Financial Services Bill

Of course the US is not creating a single regulator in the Federal Reserve, and as the Chancellor well knows, one of the major reasons for that is the enormous vested interests that stand behind the insurance regulator in New York, the derivatives regulator in Chicago and so on. The congressional obstacles to even attempting to come up with such a plan would be insurmountable. However, the US Government are proposing—and already facing quite a battle in Congress—to give the Federal Reserve prudential supervision powers over the largest and most systemically important banks. In the United States, of course, there are many thousands of banks, whereas in the United Kingdom there are many fewer than that. The US Administration have decided that the Federal Reserve needs to be involved in the prudential regulation of banks. I have never claimed that our changes will solve all the problems, but they will at least remove the pretty substantial problem of a dysfunctional regulatory arrangement in which it is not clear that there is speedy co-ordination of action. There are huge institutional jealousies and, as the Chancellor has no doubt experienced at first hand, there are dysfunctional relationships. We are trying to get this right, and we understand that the biggest challenge is the transition. We are therefore making a huge effort, and we have created a consultant board with people at a working level in the industry. I have the help of the former managing director for financial policy at the Treasury, who is directly helping me on devising the plan. I recently went to speak to the senior management of the FSA about it and, because of the constitutional arrangements, I am now in direct discussion with the Chancellor's officials about how to get it right. I am very conscious that we need to get the transition right and, in the end, the decision that I faced was twofold. The first question was whether I believed the change had to be made, and I came to the view that it did. The second was whether I should then keep my decision secret, as the previous shadow Chancellor who became Chancellor did. I thought that, in the end, that was part of the problem that we are dealing with today. There are some perfectly reasonable proposals in the Bill on the content of regulation. Having recovery and resolution plans, which are contained in clause 12, is a good idea. However, I spoke last week to the chairman of one of our largest banks, who has often made accurate observations about what is going on, and he made the point that the situation is already turning into a bureaucratic nightmare and that sight is being lost of what the living will concept should be about. There is a simple, clearly understood plan for dealing with a collapse of that particular institution, but he thinks that it will become an enormous bureaucratic operation, which will lose its clarity. We welcome the new powers in clause 13 to curtail market abuse and those in clause 14 to suspend and penalise individual market practitioners. I suspect that the issue is whether there is an appetite to use those powers. It is worth bearing in mind the observations of the former Director of Public Prosecutions, who said:""Our system for regulating markets and for prosecuting market crime is completely broken. In Britain, no one has any confidence that fraud in the banks will be prosecuted as crime."" I emphasise that the former Director of Public Prosecutions said that. We support the restriction on the provision of credit card cheques in clause 27, although I agree with the consumer group, Which?. It said last week that""we are disappointed that the Government has not taken further measures against irresponsible lending in the Bill."" One of the institutional changes that we shall make is creating a consumer protection agency that will bring together the consumer-regulating powers of the Financial Services Authority and the consumer-credit powers of the Office for Fair Trading in a single body. That will be a powerful new agency. The Chancellor briefed the press about the clauses on bonuses with enthusiasm. Perhaps he can assure us, as the Bill begins its passage—it is the first day of debate—that he is confident about the legality of clause 9. I cannot help noticing that the former Lord Chief Justice, Lord Woolf, has already started to ask questions about its legality. It would therefore be good—perhaps it could be done in Committee—to have some answers from the Government now rather than waiting for a year to pass, after which some court strikes down the provision. We need to address Lord Woolf's remarks and concerns. On bonuses more generally, we made our proposals about the coming year end. I simply remind the House that the Prime Minister promised the country that the days of the big bonuses are over. We wait and see whether that particular Prime ministerial promise will be fulfilled in the coming months. The Bill contains some perfectly reasonable clauses, but it does not address the central issues, which the Governor of the Bank of England asked it to tackle—first at the Mansion House, then in Edinburgh and last week at the Treasury Committee. He said that the Government's provisions in the two previous banking Bills and two White Papers amount to "little real reform". He challenges us all to address what he calls the""too big to fail issue"." He is right to challenge us about that. My view is that some of the riskiest investment banking activities, such as large-scale proprietary trading, do not sit easily with retail deposit taking. However, I also take the unashamedly pragmatic view that any structural solution to the problem should be enforced internationally. In the meantime, we should use capital rules to provide new safeguards.