Clause 5

Financial Services Bill – in a Public Bill Committee at 6:45 pm on 5 January 2010.

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Financial stability objective

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 41, in clause 5, page 4, line 10, at end add—

‘( ) The Financial Services and Markets Act 2000 is amended as follows.

( ) In section 2, insert after subsection (2)—

“(2A) In discharging its general functions the Authority must, so far as is reasonably possible, act in a way that ensures that financial stability takes precedence over its other regulatory objectives.”’.

With your agreement, Mr. Benton, I will wrap up amendment 41 and the stand part debate in the same speech, rather than having to respond to that debate later.

I was rather surprised to see clause 5 in the Bill, because we went round the tracks on the issue that it deals with during the passage of the Banking Act 2009, which gave the Bank of England a statutory responsibility for financial stability. At that time, we raised a question with the then Exchequer Secretary, the hon. Member for Wallasey (Angela Eagle): why was there not a similar objective for the FSA? We thought we would have some symmetry in that and so asked why only one part of the tripartite authority had that objective and the others did not. She was quite clear that they did have that objective, but that it was just wrapped up in market confidence.

She said that

“the FSA has important objectives in relation to financial stability and the Financial Services and Markets Act 2000, which has a direct bearing on what we are talking about. For example, the FSA has a responsibility for maintaining market confidence in the financial system. That, too, is about financial stability, so it is inaccurate to say that only the Bank of England has that duty in all the laws that impinge on the area we are discussing.”——[Official Report, Banking Public Bill Committee, 30 October 2008; c. 232.]

That rather suggests to me that clause 5 is completely redundant. It will not change one iota of the way the FSA operates, because it should already have been acting in that way and pursuing its duties on the objective of financial stability, which was just wrapped up in a different guise. I am not sure why we have this in the first place. Perhaps the Minister will be able to illuminate why that suddenly seems a good idea.

Clearly, not everyone listened to the then Exchequer Secretary, because clause 5 has led to some discussion about whether it will actually create greater confusion in the system. The British Bankers Association seems to think that it is a cosmetic change. It stated in its submission:

“While it is clear that the prudential regulator should have an explicit objective for financial stability, we would not see this as a dramatic step given that FSMA already provides that the FSA should act to maintain confidence in the financial system.”

The CBI noted in its response to the White Paper:

“A disadvantage of giving the FSA an explicit objective for financial stability is that this would perpetuate some of the ambiguities regarding institutional responsibilities that were apparent in the build-up to the financial crisis.”

Part of the problem is that the FSA is a micro-prudential regulator as well as a business regulator, yet the financial stability objective is defined in terms of the UK financial system. It is clear from Andrew Whittaker’s evidence that the FSA will exercise a secondary role in the council for financial stability. Moreover, it will only exercises its powers—in fact, it already has under FSMA—in pursuit of any financial stability objective.

It is not clear what the clause adds to that. How is it going to get the FSA to change its behaviour? Is it really a significant change and has the FSA been acting obliviously to any financial stability objective in the past, or is it window dressing—a cosmetic exercise to give the impression that the regulatory environment has been beefed up? The Government need to be clear on the clause’s purpose.

Mr. Loverose—

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I see that the hon. Gentleman is poised to intervene. I happily give way.

Photo of Andrew Love Andrew Love Labour, Edmonton

I thank the hon. Gentleman for giving way. Both he and his colleagues on the Opposition Benches have spent the whole day trashing the tripartite system as confused and lacking in leadership. Clause 5 offered the Opposition the opportunity to clarify through an amendment how we could overcome the situation. Why has the hon. Gentleman not taken that opportunity?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Because our approach is set out in detail in our white paper, “Plan for Sound Banking”. It clearly sets out, in more detail than the hon. Gentleman’s party did before the 1997 general election, how we are going to reform the regulation of the financial services sector. It clearly outlines our reforms in relation to the FSA, as well as our plans to give powers to the Bank of England and to set up a new consumer protection agency. It is as good a statement of our policy as he will find.

