( ) 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
New clause 2Identification 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..
I wish you a happy new year, Mr. Benton. It is a pleasure to serve under your chairmanship this afternoon.
If I remember my train of thought correctly, I was making some broad initial comments about performance, responsibility and structure and I wanted to refer to some of the comments made by the hon. Member for Chichester. It is not that long after the festive season, so I hope that he will forgive me for using a certain rather hackneyed phrase. Quoting the British Bankers Association on who has responsibility for the failure of the banks is a bit like asking turkeys to vote for Christmas. The quotes that he read out completely ignored the responsibilities of the banks, their boards and their shareholders.
As my hon. Friend the Member for Wolverhampton, South-West rightly said, the tripartite system works very well in Canada. As I have been at pains to point out, we all have lessons to learn from the global financial crisis and the way in which regulation has operated, which is why there have been extensive international discussions. After careful consideration, the Government concluded that the existing structure of international co-operation is the right one. A different model would not have helped to avoid the crisis.
It is not the Government, but the Opposition who are being driven by political expediency. They argue that the wrong system of regulation has been introduced because they want to place the blame on the Prime Minister, who was the architect of the tripartite system when he was Chancellor of the Exchequer. However, that system has been widely copied, and a different model would not have averted the crisis.
Let me set out why the Government are introducing the Council for Financial Stability and why it will make an important contribution to improving financial stability arrangements. I will then address the points that hon. Members made this morning.
At present, a standing committee of the Treasury, the Bank of England and the Financial Services Authority is established under a memorandum of understanding. The committee serves as a forum for the discussion and co-ordination of the activities of the authorities to protect financial stability. To date, the committee has played a key role in co-ordinating the authorities response to the crisis.
Meetings of the Chancellor of the Exchequer, the Governor of the Bank of England and the chairman of the FSA have guided and co-ordinated the overall strategy, supported by meetings at an official level. Managing the successive stages of the financial crisis has required the authorities to work intensively and closely, with the standing committee meeting regularly at official level. At peak times, the Committee met daily, with work at official level proceeding continuously.
In the early stages of the financial crisis, beginning with the liquidity problems faced by Northern Rock and the subsequent run on its deposits, the financial crisis management arrangements put in place in 1997 were, as the hon. Member for Chichester rightly said, severely tested for the first time. A lot has been said about the performance of the tripartite arrangements, and I do not pretend that there was not room for improvementindeed, lessons have been learned.
Several members of the Treasury Committee are on this Committee, and their report The run on the Rock, which was published in January 2008, is perhaps the most extensive and significant report on this episode, and the Government responded in July 2008. I want to highlight a few key points in response to those who say that Northern Rock is an indication that the tripartite arrangements do not work.
Let me make four brief points. First, no retail depositor lost any money as a result of the problems experienced by Northern Rock. The Government stepped in to provide depositors with the confidence that they required to stabilise the bank. We eventually took the bank into temporary public ownership, using emergency powers once it became clear that that was the best option in terms of value for money for the taxpayer and financial stability.
Secondly, once it became apparent that the authorities did not have all the appropriate tools to resolve the issues raised by a failing bank in a way that protected depositors, taxpayers and financial stability, we put in place emergency powers through the Banking (Special Provisions) Act 2008. That measure was opposed by the Conservative party, but it played an important role in ensuring that the authorities had the tools that they required. We then developed a permanent resolution framework that was implemented through the Banking Act 2009. The hon. Member for Fareham and I both served on the Committee that scrutinised that Bill before it was passed, as did a number of other hon. Members who are here today.
Thirdly, the authorities used these powers to resolve difficulties experienced by other deposit-takers, using the Banking (Special Provisions) Act in the case of Bradford & Bingley in October 2008 and the Banking Act 2009 to resolve the issue of the Dunfermline building society in March 2009. I want to stress the point that these actions again showed that the authorities were applying their new toolkit decisively and effectively, to protect depositors, financial stability and the interests of taxpayers.
Fourthly, the crisis was not just about the potential future of individual institutions. As has already been referred to, by mid-September 2008, with the loss of confidence in the global financial situation, which was particularly engendered by the failure of Lehman Brothers, the whole global financial system was on the brink of collapse. Our response to that potential disaster provided a blueprint for other nations to follow. Again, I think that that has been widely recognised by financial commentators.
The UK authorities took immediate action to stabilise the system, for example through the recapitalisation of the banks, the establishment of the Bank of Englands credit guarantee scheme and the announcement of an asset protection scheme to insure banks against future losses. That showed the tripartite authorities working together at their most effective level.
I am not saying that everything that the authorities did before the global financial crisis or indeed in response to it has been perfect in every way. Particularly with the benefit of hindsight, it is always possible to think of ways in which the operation of those arrangements could have been improved; indeed, that is what parts of this Bill are deliberately designed to achieve. However, the hon. Gentleman surely must recognise that the measures that we have taken to resolve problems once the global financial crisis hitwith regard to Northern Rock, the Banking (Special Provisions) Act, the Banking Act 2009 itself and the measures on recapitalisationare all measures whereby the tripartite authorities worked together to solve some very difficult situations.
My hon. Friend the Member for Wolverhampton, South-West says from a sedentary position, Probably not enough. I hear what he says in that regard.
However, the point that I want to make to the Committee, which is one that the hon. Member for Chichester must also address as he keeps coming back to his mantra about who is in chargeI will say a bit more about that in a momentis that pretty much every advanced nation has a system of regulation that follows a broadly tripartite model. We can discuss some of the changes that have been recently announced in the United States, if hon. Members want. Nevertheless, it is a system that is established and, as a number of Members of the Committee have rightly pointed out, we should not only look at structures to ensure that they are appropriate but at the performance of the tripartite regime too.
I believe that we have genuinely learned lessons. As part of that learning process, we fundamentally examined whether different structures would be more appropriate. Our considered view, which we expressed in Reforming financial markets, is that the tripartite regime is the most appropriate one and we do not think that a different regime, if it had been implemented before the financial crisis, would have made any significant difference in terms of how that crisis was handled.
The matters are ones of judgment and of the right people getting together and making those judgments. When I come on to discuss some of the amendments, we can expose the differences between the approach that we want, which we propose through the Council for Financial Stability, and the approach of the Conservative party, which is not in the best interests of UK customers or of financial stability.
