Banking Bill

I welcome the Bill, of course, but I express the normal caution about consensual legislation. As we all appear to agree on the principles, there is a danger of inadequate debate and an inadequate focus on the alternative views about how to approach banking reform. Unusually, I will therefore say that I have already volunteered to my Whip that I am prepared to sit on the Public Bill Committee. However, that Committee might need to be run somewhat unusually. The clause stand part process, whereby we discuss the general arguments in each clause, may have to be approached rather more permissively than usual. I also hope that we will have a full opportunity to hear from people outside the Committee and reflect carefully on what we hear. I expect that the various lobbying groups of interested parties will want to play a full part in the process leading to the production of the final Act, and I hope that we will have the opportunity of a rather more creative process than the normal, rather dumb Committee format through which I have sat with pain at various times in the past 11 years. I wish first to focus on the stage before special resolutions in the regime that is being established in the Bill. The right hon. Member for Wokingham (Mr. Redwood) raised the important question of what we should do to prevent banks from getting to the point of facing the extreme measures in the Bill. First, we need a much clearer definition of the FSA's function in that process. There was a useful discussion in the Treasury Committee about the concept of green, amber and red lights. A red light would mean when a bank was in special resolution and an amber light would be when there was anxiety about certain aspects of ongoing business that needed to be focused on and remedied. We need a clearer understanding of how that heightened supervision process will work. Secondly, we need a clear focus on the communication channels between the FSA and a bank. The FSA will need to highlight to the bank issues of potential instability that are found in the heightened supervision process. Thirdly, there must obviously be explicit expectations of corporate action and how a company will remedy something that the FSA has identified as inadequate. Fourthly, there is the area of danger that detained the Select Committee. What role should there be, if any, for public communication about the process that a bank is going through? That is an extraordinarily awkward matter. There is a public duty to give investors and depositors at least some information that could be material to their decision whether to continue their association with a company, but there is also the obvious desire not to make that company's circumstances a great deal worse through the public disclosure of difficulties. It would be helpful to have a much sharper focus on the step that immediately precedes special resolutions. We need clarity of accountability about the trigger. The Bill places the job in the hands of the FSA, but with an obligation to communicate with the other elements of the tripartite authority in that process. I agree with the view that one body must take the decision; I do not like placing accountability in the hands of committees very much. One body ought to be clearly accountable for pulling the trigger on special resolution, but in the accompanying papers that I hope will be produced to allow the Public Bill Committee to consider the Bill in depth we need to design some idea of exactly how the trigger may operate and how the communication channels will be kept open. We must bear in mind the Bank's absolute responsibility for financial stability, which is defined in the Bill—that is welcome—and the risk of regulatory forbearance. Those of us who read the FSA's internal audit report on Northern Rock would certainly hesitate to give a full-hearted endorsement of the FSA's powers in this matter. The risk of regulatory forbearance at least means that other people should be allowed to say something. He has now left the Chamber, but my right hon. Friend the Member for West Dunbartonshire (John McFall), the Chair of the Treasury Committee, made valuable points about that. I do not want to repeat what my right hon. Friend said about the financial stability committee's function, but I share the view that the Bill presents a confusing picture of exactly what the committee will be supposed to do. Critically, will it be an Executive body, as the Monetary Policy Committee effectively is—the MPC has the power to raise and lower interest rates in our country—or is it a non-Executive body that is in place to advise the Governor in some respect? If so, how appropriate is it that the Governor will chair it? That issue needs to be developed, so that we have a clear understanding of how decisions will be made in that body and what it is responsible for. Without wishing to complain about individuals, all on the Treasury Committee had doubts about whether the court, in its current form and with its current membership, provides the appropriate group of people to populate the financial stability committee. Therefore, welcome suggestions have been made for radical reform of the court's numbers and, implicitly, its membership. My view is that the committee requires a membership that is external to the UK, because it would be inappropriate for key players in the UK marketplace to be members of the financial stability committee. We can usefully gain from experience elsewhere. The Bank has its own committee, one of whose members is an ex-governor of a Swedish bank, who is almost certainly providing insights into the Scandinavian banking crisis of about 20 years ago. Having an external reference point is a useful model. I find, as others do, the Chancellor's reference to the comparison with the MPC inappropriate, given that the models are obviously, as I have said, completely different. Finally, let me turn to the role of the Financial Services Compensation Scheme. I have said in this Chamber that I share some anxiety at politicians freeloading into taxpayer guarantees of depositors. I share the concern raised in an intervention on the hon. Member for Twickenham (Dr. Cable) about the moral hazard issues involved. We need to educate our citizens about their risks and responsibilities in making deposits. One thing that came through to me loud and clear in the discussion of the Northern Rock crisis was that few people had the faintest idea what level of guarantee the FSCS applied to deposits anyway. There should be a clear obligation that when one makes a deposit in a financial institution, one is crystal clear about both the level of guarantee provided by the FSCS and the terms under which it may operate. Thus, any discussion about late payments and how quickly one would get one's money back should a circumstances arise should also be explicit. Secondly, if the coverage falls outside the FSCS in some way—for example, if one chooses to invest in an Icelandic bank through a British outlet—it should be crystal clear to the depositor what risk they are undertaking, so that they are well informed. I found shameful the absence of any proper information that banks were obliged to give to depositors as to the remaining risk, which we hope is very low, that lies with them when they agree to make a deposit. There should also be clear guidelines on the speed at which a deposit is paid back to the depositor. All of us on the Treasury Committee found unpersuasive the banking industry's arguments as to the difficulties that it would have in resolving some of the issues associated with data—for example, the number of accounts that people might hold and the conflicts between them. A clear target should be set. I shall conclude by making three brief remarks. First, unlike in the case of the urgent actions that we have taken recently, we must ensure that the actions that we take in our legislation and regulation give the correct motivations for beneficial actions; that is the moral hazard argument. I remain a firm adherent to that, convenient though it may be for politicians to resile from it. We cannot seek to protect our citizens utterly from every aspect of their decision making—we sometimes give the impression that we can do so, and that is an extraordinarily dangerous impression to give. The design of the supervision before a special resolution regime must be focused on that goal, but so must the reform of the regulatory framework that we shall discuss in due course. Secondly, we must prepare ourselves for a new world of much greater caution, less innovation, lower lending and lower levels of growth. Sometimes those who have heralded their prescience about the problems we face have perhaps not grasped the purchase that we had from the risks that we had taken; there was a period of extraordinary above-average growth across virtually the whole world. In these new circumstances, we must prepare ourselves for much sterner times. Innovations will be tested much more robustly before being accepted and we may well find it harder to employ all our citizens. I am delighted with the actions that the Government have taken, but I am certainly not of the view that with one leap we are free from the difficulties we face—much lies ahead of us. Thirdly, we must carefully consider the design of the boundaries between the state and the financial sector, given this new role of active ownership to which we have committed ourselves. Obvious issues of competition must be addressed, and there are difficulties in defining what the state, which has unusual advantages in the marketplace, should be permitted to do. We are working those out by the seat of our pants. We have to work harder on the definitions, because we will have this role for some years to come. We need robust ideas, in principle, of how those definitions should work, and they should then be designed, in practice, with the sector. I share the view that the industry is crucial to the future of our country. We risk designing away one of the critical lifebloods of the UK economy—that would be an easy reaction. The Bill does not do that, but I have heard siren voices from elsewhere that would certainly achieve it. We should seek to avoid that risk.