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8.38 pm

Motion to Resolve

Moved By Lord Howard of Rising

Lord Howard of Rising: I beg to move.

8.38 pm

Division on Lord Howard of Rising's Motion

Contents 136; Not-Contents 71.

Motion agreed.


Division No. 3


CONTENTS

Addington, L.
Alderdice, L.
Alton of Liverpool, L.
Anelay of St Johns, B. [Teller]
Ashdown of Norton-sub-Hamdon, L.
Astor of Hever, L.
Attlee, E.
Avebury, L.
Barker, B.
Bates, L.
Bell, L.
Bradshaw, L.
Bridgeman, V.
Brougham and Vaux, L.
Burnett, L.
Buscombe, B.
Butler-Sloss, B.
Byford, B.
Caithness, E.
Cathcart, E.
Chidgey, L.
Clement-Jones, L.
Colwyn, L.
Cope of Berkeley, L.
Craigavon, V.
Crickhowell, L.
De Mauley, L.
Denham, L.
Dholakia, L.
Dixon-Smith, L.
D'Souza, B.
Dykes, L.
Eccles, V.
Eccles of Moulton, B.
Elton, L.
Falkner of Margravine, B.
Ferrers, E.
Fookes, B.
Forsyth of Drumlean, L.
Fowler, L.
Garden of Frognal, B.
Gardner of Parkes, B.
Glentoran, L.
Goodhart, L.
Goodlad, L.
Greenway, L.
Hamilton of Epsom, L.
Hanham, B.
Harris of Richmond, B.
Higgins, L.
Hilton of Eggardon, B.
Hodgson of Astley Abbotts, L.
Home, E.
Howard of Rising, L.
Howe of Aberavon, L.
Howe of Idlicote, B.
Howell of Guildford, L.
Hunt of Wirral, L.
Inglewood, L.
James of Blackheath, L.
Jenkin of Roding, L.
Kimball, L.
Kirkwood of Kirkhope, L.
Knight of Collingtree, B.


10 Mar 2010 : Column 316

Laing of Dunphail, L.
Lang of Monkton, L.
Lester of Herne Hill, L.
Lindsay, E.
Livsey of Talgarth, L.
Luke, L.
Lyell, L.
Lyell of Markyate, L.
McColl of Dulwich, L.
MacGregor of Pulham Market, L.
McNally, L.
Maddock, B.
Maginnis of Drumglass, L.
Mar and Kellie, E.
Marland, L.
Marlesford, L.
Masham of Ilton, B.
Mayhew of Twysden, L.
Montrose, D.
Morris of Bolton, B.
Newby, L.
Nicholson of Winterbourne, B.
Noakes, B.
Northbrook, L.
Northover, B.
Norton of Louth, L.
O'Cathain, B.
Patten, L.
Plumb, L.
Rawlings, B.
Reay, L.
Redesdale, L.
Rennard, L.
Renton of Mount Harry, L.
Roberts of Conwy, L.
Roberts of Llandudno, L.
Rodgers of Quarry Bank, L.
Rogan, L.
Sanderson of Bowden, L.
Scott of Needham Market, B.
Seccombe, B. [Teller]
Selborne, E.
Selkirk of Douglas, L.
Selsdon, L.
Shaw of Northstead, L.
Shephard of Northwold, B.
Shutt of Greetland, L.
Skelmersdale, L.
Smith of Clifton, L.
Steel of Aikwood, L.
Stewartby, L.
Strathclyde, L.
Swinfen, L.
Taverne, L.
Taylor of Holbeach, L.
Teverson, L.
Thomas of Gresford, L.
Thomas of Walliswood, B.
Thomas of Winchester, B.
Tonge, B.
Tope, L.
Trefgarne, L.
Trenchard, V.
Trimble, L.
Verma, B.
Waddington, L.
Wallace of Saltaire, L.
Walmsley, B.
Walpole, L.
Watson of Richmond, L.
Wilcox, B.
Williams of Crosby, B.