Every contribution to the debate has prayed in aid the Treasury Committee report The run on the Rock. I do so myself. It is the most comprehensive document to look specifically at that issue. However, nowhere in that document will you find any reference to the big bang change in regulation being suggested by the Opposition. Indeed, the report went out of its way to say that we ought to keep our regulatory arrangementsperhaps we disagreed with the Treasury about how exactly that should be done, but we certainly did not go for any of the more radical suggestions made by some. We ourselves prayed in aid the continuation of the tripartiteif I can call it thatregulatory system.
My hon. Friend is absolutely right. I welcome the fact that the Treasury Committee, after a thorough analysis of the situation, took the view that the tripartite system was and remains the most appropriate, even though the Committee recommended improvements. I am trying to put some of the criticisms made of the tripartite system into perspective. It is always possible to focus on what has not gone well. As I said, there is no room for complacencylessons have been learnt. We should always be prepared to consider whether more lessons need to be taken on board.
What is also important is considering what has worked well, so that we do not end up throwing the baby out with the bathwater. The response of the tripartite authorities and the decision to legislate, through the Banking (Special Provisions) Act and the Banking Act 2009, show the tripartite authorities getting together, discussing how we handle situations and what powers and responsibilities are needed, and coming up with actions that make sure we have the tools required for the future.
The Minister gives the impression that all is sweetness and light among the tripartite authorities now but, if they are all agreed on the responsibilities and powers, why is it that time and time again the Governor of the Bank of England comes back to the fact that he has not been told what powers he has to maintain financial stability?
The tripartite authorities have discussed such matters, as the hon. Gentleman is very well aware, extensively over recent months, leading to the production of Reforming financial markets last year, in which the Government took a view of the financial crisis and identified the reforms needed to strengthen the financial system for the future. We consulted on that and the Bank of England and the FSA input to the consultation process and, indeed, to the process producing the White Paper in the first place. As a result of such discussions, we decided that we wanted to improve the standing committee arrangements. When we evaluated the standing committee and the wider tripartite arrangements, we took the view that while many different institutional frameworks exist in different countries across the world, that model of tripartite financial regulation was successful and remained appropriate.
Just let me make a bit more progress, then I shall happily give way.
Our position is that what the regulators do and the judgments they exercise matter as much if not more than the institutional framework within which they operate. We need a central bank, a regulator and an economics Ministry, but moving specific responsibilities from one body to another will not by itself make any difference other than to cause significant disruption at a time when attention should surely be focused on practical, workable improvements to regulatory performance and decision making, which is what the Government want to ensure. It is a point that my hon. Friend the Member for South Derbyshire has made on a number of occasions, which is why I happily give way to him.
I shall not make that point again. Instead, I wish to remark upon the fact that it would increase the confidence of those hon. Members considering the Bill if the White Paper, the precursor to the Bill, had more obviously engaged the Bank of England. One concern to which the Select Committee drew attention was the obvious disconnect between the Governor of the Bank of England and the process that we are now discussing. It would have been helpful, when considering the functioning of the tripartite authority, if there had been a greater degree of collegial spirit in the way in which the Bank responded to the future regulatory framework opportunities.
I do not want my hon. Friend to think that there were no significant discussions between officials from the Treasury, the Bank of England and the Financial Services Authority in the run up to producing the White Paper, because there clearly were. As is often the case when producing documents, not everybody will agree on every single line or every item. A thorough process took place, and I hope that my hon. Friend recognises the fact.
In an earlier contribution, the hon. Member for Chichester declared this clause to be the most important and most serious in the Bill. However, we heard an uncharacteristic outburst of hubris from the hon. Member for Fareham when he declared the outcome of the next general election, saying that he would not bother to put his alternative to the Committee but would wait until then.
Given the hon. Gentlemans continued assault on tripartism, is my hon. Friend surprised that the hon. Gentleman has not bothered to put forward an alternative? If the hon. Gentleman wishes to interrupt the Minister every 30 seconds, detaining the Committee as a result, would he at least detain us by giving an alternative rather than making the same argument over and over again?
It is fundamentally important that we focus on making practical improvements to regulatory performance and decision making.
I was saying that, in any system, there will be a central bank, a financial regulator and an economics Ministry. The key thing is getting them to work together in the best interests of the economy and for financial stability. Whether one is in the United Kingdom, the United States or any other country, we all face the same sort of situation. Simply moving the deckchairs around into different formulations does not mean that we can escape the fact that we need those three organisations to work together.
I shall come to the detail of the amendment of the hon. Member for Fareham in a moment, but it is nonsense to say that one body should have sole charge. None the less, there is potential to improve the tripartite model, which is why we produced the White Paper, why we consulted on it, and why we are here today debating clause 1 and the other clauses that relate to the Council for Financial Stability. We want the council to replace the tripartite standing committee. Its membership will comprise the Chancellor, acting as chairman, the Governor of the Bank of England and the chairman of the FSA. It will be responsible for considering emerging risks to the UKs financial stability and the global financial system, and co-ordinating an appropriate response.
I shall describe in detail how it will differ from existing arrangements, which I hope will clarify matters for the hon. Member for Chichester. On one hand, he said that this is the most important clause in the Bill; at other times, he says that it is just a cosmetic exercise. I do not believe that that is so. It is a significant part of the Bill. He was right in that part of his comments, and I will explain why in a moment.
First of all, I was not suggesting that the area of policy is a cosmetic exercise; I was suggesting that the Governments proposal to try to reform and improve it is a cosmetic exercise.
We need to proceed on the basis of facts. The Bank of England was not consulted about the proposals before their publicationthe Governor himself appeared before the Select Committee and said in a public session that he had not even seen them, either on the day, or the day before their publication. The hon. Member for South Derbyshire, who is on the Select Committee with me, confirms by nodding his head in agreement.
It is not the case that this side is setting up a straw man and saying that all tripartism is wrong. It is the case, though, that on this side, we have repeatedly said that any system must have clear leadership. I have said that that leadership should come from the Chancellor. It is simply not the case that the tripartite arrangements worked well before 2007it was not chaired by the Chancellor. As far as I am aware, the answer to the question repeatedly asked by my hon. Friend the Member for Fareham was that there were no meetings chaired by the Chancellor before 2007. However, if the Minister can enlighten me as to when such a meeting took place, we will be interested to know.
