I beg to move Amendment 15, in Clause 4, page 3, line 33, leave out from ‘order’ to end of line 35 and insert—

‘(a) would significantly enhance the stability of the UK financial system or provide other significant benefit to the economy of the United Kingdom, and

(b) would not pose a risk to the continuity of the provision in the United Kingdom of core services.’.

With this it will be convenient to discuss Amendment 16, in Clause 4, page 5, line 13, leave out from ‘circumstances’ to end of line 15 and insert—

‘(a) would significantly enhance the stability of the UK financial system or provide other significant benefit to the economy of the United Kingdom, and

(b) would not pose a risk to the continuity of the provision in the United Kingdom of core services.’.

I think we are making good progress this morning, Dr McCrea. We now come to Clause 4. For those following the twin tracks of the amendments to the Bill and the amendments suggested in the Parliamentary Commission on Banking Standards report, amendments 15 and 16 relate to Commission amendments E and F.

A number of amendments have been tabled to the clause, and I suspect it will take slightly more time to deal with than some others. If I can say this is a vegan, it is, in many ways, the meat of the Bill, and we must discuss many of the major changes to FSMA. The clause introduces the concept of ring-fenced retail banking and sets out the rules governing how it will work. Many hon. Members will want to make points about the whole principle of ring-fencing when we debate clause stand part. That theme has run through all the discussions on the Bill.

In the Bill, the Government propose that they should be able, in certain circumstances, to set out by order classes of financial institution that are to be exempted from the ring-fencing rules. The Parliamentary Commission on Banking Standards has voiced some concerns about those exemption arrangements. We discussed some of the issues involved on Second Reading, and the Committee gives us the opportunity to scrutinise them in more detail.

I want to put a number of points to the Minister, and I hope he will be able to respond in the same helpful and forward-looking way as he has on some of the other amendments. The Opposition see the logic of excluding smaller building societies, but proposed new section 142A(2)(b) makes provision for the Treasury to exempt other classes of bank, and those are as yet unspecified. Although the Government agreed with the Commission that the tests for exempted or prohibited activities needed to be tough, which is right and proper, the Bill needs to be amended to set out more clearly what those tests and thresholds look like. As the Commission said, merely saying that an exemption must not have a significant adverse effect on the continuity of core services is not adequate. Why should an exemption be made when there is any adverse effect, whether significant or not? Those are some of the issues we need to tease out in more detail.

Looking at Amendment 15, I have some sympathy with proposed new paragraph (b), but in proposed new paragraph (a), the hon. Lady suggests an incredibly huge burden of proof over whether an institution is enhancing the stability of the UK financial system. Will she explain how she would practically go about proving that? I cannot see how it will work in law.

I thank the hon. Gentleman for that Intervention. He was perhaps suggesting that I was suggesting that, but I remind hon. Members that the amendments come from the robust work of the Banking Commission. I support the amendments so that we can have further debate and discussion.

That is fine, but the hon. Lady is the one who tabled the amendments, so she should explain the reasons why.

I take the hon. Gentleman’s point on board, but it is important to recognise that the amendments came from recommendations of the Banking Commission. I shall say more about that.

The amendments specify that any exemptions must positively enhance the stability of the financial system and have proactive benefits for the economy more broadly. In our view, that is a welcome and forward-looking suggestion, which is why we tabled the amendments— to support the Banking Commission’s work and its recommendations. The proposal is positive because exempting a class of financial institution would supplement the condition that any caveat does not pose a risk to core service continuity, which moves us forward from some of the issues that we debated earlier.

In order to be helpful and make progress, will the Minister give us his view? Does he agree that exemptions need be made only if a positive benefit flows as a result? There are concerns, which I think have been raised already, that exemptions should not be made merely because small institutions find ring-fencing onerous, which is the question here. After all, before a series of people say that it was all the fault of the Labour Government, it is worth looking again at the history of  what happened in 2008-09 and at some of the smaller institutions that found themselves in difficulty during the global financial crisis.

