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We have taken the lead in reforming international regulation through the G20 and the Financial Stability Board, as well as in the European Union, because international co-operation and co-ordination are very important, as we have seen. The origins of the problem may have been in only one part of the world, but within a matter of weeks it affected just about every part of the world. The days when we could be content that we had a regulatory regime that was fine for our own jurisdiction are behind us. We need to make sure that there is international co-operation, and that it continues in the
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future. We have also taken measures to clean up banks' balance sheets, and the process has been worked through, including the introduction of the asset protection scheme.

The final part of the reforms we need to put in place relates to the powers available to the FSA, on which we consulted following my statement of 8 July. We published a White Paper and the Bill represents the conclusions that we reached following that.

Bob Spink (Castle Point) (Ind): I welcome the Bill as far as it goes, but is there not time even now to include some protection for consumers on the pre-payment of goods-for example, furniture, holidays and concert tickets? That would be a very good thing, and would help to build confidence.

Mr. Darling: I shall come to the Bill's proposals on consumer protection, which we need to do more about. I am very much aware of the campaign being urged on us about pre-payment. We had some experience of that with the Farepak problems a couple of years ago. The provisions are not in the Bill because at this stage of this Parliament I wanted to keep the measure sufficiently small and manageable to ensure that, as I hope, it will complete all its stages before the end of the Session. That is not to say, however, that legislation on further consumer protection will not be necessary. I shall turn shortly to the measures that I propose.

The purposes of the Bill are to build on the action that we took over the past year. We want to strengthen and reform financial regulation, as well as support better corporate governance and give more rights to consumers. The Bill ensures that prudential regulation and supervision of firms is more effective. It will place far greater emphasis on monitoring and managing system-wide risks and will tighten the powers available to the FSA on the remuneration of banks, which is important for financial stability, as well as providing consumers of financial products with better support and protection. Our central objective must be to ensure that as we come through these problems, we reform and strengthen the financial system and rebuild it for the future.

Mr. David Heath (Somerton and Frome) (LD): Is there not another set of players who could put pressure for good governance on the financial institutions? I mean the credit rating agencies. If they were to take adverse conclusions from short-termism, as evidenced by excessive pay or bonuses or by over-complex financial products, it could have a strong effect on the various financial institutions. Can the Chancellor encourage the agencies to do that, and if they will not-because they are paid for by those same businesses-is there any way of bringing them within a regulation process?

Mr. Darling: The hon. Gentleman raises a very real issue. He will recall that in 2007 there was a great deal of concern about the role of credit rating agencies, especially in rating the products that had managed to get the system into so much difficulty. I shall shortly be touching on EU proposals to make sure that credit rating agencies are supervised on a Europe-wide basis, because by their nature such agencies operate across several countries, so regulation by one country alone would not be sufficient. That is a major step forward, but America has to do the same thing, because credit rating agencies are based
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there too-indeed, sub-prime products and certain other products emerged from that side of the Atlantic. The hon. Gentleman makes a strong point.

I want to say a few words about the UK regulatory architecture, which is one of the areas on which there is a difference between the two sides of the House. I may be able to anticipate one of the arguments that will be advanced from the Conservative Benches about the architecture of our present system of regulation. To attempt to blame what has happened in the UK on our system of regulation, or the architecture or set-up we have in this country, does not hold water. If we look around the world, we see that just about every country has been affected by the problem, and whereas in this country we have two bodies responsible for regulation-principally the FSA, but also the Bank of England-most countries have rather more. In the United States, for example, several different organisations are all involved in the business of regulation. As I said when we discussed the matter briefly in the Queen's Speech debates last week, the US is trying to address that issue.

Every country's system has encountered problems, but what matters-certainly in my experience-is what the regulators actually do, and the judgments that they exercise. I strongly believe that any changes to the system need to build on experience and to address areas in which there have been deficiencies. The changes need to be practical and workable, which is why I am not persuaded about upheaval in the regulatory regime, or that bringing everything together in terms of monetary and regulatory policy for institutions large and very small makes any sense.

Obviously, the functions of institutions-the central bank, the financial regulator, and finance and economics Ministries, which in our case means the Treasury-are central to the maintenance of financial stability in just about every country. The organisational relationship we now have in the UK-involving the FSA and the Bank, which is responsible for financial stability too-is much simplified compared with what we had, and we can build on it.

Mr. George Osborne (Tatton) (Con): The House is less heated than it often is when we have these exchanges, which is a good thing, so may I ask the Chancellor in all seriousness whether he agrees that there seems to be a trend in many countries to try to put the central bank back in charge of prudential supervision-where it is not already in charge? I am sure the Chancellor has met Stan Fischer, the Governor of the central Bank of Israel and also former chief economist at the World Bank. He says:

Jacques de Larosière-the architect of the European changes-says that

Although of course there were many problems in many different regulatory regimes, one of the emerging consensuses after what has happened is that central banks need to be in charge of prudential supervision.