Its development was discussed with the Bank and the FSA at a number of levels, but it ultimately represents the Governments view.
That is right. As one would expect, we consulted in preparing the White Paper, as it was right to do so.
Let me explain, as I said I would, the differences. The council will be statutorily required to meet every quarter. Meetings will be scheduled in advance with agreed agendas, and consider the analyses by the Bank and the FSA on risks to financial stability. The financial stability report of the Bank and the FSAs financial risk outlook will be considered as part of the quarterly strategic discussion. The draft terms of reference of the council, which have been published, stipulate that reports must be considered in three ways: a summary of the report must be discussed, risks highlighted must be assessed and the council must consider its response, including options for mitigating action.
What we have is a structured approach that will ensure that risks are fully monitored and a suitable response co-ordinated. It will be beneficial in times of stability, as well as in more challenging times, such as those that we have experienced over the past couple of years. The council is also required by the draft terms of reference to consider both the Banks and the FSAs financial stability strategies, as provided under the Banking Act 2009 and this Bill. The council will therefore act as a forum for discussion and co-ordination of each authoritys strategic approach to financial stability.
In addition to the statutorily mandated quarterly meetings, the council may of course meet more regularly, and, as set out in the draft terms of reference, the Government anticipate that the council will meet on a monthly basis for the foreseeable future.
What I am saying is that as a result of introducing new arrangements, with the Council for Financial Stability, we are formalising processes that are already taking place. We are acting in a more transparent and accountable way. We believe we have struck a balance in making the deliberations of the tripartite more transparent. Let me explain. Clearly, a balance needs to be struck between the public benefit from greater transparency and the need to maintain confidentiality. That is a point flagged up by many respondents to the consultation.
I would like some clarity. This is either a fundamental or a cosmetic change. The Minister argues that it is a fundamental change. Did the Chancellor, the Governor of the Bank of England and the chairman of the FSA meet regularly to discuss the financial stability report and the financial risk outlook? Yes or no?
What I am trying to say to the hon. Gentleman is that there was a standing committee, it met at regular times during the financial crisis over the past couple of years, and it will be replaced by the Council for Financial Stability. The council will formalise meeting arrangements, will be more transparent and will ensure that there is a clear line of accountability to Parliament. We intend that parliamentary scrutiny will be facilitated by the transparency of the council through its quarterly meetings and the Treasurys annual report, which is proposed in the legislation. Clearly, there are opportunities for the Treasury Committee to make its own judgments on how it wants to scrutinise matters. It is not for me as a Government Minister to make comments in that regard, but I think there is a strong case for the Treasury Committee to have a major role in providing appropriate channels of accountability to Parliament.
Will my hon. Friend set out the tripartite authoritys approach through this new institutional framework to one area that certainly seems to have been absent, which is the war-gaming exercises that would be associated with the practical working of the three authorities in confronting a crisis? I imagine that it is a clear accountability for this particular body to define the scenarios, discuss the outcomes and plan how to proceed and evaluate the result. Is there any evidence that that is part of the brief of this particular body?
The Council for Financial Stability, as my hon. Friend will know, has an important role. He will see from the terms of reference that were published on the Treasury website that its role covers a wide range of areas. It is a co-ordinating rather than a decision-making body. His point about war-gaming is a matter that would be discussed in terms of areas of responsibility for ensuring that appropriate arrangements are in place to ensure that there is an effective regulatory regime that takes a risk-based, proportionate approach. I hope that provides at least some reassurance.
One of the lessons that I am picking up from the Ministera lesson that has been learnedis that the Governor of the Bank of England, the head of the FSA and the Chancellor of the Exchequer met frequently during the crisis, but by implication did not meet frequently enough before the crisis, and the Council for Financial Stability will redress that in future by ensuring that those meetings are regular and quarterly. Another lesson that I have learned from the crisis is that some banks are too big to fail. That is particularly the case nowthis country simply cannot afford to bail out another bank. In terms of preventive measures, will the Council for Financial Stability look at the break-up of one or more of the big privately owned banks we currently have in the UK? The risk of their failing is unanswerable, because we do not have the money to bail them out.
With respect to my hon. Friend, there are other opportunities and indeed places to discuss the issue of moral hazard and the too-big-to-fail argument. In particular, when we get on to discuss living wills, we can have a substantial debate on that issue, because living wills are directly designed to address that issue.
Let me briefly make one or two points. First, I think that the hon. Member for Fareham tried to misconstrue my position when I talked about the roles of the different tripartite bodies and the role of the Bank and its responsibility for monetary policy. As I am sure he is aware from the Reforming financial markets White Paper, the Government have made it clear that there are significant practical problems associated with using short-term interest rates to pursue macro-prudential regulation policy goals. I was not for a moment pretending that that is what I was suggesting that the Bank of England should do.
On the point made about the comments of Andrew Whittaker and the FSA, I want to draw the Committees attention to the FSAs memorandum submitted following the oral evidence. The relevant section that I want to put on the record is:
Our evidence was that it is a joint enterprise that is, financial stability
between the three authorities, each of whom have different levers available to them. The Council for Financial Stability will enable effective co-ordination in relation to the overall approach on all issues relating to financial stability and will allow each of the authorities to contribute to the financial stability work. There is no general hierarchy among the authorities, each of which has its own specific responsibilities.
Again, that is the key point that I want the Committee to recognise. It is about the Financial Services Authority as the regulator, the Bank of England and the Government coming together and co-ordinating action. There is no hierarchy, and there should be none, when it comes to such matters.
In direct response to the point made by the hon. Member for Chichester about who is in charge, it is a joint enterprise, as I have just said. It is the responsibility of all the appropriate bodies. My hon. Friend the Member for West Bromwich, East praised him for his speech, but the hon. Member for Chichester said that macro-prudential regulation should be the responsibility of the Bank of England and that it should lie with the Chancellor of the Exchequer. That is not a defensible position. I will happily give way while he seeks to explain it.
