‘including both the most likely outcome and a range of reasonably possible scenarios.’.
Amendment 19, in clause 3, page 12, line 2, at end insert—
‘(f) an assessment of the impact of each macro-prudential measure on employment and economic growth.’.
Amendment 20, in clause 3, page 12, line 9, at end insert—
‘(c) an assessment of the state of financial stability against early warning indicators and report against the effectiveness of the macro-prudential measures deployed.’.
Amendment 31, in clause 3, page 12, line 9, at end insert—
‘(c) an assessment of the impact of the Committee’s measures on the functioning of financial markets and the wider economy.’.
The Committee will recall that I was moving amendment 33, which is grouped with amendments 32, 19, 20 and 31. Amendment 33 is about the Financial Policy Committee’s financial stability reports. It seeks to increase the reports’ frequency from twice a year to four times a year to align it with the Monetary Policy Committee’s quarterly bulletin.
Amendment 32 states:
“after ‘system’, insert ‘including both the most likely outcome and a range of…possible scenarios.’”
It concerns the details of what the financial stability reports must cover, particularly the requirement for the Committee to give a
“view of the stability of the UK financial system at the time when the report is prepared”.
Clearly, the recommendations of the FPC can have a wide-ranging impact, so we need to ensure that the financial stability reports and the measures that the FPC advocates impact the wider economy with as few adverse or unintended consequences as possible, especially when it comes to the prospects for economic growth. Members of the Committee will recall my anxieties that the Bill as it stands already has a blind spot for economic growth. They will know how concerned we are that so little thought has been given to the impact on growth under this system, and we have already discussed how the FPC would be improved if it had an employment and growth objective.
A submission from the Institute of Chartered Accountants in England and Wales made the compelling argument:
“Given the uncertain nature of projections about the financial system, a discussion of a range of possible scenarios in an outlook should also be introduced in the reports, to ensure the committee’s considerations are transparent.”
Our amendment therefore highlights the need for a range of reasonable possible scenarios rather than simply one narrow projection.
Members of the committee will be familiar with the fan chart process with which the MPC’s quarterly bulletin makes predictions about likely scenarios. Although I accept where we are today in terms of our economic and econometric forecasting—it is difficult to turn what many will feel is a qualitative set of analyses into a quantitative set of analyses when it comes to stability projections and such concepts—we are not in quite the same ballpark as perhaps with monetary policy. This opens up the box in terms of what sort of metrics the Monetary Policy Committee will be using. What are the tells and what are the indicators across economic activity that might suggest credit bubbles are beginning to expand?
It is all very well in hindsight saying, “Gosh, that was a big credit bubble in the housing market” or whatever it may be. Hindsight is a wonderful thing, but it does not help in terms of projecting the next scenario. We want the FPC to somehow develop a set of indicators that might act as markers or posters that say, “This set of circumstances might be an indicator that something difficult is potentially looming or around the corner.” I am not after a target-driven set of scenarios, but looking for an analysis that properly appreciates the various scenarios that might come in the medium to long term. That is the purpose of amendment 32.
Amendment 19 would make an important change to clause 3 on line 2 of page 12, at the end of the proposed new paragraph requiring the financial stability report to include various aspects. We are seeking to introduce paragraph (f), so that the report must also include
“an assessment of the impact of each macro-prudential measure on employment and economic growth.”
My hon. Friends will know about the importance of ensuring better attention to those facets of policy about which our constituents and businesses care most of all.
No, because the Office for Budget Responsibility looks at fiscal policy, and we are talking here about stability. Stability may well fall under the ambit of the OBR at some point, and I would be interested to hear its thoughts about it, but given that we are talking about the contents of the financial stability report, it is important to understand what the report will include.
I am not the one being over-prescriptive here: there is a list in the Bill that sets out that a stability report must include a, b, c, d and e. I am simply talking about the components that it ought to include. The job of the interim FPC has so far been to publish financial stability reports. They have been interesting, but there are ways in which we can improve the FPC’s analysis and ensure that it covers issues that policy makers more broadly might want to touch on. Amendment 19 would build in a better sense of specific analysis of the impact of each macro-prudential measure that the FPC feels needs to be taken.
For the sake of argument, let us say that the FPC wants to change the minimum repayments our constituents make on their credit cards from roughly 2% on a monthly basis currently to 5%, for whatever reason. That is an example of a macro-prudential tool. To what extent will the FPC properly appreciate the impact on the economy that such a change would have––not just the change itself, but the timing of the change? If many of my constituents were forced to repay their credit cards more rapidly than they would otherwise do, it might take significant sums of money out of the economy and have a significant macro-economic impact.
I want to ensure that the FPC has a proper understanding of the downstream consequences of its measures. That is why we wanted, in an earlier section of the Bill, the FPC to have regard to the Government’s employment and growth objectives, but we were defeated, at least in Committee, on that amendment. It is more appropriate to ask the Minister to think again about the impact of such elements in the FPC’s bi-annual, but hopefully quarterly, reports.