Photo of Andrew Love Andrew Love Labour, Edmonton

Her Majesty’s loyal Opposition are supposed to ensure that they play a positive role in ensuring that legislation is the best that can be achieved. I accept the hon. Gentleman’s argument that his party has set out a completely separate agenda, but the amendments that the Opposition table to the Bill should be in the spirit of the legislation. As a loyal Opposition, should the hon. Gentleman and his colleagues not have made the effort to make the Bill the best it could possibly be?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 7:00, 5 January 2010

There are two approaches, but I am not sure which one the hon. Gentleman is espousing. The amendments that we have tabled seek to improve the existing regulatory structure and to provide line-by-line scrutiny. That is our role when discussing legislation. As I said this morning when the hon. Gentleman made a similar point on clause 1, if it was not for the time constraints we could spend a lot of time talking about our reforms. In fact, I have spent a lot of time talking about them today, but, equally, we should spend a lot of  time trying to improve the Bill through line-by-line scrutiny, to clarify what it means and to understand the purpose of introducing the new objective. If the hon. Gentleman is keen to experience what it is like to be the loyal Opposition, maybe tables will be turned at some point and he will be able to see for himself what it is like to go through line-by-line scrutiny.

I come back to my question. What is the point or purpose behind including clause 5 in the Bill, given that the then Exchequer Secretary, the hon. Member for Wallasey, said that financial stability was already within the FSA’s remit through the market confidence clause? Some commentators say that this is merely a cosmetic change. Some go further and say that it causes additional confusion, given that the Bank of England has a financial stability objective. The Government need to make a clear argument on why it is necessary in the Bill, given the assurances made during the passage of the Banking Bill last year.

Through amendment 41, we seek to understand what priority financial stability has among the other objectives that the FSA will have. The Bill will change the FSA’s objectives; it will lose its public awareness remit but will gain a financial stability objective and a duty relating to international co-operation. There is a potential tension between the financial stability objective and some of the other objectives that the FSA will have. I want to understand if the Minister’s argument is that the objectives all rank equally, or whether financial stability is to take precedence over other objectives.

Let me give the Committee an example. During the crisis on Northern Rock, the FSA could have, as part of its public awareness role, reminded people about the limits to the protection on deposits and encouraged them to move their deposits out of Northern Rock and into somewhere else. Alternatively, it could have said, from a financial stability perspective, that it did not want consumers to move their deposits out of Northern Rock but wanted them to stay there. There is a tension between the public awareness role—explaining the limits of the Financial Services Compensation Scheme—and the financial stability role. Which should take precedence in that situation?

Let us look at a non-banking area—the mis-selling of pensions. There was a significant liability attached to pension mis-selling that could have had an impact on financial stability. If the liability were significant, it could have eroded the stability of insurance companies and had a wider impact on the UK economy. However, the FSA’s consumer protection remit suggests that it was right for the FSA to take action where it found examples of mis-selling and to ensure that compensation was paid. A similar argument could be applied to the recent debate about finding a solution to the bank charges issue, notwithstanding the fact that that is outside the FSA’s remit. There is clearly a financial stability impact if banks have to pay out many billions of pounds in compensation to consumers, but there is a consumer protection angle that should be borne in mind. A balancing takes place when regulatory decisions are taken by the FSA. Amendment 41, which I tabled, suggests that precedence should be given to financial stability where there is a conflict in trying to reconcile those various objectives, when it comes to the regulatory decisions that the FSA needs to make. It is a probing amendment to clarify the Government’s thinking on the  importance of financial stability for the FSA. It simply flows from my wondering why we have such an objective in the Bill, given that we were assured last year that it was unnecessary.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am pleased to hear that amendment 41 is a probing amendment; it could be very dangerous if agreed to, and it could lead to all sorts of hopefully unintended consequences. I say “hopefully unintended” because I cannot believe that the hon. Member for Fareham really wants to put the interests of financial stability above the interests of protecting consumers who have retail deposits or investments in financial markets.

Let me make a few more general comments about the clause before referring specifically to the amendment. The Government’s view is that, given the growing international consensus that both national and international regulators should enhance their focus on systemic risks to financial stability, we believe that it would be desirable for Parliament to set out more explicitly in legislation the priority that it expects the FSA to attach to the issue. That is what clause 5 does.