We are grateful to the Banking Commission for its suggestions. I would like to hear what the Minister has to say before deciding whether it is appropriate to push the Amendment to a Division or simply allow them to act us probing amendments that help us to understand the Government’s intentions and help them to come back with an amendment at a later date.

I fully support the Government. I hope that they do not accept the Amendment. It would take us in completely the wrong direction. So as not to have unintended consequences, ring-fencing has to be treated extremely carefully. It is worth bearing in mind that had there been a ring fence prior to the financial crisis, it would not have stopped Northern Rock or HBOS from getting into trouble and it would not have allowed Barclays bank to get out of trouble. There must be an onus on the Government to say that somebody not being exempted would cause real harm.

Another point worth making is that although the Government are great, wise, noble and full of men and women of the finest intelligence—there are more brain cells in this Government than in any Government in the history of mankind—Governments none the less have an appalling record of picking winners in business. They have not been trying to pick winners in the financial sector, but they have tried to do it in other sectors. The positive requirement that the amendment would introduce would expect the Government to be able to work out to what extent an un-ring-fenced bank would work, in a way they failed to do with British Leyland, British Steel, the National Coal Board and so on.

I hesitate to ask my hon. Friend a question on what he is saying, but the Clause allows the Government to exempt a class of businesses, not an individual. I am sure that he would normally agree that for the Government to take such a power is slightly concerning. We are ring-fencing everything except for a whole class of things that we might choose not to at some point. Maybe his concern should be directed at whether that power is to the good.

Whether the power should exist at all is a good question, but we do not have an Amendment to get rid of the power altogether, though I suppose we could come to that argument on Clause stand part. The exemption for a particular class brings us to the point about trying to avoid a fundamental risk to the economy. We may want to exempt a class that could not under any circumstances be fundamental to the economy, or a class of international banks that would simply close down operations in this country if it was subject to a strict ring-fence clause. The flexibility that the Government are allowing themselves by requiring a negative test is much better than the proposal of a positive test, so I hope that the officials are sending the Minister notes saying “Resist, resist, resist”.

Given my performance on the previous Clause, the officials are probably going to wrestle me out of the room before I have the chance to respond. I agree  with my hon. Friend about the reason for being careful about the exercise of these provisions. In essence, it relates to the point that the hon. Member for Telford made. There are objectives to be balanced. We need to have the necessary safeguards that the Bill provides, but not gold-plate them so much that we prevent new banks, perhaps smaller banks, from coming in to provide competition to the incumbents by imposing on them regulatory burdens that will make no particular contribution to the stability of the system.

The Minister is making an important point. One of the unintended consequences of the Amendment may be to increase large banks’ market concentration and preclude the improvement of the competitive market that we are all seeking.

My hon. Friend is right. Later in the Bill we will consider some of the measures to promote further competition in banks. One of the things that we are concerned we do is ensure that the barriers to entry are as minimal as they can be, consistent with the protection that depositors and the financial systems need. That is the essential balance that we are discussing.

It is important to reflect, as the hon. Member for Nottingham East did, that the ring-fencing provisions in the Bill are not the only recommendations of Vickers on reforming the banking system. Not everything that Vickers has recommended is to be pursued through the ring-fencing route. The capital requirements of banks and the resolution plans that are required are measures that will helpfully put in place a raft of different arrangements to provide the greater certainty and reassurance that is needed.

The Vickers report, as members know, is written in a very readable way—in fact, I think it is a compelling read—and the Vickers Commission produced a good table going through examples of some of the failed banks of recent years and considering which of its recommendations would have prevented or mitigated the failure of those different banks. Ring-fencing applies particularly to the bigger banks, rather than to the small ones which, nevertheless, can cause problems in that regard. It is for that reason that we have introduced this de minimis Clause, which the Commission itself has agreed with.