I did not say that, as the record will show; I said that responsibility for the management and provision of advice on systemic riskI said tentatively; incidentally, I also said that the Government should not rush it, which is what they are doing now, because they need a political gestureshould probably lie with the Bank of England, and that the Bank of England should then act on it under the overall direction of the Chancellor of the day. I gave my reasons why.
I have been trying to intervene on the Minister for some time, so I will take this opportunity. Does he think that it furthers the cause of credibility on this matter to persist in what is, frankly, a state of denial about the failure of the tripartite system before 2007? He refused to acknowledge that no meetings of substance took place, and he rejected completely the Treasury Committees considered conclusions.
Briefly, I conclude by reading paragraph 276 of the Treasury Committee report again, as it bears so directly on what the Minister said when he said that the system worked well:
We cannot accept, as some witnesses and now the Minister
have suggested, that the Tripartite system operated well in this crisis...for a run on a 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 the operation.
Who is in charge?
I do not want to return to the Governments response to the Treasury Committee report into Northern Rock. Our position was made clear at the time. I hope that the hon. Gentleman will acknowledge the Governments recognition that there were failings. Lessons have been learned, and that is what we have tried to do through this exercise over the last couple of years, to ensure that improvements are made where they are required. Our analysis is that the tripartite model of regulation is appropriate, and we do not think that alternative models would have produced any difference. That remains the Governments position.
In response to the question about who is in charge, each authority has its responsibilities and tools for financial stability. The key point is that each analysis and approach is effectively aligned and co-ordinated, and that is where the Council for Financial Stability can improve on the system that has been in operation. Its role will be to monitor and co-ordinate to ensure that effective alignment.
I recognise that the Minister has an impossible job in defending this. He was not the Minister prior to the development of this crisis; he has come late to the show and found himself having to handle an impossible brief by not only defending what happened, but also trying to pretend that we should broadly carry on as we are with the current system. I salute him in his efforts to do that impossible job. However, surely he must grasp that the one crucial issue that virtually everybody who has looked at this matter has concluded as necessary, is the establishment of a clear line of authority through to one man or woman. That clear line of authority is still lacking in the Bill. Even though he will not give way now, will he be prepared to leave the Committee today and consider the issue, so that we can take another look at it on Report?
This issue has been considered many times before. The hon. Gentleman holds a certain positionhe is scarred by personal experience in the matter. The Governments view is that the tripartite system is the right approach. It is a misunderstanding to say that there is one person in charge for everything to do with financial stability and consumer protection in the United Kingdom, because each authority has different responsibilities. The key point is to ensure effective alignment and co-ordination.
Surely the important point here is that there is not just a Council for Financial Stability, working alone. There has been massive change in the FSA, which failed in its regulation of Northern Rock. There has been a substantial strengthening of the Bank of England, with a special resolution regime. We still have macro-prudential regulatory changes to be made. Putting all that together, it makes sense to go down the route that the Government are going down.
I agree with my hon. Friend. The idea of having one person whom we could say was in charge of central banking, monetary policy, prudential regulation, public spending and wider fiscal policy does not make sense. It is certainly not the view of the Government, although it might be the view of the hon. Member for Chichester.
We have to proceed on the basis of some fact. No one in the Opposition is suggesting that the conduct of business regulation should be put in the charge of one man who is always the same man and is responsible for the management of systemic risk. We are talking about macro-prudential supervision in the context of maintaining financial stability in the overall financial systemsystemic riskand we are not talking about conduct of business regulation. The Minister implied repeatedly that we were eliding the twowe are not. He needs to discuss the issue in the Bill, in clause 1.
I agree with the hon. Gentleman in the sense that we are talking about macro-prudential regulation. There are those who want to carve out some of the systemically significant banks and transfer responsibility for their regulation to the Bank of England. I do not think that that would be a particularly helpful approach. In my view, the nature of the changes in the financial system over the past 20 or 30 years has seen increasing integration. Something might look systemic at one point in time, but what might not look systemic may prove to be very systemic indeed when circumstances arise. So, I do not accept that that approach is the right one to take.
The hon. Member for Fareham spoke of the rationality of markets. Apart from recommending Daniel Kahneman, in addition to Thaler and Sunstein, as I have done on previous occasions, I want to agree with the hon. Gentleman, to the extent that he highlights the roles and responsibilities of firms, their boards and their shareholders. It is important in the financial crisis that we recognise that that was at least as big a factor as difficulties with regulatory judgments that have been identified. That should be recognised.
The second point of substance to which I feel I need to respond is about macro-prudential tools. The White Paper is clear on the matter, which we are pursuing internationally, as the hon. Member for Fareham knows. International co-ordination is obviously crucial, to avoid regulatory arbitrage and to ensure consistency of approach. After we have developed the macro-prudential toolkit through ongoing work in the Basel committee, for example, we will take the decisions necessary to place those tools with the appropriate authority. Both the Bank of England and the Financial Services Authority support that position fully. We must determine what tools are needed before deciding to whom to give them. I hope that he will recognise that point.
Amendments 37 and 38 provide a different model for the council from that proposed by the Government. The council would have ultimate authority and the ability to direct the Treasury, the Bank and the FSA. As I have argued, the Governments vision for the council is one of close co-operation, monitoring and co-ordination, ensuring that the bodies are aligned in pursuing their objectives. That model respects the independence of the Bank and the Financial Services Authority.
The amendments, by contrast, would change that model completely, subserviating the power of those institutions and the Treasury to the new council. It is worth pointing out that the amendments do not go far enough in providing the necessary legal architecture for such an institutional framework. For example, how would the council take a decision to direct one of the authorities to use its powers: by majority vote or a decision by the chair? How would the direction be enforced? However, I recognise the probing spirit in which the hon. Member for Fareham moved the amendments.
I do not agree with the model proposed, for a number of good reasons, but at heart is the fundamental difference that we see the council as a body with a monitoring and co-ordinating role to ensure that authorities with distinct responsibilities for financial stability continue to work effectively and closely together. In the Governments view, the council is a forum for the effective co-operation of the three authorities. It is not about a power hierarchy, which is what the amendments would establish. There will be no votes. It is not for the Government to impose their will on an independent Bank or financial services regulator, which is why I hope that the hon. Gentleman will withdraw his amendments.
