Financial Services Bill

Public Bill Committee, 5 January 2010.

Roger Gale (Conservative, North Thanet)

Good morning. May I wish all members of the Committee a peaceful and a happy new year? May it bring at least some of you that for which you wish. That, by the way, is an entirely non-partisan statement. For the benefit of Members’ comfort, we have endeavoured to address the issue of heating. I am reliably informed that the controls in this building take a little time to respond. I was asked earlier whether Members might continue to wear their jackets. The answer is yes.

Clause 1

Mark Hoban (Conservative, Fareham)

I beg to move amendment 37, in clause 1, page 1, line 12, at end add—

‘(c) where appropriate, direct the relevant authorities to act in accordance with the powers available to them under the relevant legislation.’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following: Amendment 36, in clause 1, page 2, line 8, after ‘Council’, insert—

‘( ) specify the responsibilities of each member of the Council in protecting or enhancing the stability of the UK financial system;

( ) specify the powers each member of the Council is able to exercise in protecting or enhancing the stability of the system;’.

Amendment 38, in clause 4, page 3, line 31, at end add

‘“the relevant legislation” means for the Financial Services Authority, the Financial Services and Markets Act 2000 and for the Bank of England, the Banking Act 2009.’.

New clause 2—Identification of additional powers needed to fulfil responsibilities for financial stability—

‘The Treasury must lay a report setting out the powers that the Financial Services Authority and the Bank of England need to fulfil their responsibilities for financial stability under the relevant legislation within one year of the commencement of this Act.’.

Mark Hoban (Conservative, Fareham)

I also wish you a happy new year, Mr. Gale.

The amendments address a particular aspect of the Council for Financial Stability. I want to confine my remarks to the issue of responsibility and leave the broader issue of the principles underpinning the council to a stand part debate later. The clause needs relatively little discussion given that the evidence sessions prior to the Christmas recess dwelt at length on the Council for Financial Stability. One of the issues that we touched on and about which the Minister and I exchanged views was his use of the footballing analogy—whether the council was a team, and who was captain and who was the manager. The point that the Minister made was that all players on the team shared responsibility for scoring a goal. The Minister’s principal point was that it was a shared endeavour and that each member of the council was responsible for financial stability. He drew a very rosy picture of the council. However, in the afternoon sitting of that first day, it was clear that the two other parties on the council—the Bank of England and the Financial Services Authority—saw their roles as being different from that which the Minister set out, and I will talk about that as I go through my amendments. They did not have the same sense of shared responsibility that the Minister seemed to have. The FSA defined precisely its powers and responsibilities with regard to financial stability. The Bank of England, while acknowledging that it had a financial stability objective under the Banking Act 2009, felt that its powers to deliver that objective were limited and therefore its responsibility was by implication limited.

I want to explore the issue of responsibility, so I have tabled three amendments and new clause 2, which seeks to develop the argument in more depth. Amendments 37 and 38 give the Council for Financial Stability the power to direct members to fulfil their responsibilities under the Financial Services and Markets Act 2000 in respect of the FSA and under the Banking Act 2009 in respect of the Bank of England. Amendment 36 seeks to clarify the respective powers and responsibilities of each member of the Council for Financial Stability in the statement that the Treasury will prepare about the council. New clause 2 takes the argument a little further down the track by requiring the Government to set out the additional powers that are needed by the Bank of England and the FSA to fulfil their responsibilities for financial stability. That echoes a theme that the Governor has raised in evidence to the Treasury Committee.

Amendment 37 would give the council the power to

“direct the relevant authorities to act in accordance with the powers available to them under the relevant legislation.”

That would take the council from a body that is about co-ordination and consensus to one that has the power to give direction and be more executive in its remit. Amendment 38, for clarity, defines what the relevant legislation is, which is the FSMA for the FSA and the Banking Act 2009 for the Bank of England.

The Minister presents the council as a co-ordinating body, whose responsibility is to get the three bodies that were part of the tripartite agreement to sit down together, but the rather lengthy debate that we had in the evidence session went beyond that. The council’s powers and responsibilities are somewhat opaque, so the amendments try to probe the nature of its powers. What can it do? Is it simply a talking shop, or does it have executive power? The amendments do not tackle the issue of who is in charge, but they are an attempt to answer the question of what the council can do in a crisis to either maintain or restore financial stability. We have seen that, in a way, as the financial crisis developed.

The earliest manifestation of the crisis was Northern Rock. At the start of the saga surrounding that bank, there was some confusion about who had the final responsibility to resolve the problems, which the Government took in the end. As we now understand, there was an expression of interest by Lloyds bank to acquire Northern Rock. However, to make that takeover viable, a support facility was required. The evidence given by the Chancellor to the Treasury Committee was that that was by far the best option. However, that facility was refused at that point; of course, that support was given at a later stage when Northern Rock was nationalised.

The point is not to use hindsight to question the handling of a particular decision, but simply to ensure that we learn the right lessons from that case. It is important therefore that we know what the council is able to do. Is it simply there to talk about some of the problems, or can it reach a conclusion and act? It is important that we understand its capacity to act. We do not want to get to another financial crisis and see the same problems emerge, where everyone suddenly steps back and says, “It’s not my responsibility to sort it out,” and there is a stand-off between the three parties under the Government’s model—the Bank, the FSA and the Treasury.

One of the lessons that we need to learn from the recent events is that the executive capacity to undertake those responsibilities was not there. My amendment 37 seeks to clarify what the council can really do in a moment of crisis to resolve a situation. Is the council there to have a powerful executive role, or simply to co-ordinate and build consensus with, ultimately, the three parties reaching their own conclusion about the right course of action?

John Howell (Conservative, Henley)

Does my hon. Friend share my concern that, having gone to the trouble of putting the council on a statutory basis, the Bill suggests that the council also has a role of its own? Therefore, does he have a feeling for whether we are talking about a tripartite arrangement any more, or about what we might call a quadripartite arrangement, in which case the Bill is even less clear and definite about what the council does and how it fits into the arrangement?

Mark Hoban (Conservative, Fareham)

My hon. Friend makes an important point about the substance of the body. Does putting the council on a statutory footing give it any more substance than the informal arrangements that existed before? Tripartite arrangements are already in existence, such as the memorandum of understanding, which took place under this regime—it is a different document but similar in many respects. Where are we heading? The Treasury Committee, looking at the council last year, reached the conclusion that the exercise was cosmetic. We want to understand, by means of the group of amendments around responsibility, and new clause 2, what the substantive change between the existing system and the one proposed by the Government in the Bill is.

The reality is that, in terms of the Government’s response to the regulatory dimension of the financial crisis, the provisions are their flagship measure, the measure that the Government are pinning all their hopes on. We have yet to be persuaded that there has been a step change in the nature of the co-ordination between the three bodies—the Treasury, the FSA and the Bank of England—as a consequence of part 1 of the Bill. Given the evidence session that we had before Christmas, the Committee has the opportunity to explore what is substantially different now to the previous arrangements.

On amendment 36, I want to make sure that we are clear about the responsibilities of each member of the council

“in protecting or enhancing the stability of the UK financial system”,

and that we specify the powers that each member of the council is able to exercise in protecting or enhancing the stability of the system. We need to get across that key point, about which, coming away from the evidence sessions, I felt there was still some uncertainty—some blurring of the edges. We need to be much clearer in the Bill about those respective responsibilities.

As I said in my opening remarks, the Minister used a footballing analogy in his evidence, the essence of which was that the three partners are all ultimately responsible for the results, but will make their contributions in different ways. When pushed on the specifics, the Minister said:

“The Treasury, as the UK’s finance and economics Ministry, has its set of responsibilities”—

he did not explain what the responsibilities were—

“the Bank of England has responsibility for monetary policy as an independent central bank; and the FSA has responsibility as an independent financial regulator.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 9, Q15.]

That seems quite straightforward. We might like some more details about what the Minister feels the Treasury’s responsibilities are, because it is responsible for a wide range of economic policies—which areas of policy contribute to financial stability? Is the Treasury sufficiently clear about the impact of its economic decisions on financial stability?

What about the Bank, which is listed as having

“responsibility for monetary policy as an independent central bank”?

The Bank’s main role in monetary policy is with interest rates. We can argue that interest rates have a key role in determining financial stability. One of the arguments for having an independent central bank is that giving it control over interest rate policy provides a much more stable environment for inflation. We support the need for an independent central bank on the basis of that argument. However, as the economic crisis has demonstrated, simply having low and stable inflation does not mean we have economic stability.

Some would argue that one of the problems that we have seen in recent years is that, because interest rates have been directed at maintaining low inflation—inflation has been low, so interest rates have been low—credit has been underpriced. Credit has been cheap but, because of the change in the global economy, we have also seen increased liquidity, which has meant that more money is around, creating an asset price bubble, which has burst, with dramatic consequences for families across the UK. I am not sure that simply saying that the Bank of England’s responsibility for financial stability flows from its responsibilities for monetary policy is the right answer. That is why we need to be much clearer in the Bill about the responsibilities that the Bank of England has in maintaining financial stability.

I am sure that the Minister is aware of the speech of Adam Posen, who is an external member of the MPC, given in December last year. He made the point:

“We would be better off if we could prevent asset price booms and busts, and it is clear that monetary policy as currently practiced is not sufficient to do so.”

He seems to be at odds with the Minister’s view that monetary policy is there to help provide financial stability.

The Bank was given the objective of financial stability in the Banking Act 2009. How is the Bank to deliver? John Footman, in his evidence, suggested liquidity insurance coming from the Bank’s activities; oversight of the payments system, under the new responsibilities given under the Banking Act; and the bank resolution regime. Those are the Bank’s powers, as he saw it, in the context of financial stability. Clearly, there was a sense that the powers were not sufficient to deliver financial stability. The Governor of the Bank of England told the Treasury Committee in June:

“it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons”.

There is clearly a gap between the collective responsibility that the Minister believes in when it comes to enhancing or maintaining financial stability, and what the Bank sees as its contribution to that objective. The Minister suggested monetary policy, but Adam Posen suggests that monetary policy, as currently practised, does not deliver. John Footman identified some of the tools available to the Bank to deliver financial stability, but even then the Governor felt that his role was limited to that of being a preacher and to giving sermons, and in need of more powers if he was to be able to fulfil fully the responsibility given to the Bank in the Banking Act for maintaining financial stability.

Rob Marris (Labour, Wolverhampton South West)

It would help me understand what the hon. Gentleman is trying to do with his amendments and the direction of travel if he could tell the Committee whether he supports the existence of the Council for Financial Stability, and, if so, what he thinks the council should do.

Mark Hoban (Conservative, Fareham)

I am in danger of trespassing on to the stand part debate.

Roger Gale (Conservative, North Thanet)

Order. We were going to get to this point, so I might as well say it now. I take a relaxed view on the matter. Members can have a stand part debate at either the beginning or the end of a clause, but not both. Sometimes, for the convenience of the Committee, a more wide-ranging discussion takes place at the start of a clause, and I am perfectly happy about that. The hon. Member for Fareham set out the context of the clause in his opening remarks, and had the issue not arisen now, at the end of his remarks—I am aware of the interest of the hon. Member for Chichester in the matter as well—I would have said that, given the nature of the debates on the selected amendments, the likelihood is that we will not have a stand part debate at the end. If hon. Members wish to use the amendments now, or those in subsequent debates, to range wider, I am perfectly relaxed about it.

Mark Hoban (Conservative, Fareham)

Thank you very much, Mr. Gale. I am not quite sure where that leaves me now, other than perhaps having to speak longer on this matter than I had expected. I will conclude my remarks on the amendments, and then make my contribution to the stand part debate, and we will take it from there.

In response to the hon. Member for Wolverhampton, South-West, as will be clear when I speak later, we do not think that this will work, for all the reasons that I am trying to illuminate in the context of responsibilities, and because of the fundamental principle that the existing regulatory regime is bust. It did not work during the financial crisis, and I do not believe that simply putting the tripartite arrangements on a statutory footing will strengthen the regime sufficiently to say that that is the end of the reforms that are needed. That is why my party set out in its white paper “Plan for Sound Banking” that we would make significant reforms to financial regulation, so that the Bank of England would be explicitly both a macro-prudential regulator, building on some of the powers that it has, and a micro-prudential regulator, particularly with regard to the banking sector. We believe that some of the issues that arose during the financial crisis can be resolved only through fundamental structural change. Therefore, we make it clear that we oppose clause 1 in principle.

I am trying to tease out how the Government believe the council will work in practice. We cannot always assume the outcome of the next election, so this may be the structure that we will be lumbered with until we know the outcome, and it is therefore helpful to know precisely what the council will do in practice. I hope that that clarifies the issue for him and other Members.

Mark Todd (Labour, South Derbyshire)

My understanding of his party’s policy, which he has repeated, is that it seeks to replace a tripartite regime with a bipartite one, in which the Government continue to have a role, as they must, and the Bank of England has the regulatory responsibility currently lying with the FSA drawn into its compass. The same issue arises as to how a bipartite regime would work as it does for a tripartite regime, and I would welcome it if he expanded on that issue.

Mark Hoban (Conservative, Fareham)

The challenge of the tripartite regime concerns the responsibilities that each of the parties has and, as has been demonstrated, there is a significant gap in responsibility. The analogy that I have drawn previously is the assumption that the FSA, the Bank and the Treasury are effectively three circles. One assumed that under an efficient design of the system in the 1997 reforms, each of those three circles touched and there was a right interface between them. The crisis has demonstrated that those three circles did not touch. There were significant gaps between the authorities and what their powers and responsibilities were. Our argument is that it is not an issue about co-ordination but the powers that they have. For example, no one had the power to act as a macro-prudential regulator. Giving back those powers will strengthen the regulatory regime and the stability of the financial crisis. Our aim is to produce a system that, as far as possible, reduces the need for a resolution. We want the right mechanisms and approach to control the flow of credit, to look at the imbalances in the economy and to deliver a solution. There will be issues around the interaction between the Chancellor of the Exchequer, as the representative of the Government, and the Governor of the Bank of England, but the Bill does not tackle that issue because it does not go far enough in recognising that the fundamental structure is flawed.

Andrew Love (Labour, Edmonton)

I note that there will be a division on the principle of clause 1. I am surprised that the opportunity has not been taken to give primacy to the Bank of England for regulatory matters. Will the hon. Gentleman explain why he has been so timid in his amendments?

Mark Hoban (Conservative, Fareham)

If I had known that the hon. Gentleman might have been tempted to support that reform—

Andrew Love (Labour, Edmonton)

No, I would not; I am just trying to tease out the rationale.

Mark Hoban (Conservative, Fareham)

I could have spent a long time drafting amendments to convert the Bill, which was introduced by a Labour Government at the fag end of their term, to what a Conservative measure would look like if we formed the next Government. However, I wanted to focus the debate on the inadequacies of the Government’s measure and leave the other debate for the other side of a general election. I will make the case for why I think that the Bill is the wrong reform for financial regulation in the UK, why it does not address the failings, and why we need fundamental reform. I am sure that there is still time to table yet more new clauses to enable us to talk about the issues at greater length. The Committee carries on until 4 o’clock next Thursday afternoon, so there is much more that we could talk about. I am happy to table more amendments so that we can have that debate. I suspect that they might rest on the amendment paper uncalled, since we are not sure how far we will get. I have decided, in this debate, to focus on what is in front of us today, on what the Government are trying to do, and on why the Government are failing in their responsibilities to reform financial regulation.

The Government have not come forward with more radical proposals because the Prime Minister introduced the regulatory structure we currently work with. They have not had the nerve to recognise the fundamental flaws and are trying to have a cosmetic reform to try to persuade people that they have learned the lessons. The Treasury Committee recognises that the reform is cosmetic. It does not address the fundamental weaknesses. If the hon. Member for Edmonton or other hon. Members on the Treasury Committee wish to table amendments to reflect the output from the Committee’s deliberations, that is fine; we would be prepared to address them. However, I am realistic about how far we are going to get through the Bill. If the Government Whip moved an amendment to the programme motion, so that we could sit for another three or four weeks to discuss the reforms in our white paper, I would be happy to agree to that.

Roger Gale (Conservative, North Thanet)

Order. I think that the hon. Gentleman might find that that is not up to a Government or other Whip, but up to the Programming Sub-Committee and ultimately the House.

Mark Hoban (Conservative, Fareham)

I am grateful for that guidance, Mr. Gale. If the Programming Sub-Committee felt the need to meet again and proposed that an extension to the timetable be put to the House so that we could debate for much longer, I would be grateful. We argued for more time to be given to the Bill, to enable us to discuss such issues in more detail. Sadly, that was not the view of the House.

Andrew Tyrie (Conservative, Chichester)

The point about time is particularly relevant. Ten years ago, we were discussing exactly the same issue—I shall come on to this, if I manage to catch your eye, Mr. Gale—in the Committee on the Financial Services and Markets Bill. We tried to open a debate about the arrangements in place relating to systemic risk and financial stability during an evening sitting of the Committee. Our attempts were repeatedly negated by the antics of the Government Whip and by the Minister, who concluded, after a debate on the issue of a little over an hour:

“I gave way extensively...and, if I may say so, a great deal of time has been wasted on this matter.”—[Official Report, Standing Committee A, 13 July 1999; c. 182.]

If the Government had listened to what was said in that debate, I am confident that, although we might still have had a Northern Rock crisis, it would have been much better handled.

Mark Hoban (Conservative, Fareham)

I am grateful to my hon. Friend for that contribution. He is the only member of the Committee who went through the parliamentary process that established the FSA. A number of the issues raised at the time have resonance today. One was how the different bodies were to work together. If more time had been devoted at that point, perhaps, as he said, a different set of circumstances might have resulted, which would have been to the benefit of all of those who have an interest in the strength of the financial services sector and its regulation. Then as now, I suspect, programming and timetabling were a constraint on discussion.

Before the interventions, I was dealing with the issue of how the Bank saw its responsibilities and powers in terms of financial stability. I now want to touch on the FSA’s role, which also came up for discussion in the evidence sessions, when Andrew Whittaker, its general counsel, gave evidence to the Committee.

The FSA’s view was interesting. Again, it diverged from the view taken in the footballing team analogy used by the Minister. Although the FSA recognised that it shared a responsibility, it was clear about the limits of what it could do to deliver that objective. It was also clear about where it was in the hierarchy, when it came to delivering financial stability. Mr. Whittaker said:

“We, for our part, recognise that our role in relation to financial stability is, in some senses, a secondary one to the other authorities”

and

“it is inconceivable that we would wish to second-guess the views of the other authorities in that respect.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 28, Q58.]

I thought that a clear statement from Mr. Whittaker about the FSA’s role. It is the economic and business regulator, and the micro-prudential regulator, for the financial services sector. He clearly had a restricted view of what the FSA’s role would be in terms of delivering financial stability. It is entirely consistent with the remit of the FSA for him to see the matter in that light.

We can develop the point. If the FSA as a micro-prudential regulator believes that it has a secondary role, who is responsible for delivering macro-prudential stability? Who is the macro-prudential regulator? Is it the Bank of England, which does not seem to have the powers under the Banking Act 2009 to fulfil that role? The FSA sees itself as the micro-prudential regulator, and as not having that other role.

Rob Marris (Labour, Wolverhampton South West)

What does the hon. Gentleman understand by the terms “macro-prudential regulator” and “micro-prudential regulator”? He has used them several times.

Mark Hoban (Conservative, Fareham)

The micro-prudential regulator looks at the financial position of individual entities; that is the role that the FSA has undertaken. It looks at financial risks attached to the entities that it regulates and sets levels of capital, using the capital requirements directive, solvency 2 or other appropriate rules for different parts of the financial services sector. It looks at individual entities and their solvency.

The macro-prudential regulator looks at financial risk across the whole system. It looks at trends—in, say, credit—across the whole system, and is responsible for managing, identifying and acting on those trends. We will have a debate later—under clause 2, I think—about who is responsible for acting when one of the regulatory authorities identifies an issue or a concern. We are looking for a regulator that has responsibility for identifying global trends, and trends in the economy as a whole, and their consequences for financial stability. The regulator would have not only a requirement to identify the trends, but a toolkit to enable it to respond to issues and trends.

The FSA and Lord Turner, in his report, identified a gap between what the Bank and the FSA did. That gap is not addressed by the Bill, but it should be, and that is why our reforms seek to address that gap by giving the Bank of England an explicit role as a macro-prudential regulator.

Rob Marris (Labour, Wolverhampton South West)

Would the meltdown of a bank the size of the Royal Bank of Scotland, as an individual entity, be a matter of micro-prudential or macro-prudential regulation?

Mark Hoban (Conservative, Fareham)

There are two very clear strands. I do not think that there is a simple yes-or-no answer to that question. Clearly, in terms of the micro-prudential regulation of RBS, one would expect the regulator to look at the levels of capital and the risk within the business, and to ensure that the capital and risk were aligned. That is very much a micro-prudential role, which the FSA should be undertaking.

Of course, there is a macro-prudential issue too, which involves asking questions such as “What created the circumstances that enabled RBS to grow in the way that it did?” and “What were the wider trends in the economy, including trends relating to the availability of credit in the market as a whole?” That helped fuel RBS and its growth, as it would have helped fuel the growth of the balance sheets of other banks. In the context of RBS, there is another issue: if a bank such as RBS goes through a financial crisis, there is a wider market implication.

Part of the challenge is that if one started to separate out the micro and macro-prudential regulators, there could be an opportunity for a divide between the two, and there could be a lack of clarity on who is responsible for which aspects of activity. That is why we have argued that the Bank of England should act as both the macro-prudential and the micro-prudential regulator. The current system gives the FSA the power to act as the micro-prudential regulator, and gives the Bank of England some powers to look at macro-prudential trends. However, it does not give the Bank a toolkit that is needed to respond to those trends. The current system is therefore deficient in two ways. First, the powers are not there for the Bank of England. Secondly, the structure creates a gap between the FSA and the Bank. In his report, Lord Turner identified that as one of the failures of the regime introduced in 1997.

Rob Marris (Labour, Wolverhampton South West)

Is that not exactly what the Council for Financial Stability will do—co-ordinate to avoid that gap becoming a problem?

Mark Hoban (Conservative, Fareham)

I suspect that if we went back to the debate on the Financial Services and Markets Act that set up the new regulatory framework—perhaps my hon. Friend the Member for Chichester might be able to illuminate us on this—or on the Bank of England Act 1998, we might find a similar discussion about what structure would be in place to co-ordinate the Bank and the FSA. As a consequence, we see where we are today. The co-ordinating role is not particularly strong. When the Minister responds, he might be able to give us all comfort that this is a much beefed-up body with much clearer responsibilities and powers for the council. So far, we have not seen evidence to suggest a significant improvement on the existing regime.

Andrew Tyrie (Conservative, Chichester)

The intervention that we just had was exactly the right question, but if we listen to what we were told 10 years ago, the hon. Member for Wolverhampton, South-West might consider whether much has changed. As the then Minister, the right hon. Member for Leicester, West (Ms Hewitt), said:

“As the memorandum of understanding clearly states, managing financial stability is a common objective of the three institutions whose roles and responsibilities are clearly delineated”.—[Official Report, Standing Committee A, 13 July 1999; c. 182.]

Is that not exactly what we will be told by the Government in just a moment?

