in retrospect, was highly irresponsible.

That is why it is so important that we do not rush consideration of such a crucial measure now. We should avoid a repetition of the past, and should not rush into a set of arrangements that are equally or almost as flawed. The key question, which I shall now address, is whether the new system deals with the failings of the one created a decade ago.

Photo of Tom Watson Tom Watson Member, Labour Party National Executive Committee 12:15 pm, 5th January 2010

I never understand why I am so mesmerically attracted to the hon. Gentleman’s contributions; I do not know whether it is his supreme intellectual self-confidence or whether we are just waiting to see when the next turn will come. He is making a powerful contribution. Did he feel himself to be in a minority of one—or three— 10 years ago, and is he more confident that his party’s Front-Bench Members are listening to his criticisms today?

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

I will not linger on that unless permitted to by the Chairman. As I pointed out a moment ago, a number of other people outside the Committee voiced reservations about the new arrangements for the management of systemic risk. I am certainly not alone. However, only a few of us made such points in Committee at the time, and I think that it is fair to say that I was probably the most vociferous there and, subsequently, on the Floor of the House.

As for whether I support my Front Benchers’ approach, I will come to how I think we can best tackle the issue in a moment, but the short answer is that I am clear in my  mind—although we need to think about it carefully, and I hold this view tentatively—that the arrangements being proposed by Members on my party’s Front Bench are a huge step forward from what is being proposed in the Bill. I will explain why if I get the chance.

I am extremely gratified by the kind remarks made by the hon. Member for West Bromwich, East, at the beginning of his intervention. Nothing so flattering has ever been said about anything that I have said in the House of Commons or in Committee, and I am sure that it will not be said again.

I am nearly finished, unless I am intervened on again. I will address briefly whether we are moving things forward. We are moving forward a little with the clause. It elevates the importance of systemic risk in the framework of regulation. The Government are not dismissing the issue as they did a decade ago. As I mentioned, new clause 5 makes systemic risk an objective of the FSA. A core flaw of the original legislation was that the Government did not get the list of objectives right. I have tabled new clause 8, to which we will come much later in our proceedings and which discusses another objective that I feel should be added.

I think and hope that new clause 5 will have my support—I do my best to be a loyal Back Bencher—but we will find out when we get to it whether I shall be having a cup of coffee when it comes to be considered. However, most of clause 1 certainly does not have my support. It does not resolve the problem of clear lines of responsibility or establish who is in charge, nor does it deal with the problem that statutory institutions acquire a remorseless logic of their own.

That is a partial answer to the hon. Member for South Derbyshire, who said that the answer might be men, not measures. It might be men, not institutions; the creation of statutory institutions results in people feeling a need to defend them, to give them more power and to mind their turf. Where there is some awkward, smelly responsibility to be passed about, they feel that they need to ensure that when the music stops, the responsibility is not with them. I cannot help feeling that that is what we saw during the early stages of the Northern Rock crisis; indeed, that is implicit in the report. A succession of people went on the television and radio saying, “This isn’t our business; it’s their job to do this bit of the work.”

I fear that we saw another manifestation of exactly that when the Committee took evidence, only a few weeks ago, from Andrew Whittaker and John Footman. I want briefly to draw on that, because it is extremely relevant to clause 1. We were repeatedly told by both witnesses that their respective institutions

“treat each other as equals”.——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 38, Q97.]

We were given a more detailed answer by Mr. Footman, which left me with the impression that very little indeed has changed. He said:

“I remember the question that was asked in the Treasury Committee two years ago—‘Who is in charge; who was in charge?’—and this”, meaning the clause and the Bill,

“is an attempt to answer that question.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 38, Q95.]

That does not sound like a man convinced of his own argument, does it? A little later, Mr. Footman said that

“it is an attempt to bring together bodies whose powers are different, but which interact with one another.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 38, Q99.]

Again, I was left quite nervous about that.