Amendment 36 requires a Treasury statement on the council to specify the responsibilities of each member to protect or enhance the stability of the UK financial system and the powers available to each authority. There is merit in setting out the authorities roles and responsibilities clearly. A draft of the statement of the councils terms of reference provided for in clause 1(5) is available on the Treasurys website, as I have mentioned. It provides an overview of the authorities financial stability responsibilities and is intended to contextualise the detail of the councils objectives and procedures. The statement also says that the authorities intend to revise the memorandum of understanding first agreed between them in 1997 and updated in 2006, which describes the roles of each authority and how authorities work together to pursue financial stability.
That relates to the point made some considerable time ago by my hon. Friend the Member for Edmonton when he asked for more detail. Inevitably, legislation is provided at a high level and deals with principles. A lot of the detail will be in the new memorandum of understanding; indeed, it already exists in draft form in the terms of reference.
The MOU will complement the terms of reference and be revised in time to lay the terms of reference formally before Parliament, as set out in clause 1(9). Amendment 36 would require it to be placed in the draft statement. We believe that it is preferable to have the high-level context in the councils terms of reference and consolidate the details of each authoritys role in the memorandum of understanding. That is why we have taken the approach that we have, and why I encourage the hon. Gentleman not to press his amendment.
New clause 2 is, perhaps, based on a slight confusion between having a new objective and having new powers. We will not achieve financial stability by directly using a magic wand called the financial stability power, as I believe everyone knowsalthough it would be nice if such a thing existed. Instead, the FSA will enhance stability by using various powers such as authorising banks, making rules, discussing risk controls and so on, in a manner that is aware of, and aims towards, wider financial stability.
For example, as part of prudential regulation, one of the FSAs key tools is to decide how much capital a bank needs to hold. In the past, arguably, the FSA considered this issue primarily for each firm in isolationas we discussed earlier, the so-called micro-prudential approach. We expect the FSA to use that existing power with more awareness of wider financial stability issues, including aggregate levels of exposure and risk in the financial and banking system as a wholethe so-called macro-prudential approach that we have been discussing.
Of course, the Government are not complacent. We always keep under review the powers that the FSA and the Bank need. That is why we are in this Committee Room today, and it is why we were in the Committee Corridor a year ago for the Banking Bill, now the Banking Act 2009. If additional powers are necessary, we will consult and introduce legislation. However, we believe that the measures in the Bill are appropriate, and I invite the Committee to reject the amendments and new clause if they are pushed to a vote.
It seems quite a while since we started the debate on these amendments and stand part. The debate has been helpful, in that it has exposed some of the fundamental weaknesses that existed in the tripartite committee prior to the banking crisis. It has become clear, despite my interventions on the Minister, that if it met once, that is at best, and even that was on a virtual basis, and that the three principals did not get together to discuss the financial risk outlook or the financial stability review. It is all very well the Minister saying what a marvellous role the tripartite authorities played in the cure, but they did not work together to try to prevent the emergence of the financial crisis on a scale that would affect the UK economy.
That fundamental failure is one that my hon. Friend the Member for Chichester, when he was serving on the Committee for the Financial Services and Markets Act 2000, highlighted but the Government dismissed. The Government should recognise that the existing arrangements did not serve the country well in the run-up to the financial crisis.
The Minister gives the impression that we are now in a new age of peace and harmony among the tripartite authorities, and that they are all clear about their responsibilities and what they are to do. Let me give the Ministers own view on that. He said that I misconstrued his words in Committee when he said that the
central bank has responsibility for monetary policy that was the end of the quote I gave. He then went on to state:
What I am trying to explain to the Committee is that financial stability cuts across all those areas of responsibility.[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 15.]
In evidence-taking, even the Minister seemed to be saying that monetary policy had a role to play in delivering financial stability, so I am not sure who is misconstruing whom. That quote suggests that he did believe that monetary policy has a role, yet it is clear from the views of the MPC that it does not.
The Minister spoke about the supplementary memorandum that the FSA sent out. I was intrigued by this. He quoted paragraph 2, which states:
Our evidence was that it is a joint enterprise between the three authorities, each of whom have different levers available to them.
Paragraph 2 sounds okay and if it had stopped pretty much there the Minister would have had a conclusive point.
However, paragraph 4, in which the FSA talks about its responsibility for setting individual firms capital standards, says in the context of its macro-prudential toolkit that it
would expect to give very considerable deference to other members judgments.
Now, if one does not think that one is subservient, one does not necessarily give deference. From that statement, I very much get the impression of a hierarchy. Paragraph 5 says:
In those contexts, our role in relation to financial stability is a secondary one.
There is a disconnect, or gap, here. On the one hand, the Minister is saying, This is a shared enterprise, we are all responsible for this, no ones in charge, it is all responsibly shared. However, even the hon. Member for Wolverhampton, South-West believes that the Government should be in charge of this process and that there should be clear leadership. Indeed, his views seem to reflect those of the FSA and the Bank.
So, at the outset of the reforms that the Government have proposed, there is a gap between two members of this new Council for Financial Stability and the Treasury. One of the problems that we had, and we saw it during the financial crisis, was evidence of a gap, whereby people in the tripartite arrangements did not feel that they were responsible for particular things, that they thought that those things were somebody elses responsibility and that somebody else was in charge of them. In fact, the Governor of the Bank of England did not know who was in charge.
I do not think that what is before us today addresses that issue in a very clear fashion, because there is a gapthe Chancellor might describe it as a credibility gapbetween, on the one hand, the view of two members of the tripartite authority and, on the other hand, the view espoused by the Treasury. There is a debate to be had about who should be in charge and indeed about whether somebody should be in charge. It is deeply concerning that the three members of the Council for Financial Stability cannot agree among themselves about whether somebody or nobody is in charge. That is a testament to the lack of proper debate and discussion between those three members and I thought that it was instructive that the Governor did not feel part of the consultation process about the White Paper and had not seen it immediately prior to its publication. That does not suggest to me that there is a harmonious relationship in this new age of sweetness and light that the Minister seemed to imply had broken out.
That bodes ill for the work of the Council for Financial Stability. At some point, we will move away from the current crisis and back to a time where, we hope, markets are more stable. How will the council work then? How will it function effectively when even at this pointat the very outsetno one quite knows how it will work? That is a very bad omen.