NOT CONTENTS

Acton, L.
Adams of Craigielea, B.
Andrews, B.
Bach, L.
Bassam of Brighton, L. [Teller]
Bhattacharyya, L.
Bilston, L.
Blackstone, B.
Borrie, L.
Boyd of Duncansby, L.
Bradley, L.
Brett, L.
Brooke of Alverthorpe, L.
Brookman, L.
Campbell-Savours, L.
Clark of Windermere, L.
Crawley, B.
Davidson of Glen Clova, L.
Davies of Coity, L.
Davies of Oldham, L. [Teller]
Dean of Thornton-le-Fylde, B.
Desai, L.
Dubs, L.
Elder, L.
Evans of Parkside, L.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Foster of Bishop Auckland, L.
Gale, B.
Gilbert, L.
Golding, B.
Gould of Potternewton, B.
Graham of Edmonton, L.
Hart of Chilton, L.
Haskel, L.
Haworth, L.
Hollis of Heigham, B.
Hoyle, L.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Jones of Whitchurch, B.
Judd, L.
Lea of Crondall, L.
Macdonald of Tradeston, L.
MacKenzie of Culkein, L.
Mackenzie of Framwellgate, L.
Martin of Springburn, L.
Maxton, L.
Morgan, L.
Morgan of Drefelin, B.
Morris of Yardley, B.
Parekh, L.
Patel of Bradford, L.
Pendry, L.
Pitkeathley, B.
Puttnam, L.
Rosser, L.
Rowlands, L.
Royall of Blaisdon, B.
Sawyer, L.
Scotland of Asthal, B.
Sewel, L.
Simon, V.
Soley, L.
Stone of Blackheath, L.
Symons of Vernham Dean, B.
Thornton, B.
Tomlinson, L.
Tunnicliffe, L.
Wall of New Barnet, B.
Wilkins, B.


10 Mar 2010 : Column 317

Financial Services Bill

Bill Main Page
Copy of the Bill
Explanatory Notes
Amendments

Committee (1st Day) (Continued)

8.48 pm

Debate on whether Clause 1 should stand part of the Bill.

Baroness Noakes: 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.]



10 Mar 2010 : Column 318

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

10 Mar 2010 : Column 319

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.

Lord Newby: My Lords, we disagree with both the analysis and the prescription that the noble Baroness has just given. In terms of the analysis, she places a pretty large burden on the tripartite arrangement-the architecture for the problems which we faced in the UK-and yet she said that the Chancellor was not interested in the asset bubble. From evidence that he gave when I was a member of the Economic Affairs Select Committee of your Lordships' House, we know that the Government did not believe that the Bank of England should worry about asset bubbles either. Let us suppose that, at that stage, only two bodies were responsible for supervising the macroeconomic financial situation-a Chancellor who was uninterested, and a Government who did not believe, that the bank should be worrying about bubbles. Would that have changed the way that matters went? No, it would not. The Government and regulation were caught up in the bubble just as much as the banks were. Therefore, to argue for the collapsing of three into two, when the heads of the two were not interested, as the noble Baroness has just said, seems not to be an effective analysis of why we got into the mess that we did.

9 pm

As for the prescription, my question for the noble Baroness and her colleagues who are going to speak is: why, when I go and have meetings and dinners in the City or meet people who work there, do at least three-quarters of them not believe that this is an effective change and believe that it is merely changing the name plate on the FSA's door? That is the reality of this. I know that the noble Baroness and some of

10 Mar 2010 : Column 320

her colleagues, such as George Osborne, believe firmly that this will be an effective answer, but they are in a minority in the City. This seems to me, as someone who does not work in the City but observes it and talks to people in it, to be a serious flaw-it is going to be a problem for her party.

No one can claim that the tripartite system worked well, or that any system anywhere worked well. As the noble Baroness said, the success or failure of the system cannot be correlated with any financial supervisory architecture. We agree. The key thing that has changed, and that needs to change, is the attitude of the people at the top. The shock that they have been given by this terrible collapse will mean that their attitudes are now very different from those that they adopted before. Those attitudes are not coloured in the slightest by whether they are part of the FSA, part of the Bank, part of a duopoly running the system or part of a tripartite arrangement. It is a question of experience and changing attitudes. The best hope for an effective regulatory system is the shock that they have had in terms of the way that they manage their regulatory affairs, rather than the structure in which they operate.

Viscount Trenchard: My Lords, I support my noble friend Lady Noakes in her opposition to these clauses standing part of the Bill. I firmly believe that it is necessary that the Bank of England should again assume ultimate overall responsibility for financial supervision. Call it macro, micro or what you will, the separation of the macro from the micro was undoubtedly a contributory cause of all parties' eyes being somewhat off the ball as the financial crisis developed.

The noble Lord, Lord Newby, suggests that three-quarters of those who work in the City do not agree with my party's solution to the problem, to re-empower the Bank of England as being in overall charge of financial supervision. However, what answer does the noble Lord think he would get if he asked people who work in the City whether they think that the FSA has correctly and properly conducted financial supervision over the 10 years or more that it has been in existence? He might find that, again, at least 75 per cent of those who answered said no. In my experience, most people think that the FSA was too much an internal organisation, having meetings with itself or going to harmonisation conferences all the time and not actually spending enough time on prudential supervision. Why? Because it was separated from the real, ultimate responsibility for the macro-prudential supervision, which was at the Bank of England.