There should be transparency about the impact of jobs and growth of each macro-prudential tool. We need to have some means of holding the FPC accountable for its decisions, albeit with the Treasury’s support in enacting them. Given that there are other requirements on a financial stability report in proposed new section 9T, a specific requirement about the impact on jobs and growth is exceptionally important.
We recognise that there are difficulties in fully analysing what the impact on the economy could be from a particular measure, but it is not impossible to make an estimate. Perhaps in working with the OBR and others in the forecasting business, the FPC and the Bank of England could learn a thing or two about how to make such predictions. That is why we think the report process needs enhancing in this way.
Amendment 20 would ensure that the FPC makes
“an assessment of the state of financial stability indicators against early warning indicators and report against the effectiveness of the macro-prudential measures deployed.”
We want to insert that provision into proposed new section 9T(4), on page 12, which talks about other aspects the financial stability reports must include. Again, the amendment would aid transparency regarding the strategy and indicators used by the FPC. It would allow others to make a judgment about the effectiveness of the measures concerned.
“give guidance under Clause 3 of the draft Bill to the Bank of England to adopt indicators for gauging financial stability. The selected range of indicators must be flexible and under constant challenge and review, not only by Parliament, Government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public. The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance. The FPC should report against these criteria at regular intervals.”
The pre-legislative scrutiny Committee picked up on that proposal, and its comments chime in perfect pitch with the amendment. Paragraph 319 of its report said:
“The bi-annual Financial Stability Reports should assess the state of financial stability against the early warning indicators which we endorsed…and report the effectiveness of macro-prudential tools deployed.”
Surprise, surprise, the Government, in their response to the Treasury Committee and the pre-legislative scrutiny Committee, were of a different opinion, but it is interesting to see how they framed it. They said:
“The Government believes that openness and transparency are important to secure public understanding of macro-prudential policy. The Bank has made clear in its response to the TSC’s report into Bank accountability that the FPC will regularly publish, and report against, indicators of financial stability.”
If the Treasury is in agreement, I do not see what harm can come from writing such a requirement into the Bill.
Ultimately, we have a right as parliamentarians to say which aspects of a report and which indicators we would find particularly informative. It would also help to have a degree of specificity in this part of the Bill. The amendment would not prevent the FPC from publishing in other ways to supplement the financial stability reports. However, it would ensure, at a minimum, that the FPC reports against indicators of financial stability.
The hon. Gentleman makes a strong case, but it fails the “Just a Minute” test, because amendment 20 repeats what is in proposed new section 9T. That provision says the financial stability report must include a summary, and proposed new subsection (4)(b) goes on to say that it should include an assessment of the extent to which the exercise by the Committee means it has carried out its functions. The amendment is very worthy, but it is surely repetition.
If it was repetition, I am sure you would rule it out of order, Mr Howarth, as indeed happens on “Just a Minute”. Let us not change the rules as we go along. I do not think it is repetition, because there is no provision in the Bill asking for an assessment of the state of financial stability against early-warning indicators, and it would be useful to have such a provision. Simply judging whether the FPC’s exercise of its functions has succeeded during the reporting period in meeting its objectives is not as forward-looking a requirement as I would like. If the reports are to be useful, they need to focus on horizon scanning and what is coming in future. That is a crucial component of the FPC’s work.
Amendment 31 would introduce a requirement that the financial stability reports make
“an assessment of the impact of the Committee’s measures on the functioning of financial markets and the wider economy.”
The amendment is framed so that we can get a sense of the read-across from the work of the Financial Conduct Authority, which currently, as framed in the Bill, has a strategic objective to ensure that relevant markets function well.
It is appropriate to ensure that the FPC also keeps an eye on the smooth functioning of financial markets. There are important interconnections within the financial system and the knock-on consequences of macro-prudential measures, given the interrelated nature of the different financial services sectors, could be important. Therefore it is necessary, for completeness’ sake, to ensure that the FPC also has regard to some of those market-functioning tests. We are talking about the impact of the measures on the real economy and how they will affect the operation of day-to-day markets. The amendment would add some colour to the report.
It is difficult to debate the relative merits of each amendment in such a considerable group of amendments, but it is important that financial stability reports are rigorous, sufficiently frequent, forward looking and judged against indicators that give some intelligence about what is coming on the horizon and, in particular— I hope that my hon. Friends agree—assess the impact of the measures on the real economy and what will happen to economic growth and job creation. For those reasons, I commend the amendments to the Committee.
I want to speak briefly on amendment 32. It is important that we can forecast clouds on the horizon. Looking back to the beginning of some of our financial difficulties, all the signs were there, but we did not necessarily understand how to interpret them. I am sure that we never imagined that things would turn out as badly as they eventually did, because of the range of factors available to any Government or the FPC at any time.