I repeatedly asked those witnesses to say whether one of the bodies was in any way superior to any of the others, and whether there really was someone in charge. One of them, having said at one point that one of the roles was secondary, felt unable to admit that that meant he might be in a role subordinate to one of the other members of the tripartite committee. I therefore do not think that we have moved on very far. I do not think that the leadership question has been resolved. I do not think that the Council for Financial Stability, as provided for in the Bill, addresses the question.

It has taken the first run on a bank in modern history to get us to the point where the Government are prepared to concede that something is wrong with the legislation that they put on the statute book a decade ago. Clause 5 apart, however, I am not sure how much will be changed as a result of the Bill. It is still policy making on the hoof. Clause 1(5) states:

“The Treasury may prepare a statement containing further provision with respect to the exercise by the Council of its functions.”

In other words, the Treasury is saying, “We do not know quite how this is going to work, but as we go along we will change the rules of the game a little, and hope that finally we arrive at something we like.” Incidentally, I hope that it is because of a typographical error that there is no “s” at the end of “provision”. I hope that the suggestion is not that one further shot is being allowed, since I think that almost everyone in the Room is quietly agreed that there is something amiss with what is now proposed.

I also worry, as I keep saying, that we shall be left without clear lines of responsibility, and with no clarity about leadership. The set of new arrangements before us is still an accident waiting to happen. It may not ever happen, of course, and perhaps even if it does, it will not be for a very long time, not least because all three of the bodies concerned are on red alert at the moment, and it will take quite a while for them to slip back into what I think the Select Committee exposed as a good deal of complacency in the years prior to the Northern Rock crisis.

The arrangements are definitely inadequate. The Library set out in significant detail how little has really changed, and my hon. Friend the Member for Henley will draw on some of that work in a moment, I understand. Thus we have window dressing. The hon. Member for South Derbyshire used the term “rebranding” and my hon. Friend the Member for Fareham used the word “cosmetic”. It might be overdoing it a bit to say that the clause just rearranges the tripartite committee’s deckchairs. Whether we are on another Titanic, time will tell.

I want to respond to the intervention made a moment ago about what we should be doing. That strays into what would be a stand part debate on clause 1, but I think that we have been given permission to do that.

My tentative view is that we certainly should not rush this and that the job of macro-prudential supervision should probably be handed to the Bank of England. That is my party’s policy, and there are three reasons for it. First, the Bank already has much of the skill-set required to do the job, whereas the tripartite arrangement clearly does not, at least not when the three institutions interact. Secondly, the crisis has shown the importance of aligning fiscal and monetary policy at such a time, and with Bank of England independence and the Monetary Policy Committee doing a good job—I think that most people feel it has done a good job—there is a strong case for putting the two policies closer together. Thirdly, the Bank of England has the credibility that comes from being a long-standing institution: it has historically had the role, and it can carry weight in financial markets. I am not sure how much importance we should attach to that, but I am absolutely sure that a financial institution would sit up more if the Bank of England rang regarding an issue of macro-prudential supervision than if the call were from the FSA. Having said that, who should run the system? It has to be the Chancellor.

I will not stray into lengthy detail, but in 1987 I had a ringside seat for the so-called black Friday crisis. Global stock markets collapsed by 25 per cent. in a matter of hours, right at the time when the Government were getting away from BP shareholding. People forget, of course, the crises that did not happen; they remember only those that did. That was almost a monumental crisis, and it threw Congress into a mess for months with something called ground rubble. I hope I am not straying and giving something away—it is all in memoirs these days—but I remember the Bank of England giving us clear advice that we should bail out the underwriters of the share issue; otherwise, as the Bank was wont to say, “it’s the”—words like abyss and catastrophe come to mind.

After the Chancellor had listened extremely carefully to all the arguments, he came to the firm decision to override the Bank, taking control and full responsibility for the decisions, and to come before the House of Commons at 10 pm to make a statement to that effect. There was a good deal of risk in taking any decision, and there was certainly political and economic risk associated with that one. What I think helped us was that everybody knew that one man was in charge, and it is that experience that has led me, and led me 10 years ago, to be so critical of the arrangements being put in place.