Mark Hoban (Conservative, Fareham)

I am grateful to my hon. Friend for that comment, which is part of the problem. We have been here before. We are trying to put a fresh coat of gloss over the failings of the existing system, which is where the fundamental flaw is. The proposals in the Bill do not address the fundamental problem of co-ordination. We can be reassured by putting it on a statutory footing and by a fresh Minister making the same reassurances, but this part of the Bill does not demonstrate to me that the Government have learnt lessons from the financial crisis and the way in which the structure of financial regulation in the UK has worked over the past decade. It is the wrong answer to the question about how we learn the right lessons from the financial crisis.

Andrew Love (Labour, Edmonton)

Talking about fundamental problems in the very uncertain times in which we live, how does the hon. Gentleman respond to the very considerable City concern that this will lead to the big bang change that the Opposition are suggesting of giving potential authority to the Bank of England and creating further uncertainty, which may lead to instability at a time when we need the maximum stability and the least uncertainty?

Mark Hoban (Conservative, Fareham)

The hon. Gentleman’s intervention is interesting; it suggests two things to me. The first is that Government Back Benchers recognise that there is not an argument to be made in support of the existing regime. The Chancellor on Second Reading focused not on why our proposals were wrong in principle but on the implementation risk. I would have thought that the Government would be more confident about the regulatory regime that they introduced in the late ’90s and more robust in its defence. It demonstrates a tacit recognition that the system failed, but for political reasons the Government feel unable to make the fundamental reforms needed in this country. The second point is about the implementation risk—there was a risk in the implementation of any change in any project. The right thing to do is to ensure that implementation is planned, well-thought-through and detailed, which is the work that we are undertaking now, to ensure that the implementation risk is as low as possible. Fundamentally, if the Government think that the main argument is about implementation, that demonstrates a lack of confidence in the regulatory regime that they established.

Ian Pearson (Labour, Dudley South)

Happy new year to you, Mr. Gale, and to all members of the Committee.

I want to pick up on what the hon. Gentleman says. As I will explain in my remarks when I respond to the debate, it is clearly the Government’s position that the tripartite system has worked but it could be improved. It has been tested in extraordinary circumstances but, as he knows, no retail depositors lost out. We took effective action over Northern Rock; we took unprecedented action in recapitalising the banks. The system of co-ordination, which existed and is being improved upon as part of the Bill, has been fire-tested as part of what has gone on in the world economy. We are not defensive at all. There are strong arguments why that is the case.

Mark Hoban (Conservative, Fareham)

I find the Minister’s comments remarkable. His list of so-called successes was all about how the mess was cleared up once the bubble had burst—nothing about how the system had tackled the issues that gave rise to the financial crisis and nothing that explained why the tripartite system worked so well in the run-up to the financial crisis or how it reduced the risks. The list was all about what happened once the bubble had burst—nothing about prevention, but all about cure.

The Minister needs to reflect: taxpayers have given indemnities and guarantees, as well as direct investment in the banking system; people have lost their jobs; and we have seen a destruction of wealth in this country as a consequence of the financial crisis. The regulatory system should have played a significant role in minimising the creation of that financial crisis, but all the Minister can talk about is what happened to clear up the mess, rather than what change will take place to prevent such a problem from emerging in the first place.

The emphasis is wrong, which is why the changes we outline are focused around getting the structure of regulation right, so that we can identify problems as they emerge, much earlier on. Someone would be tasked with the responsibility of responding to the issues, so that people have the powers they need to tackle such issues as they emerge. The reforms in the Bill do not go anywhere near achieving that goal; they are a gloss on a fundamentally flawed regulatory structure. Simply to praise that structure by reference to what it did to sort out the mess it created is not a strong argument in favour of the retention of the existing tripartite regime.

Ian Pearson (Labour, Dudley South)

I am happy to expand on my arguments when I make my contribution to the debate, but again the hon. Gentleman seems to want to pretend—as the Conservative party has on previous occasions—that the problem is just one of UK financial regulation. He knows that the financial crisis was global, and all regulators around the world had to respond to it. All regimes were tested and none was found to be perfect but, I repeat, in difficult circumstances the tripartite authorities and the system we introduced played a part in ensuring that we got through the incredibly difficult financial situation in the best possible shape.

Mark Hoban (Conservative, Fareham)

The Minister should reflect on his argument—“a global financial crisis” is a great Government line. Let us not forget that the regulatory structure that the Government set up in 1997 regulated one of the world’s two global financial centres. In a global crisis, to what extent does London’s role as a global financial centre feed into that system? Did we get the regulatory regime right in the UK in the late ’90s? The answer, clearly, is, no, we did not get it right. There were some fundamental failures in the structure of regulation, leading to the crisis. Those failures may well have made the crisis in the UK worse than it would have been had there been a better structure in place.

The Government’s failure to accept that the system failed reflects badly on them, because most regulatory regimes are reflecting on and learning the lessons of the financial crisis, with a number of new restrictions, more responsibilities flowing back to central banks and people looking at the structure of financial regulation in the States. Yet the Government seem to be the only ones to have the view that the system is all working fine. All we need to do is to provide a new gloss on the co-ordinating arrangements and it will be fine. A real failure of the Government is to accept some of the flaws in the structure and that the case for reform goes beyond simply putting the tripartite arrangements on a statutory footing.

Roger Gale (Conservative, North Thanet)

Order. I accept entire responsibility for the fact that this debate has broadened. The quality of the debate is fascinating, but there is a fundamental difference between a stand part debate and a Second Reading debate and we are moving towards the latter rather than the former.

Mark Hoban (Conservative, Fareham)

Thank you, Mr. Gale. Let me return to my amendments and new clause 2. I will try not repeat myself when we come to the stand part debate.

Before this exchange on the principle of the Government’s proposed reforms and whether they are adequate to address some of the issues that emerged during the financial crisis, I was talking about the need to be clear about the allocation of responsibilities for the powers to the various tripartite authorities. The FSA stated in both its oral and written evidence to the Committee that it saw itself as having a secondary role, and the Bank was also clear about the powers that it had to contribute to financial stability. However, if we have a Council for Financial Stability and a Bank with an objective for financial stability—we will discuss giving the FSA a statutory objective for financial stability later—what are the tools needed to deliver those objectives?

The evidence sessions and the tools that I understand are available to the various tripartite authorities suggest that, under the current regime, responsibility is exercised through co-ordination. We do not, however, have the accountability that we need and there is a lack of clarity about the tools that the different parties will have to help deliver financial stability. What will those tools be and who will be responsible for them?

John Footman said during his evidence that

“we are still at the stage of thinking about the kinds of tools that would be used.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 30, Q64.]

That lack of clarity creates confusion about who will do what and who will ultimately be accountable. I do not want to see a recurrence of what we have seen in the current financial crisis where, at a moment of crisis, people are allowed to wriggle off the hook and not face up to their fundamental responsibilities. That is why we need to be clear about the council’s responsibilities.

During the evidence sittings, my hon. Friend the Member for Henley asked the Minister whether the council is a black box. The Minister replied that

“we have a Council for Financial Stability with clear terms of reference and pursuing through discussion and co-ordination an agenda that ensures that the council can work effectively as a body...It is not a black box.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 13, Q26.]

We do not, however, have clarity on the council’s responsibilities, which is why amendment 36 seeks to open up that box. It will specify who on the CFS is responsible for what and what the respective powers are. It also addresses one of the Treasury Committee’s concerns. It stated that

“Merely rebranding the Tripartite Standing Committee will achieve little by itself”,

which is absolutely right.

Although amendments 36 and 38 seek to ensure that existing responsibilities and powers are clarified, new clause 2 goes a step further. It would require the Treasury to

“lay a report setting out the powers that the Financial Services Authority and the Bank of England need to fulfil their responsibilities for financial stability...within one year of the commencement of this Act.”

The new clause would try to ensure that the Government’s concerns about what the Bank of England is able to do are allayed and, given that we have allocated the new powers to the Bank and the FSA, that there is time for a proper debate about making sure that those institutions have what they need in their toolkits to enable them to go that extra step in delivering financial stability.

We had a debate at some length on the Banking Bill—I do not wish to rerun it—about how financial stability is defined, and I think that the conclusion was that it is difficult to define such things. We know when financial stability does not exist, but it is hard to know when it does. Some would argue that we had a prolonged period of financial stability in the run-up to the financial crisis, but the causes of that instability were being built up as we were going along. I want to ensure that we know what the various parts of the new committee are doing. The Governor of the Bank of England put it this way:

“what exactly is it that people expect the Bank of England to do?”

We talked earlier about the views of Adam Posen, that monetary policy is not the right way to control asset price boom and bust. In that same speech in December he said:

“I oppose...taking asset prices directly into account when setting monetary policy (as opposed to noting their effect on forecasts of consumption, investment, et al). I oppose so doing for a very simple reason: trying to manage asset prices, let alone pop bubbles, with monetary policy instruments will not work.”

If monetary policy is not the tool that the Bank will use to deliver its financial stability objective, what tools—powers—will be available? Paul Tucker gave a speech in October 2009 in which he outlined some of the Bank’s thinking in that area. He mentioned capital requirements, risk weighting and the importance of the relative interconnectedness of financial institutions. He also said something that is an important aspect of the debate that we need to have on financial stability:

“a vital issue is whether we are ready, today, collectively to back an approach based on our judgments rather than on enforcing a book of detailed rules. If we are to tolerate supervisors where necessary substituting their judgment for that of managers and boards, then commentators, appeal tribunals and even parliamentarians will need to give supervisors the benefit of the doubt occasionally. Of course, such judgments need to be grounded and reasoned.”

He argues that regulators need to be able to exercise judgment in the application of the tools, and we need to expect regulators to make some difficult decisions when applying the tools. However, one needs to know what the tools are when applying the judgment.

In its discussion paper in November, the Bank described macro-prudential regulation as the missing link in the policy framework. There is something that the Bank needs to have, in addition to monetary policy, to enable it to act as a macro-prudential regulator. Interest rate policy, which is geared towards controlling inflation, would not deal with asset bubbles. What tools, therefore, does the Bank of England need to deal with that? If the Bank does not have the tools it needs, how will it deliver the financial stability objective? The Bill is silent on what additional tools the Bank—or indeed the FSA—will need to act as a macro-prudential regulator. That gap needs to be addressed, and new clause 2 gives a legal structure for doing that. The Government should bring forward a report identifying where the gaps are and what powers are needed for that crucial link, to fill the gap that exists in the toolkit that either the Bank or the FSA is able to exercise. New clause 2 is important as it imposes a statutory requirement to look ahead at the tools that are emerging through discussions at international and national level on macro-prudential regulation and ensure that the regulators have all the tools and powers that they need to enable them to contribute towards financial stability. My concern about how the structure is set out in clause 1 is that it gives collective responsibility to the Treasury, the Bank and the FSA without actually knowing precisely where the limits of those responsibilities are, and what powers they have to contribute to deliver that objective of financial stability. My amendments and new clause in this group help clarify those powers and responsibilities, but also recognise that there needs to be more work to ensure that the regulators have all the tools they need to help deliver the financial stability objective that the Bank already has, and the FSA is being given in clause 5.

Mr. Gale, the stand part debate—

Roger Gale (Conservative, North Thanet)

I thought that we had had some of that already.

Mark Hoban (Conservative, Fareham)

I know; that is why I was very wary in the comment I made earlier. I will try to bear in mind that we have had quite a big chunk of that debate.

I return to the point raised by my hon. Friend the Member for Chichester, which was debated during the course of the Financial Services and Markets Act. At the time, the then shadow Chancellor, my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) warned the House of Commons:

“With the removal of banking control to the Financial Services Authority...it is difficult to see how and whether the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.”—[Official Report, 11 November 1997; Vol. 300, c. 731.]

The argument my hon. Friend made at the time—I think this crisis demonstrates it—is that the reforms introduced by the Government in 1997 created a structural weakness in the system that has now been clearly identified. The Minister believes that the council will address that structural weakness. I do not believe that it is sufficiently radical to achieve that. The Minister, in his interventions, was very robust in his defence of the existing strategy. Let me remind him what he said in Committee when asked about the tripartite arrangements. He said:

“We could have done better.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 10, Q16.]

The Treasury Committee, in its report on the tripartite system, was very clear about that:

“We cannot accept, as some witnesses have suggested, that the Tripartite system operated ‘well’ in this crisis. In terms of information exchange between the Tripartite authorities, the system might have ensured that all Tripartite authorities were fully informed. However, for a run on the bank to have occurred in the United Kingdom is unacceptable, and represents a significant failure of the Tripartite system. If the system worked so ‘well’, the Tripartite authorities should take a closer look at the people side of this operation.”

Mark Todd (Labour, South Derbyshire)

I have long argued that an obsession with structure perhaps takes us away from discussion of the performance of the actual players in the structure. I wonder whether the hon. Gentleman can develop the argument a little further on the balance between changing the structure and addressing the poor performance of the FSA in regulating, for example, Northern Rock—the case that he raised. I think he would accept that the FSA’s own internal audit exercise demonstrated very substantial failure in straightforward performance of its duties given under the law.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman is absolutely right. There are two strands here that we need to recognise. First, the argument I am making here is that there was a structural failure that led to some problems falling into the gap between the Bank and the FSA. There are co-ordination issues that we need to resolve and there are structural reforms that we can make to address those issues. The hon. Gentleman is right to make the next point that, once the structure is right, how do the bodies responsible under it regulate individual institutions? We saw failures in supervision in the FSA’s handling of Northern Rock. I commend the FSA for being as open as it has been about its failings in that respect. It has done a good job of understanding where its supervisory approach failed and has taken steps to reform that approach. It recognises the problem. We cannot say that simply structural change will resolve the problems; there needs to be another approach, which is why I felt that Paul Tucker’s comments were very important too.

One issue, which cropped up in the exchange between the Minister and me about prevention as opposed to cure, was about how we ensure that the regulators learn the lessons about how we prevent these crises from emerging in future. What does it need to look at and to do to minimise the reoccurrence of another asset price bubble? How does it change its approach in order to understand what is going on within an institution and to be willing to challenge the business model and say, “Should you really be in this part of the mortgage market?” and “Should you be trading in this financial instrument?” What are the consequences of particular financial instruments for the stability of a bank? How does a regulator become much more proactive and judgmental than it has been in the past?

Prior to Christmas, we debated the FSA’s new enforcement penalties; yes, it can take action when a breach has occurred, which will stop the activity, and there is a penalty for the breach, but, acting ahead of that enforcement process, what do we do to prevent detriment to consumers in the meantime? That is a difficult judgment for a regulator to make. When does it intervene to stop something happening before it has gone through the disciplinary process? The same principle applies to the approach that a regulator needs to take in this new climate in which there is greater acceptance of regulators acting more proactively in advance of a problem—acting as the bubble grows rather then waiting until it has burst. That is about an approach rather then just structure.

The hon. Gentleman is right; there are two strands here. The Bill deals with structure—a legal framework established by Parliament—but the question then is, how do we get the regulator to change its approach? That is a more difficult thing to bring about through statute.

Mark Todd (Labour, South Derbyshire)

The other aspect that the hon. Gentleman may want to dwell on is the contribution of the underlying assumptions that most of the players made within this scenario. We now look on them with great regret but they nevertheless drove many of the players to take a more aloof position towards the financial services sector: the belief that it would somehow largely regulate itself and that the risks of collapse had dissipated so far that we did not need to give them considerable attention. That is another part, which, again, is nothing to do with the structures but part of the underlying ethos of whatever structures we choose to develop.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman again makes an important point. If he casts his mind back to the penultimate question of the evidence session, Simon Gleeson from Clifford Chance was asked if he thought that banks had done well through this. He said yes; he thought that they had. However, of course, a flawed assumption had underpinned their work. That flawed assumption was shared not just by banks, but by regulators, Government and so on. People did believe that markets worked rationally, and that individual actors in markets were rational. That dictated an approach to regulation that said, “The market will sort it out.”

One of the insights into economics developed over the past 20 or 30 years is the recognition that people are not always rational in how they act on economic issues. That insight has come from psychology as well as economics. It is expressed in a popular form in “Nudge”, the book by Thaler and Sunstein about behavioural economics, which they apply to policy prescriptions. Some people in markets do not necessarily act in a rational fashion all the time. In her book “Fool’s Gold”, Gillian Tett talks about the development of the credit default swap market. It struck me that JP Morgan, seen as the originator of the CDS, did not trade in them as aggressively as its competitors. JP Morgan argued that it understood the attached risks, unlike its competitors, who saw them as a lucrative market that they had to be in; they felt that they had to trade in those instruments because they would make great profits with apparently low levels of risk. History tells us that the approach adopted by JP Morgan was perhaps correct. That was a situation where rationality was superseded by the desire to make lots of money, to follow the rest of the market, to follow the herd. We should not assume that financial markets are economically rational, when we know from other aspects of our life that we are not always economically rational.

Rob Marrisrose—

Mark Hoban (Conservative, Fareham)

That clearly struck a chord with the hon. Member for Wolverhampton, South-West.

Rob Marris (Labour, Wolverhampton South West)

With all gentility to the hon. Gentleman, some of us socialists recognised 40 years ago that markets are not rational.

Mark Hoban (Conservative, Fareham)

I am not entirely sure that I agree. Socialists said, “Markets are not rational, but the Government are. We should have central planning; by controlling the commanding heights of the economy, we can dictate how markets and the economy will work.”

Rob Marris (Labour, Wolverhampton South West)

That is communists, not socialists.

Mark Hoban (Conservative, Fareham)

The Attlee Government believed in central planning. I am not sure that Attlee or Harold Wilson got round to five-year plans, but there was a strong sense of economic planning, which was underpinned by a belief in rationality—a belief that Governments knew better than markets. That was very much the theory of the day. In different political guises, we have all come to that belief regarding economic rationality. It indicates different strands of response to the financial crisis; it indicates that changes are needed in structural regulation, and in the approach to regulation, which is harder to legislate for. We also need to think again about the ways in which we as individuals act in markets.

Andrew Love (Labour, Edmonton)

The hon. Gentleman speaks, naturally, about the response that we must have to the financial crisis. I sympathise with his concerns about the tripartite arrangement and how we go about strengthening it. I am concerned about the touching faith that he and other Opposition Members seem to have in the idea that the central bank should always undertake the regulatory function. Most authorities worldwide use the central bank for that purpose, but they all failed in exactly the same way, and some failed to an even greater extent than we did. Why does the hon. Gentleman have such touching faith in the idea that using the central bank will solve the problem?

Mark Hoban (Conservative, Fareham)

I am in danger of straying beyond the narrow confines of clause 1, but one way of avoiding some of the fractures that we have seen over the past three years is to draw together in the Bank of England the authority to act as a macro-prudential and a micro-prudential regulator, and to ensure that the two roles interlock so that the insights of one can inform the other.

It is interesting that someone whom I do not normally quote with approval—Jacques de Larosière—said that a central bank should act as a micro-prudential regulator. His experience as the governor of the Banque de France and the chairman of the Commission Bancaire was that their daily interactions in the market had highlighted some of the problems facing individual banks, which helped them to save a number of banks from collapse.

There is therefore a growing trend to move financial regulation back towards central banks—the UK is not just an isolated example—because the responsibilities and opportunities that the central bank would have as the micro-prudential regulator of the banking system would have synergistic benefits. There are synergies there that provide a better model for regulation than the existing model.

It is important that we understand risks. I go back to the point made by Lord Turner in his recent report about the co-ordination of macro and micro-prudential analysis. He said:

“The FSA focused too much on the supervision of individual institutions, and insufficiently on wider sectoral and system-wide risks...The vital activity of macro-prudential analysis...fell between two stools.”

As people have looked at the financial crisis, evidence has built up showing that the tripartite structure introduced in the Government’s reform of financial regulation in the late ’90s did not work well or, to use the Minister’s words, could have worked better.

The proposals in the Bill are not, however, sufficiently radical to tackle that underlying problem. The Government have put the standing committee on a statutory footing. They say that the committee

“serves as a forum for discussion and coordination of the activities of the authorities to protect financial stability”,

but simply having a talking shop did not deliver financial stability in the run-up to the financial crisis. Why will putting it on a statutory footing now make things any better?

When we look below the surface, it is evident that the council and the committee will be fundamentally the same and will have the same remits. The memorandum of understanding for the standing committee says:

“It is the principal forum for agreeing policy and, where appropriate, coordinating or agreeing action between the three authorities. It is also an important channel for exchanging information on threats to UK financial stability.”

Under the new regime in the Bill,

“The council must...keep under review matters affecting the stability of the UK financial system, and...co-ordinate any action taken...for the purpose of protecting or enhancing the stability of that system.”

There does not seem to be much difference between the two, which is why I think the reform is largely cosmetic and has not really grasped the initiative. That, I think, is also why it has attracted quite a lot of criticism from within and without the House. The Treasury Committee said:

“Merely rebranding the Tripartite Standing Committee will achieve little by itself; what is required is an improvement in cooperation amongst its members, and a simplification and clarification of responsibilities for each of its members.”

The clause does not deliver that clarification of responsibilities. As the evidence-taking sitting demonstrated, there is a gulf in the understanding of responsibilities between the Treasury, the FSA and the Bank.

The Association of British Insurers said:

“It is less clear whether the CFS will result in a more joined-up approach by the Bank of England and the FSA. This is needed if significant improvements to the regulatory structure are to be achieved. What is not clear from the Government’s proposals is how the proposed CFS would actually operate or what powers it would have to require the FSA and Bank of England to pursue particular policies (or how any such power to require the Bank and the FSA to undertake certain courses of action is compatible with the independence of these institutions)”.

Fundamentally, the external comment is to ask how the provision will be any better than the previous arrangement. What is different? The only difference seems to be the statutory basis in the Bill.

There is a requirement in clause 2 for the principals to meet. We need better communication between the members. In the previous regime the principals met only once, and that was by telephone, at the behest of Hank Paulson. How can we guarantee that once the crisis is over the arrangement will not fall into disrepair? The problem with the clause, and the reason why we shall oppose it, is that the Government have not learned lessons from the financial crisis. They are simply rebadging the tripartite committee in a way that demonstrates that they have not really understood some fundamental flaws in the regulatory structure that created the financial crisis. There is still a lack of clarity about responsibilities and powers. We do not believe that there is a clear understanding of the additional powers that are needed to help deliver the financial stability objective. The clause is driven by political expediency, not by a genuine learning of the lessons of the financial crisis. That is why we oppose it.

Mark Todd (Labour, South Derbyshire)

I welcome you back to the Chair for the new year, Mr. Gale.

I will briefly expand on the remarks that I made in interventions on the hon. Member for Fareham. I have a great deal more sympathy with his amendments than with the underlying argument that he made in the clause stand part debate. The Government need to do more to define the roles, responsibilities and tools that may be available to the various members of the tripartite group. The hon. Gentleman’s amendments invite a rather sharper definition of those functions than we have had until now. I look forward to the Minister’s response, in which he will no doubt want to add rather more flesh to the bare bones of the Bill. I must admit that I share the view of the Select Committee that, without that, the establishment of the body in law is little more than an exercise in rebranding what already exists.

However, I do not feel that an obsession with the structural model of regulation is the correct target for our attention. That was the thrust of much of what was said. As I suggested, there were several other factors that made dealing with the crisis a great deal harder. The structure perhaps did not help, but I do not think that it was at the root of our failure. First, there were underlying assumptions that, to be quite honest, most of us had. I put up my own hand and say that my assumptions were flawed; probably being rather sharply at the free-market end of my party, I did not feel that heavy-handed and detailed regulation should be our focus. I certainly was not alone in that, either in this House, or, as we have found, among the key players in the sector, both regulators and participants. The assumption that the market would deal with problems and that the lightest possible touch was what was required has been found wanting.

