Financial Services Bill

My objection was to existing contracts being torn up. It was the retrospection that I was objecting to. Ultimately, any regulatory authority should perhaps have quite significant and draconian powers along the lines envisaged elsewhere in the Bill, but my concern is about the longer-term influence of the changes on our stability and competitiveness. The same principle applies to many other proposals in the Bill that would penalise the financial services in the UK. Unless it were imposed on a global scale, any initiative designed to curb bonus payments, for example, would simply drive from our shores the brightest and best in this important industry. I do not say that as a threat, because I strongly believe that no Government should be blackmailed by those in any industry into serving its particular interests above all others. However, I cannot help but conclude that in this Bill, the Government are simply grandstanding rather than introducing measures that will really be effective and minimise risk. It is easier to focus on a single issue such as bonuses than to examine major failings elsewhere. Failings in risk modelling, credit ratings, macro-economic management and elements of regulatory oversight, as well as a number of other contributory factors, created the conditions in which excessive profits were made. As my hon. Friend the Member for Henley (John Howell) said, huge bonuses were the end product of a dysfunctional financial system, not the underlying cause of them. Another suggestion is that far more of any remuneration package should be in long-term incentives rather than cash salary. Superficially that is an attractive proposition, but we should not forget that it had very little effect on the fate of either Lehman Brothers or Bear Stearns, two of the banks that have collapsed most spectacularly over the past two years. Both those organisations were famous for rewarding successful employees with large amounts of stock, which either by law or by internal practice proved unmarketable for a considerable period, yet that had little impact on the ultimate demise of both. The City remains concerned that seeking short-term solutions on bonuses to quell public and media demands could bring down on the industry a raft of new regulations designed more to punish that anything else. It should also be remembered that high remuneration, be it in salary or in bonus, is not such an emotive issue outside Europe. We need to recognise that our regulation and tax policies have to take account of those prevailing in other countries that pose a competitive threat. Let us not forget the importance of maintaining our focus on the issue that will dictate our economic health for years to come: the colossal sums of taxpayers' money and the immense Government guarantees that continue to underpin the entire financial system. The imperative to start repaying at the earliest opportunity cannot be overstated, yet commercial lending is unlikely to return to anything like normal until the second half of 2011 as toxic assets are gradually removed from banks' balance sheets. I therefore believe that the credit crunch will be with small and medium-sized businesses for some time to come. To extend beyond £200 billion of quantitative easing puts our medium-term economic prospects at great risk. When can the Bank of England and the Treasury call time on their short-term fix? Amid the euphoria of a narrative that suggests that recovery is well within sight, I fear that we are a considerable way from being out of the woods. The root causes of the global imbalances brought about by the west's financial calamity were the credit/debt bubble, along with the east's aggressive desire to build market share in global trade. China's policy of suppressing its currency to soak up the west's debt in the bond markets further helped hold down interest rates. Yet the resultant over-investment, excess capacity and vast structural debt in the west remains in place. The underlying causes of the credit crunch have not gone away. Notwithstanding the ruinously expensive bail-outs and capital raising, the losses incurred by banks are probably still not even halfway recovered. Indeed, I fear that the Government's insurance of toxic assets has provided a dangerously false dawn. There is no incentive—or currently even a requirement—for banks to crystallise non-performing loans; they could not then ignore the losses on their balance sheet. Lloyds banking group, for example, with a huge property portfolio, courtesy of its ill-starred merger just over a year ago with HBOS, sits on an enormous pile of assets worth a fraction of their book value at their boom-time purchase. The collapse in public confidence in financial institutions and their more esoteric products has met with a strong-armed, sometimes opportunistic political response. Put simply, we need to ensure that management in banks can summarise in simple terms the financial products they wish to sell. To that extent, I agree with the hon. Member for Halton (Derek Twigg)—if a derivatives product cannot be explained on two sides of A4, frankly it should not be marketed. Naturally an unworkably complicated regulatory framework risks seriously hitting the future viability and profitability of the entire industry. Instead, the well-being of the institutions in the sector—not to mention its customers—depends on the development of a workable regulatory system, based on commercial principles, which will pass muster for decades to come. How else can we persuade those in their 20s to commence a lifetime of prudent saving as a prelude to a financially comfortable retirement? It all comes down to trust. That is an ingredient that no amount of regulation or consumer protection will rapidly restore. Alongside the promotion of open competition and an end to the heresy that a bank might be too big or interconnected to fail, the best a Government can do is advance a culture of mutuality. We need to inculcate a sense of accountability between individual policyholders and a diverse range of financial institutions. For that reason, I support the potential for Northern Rock to revert to building society status once it has been stabilised financially. Promotion of as diverse as possible a financial services ecosystem should be a goal of future policy. Ethical values should come from individuals rather than resulting from a hostility which, inevitably, will be mounted against any all-powerful regulator. We should not expect too much from regulation. The buck must stop with all of us as consumers. Regulation creates barriers to entry and promotes the large and bureaucratic over the small and innovative. A competitive free market can be promoted only by the re-establishment of less concentration among all institutions in the financial sphere. Ultimately, that means allowing companies—even huge players like Lehman Brothers—to fail. The interests of depositors and retail investors should be protected from such an eventuality, but not the bondholders. Protection of the latter is one reason for the problem not going away any time soon. A healthy, competitive and innovative capitalist system requires risk-taking, which is why shareholders and bondholders should not naturally expect such blanket protection. The trouble is that too much of the current debate on banking regulation, as shown by the Bill, focuses on how we should have stopped the last crash. That has not been helped by a Government whose recent economic policy pronouncements are governed less by the national interest and more by a scorched earth policy, designed to limit the room for manoeuvre for years to come of any incoming Government. We would do better to turn our attention to how best to create a future global financial system that will be trusted by today's children investing in the decades ahead in anticipation of a long, secure retirement income.