With regard to the hon. Gentleman’s point about the comments that my hon. Friend the Member for Wallasey made during the passage of the Banking Act 2009, it remains the Government’s view that the FSA currently has the statutory objective of maintaining confidence in the financial system, which was provided for in the Financial Services and Markets Act 2000. Protecting financial stability is, of course, a fundamental component of maintaining confidence in the financial system.

However, we believe that the FSA’s objectives should contain a more explicit recognition of the role that the FSA has to play in protecting and enhancing stability. Clause 5 makes it clear beyond reasonable doubt that protecting and enhancing stability is an objective of the FSA. It will provide express legal authority for the FSA to take action to support financial stability, including using its rule-making powers and other powers, which we will no doubt come to when we discuss clause 7.

I want to emphasise that the FSA is not the only body responsible for protecting and enhancing financial stability. The term “contributing to” in subsection (1) of proposed new section 3A reflects that. Financial stability is affected by many factors, which, as we have already discussed at some length in our debates on the new Council for Financial Stability, fall within the scope of the responsibility of each of the council’s members. I do not think that I need to go into further detail about that.

Regarding the amendment proposed by the hon. Member for Fareham, I am not convinced that it would be beneficial for the FSA to be required to give financial stability priority over its other objectives. That might have the effect that consumers and others, including the firms regulated by the FSA, would never again take the other objectives seriously. It is even possible to imagine that the perception that stability is being prioritised might itself harm stability. If consumers felt that their protection was no longer a key priority for the FSA, that would undermine their confidence in the financial system and the firms that make up that system. It would not be right to impose too rigid an approach on the FSA. What we need is a carefully calibrated and sensible approach. A rule that says that stability must always take precedence could be damaging.

For the amendment to have a benefit, we must try to imagine situations in which a possible course of action might benefit stability but damage consumer protection. For example, a weak bank might be encouraged to treat its customers unfairly in order to make excess profits to bolster its capital position. If that happened, or if customers of a firm thought that it was happening, rightly or wrongly, they would presumably withdraw their deposits and place them in a different bank, thereby weakening the bank that the unfair initiative was intended to strengthen. It is difficult to understand in what situation there is likely to be a conflict between financial stability and consumer protection. I do not believe that having a priority for financial stability over consumer protection is in the interests of consumers, or that it is in the interests of financial stability overall.

In the Government’s view, it is right for the FSA to be required to contribute to the protection of financial stability. In the context of that objective, it is right that it be required to balance the risks caused to the economy by instability against excessive caution, as mentioned in subsection (2)(a) and (b) of proposed new section 3A. It is also correct that the FSA will have to consider carefully the way in which various possible actions affect all its fundamental objectives. I do not believe fundamentally that giving rigid, explicit priority to financial stability is beneficial or helpful. Indeed, it might even be harmful for the reasons I outlined. I urge the hon. Gentleman to withdraw the amendment.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful for the Minister’s response. There were clearly some words of wisdom that he glossed over quickly, given the reluctance to have further lengthy scrutiny of the clause. I think that he is saying that clause 5 makes explicit what is implicit in the FSA’s  existing remit on market confidence. That suggests that the change is largely cosmetic, but the position is clear.

On the amendment, even if the Bill does not give financial stability explicit precedence, we cannot escape the fact that regulators make trade-offs in juggling the objectives. We had a long debate about the priority of various objectives in the context of banking, and the Minister gave good arguments for why we should not give precedence to one objective. However, just because we do not lay that out in statute, it does not mean that when looking at individual cases, the regulator does not balance the application of the objectives to the regulatory decision it is making. Perhaps sometimes there is a compromise on one objective at the expense of achieving another. We should recognise that part of making regulatory decisions is striking a balance between the objectives. I accept that.

We currently place great store on financial stability as a consequence of the financial crisis. It is now much higher up people’s lists. When we talk to people about what outcomes they want for financial services, they choose security, stability and continuity. When times change, people at all levels of financial services will again get an appetite for risk, and stability will be less of a factor in their decisions. It is right to give regulators freedom to decide what are the appropriate objectives at the time and what is important in the context. Let nobody be under the illusion that regulators do not have to make trade-offs from time to time in pursuit of their regulatory functions. With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Ordered, That further consideration be now adjourned. —(Mr. Mudie.)

Adjourned till Thursday 7 December at Nine o’clock.