Financial Services Bill

My Lords, even as your Lordships debate this Bill, a worrying number of corporations are considering leaving this country and moving their business abroad—half the FTSE top 30 companies, if one is to believe the press. Taxation and the increasing costs of complying with endless streams of regulation are forcing even the most patriotic and loyal of companies to reconsider whether they can afford to stay in this country and remain competitive in today’s world markets. As if there were not enough difficulties already, the Bill in front of us today will create further reasons for financial institutions to take their business elsewhere. The Bill responds to the financial crisis, but it perpetuates the very tripartite system which so significantly managed to avoid spotting the banking crisis. A fish cannot swim with two heads, let alone three. This system demonstrated that, with responsibility divided, the ability to identify and cope with problems is significantly reduced. At the same time as proposing to continue with a system which has proved its incompetence, the Bill introduces a series of measures which will have the effect of accelerating the rush for the exit from these shores. There has been much talk of the billions of pounds of taxpayers’ money which has had to be used to bail out the banks, but those billions were required because the parameters within which banks operate, and for which Government are responsible, were inadequate. Bankers go into business to make money. It is up to Government to make sure that, as bankers pursue this goal, the urge is harnessed and kept in sensible bounds so that it can continue to be a creative force within the economy, without becoming a problem. However, the responsibility for monitoring the financial sector was removed from the organisation which had the knowledge and experience to handle the matter: the Bank of England; and given to a novice, the FSA. Sadly, this is not the only example where this Government’s obsession with discarding the collective memory in favour of something shiny and new has ended in tears. It is worth pausing for a moment to put the billions used to bail out the financial sector into perspective. In the current climate, it is all too easy to forget that the financial sector has itself been a very significant contributor to the economy and to the Exchequer. During the financial year to 31 March 2009, the total tax contribution from the financial sector, as assessed by PricewaterhouseCoopers, was £61.4 billion, or 12.1 per cent of total government tax receipts—not as high as previous years, but still a very meaningful contribution. If one does an extrapolation of the PricewaterhouseCoopers calculations for this and previous years, one comes to a total tax contribution since 1997 of about £700 billion. The numbers are not precise but, although approximate, they are sufficiently accurate to make the point that the financial sector is an immense contributor to the economic prosperity of this country—something to be preserved and looked after. The other side of the balance sheet is the Government’s total net contribution to the rescue package. This is a complicated calculation which involves many assumptions, but rather than send you to sleep by going through all the figures, I will just say that a perfectly reasonable estimate is that the maximum eventual cost to the taxpayer is unlikely to be more than £10 billion. If this seems low, in view of some of the numbers which have been bandied about, I would point out that the last PBR revised the estimate of losses from financial intervention from between £20 billion and £50 billion to £8 billion. All in all, the Exchequer is hugely in profit. Any sane person would be grateful, and ask themselves what the fundamental and underlying causes of the banking crisis were. They would also ask how the basic parameters within which financial institutions operate could be changed, if not to totally prevent then at least to significantly reduce the harmful effects of a downswing, while maintaining the benefits of a strong banking sector—in spite of claims to have abolished boom and bust, it is not possible to eliminate cycles. Instead of examining the basic structure, the Government intend to compound their errors by continuing the failed tripartite system and giving increased power to the FSA. This organisation appears to be wedded to control of the minutiae and the detail, rather than endeavouring to establish the principles required to achieve the type of robust framework within which financial institutions can be left to get on with their business without causing harm to the rest of the economy. In spite of public comment warning of perils ahead, the FSA ignored all the signs of an impending financial crisis—overgearing, dubious assets, over-complex financial instruments, and so on and so forth. Instead, it built up a massive overhead. With precious little outside discipline and controls over the tax it levies on those it regulates, the FSA continues to increase in size, as if the number of employees was a substitute for joined-up thinking. In its business plan for 2009-10, it anticipates staffing levels of 3,000. To put that in perspective, the Treasury’s latest report projects core Treasury staffing levels in March 2010 of 1,386—less than half the FSA. What have all these people been doing for the FSA, if not identifying underlying and serious potential problems? They were creating red tape and issuing fines: over £100 million worth, much of which where no harm had been done and the offending organisations themselves had identified the fault. In an earlier debate, I asked whether the £14 million of bonuses paid to FSA employees last year were related to the level of fines. I was assured that that was not so, but it took five months to extract from the FSA how it calculates bonuses. What would have happened to an organisation overseen by the FSA if it had taken so long to respond? It is now proposed to give the FSA massive new powers, among them the power to control salaries and bonuses. If Her Majesty’s Government are a significant shareholder, depositor or provider of funds in a bank or a business, they have every right—even more, a duty—to consider how much those employed are paid. However, in a free society government should not be interfering with arrangements between private citizens. The red herring is raised about the level of bonuses, and how they take money away from shareholders and prevent the building up of necessary reserves so that the Government are forced to provide assistance, but, with the odd exception, bonuses are paid from profits, generated by the person receiving the bonus. External control over the pay structure will only drive the wealth creators to go elsewhere. John Varley and Bob Diamond of Barclays Bank have led the way in waiving their bonuses. Others have followed. But for how long will this go on when, by moving to a friendlier location, the individuals would be so much better off? If people are prepared to waive remuneration one year, will they be prepared to do so in successive years? In today's world, there is no compulsion to stay in the City of London: it may be more convenient, but it is no longer essential. It is all very well for the Minister to complain in the press that while bankers took home billions in bonuses, the owners of bank shares over the past decade have had a return of zero. Compared to the returns under the Labour Government, that is wealth beyond the dreams of avarice. Records show that since the Prime Minister's first proper Budget in 1998, sterling has lost value against almost every major currency; the stock market is down; our budget deficit is worse than that of Greece; we are borrowing nearly £200 billion a year—that is, if we can continue to do so without printing the money—unemployment has increased; provision of pensions has been seriously damaged; and gold has been sold at less than a third of today's price, losing about £6 billion. The FSA will be given the power to impose unlimited fines. If a final push were needed to make those dithering rush for the exit, that will certainly provide it. Why would one want to do business where an unlimited liability hangs over one's head for what could be an unintended error, and where the track record of the institution with the power to impose a fine shows that when it comes to penalties, it has an extremely itchy trigger finger? The FSA should be abolished rather than being given increased powers. It has a culture incompatible with being a public body. Not only does it consider itself to be better than others; there is a continual stream of statements from senior executives stating how the organisation should be feared and disliked. One cannot expect fair and impartial treatment from an organisation whose chief executive says: ""There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA"." It is shameful that the head of an organisation acting on behalf of Her Majesty's Government as policeman, judge, jury and executioner should make such a remark. It shows the attitude of a bully, and is not worthy of the fine traditions of public service in this country. Financial markets should be governed by establishing clear and easily understood principles, rather than by attempting detailed controls over day-to-day activities that will inevitably fail.