Financial Services Bill

This group of new clauses and amendments deals with the provisions set out in the first four clauses for the new council for financial stability. The Minister and I went round this loop a few times and at some length in Committee. I will not repeat the length, but I may repeat some of the arguments. The Bill puts on a statutory footing the standing committee of the tripartite authorities that sought to bring together the Bank of England, the FSA and the Treasury in a single body. Its remit was to be""the principal forum for agreeing policy and, where appropriate, coordinating or agreeing action between the three authorities. It is also an important channel for exchanging information on threats to UK financial stability."" The body put in place as a consequence of the reforms the Government announced in 1997 has been subject to a lot of scrutiny over the past few years. Its operations were the subject of much work by the Treasury Committee, which said in its report:""We cannot accept… that the Tripartite system worked 'well' in this crisis."" There is widespread agreement that the tripartite authorities did not work well together in the run-up to the crisis, and some fundamental reform is needed. There are two approaches one could adopt. The first is to say that the system needs to be swept away and there needs to be wholesale reform of financial regulation, and that the structural failures—between the Bank and the FSA, for example—are such that the Bank needs to take on additional responsibility as a macro-micro potential regulator. We need to reform what is left of the Financial Services Authority. That is the view we take on the Conservative Benches, but the Government take another view. Their belief is that the structure still works and all we need to do is to put the committee on a statutory basis. That is the thrust of the first four clauses. During the evidence sessions, the Minister said that""we could have done better."––[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 10, Q16.]" That is a mild understatement, typical of the Minister. In Committee, he made a much more vigorous defence of the merits of the standing committee and why it should be put on a statutory basis, instead of introducing the wholesale reform we proposed. His argument was that the committee worked well during the crisis. He cited four instances and said that no retail depositor had lost money. When it became apparent that the authorities did not have all the appropriate tools to resolve bank failure, the Government had passed new legislation—the Banking (Special Provisions) Act 2008, which the Minister and I dealt with in Committee. If the tripartite authorities had worked well before the crisis, those arrangements would have been in place, because it is clear from the war games between the Bank and the FSA, when they looked at what would happen in a crisis, that one of the missing tools was the appropriate resolution tool. The fact that the authorities felt the need to put in those tools after the crisis arose was not necessarily a sign of the success of the tripartite arrangements but rather recognition of their failure. The Minister said that the Government had used the powers to rescue failing banks and that the world's financial system stabilised as a consequence. However, although we can see what the outcomes of the tripartite committee have been, not much light has been cast on its inner workings since the crisis started. Some of the committee's failings are quite deep-seated. In Committee, my hon. Friend the Member for Chichester (Mr. Tyrie) asked the Minister how many times the committee had met before the crisis. The Minister tried to duck the issue; indeed, he succeeded, but we know the answer. The committee met only once and that was via a telephone call at the request of Hank Paulson, the then US Treasury Secretary. It is beyond belief that the body meant to co-ordinate risk and response did not actually get together. I do not understand why it did not, but the Bill rectifies that situation. It requires that the committee meet quarterly, but just in case the principals do not want to get together they can of course send their deputies instead. There is no guarantee that the committee will function properly if it is put on a statutory basis. It is a very Labour approach—"Something needs to be done so let's pass a law." There is a real challenge here. Given that the committee was the forum for discussing financial issues, and given the warnings published during the run-up to the financial crisis, we would have thought it had plenty to talk about. The Bank of England's financial stability report for 2004 said:""The questions are whether risk is being priced properly, and to what extent the search for yield is leading to excessive leverage"—" a prescient warning of some of the problems emerging in the financial market, which would eventually lead to the crash, yet the committee did not meet to talk about those questions. I do not know what discussions there have been between the three parties, but clearly none of them got together in a room to talk about things. In the run-up to the crisis, the committee failed to look properly at the risks. The financial crisis demonstrated the problem of who was in charge. Who in the tripartite committee ensured that things were dealt with and that the authorities co-ordinated their work properly? We know that the authorities failed to co-ordinate over the emergency funding needed to provide a private sector purchaser for Northern Rock. Even when the committee was being established and the arrangements were being put in place, questions were being asked about what would happen in a crisis. In 1999, when the Financial Services and Markets Bill was wending its way through the House, my hon. Friend the Member for Chichester asked:""If a single bank crisis develops into a systemic crisis, who is responsible then?"—[Official Report, Standing Committee A, 13 July 1999; c. 174.]" When the Treasury Committee asked Governor of the Bank of England who was in charge, he came back with a question that may have been in part rhetorical:""What do you mean by 'in charge'?"" That demonstrates some of the fundamental failures of the committee. We have a standing committee tainted by its failure to prevent or anticipate the crisis, and tainted by its failure to co-ordinate before or during the first stage of the crisis. In Committee, the Minister said:""I do not pretend that there was not room for improvement—indeed, lessons have been learned."––[Official Report, Financial Services Public Bill Committee, 5 January 2010; c. 226.]" That sounds encouraging, but if there are lessons to be learned we would expect far-reaching reforms to financial regulation. We would expect the committee to be restructured, to be more dynamic and forward-looking in its work and to be much more decisive and clear about who is in charge. We are not much further forward as a consequence of that process. The old memorandum of understanding for the standing committee said:""It is the principal forum for agreeing policy and, where appropriate, coordinating or agreeing action between the three authorities. It is also an important channel for exchanging information on threats to UK financial stability."" The Bill says:""The Council must…keep under review matters affecting the stability of the UK financial system, and…co-ordinate any action taken…for the purpose of protecting or enhancing the stability of that system."" All we seem to have done is to reshuffle the words, but the remit is exactly the same. That does not fool anybody. The Treasury Committee described the changes as "largely cosmetic". In a way, the Minister nodded to that argument when he said:""What we are doing through the Council for Financial Stability is formalising arrangements that have already been in existence."—[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 5, Q4.]" I am not entirely sure whether that was the warm endorsement of a new structure that we were looking for to give us confidence. We know that earlier this month the council has already met without legislative support. It has broadly the same remit, with a re-jigging of the wording. However perhaps it will be more decisive. Perhaps it will demonstrate the leadership we are looking for. The Treasury Committee report "Run on the Rock" said:""The Tripartite authorities did not seem to have a clear leadership structure. We recommend that the creation of such an authoritative structure, must be part of the reforms for handling future financial crisis.""