The amendments pertain to the power to make exemptions, which is being given to the Treasury. Amendment 15 is about the definition of the ring-fence body, and amendment 16 is about the excluded activity of dealing in investments as principal. The case for making an exemption for small banks is clear. There are fixed costs of ring-fencing, which will be proportionately greater for smaller banks than for larger ones. Without an exemption, those higher costs could place smaller banks at a comparative disadvantage, and therefore at a competitive disadvantage, compared with their larger rivals. Meanwhile, the benefits to financial stability of requiring small banks to ring-fence are obviously quite limited, because the failure of a small bank is less likely to have systemic consequences and more likely to be manageable through these other arrangements by the authorities.

Indeed, as the Parliamentary Commission acknowledged, a de minimis exemption from ring-fencing for smaller deposit-taking institutions represents a sensible compromise between maintaining financial stability and encouraging new entrants into the banking industry. The Government propose to set the threshold for the exemption at £25 billion of core deposits. As the Committee will have seen from the draft statutory instrument that I made available on 7 March, that will be subject to further scrutiny in due course.

The PCBS recommended that the factors that must be considered in creating an exemption should be in the Bill, and that the impact on competition should be explicitly included among those factors. We agree with the PCBS that clarity over the circumstances in which an exemption may be created or varied in future is important, to give as much certainty as possible about how the powers in the Bill will be used.

The Minister is referring to some of the issues that were in the Government’s response to some of the Banking Commission’s work. That response expressed particular concern about the tests for exemptions under proposed new sections 142A(2)(b) and 142D(2) and said that the Government would consider further amendments to ensure that the tests deliver the policy intention. Can he explain what deliberation there has been? Is it still his intention to bring forward further amendments?

Yes, we will keep under close scrutiny the provisions that are required. We started with the minimal requirements, which I think is the right approach to take, and we have sought to provide clarity in the Bill. As the hon. Lady mentioned, we made clear in the Government’s response to the PCBS the conditions we think should be met before an exemption is created. New section 142A(3) requires that before the Treasury creates an exemption it must be satisfied that doing so would not be likely to have a significant adverse effect on the continuity of provision of essential core services, which under the current definition would be access to deposits and the like. Because of that requirement, the Amendment is unnecessary. The safeguard is already there.

There is a danger that the amendment could prevent the Treasury’s ability to balance the need for financial stability against economic considerations such as competition. The and/or formulation implies that the possibility of judging the relative importance of those things is taken away. The amendment would require the Treasury to be satisfied that an exemption would either actively advance financial stability or provide some significant economic benefit. It is contrary to the logic of requiring the balance between those forces to be met.

Similarly, as proposed, the requirement would be that an exemption would actively promote financial stability rather than doing no harm to it. We should reflect on the fact that that is quite an increase in the height of the test. The provisions of the Bill are intended to ensure that banks are resolvable and that core services continue to be provided. However, if the test is to promote financial stability actively, demonstrating that might be quite a high hurdle for a small bank to overcome.

I hear what the Minister says, but I refer him back to the wording of the Bill, which states that:

“An order under subsection (2)(b) may be made in relation to a class of UK institution only if the Treasury are of the opinion that the exemption conferred by the order would not be likely to have a significant adverse effect on the continuity of the provision in the United Kingdom of core services.”

The Banking Commission raised the issue of what a significant adverse effect is, how that would be decided and how that process would be gone through. Will the Minister explain the difference between an adverse effect and the point at which it is scaled up to being significant enough for the Treasury to have to act under this type of order?

We have put the power in the Bill, and that is right; it was required by the Commission. When it comes to the exercise of that power, the de minimis threshold will be set in secondary legislation. That is the place where the proposed use of the power has to be made. That decision will be vested with Ministers in the Treasury, and there will, of course, be parliamentary scrutiny of the order that would implement that. That is the test there.

The Amendment would increase the height of the hurdle, going beyond the Hippocratic principle of doing no harm to a higher test of positively doing good. I think that is unnecessary. Setting the principles for the future exercise of the de minimis power, which have to be justified before the House when it comes to it, is the right balance to strike between the objectives expressed by both sides of the House—of allowing and encouraging banks to enter the financial system, while protecting financial stability.

