Financial Services (Banking Reform) Bill

Public Bill Committee, 19 March 2013.

William McCrea (DUP, South Antrim)

Before we begin, I want to make a few preliminary announcements. Members may, if they wish, remove their jackets during Committee meetings. Would all Members please ensure that all electronic devices are turned off or switched to silent mode during Committee meetings?

The Committee will first be asked to consider the programme motion on the amendment paper, on which debate is limited to half an hour. We will then proceed to a motion to report written evidence, which I hope we can take formally.

Chris Leslie (Labour, Nottingham East)

Good morning, Dr McCrea. It is a pleasure to serve under your chairmanship. I know how much you have come to enjoy these early morning starts. I appreciate that, after your swim in the Serpentine and run around Hyde park, this is late in the day for you.

We start the Bill’s Committee stage under something of a cloud, given that the Parliamentary Commission on Banking Standards, which undertook a lot of the pre-legislative scrutiny—hence the fact that we have no evidence sessions today—has only partly concluded its work. Although it is useful to have the Programming Sub-Committee resolution before us setting out the sittings at which we can scrutinise the Bill, the Opposition would like to put on record their deep concern that the Committee is being held at an inappropriate stage. After all, the Bill is, in many ways, merely a vessel that will be populated by secondary legislation, some, but not all, of which the Minister has taken the trouble to publish in advance. Furthermore, we had hoped by now to have some recommendations from the Parliamentary Commission’s laborious and extensive evidence sessions to inform us about the changes in standards, culture and governance that are necessary to improve the banking system.

The programme motion allows us a certain amount of time to discuss the shell of the clauses before us. The Opposition have also tabled a number of new clauses, which will obviously come up for discussion towards the end of our consideration—probably after we get back from the parliamentary recess in April. Looking through the programme motion and the amendment paper, it is surprising that Her Majesty’s Government have tabled no amendments. That may be a good sign, and the Minister, having looked at the amendments tabled by Her Majesty’s loyal Opposition, may be so taken with them that he anticipates adopting them. He likes to cultivate a reputation as a listening Minister, and I hope that is, indeed, the case—perhaps that is the “glass half full” approach we should take. However, a number of responses to the Parliamentary Commission’s banking reform publication suggested the Government intended to table their own amendments in response to the Commission. I hoped that the programme motion would allow that iterative process, but the Government have tabled no amendments.

My general anxiety is that the Government are not showing sufficient respect for the Bill’s Committee stage in the House of Commons. First, they have truncated the process and tried to conclude it before we even get to see the Parliamentary Commission’s final conclusions. Now, they have not even tabled amendments in Committee so that we can properly look at their responses to the Parliamentary Commission. I sometimes feel as though the Government were treating this process as a bit of a rubber-stamping exercise and something that is just a parliamentary inconvenience. They think, “We have to get through the Committee stage process, so let’s just get on with it, put our heads down and we will sort it all out on Report and in the House of Lords.” It is absolutely vital, however, that in Committee, we take the opportunity to go through issues on a line-by-line basis and examine amendments in detail without having knives to truncate the debate.

I therefore look for some assurance from the Minister that, if the Government are going to bring forward amendments in response to the Parliamentary Commission’s recommendations that we have seen so far, they still intend to do that at the Commons Committee stage and not just dump them on the House in one fell swoop on Report stage after the Queen’s Speech under the carry-over process. We have a duty to ensure that we scrutinise matters properly.

Those are my anxieties about the programme motion. We do not particularly object to the time scales set out in it, but I thought it was important to put on the record our misgivings about how the Government have treated this process.

Greg Clark (Conservative, Tunbridge Wells)

It is a pleasure to serve under your chairmanship, Dr McCrea. I welcome colleagues to an important and potentially historic Bill committee. As the hon. Gentleman said, we have had the benefit of advice not just from the Independent Commission on Banking, chaired by Sir John Vickers, but also from the Parliamentary Commission, whose work is ongoing.

Many of the amendments that we will come on to discuss are, of course, from the PCBS. I am delighted that the hon. Gentleman has said that was taking a “glass half full” approach. It is certainly my intention that, in Committee and in later stages, we should have a full opportunity to consider the responses of all of the eminent commissions that have reported on these matters and the views of members of the Committee.

The Bill is relatively unusual in the sense that it reflects the views of a Parliamentary Commission, which reported in December. The Government responded to the scrutiny of the Parliamentary Commission in February, the Parliamentary Commission then responded to our response and, in the days ahead, I will respond to its response to our response. It could be that, in our debates about its response to our response, I might feel inclined to respond further to its response as we go on. I am conscious that this could lead us into an infinite regress of responses—and who knows where that will end?—but I say that just to make it clear to the Committee and reassure everyone that the discussions that we have here are important and significant.

In my conduct in taking the Bill through the House, I intend to respond positively and constructively to sensible points that are made. I do not think that a matter of such importance should be railroaded through this House or the other place. It is in the interests of all of us to ensure that the Bill is properly scrutinised. I will ensure that the Committee and the House can express themselves. When we bring amendments forward in response to the current and future recommendations of the Parliamentary Commission, I will ensure that the Committee has an opportunity to consider them, and I will keep its members up to date with the progress of that. As the hon. Gentleman said, we have already published some of the secondary legislation, although I remind the Committee that the secondary legislation will itself be the subject of further parliamentary procedures when it comes to be considered.

As for the timing of the sittings of the Committee, we have a lot to discuss, but I think Members of all parties are confident that we can make sufficient progress. As you would concede, Dr McCrea, to a certain extent that is in our own hands. The hon. Member for Nottingham East is a veteran of these procedures, and I am sure he is able to calibrate his contributions to ensure that we can make the best possible progress and give the Bill the scrutiny that it requires.

Chris Leslie (Labour, Nottingham East)

I know we are talking about the programme of consideration of the amendments, but is it not a rather peculiar process for the Government to have relied on the Opposition to table the amendments recommended by the Parliamentary Commission? The Government certainly have not signed up to those amendments. If we had not tabled them, presumably we would simply be having clause stand part debates throughout. Was it ever the Government’s intention to table amendments reflecting the aspects of the Commission’s suggested amendments that they agreed with?