I very much doubt that I will change my view. I said that it was my tentative view, but I think that I will stick with it as legislation is introduced. At the heart of the issue of systemic risk is a very simple principle, which is that the Government are underwriting private institutions, and therefore shareholders to some degree. The danger is that public money will be put at risk for private benefit. If we cannot make the bail-out penal, which we cannot always do, the man or woman who should be in charge must be the person who spends the taxpayers’ money.

Photo of John Howell John Howell Conservative, Henley 12:30 pm, 5th January 2010

It is a great pleasure to follow my hon. Friend the Member for Chichester. If he can bear two sets of flattery in the same Committee sitting, I will add my congratulations for his usual learned and thoughtful speech.

I want to pick up on whether there is a step change, or any change at all, in this. I was conscious of two comments the Minister made during the evidence sessions. The first was:

“What we are doing through the Council for Financial Stability is formalising arrangements that have already been in existence.”[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 5, Q4.]

There is not much ambition in that. The second comment was that the purpose is to enable

“people outside who look at these things to have confidence that this is an issue that is being grasped and looked at with great thoroughness”.——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 6, Q5.]

The question I have been wrestling with is whether the council is more than the sum of its parts, the sum of its parts or, indeed, less than the sum of its parts, with regard to what it may take away from the operation of the system. I hope to reach a conclusion on that before I sit down.

My hon. Friend mentioned the House of Commons Library research paper, page seven of which sets out an instructive table that shows before and after pictures for the council and the tripartite system under six headings. The first heading is “Constitution”, in which there is one change—that of moving from a non-statutory to a statutory basis—but it is not clear what that actually delivers.

The second heading is “Membership”. There is effectively no change in membership, although the council may invite others to attend meetings. That membership heading also deals with the Chancellor chairing the council, although as we find out later, he might not be chairing the council as he may appoint someone else to do so.

The third heading, which is perhaps more fundamental, is “Advice”. The research paper points out that there is no change in the access to advice from the old system to the new system: the principal set of advice before the council is the Bank’s financial stability report and the FSA’s financial risk outlook. Where is the new evidence coming from to be able to give some additionality to that? I will address the answer to that in a moment.

The fourth heading looks at the lack of changes in relation to transparency, which has largely come down to a question of minutes. The fifth heading deals with accountability, which seems to be encapsulated in nothing more than a retrospective annual report. The sixth heading, which potentially holds open a change, is external policy work, which actually holds out no change at all, because all the council is doing is discussing it and it is still the Treasury that is taking the lead on that.

Let us look first at the heading “Constitution”. The Minister described that in the evidence session as a “significant” improvement, but I am struggling to see how. The only real change is the fact that we now have a formal status for the tripartite arrangement. In essence, there is no additionality. I am not sure what a statutory basis brings in itself that cannot be dealt with on a non-statutory basis. The answer must be that legislation is the answer, and this is just another example of declaratory legislation: the idea is that, because we have a new law, it will work better. However, given the council’s role in improving confidence among those outside it, it is not likely to be fooled. The hon. Member for South-East  Cornwall made the point in the evidence session that building on something that was not much of a success is not much of a success and that significant changes were needed. The insubstantial nature of the changes has already been referred to by my hon. Friend the Member for Chichester.

On membership, the Chancellor acts as chairman of the council. We need to keep in mind two issues and make a distinction. Who is in charge of the council, and who is in charge of the financial system? Those two questions could be similar but are quite separate.

We know that the council is not a decision-making body. It will not have votes, so the role of the chairman needs to be explored a little further. My conclusion is that the council amounts to no more than a committee of advice to the Treasury. Is the Chancellor in charge? He is in charge of the council, but not of overall supervision. It is very much a creature of the Treasury, as can be seen from a number of the subsections of clause 1.