The Minister is being generous in dealing with these points, but it is important to have them on the record. Will he again pick up the point, made earlier by the hon. Member for Amber Valley, about the difference between an individual institution and a class of institutions? What type or class of institution does he have in mind?

Let me give an example. There could be a class of small banks, which we often think of as challenger banks. Rather than having institution-by-institution exemptions, it may be possible to define them in such a way. We should also reflect on our hope that, if the Bill becomes an Act of Parliament, it will endure for some time.

In the past, this country has had financial innovation that led to institutions coming into existence that, by definition, were not there before. In future years, there may be a new set of bodies, just as we have had a building society movement that has been very important to financial services in this country. Through the entry of new institutions, different types of bodies may emerge and cohere over time into a class that can be identified as such. Subject to statutory instruments being brought before the House to exempt such classes of institutions, to take provision for the ability to do that seems a sensible piece of future-proofing for a world in which institutions and the character of institutions may change.

Again, it is important to emphasise that the Bill’s provisions do not themselves create the exemption, but empower the House and indeed Parliament to consider it in future.

I gently say to the Minister that we have a tradition of an annual Finance Bill; if a new entrant was greatly attractive to the UK economy, we would have an annual chance to change the Bill to allow them without needing such a broad secondary power. People are concerned about what exactly could be done with that power, and that is perhaps not quite what Parliament thinks it is doing at the moment.

It is important to have the essential architecture of the future regulation of financial services in the Bill. The Bill sets out the provisions for ring-fencing; addressing in it the possibility that individual institutions and institutions by size may be exempted, and also that potential new classes of institution may be exempted, makes the provisions self-contained and is the right way to proceed.

The Parliamentary Commission was pretty exacting in its recommendations for parliamentary scrutiny of various aspects of the Bill, and we have been able to agree with it on a number of matters. The Commission agreed with the point that it is appropriate to have details for these matters brought forward in secondary legislation in future, because the area is one that is subject to change. It is also important to bear in mind that when it comes to a future class that might be exempted from being ring-fenced, the same logic and criteria in terms of their limited impact on the stability of financial services will apply to the decision to exclude that class. There will not be a blanket get-out for any institution of that type.

I do not want to go back to previous Bills, but there have been concerns before, which I think are reflected here, about giving fairly wide powers to the Treasury to do things by secondary legislation without being entirely clear about what consultation and what processes will come into play. The Minister has given us assurances on that, but, for the record, does he intend those statutory instruments to be brought forward under the negative or affirmative procedure, given that such instruments could be very significant?

The hon. Lady is right that this is a significant area. The Government’s intention is to follow the recommendations of the Delegated Powers Committee for each measure.

Relatively close to the beginning of the Committee’s work as we are, this is an appropriate point to reflect on the fact that the Bill is designed to establish the essential architecture of regulation. There is some recognition of and support for the fact that getting that architecture in place is the business before us; the details of how the powers will be exercised will be subject to debate when we come to the statutory instruments.

It is absolutely the Government’s intention that those statutory instruments, which are by no means a trivial matter, should be subject to the fullest possible debate, and in each case, as I say, we will follow the views of the Delegated Powers Committee. [Interruption.] In terms  of the exercise of this particular power, inspiration has just struck me that it will be subject to the affirmative procedure, so it will enjoy the scrutiny that that particular procedure allows.

The Minister has referred to the fact that the Bill’s provisions are very much designed to future-proof in not too exacting a way, without trying to over-prescribe or over-predict what may happen. Will he say how far the possible changing face and form of what might be termed “supermarket banking” is in the Treasury’s thinking in this regard?

Many supermarkets and retail chains offering so-called banking services do so in partnership and are fronting for other established, conventional banks, but some are doing so on their own, which may become increasingly common. That was seen to be allowed for specifically in the Financial Services Act 2012. How far is the Treasury thinking about the new forms and set-ups of banking that might be established?

We are keen to have new entrants to the sector. We know that some supermarkets have made some steps in that direction and it is important to maintain an openness to new entry. We need to reflect on the types of institutions that might come in.

