City of London

My hon. Friend makes a good suggestion. There was a disconnect between the directors and the boys in the engine room: each seemed to think that the other knew what they were doing. I just wonder if that disconnect was not a cause of the crisis. There are some regulatory issues that we need to address. Clearly, the capital requirements in place for banks had not been fully thought through. The capital requirements under Basle II encouraged procyclicality in lending and they encouraged banks to lend more in the good times. The Spanish banking system had countercyclical capital and it has come through in a much more robust state than the UK banking system and other banking systems. Obviously, we need to get the capital requirements right. We also need to ensure that there is a proper matching of capital to risk. Certain banks were able to make some quite risky investments and engage in some quite risky trading activities because they had a strong retail base. We should ensure that capital is much more closely aligned to the level of risk in trading activities and capital should also reflect the riskiness of bonus structures. If remuneration structures lead to a certain type of activity, capital should match those structures too. The regulatory structure in the UK needs reform. We have argued that there should be a "twin peaks" approach, whereby the Bank of England would act as a prudential supervisor and a new consumer protection agency would act as a consumer champion. It is interesting to note that France—a country with which we do not necessarily see eye to eye on these issues—is looking at moving to a "twin peaks" approach, with the Banque du France, France's central bank, acting as a prudential supervisor, just as in the Netherlands and Australia there is a separate prudential regulator and a separate conduct of business regulator. That structure is important as it would reinforce the importance of prudential supervision. Our existing regulatory regime, whereby the FSA acts as the prudential regulator and is also responsible for the conduct of business, rather meant that the prudential aspect got lost in recent years, because the accountability of the regulator drove it towards more conduct of business regulation. Our reforms would tackle that problem by ensuring that the regulatory structure properly addresses both prudential supervision and the conduct of business rules that really regulate the way in which consumers buy products from insurers, banks and others, and receive advice. There is no magic bullet that will solve the problem, only a series of interventions that we need to make. We need to get the capital provisions right and we need to get the regulatory structure right. However, we also need to ensure that the financial services sector sees itself as an integral part of the UK economy. It is only by getting those structures right and by building up that trust that once again people be content to see the City continuing to grow. People talk about "the imbalance" and say that the financial services sector is too big. The answer is not to shrink that sector, but to grow other parts of the economy. That is the message that we need to think about when we look at the impact of the sector on the UK as a whole.