The hon. Member for Fareham developed the point about rational behaviour. I think that generally speaking, people behaved rationally, but they did so within the moral compass available to them, using the data that they had and the information that they drew from that data. I do not think that their judgments were essentially irrational; they acted in their interests—sometimes their own personal interests—and the interests of the institutions in which they worked, although perhaps to a lesser extent in some cases. However, I did not think that their behaviour was irrational.

Secondly, there was a difficulty with the data available and with how people interpreted that data, which made performing their transactions in a relatively low-risk environment much less likely than we would have wished it to be. The failure to impose capital adequacy and liquidity obligations on businesses flowed from the assumptions about the market’s ability to self-correct and about what was important in measuring the safety of such businesses. We have learned from that. The first two issues have to do with the cultural assumptions that lay behind our actions and those of the market, and the data that people chose to use to measure what they were doing; those data were the foundations of much of their decision making.

Thirdly—this is allied to the previous point—there was poor transparency as regards much of what was happening in the marketplace, and there was ridiculous self-confidence in the idea that not fully knowing what one was trading was not a particularly material problem. There was poor transparency allied with a lack of inquisitiveness, so that if one was sold something that one did not fully understand, one did not seek to find out more; that was another key element. We are learning all those things—we have learned hard, and we have not been alone in that. However, those things have little to do with the precise structure of how we have chosen to regulate the sector.

My last point is about the performance of the duties of the various players. The hon. Member for Fareham correctly gave credit to the FSA for publishing its internal audit of its handling of Northern Rock. I read it pretty much in its entirety, and it was quite a staggering statement of poor practice, not just for a regulator, but for a body running an organisation. It held important meetings with people whom it was supposed to be regulating, without keeping any proper record of what had happened. One would not have to be performing an important function such as regulating a bank to find that an inappropriate way of carrying out a function.

Fundamentally poor-quality work was carried out by the FSA in relation to Northern Rock. We have to assume that that was typical, and that work of that kind was endemic within the FSA at the time. Its performance was shown to be poor in the case of Northern Rock, and no one has produced any evidence to suggest that that was the only institution where the FSA had a rather poor grasp of what was happening. It is likely that that was the FSA’s typical behaviour when managing its relationships with banks, and that it was by good fortune that other dramatic events had not taken place previously.

I suppose that that goes back to one of the fundamental reasons why I have been involved in public policy—I am a practical person. Often, people spend a great deal of time debating the principles and structures of how to do things, without necessarily engaging with the solid base of ensuring that something is done right.

Mark Hoban (Conservative, Fareham)

Is not part of the challenge we face the fact that we in Parliament will determine the legislative structure? That is the way the FSA has been set up. We set the perimeters of its activity and its objectives, but ultimately the responsibility for implementing regulation on a day-to-day basis rests solely with the FSA. Our challenge as legislators is that our remit is limited to structure, although we might make broad declarations about approach. The responsibility for implementation and for understanding the approach rests with the FSA or the regulator.

Mark Todd (Labour, South Derbyshire)

I can agree only in part. It is our duty—here I take a collective view of us as public policy makers—and certainly the duty of the Government to direct the regulator to perform its duties in a particular way and audit the performance of those functions. One of the difficulties that arose when looking at the performance of the FSA was that the problem had been going on for some considerable time without any proper oversight or challenge within the FSA.

Perhaps one of the most telling parts of the document related to the failure of internal challenge. One team of people performing functions within Northern Rock had not been challenged in any significant way by anyone within the FSA. The internal scrutiny within the organisation was incredibly poor. I am a member of the Treasury Committee, and we have had people from the FSA in front of us from time to time; the issue is perhaps one that we should have taken a more detailed interest in. It certainly should have been a matter that the responsible Department pursued, in order to test how well the FSA was carrying out its extremely material duties.

The hon. Member for Fareham does not persuade me with the suggestion that simply transferring many functions to the Bank of England would set the matter right. We would do better to use the shock of the learning process from practical events over the past two years. Changing the seats in which people work will probably be immaterial to the performance of those duties. I have noted the Bank of England’s significant lack of enthusiasm for reabsorbing detailed regulatory responsibility for banking. However, the fact that it does not want to do something does not mean that we should not do it. If it is the right thing to do, fair enough. However, I am yet to be convinced that fundamental structural change should be our concern.

Colin Breed (Liberal Democrat, South East Cornwall)

Part of the Bank of England’s reluctance—if that is what it is—is that it feels that sometimes conflicts of interest arise in the way in which it deals with banks if, on the one hand, it supervises and regulates and, on the other hand, wants to work with them in respect of the general apparatus of financial transactions. At times, that creates conflicts of interest that it has to resolve.

Mark Todd (Labour, South Derbyshire)

That is certainly true and I assume that the Opposition’s proposals attempt to deal with those conflicts. The other discomfort is that the Bank probably has some sympathy with the argument I presented, which is that such activity is not innately better done by it than by some other body specifically tasked with the function of supervision and regulation.

The intellectual argument has not been made thoroughly enough to persuade me. With that in mind, I want to listen carefully to what the Minister says in response to the amendments that have been tabled, as opposed to on the more general discussion that we have usefully had on the alternative approaches to regulation. The Government have a great deal more to do in defining how their chosen regulatory framework—the tripartite system—will work, how the individual players within that tripartite structure will function, and how confidence can be displayed to the world that the system will deliver, with greater assurance, a lower-risk environment than the one that we have seen over the past two years.

Andrew Tyrie (Conservative, Chichester)

We are discussing the most important clause in the Bill; there is no doubt about that. It is the centrepiece of the measures in the Bill that are designed to try to prevent a repetition of the catastrophe of 2007-08, and especially of the run on the Rock.

The Government have been forced to conclude that there is a need for fundamental reform as a result of that specific crisis. At the heart of the crisis was the inadequacy of the regulatory structure, which was placed on the statute book almost exactly a decade ago. The Minister is an intelligent and thoughtful man, but he seems to be in a state of complete denial. He said that the tripartite system worked. He is in a group of one—or perhaps I should say three—if he believes for one moment that the tripartite system worked well. Even if they say so publicly, privately, members of the tripartite tell us that it was a catastrophe.

The Minister’s suggestion that the run on the Rock was caused by foreigners is patently absurd. The failure of the wholesale markets had an international dimension and, to a substantial degree, an international origin. What we had was not just the failure of a bank as a consequence of the failure of the wholesale markets, but a near-failure of the whole banking system. The failure of Northern Rock generated risks to the broader banking system. The management of those risks lies squarely with the tripartite arrangement, which failed. That is why we need to come back again to look at the measures that were put on the statute book 10 years ago. They simply failed. We have had a decisive judgment from loads of people about the failure of the system. I am flabbergasted that the Minister does not, as they say in modern jargon, concede and move on. The British Bankers Association said:

“no one entity had clear power to take the lead”—

I promise not to go on and on with these quotations, Mr. Gale, but there are so many that I should give just a few. Professor Willem Buiter, one of the country’s outstanding monetary economists and one of the first appointees to the Monetary Policy Committee, where he did an outstanding job, said:

“The Tripartite arrangement between the Treasury, the Financial Services Authority and the Bank of England, for dealing with financial inability is flawed. Responsibility for this design flaw must be laid at the door of the man who created the arrangement—the former Chancellor and current Prime Minister, Gordon Brown. The Treasury, as the dominant partner in the arrangement, also bears primary responsibility for the way in which the Tripartite arrangement performed operationally.”

That is pretty vigorous stuff, but if we feel that the jury is still out, what about an all-party Select Committee? I was not serving on the Treasury Committee at the time, so I cannot be fitted for the responsibility of tabling any of the questions that were asked. Paragraph 283 of the Committee’s report “The run on the Rock” says:

“When we questioned the Tripartite authorities as to who was in charge, the Governor’s first reply was ‘What do you mean by “in charge”? Would you like to define that?’. When we further questioned him as to who was responsible, he replied ‘We are each responsible for the various responsibilities that we have been given under the [Memorandum of Understanding].’”

What kind of arrangement was that? There was some really excellent stuff in the rest of paragraph 283, but I will not go further. However, in paragraph 284, the Committee was led to conclude:

“the Tripartite authorities did not seem to have a clear leadership structure. We recommend that the creation of such an authoritative structure must be part of the reforms for handling future financial crises”.

And so the quotations go on.

It could reasonably be argued that all of that can be said with the advantage of hindsight, but it did not require hindsight to spot the risk, and others spotted it 10 years ago in the equivalent of this Committee. I was one of them, as were Howard Flight and my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), who was not on the Committee, although he spoke about the issue on the Floor of the House.

Of course, it is easy to put down markers in opposition. Then when things go wrong, one’s number can come up like the numbers on a roulette wheel. If we look carefully at the detail of the Opposition’s points, however, it is clear that that is not what was going on. We went straight to the heart of what was wrong with the system at its inception.

I tried repeatedly to raise some of the points that are being made today. I tried, but failed, to get the Government to focus on the manifest flaw in their new system for managing systemic risk and ensuring financial stability. I repeatedly asked who was in charge. When I say “repeatedly”, I mean on at least three occasions in six months on the Floor of the House or in Committee.

The key issue is whether the existing flaws are being removed in the Bill. The existing system requires the tripartite committee to work on the basis of a memorandum of understating. As several hon. Members have said, however, the Bill does little more than put the committee on a statutory footing. It is becoming increasingly clear that little will change as a result, and the hon. Member for South Derbyshire said pretty much the same a moment ago. He challenged the alternatives that might be put in place, and I might come to that if I am allowed to stray from clause 1 for a moment.

Let us go back for a moment to those three points in 1999. My first point was that the FSA’s responsibility for systemic risk should be added to the legislation as an objective of the FSA and put on the statute book. That is now—finally, belatedly, 10 years later—being done, in clause 5 of the Bill, which we shall discuss later.

Secondly, as I have already mentioned, I pointed out that no one seemed to be in charge under the memorandum of understanding as drafted at the time, and it remained in that form. As I said at the time—for “bank”, read “Northern Rock”—

“If a single bank crisis develops into a systemic crisis, who is responsible then?”—[Official Report, Standing Committee A, 13 July 1999; c. 174.]

The memorandum of understanding required the responsibility to be shared. It is still being shared in pretty much the same way. I challenged whether those arrangements were sustainable and argued that, for the tripartite to be effective, a formal and reasonably transparent structure was needed, with papers, minutes and, where practical, something available in the public domain, to show that the job was being done. My hon. Friend the Member for Henley might well say more about that, I gather, if he manages to catch your eye, Mr. Gale.

At the time when I was making those points, others—many others—were making them outside the Committee. The Joint Committee under Lord Burns had looked at the Financial Services and Markets Bill in 1999 and had come to pretty much the same conclusion. By the end of that year I had made up my mind that the new system was an accident waiting to happen and that the system, with its three-way division of responsibilities, would create deep problems. I said that the system was wholly untested and might be found wanting. I said that the problem with the memorandum was the division of responsibility between the three groups. It was the FSA’s job to spot something early on, when trouble might arise in a particular firm, but it was the Bank’s responsibility to suggest and put in place a support operation and the Chancellor’s job to explain everything to Parliament. I explained at the time that the system would not work and would be a mess—and so it has proved.

I have already pointed out that we had very little time to look into the matter in 1999. The scrutiny of such a crucial part of the Bill in 1999 was an object lesson in how not to do line-by-line scrutiny. The only substantive response from the Minister—the right hon. Member for Leicester, West (Ms Hewitt)—was pretty perfunctory and gave the impression that none of those issues mattered at all:

“The questions raised by Opposition Members at considerable length are nothing like as difficult as has been suggested.”

She went on to say something that I have already quoted:

“As the memorandum of understanding clearly states, managing financial responsibility is a common objective of the three institutions whose roles and responsibilities are clearly delineated in that memorandum.”—[Official Report, Standing Committee A, 13 July 1999; c. 182.]

That is just what we have been hearing, is it not? It is what we are getting from the Government on the new measure. As I have also mentioned, the Minister then concluded that we were all wasting time, a response which, in retrospect, was highly irresponsible.

That is why it is so important that we do not rush consideration of such a crucial measure now. We should avoid a repetition of the past, and should not rush into a set of arrangements that are equally or almost as flawed. The key question, which I shall now address, is whether the new system deals with the failings of the one created a decade ago.

Tom Watson (Labour, West Bromwich East)

I never understand why I am so mesmerically attracted to the hon. Gentleman’s contributions; I do not know whether it is his supreme intellectual self-confidence or whether we are just waiting to see when the next turn will come. He is making a powerful contribution. Did he feel himself to be in a minority of one—or three— 10 years ago, and is he more confident that his party’s Front-Bench Members are listening to his criticisms today?

Andrew Tyrie (Conservative, Chichester)

I will not linger on that unless permitted to by the Chairman. As I pointed out a moment ago, a number of other people outside the Committee voiced reservations about the new arrangements for the management of systemic risk. I am certainly not alone. However, only a few of us made such points in Committee at the time, and I think that it is fair to say that I was probably the most vociferous there and, subsequently, on the Floor of the House.

As for whether I support my Front Benchers’ approach, I will come to how I think we can best tackle the issue in a moment, but the short answer is that I am clear in my mind—although we need to think about it carefully, and I hold this view tentatively—that the arrangements being proposed by Members on my party’s Front Bench are a huge step forward from what is being proposed in the Bill. I will explain why if I get the chance.

I am extremely gratified by the kind remarks made by the hon. Member for West Bromwich, East, at the beginning of his intervention. Nothing so flattering has ever been said about anything that I have said in the House of Commons or in Committee, and I am sure that it will not be said again.

I am nearly finished, unless I am intervened on again. I will address briefly whether we are moving things forward. We are moving forward a little with the clause. It elevates the importance of systemic risk in the framework of regulation. The Government are not dismissing the issue as they did a decade ago. As I mentioned, new clause 5 makes systemic risk an objective of the FSA. A core flaw of the original legislation was that the Government did not get the list of objectives right. I have tabled new clause 8, to which we will come much later in our proceedings and which discusses another objective that I feel should be added.

I think and hope that new clause 5 will have my support—I do my best to be a loyal Back Bencher—but we will find out when we get to it whether I shall be having a cup of coffee when it comes to be considered. However, most of clause 1 certainly does not have my support. It does not resolve the problem of clear lines of responsibility or establish who is in charge, nor does it deal with the problem that statutory institutions acquire a remorseless logic of their own.

That is a partial answer to the hon. Member for South Derbyshire, who said that the answer might be men, not measures. It might be men, not institutions; the creation of statutory institutions results in people feeling a need to defend them, to give them more power and to mind their turf. Where there is some awkward, smelly responsibility to be passed about, they feel that they need to ensure that when the music stops, the responsibility is not with them. I cannot help feeling that that is what we saw during the early stages of the Northern Rock crisis; indeed, that is implicit in the report. A succession of people went on the television and radio saying, “This isn’t our business; it’s their job to do this bit of the work.”

I fear that we saw another manifestation of exactly that when the Committee took evidence, only a few weeks ago, from Andrew Whittaker and John Footman. I want briefly to draw on that, because it is extremely relevant to clause 1. We were repeatedly told by both witnesses that their respective institutions

“treat each other as equals”.——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 38, Q97.]

We were given a more detailed answer by Mr. Footman, which left me with the impression that very little indeed has changed. He said:

“I remember the question that was asked in the Treasury Committee two years ago—‘Who is in charge; who was in charge?’—and this”,

meaning the clause and the Bill,

“is an attempt to answer that question.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 38, Q95.]

That does not sound like a man convinced of his own argument, does it? A little later, Mr. Footman said that

“it is an attempt to bring together bodies whose powers are different, but which interact with one another.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 38, Q99.]

Again, I was left quite nervous about that.

I repeatedly asked those witnesses to say whether one of the bodies was in any way superior to any of the others, and whether there really was someone in charge. One of them, having said at one point that one of the roles was secondary, felt unable to admit that that meant he might be in a role subordinate to one of the other members of the tripartite committee. I therefore do not think that we have moved on very far. I do not think that the leadership question has been resolved. I do not think that the Council for Financial Stability, as provided for in the Bill, addresses the question.

It has taken the first run on a bank in modern history to get us to the point where the Government are prepared to concede that something is wrong with the legislation that they put on the statute book a decade ago. Clause 5 apart, however, I am not sure how much will be changed as a result of the Bill. It is still policy making on the hoof. Clause 1(5) states:

“The Treasury may prepare a statement containing further provision with respect to the exercise by the Council of its functions.”

In other words, the Treasury is saying, “We do not know quite how this is going to work, but as we go along we will change the rules of the game a little, and hope that finally we arrive at something we like.” Incidentally, I hope that it is because of a typographical error that there is no “s” at the end of “provision”. I hope that the suggestion is not that one further shot is being allowed, since I think that almost everyone in the Room is quietly agreed that there is something amiss with what is now proposed.

I also worry, as I keep saying, that we shall be left without clear lines of responsibility, and with no clarity about leadership. The set of new arrangements before us is still an accident waiting to happen. It may not ever happen, of course, and perhaps even if it does, it will not be for a very long time, not least because all three of the bodies concerned are on red alert at the moment, and it will take quite a while for them to slip back into what I think the Select Committee exposed as a good deal of complacency in the years prior to the Northern Rock crisis.

The arrangements are definitely inadequate. The Library set out in significant detail how little has really changed, and my hon. Friend the Member for Henley will draw on some of that work in a moment, I understand. Thus we have window dressing. The hon. Member for South Derbyshire used the term “rebranding” and my hon. Friend the Member for Fareham used the word “cosmetic”. It might be overdoing it a bit to say that the clause just rearranges the tripartite committee’s deckchairs. Whether we are on another Titanic, time will tell.

I want to respond to the intervention made a moment ago about what we should be doing. That strays into what would be a stand part debate on clause 1, but I think that we have been given permission to do that.

My tentative view is that we certainly should not rush this and that the job of macro-prudential supervision should probably be handed to the Bank of England. That is my party’s policy, and there are three reasons for it. First, the Bank already has much of the skill-set required to do the job, whereas the tripartite arrangement clearly does not, at least not when the three institutions interact. Secondly, the crisis has shown the importance of aligning fiscal and monetary policy at such a time, and with Bank of England independence and the Monetary Policy Committee doing a good job—I think that most people feel it has done a good job—there is a strong case for putting the two policies closer together. Thirdly, the Bank of England has the credibility that comes from being a long-standing institution: it has historically had the role, and it can carry weight in financial markets. I am not sure how much importance we should attach to that, but I am absolutely sure that a financial institution would sit up more if the Bank of England rang regarding an issue of macro-prudential supervision than if the call were from the FSA. Having said that, who should run the system? It has to be the Chancellor.

I will not stray into lengthy detail, but in 1987 I had a ringside seat for the so-called black Friday crisis. Global stock markets collapsed by 25 per cent. in a matter of hours, right at the time when the Government were getting away from BP shareholding. People forget, of course, the crises that did not happen; they remember only those that did. That was almost a monumental crisis, and it threw Congress into a mess for months with something called ground rubble. I hope I am not straying and giving something away—it is all in memoirs these days—but I remember the Bank of England giving us clear advice that we should bail out the underwriters of the share issue; otherwise, as the Bank was wont to say, “it’s the”—words like abyss and catastrophe come to mind.

After the Chancellor had listened extremely carefully to all the arguments, he came to the firm decision to override the Bank, taking control and full responsibility for the decisions, and to come before the House of Commons at 10 pm to make a statement to that effect. There was a good deal of risk in taking any decision, and there was certainly political and economic risk associated with that one. What I think helped us was that everybody knew that one man was in charge, and it is that experience that has led me, and led me 10 years ago, to be so critical of the arrangements being put in place.

I very much doubt that I will change my view. I said that it was my tentative view, but I think that I will stick with it as legislation is introduced. At the heart of the issue of systemic risk is a very simple principle, which is that the Government are underwriting private institutions, and therefore shareholders to some degree. The danger is that public money will be put at risk for private benefit. If we cannot make the bail-out penal, which we cannot always do, the man or woman who should be in charge must be the person who spends the taxpayers’ money.

John Howell (Conservative, Henley)

It is a great pleasure to follow my hon. Friend the Member for Chichester. If he can bear two sets of flattery in the same Committee sitting, I will add my congratulations for his usual learned and thoughtful speech.

I want to pick up on whether there is a step change, or any change at all, in this. I was conscious of two comments the Minister made during the evidence sessions. The first was:

“What we are doing through the Council for Financial Stability is formalising arrangements that have already been in existence.”—[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 5, Q4.]

There is not much ambition in that. The second comment was that the purpose is to enable

“people outside who look at these things to have confidence that this is an issue that is being grasped and looked at with great thoroughness”.——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 6, Q5.]

The question I have been wrestling with is whether the council is more than the sum of its parts, the sum of its parts or, indeed, less than the sum of its parts, with regard to what it may take away from the operation of the system. I hope to reach a conclusion on that before I sit down.

My hon. Friend mentioned the House of Commons Library research paper, page seven of which sets out an instructive table that shows before and after pictures for the council and the tripartite system under six headings. The first heading is “Constitution”, in which there is one change—that of moving from a non-statutory to a statutory basis—but it is not clear what that actually delivers.

The second heading is “Membership”. There is effectively no change in membership, although the council may invite others to attend meetings. That membership heading also deals with the Chancellor chairing the council, although as we find out later, he might not be chairing the council as he may appoint someone else to do so.

The third heading, which is perhaps more fundamental, is “Advice”. The research paper points out that there is no change in the access to advice from the old system to the new system: the principal set of advice before the council is the Bank’s financial stability report and the FSA’s financial risk outlook. Where is the new evidence coming from to be able to give some additionality to that? I will address the answer to that in a moment.

The fourth heading looks at the lack of changes in relation to transparency, which has largely come down to a question of minutes. The fifth heading deals with accountability, which seems to be encapsulated in nothing more than a retrospective annual report. The sixth heading, which potentially holds open a change, is external policy work, which actually holds out no change at all, because all the council is doing is discussing it and it is still the Treasury that is taking the lead on that.

Let us look first at the heading “Constitution”. The Minister described that in the evidence session as a “significant” improvement, but I am struggling to see how. The only real change is the fact that we now have a formal status for the tripartite arrangement. In essence, there is no additionality. I am not sure what a statutory basis brings in itself that cannot be dealt with on a non-statutory basis. The answer must be that legislation is the answer, and this is just another example of declaratory legislation: the idea is that, because we have a new law, it will work better. However, given the council’s role in improving confidence among those outside it, it is not likely to be fooled. The hon. Member for South-East Cornwall made the point in the evidence session that building on something that was not much of a success is not much of a success and that significant changes were needed. The insubstantial nature of the changes has already been referred to by my hon. Friend the Member for Chichester.

On membership, the Chancellor acts as chairman of the council. We need to keep in mind two issues and make a distinction. Who is in charge of the council, and who is in charge of the financial system? Those two questions could be similar but are quite separate.

We know that the council is not a decision-making body. It will not have votes, so the role of the chairman needs to be explored a little further. My conclusion is that the council amounts to no more than a committee of advice to the Treasury. Is the Chancellor in charge? He is in charge of the council, but not of overall supervision. It is very much a creature of the Treasury, as can be seen from a number of the subsections of clause 1.