Although it is not necessary to include it in the Bill, will the Minister comment on scenario planning to ensure that we map out eventualities and consequences that may not immediately be apparent? That is important, because we do not have a crystal ball or, indeed, many crystal balls. The Minister’s reassurance that, in the normal course of things, he would expect an element of scenario planning to facilitate the work of the committees would be welcome.
It is a pleasure to welcome you to the Chair for this afternoon’s proceedings, Mr Howarth. As an experienced Chairman, you will know that Ministers occasionally seek enlightenment and clarification during the lunch break, and that has been the case today.
During a previous debate, the hon. Member for Nottingham East asked me to write to him about the Joint Committee on Statutory Instruments. I can inform him that it was not that Committee, but the equally well respected and experienced Delegated Powers and Regulatory Reform Committee of the House of Lords that made a representation to the pre-legislative scrutiny Committee. I know that he will have read its recommendations as part of his assiduous preparation. In paragraph 9, on page 127 of the pre-legislative scrutiny Committee’s report, the Delegated Powers and Regulatory Reform Committee stated that the reason for the power to make macro-prudential tools was explained in the Treasury’s delegated powers memorandum and that
“We do not consider it inappropriate; and the importance of the power is recognised by the application of the draft affirmative procedure or, in urgent cases, the 28-day ‘made affirmative’ procedure”.
That Committee has therefore adopted the same view as the Treasury, which is that the affirmative, rather than the super-affirmative procedure, is needed. I thought it would be useful to clarify that, although we identified the wrong Committee, we certainly arrived at the right answer.
Amendment 33 would require four financial stability reports to be published every year, which draws a parallel with the inflation reports that were so notably contributed to by my hon. Friend the Member for West Suffolk in his time at the Bank of England. There are key differences between monetary policy and macro-prudential policy. Macro-prudential policy action may take time—perhaps running into months—to be implemented properly, and its full effects may not be felt for a long time. That different pace of macro-prudential policy is reflected in the fact that the FPC will meet quarterly, while the MPC holds monthly meetings. The six-monthly financial stability report also reflects the longer time frame over which macro-prudential actions must be considered. As my hon. Friend made clear this morning, that report is not the only communication tool; it will be supplemented in other ways. The six-monthly cycle will sit neatly with the quarterly pattern of meetings, bearing it in mind that the MPC meets monthly and the inflation report is quarterly. On that basis, there is no requirement to have the same frequency of reports.
My hon. Friend the Member for Macclesfield, who is clearly a devotee of the panel game “Just a Minute”, rightly pointed out the repetition not so much in the speech made by the hon. Member for Nottingham East, but in his amendments. Amendment 32 would insert the phrase,
“including both the most likely outcome and a range of reasonably possible scenarios.”
However, subsection (3)(e) refers to
“the Committee’s view of the outlook for the stability of the UK financial system.”
A forward-looking sense is therefore already enshrined in the Bill.
On amendments 19 and 31, as I made clear last week, one of the interim FPC’s recommendations on macro-prudential tools is the need to think through the likely macro-economic impact of those tools on the wider economy, which is a key part of putting the powers in place. As the hon. Member for Islwyn pointed out in the debate about indicators, the FPC’s December report stated that it should look at a range of them. That report—it has already been much quoted in Committee—also stated, in section four, on “Selection criteria” for tools, that
“The second criterion is the efficiency with which a tool successfully achieves a reduction in systemic risk”.
The points are well made by the hon. Member for Nottingham East, but they are already reflected in the Bill or by the way in which the Financial Policy Committee will act in practice. On that basis, I do not believe that the amendments are necessary.
I am grateful to the Minister for his explanation. I hope that we do not get into the practice of finishing discussions on groups of amendments that took place previously. The Minister mentioned the Delegated Powers and Regulatory Reform Committee in respect of the super-affirmative procedure, which we talked about this morning. I would have been quite happy for the Minister to write to us with his apology for getting the wrong Committee.
I was just about to say that it is important to have some flexibility in the proceedings to allow Ministers to be helpful whenever that is necessary.
The Minister’s justification for not wanting four reports from the Financial Policy Committee was a little tenuous. The pace of macro-prudential policy is sufficiently longer than it is for monetary policy or other macro-economic policy arrangements. With the greatest of respect to the Minister, that has yet to be proven. There are many ways in which the pace could be quicker or slower, but I do not think that he can say at this stage that he knows what the pace of macro-prudential policymaking is likely to be. There are many other non-macro-prudential policy measures that can take an inordinately long time to enact, so the argument is a little spurious. None the less, I accept his point about the fact that the MPC meets on a monthly basis and then has a quarterly report. That is a stronger point. Reports do not necessarily have to align with each particular meeting. If we are creating a certain degree of constitutional symmetry within the Bank and we are having a Financial Policy Committee and an MPC as well, it would make sense to mirror the four reports a year. We may want to return to this matter when we are in Government, but at this point in time, the Minister makes his arguments well, so I will not press that issue.
