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Reforming Financial Markets

My Lords, I welcome the contributions from the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby. The framework set out by my right honourable friend the Chancellor of the Exchequer yesterday in his speech in the other place and in the document that we published yesterday afternoon is a strong one, which draws on the competencies and strengths of the Bank of England, the Financial Services Authority and the Treasury. In its development, we consulted extensively over a long period of time with a broad group of stakeholders, including practitioners, trade associations, the Bank of England and the Financial Services Authority. The noble Baroness refers us back to the structure before 1997. Let me respond to that, and let me also respond in a moment on the structure before 1986. Before 1997, we had a proliferation of largely self-regulating entities. I was in the financial services sector myself at the time. The company which I led was a member of or regulated by more than four separate bodies in the United Kingdom: the SIB, the FSA, the PIA, IMRO, the DTI, the Bank of England and many others. That surely cannot be an appropriate model to which we should aspire to return. Indeed, it is clear that the world is moving towards increased consolidation of financial supervision into a single body, reflective of the fact that businesses are increasingly organising themselves across multiple business lines. The noble Lord, Lord Newby, reminds us that the history of banking supervision prior to 1997 was not without its blemishes. One remembers BCCI and Barings. The noble Lord, Lord Lawson, whom I see in his place today, reminded us earlier this week about Johnson Matthey. Before that, in the early 1970s, when I first came to work in the City, we had the secondary banking crisis. There is no evidence that we should, as the noble Baroness suggests, go back to a system that was somehow perfect and which would address current failures in supervision, which are not isolated to the United Kingdom. We have seen significant banking failures in the United States of America, Switzerland and Germany and many other jurisdictions where there are radically different structures. At the heart of my right honourable friend's proposal yesterday is a clear message about judgments and behaviours. The solution to severely reducing any possibility of a repeat of the experience of the past two years must lie in behaviours, judgments and social factors, rather than architecture. The noble Baroness has failed to appreciate the importance of the council for financial stability. The heart of this radical and powerful proposal will be in transparency and accountability. This will bring together the complementary skills of the Bank of England, in macroeconomic analysis, and the Financial Services Authority, in its familiarity with the institutions that it supervises—a familiarity which, as we know, will now be tested against far higher standards as a consequence of the enhanced supervisory programme introduced by the noble Lord, Lord Turner, and the board of the Financial Services Authority. At the heart of that will be clear and open reporting of the views expressed. The governor has talked about giving sermons to an empty church. His sermons, his encyclicals, will now be widely reported. In particular, to address comments from some observers, the Bank of England will in future make it very clear what actions it believes should be taken in the light of its analysis of the macroeconomic situation. So that will be not only a sermon that tells us about sins, failings, and shortcomings, but one which gives us hope and guidance, by pointing out the actions that should be taken. In the event that the FSA does not respond constructively and positively, that will be a matter of record. That is of considerable importance. I wrestle with the noble Baroness's comment—I believe that I cite her correctly—that we do not need the FSA involved in financial stability. That is an extraordinary statement, if that reflects the view of the party opposite. I said that I would take us back to 1986. I do so in part because of the debate about Glass-Steagall, which I fully anticipate that the noble Lord, Lord Lawson, will speak to shortly. Prior to 1986, we had a form of Glass-Steagall in this country, but we brought that to an end with what is colloquially known as big bang. Big bang removed the barriers that existed, separating much of the activity that takes place under the heading of investment banking from retail and commercial banking. From recollection, the party opposite was in power at that time. I welcome the noble Baroness’s strong endorsements for the proposals made in connection with capital, liquidity, strengthening governance and addressing issues about remuneration, and her support—support reiterated by the noble Lord, Lord Newby—for education and steps to improve consumer information. She said that there would be dangers if we ran ahead of other countries in the steps that we were taking. My right honourable friend was clear that we are working at the heart of the G20 and EU to ensure that we take other countries with us. We will run ahead of other countries if that is defined as leading the debate, setting the standards and insisting on change, but we will not become detached from other countries to a point where it would disadvantage British businesses and British retail customers of our banks. The noble Baroness asked what we would do over the next nine months. We will consult, engage, lead the debate and take forward programmes to set higher standards around issues such as accounting, derivatives and central clearing parties, and to participate fully in the debate about macroprudential supervision. The legislation we propose to bring forward is detailed clearly in annexe A of the paper; it will focus on the establishment of the council, and we will give it priority in our legislative programme. In parallel, we will work hard to help our partners in Europe understand the flaws and misunderstandings in the current draft directive on the alternative investment management industry. We are already working to make progress on that. I assure the noble Lord, Lord Newby, that in my judgment the FSA has appropriate support and resource in place here. I welcome the strong statements of the noble Lord, Lord Newby, in support of consumer empowerment. I assure him that we have not given any instruction to the RBS about making loans in respect of 90 per cent of loan to value. We leave that matter in the hands of those at the Royal Bank of Scotland. They are the competent people, under Sir Philip Hampton and Mr Stephen Hester, to make those decisions. I have already spoken about Glass-Steagall. The noble Lord, Lord Newby, said that it was assumed that reference to "the House" was to the other place; in that, he is of course correct because I was reading my right honourable friend’s Statement. However, I certainly expect the appropriate committees of this House to take an active interest in the reports and minutes of the council for financial stability. I assure the noble Lord, Lord Newby, that it is not the Government’s intention to rush to sell shares in the Lloyds Banking Group and the royal bank. We are clear that the taxpayer has taken significant risk, made a large investment and expects to be appropriately rewarded for that. I have no doubt that it will be. At the time that we made those investments, I said that I was confident that the taxpayer would make a large profit. My confidence in that is greater now than when I made that statement. We will make the sales when we think it is appropriate to do so; when we get a fair reward; and when it contributes to competition and sustaining the significant improvement in financial stability, which my right honourable friend has already achieved with his strong and confident actions.