Some of the new entrants are unlikely to want to engage in the kind of universal banking—investment as well as retail—that ring-fencing will, because of the abuse that we have seen, provide safeguards against. There are other provisions, not least the powers that the PRA and FCA have, to ensure that even core retail-focused banks operate in a way that is safe for their depositors; that is what we want to see.

The same logic would apply to new entrants of the type that the hon. Gentleman described as it would for any other bank: an exemption can happen only if it would not harm the requirement that there should be the continuity of core services. That test applies to all entrants, no matter what their character.

We have had a useful discussion to consider this group of amendments. We brought them forward because they were recommended in the Banking Commission report. I was struck by the fact that—I have asked the Minister about this—in the Government’s response to the recommendations, they said that they

“will consider further amendments to ensure that the tests deliver the policy intention.”

So the Government and the Minister seem to be in a thinking mode and are prepared to consider further amendments, and that is why it is important to tease out issues on the amendments.

I did not want to reopen the debate we had in Committee on the previous Financial Services Bill on whether a growth agenda should be built into the requirements of legislation, or whether it is enough simply not to harm the economy. However, the principles here are similar in terms of the Banking Commission’s report: should the legislation be constructed in such a way to ensure that the actions encourage a positive impact on the economy, or is it simply about trying to avoid damage?

I was particularly interested in the definition of whether the Treasury has the decision on something that would “adversely affect” or have a “significant adverse effect”. That may seem like semantics, but it is quite important, as it is also to understand what the process would be and what Ministers have in mind.

I was heartened to hear the Minister—when inspiration struck him—give confirmation that an order-making power would be subject to the affirmative process, because something as significant as looking at exempting a whole class of banking or financial institutions ought to be subject to proper parliamentary scrutiny in an open, detailed process. That confirmation is helpful.

I hope that the Minister will consider the points raised during the course of the discussion. I will not push the Amendment to a vote, but a number of points have been made that we may wish to come back to on implementing the spirit of the Commission’s report as well as improving the legislation. I am sure that we will have further discussions on that in the next set of the amendments. In light of that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move Amendment 26, in Clause 4, page 3, line 35, at end insert—

‘(3A) In making an order under subsection (2)(b) which—

(a) provides an exemption for UK institutions holding deposits below a specified amount, or

(b) varies the amount previously specified for the purposes of such an exemption, the Treasury must aim to enhance competition among UK institutions which have a Part 4A permission relating to one or more core activities (in particular by having regard to the likely effect on the number of UK institutions applying for or obtaining such a permission for the first time).’.

Amendment 26 relates to Commission amendment P, for those following this in the report. It talks about the impact of de minimis exemption from ring-fencing rules on competition in the sector.

I will explain a couple of points and the context of the amendment. When and if Ministers decide, under proposed new section 142A(2)(b) of FSMA, that a set of banking institutions should be exempted from the ring fence, that will clearly have an impact on the operation of the financial services market and the choices presented to consumers.

We discussed previously whether we should be looking for the positives or simply trying to avoid the negatives. However, the reality is that—this is why I was so keen to tease out what the process would be and whether it would be affirmative—whenever the exemptions from ring-fencing are used, there will be such an impact. We are trying to tease that out in some more detail with the amendment.

We have already heard about issues around competition in the banking sector, and I am sure that other hon. Members will want to speak about that. We know that competition is already limited. The big five banks—HSBC, Barclays, RBS, Lloyds and Santander—dominate the current account, mortgage and loan markets. One reason why the banking system needs reform is to tackle that near-monopoly scenario, which can have an impact on those seeking credit and those who want a return on  their savings and investments. This discussion is timely, given what is happening in the wider world at the moment; of course, we discussed much of this on Second Reading.

The Parliamentary Commission on Banking Standards suggests that the Bill needs to ensure that due consideration is given to the impact of the de minimis exemption rule on the market and choice for consumers. Once again, if we look at the Government’s responses to the Commission, they have indicated that they accept that in principle and may want to bring forward amendments—perhaps the Minister will say something on that—but it is important that we test the issue in Committee in some further detail.