The Chancellor acts as chairman, but we know that he and indeed other members can appoint a deputy, so the Governor of the Bank of England could be present but not the Chancellor. The council is therefore chaired by a Treasury underling rather than by the most prominent person in the tripartite arrangement, the Bank of England Governor, who would be there. The lack of balance shows that there is an implied hierarchy. The Treasury is setting the terms of reference and making any changes. Indeed, in answer to question 62 in column 29, John Footman from the Bank of England made the point that the Chancellor is regarded as the first among equals.

The question of the evidence base is even more crucial. If we are going to do better at something, we need to start looking at the new forms of evidence that the council might have before it to make better and more informed decisions. As we have seen, the House of Commons Library paper could not detect any significant changes in the evidence. Part of the reason for that is that the sort of new evidence that would need to come out would be driven by the toolkit needed to solve the problems. Given that this is going ahead of the definition of the toolkit, it is not surprising that it is struggling to find new evidence. In the FSA additional information that came through this morning, we see an admission that it is still struggling to work with the toolkit.

Much of the question of transparency is dealt with in clause 2. I am sure we will cover that when we debate clause 2, but the minutes will be so hedged by contingencies that they will say nothing of any interest whatever. According to the draft terms of reference for the council, the main activity will be undertaken not by the main meeting but by a meeting of deputies who will meet monthly and, as in all such situations, the committee of deputies will do all the work. According to the draft terms of reference, the minutes will not be published, so we are left with a perfectly illusory system of transparency that promises much and delivers nothing.

The same can be said for accountability, which I am sure we will address in clause 3, and which is expressed in terms of an annual report. It, too, will be a heavily censored and retrospective historic document. I challenge the Minister to say what it will deliver in terms of accountability, when the real accountability needed is on a much more frequent basis, particularly as a crisis unfolds.

In conclusion, I am not at all clear what additionality a statutory basis brings. Having created a statutory basis, I am surprised that the Government have not used it to create something more than just a body to provide advice to the Chancellor and to cover the back of the Treasury. I can see little greater role for the council than that of the many ministerial advisory committees that exist up and down Whitehall, on which many of us, in our previous existences, have had the pleasures—sometimes—of serving. They are useful in giving advice to Ministers—it is always good—but Ministers are not willing to take advice. However, in terms of delivering anything of substance, there was not much at all.

Indeed, I was most struck by the quote from Adrian Coles of the Building Societies Association in column 71, in his answer to question 3, in which he made it clear that the council would not prevent the next bubble or the next banking crisis, but all it was likely to do was to make a “modest contribution” to the whole of the system.

Rob Marris (Labour, Wolverhampton South West)

It is a pleasure to serve under your chairmanship again in the new year, Mr. Gale.

I will move from the general and comparative to the specific. The cornerstone of the Bill is clause 1—the Council for Financial Stability, which is all about preventing, or trying to prevent, further crises. There will be further crises, so the question is how we deal with them and how we lessen the number of them, if we can, as a society and an economy.

I say to the Opposition that if we get the diagnosis wrong, we will get the treatment wrong. The country that undoubtedly had the most stable banking system throughout the crisis among the G7—arguably among the G20 and the whole world—was Canada. I see Conservative Members smiling, because I suspect that I know as much about the Canadian banking system as anyone on this Committee, although I am not an expert. Surprise, surprise, the system there is tripartite, and it has worked very well. In fact, the system in Canada has less regulation than that in the States, which came close to meltdown, particularly with the collapse of Lehman Brothers. The banks in Canada are federally chartered. Some of them are the biggest in the world—two of the 10 biggest banks in the world by capitalisation are Canadian. They are big beasts, and they are run by cautious bankers. The Scottish Presbyterian tradition has permeated banking in Canada since the founding of the bank of Montreal in, from memory, 1821. The higher capital amounts kept by Canadian banks were encouraged by, but not statutorily mandated by, the federal Government of Canada. It was something that the biggest five banks in Canada decided they ought to do and did for many years. I think, again from memory, that the last run on a bank in Canada was in 1921. It is a system that has worked well, including through this crisis.

In Canada, there is also a role for legislation. Would that we had had the legislation in this country—and, to some extent, we did. However, the Conservative Government got rid of it in the mid-1980s, and it is a great pity that the Labour Government did not reinstate the mortgages legislation. Canada did not have things such as 100 per cent. or 125 per cent. mortgage bubbles, because if someone took out a mortgage for more than 80 per cent. of the value of the property, they had to insure the whole mortgage, not just the balance above 80 per cent., with the Canadian Mortgage and Housing Corporation.

The Canadians were more stable through statutory provisions there, but I stress that it was a tripartite system, where there was much better co-ordination than there was in this country. The hon. Member for Fareham and my hon. Friend the Member for South Derbyshire stated that it is about using one’s judgment. When the hon. Member for Chichester talked about a tripartite arrangement that failed, he went on, unusually for him, because he is usually intellectually astute, to condemn tripartism itself. One needs to make a distinction. The tripartite arrangements in the UK, which the Council for Financial Stability seeks to address, did not work as well as they should have. I do not leap from that, as he apparently does, to saying that tripartism is the problem.

That is the leap of faith that his own Front Benchers take. It was, to use the words of the hon. Member for Chichester, to do with how things performed operationally. As the Treasury Committee report stated, we had complacency and underperformance from the FSA, to which my hon. Friend the Member for South Derbyshire referred, and, arguably, from the Bank of England as well. So, putting all the eggs in the Bank of England basket is not necessarily a great way of preventing that.

One of the things that we can learn with hindsight—and the measure was embryonic 10 years ago, as the hon. Member for Chichester rightly pointed out—is the lack of co-ordination, the pass-the-parcel approach, to such matters. If we look back and analyse that, and we get on to talking about minding the gaps, to which we referred when the hon. Member for Fareham was opening the debate, we see that it is to do with interaction and co-ordination. Clause 1 provides the co-ordination. It does not provide for getting rid of tripartism, nor should it, because that would lead to another mechanistic approach. It is mechanistic to say, “Well, instead of having a Council for Financial Stability, we will put pretty much all our eggs in a Bank of England basket and downgrade the FSA and so on”. There is not a bad comparative model on the other side of the Atlantic, in Canada, which had a tripartite system that worked well and was better co-ordinated.

Clause 1, which I favour, tries to address the gaps, the lack of co-ordination and the complacency and underperformance of the FSA and, to some extent, of the Bank of England. Clause 1 makes it very clear statutorily that the Chancellor of the Exchequer is in charge. When the hon. Member for Chichester referred to what happened in 1987—I recall that he was a special adviser in the Treasury—he had a ringside seat, and the Chancellor was in charge. The Chancellor came to the House to make a statement at 10 o’clock. Of course the Chancellor is in charge because—to Anglicise the phrase—the sterling stops with him. We know that it was the Chancellor, the Government and the taxpayer who bailed out the rotten banks that had been underperforming and had been allowed to underperform through the failings of some of the regulators. Of course responsibility lies with the Chancellor, but it is helpful to have it spelled out in clause 1. As Members of Parliament who are all members of political parties—there are no independents with us today—we go to meetings, whether of a trade union or a political party, and we know that it is the Chair who has a big say in what goes on, as indeed you quite rightly do, Mr. Gale. So, specifying that the chair of the Council for Financial Stability is the Chancellor of the Exchequer highlights statutorily in a declaratory sense what we all know to be the case anyway, but if that is a step to restoring confidence in the regulation of financial institutions in the United Kingdom and it helps to prevent further crises, and to rebuild confidence in our system, then it is a useful thing to do in statute.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman obviously has a very clear view that the Chancellor is in charge, yet what is he in charge of? He is chairman of the council, but what does the council do? It keeps the system under review and it co-ordinates. That is not much. From what I can see, there is no executive power vested in the Council for Financial Stability. All it is in charge of is ensuring that things are kept under review and there is co-ordination.

Rob Marris (Labour, Wolverhampton South West)

I entirely agree, but I sense that I place far more emphasis than the hon. Gentleman does on the role of co-ordination. Under the system that we have had for the last 10 years, there was not enough co-ordination—that was one of the failings. In reality, the Chancellor will be in charge. If three people get together, and someone from the FSA says, “We’re thinking of doing this”, and someone from the Bank of England says, “We’re thinking of doing that”, they will listen to the Chancellor, and the other two around the table will have some idea of what is going on. They will not be in silos; I get the sense that to some extent they were in silos through this crisis and before it.

Andrew Tyrie (Conservative, Chichester)

Can we make this a little more concrete? Under the hon. Gentleman’s proposal, who would be in charge of ensuring that liquidity statistics for the banks are collected? We now know that no liquidity statistics were being collected in a co-ordinated fashion by anybody, and that is one of the reasons the crisis did so much damage so early on when it broke. Do we not need to go well beyond putting someone in charge in a declamatory sense—or declaratory sense, as the hon. Gentleman said—to the point where somebody has direct and statutory responsibility for the overall management of the system?

Rob Marris (Labour, Wolverhampton South West)

That may well be the case, but getting three people together in one room so that they can realise that the lacunae exist sounds like a major step forward.

Mark Todd (Labour, South Derbyshire)

Indeed, it might be. If my hon. Friend turns to clause 1, subsections (5), (6), (7) and beyond, he will see that the Treasury is not merely given the task of being the chair of this body, but that it will have a substantial functional role. Perhaps he would agree that some of the more telling points made by the hon. Member for Fareham were requests for a sharper definition of exactly what the Treasury would expect from this body. That is where one hopes the Minister will provide us with greater information.

Rob Marris (Labour, Wolverhampton South West)

I entirely agree with my hon. Friend. It is a day for agreement, and it would have been better had we had some of that sharper focus in the Bill. I hope that we will get it from the Minister today. As my hon. Friend said, the first part of clause 1, and the second part from subsection (5) onwards, take us a step further. I hope that today the Minister will take the matter even further, because the amendments do not give us that sharp focus and I shall not support them.

Ian Pearson (Labour, Dudley South)

The debate on the Council for Financial Stability has warmed up a lot faster than the Committee Room. I will make some initial observations about performance, responsibility and structure, which has been at the heart of many of today’s contributions. I will then discuss in more detail the amendments tabled by the hon. Member for Fareham.

It is clear that Governments and regulators around the world have learned lessons from the financial crisis. No system has proved perfect, and in almost every jurisdiction the conclusion has been reached that further action needs to be taken. My hon. Friend the Member for South Derbyshire raised issues of performance that have been acknowledged by members of the tripartite body. It is also important to acknowledge and make explicit in the Committee the roles and responsibilities of individual executives, of boards and of shareholders in contributing to this financial crisis. The debate that we have had over the last two and a half hours has focused on the perceived failures of regulation, without acknowledging the perceived failures of the way in which companies were run, which contributed directly to the financial crisis.

Roger Gale (Conservative, North Thanet)

Order. Before I suspend the sitting, I would like to make a couple of announcements. I apologise to the Committee for the fact that it has been petrifyingly cold this morning. Some things are outside my gift, but a change of room is possible. I say it is within my gift—it has been gifted to us. It will require hon. Members to take their papers with them now, but the Committee will sit in Committee Room 11 this afternoon.

Mark Todd (Labour, South Derbyshire)

Is it warm in there?

Roger Gale (Conservative, North Thanet)

That is the reason for going there. The problem has been that the door does not shut properly in this room. I cannot guarantee that it will be warm, but it certainly will not be as cold. I am advised that it is warm.

During the debate, the hon. Member for Fareham made the point that the Committee is pressed for time. The sittings resolution—the ultimate resolution—is a resolution of the House and it cannot be changed by the Programming Sub-Committee. However, we can use the time available. I say to hon. Members now, that should it become necessary, there will be the opportunity on Tuesday next week—rather than tonight when hon. Members and staff will already have made arrangements—to have a further sitting between 8 pm and 10 pm. If the usual channels decide, perhaps on Thursday, that that is necessary, I would be prepared to chair a further sitting on Tuesday if that would help the Committee in its deliberations. I mention that now so that hon. Members can look at their diaries.

Joe Benton (Labour, Bootle)

I remind the Committee that with this we are discussing the following: amendment 36, in clause 1, page 2, line 8, after ‘Council’, insert—

‘( ) specify the responsibilities of each member of the Council in protecting or enhancing the stability of the UK financial system;

( ) specify the powers each member of the Council is able to exercise in protecting or enhancing the stability of the system;’.

Amendment 38, in clause 4, page 3, line 31, at end add

‘“the relevant legislation” means for the Financial Services Authority, the Financial Services and Markets Act 2000 and for the Bank of England, the Banking Act 2009.’.

New clause 2—Identification of additional powers needed to fulfil responsibilities for financial stability—

‘The Treasury must lay a report setting out the powers that the Financial Services Authority and the Bank of England need to fulfil their responsibilities for financial stability under the relevant legislation within one year of the commencement of this Act.’.

Ian Pearson (Labour, Dudley South)

I wish you a happy new year, Mr. Benton. It is a pleasure to serve under your chairmanship this afternoon.

If I remember my train of thought correctly, I was making some broad initial comments about performance, responsibility and structure and I wanted to refer to some of the comments made by the hon. Member for Chichester. It is not that long after the festive season, so I hope that he will forgive me for using a certain rather hackneyed phrase. Quoting the British Bankers Association on who has responsibility for the failure of the banks is a bit like asking turkeys to vote for Christmas. The quotes that he read out completely ignored the responsibilities of the banks, their boards and their shareholders.

As my hon. Friend the Member for Wolverhampton, South-West rightly said, the tripartite system works very well in Canada. As I have been at pains to point out, we all have lessons to learn from the global financial crisis and the way in which regulation has operated, which is why there have been extensive international discussions. After careful consideration, the Government concluded that the existing structure of international co-operation is the right one. A different model would not have helped to avoid the crisis.

It is not the Government, but the Opposition who are being driven by political expediency. They argue that the wrong system of regulation has been introduced because they want to place the blame on the Prime Minister, who was the architect of the tripartite system when he was Chancellor of the Exchequer. However, that system has been widely copied, and a different model would not have averted the crisis.

Let me set out why the Government are introducing the Council for Financial Stability and why it will make an important contribution to improving financial stability arrangements. I will then address the points that hon. Members made this morning.

At present, a standing committee of the Treasury, the Bank of England and the Financial Services Authority is established under a memorandum of understanding. The committee serves as a forum for the discussion and co-ordination of the activities of the authorities to protect financial stability. To date, the committee has played a key role in co-ordinating the authorities’ response to the crisis.

Meetings of the Chancellor of the Exchequer, the Governor of the Bank of England and the chairman of the FSA have guided and co-ordinated the overall strategy, supported by meetings at an official level. Managing the successive stages of the financial crisis has required the authorities to work intensively and closely, with the standing committee meeting regularly at official level. At peak times, the Committee met daily, with work at official level proceeding continuously.

In the early stages of the financial crisis, beginning with the liquidity problems faced by Northern Rock and the subsequent run on its deposits, the financial crisis management arrangements put in place in 1997 were, as the hon. Member for Chichester rightly said, severely tested for the first time. A lot has been said about the performance of the tripartite arrangements, and I do not pretend that there was not room for improvement—indeed, lessons have been learned.

Several members of the Treasury Committee are on this Committee, and their report “The run on the Rock”, which was published in January 2008, is perhaps the most extensive and significant report on this episode, and the Government responded in July 2008. I want to highlight a few key points in response to those who say that Northern Rock is an indication that the tripartite arrangements do not work.

Let me make four brief points. First, no retail depositor lost any money as a result of the problems experienced by Northern Rock. The Government stepped in to provide depositors with the confidence that they required to stabilise the bank. We eventually took the bank into temporary public ownership, using emergency powers once it became clear that that was the best option in terms of value for money for the taxpayer and financial stability.

Secondly, once it became apparent that the authorities did not have all the appropriate tools to resolve the issues raised by a failing bank in a way that protected depositors, taxpayers and financial stability, we put in place emergency powers through the Banking (Special Provisions) Act 2008. That measure was opposed by the Conservative party, but it played an important role in ensuring that the authorities had the tools that they required. We then developed a permanent resolution framework that was implemented through the Banking Act 2009. The hon. Member for Fareham and I both served on the Committee that scrutinised that Bill before it was passed, as did a number of other hon. Members who are here today.

Thirdly, the authorities used these powers to resolve difficulties experienced by other deposit-takers, using the Banking (Special Provisions) Act in the case of Bradford & Bingley in October 2008 and the Banking Act 2009 to resolve the issue of the Dunfermline building society in March 2009. I want to stress the point that these actions again showed that the authorities were applying their new toolkit decisively and effectively, to protect depositors, financial stability and the interests of taxpayers.

Fourthly, the crisis was not just about the potential future of individual institutions. As has already been referred to, by mid-September 2008, with the loss of confidence in the global financial situation, which was particularly engendered by the failure of Lehman Brothers, the whole global financial system was on the brink of collapse. Our response to that potential disaster provided a blueprint for other nations to follow. Again, I think that that has been widely recognised by financial commentators.

The UK authorities took immediate action to stabilise the system, for example through the recapitalisation of the banks, the establishment of the Bank of England’s credit guarantee scheme and the announcement of an asset protection scheme to insure banks against future losses. That showed the tripartite authorities working together at their most effective level.

Mark Hoban (Conservative, Fareham)

The Minister has given a great litany of things that the tripartite committee did after the system collapsed. How many times did the Governor of the Bank of England, the Chancellor and the chairman of the Financial Services Authority meet prior to the collapse of Northern Rock in 2007?

Ian Pearson (Labour, Dudley South)

I am not saying that everything that the authorities did before the global financial crisis or indeed in response to it has been perfect in every way. Particularly with the benefit of hindsight, it is always possible to think of ways in which the operation of those arrangements could have been improved; indeed, that is what parts of this Bill are deliberately designed to achieve. However, the hon. Gentleman surely must recognise that the measures that we have taken to resolve problems once the global financial crisis hit—with regard to Northern Rock, the Banking (Special Provisions) Act, the Banking Act 2009 itself and the measures on recapitalisation—are all measures whereby the tripartite authorities worked together to solve some very difficult situations.

Mark Hoban (Conservative, Fareham)

How many times did the tripartite committee meet prior to the collapse of Northern Rock?

Ian Pearson (Labour, Dudley South)

My hon. Friend the Member for Wolverhampton, South-West says from a sedentary position, “Probably not enough.” I hear what he says in that regard.

However, the point that I want to make to the Committee, which is one that the hon. Member for Chichester must also address as he keeps coming back to his mantra about who is in charge—I will say a bit more about that in a moment—is that pretty much every advanced nation has a system of regulation that follows a broadly tripartite model. We can discuss some of the changes that have been recently announced in the United States, if hon. Members want. Nevertheless, it is a system that is established and, as a number of Members of the Committee have rightly pointed out, we should not only look at structures to ensure that they are appropriate but at the performance of the tripartite regime too.

I believe that we have genuinely learned lessons. As part of that learning process, we fundamentally examined whether different structures would be more appropriate. Our considered view, which we expressed in “Reforming financial markets”, is that the tripartite regime is the most appropriate one and we do not think that a different regime, if it had been implemented before the financial crisis, would have made any significant difference in terms of how that crisis was handled.

The matters are ones of judgment and of the right people getting together and making those judgments. When I come on to discuss some of the amendments, we can expose the differences between the approach that we want, which we propose through the Council for Financial Stability, and the approach of the Conservative party, which is not in the best interests of UK customers or of financial stability.

Andrew Love (Labour, Edmonton)

Every contribution to the debate has prayed in aid the Treasury Committee report “The run on the Rock”. I do so myself. It is the most comprehensive document to look specifically at that issue. However, nowhere in that document will you find any reference to the big bang change in regulation being suggested by the Opposition. Indeed, the report went out of its way to say that we ought to keep our regulatory arrangements—perhaps we disagreed with the Treasury about how exactly that should be done, but we certainly did not go for any of the more radical suggestions made by some. We ourselves prayed in aid the continuation of the tripartite—if I can call it that—regulatory system.

Ian Pearson (Labour, Dudley South)

My hon. Friend is absolutely right. I welcome the fact that the Treasury Committee, after a thorough analysis of the situation, took the view that the tripartite system was and remains the most appropriate, even though the Committee recommended improvements. I am trying to put some of the criticisms made of the tripartite system into perspective. It is always possible to focus on what has not gone well. As I said, there is no room for complacency—lessons have been learnt. We should always be prepared to consider whether more lessons need to be taken on board.

What is also important is considering what has worked well, so that we do not end up throwing the baby out with the bathwater. The response of the tripartite authorities and the decision to legislate, through the Banking (Special Provisions) Act and the Banking Act 2009, show the tripartite authorities getting together, discussing how we handle situations and what powers and responsibilities are needed, and coming up with actions that make sure we have the tools required for the future.

Mark Hoban (Conservative, Fareham)

The Minister gives the impression that all is sweetness and light among the tripartite authorities now but, if they are all agreed on the responsibilities and powers, why is it that time and time again the Governor of the Bank of England comes back to the fact that he has not been told what powers he has to maintain financial stability?

Ian Pearson (Labour, Dudley South)

The tripartite authorities have discussed such matters, as the hon. Gentleman is very well aware, extensively over recent months, leading to the production of “Reforming financial markets” last year, in which the Government took a view of the financial crisis and identified the reforms needed to strengthen the financial system for the future. We consulted on that and the Bank of England and the FSA input to the consultation process and, indeed, to the process producing the White Paper in the first place. As a result of such discussions, we decided that we wanted to improve the standing committee arrangements. When we evaluated the standing committee and the wider tripartite arrangements, we took the view that while many different institutional frameworks exist in different countries across the world, that model of tripartite financial regulation was successful and remained appropriate.

Mark Hoban (Conservative, Fareham)

Will the Minister give way?

Ian Pearson (Labour, Dudley South)

Just let me make a bit more progress, then I shall happily give way.

Our position is that what the regulators do and the judgments they exercise matter as much if not more than the institutional framework within which they operate. We need a central bank, a regulator and an economics Ministry, but moving specific responsibilities from one body to another will not by itself make any difference other than to cause significant disruption at a time when attention should surely be focused on practical, workable improvements to regulatory performance and decision making, which is what the Government want to ensure. It is a point that my hon. Friend the Member for South Derbyshire has made on a number of occasions, which is why I happily give way to him.

Mark Todd (Labour, South Derbyshire)

I shall not make that point again. Instead, I wish to remark upon the fact that it would increase the confidence of those hon. Members considering the Bill if the White Paper, the precursor to the Bill, had more obviously engaged the Bank of England. One concern to which the Select Committee drew attention was the obvious disconnect between the Governor of the Bank of England and the process that we are now discussing. It would have been helpful, when considering the functioning of the tripartite authority, if there had been a greater degree of collegial spirit in the way in which the Bank responded to the future regulatory framework opportunities.

Ian Pearson (Labour, Dudley South)

I do not want my hon. Friend to think that there were no significant discussions between officials from the Treasury, the Bank of England and the Financial Services Authority in the run up to producing the White Paper, because there clearly were. As is often the case when producing documents, not everybody will agree on every single line or every item. A thorough process took place, and I hope that my hon. Friend recognises the fact.

Tom Watson (Labour, West Bromwich East)

In an earlier contribution, the hon. Member for Chichester declared this clause to be the most important and most serious in the Bill. However, we heard an uncharacteristic outburst of hubris from the hon. Member for Fareham when he declared the outcome of the next general election, saying that he would not bother to put his alternative to the Committee but would wait until then.