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman should perhaps express his thanks to the Commission for its unusual courtesy in drafting the amendments, saving himself and his colleagues a great deal of work. Since it has done so, we had a certain expectation that they might be tabled, if not by the hon. Gentleman then by certain colleagues other on the Committee.

It is clearly helpful to have the words and recommendations of the Parliamentary Commission available to us to debate in the Committee. The device that has been used is helpful to the Committee and to the whole House. The hon. Gentleman is moving some of the amendments and moving some of his own, and reflecting the recommendations of the Commission, as it were.

William McCrea (DUP, South Antrim)

Copies of the memorandums that the Committee receives will be made available in the Committee Room.

Before we come to our line-by-line consideration of the Bill, a brief reminder of procedure may be useful to the Committee. The selection list for today’s sitting is available in the room. It shows how the amendments selected for debate have been grouped together. Amendments grouped together are generally on the same or a similar issue. A Member who has put their name to the lead amendment in a group is called first. Other Members are then free to catch my eye to speak to the amendments in the group. A Member may speak more than once in a single debate.

At the end of the debate on a group of amendments, I will call again the Member who moved the lead amendment, and before they sit down they will need to indicate if they wish to withdraw the amendment or seek a Division. If a Member wishes to press any other amendment in a group to a vote, they will need to let me know. I will work on the assumption that the Government wish the Committee to reach a decision on all Government amendments.

Please note that decisions on amendments do not take place in the order in which they are debated, but in the order in which they appear on the amendment paper. I will use my discretion to decide whether to allow a separate stand part debate on individual clauses and schedules following the debate on the relevant amendments.

As a general rule, I and my fellow Chair do not intend to call starred amendments, which have not been tabled with adequate notice. The required notice period in Public Bill Committees is three working days, therefore amendments should be tabled by the rise of the House on Monday for consideration on Thursday, and by the rise of the House on Thursday for consideration the following Tuesday. I hope that explanation is helpful. We now begin our line-by-line consideration of the Bill.

Clause 1 - Objectives of Prudential Regulation Authority

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 11, in clause 1, page 1, line 11, after ‘that’, insert

‘reduces the risk of ring-fenced bodies assuming disproportionate exposure, enhances their capacity to cope with other exposure and otherwise’.

William McCrea (DUP, South Antrim)

With this it will be convenient to discuss amendment 13, in clause 2, page 2, line 42, after ‘that’, insert

‘reduces the risk of ring-fenced bodies assuming disproportionate exposure, enhances their capacity to cope with other exposure and otherwise’.

Chris Leslie (Labour, Nottingham East)

If I may say so, Dr McCrea, your modernising approach to setting out the way in which a Committee works is refreshing. I have been in the House of Commons on and off since 1997, and I think this is the first time I have served on a Committee where anybody has actually said how the thing works. Learning by trial and error is one thing, but it is very helpful to have your exposition to guide us through the process.

Perhaps I can take the opportunity to say, because it will be useful for the consideration of the amendments, that hon. Members may wish to get the documents that are not in the Committee Room from the Vote Office. In particular, there is the most recent report but one of the Parliamentary Commission on Banking Standards, which contained its agglomerated recommendations and draft amendments. There is a useful set of tables at the back of that document that set out the rationale behind the amendments they it suggested and the Government’s response to them. Dare I say it, I also commend the Government’s own Treasury paper—I shiver when I say that—which is the response to the Commission’s first report, usefully setting out what the Commission has recommended and the Government’s response. There have been plenty of other documents in the history of the preamble to the Bill, but if Members want to follow the Committee proceedings, those are the two key sets.

Clause 1 sets the scene for some of the meatier clauses in the Bill. We are moving towards the concept of ring-fencing and the quasi-separation of retail and investment banking. That came from the accumulated recommendations of the Vickers Independent Commission on Banking, which were then taken forward by the Parliamentary Commission.

I say the clause is a preamble to the meatier clauses because it addresses changes that are essentially prerequisites for the regulators, particularly the Prudential Regulation Authority and the Financial Conduct Authority. Members will remember that the Government have taken the view that they want to separate the functions of the Financial Services Authority into those two regulators.

The PRA is essentially an adjunct of the Bank of England. In fact, it has even moved out of Canary Wharf to locate itself in nice new shiny offices right next door to the Bank of England, at great expense, just to make that point absolutely clear. It is fair to say that the PRA has been given responsibility for what is known as micro-prudential regulation. The Financial Policy Committee at the Bank of England oversees macro-prudential regulation and all the downstream, firm-by-firm, individual business conduct issues are left for the FCA to field. We will talk about the FCA in a moment.

The clause makes changes to the general objectives of the PRA. Members will recall that we have not, unfortunately, had a rewrite of financial services legislation, which might have been a laborious and difficult process. The Government have chosen, for various reasons, to amend the Financial Services and Markets Act 2000. In a set of documents that I think have been circulated to Committee members, the Government have illustrated what a consolidated version of the 2000 Act might look like. I have not heard of a Keeling version, which is a new phrase for me, but that suggestion has been circulated. That version shows how question of continuity will be embedded in the new PRA’s overarching strategic approach. That is the issue upon which it has been felt necessary to underpin the new arrangements on ring-fencing.

The PRA will have a number of duties, and its general objective will be to ensure that

“the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the UK financial system, and…seeking to minimise the adverse effect that the failure of a PRA-authorised person could be expected to have on the stability of the UK financial system.”

Now, according to the changes set out in the Bill, its general objectives will also include

“discharging its general functions in relation to the matters mentioned in subsection (4A) in a way that seeks to...ensure that the business of ring-fenced bodies is carried on in a way that avoids any adverse effect on the continuity of the provision in the United Kingdom of core services…ensure that the business of ring-fenced bodies is protected from risks...that could adversely affect the continuity of the provision...of core services, and...minimise the risk that the failure of a ring-fenced body could affect the continuity of the provision...of core services.”

I wish I could claim credit for the amendments, but they are the brainchild of the august Parliamentary Commission on Banking Standards. In one of its reports, it helpfully set out some recommended amendments, in this case recommended amendments A and C. Inspired by the Commission’s wisdom, we have tabled those measures for the delectation of the Committee this morning as amendments 11 and 13, which you have chosen to group together, Dr McCrea.