The Chancellor acts as chairman, but we know that he and indeed other members can appoint a deputy, so the Governor of the Bank of England could be present but not the Chancellor. The council is therefore chaired by a Treasury underling rather than by the most prominent person in the tripartite arrangement, the Bank of England Governor, who would be there. The lack of balance shows that there is an implied hierarchy. The Treasury is setting the terms of reference and making any changes. Indeed, in answer to question 62 in column 29, John Footman from the Bank of England made the point that the Chancellor is regarded as the first among equals.

The question of the evidence base is even more crucial. If we are going to do better at something, we need to start looking at the new forms of evidence that the council might have before it to make better and more informed decisions. As we have seen, the House of Commons Library paper could not detect any significant changes in the evidence. Part of the reason for that is that the sort of new evidence that would need to come out would be driven by the toolkit needed to solve the problems. Given that this is going ahead of the definition of the toolkit, it is not surprising that it is struggling to find new evidence. In the FSA additional information that came through this morning, we see an admission that it is still struggling to work with the toolkit.

Much of the question of transparency is dealt with in clause 2. I am sure we will cover that when we debate clause 2, but the minutes will be so hedged by contingencies that they will say nothing of any interest whatever. According to the draft terms of reference for the council, the main activity will be undertaken not by the main meeting but by a meeting of deputies who will meet monthly and, as in all such situations, the committee of deputies will do all the work. According to the draft terms of reference, the minutes will not be published, so we are left with a perfectly illusory system of transparency that promises much and delivers nothing.

The same can be said for accountability, which I am sure we will address in clause 3, and which is expressed in terms of an annual report. It, too, will be a heavily censored and retrospective historic document. I challenge the Minister to say what it will deliver in terms of  accountability, when the real accountability needed is on a much more frequent basis, particularly as a crisis unfolds.

In conclusion, I am not at all clear what additionality a statutory basis brings. Having created a statutory basis, I am surprised that the Government have not used it to create something more than just a body to provide advice to the Chancellor and to cover the back of the Treasury. I can see little greater role for the council than that of the many ministerial advisory committees that exist up and down Whitehall, on which many of us, in our previous existences, have had the pleasures—sometimes—of serving. They are useful in giving advice to Ministers—it is always good—but Ministers are not willing to take advice. However, in terms of delivering anything of substance, there was not much at all.

Indeed, I was most struck by the quote from Adrian Coles of the Building Societies Association in column 71, in his answer to question 3, in which he made it clear that the council would not prevent the next bubble or the next banking crisis, but all it was likely to do was to make a “modest contribution” to the whole of the system.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 12:45 pm, 5th January 2010

It is a pleasure to serve under your chairmanship again in the new year, Mr. Gale.

I will move from the general and comparative to the specific. The cornerstone of the Bill is clause 1—the Council for Financial Stability, which is all about preventing, or trying to prevent, further crises. There will be further crises, so the question is how we deal with them and how we lessen the number of them, if we can, as a society and an economy.

I say to the Opposition that if we get the diagnosis wrong, we will get the treatment wrong. The country that undoubtedly had the most stable banking system throughout the crisis among the G7—arguably among the G20 and the whole world—was Canada. I see Conservative Members smiling, because I suspect that I know as much about the Canadian banking system as anyone on this Committee, although I am not an expert. Surprise, surprise, the system there is tripartite, and it has worked very well. In fact, the system in Canada has less regulation than that in the States, which came close to meltdown, particularly with the collapse of Lehman Brothers. The banks in Canada are federally chartered. Some of them are the biggest in the world—two of the 10 biggest banks in the world by capitalisation are Canadian. They are big beasts, and they are run by cautious bankers. The Scottish Presbyterian tradition has permeated banking in Canada since the founding of the bank of Montreal in, from memory, 1821. The higher capital amounts kept by Canadian banks were encouraged by, but not statutorily mandated by, the federal Government of Canada. It was something that the biggest five banks in Canada decided they ought to do and did for many years. I think, again from memory, that the last run on a bank in Canada was in 1921. It is a system that has worked well, including through this crisis.