The Minister thinks that amendment 32 is already sufficiently covered by subsection (3)(e). Again, that is a moot point. It would have been preferable to have been more specific about the sort of forward looking early-warning indicators or the range of scenarios that might be there. The hon. Member for Solihull made an important point on this; Ministers do not want to write any more on that in the Bill. It is a shame, but we have heard the Government’s point.
I am afraid that I do not agree with the Minister when it comes to amendment 19. It is important that at the very least the financial stability report should have an assessment of the impact on the real economy of each one of the macro-prudential tools that are being put in place. It is a bit like the regulatory impact assessment that we sometimes have accompanying legislation or other statutory instruments. At the very least, it is the sort of impact assessment that most of us should be concerned about in the Committee. It is not in any way a light matter. I am happy to withdraw amendment 33 and not to press amendments 32, 20 and 31, but I will press amendment 19 to a Division, because it is an important point of principle. I beg to ask leave to withdraw the amendment.
We have come to a point where we have exhausted clause 3, although I say that with a degree of regret because it is probably one of the most important clauses in the Bill. There are so many difficulties with the legislation that it has taken a bit of time to debate and try to amend, although the Government have not conceded a thing.
The Government Whip says that I have not persuaded the Minister, and I bear that failing entirely on my shoulders. Perhaps I will try harder in future clauses when it will be important to make my arguments in a more forceful but not necessarily more voluminous way, although I could be tempted.
Clause 3 has some merit in that it establishes the Financial Policy Committee and sets out the concept of macro-prudential policy making. The Opposition recognise that and support the work of the interim Financial Policy Committee. If the Bill is enacted, we want to see a Financial Policy Committee that works effectively. The problem is that clause 3 also contains many gaping holes, and the Minister has not assured me that the legislation is adequate as it stands.
For example, the status of the FPC as a sub-committee rather than a committee was raised by the Treasury Committee and the pre-legislative scrutiny Committee. We sought clarity during earlier debates about the internal wiring between the FPC and the regulators, and the FPC and the rest of the Bank of England, but rather than shedding light on the matter, the Minister has confused and obfuscated the situation.
On committee membership we had a small discussion about whether there will be a fair balance of external representatives from the wider economy, or whether the committee will be a creature of the Governor. Seven executives will be appointed, four externally. The Minister made a point about the chief executive of the Financial Conduct Authority, but even if that is factored into the figures, the majority of appointees will still be made by the Governor and that will create quite an imperial system within the Bank. I do not think that the right balance has been struck between non-executives and Bank executives, which is a pity.
One of the biggest blind spots in the clause is the lack of attention paid to the impact that macro-prudential policy making could have on jobs and growth. I know that we divided the Committee specifically, just now, on the macro-prudential measures, but also on the strategic objectives of the Bank, and it is troubling that the Government have not accepted that somehow macro-prudential policy making could have an impact on growth.
The Minister could have said, “Yes, I think that some of the stuff that the FPC will be doing might cause difficulties—it could lead to higher or lower unemployment; there could be downstream consequences for the real economy”; but, no, his view was that there was a wall to be built around the work of the FPC, that it had nothing to do with jobs and growth, and that, in fact, if we were to give it an obligation to have regard to those things, somehow that would breach the fundamental principle of separation of powers, which was something to be resisted at all costs.
It was partly for those reasons that we felt, “Well, hang on a minute, we need proper parliamentary scrutiny of the macro-prudential measures, when they come, so at least we can pause and properly check whether adequate account has been taken of issues to do with the real economy”; but those concerns were rebuffed again by the Minister.
As to problems with parliamentary scrutiny and accountability, the Minister has cited one House of Commons Committee that perhaps had not picked up on the importance of the super-affirmative process, but others who have perhaps considered the matter in greater detail made the recommendations. Sometimes I think that because I am the one advocating the conclusions of the pre-legislative scrutiny Committee or the Treasury Committee, I am colouring them from my perspective; but I am trying to bring the issues to the fore in Committee.
The Government are right to want financial stability, but they must be careful about lack of accountability and about having insufficient regard for the effect on the wider economy. The clause has serious deficiencies, which could have significant consequences. Unless we get the fundamentals of the regulators right, we risk creating regulation that is out of touch and that pays inadequate attention to the important tasks of creating jobs and growth in the UK economy.
That leaves us in a dilemma. The Minister has rigidly refused to accept any changes to the clause, and, as we near the end of consideration of part 1, it is exactly as it was when we began our proceedings. Report stage is still to come, and although some of the bigger points of principle that I have been arguing will not be accepted, there are some smaller ones about which Treasury Committee members have concerns, and they may try to influence Ministers behind the scenes.