Amendment 11 deals with the PRA objectives, and amendment 13 deals with the FCA objectives. Essentially, they would insert into the Bill the same responsibilities for those two, mirroring regulators, which would be to reduce the risk of ring-fenced bodies assuming disproportionate exposure and to enhance the capacity of such bodies to cope with other exposures.

David Wright (Labour, Telford)

One of the key issues is to ensure that the regulatory body is effective, but also that organisations can actually fail, and, if they do fail, that they can fail in a managed way. It is crucial that we do not have a system that simply props institutions up; it must allow failure, but failure in a co-ordinated manner.

Chris Leslie (Labour, Nottingham East)

Absolutely. Discussions on this issue can get quite theoretical, but it is nevertheless important to have them, as our constituents know the downstream consequences of banking failure and the financial consequences for the taxpayer that have flowed from that ever since the crisis. It is crucial to ensure that we properly define the balance between continuity and the handling of risk exposure, as well as the approach to winding down or resolving problems in banks that get into difficulty. The regulator needs clear guidance on that.

Initially, the Commission was concerned that the Bill lacked a clear objective for the role of the regulator, which left its future operation vulnerable to changing attitudes over time. The Government responded to that concern with the change in the continuity objective that is set out in clauses 1 and 2. Andrew Bailey, now the chief executive of the PRA, said in evidence to the Commission that he thought that the Government needed to go a step further than they had in the original draft Bill, which he felt was

“a bit too enabling without specifying how the objectives work.”

He suggested having

“a better narrative regarding how the PRA’s safety and soundness and continuity objectives interact.”

Although the Bill has been improved somewhat, we are still worried that there could be a conflict between the concept of continuity and the important goals of safety and soundness. For example, is there a likelihood that at some point some risks will be ignored in furtherance of a “business as usual” approach, and that in retrospect we will see that those risks should have been tackled and rooted out? That is one of the key tensions that Andrew Bailey and others have seen.

The Vickers report, by the Independent Commission on Banking led by Sir John Vickers, said that three objectives were needed, and needed to be balanced, in the process of banking reform: first, making the resolution of troubled banks easier; secondly, insulating retail banking customers from investment banking activities; and thirdly, reducing the risk to public funds. Those were the core objectives. The Commission felt that the continuity objective as originally drafted did not adequately capture the three concepts, and recommended changes. In response, the Government agreed that

“the objectives of ring-fencing should be fully reflected on the face of the Bill”.

Since then, changes to the objectives of the PRA and SCA have been brought forward to promote the safety and soundness of the institutions that they regulate. However, the Parliamentary Commission still feels that further amendments are needed to ensure that the formulation of the continuity objective adheres more closely to the Vickers objective on ring-fencing. We agree that those amendments are needed, because the regulator needs always to think about the risk exposure of the banking system and how any overexposure may be handled and eventually resolved. An explicit reference to reducing the chances of ring-fenced retail banks getting embroiled in excessive exposure to risk is a basic principle that should be stated in the Bill. That may seem like a statement of the bleedin’ obvious, as somebody once said, but it is important that we say that we want the retail banks to be relatively boring, humdrum, safe and vanilla in their characteristics. It is really important that, having made the separation, the retail banks do not get tempted to accumulate excessive risks along the way. That is why we need to place that reference in the Bill.

It is also important to focus on how well retail banks are able to sustain themselves in a risk-exposed environment, because the banking system is interdependent and even under the ring-fenced environment those retail banks will often be doing business with other banks not just in the UK but globally. As we will discuss under later clauses, viewing some of the banking rules on a firm by firm basis is an anachronistic approach to regulation. We need to recognise that, from time to time, we need whole-system changes. That should be one of the key lessons from the financial crisis, and it is certainly one of the key lessons from LIBOR, because all banks interrelate and do business with one another. Recognition of that is another facet of the amendment.

I do not think that there are convincing arguments against including the statements contained in the amendments. Such arguments do not outweigh the potential advantages of putting those statements in the Bill for the regulator. For that reason, I felt that it was important to table the amendments to test the Government’s attitude on the new regulatory arrangements.

Greg Clark (Conservative, Tunbridge Wells)

Before I speak about this set of amendments, may I put on record the sympathy of the whole Committee for my hon. Friend the Member for Carlisle, whose father died yesterday? He cannot be with us today, although he will join us for future sittings. I am sure that the whole Committee will want to send our condolences to our hon. Friend and his family.

On the matter in hand, I support, as does the hon. Member for Nottingham East, the principles and objectives of ring-fencing as recommended by the Independent Commission on Banking. The objectives that the Commission set out to improve bank resolvability, insulate vital banking services and—very importantly—curtail the possibility of taxpayer support being required are extremely important principles that are reflected in the Bill. In the Government’s response to the ICB’s report in December 2011, in the White Paper in June 2012 and in the draft Bill in October, we made clear our adoption of those recommendations.

The Parliamentary Commission on Banking, and some of the distinguished figures from whom it took evidence, made some further recommendations. Andrew Bailey, to whom the hon. Member for Nottingham East referred, expressed some concerns and made some direct recommendations about the continuity objective of the PRA. In response to that, we have made the continuity objective part of the safety and soundness objective of the PRA as a whole. Its prominence is clear, and that integration was Dr Bailey’s suggested way of getting around any potential conflict between these objectives. We followed his sensible advice on the matter.

There is a broad consensus on what ring-fencing should do. Based on the PCBS’s advice, we have amended the Bill before its introduction to clarify that the PRA’s continuity objective is very much part of its general objective. The amendments that the hon. Gentleman has rightly tabled reflect some further suggestions from the Parliamentary Commission, and I am happy to consider the debate on them. There is no objection in principle to them, but I will set out some of the concerns we have at the outset, on which I will reflect during the debate. Hon. Members may have their own views.

The proposed amendments to both the PRA’s objective and the FCA’s objective would insert the words

“reduces the risk of ring-fenced bodies assuming disproportionate exposure”

into the clause. The question is who defines what “disproportionate” means. The danger is that, far from clarifying the objective and making it more certain and dependable, the amendment raises a question to which the answer may not be obvious. It would presumably not be the PRA that determined what disproportionate exposure would be, because we are talking about the PRA’s governing objective and one would assume that someone other than the PRA would decide that. It is not clear, however, who would define the objective of the regulator, or, at least, who would determine what the word “disproportionate” meant, if the amendment is agreed.