The hon. Member for South Derbyshire talked about the importance of learning. Not all of this process is about structural change; sometimes people have to learn. There is a strong element of truth in that. The problem about learning is that people forget. I used to know GermanI did German A-levelbut I could barely string together a sentence of German today, 27 years later. People forget. People said after the last housing crisis that there will not be another one and that we had learned from the mistakes that had been made. People forget and lessons are unlearned. So part of the purpose of structural reform is to ensure that some of that learning is enshrined.
I think that we would all recogniseI think that the FSA itself recognisesthat in the run-up to the financial crisis, the FSAs predominant focus was on conduct of business regulation. For a host of reasons, that is where the FSAs focus was, to the detriment of prudential supervision. It now seeks to rebalance thatit has learned that lessonbut what will happen in 10 years time? How will it retain that learning once times and pressures have changed?
We come back to the point made by my hon. Friend the Member for Chichester. In our White Paper, we argued that conduct of business should rest with the Consumer Protection Agency, and that the micro-prudential supervision of banks and systemically important businesses or sectors should rest with the Bank of England. We realise that there could be a conflict of intentionthat one would be subordinate to another. We want to move away from that, to prevent it from happening again. We therefore suggest giving one institution a clear responsibility for the conduct of business and the other a clear responsibility for micro-prudential regulation, so as to enshrine the learning that has resulted from the crisis.
I agree with the hon. Gentlemans comments on learning, although I would argue that the institutional framework does not necessarily aid the retention of memory; it is strongly to do with the culture of the organisation, its leadership and so on.
That aside, however, there is a lot of learning to be done on all sides. The Governor will probably look back on his early concerns about moral hazard and wonder whether he struck the correct balance in his responses. Incidentally, that is exactly why I raised with the Minister the question of war-gamingthe regular testing of experience, learning and practice among key participants. That has to be done not only by the Chancellor, the Governor and the head of the FSA, who make up the tripartite body, but by the institutions that they lead.
The better the relationship between the principals in peacetime, the easier it is in war time. The hon. Gentleman rightly spoke of war-gaming. It was as a consequence of the war games held prior to the Northern Rock crisis that the FSA and the Bank recognised the lack of a special resolution regime.
As the hon. Gentleman says, no one did anything about it. One hopes that under the arrangements produced by the Government, or those provided by the Opposition, the message about listening to the principals is not forgotten. If a resolution regime had been in place prior to the financial crisis, the outcome might have been very different for some of the parties involved. It is an important issue, and one that should be reflected upon.
Structure, however, has a role to play. The remit and objectives set for an institution in part drive its behaviour. That is why we shall spend some time later today arguing about the setting of the FSAs objectives, as they will drive some of its actions. There are some important issues to do with structure that cannot be allowed to get in the way, particularly if we believe, as I do, that the structure and reforms of 1997 created tension and some gaps, which flowed through into the current crisis. That is why the amendments are important.
I start with the Ministers premise that there is a shared enterprise between the three tripartite authorities. If it is a shared enterprise, people need to know their responsibilities within the framework. If the Bill reaches the statue book, the Bank of England and the FSA will have within their remit the goal of protecting and enhancing financial stability. We therefore come back to the question of what they can do to deliver that objective. What powers will they need to protect and maintain financial stability, and where are the gaps to be found? However, I fear that we see in the Bill the creation of a great building with a clear view from the top floora view of the shared enterprise, underpinned by shared responsibilitiesbut one that is built on weak foundations, as there is no full range of powers available to the Bank and the FSA to deliver their objective. In this context I am thinking particularly of the Bank, because it is the Governor who, on a number of occasions, raised the issue of lacking, in his mind, the powers that he needs to deliver the financial stability objective. The special resolution regime helps the overview of the payment system, but it is not the full suite.
The Minister suggested that there is more work to be done on the macro-prudential toolkit, which had those powers. New clause 2 reminds the Government that that needs to be set outit would be easy for such things to be forgotten along the way. Only when we have that full suite of powers we will know that we have a system with a clear link between objective responsibility and the tools to do the job; we are some way from that.
For those who believe that a tripartite system, or tripartism, as the hon. Member for Wolverhampton, South-West described it, works, the proposal in the Bill takes them part of the way, but it can be clearer. I do not think that the clause goes far enough to clarify the issues, and my amendments, particularly amendment 36 and new clause 2, which I would like to push to a vote when it is appropriate, help to toughen the clause.
For those of us who do not believe that the tripartite system or the regulatory structure has worked in the UK, clause 1the Governments flagship measure, which is meant to introduce some reformsis nowhere near the right answer to the question about what went wrong with the regulatory system and what we can do to resolve it. That is why we raised alternative proposals that would enhance the role of the Bank of England, splitting micro-prudential regulation from the conduct of business regulation, giving the latter to a separate Consumer Protection Agency. We believe that the flaws of the system that the Prime Minister designed in 1997 are so fundamental that the gloss of a Council for Financial Stability is insufficient. That is why I will ask my hon. Friends to vote against the clause. I beg to ask leave to withdraw the amendment.
I welcome you to the Chair this afternoon, Mr. Benton. Perhaps your colleague, Mr. Gale, has indicated to you that he had permitted the stand-part debate to take place within the context of the amendments. I reserved my contributions to that wider debate to preface my amendments, but now, with your permission, I would like to contribute to the wider debate.
It is not difficult to agree with many Members on the demonstrable inadequacy of the tripartite situation, as it was availableif that is the right termduring the crisis that we saw a couple of years ago and in recent months. It is essential to look at, as the Minister said, the alternatives, including scrapping the current tripartite system and assigning responsibilities more directly to one or another of the existing players, specifically the Bank of England. It is right that a proper review takes place and all the alternatives are considered.
The hon. Member for Chichester, who with remarkable timing has just resumed his seat, could well claim to have been rather prophetic in his protestations of 1999. I was interested in his contribution about his experience in 1987it reminded me of that dark day when I had to return swiftly to my own bank as we saw the sea of red on our screens and millions of pounds disappear, principally from our clients accounts, but also from our own. That day will be for ever etched in the memories of those who went through it because it was such a disaster.