I hope that the Minister will table amendments to clause 3 on Report, and we would welcome those, particularly if they were in the spirit of some of our suggestions. As things stand it would be irresponsible merely to allow clause 3 to be passed without voicing our concerns. We are in favour of a financial stability strategy and a strong and functioning Financial Policy Committee, but clause 3 would not achieve those ends, so, with the greatest regret, we must vote against it.
It is a pleasure to reconvene under your chairmanship again, this afternoon, Mr Howarth. I do not want to detain the Committee long, but, as the hon. Member for Nottingham East said, clause 3 is perhaps the most significant provision in the Bill, and the clause stand part debate is a significant milestone.
The clause is important because of the macro-prudential regulatory regime that it introduces, and the possible overall consequences for many different sectors of the economy. There has been talk about the ability to regulate mortgage lending and credit cards—and perhaps the leverage and debt exposure of small and medium-sized enterprises. Potentially all parts of the economy could be touched by the powers that we have debated in the past three sittings. That is why the clause represents such a significant step and such a change in the way we manage the UK economy. It is clearly the right change. The hon. Member for Nottingham East suggested that in his comments, although he cannot quite bring himself to support the clause overall. We clearly need to avoid the type of asset class bubbles seen in recent years, which have distorted parts of the economy and caused so much damage.
I do have a concern, however, about parliamentary oversight. I was reassured on Second Reading, when I intervened on my right hon. Friend the Chancellor, who made it clear that he is relaxed about debates on the Floor of the House on proposed macro-prudential measures. I see my hon. Friend the Minister nodding, so perhaps we will look again at whether that can be made more explicit in the Bill, while still resisting the further proposals of the hon. Member for Nottingham East.
In particular, if we look at proposed new section 9J(2) and (3), the FPC, when issuing a macro-prudential measure,
“must give the Treasury a copy of any direction under section 9G”,
but the Treasury then
“may, if they think fit, lay” a copy of that order before Parliament. I find that provision wholly unacceptable, and I hope that the Government will take that on board and review it on Report. Clearly, given the level of the powers that Parliament is handing to the Bank of England, Parliament must maintain authority. We must be accountable for the powers being handed over, and there must be some form of redress. Therefore, that provision as it stands is not satisfactory, although I look to the Minister to enlighten me in case I am misreading it. If a copy of an order is laid before the Treasury, it is perfectly proper and easy for it also to be put in the House of Commons Library.
I also wonder whether the new body that we are creating is the opposite of a rolling stone gathering no moss. We may well be creating a rolling stone gathering all sorts of moss, with all sorts of additional powers accreting to it as the years go on. Can the Minister, therefore, enlighten us as to whether consideration was given to the insertion of sunset clauses on the macro-prudential measures? It strikes me that everyone in the House wants to maintain responsibility for the powers that we are handing over, and one of the easiest ways to do that might be to ensure that they are in some way self-limiting.
Overall, we clearly have the right direction of travel. The lesson of the previous years is that we have not properly managed full oversight of the UK’s economy so, with those two caveats, I am happy to support the clause.
I was intrigued to hear the remarks of the hon. Member for St Austell and Newquay on oversight. For a minute, I thought he was going to agree with us, and he seemed to be havering between what the Government are saying about the lack of necessity for a Select Committee to scrutinise financial services and his own concerns that there should be proper parliamentary oversight and sufficient debate on the Floor of the House. I await with great interest the response of the Minister or, perhaps, an amended clause 3 on Report.
We have had an interesting debate on the clause which, in many ways, is the nub of the Bill. It is a good attempt to ensure that the stable door is closed after the horse has bolted. I give it six or perhaps seven out of 10, but it is not perfect. We can never be perfect, of course, but what my hon. Friend the Member for Nottingham East has tried to do is to improve it and to be helpful to the Government in this joint venture, because the wish throughout the House is to produce a Bill that not only will prevent some of the catastrophes that we have seen from happening again, but will work to ensure provision for jobs and growth in the economy. Regrettably, the Minister was unable to give an assurance that he would consider my hon. Friend’s proposals, even if the amendment was unacceptable to the Government. I had hoped that he might say more about jobs and growth, and whether the FPC could balance its remit for ensuring stability and—dare I use the word?—prudence in that side of the economy, which is so important in ensuring that the deficit is repaid.
I support my hon. Friend in urging the Opposition to vote against clause 3, simply because of the number of amendments that he has helpfully proposed to the Government that have been completely rejected. In light of that, I hope the Minister will reconsider some of the points that were made even though the amendments were rejected. During this Parliament, the Minister and I debated the then Equitable Life (Payments) Bill. Do he and the Government believe that clause 3, as it stands, would prevent another Equitable scandal? That is what my constituents and those of every Member in Committee want to know. Will it prevent, or would it have prevented had it been in place, the scandal of Equitable occurring in the first place?