There is a similar question around the use of the word “exposure”. It prompts the question of, “Exposure to what?” It may be that it is not possible to specify what it means. Amendment 11 would amend proposed new paragraph (c)(i) in clause 1(2)(b), which relates to the internal policies of banks, but proposed new paragraph (c)(ii) in clause 1(2)(b) deals with external threats and ensures that the business of ring-fenced bodies is protected from risks that could affect the continuity of provision. “Exposure” implies exposure to things outside the bank. If that is the case, the appropriate place to locate an amendment of this type is new paragraph (c)(ii), which states that the PRA must

“ensure that the business of ring-fenced bodies is protected from risks (arising in the United Kingdom or elsewhere) that could adversely affect the continuity of the provision in the United Kingdom of core services”.

There is no ambiguity in that sub-paragraph. It is clear that any risks that could adversely affect the provision of core services are a matter for the PRA to act against. The current wording of new paragraph (c)(ii) means that if the PRA is required to protect the ring-fenced body from such external risks, their exposures, however defined, must be part of that objective already. Given that that is an absolute requirement, the need for the word “proportionate” is overtaken as a harder test in the current draft of subsection (2) than would be implied by the amendment.

I am happy to consider the contributions of Members on this matter. There is no difference of principle between us, but on looking at the intentions behind the PCBS’s report, we think that the test for the PRA to ensure that external exposures are taken into account is addressed explicitly and in a more exacting way in new paragraph (c)(ii).

William McCrea (DUP, South Antrim)

Before we go any further I should like to join the Minister, as I am sure all Members would, in extending our sympathy to the hon. Member for Carlisle. We send him our good wishes.

Chris Leslie (Labour, Nottingham East)

I join you, Dr McCrea, and send the Opposition’s sympathy to the hon. Member for Carlisle.

The Minister was very thoughtful in his response, in a way intimating that he could see why the amendments had been tabled and that he would take them away to chew over. I wonder whether I should apologise at this stage to the PCBS, which relied on the Opposition to table these amendments and on me in particular, with my hon. Friend the Member for Kilmarnock and Loudoun. Somehow we have added the stain of the unclean to the amendments, which has deterred the Government from simply accepting them, merely because they have been tabled by the Labour party. I do not think that should deter the Minister. It would be quite useful in future if we have these big commissions for at least one member of that commission to serve on the Committee considering the Bill. I always find it slightly peculiar that they go to all the trouble of dreaming up a whole set of amendments, then rely on those of us who have not been party to the discussions to table them.

Greg Clark (Conservative, Tunbridge Wells)

Perhaps I should confirm immediately for the record that the fact that the hon. Gentleman has tabled recommendations from the PCBS in no way diminishes them in our eyes. Whether they are the product of his own reflections or come from others, we will be open-minded in this Committee. When I say that we are unconvinced that these amendments are necessary, it is not because the hon. Gentleman moves them, it is a genuine reflection, forensically, I hope he would concede, of our view that they do not add anything that is not in the Bill. He is experienced enough to know that, when it is possible and appropriate to agree with suggestions, the convention is that they are taken away and checked by the similarly expert parliamentary draftsmen. I hope the Commission and the Committee will accept my assurances that we intend to approach this constructively.

Chris Leslie (Labour, Nottingham East)

The Minister was doing so well that I felt born again, renewed and reinvigorated. At last I was a genuine citizen, a player even in this legislative process. But then he fell back on the usual, “Oh well, we are not going to accept anything at the Committee stage anyway. We are going to ask for these things to be withdrawn.” “Come on, Minister,” is what I would say to him. “Show that you are an independent, free-thinking, albeit junior Minister, and accept the occasional Opposition amendment, tabled with the support of the Commission. Go back and tell the Chancellor. You are a free thinker.” It is important occasionally for plucky up and coming Ministers to show that they have that free spirit.

David Wright (Labour, Telford)

My hon. Friend has been a Minister, and I have been a Government Whip. Does he predict that the amendments might return on Report, miraculously converted into Government amendments?

Chris Leslie (Labour, Nottingham East)

I would prefer the amendments to be accepted in Committee, but history suggests that that will not happen. We digress, however.

The Minister took issue with several aspects of the amendments. He relied on the age-old device of simply questioning the word “disproportionate” and asking who would define it. It is clear that the PRA would define it. I disagree with the argument that that is externalised from the PRA’s capability. The amendments would ensure that the PRA discharges

“its general functions…in a way that seeks to ensure that the business of ring-fenced bodies is carried on in a way that reduces the risk of ring-fenced bodies assuming disproportionate exposure.”

I believe it is clear that the PRA must determine and define that for itself, so the Minister’s argument is not particularly strong.

Greg Clark (Conservative, Tunbridge Wells)

This is a genuine question. Why does the hon. Gentleman think that the amendments, especially the word “disproportionate”, strengthen the already explicit statement that the PRA must ensure that ring-fenced bodies are

“protected from risks…that could adversely affect the continuity of the provision in the United Kingdom of core services”?

How would the introduction of the word “disproportionate” do anything other than weaken that test?

Chris Leslie (Labour, Nottingham East)

First, the continuity of core services is slightly different from the capacity to cope with exposure to risk. If the clause included the concept of disproportionate exposure, the PRA would have more latitude to interpret the legislation and to ensure that retail banks behave better. That was the Commission’s objective.

Mark Durkan (Social Democratic and Labour Party, Foyle)

The Minister said that the PRA “must ensure”, but the wording in the Bill is

“in a way that seeks to ensure”,

which is very different. Why does my hon. Friend think that the Minister believes that the amendments would lead to a more externalised judgment than would the current drafting?

Chris Leslie (Labour, Nottingham East)

My hon. Friend has pointed out a flaw in the Government’s initial rebuttal of the amendments, although the textual disagreements between the Government and the Opposition are not major ones.