Today, the financial services industry is different from how it was in 1987indeed, it is pretty different from how it was in 1999. Perhaps the biggest criticism that we can level at the tripartite arrangement is that its members completely failed to respond to the changes that were taking place beneath their noses, or to understand their roles and responsibilities and the need to reform and substantially change the way they undertook those duties. As the hon. Member for Fareham pointed out, it appears that they did not have many meetings and did not particularly understand what the tripartite was supposed to be doing. Nevertheless, under their nosesboth individually and collectivelysignificant changes in the way the financial services industry operated were taking place.
In recent years, we have seen the dramatic expansion of financial conglomeratesnot only the banks, but all the other aspects that been added to them through mergers and acquisitions. We have seen a huge rise in greater international cross-border transactions, and the growth of new financial instruments whose implications for individual institutions were often not precisely understood. We have seen the gradual but increasing reduction of capital inadequacy liquidity requirements and greater interconnectivity between financial institutions, so that on floor 4 an instrument was being sold, while on floor 7 of the same building it was being bought back, perhaps even on the same day.
Does the hon. Gentleman agree that the biggest change was the idea that markets could do it for themselves and that we needed only the very lightest regulation possible? Was it not that more than anything else that undermined the financial system?
Yes, that is right in the sense that a lighter touch might have been more appropriate in 1999 than in 2009. Although lighter touch regulation might have been required or available to allow the markets to operate in the early period, it later became clear that the way in which they operated had changed so significantly that that lighter touch was inappropriate. That should have been recognised and the proper reforms put in place. We knew from evidence to the Treasury Committee that the FSA was trying to identify what new powers it would require, albeit that it was taking a heck of a long time to do it. Events rather overtook it.
Finally, between 1999 and 2009, the way in which the banks funded themselves completely changed, and it is difficult to see how what might have been considered appropriate in 1999 was in any way appropriate from 2007 onwards. The hon. Member for Wolverhampton, South-West reminded us again of those paragons of virtue in Canada, and its banking system with its rather Scottish Presbyterian influences and traditions. That probably goes for HSBC as well, which had similar traditions and was probably one of the banks least affected by the crisis that engulfed them.
I have been persuaded that no one individual component of the current tripartite group could or perhaps even should be solely responsible for financial stabilityall have a role to play and all come from different perspectives. But how is co-ordination to be achieved? There would have to be co-ordination. The different elements could not work in some sort of creative tension. They would have to understand that it was a co-ordinated effort. Where would all the evidence and information be put, where would the collation be done and where would there be sufficient authority to make appropriate and timely decisions?
A tripartite body of some description seems inevitable to deal with the current complexities and scale of the financial services organisations in the UK. However, as has been graphically pointed out, the current tripartite group, with its inadequate memorandum, informal meetings and ill defined responsibilities, clearly does not fit the bill. It was completely unsuccessful; it is rather difficult to defend any other position. Depositors may have been saved, but taxpayers certainly have not been. Reform was essential some years ago, and it is even more essential today. However, I do not believe that it is for the Council for Financial Stability to undertake micro-management of the regulation of banks or to get into great detail. In my view, it should look over the broader aspects of the whole financial stability framework.
Greater clarity is needed in the relationships between the tripartite body and its membership. We need to understand with greater clarity exactly what it is doing. It needs to have greater formality about it and greater transparency in its operations. Clear responses to the failures already exposed are also needed.
The Council for Financial Stability needs a more distinct persona. It should be not a talking shopalbeit that it meets every month or quarter or whatever it isbut a forum for close monitoring and decisions, even if those decisions are implemented by others. In other words, the Bank of England, the FSA and the Treasury may individually have to undertake some of those decisions, but they have to understand that they need to be made collectively. That is the strength of a tripartite organisation.
In particular, I want the council to be completely separate, if that is possible, from the Treasury, although I agree that it should be chaired by the Chancellor of the Exchequer. It must not become just a Treasury sub-committee, driven by the Treasury, nursed along by it and promoted and publicised by it. I want the council to be recognised as distinct, to have some responsibilities independent from the Treasury and to account to Parliament and the public, not to the Treasury. It is important that the council has a persona more like that of the Monetary Policy Committee.
The amendments in my name and that of my hon. Friend the Member for Twickenham covering the various clauses under the heading Council for Financial Stability are an attempt to provide greater clarity and transparency and to create a separate identity for the council in the Bill to differentiate its role from that of the Treasury. Specifically, amendments 20 and 21 would beef up the current wording. In that sense, they may be probingthey enable me to make these remarks. However, it is important that the Treasurys responsibility to prepare a statement in respect of the councils functions is absolute and that that does happen; I am sure that it will. It is also important that it does not just prescribe what those should be. The council should not be confined or restricted to what is in subsections (6)(a) to (d). I think that the council itself might make a contribution in putting down what it thinks some of its functions should be. Part of the purpose of the amendments is to allow the council the freedom and responsibility to indicate what it believes its functions should be, rather than being told by the Treasury. That would give more of a sense of independence from the Treasury.
The later amendments support the overall contention that the fact that the current tripartite has been found wanting does not mean that a tripartite body cannot be made to function. Indeed, in todays complex world of conglomerates and interconnected financial services, it must be made to work. The changes to the powers of the FSA and the Bank of England, along with the experiences of recent months and years, will, I am sure, provide valuable lessons for the operations of the financial stability council. I see no reason why, with greater definition, better transparency and a real persona, it should not be as successful as an MPC.
I acknowledge the hon. Gentlemans stand-part speech. I note that he said that some sort of tripartite system seems inevitable; I welcome his support in that respect at least. He made a number of good points. I was less sure when he spoke of the council as having an independent personality but being chaired by the Chancellor; I am not sure how that would work in practice. However, I recognise the points that he made, and I will not repeat my earlier comments in response to other hon. Members.
Amendment 20 covers the statement that the Treasury may produce under clause 1(5) and would place in primary legislation a requirement on the Treasury to prepare such a statement. It is certainly our intention to produce a statement, but we want it to be a document that can evolve over time as necessary. That is why subsection (7) requires the Treasury to keep the statement under review and subsection (9) requires it to lay the initial or revised statement before Parliament. A draft version of the statement is available on the Treasury website, as the hon. Gentleman knows, partly to facilitate the Committees scrutiny of the Bill. That publication makes it clear that we intend to lay a statement after the Bill is enacted, so I do not think that there is any reason to make the amendment that he proposes. However, I am happy to consider that point further.