Given the hon. Gentleman’s continued assault on tripartism, is my hon. Friend surprised that the hon. Gentleman has not bothered to put forward an alternative? If the hon. Gentleman wishes to interrupt the Minister every 30 seconds, detaining the Committee as a result, would he at least detain us by giving an alternative rather than making the same argument over and over again?

Ian Pearson (Labour, Dudley South)

It is fundamentally important that we focus on making practical improvements to regulatory performance and decision making.

I was saying that, in any system, there will be a central bank, a financial regulator and an economics Ministry. The key thing is getting them to work together in the best interests of the economy and for financial stability. Whether one is in the United Kingdom, the United States or any other country, we all face the same sort of situation. Simply moving the deckchairs around into different formulations does not mean that we can escape the fact that we need those three organisations to work together.

I shall come to the detail of the amendment of the hon. Member for Fareham in a moment, but it is nonsense to say that one body should have sole charge. None the less, there is potential to improve the tripartite model, which is why we produced the White Paper, why we consulted on it, and why we are here today debating clause 1 and the other clauses that relate to the Council for Financial Stability. We want the council to replace the tripartite standing committee. Its membership will comprise the Chancellor, acting as chairman, the Governor of the Bank of England and the chairman of the FSA. It will be responsible for considering emerging risks to the UK’s financial stability and the global financial system, and co-ordinating an appropriate response.

I shall describe in detail how it will differ from existing arrangements, which I hope will clarify matters for the hon. Member for Chichester. On one hand, he said that this is the most important clause in the Bill; at other times, he says that it is just a cosmetic exercise. I do not believe that that is so. It is a significant part of the Bill. He was right in that part of his comments, and I will explain why in a moment.

Andrew Tyrie (Conservative, Chichester)

First of all, I was not suggesting that the area of policy is a cosmetic exercise; I was suggesting that the Government’s proposal to try to reform and improve it is a cosmetic exercise.

We need to proceed on the basis of facts. The Bank of England was not consulted about the proposals before their publication—the Governor himself appeared before the Select Committee and said in a public session that he had not even seen them, either on the day, or the day before their publication. The hon. Member for South Derbyshire, who is on the Select Committee with me, confirms by nodding his head in agreement.

It is not the case that this side is setting up a straw man and saying that all tripartism is wrong. It is the case, though, that on this side, we have repeatedly said that any system must have clear leadership. I have said that that leadership should come from the Chancellor. It is simply not the case that the tripartite arrangements worked well before 2007—it was not chaired by the Chancellor. As far as I am aware, the answer to the question repeatedly asked by my hon. Friend the Member for Fareham was that there were no meetings chaired by the Chancellor before 2007. However, if the Minister can enlighten me as to when such a meeting took place, we will be interested to know.

Ian Pearson (Labour, Dudley South)

The hon. Gentleman talked about consultation, and I repeat what we said in response to the Treasury Committee and the relevant extract in relation to the White Paper. Our response was:

“Its development was discussed with the Bank and the FSA at a number of levels, but it ultimately represents the Government’s view.”

That is right. As one would expect, we consulted in preparing the White Paper, as it was right to do so.

Let me explain, as I said I would, the differences. The council will be statutorily required to meet every quarter. Meetings will be scheduled in advance with agreed agendas, and consider the analyses by the Bank and the FSA on risks to financial stability. The financial stability report of the Bank and the FSA’s financial risk outlook will be considered as part of the quarterly strategic discussion. The draft terms of reference of the council, which have been published, stipulate that reports must be considered in three ways: a summary of the report must be discussed, risks highlighted must be assessed and the council must consider its response, including options for mitigating action.

What we have is a structured approach that will ensure that risks are fully monitored and a suitable response co-ordinated. It will be beneficial in times of stability, as well as in more challenging times, such as those that we have experienced over the past couple of years. The council is also required by the draft terms of reference to consider both the Bank’s and the FSA’s financial stability strategies, as provided under the Banking Act 2009 and this Bill. The council will therefore act as a forum for discussion and co-ordination of each authority’s strategic approach to financial stability.

In addition to the statutorily mandated quarterly meetings, the council may of course meet more regularly, and, as set out in the draft terms of reference, the Government anticipate that the council will meet on a monthly basis for the foreseeable future.

Mark Hoban (Conservative, Fareham)

The Minister talked about the process that the council would go through in reviewing the financial stability report and the FSA’s financial risk outlook. Is he saying that the process is a new one, or did the process take place before the run on Northern Rock?

Ian Pearson (Labour, Dudley South)

What I am saying is that as a result of introducing new arrangements, with the Council for Financial Stability, we are formalising processes that are already taking place. We are acting in a more transparent and accountable way. We believe we have struck a balance in making the deliberations of the tripartite more transparent. Let me explain. Clearly, a balance needs to be struck between the public benefit from greater transparency and the need to maintain confidentiality. That is a point flagged up by many respondents to the consultation.

Mark Hoban (Conservative, Fareham)

I would like some clarity. This is either a fundamental or a cosmetic change. The Minister argues that it is a fundamental change. Did the Chancellor, the Governor of the Bank of England and the chairman of the FSA meet regularly to discuss the financial stability report and the financial risk outlook? Yes or no?

Ian Pearson (Labour, Dudley South)

What I am trying to say to the hon. Gentleman is that there was a standing committee, it met at regular times during the financial crisis over the past couple of years, and it will be replaced by the Council for Financial Stability. The council will formalise meeting arrangements, will be more transparent and will ensure that there is a clear line of accountability to Parliament. We intend that parliamentary scrutiny will be facilitated by the transparency of the council through its quarterly meetings and the Treasury’s annual report, which is proposed in the legislation. Clearly, there are opportunities for the Treasury Committee to make its own judgments on how it wants to scrutinise matters. It is not for me as a Government Minister to make comments in that regard, but I think there is a strong case for the Treasury Committee to have a major role in providing appropriate channels of accountability to Parliament.

Mark Todd (Labour, South Derbyshire)

Will my hon. Friend set out the tripartite authority’s approach through this new institutional framework to one area that certainly seems to have been absent, which is the war-gaming exercises that would be associated with the practical working of the three authorities in confronting a crisis? I imagine that it is a clear accountability for this particular body to define the scenarios, discuss the outcomes and plan how to proceed and evaluate the result. Is there any evidence that that is part of the brief of this particular body?

Ian Pearson (Labour, Dudley South)

The Council for Financial Stability, as my hon. Friend will know, has an important role. He will see from the terms of reference that were published on the Treasury website that its role covers a wide range of areas. It is a co-ordinating rather than a decision-making body. His point about war-gaming is a matter that would be discussed in terms of areas of responsibility for ensuring that appropriate arrangements are in place to ensure that there is an effective regulatory regime that takes a risk-based, proportionate approach. I hope that provides at least some reassurance.

Rob Marris (Labour, Wolverhampton South West)

Will my hon. Friend give way?

Ian Pearson (Labour, Dudley South)

I will give way one last time to my hon. Friend and then I must make some progress and move on to the amendments.

Rob Marris (Labour, Wolverhampton South West)

One of the lessons that I am picking up from the Minister—a lesson that has been learned—is that the Governor of the Bank of England, the head of the FSA and the Chancellor of the Exchequer met frequently during the crisis, but by implication did not meet frequently enough before the crisis, and the Council for Financial Stability will redress that in future by ensuring that those meetings are regular and quarterly. Another lesson that I have learned from the crisis is that some banks are too big to fail. That is particularly the case now—this country simply cannot afford to bail out another bank. In terms of preventive measures, will the Council for Financial Stability look at the break-up of one or more of the big privately owned banks we currently have in the UK? The risk of their failing is unanswerable, because we do not have the money to bail them out.

Ian Pearson (Labour, Dudley South)

With respect to my hon. Friend, there are other opportunities and indeed places to discuss the issue of moral hazard and the too-big-to-fail argument. In particular, when we get on to discuss living wills, we can have a substantial debate on that issue, because living wills are directly designed to address that issue.

Let me briefly make one or two points. First, I think that the hon. Member for Fareham tried to misconstrue my position when I talked about the roles of the different tripartite bodies and the role of the Bank and its responsibility for monetary policy. As I am sure he is aware from the “Reforming financial markets” White Paper, the Government have made it clear that there are significant practical problems associated with using short-term interest rates to pursue macro-prudential regulation policy goals. I was not for a moment pretending that that is what I was suggesting that the Bank of England should do.

On the point made about the comments of Andrew Whittaker and the FSA, I want to draw the Committee’s attention to the FSA’s memorandum submitted following the oral evidence. The relevant section that I want to put on the record is:

“Our evidence was that it is a joint enterprise”—

that is, financial stability—

“between the three authorities, each of whom have different levers available to them. The Council for Financial Stability will enable effective co-ordination in relation to the overall approach on all issues relating to financial stability and will allow each of the authorities to contribute to the financial stability work. There is no general hierarchy among the authorities, each of which has its own specific responsibilities.”

Again, that is the key point that I want the Committee to recognise. It is about the Financial Services Authority as the regulator, the Bank of England and the Government coming together and co-ordinating action. There is no hierarchy, and there should be none, when it comes to such matters.

In direct response to the point made by the hon. Member for Chichester about who is in charge, it is a joint enterprise, as I have just said. It is the responsibility of all the appropriate bodies. My hon. Friend the Member for West Bromwich, East praised him for his speech, but the hon. Member for Chichester said that macro-prudential regulation should be the responsibility of the Bank of England and that it should lie with the Chancellor of the Exchequer. That is not a defensible position. I will happily give way while he seeks to explain it.

Andrew Tyrie (Conservative, Chichester)

I did not say that, as the record will show; I said that responsibility for the management and provision of advice on systemic risk—I said “tentatively”; incidentally, I also said that the Government should not rush it, which is what they are doing now, because they need a political gesture—should probably lie with the Bank of England, and that the Bank of England should then act on it under the overall direction of the Chancellor of the day. I gave my reasons why.

I have been trying to intervene on the Minister for some time, so I will take this opportunity. Does he think that it furthers the cause of credibility on this matter to persist in what is, frankly, a state of denial about the failure of the tripartite system before 2007? He refused to acknowledge that no meetings of substance took place, and he rejected completely the Treasury Committee’s considered conclusions.

Briefly, I conclude by reading paragraph 276 of the Treasury Committee report again, as it bears so directly on what the Minister said when he said that the system worked well:

“We cannot accept, as some witnesses—

and now the Minister—

“have suggested, that the Tripartite system operated “well” in this crisis...for a run on a bank to have occurred in the United Kingdom is unacceptable, and represents a significant failure of the Tripartite system. If the system worked so “well”, the Tripartite authorities should take a closer look at the people side of the operation.”

Who is in charge?

Ian Pearson (Labour, Dudley South)

I do not want to return to the Government’s response to the Treasury Committee report into Northern Rock. Our position was made clear at the time. I hope that the hon. Gentleman will acknowledge the Government’s recognition that there were failings. Lessons have been learned, and that is what we have tried to do through this exercise over the last couple of years, to ensure that improvements are made where they are required. Our analysis is that the tripartite model of regulation is appropriate, and we do not think that alternative models would have produced any difference. That remains the Government’s position.

In response to the question about who is in charge, each authority has its responsibilities and tools for financial stability. The key point is that each analysis and approach is effectively aligned and co-ordinated, and that is where the Council for Financial Stability can improve on the system that has been in operation. Its role will be to monitor and co-ordinate to ensure that effective alignment.

Andrew Tyrie (Conservative, Chichester)

I recognise that the Minister has an impossible job in defending this. He was not the Minister prior to the development of this crisis; he has come late to the show and found himself having to handle an impossible brief by not only defending what happened, but also trying to pretend that we should broadly carry on as we are with the current system. I salute him in his efforts to do that impossible job. However, surely he must grasp that the one crucial issue that virtually everybody who has looked at this matter has concluded as necessary, is the establishment of a clear line of authority through to one man or woman. That clear line of authority is still lacking in the Bill. Even though he will not give way now, will he be prepared to leave the Committee today and consider the issue, so that we can take another look at it on Report?

Ian Pearson (Labour, Dudley South)

This issue has been considered many times before. The hon. Gentleman holds a certain position—he is scarred by personal experience in the matter. The Government’s view is that the tripartite system is the right approach. It is a misunderstanding to say that there is one person in charge for everything to do with financial stability and consumer protection in the United Kingdom, because each authority has different responsibilities. The key point is to ensure effective alignment and co-ordination.

Andrew Love (Labour, Edmonton)

Will the Minister give way?

Ian Pearson (Labour, Dudley South)

I happily give way to my hon. Friend, but then I must make some progress.

Andrew Love (Labour, Edmonton)

Surely the important point here is that there is not just a Council for Financial Stability, working alone. There has been massive change in the FSA, which failed in its regulation of Northern Rock. There has been a substantial strengthening of the Bank of England, with a special resolution regime. We still have macro-prudential regulatory changes to be made. Putting all that together, it makes sense to go down the route that the Government are going down.

Ian Pearson (Labour, Dudley South)

I agree with my hon. Friend. The idea of having one person whom we could say was in charge of central banking, monetary policy, prudential regulation, public spending and wider fiscal policy does not make sense. It is certainly not the view of the Government, although it might be the view of the hon. Member for Chichester.

Andrew Tyrie (Conservative, Chichester)

We have to proceed on the basis of some fact. No one in the Opposition is suggesting that the conduct of business regulation should be put in the charge of one man who is always the same man and is responsible for the management of systemic risk. We are talking about macro-prudential supervision in the context of maintaining financial stability in the overall financial system—systemic risk—and we are not talking about conduct of business regulation. The Minister implied repeatedly that we were eliding the two—we are not. He needs to discuss the issue in the Bill, in clause 1.

Ian Pearson (Labour, Dudley South)

I agree with the hon. Gentleman in the sense that we are talking about macro-prudential regulation. There are those who want to carve out some of the systemically significant banks and transfer responsibility for their regulation to the Bank of England. I do not think that that would be a particularly helpful approach. In my view, the nature of the changes in the financial system over the past 20 or 30 years has seen increasing integration. Something might look systemic at one point in time, but what might not look systemic may prove to be very systemic indeed when circumstances arise. So, I do not accept that that approach is the right one to take.

The hon. Member for Fareham spoke of the rationality of markets. Apart from recommending Daniel Kahneman, in addition to Thaler and Sunstein, as I have done on previous occasions, I want to agree with the hon. Gentleman, to the extent that he highlights the roles and responsibilities of firms, their boards and their shareholders. It is important in the financial crisis that we recognise that that was at least as big a factor as difficulties with regulatory judgments that have been identified. That should be recognised.

The second point of substance to which I feel I need to respond is about macro-prudential tools. The White Paper is clear on the matter, which we are pursuing internationally, as the hon. Member for Fareham knows. International co-ordination is obviously crucial, to avoid regulatory arbitrage and to ensure consistency of approach. After we have developed the macro-prudential toolkit through ongoing work in the Basel committee, for example, we will take the decisions necessary to place those tools with the appropriate authority. Both the Bank of England and the Financial Services Authority support that position fully. We must determine what tools are needed before deciding to whom to give them. I hope that he will recognise that point.

Amendments 37 and 38 provide a different model for the council from that proposed by the Government. The council would have ultimate authority and the ability to direct the Treasury, the Bank and the FSA. As I have argued, the Government’s vision for the council is one of close co-operation, monitoring and co-ordination, ensuring that the bodies are aligned in pursuing their objectives. That model respects the independence of the Bank and the Financial Services Authority.

The amendments, by contrast, would change that model completely, subserviating the power of those institutions and the Treasury to the new council. It is worth pointing out that the amendments do not go far enough in providing the necessary legal architecture for such an institutional framework. For example, how would the council take a decision to direct one of the authorities to use its powers: by majority vote or a decision by the chair? How would the direction be enforced? However, I recognise the probing spirit in which the hon. Member for Fareham moved the amendments.

I do not agree with the model proposed, for a number of good reasons, but at heart is the fundamental difference that we see the council as a body with a monitoring and co-ordinating role to ensure that authorities with distinct responsibilities for financial stability continue to work effectively and closely together. In the Government’s view, the council is a forum for the effective co-operation of the three authorities. It is not about a power hierarchy, which is what the amendments would establish. There will be no votes. It is not for the Government to impose their will on an independent Bank or financial services regulator, which is why I hope that the hon. Gentleman will withdraw his amendments.

Amendment 36 requires a Treasury statement on the council to specify the responsibilities of each member to protect or enhance the stability of the UK financial system and the powers available to each authority. There is merit in setting out the authorities’ roles and responsibilities clearly. A draft of the statement of the council’s terms of reference provided for in clause 1(5) is available on the Treasury’s website, as I have mentioned. It provides an overview of the authorities’ financial stability responsibilities and is intended to contextualise the detail of the council’s objectives and procedures. The statement also says that the authorities intend to revise the memorandum of understanding first agreed between them in 1997 and updated in 2006, which describes the roles of each authority and how authorities work together to pursue financial stability.

That relates to the point made some considerable time ago by my hon. Friend the Member for Edmonton when he asked for more detail. Inevitably, legislation is provided at a high level and deals with principles. A lot of the detail will be in the new memorandum of understanding; indeed, it already exists in draft form in the terms of reference.

The MOU will complement the terms of reference and be revised in time to lay the terms of reference formally before Parliament, as set out in clause 1(9). Amendment 36 would require it to be placed in the draft statement. We believe that it is preferable to have the high-level context in the council’s terms of reference and consolidate the details of each authority’s role in the memorandum of understanding. That is why we have taken the approach that we have, and why I encourage the hon. Gentleman not to press his amendment.

New clause 2 is, perhaps, based on a slight confusion between having a new objective and having new powers. We will not achieve financial stability by directly using a magic wand called “the financial stability power”, as I believe everyone knows—although it would be nice if such a thing existed. Instead, the FSA will enhance stability by using various powers such as authorising banks, making rules, discussing risk controls and so on, in a manner that is aware of, and aims towards, wider financial stability.

For example, as part of prudential regulation, one of the FSA’s key tools is to decide how much capital a bank needs to hold. In the past, arguably, the FSA considered this issue primarily for each firm in isolation—as we discussed earlier, the so-called micro-prudential approach. We expect the FSA to use that existing power with more awareness of wider financial stability issues, including aggregate levels of exposure and risk in the financial and banking system as a whole—the so-called macro-prudential approach that we have been discussing.

Of course, the Government are not complacent. We always keep under review the powers that the FSA and the Bank need. That is why we are in this Committee Room today, and it is why we were in the Committee Corridor a year ago for the Banking Bill, now the Banking Act 2009. If additional powers are necessary, we will consult and introduce legislation. However, we believe that the measures in the Bill are appropriate, and I invite the Committee to reject the amendments and new clause if they are pushed to a vote.

Mark Hoban (Conservative, Fareham)

It seems quite a while since we started the debate on these amendments and stand part. The debate has been helpful, in that it has exposed some of the fundamental weaknesses that existed in the tripartite committee prior to the banking crisis. It has become clear, despite my interventions on the Minister, that if it met once, that is at best, and even that was on a virtual basis, and that the three principals did not get together to discuss the financial risk outlook or the financial stability review. It is all very well the Minister saying what a marvellous role the tripartite authorities played in the cure, but they did not work together to try to prevent the emergence of the financial crisis on a scale that would affect the UK economy.

That fundamental failure is one that my hon. Friend the Member for Chichester, when he was serving on the Committee for the Financial Services and Markets Act 2000, highlighted but the Government dismissed. The Government should recognise that the existing arrangements did not serve the country well in the run-up to the financial crisis.

The Minister gives the impression that we are now in a new age of peace and harmony among the tripartite authorities, and that they are all clear about their responsibilities and what they are to do. Let me give the Minister’s own view on that. He said that I misconstrued his words in Committee when he said that the

“central bank has responsibility for monetary policy”—

that was the end of the quote I gave. He then went on to state:

“What I am trying to explain to the Committee is that financial stability cuts across all those areas of responsibility.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 15.]

In evidence-taking, even the Minister seemed to be saying that monetary policy had a role to play in delivering financial stability, so I am not sure who is misconstruing whom. That quote suggests that he did believe that monetary policy has a role, yet it is clear from the views of the MPC that it does not.

The Minister spoke about the supplementary memorandum that the FSA sent out. I was intrigued by this. He quoted paragraph 2, which states:

“Our evidence was that it is a joint enterprise between the three authorities, each of whom have different levers available to them.”

Paragraph 2 sounds okay and if it had stopped pretty much there the Minister would have had a conclusive point.

However, paragraph 4, in which the FSA talks about its responsibility for setting individual firms’ capital standards, says in the context of its macro-prudential toolkit that it

“would expect to give very considerable deference to other members’ judgments”.

Now, if one does not think that one is subservient, one does not necessarily give deference. From that statement, I very much get the impression of a hierarchy. Paragraph 5 says:

“In those contexts, our role in relation to financial stability is a secondary one.”

There is a disconnect, or gap, here. On the one hand, the Minister is saying, “This is a shared enterprise, we are all responsible for this, no one’s in charge, it is all responsibly shared”. However, even the hon. Member for Wolverhampton, South-West believes that the Government should be in charge of this process and that there should be clear leadership. Indeed, his views seem to reflect those of the FSA and the Bank.

So, at the outset of the reforms that the Government have proposed, there is a gap between two members of this new Council for Financial Stability and the Treasury. One of the problems that we had, and we saw it during the financial crisis, was evidence of a gap, whereby people in the tripartite arrangements did not feel that they were responsible for particular things, that they thought that those things were somebody else’s responsibility and that somebody else was in charge of them. In fact, the Governor of the Bank of England did not know who was in charge.

I do not think that what is before us today addresses that issue in a very clear fashion, because there is a gap—the Chancellor might describe it as a credibility gap—between, on the one hand, the view of two members of the tripartite authority and, on the other hand, the view espoused by the Treasury. There is a debate to be had about who should be in charge and indeed about whether somebody should be in charge. It is deeply concerning that the three members of the Council for Financial Stability cannot agree among themselves about whether somebody or nobody is in charge. That is a testament to the lack of proper debate and discussion between those three members and I thought that it was instructive that the Governor did not feel part of the consultation process about the White Paper and had not seen it immediately prior to its publication. That does not suggest to me that there is a harmonious relationship in this new age of sweetness and light that the Minister seemed to imply had broken out.

That bodes ill for the work of the Council for Financial Stability. At some point, we will move away from the current crisis and back to a time where, we hope, markets are more stable. How will the council work then? How will it function effectively when even at this point—at the very outset—no one quite knows how it will work? That is a very bad omen.

The hon. Member for South Derbyshire talked about the importance of learning. Not all of this process is about structural change; sometimes people have to learn. There is a strong element of truth in that. The problem about learning is that people forget. I used to know German—I did German A-level—but I could barely string together a sentence of German today, 27 years later. People forget. People said after the last housing crisis that there will not be another one and that we had learned from the mistakes that had been made. People forget and lessons are unlearned. So part of the purpose of structural reform is to ensure that some of that learning is enshrined.

I think that we would all recognise—I think that the FSA itself recognises—that in the run-up to the financial crisis, the FSA’s predominant focus was on conduct of business regulation. For a host of reasons, that is where the FSA’s focus was, to the detriment of prudential supervision. It now seeks to rebalance that—it has learned that lesson—but what will happen in 10 years’ time? How will it retain that learning once times and pressures have changed?

