Financial Services Bill

My Lords, I have given notice that we oppose Clause 1 standing part of the Bill and, for the convenience of the Committee, I have grouped Clauses 2, 3 and 4 stand part with Clause 1, as my reasons for opposition strike at the totality of these clauses and not merely at Clause 1. The Council for Financial Stability is not much more than the tripartite arrangements given a fancy title. A couple of pages of legislation cannot create substance when none exists. We know that the only reason why the tripartite arrangements are being preserved in the Bill is that they were invented by the Prime Minister, and there is no recorded occasion when he has admitted that he personally has got something wrong. It is not in his nature. That the tripartite arrangements failed is not just the opinion of my party; it is also the opinion of the Labour-dominated Treasury Select Committee in another place. That is what it found in its report on Northern Rock, entitled The Run on the Rock. Turf wars between the three parties meant that even when issues were identified nothing was done. The tripartite authorities had hardly met formally at principal level until the Northern Rock crisis. The bank issued careful analysis of the excessive leverage building up, but the three did not sit down to discuss the issues. In a rational world, the Government would have looked at the arrangements and concluded that they were bust and needed to be radically overhauled. Instead, we have the cosmetic, window-dressing solution of these clauses, which make the parties meet to discuss the analysis that each produces. If anyone thinks that this is more than a superficial approach, they need look no further than the evidence of the Financial Secretary to the Public Bill Committee in another place when he said: ""What we are doing through the Council for Financial Stability is formalising arrangements that have already been in existence".—[Official Report, Commons, Financial Services Bill Committee, 8/12/09; col. 5.]" There we have it. This Bill will give us nothing more than the failed tripartite arrangements. There is nothing in this new council to give us any confidence that they will not fail us again. Doubtless, if exactly the same circumstances arose, while those on the council have the memory of the recent financial crisis still in their minds, the same mistakes will not be made. The Banking Act 2009, which we supported, created more efficient tools in the special resolution regime. We will have no confidence that the old arrangements in their new clothes will be able to anticipate, let alone respond, to any new crisis. As the director of the Building Societies Association said when he gave evidence to the Public Bill Committee in the other place: ""Of itself it is not going to prevent the next bubble, it is not going to prevent the next banking crisis".—[Official Report, Commons, Financial Services Bill Committee, 10/12/09; col. 70.]" We oppose these clauses because they do not address the fundamental flaws in the structure created in 1997 by the Prime Minister. The big idea of the first few days of the then Chancellor was monetary policy independence for the Bank of England, which has been widely supported. But he was not content with one big idea; he had to have another one, which involved wrecking the link between the detailed work of banking supervision, which we now refer to as micro-prudential supervision, and the overall understanding and analysis of developments in financial markets, which we now refer to as macro-prudential supervision. The Prime Minister deluded himself that he was generating value by creating the huge organisation of the FSA out of the various supervisory bodies already in existence and transferring to it the Bank of England’s banking supervision role. We now know that he destroyed value because the dislocation between micro and macro-prudential supervision meant that the build-up of excessive debt went almost unnoticed and was certainly not acted upon. The Bank of England, with its rather ill-defined non-statutory function relating to financial stability, did analyse it, but nothing happened in practical terms. The Chancellor was not interested because excessive borrowing was what was underpinning the illusion of a bust-free boom. The FSA, if it was interested, did nothing. Even the Prime Minister knew back then, in 1997, that he was playing a dangerous game and that the system would be more vulnerable with three separate players in the area of financial stability. At least, I think that that is why he created the tripartite authorities with their own memorandum of understanding. He must have realised that his new structure had gaps and that something needed to compensate for that. It did not work and this country is paying the price for the failure of the tripartite arrangements. The Government’s narrative has always been that all of the problems derived from the global financial crisis. We do not deny the existence of the global financial crisis, but the way that it hit the UK, which has a uniquely high dependence on the financial services sector and a small number of systemically important organisations, can be laid at the door of the tripartite arrangements. The UK cannot blame what happened wholly on the rest of the world because the architecture created by the Prime Minister when he was Chancellor was itself a big part of the problem when put to the test. That is the background to my party’s policy, which is to ensure that never again will micro-prudential supervision of systemically important organisations be severed from macro-prudential supervision. The shorthand for this is returning banking supervision to the Bank of England, but it is of course much more than that. Under our proposals the bank will assume more responsibilities than it shed in 1997. We all know that there is not one model of supervision in the main financial centres and that the impact of the global financial crisis cannot be correlated with any particular supervisory architecture. However, it is interesting to note that the US has recently decided that the Federal Reserve Bank will continue to supervise systemically important banks. The tide is not running towards the separation of macro and micro-prudential supervision. In addition, we will be separating out of the FSA its consumer functions and placing them in a separate consumer agency. Anyone in the City will know that, until the last couple of years, the FSA was dominated by its treating-customers-fairly agenda. I do not know how or why this happened; that will repay careful study at some time. In our view it contributed to the FSA’s lack of focus on prudential supervision. This, too, will not be allowed to happen again. Both consumer protection and prudential supervision are important, but they are not the same and they should not be confused in the same body. Whether or not the population of our country allow my party to form the next Government in a couple of months’ time remains to be seen. If we do form the next Government, we are quite clear that Clauses 1 to 4 of this Bill are not part of our vision of the future arrangements for financial stability. However, even if we do not form the next Government, we would still oppose these clauses. They are half-baked for the reasons that I have outlined in other amendments today. They do not answer who is in charge or deal with the powers that are needed. Most importantly, they are a mere cosmetic patch applied to conceal what ought to be made plain—that the tripartite arrangements did not work and are unlikely to deliver in future. For these reasons we oppose these clauses standing part of the Bill.