Governments always prefer flexibility, but on the point of substance, we want to produce a statement. It is highly likely that Governments will always want to produce a statement. I do not have any difficulty with the substance of the amendment, but given that we have made clear our intention to publish the statement and I have repeated it today, I do not propose that the Committee should support the amendment and I hope that the hon. Gentleman will withdraw it.
Amendment 21 concerns subsection (6), which indicates what matters the statement may cover. The amendment would strengthen the requirement to indicate that those matters should, inter alia, cover the specified areas. Again, it is not a matter of great division between us. The intention of the subsection is to specify what matters the statement can cover while maintaining flexibility. The wording may is used to provide sensible flexibility in future. We are trying, as Government always try, to ensure that the legislation is as far as possible future-proofed.
All the measures mentioned in paragraphs (a) to (c) of subsection (6) are covered in the draft terms of reference that we published, but it is conceivable that they may not always be necessary, which is why changing the wording as the hon. Member for South-East Cornwall proposes would not make any substantial difference at the moment to the operation of the clause in practice. I do not believe that the amendment is necessary, and we would like to reserve the right to future-proof the Bill as far as possible; that is why the wording is as it is.
As I indicated to the Minister, the amendment was of a probing nature, to enable me to preface the idea that we broadly support the continuance of the tripartite arrangement, albeit with a considerable amount of stiffening and the creating of a new persona.
The Minister seemed to indicate that it was impossible for someone to chair something that they were not necessarily directly in, but that happens in huge numbers of organisations. User forums are an example; user groups may join together, often as consumer groups, and if someone is a chair of a particular user group there is no reason why he cannot operate effectively as the chair of the whole group while still being the representative of one particular member body. That can work quite successfully. It would mean that there was a differencethere should be a clear and definable differencebetween the council and any Treasury operation.
The Minister is much more for having a sub-committee of the Treasury drive the whole thing, whether that is right or wrong. I believe that there should be greater independence. We have formulated amendments 20 and 21, and some subsequent ones, to try to create that independence. However, I am happy to beg to ask leave to withdraw the amendment.
Amendment proposed: 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;.(Mr. Hoban.)
include any...provision that the Treasury consider would facilitate the effective exercise by the Council of its functions.
It is for the council to consider what would facilitate the effective exercise of its functions. The interests of the FSA and the Bank of England are not necessarily what the Treasury thinks they ought to be. The amendments would therefore replace Treasury with Council and remove the words by the Council.
I thank the hon. Gentleman for giving way, particularly as he seems to be drawing to a conclusion. I am somewhat ill at ease with the suggestion in his contribution, and his previous contributions, that there is something malign about the Treasurys involvement in such matters. The Treasury and the Chancellor of the Exchequer keep Parliament informed of what is happening with issues that are critical to our economy. Why does the hon. Gentleman take such a negative line?
I am not being negative about the Treasury; it probably has the most important part to play. However, if the new statutory body is to have clear responsibilities, it must be given the opportunity to create its own view of its functions. If not, it will be little more than an arms length part of the Treasury. Perhaps this is where I see some malign intent: it would be extremely convenient if, in time, the council was directed, controlled and influenced by the Treasury. When a fundamental disaster befell us, however, it would be not the Treasurys fault, but the fault of the council.
If the council is to operate satisfactorilyI see no reason why it should notit should be able to enhance its role with its own individual rights, rather than being a sub-committee of the Treasury. It would then be able to consider its functions properly, perhaps ensuring that we do not suffer the same problems again. It could reform itself in response to changes in the financial services industry and in the financial architecture and landscape, here and elsewhere in the world. It is right that the council should seek those functions, although the Treasury will of course have a major say, bearing in mind that it will chair the council.
As the hon. Gentleman suggested, I was about to draw my remarks to a close. The amendments may be controversial, but they are not difficult to understand.
The hon. Member for South-East Cornwall is admirably logical in following through his line of thought that the Council for Financial Stability should have more independence and personality. However, for the reasons that I outlined earlier, the Government believe that it is right that the Treasury should play the role described in the legislation.
The hon. Gentleman referred to clause 1(6)(d). That provision is intended to provide flexibility, so that if it becomes apparent that the operation of the council needs to be clarified, that can be done. It is necessary to enable the council to develop its role and adapt to unanticipated circumstances. I do not see anything between us on its capacity to do that.
The hon. Gentleman will be aware that under clause 1(8) the Treasury will have to consult the Bank and the FSA when preparing statements to be issued under the legislation. Such consultation will provide ample opportunity for the Bank and the FSA to influence the contents of statements. That brings me back to a point that I have made on previous occasions: we are talking about a joint enterprise. The need for change will be discussed and agreed by the tripartite authorities. It is certainly not our intention for the council to become an arms length part of the Treasury.
I have been at pains to point out that each member of the council has its own areas of competence, responsibility and independence. The role of the council is to monitor and co-ordinate action, but someone must have responsibility, and we make clear in the Bill that it is the Treasury.
In resisting the amendments, is the Minister signalling the Governments return to the welcome embrace of democratic accountability, as the Treasury will take the lead if the amendments are resisted? Correspondingly, is there recognition by the Government that we have far too many arms length bodies, quangos and the like? Can I welcome a change of emphasis by the Government?
I think that my hon. Friend is making too much of what is proposed. It is important that the Treasury retains the role in question, rather than the council having it. The statement is reported to Parliament, so it is natural that it should come from the Treasury. With the explanations that I have given and an understanding that we are adopting different logical positions, I hope that the hon. Member for South-East Cornwall will withdraw his amendments.
I thank the Minister for those responses. It might have been clearer if I had indicated in my amendments that we could have deleted subsection (8), but I do not think that that would have been necessarily proper. It is a matter of trying to get the relationships rights. I do not want to repeat myself, but if the council is being set up as a statutory body, it needs to have proper functions and not be some sort of arms length quango. It has to create for itself acceptance in the markets, both domestically and internationally. Its credibility would be significantly enhanced if it had a degree of independence. However, I beg to ask leave to withdraw the amendment.