We come back to the point made by my hon. Friend the Member for Chichester. In our White Paper, we argued that conduct of business should rest with the Consumer Protection Agency, and that the micro-prudential supervision of banks and systemically important businesses or sectors should rest with the Bank of England. We realise that there could be a conflict of intention—that one would be subordinate to another. We want to move away from that, to prevent it from happening again. We therefore suggest giving one institution a clear responsibility for the conduct of business and the other a clear responsibility for micro-prudential regulation, so as to enshrine the learning that has resulted from the crisis.

Mark Todd (Labour, South Derbyshire)

I agree with the hon. Gentleman’s comments on learning, although I would argue that the institutional framework does not necessarily aid the retention of memory; it is strongly to do with the culture of the organisation, its leadership and so on.

That aside, however, there is a lot of learning to be done on all sides. The Governor will probably look back on his early concerns about moral hazard and wonder whether he struck the correct balance in his responses. Incidentally, that is exactly why I raised with the Minister the question of war-gaming—the regular testing of experience, learning and practice among key participants. That has to be done not only by the Chancellor, the Governor and the head of the FSA, who make up the tripartite body, but by the institutions that they lead.

Mark Hoban (Conservative, Fareham)

The better the relationship between the principals in peacetime, the easier it is in war time. The hon. Gentleman rightly spoke of war-gaming. It was as a consequence of the war games held prior to the Northern Rock crisis that the FSA and the Bank recognised the lack of a special resolution regime.

Mark Todd (Labour, South Derbyshire)

And no one did anything about it.

Mark Hoban (Conservative, Fareham)

As the hon. Gentleman says, no one did anything about it. One hopes that under the arrangements produced by the Government, or those provided by the Opposition, the message about listening to the principals is not forgotten. If a resolution regime had been in place prior to the financial crisis, the outcome might have been very different for some of the parties involved. It is an important issue, and one that should be reflected upon.

Structure, however, has a role to play. The remit and objectives set for an institution in part drive its behaviour. That is why we shall spend some time later today arguing about the setting of the FSA’s objectives, as they will drive some of its actions. There are some important issues to do with structure that cannot be allowed to get in the way, particularly if we believe, as I do, that the structure and reforms of 1997 created tension and some gaps, which flowed through into the current crisis. That is why the amendments are important.

I start with the Minister’s premise that there is a shared enterprise between the three tripartite authorities. If it is a shared enterprise, people need to know their responsibilities within the framework. If the Bill reaches the statue book, the Bank of England and the FSA will have within their remit the goal of protecting and enhancing financial stability. We therefore come back to the question of what they can do to deliver that objective. What powers will they need to protect and maintain financial stability, and where are the gaps to be found? However, I fear that we see in the Bill the creation of a great building with a clear view from the top floor—a view of the shared enterprise, underpinned by shared responsibilities—but one that is built on weak foundations, as there is no full range of powers available to the Bank and the FSA to deliver their objective. In this context I am thinking particularly of the Bank, because it is the Governor who, on a number of occasions, raised the issue of lacking, in his mind, the powers that he needs to deliver the financial stability objective. The special resolution regime helps the overview of the payment system, but it is not the full suite.

The Minister suggested that there is more work to be done on the macro-prudential toolkit, which had those powers. New clause 2 reminds the Government that that needs to be set out—it would be easy for such things to be forgotten along the way. Only when we have that full suite of powers we will know that we have a system with a clear link between objective responsibility and the tools to do the job; we are some way from that.

For those who believe that a tripartite system, or tripartism, as the hon. Member for Wolverhampton, South-West described it, works, the proposal in the Bill takes them part of the way, but it can be clearer. I do not think that the clause goes far enough to clarify the issues, and my amendments, particularly amendment 36 and new clause 2, which I would like to push to a vote when it is appropriate, help to toughen the clause.

For those of us who do not believe that the tripartite system or the regulatory structure has worked in the UK, clause 1—the Government’s flagship measure, which is meant to introduce some reforms—is nowhere near the right answer to the question about what went wrong with the regulatory system and what we can do to resolve it. That is why we raised alternative proposals that would enhance the role of the Bank of England, splitting micro-prudential regulation from the conduct of business regulation, giving the latter to a separate Consumer Protection Agency. We believe that the flaws of the system that the Prime Minister designed in 1997 are so fundamental that the gloss of a Council for Financial Stability is insufficient. That is why I will ask my hon. Friends to vote against the clause. I beg to ask leave to withdraw the amendment.

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment 20, in clause 1, page 2, line 1, leave out ‘may’ and insert ‘must’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss amendment 21, in clause 1, page 2, line 3, leave out ‘may’ and insert ‘should inter alia’.

Colin Breed (Liberal Democrat, South East Cornwall)

I welcome you to the Chair this afternoon, Mr. Benton. Perhaps your colleague, Mr. Gale, has indicated to you that he had permitted the stand-part debate to take place within the context of the amendments. I reserved my contributions to that wider debate to preface my amendments, but now, with your permission, I would like to contribute to the wider debate.

It is not difficult to agree with many Members on the demonstrable inadequacy of the tripartite situation, as it was available—if that is the right term—during the crisis that we saw a couple of years ago and in recent months. It is essential to look at, as the Minister said, the alternatives, including scrapping the current tripartite system and assigning responsibilities more directly to one or another of the existing players, specifically the Bank of England. It is right that a proper review takes place and all the alternatives are considered.

The hon. Member for Chichester, who with remarkable timing has just resumed his seat, could well claim to have been rather prophetic in his protestations of 1999. I was interested in his contribution about his experience in 1987—it reminded me of that dark day when I had to return swiftly to my own bank as we saw the sea of red on our screens and millions of pounds disappear, principally from our clients’ accounts, but also from our own. That day will be for ever etched in the memories of those who went through it because it was such a disaster.

Today, the financial services industry is different from how it was in 1987—indeed, it is pretty different from how it was in 1999. Perhaps the biggest criticism that we can level at the tripartite arrangement is that its members completely failed to respond to the changes that were taking place beneath their noses, or to understand their roles and responsibilities and the need to reform and substantially change the way they undertook those duties. As the hon. Member for Fareham pointed out, it appears that they did not have many meetings and did not particularly understand what the tripartite was supposed to be doing. Nevertheless, under their noses—both individually and collectively—significant changes in the way the financial services industry operated were taking place.

In recent years, we have seen the dramatic expansion of financial conglomerates—not only the banks, but all the other aspects that been added to them through mergers and acquisitions. We have seen a huge rise in greater international cross-border transactions, and the growth of new financial instruments whose implications for individual institutions were often not precisely understood. We have seen the gradual but increasing reduction of capital inadequacy liquidity requirements and greater interconnectivity between financial institutions, so that on floor 4 an instrument was being sold, while on floor 7 of the same building it was being bought back, perhaps even on the same day.

Andrew Love (Labour, Edmonton)

Does the hon. Gentleman agree that the biggest change was the idea that markets could do it for themselves and that we needed only the very lightest regulation possible? Was it not that more than anything else that undermined the financial system?

Colin Breed (Liberal Democrat, South East Cornwall)

Yes, that is right in the sense that a lighter touch might have been more appropriate in 1999 than in 2009. Although lighter touch regulation might have been required or available to allow the markets to operate in the early period, it later became clear that the way in which they operated had changed so significantly that that lighter touch was inappropriate. That should have been recognised and the proper reforms put in place. We knew from evidence to the Treasury Committee that the FSA was trying to identify what new powers it would require, albeit that it was taking a heck of a long time to do it. Events rather overtook it.

Finally, between 1999 and 2009, the way in which the banks funded themselves completely changed, and it is difficult to see how what might have been considered appropriate in 1999 was in any way appropriate from 2007 onwards. The hon. Member for Wolverhampton, South-West reminded us again of those paragons of virtue in Canada, and its banking system with its rather Scottish Presbyterian influences and traditions. That probably goes for HSBC as well, which had similar traditions and was probably one of the banks least affected by the crisis that engulfed them.

I have been persuaded that no one individual component of the current tripartite group could or perhaps even should be solely responsible for financial stability—all have a role to play and all come from different perspectives. But how is co-ordination to be achieved? There would have to be co-ordination. The different elements could not work in some sort of creative tension. They would have to understand that it was a co-ordinated effort. Where would all the evidence and information be put, where would the collation be done and where would there be sufficient authority to make appropriate and timely decisions?

A tripartite body of some description seems inevitable to deal with the current complexities and scale of the financial services organisations in the UK. However, as has been graphically pointed out, the current tripartite group, with its inadequate memorandum, informal meetings and ill defined responsibilities, clearly does not fit the bill. It was completely unsuccessful; it is rather difficult to defend any other position. Depositors may have been saved, but taxpayers certainly have not been. Reform was essential some years ago, and it is even more essential today. However, I do not believe that it is for the Council for Financial Stability to undertake micro-management of the regulation of banks or to get into great detail. In my view, it should look over the broader aspects of the whole financial stability framework.

Greater clarity is needed in the relationships between the tripartite body and its membership. We need to understand with greater clarity exactly what it is doing. It needs to have greater formality about it and greater transparency in its operations. Clear responses to the failures already exposed are also needed.

The Council for Financial Stability needs a more distinct persona. It should be not a talking shop—albeit that it meets every month or quarter or whatever it is—but a forum for close monitoring and decisions, even if those decisions are implemented by others. In other words, the Bank of England, the FSA and the Treasury may individually have to undertake some of those decisions, but they have to understand that they need to be made collectively. That is the strength of a tripartite organisation.

In particular, I want the council to be completely separate, if that is possible, from the Treasury, although I agree that it should be chaired by the Chancellor of the Exchequer. It must not become just a Treasury sub-committee, driven by the Treasury, nursed along by it and promoted and publicised by it. I want the council to be recognised as distinct, to have some responsibilities independent from the Treasury and to account to Parliament and the public, not to the Treasury. It is important that the council has a persona more like that of the Monetary Policy Committee.

The amendments in my name and that of my hon. Friend the Member for Twickenham covering the various clauses under the heading “Council for Financial Stability” are an attempt to provide greater clarity and transparency and to create a separate identity for the council in the Bill to differentiate its role from that of the Treasury. Specifically, amendments 20 and 21 would beef up the current wording. In that sense, they may be probing—they enable me to make these remarks. However, it is important that the Treasury’s responsibility to prepare a statement in respect of the council’s functions is absolute and that that does happen; I am sure that it will. It is also important that it does not just prescribe what those should be. The council should not be confined or restricted to what is in subsections (6)(a) to (d). I think that the council itself might make a contribution in putting down what it thinks some of its functions should be. Part of the purpose of the amendments is to allow the council the freedom and responsibility to indicate what it believes its functions should be, rather than being told by the Treasury. That would give more of a sense of independence from the Treasury.

The later amendments support the overall contention that the fact that the current tripartite has been found wanting does not mean that a tripartite body cannot be made to function. Indeed, in today’s complex world of conglomerates and interconnected financial services, it must be made to work. The changes to the powers of the FSA and the Bank of England, along with the experiences of recent months and years, will, I am sure, provide valuable lessons for the operations of the financial stability council. I see no reason why, with greater definition, better transparency and a real persona, it should not be as successful as an MPC.

Ian Pearson (Labour, Dudley South)

I acknowledge the hon. Gentleman’s stand-part speech. I note that he said that some sort of tripartite system seems inevitable; I welcome his support in that respect at least. He made a number of good points. I was less sure when he spoke of the council as having an independent personality but being chaired by the Chancellor; I am not sure how that would work in practice. However, I recognise the points that he made, and I will not repeat my earlier comments in response to other hon. Members.

Amendment 20 covers the statement that the Treasury may produce under clause 1(5) and would place in primary legislation a requirement on the Treasury to prepare such a statement. It is certainly our intention to produce a statement, but we want it to be a document that can evolve over time as necessary. That is why subsection (7) requires the Treasury to keep the statement under review and subsection (9) requires it to lay the initial or revised statement before Parliament. A draft version of the statement is available on the Treasury website, as the hon. Gentleman knows, partly to facilitate the Committee’s scrutiny of the Bill. That publication makes it clear that we intend to lay a statement after the Bill is enacted, so I do not think that there is any reason to make the amendment that he proposes. However, I am happy to consider that point further.

Rob Marris (Labour, Wolverhampton South West)

May I turn it around the other way? Given that the Minister just said that a statement will be prepared and revised if necessary in due course, is there any reason to oppose amendment 20?

Ian Pearson (Labour, Dudley South)

Governments always prefer flexibility, but on the point of substance, we want to produce a statement. It is highly likely that Governments will always want to produce a statement. I do not have any difficulty with the substance of the amendment, but given that we have made clear our intention to publish the statement and I have repeated it today, I do not propose that the Committee should support the amendment and I hope that the hon. Gentleman will withdraw it.

Amendment 21 concerns subsection (6), which indicates what matters the statement may cover. The amendment would strengthen the requirement to indicate that those matters should, inter alia, cover the specified areas. Again, it is not a matter of great division between us. The intention of the subsection is to specify what matters the statement can cover while maintaining flexibility. The wording “may” is used to provide sensible flexibility in future. We are trying, as Government always try, to ensure that the legislation is as far as possible future-proofed.

All the measures mentioned in paragraphs (a) to (c) of subsection (6) are covered in the draft terms of reference that we published, but it is conceivable that they may not always be necessary, which is why changing the wording as the hon. Member for South-East Cornwall proposes would not make any substantial difference at the moment to the operation of the clause in practice. I do not believe that the amendment is necessary, and we would like to reserve the right to future-proof the Bill as far as possible; that is why the wording is as it is.

Colin Breed (Liberal Democrat, South East Cornwall)

As I indicated to the Minister, the amendment was of a probing nature, to enable me to preface the idea that we broadly support the continuance of the tripartite arrangement, albeit with a considerable amount of stiffening and the creating of a new persona.

The Minister seemed to indicate that it was impossible for someone to chair something that they were not necessarily directly in, but that happens in huge numbers of organisations. User forums are an example; user groups may join together, often as consumer groups, and if someone is a chair of a particular user group there is no reason why he cannot operate effectively as the chair of the whole group while still being the representative of one particular member body. That can work quite successfully. It would mean that there was a difference—there should be a clear and definable difference—between the council and any Treasury operation.

The Minister is much more for having a sub-committee of the Treasury drive the whole thing, whether that is right or wrong. I believe that there should be greater independence. We have formulated amendments 20 and 21, and some subsequent ones, to try to create that independence. However, I am happy to beg to ask leave to withdraw the amendment.

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment 22, in clause 1, page 2, line 9, leave out ‘Treasury’ and insert ‘Council’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss amendment 23, in clause 1, page 2, line 10, leave out ‘by the Council’.

Colin Breed (Liberal Democrat, South East Cornwall)

The amendment would enhance the position of the council, as opposed to that of the Treasury. Clause 1(6)(d) says:

“include any...provision that the Treasury consider would facilitate the effective exercise by the Council of its functions.”

It is for the council to consider what would facilitate the effective exercise of its functions. The interests of the FSA and the Bank of England are not necessarily what the Treasury thinks they ought to be. The amendments would therefore replace “Treasury” with “Council” and remove the words “by the Council”.

Andrew Love (Labour, Edmonton)

I thank the hon. Gentleman for giving way, particularly as he seems to be drawing to a conclusion. I am somewhat ill at ease with the suggestion in his contribution, and his previous contributions, that there is something malign about the Treasury’s involvement in such matters. The Treasury and the Chancellor of the Exchequer keep Parliament informed of what is happening with issues that are critical to our economy. Why does the hon. Gentleman take such a negative line?

Colin Breed (Liberal Democrat, South East Cornwall)

I am not being negative about the Treasury; it probably has the most important part to play. However, if the new statutory body is to have clear responsibilities, it must be given the opportunity to create its own view of its functions. If not, it will be little more than an arm’s length part of the Treasury. Perhaps this is where I see some malign intent: it would be extremely convenient if, in time, the council was directed, controlled and influenced by the Treasury. When a fundamental disaster befell us, however, it would be not the Treasury’s fault, but the fault of the council.

If the council is to operate satisfactorily—I see no reason why it should not—it should be able to enhance its role with its own individual rights, rather than being a sub-committee of the Treasury. It would then be able to consider its functions properly, perhaps ensuring that we do not suffer the same problems again. It could reform itself in response to changes in the financial services industry and in the financial architecture and landscape, here and elsewhere in the world. It is right that the council should seek those functions, although the Treasury will of course have a major say, bearing in mind that it will chair the council.

As the hon. Gentleman suggested, I was about to draw my remarks to a close. The amendments may be controversial, but they are not difficult to understand.

Ian Pearson (Labour, Dudley South)

The hon. Member for South-East Cornwall is admirably logical in following through his line of thought that the Council for Financial Stability should have more independence and personality. However, for the reasons that I outlined earlier, the Government believe that it is right that the Treasury should play the role described in the legislation.

The hon. Gentleman referred to clause 1(6)(d). That provision is intended to provide flexibility, so that if it becomes apparent that the operation of the council needs to be clarified, that can be done. It is necessary to enable the council to develop its role and adapt to unanticipated circumstances. I do not see anything between us on its capacity to do that.

The hon. Gentleman will be aware that under clause 1(8) the Treasury will have to consult the Bank and the FSA when preparing statements to be issued under the legislation. Such consultation will provide ample opportunity for the Bank and the FSA to influence the contents of statements. That brings me back to a point that I have made on previous occasions: we are talking about a joint enterprise. The need for change will be discussed and agreed by the tripartite authorities. It is certainly not our intention for the council to become an arm’s length part of the Treasury.

I have been at pains to point out that each member of the council has its own areas of competence, responsibility and independence. The role of the council is to monitor and co-ordinate action, but someone must have responsibility, and we make clear in the Bill that it is the Treasury.

Rob Marris (Labour, Wolverhampton South West)

In resisting the amendments, is the Minister signalling the Government’s return to the welcome embrace of democratic accountability, as the Treasury will take the lead if the amendments are resisted? Correspondingly, is there recognition by the Government that we have far too many arm’s length bodies, quangos and the like? Can I welcome a change of emphasis by the Government?

Ian Pearson (Labour, Dudley South)

I think that my hon. Friend is making too much of what is proposed. It is important that the Treasury retains the role in question, rather than the council having it. The statement is reported to Parliament, so it is natural that it should come from the Treasury. With the explanations that I have given and an understanding that we are adopting different logical positions, I hope that the hon. Member for South-East Cornwall will withdraw his amendments.

Colin Breed (Liberal Democrat, South East Cornwall)

I thank the Minister for those responses. It might have been clearer if I had indicated in my amendments that we could have deleted subsection (8), but I do not think that that would have been necessarily proper. It is a matter of trying to get the relationships rights. I do not want to repeat myself, but if the council is being set up as a statutory body, it needs to have proper functions and not be some sort of arm’s length quango. It has to create for itself acceptance in the markets, both domestically and internationally. Its credibility would be significantly enhanced if it had a degree of independence. However, I beg to ask leave to withdraw the amendment.

Clause 2

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment 24, in clause 2, page 2, line 22, leave out ‘quarterly’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss the following: amendment 25, in clause 2, page 2, line 24, leave out ‘quarterly’.

Amendment 26, in clause 2, page 2, line 25, leave out ‘quarterly’.

Colin Breed (Liberal Democrat, South East Cornwall)

These are modest amendments, deleting the word “quarterly” so that the council must in normal circumstances look at its meetings sequentially. It seems clear that there will be monthly meetings, and there might be intermediate meetings between quarterly meetings. That was alluded to in the debate on whether clause 1 should stand part of the Bill, when it was suggested that the quarterly meeting will be nothing more than a rubber-stamping exercise with very little in it of any material benefit to anyone. The minutes of those meetings will be published, whereas the minutes of the meetings held in the interim, which might contain more helpful information, will not be published. It would be more appropriate for minutes to be taken, so that we have a proper formality in all meetings, and for minutes of those meetings to be published and considered every time.

Limiting everything to the report of the council’s quarterly meetings, and publishing the minutes of each of those quarterly meetings, seems insufficient if we are to have an understanding of what the council is doing, what it is considering and discussing and what issues it has on its agenda. This small amendment would take out the word “quarterly”, so that we had details of all council meetings, rather than only the quarterly ones.

Ian Pearson (Labour, Dudley South)

As I have indicated, under the Government’s proposals, the council will be statutorily required to meet every quarter, although we anticipate that it will meet more often than that in the current circumstances. The importance of quarterly meetings is that they are scheduled in advance with agreed agendas, and they will assess the analysis made by the Bank and the FSA regarding risks to financial stability. Quarterly strategic discussions, including those on the Bank’s financial stability report, the FSA’s financial risk outlook and the annual report on the council, will be publically minuted. As set out in the terms of reference, those minutes will be released within one month of the meeting. It is important that that structure and transparency is provided for under the proposals.

The Government do not believe that the hon. Gentleman’s amendments would be helpful, because we do not think that it would necessarily be right to minute publicly all meetings. In future, when the council is required to meet more regularly than every quarter, it is probable that discussions will be dominated by operational matters that are likely to need to remain confidential. We can all envisage circumstances where matters may need to be confidential, and minuting meetings that are dominated by confidential discussion would not be helpful. For example, publishing minutes that reveal nothing of substance could lead to damaging speculation about the stability of specific firms or markets. Such speculation might naturally be centred on firms or markets that are not in fact the subject of specific concerns of the members of the council.

The Government believe that transparency about the quarterly strategic discussions is more beneficial, hence the distinction between quarterly meetings and, when necessary, other meetings. I stress that what we are proposing is a significant stride forward in transparency when compared with previous arrangements. I hope that the reasons I have outlined will lead the hon. Member for South-East Cornwall to withdraw his amendment.

Mark Hoban (Conservative, Fareham)

I am slightly surprised by the Minister’s answer. I intended to raise the point about confidentiality during the clause stand part debate, as it applies to both clause 2 and clause 3 in a broader context. Late last year, loans were made to HBOS and the Royal Bank of Scotland to provide them with adequate liquidity and ensure that they were solvent. It took some time—even longer than anticipated—for details of those loans to become public. I am slightly concerned that the lack of transparency to which the Minister refers in the context of the intermittent meetings of the council might create an atmosphere of secrecy that people feel uncomfortable with. We touched on that matter in the Banking Act 2009. A balance must be struck between transparency, commercial confidentiality and unsettling the markets. If minutes are not published, I am not clear how we will know—or if we will know—whether meetings take place outside the normal quarterly cycle.

Ian Pearson (Labour, Dudley South)

There is indeed a balance to be struck between transparency and confidentiality. With quarterly meetings, we are proposing a significant improvement in transparency, compared with current arrangements. However, when striking that balance, it is important to recognise that there will or may be occasions in the future when confidential discussions need to take place about a particular institution or market, or about another range of circumstances that it is in everyone’s interests should remain confidential.

My basic point is about something that is pretty much the sole item of discussion on an agenda. If a minute must be published saying that something was discussed but it was completely confidential and we cannot say anything about it, is publication really in anyone’s interests? I do not think so, which is why, when we thought carefully about the judgment to be made, we decided on quarterly strategic discussions—looking at financial stability as a whole, and at reports from the Bank and the FSA. If there are meetings in between such periods, particularly if they concern confidential items, they should not be completely minuted. If the Committee thinks about it, that is the right balance.