Mr. Darling: I agree with the hon. Gentleman that this is not a case where there is a definite right answer, although there are plenty of definite wrong answers. This is not a case where I am saying "Absolutely" from the start, so I think he is mistaken-I am not saying that
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at all. What I am saying is that we have made a distinction regarding the functions of the central bank, which essentially involve monetary policy-obviously-and macro-prudential issues, where the bank needs to take an overview of what is going on in the economy in terms of its monetary duties and financial stability.

A single organisation that deals with monetary policy and with some of the bigger macro issues, and which is responsible for the individual regulation of banks large and small, as well as of financial advisers, some of which are very small indeed, makes no sense. There are frequently times when it would be very tempting to tell one person, "You're in charge of the lot-sort it out. If you don't, everything will be your fault and you'll have to make way for someone else." However, we have to remember that when the Bank of England was responsible for the larger banks years ago, there were far fewer of them. They were also all very British, in the sense that they were based here and the people we had to deal with were here, not spread throughout the world. However, the Bank of England never dealt with the insurance companies, it could not deal with what happened in the '80s, when we saw the growth of bank assurance, and it could not and never did deal with some of the other financial institutions that can affect financial stability.

We can argue where we should draw the line, and wherever we draw it there will be anomalies. However, the system that we have-we should remember that the FSA took over from about nine different self-regulatory organisations 12 years ago-represents a sensible way to proceed. It is easy for the FSA and the Bank to work together, and the Treasury will always be at the table in times of crisis, for the perfectly obvious reason that any rescue will have financial implications. However, I honestly do not believe that bringing everybody under the same roof-it would be a very large roof indeed-makes any sense.

The hon. Member for Tatton (Mr. Osborne) mentioned Jacques de Larosière, who was asked to produce a report for the European Union, and I wanted to touch on that earlier, because the House will be interested to know where we have got to. In Europe we will not, of course, have a single regulator. De Larosière suggested, first, that there should be a council for financial stability, which is advisory, and that is fine. The European Central Bank clearly has a view as to what is going on in Europe, but of course, its relationship is not the same with every country, for perfectly obvious reasons. De Larosière is also setting up three agencies to look at different aspects of the financial sector. All that sits together with the individual national regulators, and that in itself-the hon. Gentleman and I might have more common ground here-is problematic, shall we say? We are trying to solve some of these problems, but they are there.

Mr. Osborne: On that point, I should mention that Jacques de Larosière took part in a meeting with my hon. Friend the Member for Fareham (Mr. Hoban). The Chancellor dwells on his views, so let me tell him what he said:

-the Conservative party's report-

Mr. Darling: I am glad that the meeting with Jacques de Larosière was so convivial. As he was discussing the Conservative party's proposals, I was not there and I am in no position to comment on what he said. All that I would say is that having seen his report, I think that there are still issues that need to be resolved in terms of what can be regulated at a European level and what is regulated here.

In the United Kingdom we have a very complex financial services industry. Many of the banks operating in this country are regulated in different parts of the world even though they have major presences here. We have the banks and we have the insurance companies-we have a wide range of institutions. On the basis of my own observations and my experience over the last two and a half years, I would think long and hard about putting all those bodies under an organisation that was regulated ultimately, I suppose, by the Governor of the Bank of England, no matter who that happened to be. I would also worry-this is not just my worry; it has been repeated outside the House-that if we made the changes that the hon. Gentleman proposes, there is the risk that someone may take their eye off what they are supposed to be doing, and we get into difficulties, although I know that the hon. Gentleman has given assurances on that subject.

The structure that we have with the Bank and the FSA is the right one. We are not going to agree on that, and there will always be an argument as to where we draw the line. However, I draw it on a purely practical basis, because the most important thing that we need to keep in mind is not so much the architecture. At the end of the day, we can make any organogram work, but what matters is whether we know what is going on in the first place, and when we find out what is going on, whether we make the right calls and see the process through. If we get that wrong, it really does not matter how we have brigaded all the regulators. The most important thing is making the right calls.

Ms Sally Keeble (Northampton, North) (Lab): Will my right hon. Friend comment on an issue that has been of some concern to me? If we return all the supervision to the Bank of England at a time when quantitative easing is going on as well, the Bank would be trying to do two things: it would be trying to reflate the economy at the same time as it was trying to supervise the institutions involved. There could be a real conflict of interest over what the Bank was doing.

Mr. Darling: That could be the case, but the Bank's principal responsibility for 10 years related very much to monetary policy, and quantitative easing is part of that. I worry what we would bring to the issue if we simply backed the FSA into the Bank of England, other than that one person would nominally be in charge of the whole organisation.