My final point is one to which I alluded last week. Small and medium-sized enterprises, to which the hon. Member for St Austell and Newquay and many other hon. Members have referred, are the cornerstone of creating jobs, growth and wealth in this country. Many of my hon. Friend’s share my view that we must ensure that whatever legislation we enact through the Committee process will help such enterprises, in any way possible, to carry out their businesses and expand, grow and become larger. In doing so, we will create the jobs, growth and wealth that this country so badly needs.
A Bill of this kind, as written, may seem extremely abstract and far removed from the everyday considerations of many of our constituents. However, the clause goes to the heart of what people want from the measure. We can trade allegations about who was asleep on the job and who did and did not want regulation in the past, and we have done so on the Floor of the House at various times. Clearly, the public expect us to introduce a system that will work and be in place for a considerable time to come. They want a system that not only prevents situations such as that of Equitable and others, which many of us are still dealing with, but that relates to the bigger picture, too, in which organisations such as the Royal Bank of Scotland overreached itself.
That is why some of the provisions in the clause, on which we have tabled amendments, are especially important. We must get right the balance on financial stability and strategy, which we debated at length. It is not good enough simply to say that financial stability in itself is the be-all and end-all of what we are trying to achieve in financial policy. That can be overdone, and it is perhaps the habit of politics to run from one extreme to the other end of the spectrum. We are already seeing the effects of the banks becoming ultra-cautious, certainly compared with how they were previously. That has implications for the economy, and our constituents in their day-to-day life. The economy is affected because businesses need to borrow to expand and grow, but there is also a huge effect on the housing market. Decisions are being taking about deposits for house purchase, and the ratio of income to loans. That affects not just individual households, but house builders, and in turn employment and jobs in our local economies.
The lack of jobs has a knock-on effect on other aspects of our local economies. It also has a marked effect on housing tenure, not because of planned decisions about what sort of housing tenure we want, but by default. The private rented sector, which virtually disappeared some 20 years ago, is growing, and that is having an effect on household budgets because of the rise in rents as people are pushed more and more into the private rented sector, creating huge demand there, which in turn again, affects the Government’s budgets.
We have had huge debates in recent months about, for example, housing benefit, and the size of the housing benefit bill. Unless there is some control over rents, or the huge overwhelming demand for such accommodation ceases, much of what the Government are trying to do will come to grief. I have seen that in my constituency where the amount of money that people can claim if they require housing benefit assistance to rent in the private sector has been reduced. The amount that they can claim for a one-bedroom house was £115 a week last year.
I was simply trying to illustrate the importance of these debates to our constituents.
As well as the wider issue of the financial stability part of the clause, it is important to our constituents that we consider aspects such as public consultation and, as we discussed earlier today, proper parliamentary scrutiny of the procedures that will be put in place, because they are crucial, and if we get this wrong and the provision does not work as it should, the country as a whole and many of our constituents will suffer. On that basis, I support my hon. Friend the Member for Nottingham East in not wanting clause 3 to stand part of the Bill in its current form.
It is a pleasure, Mr Howarth, to serve under your chairmanship again. I will try to be brief. I want to press the Minister on a point I raised earlier. I am still not clear about what financial stability looks like. How does one do the touch, taste, feel test? He has still not come up with a simple definition of financial stability. History is littered with all sorts of examples of economies believing that they were financially secure and stable. I do not want to give a history lesson, but we all know about the tulip boom in the Netherlands in the 17th century, the Wall street crash in 1929 and Black Wednesday in 1989. At every stage, every Government thought that everything was tickety-boo.
Now we find ourselves in the situation of the FPC working towards financial stability, but the Government cannot provide an indicator. I am talking about a simple indicator so that when I walk down the street in Blackwood in my constituency, and someone asks me whether we have financial stability, I can say yes or no, because of x, y or z. That brings me back to the thought that probably the best way—it is not perfect—of measuring financial stability in layman’s terms for someone on the bus in Blackwood on a Saturday morning is by saying whether the economy is growing and creating jobs. That is the simplest way of talking about financial stability.
Will the hon. Gentleman reflect for a moment on the fact that, just before the financial crisis hit, the economy was growing and was creating jobs, yet that growth was fuelled by the instability that led to a massive contraction in both?
I think the Minister saw my argument about the tulip boom and things like that. Perhaps he can enlighten me, but I cannot think of something simple to say in terms of what financial stability looks like because of how the markets work.
I shall make a general point before I finish. It seems that sometimes we have applied economic theory to people’s behaviours. We do not know what the behaviours are of people in the market. So when we talk about financial stability, we do not know how people have behaved to create financial stability. Also, people tend to take risks, which at such a time will destabilise their business and society. All I am looking for from the Minister is for him to answer this simple question in a few sentences: what does financial stability look like? I hope that he can enlighten me on that.
I will speak briefly to argue that the financial policy committee that clause 3 sets up is the meat of the Bill. It is one of the most important innovations in the measure and probably across the whole banking reform programme that the Government are introducing. It removes the tripartite committee that failed so catastrophically. Therefore, if someone votes against the clause, they are, in effect, voting against the Bill as a whole and against reforming the banks. It would be a vote in favour of the status quo.