Mark Hoban (Conservative, Fareham)

May I make a suggestion to the Minister? At one of those interim meetings, a discussion takes place between the tripartite authorities and the outcome is an action that the FSA will take to increase the capital requirements of all banks in order to restrict in effect the level of lending. That is clearly commercially confidential, but also a response to a risk identified in the financial stability report or in the financial risk outlook. Could such action be taken at one of the interim meetings and therefore not made public?

Ian Pearson (Labour, Dudley South)

I do not want to speculate and respond immediately about individual circumstances. It would depend on the circumstances of each case as to what should remain confidential and for how long. As the hon. Gentleman is aware, under the Financial Services and Markets Act 2000, the requirement is for a lot of information to be made publicly available at appropriate times. Certainly the Council for Financial Stability has the capacity to decide to minute something publicly, so it could. However, if the council decided it would best remain confidential, we ought to recognise the judgment of those who would be making that decision. What we are proposing in the system that we have before us maintains the flexibility to allow that judgment to be exercised.

Mark Hoban (Conservative, Fareham)

I have listened to the point made by the Minister, and I have great sympathy with it, but if the action led to the expenditure of taxpayers’ money or the issue of a guarantee or indemnity by the taxpayer, would that be picked up by the reports made to Parliament as part of the Banking Act 2009? Is there a backstop that ensures that information appropriate to taxpayers is made know at the appropriate point?

Ian Pearson (Labour, Dudley South)

I think that the short answer to the hon. Gentleman’s question is yes. Systems of parliamentary accountability are in place now for the expenditure of Government funds or the taking on board of contingent liabilities, as he is well aware. None of that will change. All we are saying here is that we want to see quarterly minutes and that we think that there is a reasonable case, when meetings take place between the quarterly ones and confidential items are discussed, that if the decision of the Council for Financial Stability is that they should not be minuted, that ought to be respected.

Colin Breed (Liberal Democrat, South East Cornwall)

During the evidence session, the Minister must have listened to the evidence from my questions about the potential for the meetings. Given the scenario that now exists with the media and everything else, the knowledge of an unscheduled meeting of the council, perhaps over a weekend, is unlikely to persist much longer than a few hours before it appears on Mr. Robert Peston’s blog. The fact that the Government still feel that they can maintain an area of such confidentiality in today’s world is extremely naive. There are safeguards in the Bill to determine what is confidential and what can be there. I entirely agree. The fact that nothing is said may well precipitate the crisis that we are trying to avoid. The Minister may find himself—or future Ministers may find themselves—being grilled on “Newsnight”, where he may find it difficult to defend. Of course it will be published. A month or 40 days later, everything would have moved on in many respects anyway.

It is difficult to criticise something that we have not seen, and we have not seen what the quarterly minutes might produce. They might be relatively full, and might consider at least the essence of what the interim meetings have discussed. Arguments were proposed when the question of whether to publish Monetary Policy Committee minutes was being discussed. The publication of the MPC’s minutes several weeks later has been a real strength to its credibility, to people’s understanding of how it works and to the markets’ acceptance of its work. What we are discussing is equally important. It is important that we err on the side of transparency and publication, not on the side of secrecy and trying to deny material. Yes, I accept that there needs to be some confidentiality and sensitivity, but we must not have completely sterile quarterly minutes that mean nothing to anyone, and which do not in any way give an indication of the work of the Council for Financial Stability.

The council may not be talking about individual banks, but about the sorts of strategies that it jolly well should have been talking about in the years leading up to Northern Rock. Had the issue been given much wider publication and airing in the general financial fields, we might well have got the bank to pursue what it should have been doing in reforming itself somewhat more quickly than it did. There is a benefit in recognising that publication of as much as possible about its work and its thinking will add to its credibility, and provide us with a much better system of regulation.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman is making an interesting point, but is there not a distinction between the work of the MPC and that of the council? The minutes of the MPC explain a decision, the outcome of which is in the public domain—everyone knows whether interest rates are left unchanged, increased or decreased, or whether there is more quantitative easing. The difference here is when a decision is taken by the Council for Financial Stability, the outcome may not be in the public domain. It may have decided that an institution should hold more capital or should cease to have a particular type of business, or that a group of institutions must change the way they work. Such decisions might not be in the public domain. We can argue about whether they should be, but there is a difference in the type of decisions that are being made by the two bodies. That should be reflected in how much confidentiality there is on the publication of the council’s minutes.

Colin Breed (Liberal Democrat, South East Cornwall)

I broadly agree with that. I think I said earlier that it is not the council’s role is to micromanage the regulation of banks. The FSA’s role is to indicate to individual organisations whether they have sufficient capital. I think the council has a much broader remit, much of which ought to be considering the markets and the overall framework of stability. It may well have evidence, information or contributions from the FSA in respect of individual organisations. I do not think that that is an appropriate thing to put down in the minutes. That a number of institutions are finding life a bit more difficult, whatever the circumstances, is the sort of information that needs to be fed into the council’s considerations. That is not to do with the sensitivity of individual organisations and I do not think the council will get too involved in that.

As I said, perhaps the analogy of the MPC is not exact. For there to be credibility, an understanding of the council’s functions and for the wider financial community to see that the council is doing what it thinks it ought to be doing, there should be publication and transparency as far as possible, rather than just the minimum that is required.

I have said what I want to say to the Minister. I am sure he understands that we are not far removed on the page. When we see the first set of minutes, we will begin to see whether they are meaningful. On that basis, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 35, in clause 2, page 2, line 22, at end insert

‘and publish its response to those risks in its minutes.’.

The clause concerns the way in which the council proceeds and the publication of minutes. As the hon. Member for South-East Cornwall said, the proof of the pudding will be in the first set of minutes that we see. We will then know how thorough are the discussions between the various principals and what contribution the committee’s deliberations will make to financial stability. We welcome the fact that it will meet at least quarterly and the Minister’s comment that it will meet at least monthly during the financial crisis. As we established, that is an improvement on the situation in the run-up to the financial crisis.

The amendment asks for more clarity on what will be published in the minutes. We know that the council will review the financial risk outlook and the financial stability review. That will be a key part of its work. The Bank and the FSA do excellent work in looking at the market, understanding what risks there are and elaborating on their impact. Those who have read the reports will be impressed by their thoroughness.

The role of analysing the macro-prudential risks is being looked at in more detail by institutions across the world and is part of the remit of the European systemic risk board, which is part of the architecture put in place as a consequence of the de Larosière review. That body will look at some of the emerging macro-prudential issues at a European level. Such work is already happening. The Bank of England has been monitoring financial stability in quarterly reports.

When he was deputy governor for financial stability, Sir John Gieve in an interview with the BBC in December 2008 said:

“We did spot some crazy borrowing going on, asset prices looking unsustainable and we said actually for a couple of years before the crash that a correction was coming.”

One school of thought says that the financial crisis came as a bit of a surprise to all of us; another says that some of the problems had been identified, but that no one acted on that. The Bank for International Settlements identified in its reports some of the seeds of the financial crisis. Part of the problem is that bodies that had the task of analysing the trends published reports that generated the odd press article, but nothing seemed to happen as a consequence. Who did anything about the warnings that the Bank of England issued or that were identified by the Bank for International Settlements? I suspect that very few people did anything about them at all and that is the problem. It was very easy to ignore them, because some of the conclusions that they were reaching were quite difficult. To use a phrase of a US Federal Reserve bank governor in the 1930s, it required people to take away the punch bowl at the party. It required someone to tell Chuck Prince to stop dancing. It required someone to say, “You have to stop a particular activity, you will have to cease doing it, so we will have to do it in a different way.” It is very easy to ask people to identify the risks, but it is much harder for someone then to decide how to act on the findings of those reports.

The Governor of the Bank of England told the Treasury Committee in June 2009:

“We were given a statutory responsibility for financial stability in the Banking Act, and the question I put to you in February at this committee, to which I have not really received any adequate answer from anywhere, was: what exactly is it that people expect the Bank of England to do? All we can do at present”—

this is the key section of his comments to the Committee—

“before a bank is deemed by the FSA to have failed, is to write our financial stability report and give speeches”.

Under the new regime, therefore, the Governor produces his financial stability report, the chairman of the FSA produces the FSA’s financial risk outlook, but what happens next? That is the challenge.

I am sure that we have all had the experience of either sitting in church listening to sermons or listening to experts in the new year telling us how to change our lives and we think, “This is a jolly good idea about how to change our lives, but I will leave it until tomorrow,” or, “I will put that diet off until next month.” Of course, no one then goes back and asks those experts, “Well, you issued these warnings about people’s health, alcohol consumption and smoking, but what happened about those warnings?” We need to ensure that the Council for Financial Stability does not end up in a situation where it talks about these reports but then nothing happens in terms of responding to the risk that has been identified.

One way to ensure that there is an audit trail about the activities of the council is to make sure that, in the minutes of its meetings, there is not only evidence that the risks have been identified and discussed but that there is some record of the decisions that have been taken by the members of the council on how they will exercise their respective responsibilities in response to those risks.

That goes back to the debate that we had on the previous clause about the FSA’s supplementary addendum. As the body responsible for setting capital standards, it may be that the FSA’s remit, as a consequence of one of these meetings of the Council for Financial Stability, is to increase capital across the board, because the risk analysis that the Bank of England has made suggests that there is a credit bubble rising and that holding more capital is the right way to choke off some of that additional lending. That might be the outcome of a council meeting and we can then see very clearly the risk identified in the financial stability report and the response to it in the Council for Financial Stability.

When I was an auditor, we would start every audit with a list of risks and our responses, so that there was a very clear starting point; we knew what we had identified and what we would do as a consequence. That provided a discipline and a framework for the work that we were about to do. The minutes of the council should be sufficiently transparent to ensure that readers of those minutes know exactly how the authorities have dealt with the risks that have been identified.

It may be the case that, after deliberation, people say, “Actually, the risk is not material, the probability of it occurring is so slim that no action should be taken, but this is how we have disposed of that risk and that is how we have decided how that risk should be dealt with.” If the amendment is adopted, at least we will be able to see in the minutes how the council reached a conclusion about what it was going to do and each member’s justification of how it would respond to the risk and exercise its responsibilities.

That is an important way of establishing transparency and accountability and ensuring that the risks identified in all the different processes have been properly addressed and acted on. It will avoid a recurrence of the situation in which people identify risks like those in the December 2004 financial stability report, which said:

“The questions are whether risk is being priced properly, and to what extent the search for yield is leading to excessive leverage”.

That is a clear sign of what was going to happen, but no one appeared to do anything about it. If there is greater transparency through the minutes, it will demonstrate that risks have been identified and discussed and that action has been taken, or an agreement reached on why action should not be taken. We will know what has happened to the risks. That was not the case under the previous regime, and this is an opportunity to put that right.

John Howell (Conservative, Henley)

I want to pick up two points arising from the speech that my hon. Friend has just made and continue the theme of what can be published in the minutes. The need for an audit trail is even more important when we consider the draft terms of reference.

Annexe B discusses the Council for Financial Stability’s deputies—civil servants who will meet monthly. It is not unreasonable to expect that they will do most of the donkey work. Indeed, B1 of annexe B states that the deputies

“will meet to prepare and advance the work of the Council.”

My view is that their role will be to lay the grounds and, hopefully, to assess a lot of the material that comes before them in order to prepare what will be discussed at the main meeting of the principals of the Council for Financial Stability. Yet we see from the draft terms of reference that the minutes of that group will not be published. I understand the sensitivity about naming civil servants, but surely there must be an audit trail. My hon. Friend’s amendment addresses the weakness arising from the terms of reference.

My second point relates to the things that can be excluded from the minutes. I am less worried than others about the exclusion of things that are genuinely commercially confidential, but there is also the potential to remove anything that might pose a threat to the stability of the UK financial system. That is such a wide definition that some witnesses asked what exactly would be left. There is a distinct risk that the provision could be used politically. Is it wide enough to exclude, for example, remarks that are critical of the Chancellor or of specific Government policy: in other words, politically embarrassing?

Given that the council is required to meet quarterly but the principals are not required to attend—they can send deputies—there could be a run of meetings to which the Chancellor or the Governor of the Bank of England do not turn up. The attendance list, therefore, could itself be a cause of risk. If the Chancellor, the Governor of the Bank of England and the chairman of the FSA all suddenly decide to turn up together and that is the only thing printed in the minutes, everyone will know that something untoward happened. We need to explore further with the Minister how the provision for redaction of the minutes will be used.

Ian Pearson (Labour, Dudley South)

This debate essentially follows some of the points made by the hon. Member for South-East Cornwall. We as a Government have made it clear on the face of the Bill that important strategic discussions will be held at a minuted quarterly meeting. It is right that hon. Members press us about whether the minutes will be illuminating. The minutes must follow the structure set out in the terms of reference, which the hon. Member for Henley referred to, and which I have referred to on a number of occasions already today. We have a structured agenda that provides the basis for discussions that will then be minuted. I do not believe that the minutes will be sterile—the hon. Member for South-East Cornwall raised that risk—nor do I believe that the amendment is necessary, because the same effect will be achieved by the requirements of the draft terms of reference. We intend that the minutes will provide significant clarity on the views of each authority individually, and the council collectively, on the challenges to financial stability and on the co-ordinated action being taken. Putting that on record will perhaps provide some reassurance to hon. Members, and to others who follow these discussions.

The provision proposed by the amendment is therefore not needed, nor does the requirement need to be in the Bill. As I have indicated, it is better that it appears in the terms of reference, as that is a more suitable vehicle. We are introducing greater transparency through the proposals. It is not appropriate, as the hon. Member for Henley suggested, that the proceedings of working group meetings be disclosed, but significant transparency is clearly outlined in the Bill and in the terms of reference. I hope that with those additional clarifications, the hon. Member for Fareham will seek leave to withdraw his amendment.

Mark Hoban (Conservative, Fareham)

There is a difficult balance to strike between what should be in the Bill and what should be in a non-statutory document, which is what the terms of reference are. The draft terms of reference will not be a statutory instrument to be debated on the Floor of the House, and may well change between now and Royal Assent. Although I take some comfort from the Minister’s saying that the sort of information that I expect to see in the minutes will be there, and that the terms of reference will get us to that point, that perhaps does not go as far as having a measure in the Bill.

The comment that my hon. Friend the Member for Henley made, and which the Minister did not pick up on, was about the publication of the register of who is at the meeting. My hon. Friend made a slightly whimsical point about whether all the principals turning up would mean that there was a crisis. I hope that the fact that all the principals turned up would not be notable because it happened regularly. However, people’s attention might lie with the body now, but over time they might take less interest and send their deputies. My hon. Friend made an important point about transparency as a way of monitoring the engagement of the principals, and that might be reflected in the terms of reference at some point.

I take some reassurance from the Minister’s saying that the requirement in the amendment will be in the terms of reference, and I hope that that is followed through because it will be proof of how seriously the system is taken. One of the failures of the regime in the run-up to the financial crisis was that risks were flagged but no action was taken, and if we are trying to increase financial stability in the UK we want to avoid a recurrence of that. I beg to ask leave to withdraw the amendment.

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment 28, in clause 2, page 2, line 36, leave out ‘someone else’ and insert ‘an approved nominee’.

On the basis that I withdrew a previous amendment in respect of meetings as opposed to quarterly meetings and there is already a reference to the minutes of quarterly meetings being published, I was happy not to move amendment 27.

The Bill’s wording is most extraordinary. Clause 2 states:

“If a member of the Council is unable to take part in any of its proceedings, the member may appoint someone else”.

“Someone else” could be almost anyone. Indeed, my admirable researcher, Andrew Baldwin, asked me whether he could apply for the job. The phrase “someone else” is also a bit demeaning. Some of us may be used to serving on a local council, where we sometimes have designated deputies, but a designated deputy is normally someone who is acceptable to the committee or the council.

My amendment highlights the strange situation whereby “someone else” may be appointed. Perhaps it should be someone who is “an approved nominee”. Approval means not just approval by the person who is designating a person to represent them; that person should be acceptable to the other members of the council. I think that both the FSA and the Bank of England would want to know who the approved deputy is from the Treasury—for the Chancellor—who might well be chairing the meeting. It is not an unreasonable request to say that we should not use the wording “someone else” but should refer to an approved nominee or an approved person to undertake that deputising requirement.

Rob Marris (Labour, Wolverhampton South West)

I have some sympathy with the amendment and I seek an assurance from my hon. Friend the Minister that the “someone else” will not be one of the other two, because under the provision the Chancellor could nominate the Governor of the Bank of England and so could the head of the FSA, and there would be a meeting of one person saying, “I’m the someone else times two.” It may seem ridiculous, but may I have an assurance from the Minister that that is in no way the intention and that that signal will be sent out if the amendment is not accepted?

Ian Pearson (Labour, Dudley South)

That certainly is not the intention. The principals themselves are best placed to decide who represents them. I do not think that we will find ourselves in a situation like Caligula where he appoints his horse. We can rely on the Chancellor, the Governor and the FSA to appoint suitable people. Using the phrase “someone else” at least gives the Chancellor the flexibility to appoint another Minister, a permanent secretary or a most responsible official. We could make too much of this. What we are trying to achieve with the Council for Financial Stability is quite straightforward. It will be senior-level representation. The Chancellor’s photocopying assistant is not likely to be appointed as his deputy. We can leave the matter to the good judgment of those involved.

Colin Breed (Liberal Democrat, South East Cornwall)

Of course we can leave the matter to the good judgment of those involved, but there is a more serious point. There could be some qualification. If, as far as the Treasury is concerned, it has to be a ministerial-level appointment, that is fine, but of course we are also talking about the FSA and the Bank of England. They, too, may have certain levels of appointed official who would be nominated to be a deputy or a representative. I am happy if that is the case. I would not be happy if the “someone else” was someone different every time. There would be no continuity, in that we could have three people sitting around the table who have not even met each other very much, and there could be three completely different people the next time, and the following time.

I know that that is ridiculous—it is almost as ridiculous as the suggestion by the hon. Member for Wolverhampton, South-West—but it exposes the inadequacy of the term “someone else”. Will the Minister, perhaps before Report, at least consider a slightly better wording that would indicate that whoever operates on that deputy or representation basis had at least some standing and was acceptable to the other members of the council?

Ian Pearson (Labour, Dudley South)

I am not sure whether the hon. Gentleman was intervening on me. It is unlikely that I might want to do that, but I understand his point. If he had suggested “someone else appropriate”, that might have addressed the issue that he raises. I seem to remember that somewhere in the Banking Act 2009 we referred to appropriate people, but I believe that those who follow these things will understand that there is no intention other than to have senior level and appropriate representation, if not the direct principals themselves, who may not be able to participate because of illness or for other reasons. We have the clause in the Bill to take account of that.

Colin Breed (Liberal Democrat, South East Cornwall)

I am happy with the Minister’s assurances. If he could come up with a slightly different wording before we finalise the Bill, I would be absolutely delighted. On that basis, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 39, in clause 2, page 2, line 39, at end add—

‘(9) Where the Council is unable to reach agreement on the exercise of its functions, the Chancellor of the Exchequer can take reasonable steps in pursuit of its function.’.

The Bill appoints the Chancellor of the Exchequer as chairman of the council. The question is, what role does the chairman play in the committee? Is he or she there simply to control proceedings and ensure that people run through the agenda, or is there more to it than that? In a way, this goes back to the point that the hon. Member for Wolverhampton, South-West made in a debate on the previous clause. He assumed that the structure of clause 1 was such that the powers in subsections (5), (6) and (7) meant that it was clear that the Chancellor was in charge.

When the hon. Gentleman made his point, the Minister winced, because he has been keen throughout to avoid creating the impression that the Chancellor is in charge. However, I can foresee a situation where there is deadlock in the committee: an issue may be raised in a report from the FSA or the Bank and there is no agreement among the principals about what the action should be. It may be as a consequence of a difference of opinion about the nature of the risk, or about the probability of the risk materialising and having an impact on financial stability. It may be that people cannot agree on the appropriate action to be taken. A risk is identified, everyone agrees that it is important to tackle it, but no one can say what the action will be.

The Minister has been clear that under the terms of reference there will be a process of risk identification, and then the action to be taken will be reported in the minutes. What will happen if the committee cannot agree on the right action? Is the lack of agreement—that impasse—a reason for doing nothing and just saying, “Let’s see what happens”? Or should someone actually have responsibility for ensuring that action is taken?

The Minister’s argument is that this is a shared enterprise, that no one is in charge. The Chancellor happens to be chairman because he is the chairman of the group, and the Treasury has set out its functions, but we are not to think that this in any way means that he has authority over the others. Yet the reality is that, at times, the Chancellor has to be in charge. There are certain circumstances in law when the Chancellor is not in charge, and we discussed them in the context of the Banking Act. For example, responsibility for triggering the special resolution regime rests with the FSA, and the choice of the resolution regime in certain circumstances rests with the Bank. It is only when taxpayers’ money is at risk that the Treasury has a role to play. In practice, there is a sense of the Chancellor being in charge at the crunch. We go back to the evidence session when we asked John Footman who was the first among equals in the relationship. He said:

“The obvious answer is that only one person in that committee is directly accountable to Parliament, and that is the Chancellor.”—[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 29, Q62.]

We asked Andrew Whittaker the same type of question. We know that in certain aspects, they seem to set up a secondary role, but he said that the Chancellor sits at the head of the triangle because of

“the impact on the real economy and the fiscal impact of any rescue package.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 29, Q63.]

There seems to be an expectation among the members of the Council for Financial Stability that the Chancellor is not just the chairman in a formal sense, but he also has a degree of additional responsibility because he is accountable to Parliament for the fiscal impact. As we probed this matter at length during the Committee, it was clear from the point of view of the Bank that if there was a hierarchy, the person at the top was the Chancellor. The Government must be clearer about their expectations of the role of the Chancellor as chairman. They must accept that the other participants are right and that de facto the Chancellor is head of the Committee or they must say that in no sense does the Chancellor have the final say. That would create clarity, but I am not sure whether it would create the right outcome. We saw this in various parts of the crisis. Obviously, the rescue of Northern Rock is the most transparent aspect of the crisis. When we look at the decisions taken on Lloyds, RBS or Dunfermline, we may find that in practice there was a very clear hierarchy about who banged heads together to say, “This is the right solution for Dunfermline.” or, “This is the right outcome for RBS.” Clearly, if there is an impasse—if people on the Council for Financial Stability are not prepared to take action within their remit—how is that broken? Do Treasury officials simply call out for more curry to fuel them through the long nights and then beat everyone into submission, or is there a process in which the Chancellor takes charge, because that is what people expect?

Let me reflect for a moment on my business experience. Sometimes, very complex corporate structures created, in accounting terms, a deadlock company in which no one had control, but there would be a set of decisions in which it was very clear that one party or another had control and could make the big decisions. It may be a veto that they had over a capital investment of a certain size. It may be control that they had over the sale of the other party’s stake in that business. Clearly, there was a mechanism for resolving deadlock. At the moment, we do not seem to have that in the Bill.

Given that everyone apart from those in the Treasury seems to think that the Chancellor is in charge, my probing amendment suggests that we should be up front and honest and say that where there is an impasse the Chancellor will be able to direct people to use their powers.

Ian Pearson (Labour, Dudley South)

I feel that we are going over old ground. The hon. Member for Fareham does not like the tripartite system of regulation. He clearly is not very keen on the Council for Financial Stability and wants to create some mischief about how it should operate. I think he understands our proposals on the operation of the Council for Financial Stability. We see it as a body that will work to ensure the effective co-operation of the three authorities, each of which has a role to play. As I have made very clear, the matter is not about a power hierarchy; it is about working together towards the right outcomes.

