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Financial Services and Markets

The jargon in this order may deter not just members of the public but—dare I say it?—hon. Members from rolling up their sleeves and getting involved in this debate. I contend, however, that, in layman’s turns, the order involves an incredibly important set of issues. We are talking about giving the regulators of the unelected Bank of England’s Financial Policy Committee incredible powers that will enable them to tell people the level of deposit required for their home loan purchase and, potentially at a moment’s notice, that minimum repayments on their credit cards will need to rise from, for example, 2% to 5%. They will also be able to tell businesses that loans and overdrafts that they may have already arranged with their banks are no longer feasible. We are talking about the significant potential impacts that macro-prudential policy making could have downstream on the economy and consumers. As we have said many times, although prudential regulatory theory is fine—it is difficult to disagree with the concept—the practical reality and serious questions about how it will work merit consideration.

We support the creation of the FPC at the Bank of England. An important lesson from the global financial crisis is that we need better systemic oversight, not just firm-by-firm regulation. We have to see the wood for the trees. However, as was said last year during the passage of the Financial Services Act 2012, questions linger about the FPC’s accountability and the rationale

behind the choices it will make. Asking very clever people to gaze into a crystal ball and predict the economic future is a big thing for Parliament to do. We are asking them to improve their foresight when most people find it easier to draw conclusions in hindsight. There is, therefore, a lot of responsibility on the shoulders of the Bank of England and, of course, this provides a perfect vehicle for it to be landed with the blame by politicians if things go wrong. Members of the FPC will no doubt be well aware of those responsibilities.

As the Minister has said, the order is relatively straightforward. It gives the Prudential Regulation Authority, which is an arm of the Bank of England, the power to make banks and investment firms increase their capital holdings—in other words, their additional own funds—in relation to their exposure to residential property, commercial property or the financial sector. It will also give the PRA the power to make those banks and investment firms treat exposures to other financial services companies, residential property or commercial property as riskier ventures than they might otherwise have done—in other words, to raise the risk weightings on those holdings.

It was interesting to hear the Minister say that, after the consultation, the Government changed things so that the PRA-regulated firms would be those that are systemically important. That throws up a question that has just occurred to me. I had assumed that all residential mortgage loans and commercial transactions would be affected by a turn of the dial by the FPC. As it turns out, the Minister is saying that only transactions undertaken by systemically important organisations or the larger banks will be affected. Will he tell the House what proportion of residential and commercial transactions will not be affected if the FPC decides to adjust the availability of finance in those sectors or the capital requirements affecting those sectors? I assume that the vast majority of the firms in those markets are systemically important, but it would be interesting if the Minister gave a breakdown. If he cannot tonight, I would be happy if his team wrote to me on that issue.

There are other macro-prudential tools. The Minister mentioned the counter-cyclical capital buffer. That is part of the Basel III requirements which will be implemented through European directives and so forth. I want to ask him about some of the other macro-prudential tools that were discussed in a long document by the FPC.

I am pretty sure that the Minister is saying that, by and large, the sectoral capital requirements are those that are dealt with in the order, but I am not entirely clear about that. If one wanted to be very theoretical about macro-prudential policy, one could argue that history shows, whether through the South Sea bubble or the tulip boom, what has happened to various sectors that nobody predicted would become overheated. I do not necessarily see all sectors coming under the potential purview of the FPC. I assume that the Government would simply vest the FPC with other sectoral issues if they felt that there were emerging pressures or credit bubbles in other sectors. It does not seem that the Minister is today allowing the FPC to intervene across the whole landscape.

The hon. Member for Chichester (Mr Tyrie), who chairs the Treasury Committee, rightly asked about the leverage ratio. I am surprised that the Minister wants to wait until 2018 for that. He says that he hopes there will not be slippage, but he has been around the European

policy-making circuit for long enough to realise that a commitment to do something in 2018 means that it may well not materialise until 2022 or even later. One just has to look at the solvency II discussions, which seem to be generational. I regret that the Government seem reluctant to take a British approach to regulating on the leverage ratio. I do not think that we should simply wait for Europe to determine such matters for us. It would be better if the Minister gave a commitment that he would at least consider including in the Financial Services (Banking Reform) Bill the recommendations of the Parliamentary Commission on Banking Standards on giving the FPC the right to get into some of the leverage ratio questions.