Alok Sharma (Conservative, Reading West)

Having sat on Bill Committees with the hon. Gentleman for several years, I know that progress will probably be quite slow. Of course, we must scrutinise the Bill clause by clause and consider the meaning of individual words, but whether banks behave well will depend, ultimately, on whether they follow the spirit of the law, and on the culture of banking. That is a key area that we should consider, even though it is not part of the Bill. We can debate the details—indeed, we will probably do so until late in the evenings—but we must bear in mind that this should be about banks following the spirit of the law, rather than about individual words.

Chris Leslie (Labour, Nottingham East)

I take the hon. Gentleman’s point that we should consider both the letter and the spirit of the law. We want to discuss the spirit of the law, but right now we are discussing the letter. For that purpose, we need to finalise the questions that remain about the amendments from the Commission. The Minister has tried to distinguish between internalised risks for the bank and externalised risks—between new paragraphs (c)(i) and (c)(ii)—but that distinction should not be drawn in respect of disproportionate exposure. Obviously those exposures are from external actors, but they are also internalised within the banks themselves, so that is a bit of a red herring of an argument. However, I will allow the Minister the latitude and flexibility to consider the issues that I have raised, so I am “happy” to withdraw the amendment. If the Government can find a version of it with which they are satisfied, that will obviously be preferable. I beg to ask leave to withdraw the amendment.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I beg to move amendment 12, in clause 1, page 1, line 18, after ‘services,’, insert

‘in particular by securing the orderly handling of circumstances in which ring-fenced bodies have encountered or may encounter financial difficulties,’.

William McCrea (DUP, South Antrim)

With this it will be convenient to discuss amendment 14, in clause 2, page 3, line 6, after ‘services,’, insert

‘in particular by securing the orderly handling of circumstances in which ring-fenced bodies have encountered or may encounter financial difficulties,’.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to serve under your chairmanship this morning, Dr McCrea. Like my hon. Friend the Member for Nottingham East, I was grateful to you for setting out how the Committee would proceed.

The hon. Member for Reading West suggested that progress would perhaps be slow at various points. Those of us who have served on a number of Bill Committees with my hon. Friend the Member for Nottingham East know that if progress is slow, it is because we are scrutinising both the letter of the law, line by line, and its spirit. That is what is required of Committees.

Alok Sharma (Conservative, Reading West)

I thank the hon. Lady for clarifying that, but may I say that I hope we will not get to the Committee’s last sitting with large chunks of the Bill not having been examined? That has happened in the past when the hon. Member for Nottingham East, and indeed the hon. Lady herself, have been going through Bills.

William McCrea (DUP, South Antrim)

Order. I therefore think it is important that we do not waste time talking about past Committees and that we instead get on with the business of this Committee, which is to scrutinise the Bill.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Thank you for that clarification, Dr McCrea. We have tabled several new clauses, and we will of course seek to get to them. Those who have served on Bill Committees with me will know that, if we can deal with amendments in a few words rather than speak at length and still scrutinise the Bill properly, I believe that that is the correct way to proceed.

On that note, I turn to the amendments. They arise as a result of recommendations made by the Parliamentary Commission on Banking Standards. We have already heard about the importance of the role of the Banking Commission in ensuring that we have amendments to consider in Committee, and I echo the comments of my hon. Friend the Member for Nottingham East about the Government’s role. It is important to hear what they have to say, and as he suggested, I hope that we have a listening Minister here. It would certainly break the mould if we had a Minister who listened enough to acknowledge that an Opposition amendment—and the Banking Commission—had merit. There may also be an opportunity for him simply to accept some of our amendments rather than reconsider matters elsewhere.

The amendments relate to the objectives of the Prudential Regulation Authority and the orderly handling of the risk difficulties facing the ring-fenced banks. It is clear from the Banking Commission’s report that it feels that amendments are needed to ensure that the formulation of the continuity objective more closely adheres to the Vickers objectives on ring-fencing. That aim has run through all the debates and discussions on the Bill. The question is how we can take the principles and objectives of the Vickers report and ensure that they are crystallised in the letter of the law. We all understand and have talked about what the spirit of the law ought to be.

The amendments correspond to the Commission’s proposed amendments B and D. They are intended to make the Bill more explicit about the need for the retail banks to be overseen by regulators who will help with the orderly handling of circumstances in which they might encounter financial difficulties. That relates to the point that my hon. Friend the Member for Telford made in an intervention. We are not saying that there will not be circumstances in which difficulties arise or banks fail for one reason or another, but in those circumstances there should be a correct and proper process of oversight.

We, as well as the Commission, take the view that the amendments are needed on the face of the Bill for a number of reasons. As I have already outlined, they would better achieve the goals set out by the three Vickers principles for ring-fencing; in particular, they explicitly set out the role of the regulators in the resolution process. The regulators are tasked with making it easier to sort out retail banks that get into trouble, rather than simply leaving it to what has been described as a market-oriented insolvency situation.

The orderly handling of those difficulties is also needed to promote public trust and confidence. That is something we should all have in mind during scrutiny of this Bill because many members of the public looking at the technical issues will want to know not only whether the legislation has been strengthened, but also whether the culture will change. That has already been mentioned during the discussion this morning. It will be very important, and should also form part of the implied assurances undertaken by the regulatory process.

I look forward to hearing what the Minister has to say in response to these points on the amendments. I recall points that he made in relation to earlier amendments, and if these amendments are not drafted in exactly the terms that the Government would wish to see or if they are not located in the right place in the Bill, I hope he will outline that in his comments. I also hope he will give us an assurance that if the Government agree with the principle and with what the Commission has said—even if they do not agree with the fine-tuning of the amendments—they will table suitable amendments at a later stage. I therefore look forward to the Minister’s response.

Greg Clark (Conservative, Tunbridge Wells)

I can start with that assurance. Certainly, if there are any amendments—whether advanced on behalf of the Commission or from elsewhere in this Committee—that we agree with and think sensible, but which have some deficiency in the wording, I make a commitment to bring them back at a later stage.

The amendments, which the hon. Lady has said reflect the views of the Commission, address the really important issue of supporting the resolvability of ring-fenced banks. The hon. Member for Telford quite rightly made the point that the provisions of the Bill are designed not to ensure that no bank ever fails, but to ensure that when a bank does fail, it can do so safely, without affecting the continuity of core services and without causing taxpayers to have to contribute their own resources to it. We just need to look at the events in Cyprus this week to see how important it is to have these robust arrangements put in place, in which people can have confidence in advance, to avoid the kind of uncertainty and negotiations that have taken place in this country and others before and are happening in Cyprus as we speak. The objective of making it easier to deal with failing banks without recourse to the taxpayer was, of course, an objective given to the House by the Vickers Commission and we totally agree with it.