Whether the FSA is completely abolished, or is simply made to report to the Bank of England with regard to prudential supervision, does not matter so much. If the noble Lord asked people in the City whether they thought that the FSA ought to report ultimately to the governor or to the Bank of England, again he would find that a majority of practitioners supported that view.

It is clear that Clauses 1 to 4 are purely cosmetic and that the financial stability council is no different in composition or function from what was there before. It is a totally inadequate response to what has happened, and therefore I wholly support my noble friend's opposition.



10 Mar 2010 : Column 321

Lord Higgins: My Lords, I cannot recall an occasion in either House when a debate has had such a surreal atmosphere about it. We know that it is inconceivable that this clause will become law, yet we are going through the motions of debating and amending it. We have had a number of interesting debates on various aspects of economic management, but the reality is that this clause simply formalises the failure of the tripartite system. Instead of getting rid of it, the clause continues the process and merely seeks to ensure that the people in the tripartite system do their job in the way which they ought to be doing without any legislative provision whatever.

One of the important things that we need to do about regulation in the City is to restore the authority of the regulators. It used to be the case that the authority of the Governor of the Bank of England was hugely influential. It used to be said that even his raising his eyebrows was sufficient to terrify bankers. That is no longer the case, but we can do something to avoid a situation where authority is divided between the governor on the one hand, with his historic role in these matters, and the FSA on the other. Therefore I believe that the proposals put forward by my party concerning this are entirely to be supported, and that the continuing division of authority as the Government propose in the Bill is certainly a mistake.

We have debated a number of aspects of this clause, but I want to raise one other point. There is at the moment a fashion to invent new economic expressions, of which the most pervasive is that of quantitative easing, when all one used to refer to was increasing the money supply. Now we suddenly have another: macro-prudential regulation. It is not the least bit clear what that means. In fact, it is likely to lead to considerable confusion because there are two separate things.

The first is the macroeconomic management of the economy. It is certainly important, to avoid future disasters of the kind that we have just had, that that should be operated properly. However, that is rightly the concern of the Treasury and to some extent the Bank of England, with the powers which the present Prime Minister gave it back in 1997-98-although, as I have pointed out on many occasions in this House, monetary policy was not transferred to the Bank of England; all that was transferred was the right to set a single interest rate in the hope that other people would follow. Control of the money supply continued to be taken away by the then Chancellor of the Exchequer by removing the Debt Management Office from the Bank to the Treasury. We therefore have an extremely unsatisfactory situation regarding the macroeconomic management side.

However, we also have the question of microeconomic management and regulation, which at the moment falls to be undertaken jointly by the FSA and, to some extent I suppose, by the Bank. The use of that expression "macro-prudential regulation" totally confuses the distinction between macroeconomic management on the one hand and micro-regulation on the other. That might affect major banks of a very significant size that may put forward or introduce macroeconomic instability into the economy. However, that is really a separate operation from macroeconomic management. It is important not to use this expression, which I believe is

10 Mar 2010 : Column 322

rather fashionably used by the FSA, to confuse one thing with the other. Having said that, I remain of the view, as my noble friend knows, that this clause is mere window dressing. It is not likely to do more than formalise the problems we have faced over the past few years, and to that extent it is not the way to go forward.

Viscount Eccles: My Lords, I believe this is the answer to the noble Lord, Lord Newby, as to why it is wrong to persist with the FSA in its present form. If you start a very important and large institution, which had forebears, and it is a failure, it is very seldom-I should like the noble Lord, Lord Newby, to find me an example-that anyone can put the culture and performance of that institution right. Institutions acquire a character of their own in their very early years. When it goes well, it is brilliantly unchangeable, whoever happens to be in charge. But if they acquire the wrong character right at the beginning, it is virtually impossible to put them right.

Lord Whitty: My Lords, I apologise to the noble Baroness that I was not in the Chamber to hear her speech, but I was watching it on the monitor. I am afraid she provoked me to come across here to intervene in the debate on this clause standing part.

At one point she said that one of the problems with the FSA was that it was taking too much time engaging in consumer protection. I declare my interest as chair of Consumer Focus. That canard, which has run through quite a lot of commentary on the failures of the banking regulation system, is a complete misinterpretation. We have to ask ourselves what the banking system is for. The banking system is not for itself, nor is it for the City of London. It has a good benefit on the balance of payments in making a profit, and we should recognise that, but essentially the banking system is to provide the oil and the money to ensure that the rest of the economy and society operate. Its responsibility is to its depositors, to those who take loans from it and to the other people who take up its financial services. It is therefore an absurd argument to say that the regulator has undermined the industry by forcing it to take too much notice of its customers. If you step back and think whether it could make sense to apply that to any other industry, then the absurdity becomes apparent.


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