In response to the question about what financial stability means, I am sure that we will get an eloquent description from the Minister. However we certainly know what financial instability looks like: everything that happened in the past few years thanks to a system that did not work and that the clause is at the heart of replacing.
I will not give the hon. Member for Islwyn a glib statement about what financial stability is because, as he demonstrated when I intervened on him, it is rather difficult to characterise. That is part of the challenge. There is no simple definition. If there were, we would know what it is and how to get there.
The threats to financial stability are manifold and will come from different areas. Different people will have their own views about what those threats are. The challenge is not, as the hon. Member for Leeds North East said, to close a stable door after the horse has bolted, but to try to stop the next horse bolting. We are looking for a forward-looking committee that will survey the horizon. Again, that is one of the things that the committee will have to report on in its six-monthly review: it will have to consider the outlook for financial stability.
As we discussed last Thursday, credit and the ratio of credit to GDP will be an indicator of that, but there are other things as well. Sometimes structural matters will undermine the stability of the country’s financial system or it may be the growth of a new product. Anyone who has read Gillian Tett’s book, “Fool’s Gold,” will understand about the growth of credit-derivative obligations. The growth of that product was a threat to financial stability. It is very hard to measure the complexity of product. We need a committee that has the experience and the expertise to be able to look ahead to those future threats. It will need the expertise of the officials of the Bank of England, but it will also need a broad representation. We discussed those points earlier in Committee. It is important to have that balance of internal and external members to ensure that there is not a risk of group-think.
It is easier to identify instability than stability. I said that the seeds of the financial instability during the banking crisis were sown during a period of what people might have described as stability. It is difficult, but we need the committee to understand whether instability relates to new products, changing market structures or growth of credit and to consider areas that could trigger instability, such as a new financial instrument in the market, and think through the impact on financial stability of the growth of shadow banking—the role of money market funds.
The FPC has a key role to play in looking ahead and taking action to tackle problems that it sees. Going back to what the committee should do and how we ensure that it is targeting the right things and appropriately taking into account the impact of its actions, I think that all Committee members recognise that financial instability has its cost, as we have seen in recent years, but too much financial stability is the stability of the graveyard and it, too, has its costs. We need to take into account the impact of the committee’s actions. We need to assess whether the FPC is doing a good job, taking the right decisions and making the right judgments on how to use the powers available to it.
The answer to these questions relies on three key elements: getting the objective right; making decision making as transparent as possible and providing for adequate retrospective scrutiny; and the challenge of decisions. It is right to focus on getting the objective right and ensuring that the committee can be held to account for its performance.
The hon. Member for Nottingham East and others asked whether the balance is there in the objective. One overriding Government objective throughout the reform is to create specialised bodies with specific, focused objectives. That approach, which has been widely supported, allows each body to concentrate on one, or a small number of, areas in which it has the greatest expertise, instead of asking them to do a lot of different things, perhaps leading to their achieving none. We have seen what happens when we give bodies too much responsibility, or responsibilities that are too wide-ranging without setting any sense of prioritisation, such as in respect of the FSA. I am wary of diluting the FPC’s focus and role by asking it to promote, in some other way, other public policy goals at the same time as pursuing financial stability. That is why the Government believe that the FPC should be asked to focus on a single primary objective of financial stability.
We agree that the FPC’s pursuit of stability should not be completely unfettered. As the Chancellor said, we do not seek the stability of the graveyard. In other words, the FPC should not be able to pursue stability to the point where the financial sector can no longer support the wider economy. It is a question of balance. On one side, costs imposed by intrusive regulation may restrict the ability of the financial sector as a whole to support economic growth and, on the other, an under-regulated, unstable financial sector can have, as we have seen, devastating effects on the economy by fuelling unsustainable bubbles and causing disorderly firm failure.
Clearly, over the long term, financial stability and sustainable economic growth are complementary, not contradictory. Financial stability is an essential precondition of sustainable economic growth.
My position, like that of the Government, is clear: the FPC should not be able to use its powers to take action where the costs that that action would impose are disproportionate to the benefits.
The hon. Gentleman makes an important point. That is why there is no blanket ban on the creation of new products or services, for example, and why financial services firms will be encouraged to identify new opportunities in the markets. New products that are available would benefit businesses. For example, at the moment we are considering, through the business finance partnership, using the resources of financial management companies or insurers to lend to businesses. That innovative approach could support economic growth and should be encouraged. However, the challenge is whether it could move to a point where it creates instability. The Committee needs the judgment and the understanding to recognise what is genuine innovation, what can help support the wider economy and what developments pose a risk to the economy. This is about creating a stable platform where people are encouraged to be innovative and to adapt to compete and provide new ways of meeting the needs of our constituents rather than simply closing down any of the opportunities to do so.