As a preface to my remarks about the amendments before us, the structure of this clause is important in how it reflects the Vickers Commission’s recommendations. We touched on this in an earlier set of amendments, but in clause proposed new paragraph (2)(c), we effectively have three sub-headings. Proposed new sub-paragraph (i) deals with the internal affairs of the banks, ensuring that the business of ring-fenced banks is carried on in a way that avoids an adverse effect on the continuity of services. Proposed new sub-paragraph (ii), as we discussed earlier, deals with external risks, ensuring that ring-fenced activity is protected from such risks arising in the United Kingdom or elsewhere. New sub-paragraph (iii) deals with resolution—the safe resolvability of banks. It states that the authority should

“minimise the risk that the failure of a ring-fenced body could affect the continuity of the provision in the United Kingdom of core services.”

There is a clarity to the structure of the Bill; it is there for a reason and it is important to respect it. My hon. Friend the Member for Reading West is absolutely right that we should consider the spirit as well as the letter of the law, but one thing we should bequeath to practitioners and regulators who will make use of what I hope will become an Act of Parliament is a resistance on our part to the temptation to add curlicues and additions to the wrong parts of the Bill. That could end up confusing the clear structure of the Bill and the clear statement that it makes. That point applies to the amendments, as I shall explain.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I look forward to hearing the Minister’s explanation about why he feels as he does about “curlicues”, to use his term. Has he thought about the time the Commission took to consider the issue and the fact that it proposed the amendments? Presumably, the Commission did not see the amendments as unnecessary, but as something that gave greater clarity rather than causing any confusion.

Greg Clark (Conservative, Tunbridge Wells)

I have respect for the Commission, which is why I said earlier that it might want to respond to my response to its response to my response to its original response. If the Commission intended something not captured in the amendment, I will be happy to consider that. There is no difficulty about the principle of what the Commission recommends—that it should be clear that banks should be resolvable without recourse to the taxpayer.

Let me address precisely why, so far, I am not convinced that the amendments are necessary. As I said, the resolution objective is captured in new sub-paragraph (iii), relating to the PRA and FCA—specifically, that the PRA should seek to

“minimise the risk that the failure of a ring-fenced body could affect the continuity of the provision in the United Kingdom of core services.”

The amendments would amend new sub-paragraph (ii) rather than new sub-paragraph (iii); the former, as I have explained, is about the external risks rather than resolution per se. I would be interested to hear from the hon. Member for Kilmarnock and Loudoun, or any other hon. Member with an insight into the mind of the Commission, about why it proposed the amendment not to the resolution provisions in the Bill but to the external risks provisions.

However, wherever it is, the amendment would add the notion of orderly handling. Let us pause to consider that. No one in the Committee could object to the concept that the resolution of a bank should be handled in an orderly way. However, the word “orderly” is a little vague. In a world where we need real clarity about what is intended and what will be interrogated later, we should pause before simply accepting the amendment just because the Commission has suggested it. We should know a little more about why it thinks the amendment necessary and whether “orderly” is the mot juste to capture what it has in mind.

The PRA has asked for clear objectives. It has expressly said that it did not want a set of objectives that it was forced to interpret in the face of what inevitably would be lobbying by vested interests from all sides. It has asked that the terminology be clear and unambiguous from the outset.

Proposed new paragraph (c)(iii), which deals with resolution, requires the PRA to act in such a way that the continuity of core services is protected if a ring-fenced body fails. If this objective is enacted by Parliament and becomes an objective of the PRA, then if the continuity of core services has been protected, it seems to me to follow that it must have been handled in an orderly way. Moreover, the amendments refer to:

“securing the orderly handling of circumstances in which ring-fenced bodies have encountered or may encounter financial difficulties”.

This may again seem pedantic—and this is my personal study and weighing-up of the Bill—but it seems to me that it is not the circumstances of a bank’s prospective failure that concern us. Those circumstances could be a macro-economic shock, a bad lending decision or some other ill, but it is the bank’s failure that must be handled in an orderly fashion, not its response to the circumstances.

I am more than happy to listen now to the contributions of Members who may be able to clarify some aspects of the Commission’s intention in terms of where this particular amendment should properly be located, or whether this question of orderly resolution is not fully captured by the requirement to secure the continuity of services. Having reflected on it, my feeling is that these provisions are in the Bill. It may be possible to make some more progress here, but if I have missed something in response to the hon. Lady then I finish where I began. If there is something specific that I do not think divides us, I am very happy to come back at a later stage and reflect that.

Jacob Rees-Mogg (Conservative, North East Somerset)

May I say, Dr McCrea, what a pleasure it is to serve under your chairmanship. This is subject to the one qualification that the monstrous calumny that you are a moderniser is squashed. I have always had confidence that if there was one party in Parliament in which I had a number of soulmates, it was the Democratic Unionists, who are proper old-fashioned-isers rather than modernisers. Having made that point, I come to the amendment, which I find quite attractive. It seems to me that it is trying to bring to the United Kingdom the approach followed in America by the Federal Deposit Insurance Corporation, whereby if a bank fails, the depositors who are protected are immediately moved to another bank with almost no loss of service. The advantage of that is that small banks can fail, and the failure of small banks is actually rather important to reduce moral hazard and ensure that the financial system has genuine underlying stability. This is because knowing that the whole business can fail reduces the amount of risk that will be taken in, for example, a Northern Rock circumstance. What we currently have—or had at the time of the banking crisis—is a feeling that nobody at all could fail.

It may be impossible to come to any answer to the “too big to fail” question. It may always be the case that Governments have to prop up the biggest banks if they get into real trouble, and therefore the need is to regulate away from that real trouble. In a United States context it seems to be possible to allow dozens and dozens of small banks to fail without threatening the underlying financial stability. Having said that, I think the Minister’s point, that the amendment should come not in new sub-paragraph (ii) but in new sub-paragraph (iii), looks to be correct. I am not absolutely certain of this, but it is a very convincing argument.