As I have said, I understand the case that others make, but I approach it from an entirely practical perspective and regrettably-I use the word advisedly-I have had a lot of experience of this issue in the last two
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and half years. I have observed first hand some of the do's and don'ts, and I may set them down one day-[Hon. Members: "Ah!"] Some of my proposals and the lessons that I draw are reflected in the Bill. I do not want to labour the point; I simply think that the proposal to put everything under the Bank of England is inherently risky, and I would not do that.

Mr. Mark Field (Cities of London and Westminster) (Con): I agree with what the Chancellor says, broadly, about the practical application. However, in what he said to my hon. Friend the Member for Tatton (Mr. Osborne) he recognised that there is a fundamental difference in the outlook of the Labour party and that of the Conservative party. Is he not concerned that the increase in the FSA's powers proposed in the Bill comes at a rather strange time, given my party's commitment to get rid of it? How will we able to employ the brightest and the best to take on these new powers if the sword of Damocles will be hanging over the FSA in the-probable, I hope-event that we have a Conservative Administration before too long?

Mr. Darling: I do not really think that that is a problem of my making. However we organise things, we need to ensure that the regulator has sufficient powers, and I would like now to say why it needs those new powers, because I think that they are necessary no matter what we do.

Stewart Hosie (Dundee, East) (SNP): Will the Chancellor give way?

Mr. Darling: May I make some progress before coming back to the hon. Gentleman, or does he want to ask me a generalised question?

Stewart Hosie: I agreed with the Chancellor when he said that the difficulty was not the structure but whether someone takes their eye off the ball-but I hope that he can explain something. We have had Bank of England stability reports for 20-odd years. The stability report immediately before the crash in 2007 said:

It referred to

and "structural developments", but it said that there had been an increase in

The entire document was filled with such comments and contradictions. So irrespective of the structure, how can the Chancellor ensure that we do not get a document from the new Council for Financial Stability that takes its eye off the ball like that, or glosses over very real risks once they are identified?

Mr. Darling: First, the hon. Gentleman rather makes my point that, never mind the architecture, what matters is that the people who are charged with doing the job actually do it. They will not always get it right, but although some people say that they saw all this coming-some of whom, I am bound to say, forgot to tell anyone else that they could see it, but I am sure that they could-it is important that we have regulators and supervisors who do the job.

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Secondly, the Bank of England or the FSA produce reports at the moment, but the reports can just lie there. Of course, many reports were acted upon, and many of them picked up in one way or another, but one of the things that I want to achieve through the Council for Financial Stability, which I shall come to in a moment, is a more formal process, so that when the Bank of England publishes its six-monthly reports, the council-the FSA, the Bank of England and the Treasury-must consider them and decide what to do about them. That is a better way of holding people to account.

Mr. Andrew Pelling (Croydon, Central) (Ind) rose-

Mr. Darling: I will give way to the hon. Gentleman, and then I shall make some progress.

Mr. Pelling: The Chancellor emphasised the importance of international co-operation and the associated complexity. Under the Bill, the FSA will have discretion to work in that area. Obviously, this aspect of regulation is of fundamental national interest, given the impact on the City's earning capacity. Under the Bill, how will Parliament be able to scrutinise and have some control over the FSA-to the extent that important interests might have to be given away in such negotiations with European regulators?

Mr. Darling: I will come to that shortly, but I should like to do so in what I think is a logical order.

Following on from the exchanges over the past five or ten minutes or so, I have to say that it is important to formalise the relationship between, especially, the Bank and the FSA as well as the Treasury, so that we can ensure effective co-ordination. The council's draft terms of reference, which we have published today, set out the roles for each member institution. Under the Banking Act 2009, we formalised and strengthened the role of the Bank of England in protecting financial stability. We provided the Bank with a statutory objective of financial stability-it did not have that statutory objective until this year-and a lead role in dealing with failing banks under a special resolution regime. Alongside the Bank's responsibilities for monetary policy, liquidity, the oversight of inter-bank payment systems and its role in monitoring the financial system as a whole, that will give the Bank an enhanced supervisory role, as well as a role in assessing a firm's resolution plans-living wills, as they are commonly known-because it should also have that responsibility.

The FSA, which is the single regulator, brings into one place the work of up to nine different regulatory agencies that were in place 12 years ago. As I told the hon. Member for Tatton, other countries have multiple regulators. For example, Hong Kong, China and India have separate regulators for banking, insurance and securities. The US Administration are trying to rationalise a highly fragmented regulatory model. Indeed, they are proposing a council that sits on top of the regulators because, for various reasons, they think that it will take too long to try to bring together the other regulators, even if they had congressional agreement to do so. Of course, in America many of those responsibilities are devolved to individual states, thus making the regulatory regime very complex indeed.

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