As well as ensuring that the cost is not disproportionate to the benefits, it is important that the FPC should not be able to take action that would seriously damage the ability of the financial sector to contribute to growth in the medium to long term. The Bill, as drafted in new section 9E, subsection (4), and in new section 9C, prevents the FPC from acting where it will have a significant adverse impact on the capacity of the financial sector to contribute to the growth of the economy in the longer term. It is not a “have regard to” but a clear requirement that it should not do anything that will have a significant adverse effect on the Government’s wider macro-economic policy. It is a much tougher bind than the “have regard to” that was proposed at an earlier stage.
The hon. Member for Leeds North East talked about Equitable Life. The challenge of what to do with Equitable Life is not a role for the Financial Policy Committee looking at system–wide financial stability. However, when we discuss the PRA, which has a particular responsibility around the solvency of insurance companies and towards with-profits policyholders, we will see an increased focus on meeting the needs of policyholders and their reasonable expectations—a phrase that was used quite a lot in the court case. I am sure that we will come on to that at a later point.
My hon. Friend the Member for St Austell and Newquay talked about sunset clauses. He will be relieved to know that new section 9K allows orders to be published with a sunset clause, and that may be a tool that the FPC may wish to consider. He also raised the issue of “may”, which is in new section 9J. This raises an important point in relation to the exercise of the FPC’s powers. The question is whether it will be appropriate in all cases for the FPC to publish the orders that it is given to deliver financial stability. The assumption would be that the FPC will publish that information, but there may be times where it may not be in the public interest to publish those orders. While it is right to issue that order and to give direction about what should happen, there may be times when the matter is of such sensitivity to the wider economy that to make it known would be detrimental to financial stability. Although a degree of caution needs to be exercised, I believe that we should err on the side of openness and not on the side of keeping things quiet.
I entirely agree with the Minister’s analysis. There will be times when providing a running commentary on the state of the economy and the potential difficulties that we may be facing could be counter-productive. However, I totally agree that, wherever we can, we must err on the side of transparency.
I am grateful to my hon. Friend for her comments. One of the things that I am keen to pursue in financial regulation is a greater use of transparency as a tool for delivering better outcomes. My hon. Friend the Member for St Austell and Newquay returned to the point about debates on macro-prudential tools taking place on the Floor of the House. I have no aversion to that. The more opportunities there are for people with an interest to take part, the better. However, as in all such cases, it is a matter for the usual channels. The strong support for such debates, particularly from my right hon. Friend the Chancellor, sends a clear signal about how we want these tools to be debated. It is important. As we have said time and again in our last few sittings, consultation, engagement and transparency are absolutely vital. They are vital not only in terms of accountability. It is important to recognise that the FPC’s role in financial stability is not simply through the application of tools, but via the messages that it sends. That is important.
In conclusion, the clause is an important part of the Bill. The FPC will play a huge role in trying to tackle the causes of financial instability and trying to bring about the stability that is absolutely vital if we are to have a stable economy.
I will counsel the hon. Member for Nottingham East on how he votes. He has had sufficient experience in this House to make his own judgment, but by voting against the clause he sends a signal that the Labour party has not learnt any lessons from the tripartite system. It has not recognised the threats to financial stability and the way in which financial stability needs to be tackled in the new regulatory architecture. He would be setting his and his party’s face against significant reforms to the stability of the financial system. He has made his point eloquently in the debates on various amendments. We know exactly where he stands. He wants to see both more spaghetti and less spaghetti around the wiring. He wants more clarity and less clarity around the roles of these bodies. The clause is a fundamental piece of reform. To oppose it would send a signal that the Labour party has set its face against reform, which I do not think is where he or his right hon. Friend the shadow Chancellor are really at.
I do not wish to be misrepresented in any way. As I said in my speech on clause 3 stand part, I think there is a virtue in the financial stability objective and the Financial Policy Committee, but we in opposition need to put pressure on Ministers in Committee to listen to the detailed points of improvement that we want to see. Other than that, we can urge Ministers on Report, which is the last opportunity to vote on individual clauses. I have great expectations for this Minister on Report. I know that he is a considerate and thoughtful fellow. I hope that he will, on reflection, recognise the importance of some, if not all, of the amendments that we have tabled. I hope that he will introduce changes on Report and then we can hopefully all skip off into the sunset supporting one another on clause 3. However, as it stands, it would be invidious for us to abstain on the matter.
I want him to join us wholeheartedly and support the clause. That is not unusual. I remember times in opposition when I supported the previous Government on clauses in Bills when I thought it was the right thing to do. The reforms are important. We know exactly what the hon. Gentleman’s points of concern are, but I hope that they do not detract from the fact that this is a significant piece of reform that recognises and learns lessons from the financial crisis. To oppose it would send the wrong signal about the Labour party’s ability and willingness to embrace change.