On a straight reading of new sub-paragraph (iii), a ring-fenced body could affect the continuity of the provision of core services in the United Kingdom. This seems to me to mean not the core services provided by the individual institution but those in the United Kingdom as a whole. Therefore, small banks, where the continuity of their services affects only their customers and not the core of the United Kingdom, are not really covered by new sub-paragraph (iii). I would like to indicate a broad sympathy with this amendment. I think the basic idea, the model from the United States, is one that we could beneficially follow. It might actually help us to set up more small banks to produce more competition, and get away from the model of a small number of big banks upon which the whole economy is dependent. It would then ensure that those small banks can, if necessary, have an orderly transition into other banks if they fail, with the protection of the depositors up to whatever limit the Government decides to set.

Mike Thornton (Liberal Democrat, Eastleigh)

Thank you, Dr McCrea, for letting me talk. I think that it is quite interesting that that is how insurance companies tend to work in this country, but I do not actually understand this amendment. I am sorry, but I do not like to look at something that I do not understand. It is probably because I am new to Parliament and do not properly understand parliamentary language, so forgive me, but it does not seem to make any sense. I obviously do not want to say anything disrespectful, or anything that might imply that it has not been thought seriously about, but it seems to me to be saying

“in particular by securing the orderly handling of circumstances”

—I am not sure how you can handle those—

“in which ring-fenced bodies have encountered or may encounter financial difficulties”.

I thought that this Bill was about banks that have encountered financial difficulties. By definition, we are dealing with institutions that have had financial difficulties, otherwise none of these clauses would be necessary. Therefore, we already have institutions with financial difficulties, so I am not sure why we should be inserting a clause about it. I apologise if I am misunderstanding, but I would like to hear why we need to insert a provision about an institution having financial difficulties when that is what the Banking Reform Bill is all about.

William McCrea (DUP, South Antrim)

I assure the hon. Gentleman that it would not be disrespectful to honourably say that one does not fully understand the amendment.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I was about to look for a particular piece in the Banking Commission report which perhaps would have assisted the hon. Gentleman, but we may have the opportunity to do that later in the process. It has certainly taken me some time since coming to this place, having served in another Parliament, to understand the procedures and processes and the ways in which these Committees operate, so I am sure the hon. Gentleman will enjoy this particular Bill as his first outing. Sometimes it does us no harm to be asked what particular things mean.

I was slightly perturbed to hear the hon. Member for North East Somerset suggest that he was attracted to some of the wording that had been put forward because, although he and I may not always agree on things, I respect his views. I began to wonder if somewhere along the line we had got it wrong, given that the hon. Member seemed to be beginning to support it. He did, of course, then go on in his characteristic style to explain why—not withstanding the attraction to the principle—he felt that the amendment might be better located elsewhere. We were asked to think about what was in the mind of the Commission when it decided to suggest this amendment in the place that it is. I would hesitate to say that I could get inside the mind of the Commission, which has done such a huge amount of work on this, but I believe that it had good reason to suggest that further strengthening of the Bill was required. Once again, perhaps slightly unfortunately, we have heard from the Minister that, notwithstanding the principle—he said he had no difficulty with the principle of what we were trying to achieve here—he was not convinced about where the amendment would be inserted.

There has also been some discussion about nobody having any objection to orderly handling, but perhaps this was a bit vague. What we have tried to do here, and what the Banking Commission had in mind, was to try to ensure that, at every possible stage, this wording would not only give additional strength to the Bill but send a message to the public—this has been raised in a number of interventions—that gives them confidence and trust, and ensures that, when financial institutions get into difficulty, all circumstances are looked at, whether macro-economic or closer to home. Customers and those who have resources in banks would then be confident that everything possible would be done not only to address those issues but to ensure that whatever happened would be done in an orderly fashion and would not cause them particular problems.

I heard what the Minister said in relation to the placing of such an amendment. I will try to tempt the Minister. Even if he cannot say at the moment whether he would seek to bring this amendment back and insert it in another sub-paragraph, will he give an assurance that he will look favourably on the principle—he seems to agree with it—and perhaps table an amendment either in new sub-paragraph (iii) or elsewhere that would achieve the same purpose? I would like to hear what he has to say on that before I decide how to proceed with this matter.

Greg Clark (Conservative, Tunbridge Wells)

This Committee is establishing itself already as one in which anything is possible: the Democratic Unionist party describes itself as a modernising force; my hon. Friend the Member for North East Somerset finds himself in full agreement with the Labour Front-Bench Members; and my hon. Friend the Member for Eastleigh describes words that Lord Lawson and others have committed themselves to as not making any sense—he is a braver man than me. I think that we will have an entertaining time over the next few weeks.

Let me address the points made. It has been clearly communicated that there is a unity of purpose: we all absolutely agree that it is important for banks large and small to be able to fail while the provision of services to customers continues, but with no consequences for taxpayers. That is why new sub-paragraph (iii) as drafted refers to protecting the continuity of services.

David Wright (Labour, Telford)

May I make the point to the Minister, following on from the hon. Member for North East Somerset, that it is not always about smaller banks failing and being swallowed by larger institutions; it is really important that larger banks can fail in an orderly manner and be divided up into smaller banking organisations. We should not see this as a conveyor belt to increase the size of banks and financial institutions; it ought to be possible to go the other way as well.

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman is absolutely right. A problem we face in this country is that there are too few banks and they are over-concentrated, with negative consequences for competition. The arrangements that we put in place should not, therefore, lead to an inevitable further concentration of banking into larger and larger groups if, in the future, a bank—large or small—were to fail. That is absolutely the Bill’s intention, and I am sure that that is the intention of the movers of the amendment, and indeed the Commission, which is why we have specified the protection of the provision of services in the Bill rather than the protection of the institutions themselves. That is the point that we want to get across.

