Financial Services Bill

It is a great pleasure to speak in this debate, partly because in a previous existence I spent a number of years on two occasions as a compliance officer under three different regulatory regimes, and also because I am the third of the three Treasury Committee musketeers who did not go on the trip to Shanghai and who were left behind to hold the fort. What is abundantly clear—I do not need to repeat it—is the utter uselessness of the current regulatory regime and how the FSA operates. That can be illustrated by the exchange of words between my right hon. Friend the Chancellor of the Exchequer and the shadow Chancellor about the operation of the day-to-day running of the tripartite regime. Only last week we heard from Hector Sants, the chief executive officer of the FSA, that while he was a managing director of wholesale and institutional markets at the FSA, he had no discussions whatever about the Royal Bank of Scotland's investment bank. Lord Turner went on to add that the FSA was singularly incapable of meeting the expectations placed on it given the breadth of its regulatory responsibility. Given that, the need for a new regime is unquestionable. I am certainly satisfied, in the broadest sense, that the Bill makes great progress, not least in response to Lord Turner's comments. We are dividing up regulation between the financial conduct authority, which will be charged with protecting the consumer, the prudential regulation authority, which will look after the nuts and bolts of the system, and the Financial Policy Committee, which has been set up to look at systemic risks. As the third member of the Treasury Committee to speak in this debate, I fear I might repeat some points that have been made. If I do so, it will be to reinforce those points. One thing that has not been talked about, however, is the speed and complexity of the Bill. It is complex and has very far-reaching implications for the long-term security of our financial system as well as for the competitiveness of this country. It is worth remembering that financial services employ more than 1 million people in the UK and raise more than £50 billion a year in tax revenue. The Bill seeks to amend three previous Acts. The Treasury Committee recommended that the Government start afresh with a new Bill dedicated to addressing all the myriad points discussed since the financial crisis and, indeed, before. The Governor of the Bank of England agrees; he said to a meeting of the Committee last year that"““our first preference had been to have a clean, new Bill, spelling out the new system rather than just amend FSMA.””" He continued, and on this point I wholeheartedly agree:"““We are losing the simplicity and the ability to have a cleaner debate about the…framework.””" The more complex a system, the easier it is for it to go wrong and the more difficult it is to find out why it went wrong in the first place and to repair it. One of the most profound elements of the Bill is the creation of the FPC, and we have heard a lot about that this afternoon. The FPC is charged with making sure that systemic risks do not emerge and that bubbles, such as credit bubbles, are not allowed to develop. That is unprecedented in our financial system and will have far-reaching implications. The interim FPC, as we have heard, has been in place for some time and the Treasury Committee has spoken with its members about how it is moving along, but its final format is yet to be set in stone. At the FPC's disposal will be a range of macro-prudential tools that it can use to control the financial system and markets, and I was pleased to hear the Chancellor say that we would be able to debate the matter on the Floor of the House and decide which tools will be available. The tools will fall into two categories, however. Those in the first category, which will be debated in the House, will be the tools of direction and might include such things as loan-to-value ratios for mortgages, liquidity requirements and capital ratios for banks, which could be directed on to the system via the PRA or the FCA. The measures in the second category, which have not really been talked about this afternoon, will be powers of recommendation and they can be absolutely anything. The actions of the FPC, however, will have the most effect not just on our economy but on our society. Let me take one of the simplest cases by way of an example. The FPC, in its wisdom, might decide that a credit-fuelled asset bubble is emerging so it wants to tighten up loan-to-value ratios on mortgages. Instead of a 10% or 15% deposit on a house purchase, it will direct that lenders move to a 30% deposit. That is all very simple and fair enough. However, those who are affected first and most deeply will almost certainly be first-time buyers who will suddenly find they do not have the deposits to make a house purchase. People who have only recently bought a property and who therefore probably have relatively low equity might find that they are now not in a position to move house, which will have implications for the mobility of our work force. For a property developer, the tightening of the loan-to-value ratio alone might influence a decision not to develop their land bank. The tightening of that potential supply could lead to exactly the opposite effect on house prices to that which is desired. I hope that illustrates that the implications of such a simple move are widespread and can, indeed, be unpredictable. As we have heard, the FPC will have a