I have a number of other points that I want to ask the Minister about briefly. On the enforcement of prudential regulation, will he elaborate on the penalties or disciplinary steps that the regulator will have at its disposal if an investment firm or bank contravenes the imposed requirements of the FPC? If we have a body that is making policy, we must ask how it will be enforced. So far, a lot of the penalties in the Financial Services (Banking Reform) Bill seem to involve an individual seeking redress through the civil courts, which seems quite weak. What will happen if a bank steps across a line?

Members will recall the debate that we had during the passage of the Financial Services Act 2012 on the stability rules that the Government originally proposed to give to the Bank of England. They wanted to emphasise stability, which of course is vital, but they left out the importance of getting the economy growing and creating jobs, especially when times are tough or when there is a deflationary environment. Eventually, the Chancellor of the Exchequer was forced to relent and an amendment was inserted in the House of Lords to ensure that the FPC has regard to the economic objectives of Government policy.

Are we in danger of repeating the same lopsidedness in the regulations, or of an asymmetrical approach to attempts to control the heat of the economy? The measures in the order specify that banks must hold “additional” funds if lending to households or businesses, with a view to slowing things down and taking the heat out of the economy. That, of course, is a necessary part of the toolkit, but what happens if things slow down too much and the economy needs more lending to businesses and households, or more inter-bank and financial services mutual investment? The order does not seem to contain corresponding or parallel powers to dial things down, relieve capital requirements or remove “additional own funds” provisions if they prove in retrospect to have gone too far. Is that a problem with the order? Should not the power be symmetrical? I would be grateful if the Minister would consider that point.

On enforcement, are there dangers and risks of gaming in sectoral capital requirements? If we draw up operational targets that focus on the means rather than the ends, will the Minister assure the House that some of the specific requirements on residential or commercial investment cannot be evaded by twisting definitions, deliberate misinterpretation or gaming? I gather that that point came up at the Treasury Committee last year and there are important concerns.

Will the Minister update the House on the latest information about who will make decisions on the loan-to-value and loan-to-income ratios on mortgages? There was a bit of pass the parcel between the FPC Committee and the Treasury last year when it came to mortgage regulation. The Treasury wanted the Bank of England to do the deed, but the Bank said it was a political decision and wanted Ministers to make decisions restricting LTV ratios. Will the Minister say where things currently stand, because such things do matter? As Adrian Coles from the Building Societies Association has rightly said, a change to the loan-to-value ratio may not matter much to those wanting to get a foot on the property ladder who have already got access to deep pockets or the bank of mum and dad, as it is known, but rapid decisions to increase the amount of deposit a home buyer needs will hit the least well off in society. Who will decide those things—the Treasury or the FPC?

My final two points are on geographical regulation and business lending. Will the sectoral powers be available for the Bank of England to use area by area, region by region, and locality by locality? In other words, will the Bank be able, or is it seeking, to take heat out of certain geographical housing markets and not others? I do not advocate this, but if it so wished could the Bank use these powers to make it harder to buy a house in London than in Cornwall, or vice versa? Will the Minister clarify how specific—or area-specific—the Bank can be with these powers?

Lending to small and medium-sized enterprises has fallen off and is still doing so. The funding for lending scheme was supposed to change that but its rules are skewed towards residential lending rather than business lending. Is the order to be seen in parallel with that scheme, and can the scheme be reformed to favour business lending? Will the Chancellor consider those issues in the Budget?

Transparency and the openness of the FPC must be considered and many, including the Council of Mortgage Lenders, have said that we need proper analysis by the FPC about what it is doing and an explanation of why it is using its powers. A narrative requirement on the FPC is a reasonable request, so will the Minister explain why that is not in the order?

The Opposition support these general powers but we hope for refinements and improved accountability in the enactment of some of these tools. We want Parliament to have better scrutiny of these measures and for the Treasury to ensure that when the tools are granted, whether or not that is in the next wave or regulations or legislation, the Treasury Committee and others will have a better opportunity for proper oversight of how the Bank of England is exercising these considerable powers.

7.44 pm