In Canada, there is also a role for legislation. Would that we had had the legislation in this country—and, to some extent, we did. However, the Conservative Government got rid of it in the mid-1980s, and it is a  great pity that the Labour Government did not reinstate the mortgages legislation. Canada did not have things such as 100 per cent. or 125 per cent. mortgage bubbles, because if someone took out a mortgage for more than 80 per cent. of the value of the property, they had to insure the whole mortgage, not just the balance above 80 per cent., with the Canadian Mortgage and Housing Corporation.

The Canadians were more stable through statutory provisions there, but I stress that it was a tripartite system, where there was much better co-ordination than there was in this country. The hon. Member for Fareham and my hon. Friend the Member for South Derbyshire stated that it is about using one’s judgment. When the hon. Member for Chichester talked about a tripartite arrangement that failed, he went on, unusually for him, because he is usually intellectually astute, to condemn tripartism itself. One needs to make a distinction. The tripartite arrangements in the UK, which the Council for Financial Stability seeks to address, did not work as well as they should have. I do not leap from that, as he apparently does, to saying that tripartism is the problem.

That is the leap of faith that his own Front Benchers take. It was, to use the words of the hon. Member for Chichester, to do with how things performed operationally. As the Treasury Committee report stated, we had complacency and underperformance from the FSA, to which my hon. Friend the Member for South Derbyshire referred, and, arguably, from the Bank of England as well. So, putting all the eggs in the Bank of England basket is not necessarily a great way of preventing that.

One of the things that we can learn with hindsight—and the measure was embryonic 10 years ago, as the hon. Member for Chichester rightly pointed out—is the lack of co-ordination, the pass-the-parcel approach, to such matters. If we look back and analyse that, and we get on to talking about minding the gaps, to which we referred when the hon. Member for Fareham was opening the debate, we see that it is to do with interaction and co-ordination. Clause 1 provides the co-ordination. It does not provide for getting rid of tripartism, nor should it, because that would lead to another mechanistic approach. It is mechanistic to say, “Well, instead of having a Council for Financial Stability, we will put pretty much all our eggs in a Bank of England basket and downgrade the FSA and so on”. There is not a bad comparative model on the other side of the Atlantic, in Canada, which had a tripartite system that worked well and was better co-ordinated.

Clause 1, which I favour, tries to address the gaps, the lack of co-ordination and the complacency and underperformance of the FSA and, to some extent, of the Bank of England. Clause 1 makes it very clear statutorily that the Chancellor of the Exchequer is in charge. When the hon. Member for Chichester referred to what happened in 1987—I recall that he was a special adviser in the Treasury—he had a ringside seat, and the Chancellor was in charge. The Chancellor came to the House to make a statement at 10 o’clock. Of course the Chancellor is in charge because—to Anglicise the phrase—the sterling stops with him. We know that it was the Chancellor, the Government and the taxpayer who bailed out the rotten banks that had been underperforming and had been allowed to underperform through the failings of some of the regulators. Of course responsibility lies with the Chancellor, but it is helpful  to have it spelled out in clause 1. As Members of Parliament who are all members of political parties—there are no independents with us today—we go to meetings, whether of a trade union or a political party, and we know that it is the Chair who has a big say in what goes on, as indeed you quite rightly do, Mr. Gale. So, specifying that the chair of the Council for Financial Stability is the Chancellor of the Exchequer highlights statutorily in a declaratory sense what we all know to be the case anyway, but if that is a step to restoring confidence in the regulation of financial institutions in the United Kingdom and it helps to prevent further crises, and to rebuild confidence in our system, then it is a useful thing to do in statute.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman obviously has a very clear view that the Chancellor is in charge, yet what is he in charge of? He is chairman of the council, but what does the council do? It keeps the system under review and it co-ordinates. That is not much. From what I can see, there is no executive power vested in the Council for Financial Stability. All it is in charge of is ensuring that things are kept under review and there is co-ordination.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I entirely agree, but I sense that I place far more emphasis than the hon. Gentleman does on the role of co-ordination. Under the system that we have had for the last 10 years, there was not enough co-ordination—that was one of the failings. In reality, the Chancellor will be in charge. If three people get together, and someone from the FSA says, “We’re thinking of doing this”, and someone from the Bank of England says, “We’re thinking of doing that”, they will listen to the Chancellor, and the other two around the table will have some idea of what is going on. They will not be in silos; I get the sense that to some extent they were in silos through this crisis and before it.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