It is not surprising that people note that the Chancellor is the only one who is accountable to Parliament; nor is it surprising that people say that the Chancellor is the one responsible for the public finances. That is clear. However, it is also clear that the Bank of England is independent and has legal responsibilities that are defined in law. That is also the true of the Financial Services Authority. There will be issues on which the FSA will take a secondary role and other issues on which the Bank will take a secondary role—or, indeed, on which the Government will. That will depend on what is being discussed and what roles and responsibilities are involved. It is a fundamental misunderstanding of the council to see it as anything other than a monitoring and co-ordinating body to ensure that the tripartite organisations are working effectively together on an aligned basis.

Mark Todd (Labour, South Derbyshire)

There was some evidence—I suspect that when the history is written, we will see what substance there was to this—of dissent between the Bank of England and the FSA at an early stage of the Rock crisis. It was not entirely clear how that disagreement was fully resolved. I have to say to the hon. Member for Fareham that my answer would have been rather different: there is a de facto position, which is that, in the end, the Chancellor has a responsibility to ensure a solution. However, I am not entirely sure that it is helpful to state that in the Bill. He is perhaps too optimistic in thinking that an inability to produce a resolution is a purely hypothetical argument, because I honestly think there is some evidence that it could happen and perhaps has happened.

Ian Pearson (Labour, Dudley South)

History is often fascinating. I do not want to comment on that aspect of history, despite my hon. Friend suggesting that I might. The point I want to make in response to the hon. Member for Fareham is that, through the Council for Financial Stability, we are trying to establish an organisation that acts as an effective, co-ordinating body that brings together the three key players involved in ensuring the financial stability of the system. We want to ensure that those key players are effectively aligned and working together.

Elsewhere, we have discussed the fact that a formalised agenda will be followed and that there will be far greater transparency in how decisions, actions and discussions are minuted. That is the right approach to take. It would not be right or constitutionally correct, given the legal responsibilities of the other members of tripartite, to try to put forward an amendment in the form that the hon. Gentleman proposes. I strongly advise my hon. Friends to resist the amendment.

Mark Hoban (Conservative, Fareham)

This debate illustrates part of the problem that we saw emerge at the early stage of this crisis. I think my interpretation of events is shared by the hon. Member for South Derbyshire. There was an opportunity to resolve the problems with Northern Rock at a very early stage, but that opportunity was lost because the tripartite authorities could not agree about the exercise of their respective powers. One player had the opportunity to extend to the inquirer some financial support, but that was not forthcoming. We do not know what other tensions there were in the system as the crisis developed.

The Minister has given the impression of cosy, happy harmony, and that might be true. I do not doubt the Minister’s word, but I am sure that there have been times in this crisis where there was not that happy harmony and somebody had to say, “This is what is going to happen”. Unless there is some acknowledgement of the decision-making process and at what point individual players have or do not have responsibility, we are always going to be left with the question about who is in charge. That is the question that the Governor of the Bank of England was asked at the Treasury Committee. The impression that we are left with, at the end of this short debate, is actually that no one is in charge—it is a shared responsibility. It is about co-ordination; it is not about action. There is no executive power invested in the body.

Let us assume for the sake of argument that the tripartite regime continues to exist. We might get to another crisis in five or six years and go through that loop again where no one actually seems to be able to take control and the situation gets out of control because of a lack leadership and responsibility. We all want to see a system where the lines of accountability are much clearer than they are. I still do not think that we are at that point. Even if we were to assume that the tripartite authority system was to remain in place, I still think that there is a lot to be done with the tripartite system to get it to a point where people are very clear about their respective roles, responsibilities and powers. There are still some big gaps, such as the macro-prudential toolkit. We need some clarity about who is in charge at what point in the process.

The Minister is perhaps right to say that my amendment could be better drafted if I wanted to disregard the constitutional niceties. I could introduce a longer clause more akin to the sort of deadlock provisions in companies where there are some very specified circumstances for who is in charge, but until we clarify responsibilities and powers we are not going to be in a position to do that and we are still going to be left with uncertainty. The preceding clause still perpetuates the uncertainty that bedevilled the tripartite authorities at the start of the crisis, but I beg to ask leave to withdraw the amendment.

Clause 3

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment 29, in clause 3, page 2, line 41, leave out ‘Treasury’ and insert ‘Council’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss the following: amendment 30, in clause 3, page 3, line 3, leave out ‘Treasury’ and insert ‘Council’.

Amendment 31, in clause 3, page 3, line 5, leave out ‘Treasury’ and insert ‘Council’.

Amendment 32, in clause 3, page 3, line 5, leave out ‘lay’ and insert ‘publish’.

Amendment 33, in clause 3, page 3, line 6, leave out ‘before Parliament’.

Amendment 34, in clause 3, page 3, line 7, leave out ‘laid before Parliament’.

Colin Breed (Liberal Democrat, South East Cornwall)

The amendments propose that it should be for the council to publish its own report, and not necessarily for the Treasury. Of course, the Treasury will have a considerable influence over what the report contains and when it is published. The amendments seek to increase the need for the council to recognise its role in financial stability. Amendments 26 and 34 propose that the council produce its own report, including publishing, rather than that being done through the Treasury. That is relatively simple, and I can imagine what the Minister will say, but by that means the council could gain the credibility, acceptability and element of transparency that it needs. In producing its own report, rather than the Treasury doing so, the council will ensure that, although other members may be consulted—I am sure that that will be so and that they will probably agree to the report and may even countersign it—its role will be enhanced.

Ian Pearson (Labour, Dudley South)

There are two sets of amendments in this group: amendments 29, 30 and 31 require the council to prepare the report, as opposed to the Treasury, whereas amendments 32, 33 and 34 remove the requirement for the Treasury to lay the report before Parliament and instead require it to be published by the council.

As has been made clear previously, we are keen to improve the transparency and accountability of the current arrangements. Minuting quarterly meetings forms a key element of that strategy, as does a formal report on the council by the Treasury each year. The report will cover the activities carried out by the council and will also describe significant regulatory actions taken and future developments proposed in respect of regulatory legislation.

We think that it is appropriate for the Treasury to lead on drafting the annual report. The Chancellor is the chair of the council, which is ultimately accountable to Parliament and the public. We recognise that other council members have a vital interest in it—that is obvious—but we go back to the point that has been made previously: although the authorities will work together closely on the production of the report, ultimately the Treasury should produce the draft to ensure that it is fully scrutinised and consulted on with the bank and the FSA. Our intention is that the draft will be submitted to the council as part of its regular meetings.

I do not think that the hon. Gentleman’s amendment suggesting that the council should publish the report rather than the Treasury should be agreed to, for similar reasons to those I outlined earlier. There would be a significant weakening of accountability if the report were to be published by the council, rather than allowing Parliament its proper role in scrutinising it. For those reasons, I invite the hon. Gentleman to withdraw his amendment.

Colin Breed (Liberal Democrat, South East Cornwall)

I guessed what the Minister was going to say and I accept that. I suppose that the Treasury Committee will wish to review the report to ensure that it does what it says it will do and will have contact with the representatives of the council’s membership to ensure that it is happy with the report’s contents.

The amendments are part of a suite of amendments that would enhance the role of what will be an important body. The contents of the published minutes will be much scrutinised by the financial media and will be eagerly awaited. If the report does not contain substantive information, it will be heavily criticised and the council will be all the poorer for that.

We have to wait to see what will happen. I am happy to ask leave to withdraw the amendment on the basis that I have raised these issues. We can only await the initial publication of minutes and the report to see whether the transparency the Minister says he wants actually happens. On that basis, I beg to ask leave to withdraw the amendment.

Clause 4

Rob Marris (Labour, Wolverhampton South West)

This is the definitions clause. I refer to clauses 2(5)(a) and 3(3)(a), both of which use the weasel words “commercially confidential”, which does not appear as a defined term in clause 4. I am disappointed by that but it is not unexpected because, as I say, they are weasel words used by Governments of all political parties to sweep things under the carpet, often unnecessarily. When we were discussing clause 2 and amendments 24 to 26, the Minister said that the Bill significantly improved transparency. Later in that debate he said that he would not speculate on the scenario outlined by the hon. Member for Fareham. That is the sort of difficulty that one has in trying to get information, which should be in the public domain.

I appreciate that, particularly when we are dealing with big finance, there will be commercially confidential matters that could affect shareholders or the stability of the economy, which the Bill is all about. However, to have no definition of what is meant by “commercially confidential” is to drive a coach and horses though the publication of anything worth while. I say again: they are weasel words, often used by Governments unnecessarily.

When I was on the Work and Pensions Committee in the previous Parliament, we had a sub-committee on the computerisation programmes that the Department for Work and Pensions was running. We got in several big suppliers, and the tenor of what several of them said was that there were matters that they as commercial entities—profit-making companies—would have been happy to have in the public domain but of which the Government blocked publication claiming commercial confidentiality. That is the kind of nonsense, Alice in Wonderland affair that we have when “commercially confidential” appears twice in the Bill—in important pieces of the Bill—and becomes what the Government say it means, because there is no definition in clause 4.

I am not going to vote in favour of clause 4 standing part of the Bill; I am going to abstain. The other definitions are fine but that lacuna is bitterly disappointing. It should be defined in the Bill and just because it is difficult to define does not mean that we should not do so. I urge the Minister to come back on Report with an amendment to clause 4 and a definition of commercially confidential.

Ian Pearson (Labour, Dudley South)

For Labour Members, it is always worth discussing clause 4; we have done so on many occasions over the past 100 or so years of our party’s history, so I am delighted to do it. It is particularly appropriate that clause 4 is about definitions. It might not be the means of production, distribution and exchange in this case but it is right that my hon. Friend refers to issues that concern him.

I do not see “commercial confidentiality” as being weasel words. If he is suggesting that on occasion Governments might have used commercial confidentiality as a defence for not putting things in the public domain that they perhaps ought to have done, I might have some sympathy with the view. However, I strenuously say to the Committee that there is a purpose and point to commercial confidentiality. It is extremely important that commercial confidentiality should be maintained, if used in the right way. Without commercial confidentiality, it would be impossible for the Government to do business with many businesses. I am happy to reflect on whether we should define that in the terms of reference. At this point in time, I am not particularly sited on whether the term is so sufficiently defined and used elsewhere that it is not required in clause 4, or whether it might be appropriate to be included in clause 4, but I will take advice from officials and reflect on that.

Rob Marris (Labour, Wolverhampton South West)

I am grateful that the Minister will reflect on that. I appreciate the importance of commercial confidentiality, but he just said that that was when it was used in the right way. The problem is that there is no definition of what the Government think is the right way.

Ian Pearson (Labour, Dudley South)

As I have said, I am happy to take away my hon. Friend’s point on whether we should define that in the terms of reference, but I want to make the point strongly that commercial confidentiality is important for how the Government deal with business. The Council for Financial Stability could not operate in the way we would want it to if it did not respect commercial confidentiality.

I would also like to clarify for the record the definition of international financial regulation and supervision, which is intended to include two related but distinct concepts. First, the definition includes regulation or supervision by an international body of the financial systems operating in a number of different countries or territories. An example of such a body would be one operating within the European Union. Secondly, the definition includes the regulation of the financial system of a particular country or territory outside the UK by the relevant authority or authorities in that country.

Clause 5

Mark Hoban (Conservative, Fareham)

I beg to move amendment 41, in clause 5, page 4, line 10, at end add—

‘( ) The Financial Services and Markets Act 2000 is amended as follows.

( ) In section 2, insert after subsection (2)—

“(2A) In discharging its general functions the Authority must, so far as is reasonably possible, act in a way that ensures that financial stability takes precedence over its other regulatory objectives.”’.

With your agreement, Mr. Benton, I will wrap up amendment 41 and the stand part debate in the same speech, rather than having to respond to that debate later.

I was rather surprised to see clause 5 in the Bill, because we went round the tracks on the issue that it deals with during the passage of the Banking Act 2009, which gave the Bank of England a statutory responsibility for financial stability. At that time, we raised a question with the then Exchequer Secretary, the hon. Member for Wallasey (Angela Eagle): why was there not a similar objective for the FSA? We thought we would have some symmetry in that and so asked why only one part of the tripartite authority had that objective and the others did not. She was quite clear that they did have that objective, but that it was just wrapped up in market confidence.

She said that

“the FSA has important objectives in relation to financial stability and the Financial Services and Markets Act 2000, which has a direct bearing on what we are talking about. For example, the FSA has a responsibility for maintaining market confidence in the financial system. That, too, is about financial stability, so it is inaccurate to say that only the Bank of England has that duty in all the laws that impinge on the area we are discussing.”——[Official Report, Banking Public Bill Committee, 30 October 2008; c. 232.]

That rather suggests to me that clause 5 is completely redundant. It will not change one iota of the way the FSA operates, because it should already have been acting in that way and pursuing its duties on the objective of financial stability, which was just wrapped up in a different guise. I am not sure why we have this in the first place. Perhaps the Minister will be able to illuminate why that suddenly seems a good idea.

Clearly, not everyone listened to the then Exchequer Secretary, because clause 5 has led to some discussion about whether it will actually create greater confusion in the system. The British Bankers Association seems to think that it is a cosmetic change. It stated in its submission:

“While it is clear that the prudential regulator should have an explicit objective for financial stability, we would not see this as a dramatic step given that FSMA already provides that the FSA should act to maintain confidence in the financial system.”

The CBI noted in its response to the White Paper:

“A disadvantage of giving the FSA an explicit objective for financial stability is that this would perpetuate some of the ambiguities regarding institutional responsibilities that were apparent in the build-up to the financial crisis.”

Part of the problem is that the FSA is a micro-prudential regulator as well as a business regulator, yet the financial stability objective is defined in terms of the UK financial system. It is clear from Andrew Whittaker’s evidence that the FSA will exercise a secondary role in the council for financial stability. Moreover, it will only exercises its powers—in fact, it already has under FSMA—in pursuit of any financial stability objective.

It is not clear what the clause adds to that. How is it going to get the FSA to change its behaviour? Is it really a significant change and has the FSA been acting obliviously to any financial stability objective in the past, or is it window dressing—a cosmetic exercise to give the impression that the regulatory environment has been beefed up? The Government need to be clear on the clause’s purpose.

Mr. Loverose—

Mark Hoban (Conservative, Fareham)

I see that the hon. Gentleman is poised to intervene. I happily give way.

Andrew Love (Labour, Edmonton)

I thank the hon. Gentleman for giving way. Both he and his colleagues on the Opposition Benches have spent the whole day trashing the tripartite system as confused and lacking in leadership. Clause 5 offered the Opposition the opportunity to clarify through an amendment how we could overcome the situation. Why has the hon. Gentleman not taken that opportunity?

Mark Hoban (Conservative, Fareham)

Because our approach is set out in detail in our white paper, “Plan for Sound Banking”. It clearly sets out, in more detail than the hon. Gentleman’s party did before the 1997 general election, how we are going to reform the regulation of the financial services sector. It clearly outlines our reforms in relation to the FSA, as well as our plans to give powers to the Bank of England and to set up a new consumer protection agency. It is as good a statement of our policy as he will find.

Andrew Love (Labour, Edmonton)

Her Majesty’s loyal Opposition are supposed to ensure that they play a positive role in ensuring that legislation is the best that can be achieved. I accept the hon. Gentleman’s argument that his party has set out a completely separate agenda, but the amendments that the Opposition table to the Bill should be in the spirit of the legislation. As a loyal Opposition, should the hon. Gentleman and his colleagues not have made the effort to make the Bill the best it could possibly be?

Mark Hoban (Conservative, Fareham)

There are two approaches, but I am not sure which one the hon. Gentleman is espousing. The amendments that we have tabled seek to improve the existing regulatory structure and to provide line-by-line scrutiny. That is our role when discussing legislation. As I said this morning when the hon. Gentleman made a similar point on clause 1, if it was not for the time constraints we could spend a lot of time talking about our reforms. In fact, I have spent a lot of time talking about them today, but, equally, we should spend a lot of time trying to improve the Bill through line-by-line scrutiny, to clarify what it means and to understand the purpose of introducing the new objective. If the hon. Gentleman is keen to experience what it is like to be the loyal Opposition, maybe tables will be turned at some point and he will be able to see for himself what it is like to go through line-by-line scrutiny.

I come back to my question. What is the point or purpose behind including clause 5 in the Bill, given that the then Exchequer Secretary, the hon. Member for Wallasey, said that financial stability was already within the FSA’s remit through the market confidence clause? Some commentators say that this is merely a cosmetic change. Some go further and say that it causes additional confusion, given that the Bank of England has a financial stability objective. The Government need to make a clear argument on why it is necessary in the Bill, given the assurances made during the passage of the Banking Bill last year.

Through amendment 41, we seek to understand what priority financial stability has among the other objectives that the FSA will have. The Bill will change the FSA’s objectives; it will lose its public awareness remit but will gain a financial stability objective and a duty relating to international co-operation. There is a potential tension between the financial stability objective and some of the other objectives that the FSA will have. I want to understand if the Minister’s argument is that the objectives all rank equally, or whether financial stability is to take precedence over other objectives.

Let me give the Committee an example. During the crisis on Northern Rock, the FSA could have, as part of its public awareness role, reminded people about the limits to the protection on deposits and encouraged them to move their deposits out of Northern Rock and into somewhere else. Alternatively, it could have said, from a financial stability perspective, that it did not want consumers to move their deposits out of Northern Rock but wanted them to stay there. There is a tension between the public awareness role—explaining the limits of the Financial Services Compensation Scheme—and the financial stability role. Which should take precedence in that situation?

Let us look at a non-banking area—the mis-selling of pensions. There was a significant liability attached to pension mis-selling that could have had an impact on financial stability. If the liability were significant, it could have eroded the stability of insurance companies and had a wider impact on the UK economy. However, the FSA’s consumer protection remit suggests that it was right for the FSA to take action where it found examples of mis-selling and to ensure that compensation was paid. A similar argument could be applied to the recent debate about finding a solution to the bank charges issue, notwithstanding the fact that that is outside the FSA’s remit. There is clearly a financial stability impact if banks have to pay out many billions of pounds in compensation to consumers, but there is a consumer protection angle that should be borne in mind. A balancing takes place when regulatory decisions are taken by the FSA. Amendment 41, which I tabled, suggests that precedence should be given to financial stability where there is a conflict in trying to reconcile those various objectives, when it comes to the regulatory decisions that the FSA needs to make. It is a probing amendment to clarify the Government’s thinking on the importance of financial stability for the FSA. It simply flows from my wondering why we have such an objective in the Bill, given that we were assured last year that it was unnecessary.

Ian Pearson (Labour, Dudley South)

I am pleased to hear that amendment 41 is a probing amendment; it could be very dangerous if agreed to, and it could lead to all sorts of hopefully unintended consequences. I say “hopefully unintended” because I cannot believe that the hon. Member for Fareham really wants to put the interests of financial stability above the interests of protecting consumers who have retail deposits or investments in financial markets.

Let me make a few more general comments about the clause before referring specifically to the amendment. The Government’s view is that, given the growing international consensus that both national and international regulators should enhance their focus on systemic risks to financial stability, we believe that it would be desirable for Parliament to set out more explicitly in legislation the priority that it expects the FSA to attach to the issue. That is what clause 5 does.

With regard to the hon. Gentleman’s point about the comments that my hon. Friend the Member for Wallasey made during the passage of the Banking Act 2009, it remains the Government’s view that the FSA currently has the statutory objective of maintaining confidence in the financial system, which was provided for in the Financial Services and Markets Act 2000. Protecting financial stability is, of course, a fundamental component of maintaining confidence in the financial system.

However, we believe that the FSA’s objectives should contain a more explicit recognition of the role that the FSA has to play in protecting and enhancing stability. Clause 5 makes it clear beyond reasonable doubt that protecting and enhancing stability is an objective of the FSA. It will provide express legal authority for the FSA to take action to support financial stability, including using its rule-making powers and other powers, which we will no doubt come to when we discuss clause 7.

I want to emphasise that the FSA is not the only body responsible for protecting and enhancing financial stability. The term “contributing to” in subsection (1) of proposed new section 3A reflects that. Financial stability is affected by many factors, which, as we have already discussed at some length in our debates on the new Council for Financial Stability, fall within the scope of the responsibility of each of the council’s members. I do not think that I need to go into further detail about that.

Regarding the amendment proposed by the hon. Member for Fareham, I am not convinced that it would be beneficial for the FSA to be required to give financial stability priority over its other objectives. That might have the effect that consumers and others, including the firms regulated by the FSA, would never again take the other objectives seriously. It is even possible to imagine that the perception that stability is being prioritised might itself harm stability. If consumers felt that their protection was no longer a key priority for the FSA, that would undermine their confidence in the financial system and the firms that make up that system. It would not be right to impose too rigid an approach on the FSA. What we need is a carefully calibrated and sensible approach. A rule that says that stability must always take precedence could be damaging.

For the amendment to have a benefit, we must try to imagine situations in which a possible course of action might benefit stability but damage consumer protection. For example, a weak bank might be encouraged to treat its customers unfairly in order to make excess profits to bolster its capital position. If that happened, or if customers of a firm thought that it was happening, rightly or wrongly, they would presumably withdraw their deposits and place them in a different bank, thereby weakening the bank that the unfair initiative was intended to strengthen. It is difficult to understand in what situation there is likely to be a conflict between financial stability and consumer protection. I do not believe that having a priority for financial stability over consumer protection is in the interests of consumers, or that it is in the interests of financial stability overall.

In the Government’s view, it is right for the FSA to be required to contribute to the protection of financial stability. In the context of that objective, it is right that it be required to balance the risks caused to the economy by instability against excessive caution, as mentioned in subsection (2)(a) and (b) of proposed new section 3A. It is also correct that the FSA will have to consider carefully the way in which various possible actions affect all its fundamental objectives. I do not believe fundamentally that giving rigid, explicit priority to financial stability is beneficial or helpful. Indeed, it might even be harmful for the reasons I outlined. I urge the hon. Gentleman to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I am grateful for the Minister’s response. There were clearly some words of wisdom that he glossed over quickly, given the reluctance to have further lengthy scrutiny of the clause. I think that he is saying that clause 5 makes explicit what is implicit in the FSA’s existing remit on market confidence. That suggests that the change is largely cosmetic, but the position is clear.

On the amendment, even if the Bill does not give financial stability explicit precedence, we cannot escape the fact that regulators make trade-offs in juggling the objectives. We had a long debate about the priority of various objectives in the context of banking, and the Minister gave good arguments for why we should not give precedence to one objective. However, just because we do not lay that out in statute, it does not mean that when looking at individual cases, the regulator does not balance the application of the objectives to the regulatory decision it is making. Perhaps sometimes there is a compromise on one objective at the expense of achieving another. We should recognise that part of making regulatory decisions is striking a balance between the objectives. I accept that.

We currently place great store on financial stability as a consequence of the financial crisis. It is now much higher up people’s lists. When we talk to people about what outcomes they want for financial services, they choose security, stability and continuity. When times change, people at all levels of financial services will again get an appetite for risk, and stability will be less of a factor in their decisions. It is right to give regulators freedom to decide what are the appropriate objectives at the time and what is important in the context. Let nobody be under the illusion that regulators do not have to make trade-offs from time to time in pursuit of their regulatory functions. With that, I beg to ask leave to withdraw the amendment.