I want to put it on the record and stress that we want new entrants in the banking sector. It may be that the de minimis exemption rule needs to accommodate all the hurdles and obstacles that can prevent challengers from coming on to the scene. We had some reference to that during the previous debate.

Without wishing to jump ahead to matters that we will discuss at a later stage, and assuring the Government Whips that we do want to reach our new clauses, we have already tabled a new clause that would require a review to be conducted into the obstacles and issues preventing new entrants into the financial services retail market. When we reach that point, we will suggest that it should be a priority for the Treasury.

Amendment 26, requiring the de minimis exemption arrangements to aim for enhanced competition, is a positive way to view the impact of ring-fencing on the nascent banking entities wishing to enter the market. I appreciate that time is short in this sitting, but I hope the Minister will be able to elaborate on Government plans to start up banking institutions, to get more people into the market and, of course, to encourage new mutuals. We have heard much discussion and comment in the past about that, and there is at least apparently tacit support from the Government for the mutual sector, although we are yet to see exactly how that translates into practice, particularly in terms of new entrants.

I would like to hear from the Minister in the time available not only about his views on the amendment, but also about the context of what we need to do get new entrants into the banking sector in a way that will give better deals and security for customers. Several hon. Members mentioned that on Second Reading and in Committee this morning.

Members of the public looking on, and those moved to read the record of the Committee’s proceedings word by word afterwards—I am sure at least one or two people will do that—will want to see not only that the Opposition have proposed the amendments suggested by the Banking Commission, but what the Government intend to do about them.

My hon. Friend is making a strong point about the importance of mutuals, co-operatives and other banks coming into the sector. Like me, she has no doubt reflected on the situation in other countries—particularly in Germany and Canada, where such organisations are much stronger. That underlines why we need to move towards such a system to allow new entrants to come in and create a much stronger, more diverse banking sector.

My hon. Friend is right. We must put our house in order in respect of the banking sector, and I come back to the issue of the culture.

I refer back to the comments made earlier by my hon. Friend the Member for Nottingham East. The public will not be convinced that things are moving on until they see a change in the culture of banking. Issues continue to be raised with all hon. Members about bonuses and people perceive many, although not all, of those at the top of the banking sector as being out of touch with what the public want.

We want to ensure that the Government have not only fully understood that, but actively undertaken work to ensure that new entrants can come into the process and, as my hon. Friend the Member for Cardiff South and Penarth suggested, to encourage the setting up of new mutuals. It would not be appropriate for me to go into all the international examples, but there are opportunities for co-operative and mutual solutions in the banking sector. We could also look more broadly at how not only new entrants but existing small institutions can be supported.

I would be happy to hear the Minister’s view of the amendments and what plans the Government have to encourage new entrants, support consumers and ensure that we make the changes so desperately needed to the culture of banking.

That is a lot to fit into two minutes, but I dare say we will have a chance after the break to cover the points that have been raised.

I find myself back in my previous mode of being tempted by the hon. Lady’s Amendment, although it is fair to say that she could have given her speech, commendable though it was, in Opposition to her previous amendments. Nevertheless, she has arrived at the right point: we should strengthen competition in the banking sector, and I hope that one theme of this Committee, and indeed of the Bill’s passage through both Houses, is that we will make it unambiguously clear in what we say and what we put in the Bill that new entrants should see the British banking industry as an attractive place to compete and put some of the existing institutions under pressure. I therefore have no difficulty in accepting the Parliamentary Commission’s pressure and encouragement in that direction.

Amendment 26 would make it explicit in the Bill that the Treasury should be mindful of competition in banking when creating or varying the exemption from the ring fence for small banks. As I said, the goal of promoting competition is central to the logic of a small banks exemption; that is why we had the debate this morning about the de minimis level. When setting an exemption, the Treasury would therefore naturally have to consider the impact on competition. As the Government made clear in their first response to the PCBS, we accept the case for including competition among the conditions for setting exemptions from the ring fence in the Bill.

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

Adjourned till this day at Two o’clock.