Financial Services Bill

I will come to that shortly, but I should like to do so in what I think is a logical order. Following on from the exchanges over the past five or ten minutes or so, I have to say that it is important to formalise the relationship between, especially, the Bank and the FSA as well as the Treasury, so that we can ensure effective co-ordination. The council's draft terms of reference, which we have published today, set out the roles for each member institution. Under the Banking Act 2009, we formalised and strengthened the role of the Bank of England in protecting financial stability. We provided the Bank with a statutory objective of financial stability—it did not have that statutory objective until this year—and a lead role in dealing with failing banks under a special resolution regime. Alongside the Bank's responsibilities for monetary policy, liquidity, the oversight of inter-bank payment systems and its role in monitoring the financial system as a whole, that will give the Bank an enhanced supervisory role, as well as a role in assessing a firm's resolution plans—living wills, as they are commonly known—because it should also have that responsibility. The FSA, which is the single regulator, brings into one place the work of up to nine different regulatory agencies that were in place 12 years ago. As I told the hon. Member for Tatton, other countries have multiple regulators. For example, Hong Kong, China and India have separate regulators for banking, insurance and securities. The US Administration are trying to rationalise a highly fragmented regulatory model. Indeed, they are proposing a council that sits on top of the regulators because, for various reasons, they think that it will take too long to try to bring together the other regulators, even if they had congressional agreement to do so. Of course, in America many of those responsibilities are devolved to individual states, thus making the regulatory regime very complex indeed. By contrast, we have one regulator, and we are building on the advantages of the single regulator by enhancing the FSA's objectives and powers, to ensure that when conducting its supervision of individual banks, it takes into account the systemic risk that may be faced. That new macro-prudential element will enhance its ability to monitor, assess and mitigate risks to the country's financial stability. Of course, that sits alongside its new duties in relation to remuneration and living wills, to which I will return shortly. As the hon. Member for Croydon, Central (Mr. Pelling) has said, this crisis has also demonstrated the need to ensure that we have international co-operation, and we need to make sure that the Bank of England and the FSA work closely together on that. Clauses 1 to 4 will set up the new Council for Financial Stability, which will be responsible for considering emerging risks to the UK's financial stability and, as he has said, to the global financial system and for ensuring that we can co-ordinate the response by our authorities. The council will comprise the Governor of the Bank of England, the chair of the FSA and myself. It can draw on external expertise if necessary, but it will put that relationship on to a more formal, transparent and accountable basis. For the past 10 or so years, the relationship has been governed by a memorandum of understanding. I do not think that that is sufficient; it should formal, based on statute, transparent and accountable. The authorities can then be held to account, and we can have greater parliamentary scrutiny in the House and the other place, as we set out in clause 3. Even though I suspect that the Bill will be going through the House for some weeks yet, we will ensure that the council is established beforehand, so that we can see that it is working and publish its minutes, as proposed. Clause 5, 7 and 8 will strengthen the FSA's objectives, by providing it with an explicit financial stability objective. When conducting its supervision of individual banks, it needs to take into account overall systemic risk. As I said, and as hon. Members have mentioned, the crisis has also shown that financial stability is not contained within national boundaries. We need a strong domestic regulatory system, but we also need co-operation. Clause 8 will formalise the FSA's responsibility to work internationally and to promote effective international regulation. It has been doing that already, particularly in relation to the colleges of regulators, which have been established over the past couple of years, to ensure that some of the larger institutions that span several countries are monitored by individual regulators, so that they can see what is going on and understand the risks to which they might be exposed. The hon. Member for Tatton asked about Jacques de Larosière's report, which will be on the Finance Ministers' agenda when we meet in Brussels on Wednesday. The European Union is trying to establish a new European systemic risk board, which will issue non-binding risk warnings and make recommendations. I believe that that is right and entirely sensible, and we will support it. Of course, that must go hand in hand with some more detailed, micro-prudential proposals on the European supervisory authorities, of which three are proposed to deal with banking securities, insurance and occupational pensions. They will have enhanced roles, but it is very important that we recognise that some things need to be done at a Europe-wide level. That makes a lot of sense to us. For example, some of our problems with Icelandic authorities would have been more easily resolved if they had come within a regime that allowed us to get hold of the situation before it reached a critical stage. There is a lot to be said for that, but it is important that certain things remain with us because, at the end of the day in any crisis, only national Governments have the resources if a rescue needs to be mounted. That is why one of our red lines is that we cannot have a situation where any of those new authorities can impinge in any way on the fiscal responsibility of member states. It is important not only that that is clearly stated—I believe that it will be—but that the mechanisms in place ensure in reality that the responsibility for any fiscal action lies with member states. That is how it should be; it is not something that can be effected even by the Commission or any of its agencies. It is important that we get right the regime for who would have the power to declare an emergency. At the end of the day, that must be a matter for the European Council—the people who are elected—rather than for an agency or the Commission. It is also important that direct powers over firms are curtailed, so that such powers exist only where absolutely needed. Individual regulation must be a matter for the member state and for the Government concerned.