Can we make this a little more concrete? Under the hon. Gentleman’s proposal, who would be in charge of ensuring that liquidity statistics for the banks are collected? We now know that no liquidity statistics were being collected in a co-ordinated fashion by anybody, and that is one of the reasons the crisis did so much damage so early on when it broke. Do we not need to go well beyond putting someone in charge in a declamatory sense—or declaratory sense, as the hon. Gentleman said—to the point where somebody has direct and statutory responsibility for the overall management of the system?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

That may well be the case, but getting three people together in one room so that they can realise that the lacunae exist sounds like a major step forward.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

Indeed, it might be. If my hon. Friend turns to clause 1, subsections (5), (6), (7) and beyond, he will see that the Treasury is not merely given the task of being the chair of this body, but that it will have a substantial functional role. Perhaps he would agree that some of the more telling points made by the hon. Member for Fareham were requests for a sharper definition  of exactly what the Treasury would expect from this body. That is where one hopes the Minister will provide us with greater information.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I entirely agree with my hon. Friend. It is a day for agreement, and it would have been better had we had some of that sharper focus in the Bill. I hope that we will get it from the Minister today. As my hon. Friend said, the first part of clause 1, and the second part from subsection (5) onwards, take us a step further. I hope that today the Minister will take the matter even further, because the amendments do not give us that sharp focus and I shall not support them.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The debate on the Council for Financial Stability has warmed up a lot faster than the Committee Room. I will make some initial observations about performance, responsibility and structure, which has been at the heart of many of today’s contributions. I will then discuss in more detail the amendments tabled by the hon. Member for Fareham.

It is clear that Governments and regulators around the world have learned lessons from the financial crisis. No system has proved perfect, and in almost every jurisdiction the conclusion has been reached that further action needs to be taken. My hon. Friend the Member for South Derbyshire raised issues of performance that have been acknowledged by members of the tripartite body. It is also important to acknowledge and make explicit in the Committee the roles and responsibilities of individual executives, of boards and of shareholders in contributing to this financial crisis. The debate that we have had over the last two and a half hours has focused on the perceived failures of regulation, without acknowledging the perceived failures of the way in which companies were run, which contributed directly to the financial crisis.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. Before I suspend the sitting, I would like to make a couple of announcements. I apologise to the Committee for the fact that it has been petrifyingly cold this morning. Some things are outside my gift, but a change of room is possible. I say it is within my gift—it has been gifted to us. It will require hon. Members to take their papers with them now, but the Committee will sit in Committee Room 11 this afternoon.

Photo of Roger Gale Roger Gale Conservative, North Thanet

That is the reason for going there. The problem has been that the door does not shut properly in this room. I cannot guarantee that it will be warm, but it certainly will not be as cold. I am advised that it is warm.

During the debate, the hon. Member for Fareham made the point that the Committee is pressed for time. The sittings resolution—the ultimate resolution—is a resolution of the House and it cannot be changed by the Programming Sub-Committee. However, we can use the time available. I say to hon. Members now, that should it become necessary, there will be the opportunity on Tuesday next week—rather than tonight when hon. Members and staff will already have made  arrangements—to have a further sitting between 8 pm and 10 pm. If the usual channels decide, perhaps on Thursday, that that is necessary, I would be prepared to chair a further sitting on Tuesday if that would help the Committee in its deliberations. I mention that now so that hon. Members can look at their diaries.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Four o’clock.