financial stability objective, which will develop from recommendations by the Treasury. The FPC will need to monitor indicators of financial stability, but we do not yet know what those will be. Nor do we know at what levels they will start triggering intervention. The interim FPC has given us a guide, but it gives little indication as to what will actually happen. Were it to publish its dashboard of limits in relation to where it does intervene, the markets would, to a certain extent, be self-correcting. However, there will be occasions on which it will not want to publish because it wants to be discreet or even secretive about its interventions. Under those circumstances, the Treasury Committee will find it difficult to scrutinise such secret interventions. That brings me to my next point, which is incredibly important, on the governance of the Bank of England. Let me address the good news first: the Treasury Committee very much welcomes the move to a single eight-year term for the Governor of the Bank of England, as opposed to two five-year terms. However, that raises the possibility of a Governor crossing Governments of two flavours, and we on the Treasury Committee think it would make sense if Parliament, through the Treasury Committee, had a power of veto over the Governor's appointment. The Chancellor took the unprecedented and extremely welcome move, after the election, of giving the Treasury Committee a power of veto over the appointment of the chairman of the Office for Budget Responsibility. Now we have seen how well that works in practice, we think the Governor's appointment is another occasion for which such a power of veto would be appropriate. More widely, the Treasury Committee is concerned about the governance of the Bank of England. I welcome the Chancellor's comment about the new oversight committee, but currently the court is responsible for essentially administrative matters—pay and rations. We want the Bank to have a proper board with a new name that reflects its updated role. We recommend that the board should have a majority of external members, as we have heard from my hon. Friend the Member for Bury St Edmunds (Mr Ruffley), who must have more relevant skills and experience. The Treasury Committee wants the board to be able to conduct retrospective internal reviews of the Bank's policy decisions. In its response to these calls, the Bank envisages limiting that power to commissioning external reviews or conducting internal reviews only of the decision-making processes of the Bank. The creation of the FPC makes this governance issue particularly important. As we know, the MPC uses just two tools—quantitative easing and interest rates—and the minutes of its meetings are published so we know exactly what is going on, which is a very good thing. The FPC, however, has many measures at its disposal, both directive and recommendational—potentially an infinite range. By their nature, those measures might on occasion be implemented in a secret way, which means that the FPC might not be able to give a full and open account to the Treasury Committee or to publish entirely transparent minutes. Moreover, it might be years or even decades before we know that an intervention has taken place or even that an intervention has become necessary. That is why the governing body of the Bank needs to be able to look at the merits of the FPC's policies and not just at the methods. The Bank's board must not be restricted to finding out whether the wrong decision was made, but in the right way. Crisis management is a crucial area about which much has been said this afternoon. I certainly welcome the creation of a new power of direction for the Chancellor over the Bank in a crisis, which was recommended by the Treasury Committee. The Bill requires that the Governor must formally notify the Chancellor in the event of public funds being at a material risk. The Chancellor cannot direct the Bank unless there is a threat to financial stability as well as a threat to public funds, and the scope of the power of direction is narrowly defined. The arrangements for crisis management are something that could be discussed in Committee, but clarity is vital. For me, the answer to this simple question is crucial. If I see an unhappy bunch of customers outside a bank in Kidderminster high street, who should I telephone? I think the Bill answers that question. I have voiced a number of concerns from the Treasury Committee and they include my personal feelings. However, I welcome the aims and thrusts of the Bill and the fact that the Government have moved some way towards the Treasury Committee's recommendations. Let me finish on this point: the financial services industry is incredibly important to this country in terms both of employment and of economic and fiscal contribution. It represents around 11% of gross domestic product, but it is already under widespread attack, including from the press and politicians. Over the next few months there will be a change to the regulatory regime, which we are debating today, followed by a change in the banking regulations, all mixed in with a plethora of new rules from Europe. It is vital that we sort out the current regulatory framework to ensure that we can spot and resolve the crises of the future, but it is just as important that we provide a stable regulatory platform to allow all the firms and individuals involved in this industry to continue to be profitable, to plan for the future with confidence and to be sure of regulatory stability.