Financial Services Bill

My Lords, I am grateful to the noble Lord, Lord Hamilton, for his contribution in introducing a wide-ranging debate. I agree that vigilant monitoring, effective analysis and evaluation of all the risks to the financial stability of the United Kingdom is desirable; indeed it is essential. I include in this the risks inherent in the system itself. However, where I differ from the noble Lord is in the belief that a statutory and specific report should be required by this legislation. Under the current arrangements, the Bank of England twice a year produces its considered analysis of financial risk through its financial stability report. The FSA similarly produces a report on the financial risk outlook, with its well thought out appraisal of risk. Additionally, the annual report of the Council for Financial Stability, which we will debate later, provides a further vehicle for reviewing and reporting on the actions of the council and more widely on financial stability. The Council for Financial Stability will formally consider each of these reports, discuss the identified risks and agree the required actions in response. The formal and structured approach of the council can ensure that thorough analysis of financial stability is properly evaluated on an ongoing basis. As such, I do not believe that an additional one-off report is desirable or necessary. What matters more is the quality of regular and ongoing monitoring of risk and the effective co-ordination of actions to mitigate those challenges, challenges which could theoretically cause significant damage to the stability of the financial system. The noble Lord, Lord Hamilton of Epsom, described himself as a Hayekian liberal, as my noble friend Lord Desai had described himself. It is very encouraging to see a meeting of minds on that description—and in some respects I could also join that group, though not, perhaps, in a totally unqualified way. I thought that the noble Lord, Lord Hamilton, put his finger on one of the issues when he went on to talk about bankers paying themselves bonuses. I think that it is the paying themselves that is the issue. It is not the bonuses. The noble Lord mentioned Northern Rock. In parenthesis, I should say that the figures that Northern Rock announced today showed a very strong second half recovery to profitability. Mr Hoffman, who was recruited from Barclays to run Northern Rock, is doing a first class job in stabilising that business and had no part to play in its failure. However, it is the paying themselves bonuses that was the critical failure, at least in some of these processes. That is one of the reasons why we have placed so much reliance on strengthening governance and shareholder stewardship, including the new disclosure provisions which I announced today. The noble Lord, Lord Sanderson of Bowden, was right as well in saying that much of this also was a manifestation of greed. There has been much talk today about Glass-Steagall, which we discussed at some length on Second Reading. I again pay tribute to the noble Lord, Lord Lawson of Blaby, who produced a very thoughtful and considered speech. It was clear that a great deal of work had gone into the preparation of his speech and I think that we all benefited from listening to his views. Of course, Glass-Steagall is really rather different from what I think several noble Lords have in mind. Glass-Steagall was about separating the securities issuance and trading aspects of a business from banking. That was not at the core of the problem. The global financial system was brought to its knees not by the interface between securities activity and banking but by poor credit decisions—often within the context of a complex derivative-based structure—backed up by a funding structure that was not sustainable. There was nothing in Glass-Steagall per se—had it been in force—that would have avoided some of the outcomes which we saw with Lehman and Bear Stearns or, in this country, with Northern Rock, Bradford & Bingley and the Royal Bank of Scotland. So the too big to fail issue is actually a more critical one, and the language which is sometimes used about "casino banking" and "utility banking" gets us closer to the heart of where the intellectual debate lies here than referring back to Glass-Steagall. I do not think that the elements of Glass-Steagall are truly relevant to the issue that we are addressing. That has some bearing on the interesting contribution from the noble Lord, Lord Northbrook, who today cited a different source. We usually get Mr Michael Saunders of Citibank. He will be very annoyed that we have gone on for close to three hours without any reference to him at all, but no doubt that will come in the next batch of amendments. There is nothing in the Volcker rule that President Obama has announced that proposes Glass-Steagall, although Volcker’s article in the New York Times, to which the noble Lord, Lord Higgins, refers, does talk to Glass-Steagall. I cited that article myself in the Second Reading debate as being a considered review of some of the issues. The Volcker rule, as President Obama described it, does not propose anything close to Glass-Steagall. In fact, there seems to be quite a lot of rapid moving backwards from the Volcker rule—in particular from Mr Osborne, who welcomed it at about 11 o’clock in the evening and decided at ten past seven the following morning that he had changed his mind. But more of that in a moment.