I said that this was turning out to be an unusual and surprising Bill Committee, so let me add a further note of novelty. As is tradition, I have a note from my officials with advice that says, “resist this amendment”. Let me turn away from my officials and say that, having listened to the contributions from my hon. Friend and the Opposition Members, if it is possible, as I think it may be, to locate in the right clause of the Bill—I think that this particular resolution clause is the one—a more explicit assurance that the clause deals with the importance of continuing core services if a bank were to fail in future, I dare say the ingenuity of my officials and possibly of members of the Banking Commission themselves may enable us to find a form of words that satisfies Members that we have put in place something that addresses that.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is indeed a very unusual Committee already. I am surprised and very pleased to hear the Minister give those assurances. Having been a Minister myself in another Parliament, I remember well the notes that used to appear in front of me all the time basically saying, “Resist absolutely everything”, and telling me to repel any Opposition amendments. In the words that officials might use, I think the Minister has made some brave decisions already this morning. The Whips and others will now be panicking and wondering what will come later. On this occasion, I am glad to have tempted the Minister so far. He may find himself pulled back on some kind of rope later on in the day. I hope not. I will take his assurances in the spirit in which they were given. I look forward to his tabling an appropriate amendment, in an appropriate place, at an appropriate point in the future. I beg to ask leave to withdraw the amendment.

William McCrea (DUP, South Antrim)

Yes, this is certainly a novel Committee, hearing my party described in the manner it has been. I will try, as Chair, to lead myself from the other side of that and be a stabilising force for good.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I will not take up a great deal of the Committee’s time because we have had some healthy exchanges. We should, however, put on record how important the clause is. We have had assurances from the Minister and we have already seen how exciting a Financial Services (Banking Reform) Bill Commons Committee stage can be. That has perhaps been a surprise to all of us. It just shows, Dr McCrea, what your modernising approach can do to permeate a different culture and a different approach. That change in culture and approach is something we want to see in the banking sector and throughout financial services. Again, that is why the report from the Commission is so important.

I noted a couple of points that my hon. Friend the Member for Nottingham East made at the outset. He said that retail banks should be boring, safe and humdrum. We also want to ensure that retail banks can operate in that context. We have had a good debate and discussion on the ways in which the clause can be improved. I have no objection to the clause standing part of the Bill. I look forward to making similar progress on the next set of clauses and amendments.

Clause 2 - Modification of objectives of Financial Conduct Authority

Greg Clark (Conservative, Tunbridge Wells)

I think we could possibly do this formally as the debates we have had referred to clauses 1, 2 and, in effect, 3. I think we have had a full enough discussion. It is amazing to see what can happen when the back of the hon. Member for Nottingham East is turned. [ Interruption. ]

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Some of the comments made by the Whips from a sedentary position may tempt me not to move at such speed. Seriously, it is important just to put a couple of points on the record. The clause mirrors in many ways the changes made further upstream to the PRA, with consequential changes to the objectives of the Financial Conduct Authority. As hon. Members may remember, those of us who sat on the Committee that considered the Financial Services Bill last year, including myself and my hon. Friend the Member for Nottingham East, spent considerable amounts of time discussing the objectives of the respective parts of those organisations. At that time, we talked about how important it was that there should be harmony in the way the PRA and the FCA worked in practice. Considerable numbers of hours were spent discussing that issue in detail.

We are pleased to see the way the recommended changes have been implemented in the clause. However, I have a couple of points that I hope the Minister will elaborate on, in relation to how the FCA would work in respect of the high level of continuity issues that are set out in the clause. The PRA may well be sending out routine investigatory inquiries to retail banks, and the FCA will, presumably, audit the arrangements periodically. I would like to hear the Minister explain how that will be co-ordinated. Will we end up with two sets of continuity regulators? That could lead to difficulties and lack of co-ordination. How will the bodies split their activities?

I do not want to reopen the question, which we discussed in the Committee that considered what is now the Financial Services Act 2012, whether it is sensible to have both the FCA and the PRA in the way that is determined in the Act, and we do not oppose the clause. However, it would be helpful to hear some reassurance and explanations from the Minister.

Greg Clark (Conservative, Tunbridge Wells)

I am of course happy to speak to the clause and respond to the hon. Lady’s questions. In essence, the inclusion of the clause relating to the FCA is a piece of future-proofing. All of us intend and expect that the burden of responsibility for the arrangements will be on the PRA. That is absolutely our intention in terms of the activity that has been specified from the beginning, which is the regulation of deposits; that is very much going to be a PRA responsibility. However, during the course of scrutiny mention has been made that, as in future there could be an activity that came under the FCA’s remit, it would be sensible to make the same provisions available to the FCA in the Bill. Members who have studied the Bill will see—it has been clear in our discussion of the amendments that we have considered so far—that the provisions will apply to the FCA and the PRA in an identical way.

The hon. Lady made some reasonable points about the arrangements for ensuring that there is no difference of view or in approach between the PRA and the FCA in the event, unintended though that is, that activities would fall across the different regulators. As she and other Members will know from sitting on previous Bill Committees, there are arrangements to co-ordinate the work of the PRA and the FCA. Indeed, the two institutions are required to co-ordinate their functions under new section 3D of the Financial Services and Markets Act 2000, and are also required to maintain a current memorandum of understanding as to how they work together. We should also reflect on the fact that the arrangements for mutual contact between the PRA and the FCA are well established, and the FCA’s objective in this case is narrowly focused on only those activities related to the conduct regulation of particular firms.

We should regard the clause as a measure for the purpose of ensuring that we do not have to come back to the House for primary legislation should there be some activities in future that the FCA needs to look into. Bearing in mind the extensive discussions to ensure that the two bodies under the twin peaks model are co-ordinated, and in the light of the discussions we have had about the powers of the PRA and the FCA, I hope that the Committee will find itself satisfied.

Clause 3 - Amendment of PRA power of direction

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Given that the Minister is in listening and answering mode, I want to ask a couple of questions about clause 3. In general, the Opposition have no problem with the clause, which amends section 3I of the Financial Services and Markets Act 2000 to allow the PRA to require the FCA to refrain from certain action if the PRA believes that such action would

“threaten the continuity of core services”.

As we discussed in relation to clause 2, it is important to have clarity on the distinct roles and powers of the PRA and the FCA, with a view to preserving the continuity of core services in the event of a crisis, and the Minister has taken that on board.

For the record, will the Minister give us some examples of scenarios in which the PRA might want the FCA to hold back from intervention? I see some Government Members nodding in agreement, which I take as a sign that they also consider the question to be important. Which of the FCA’s routine activities on the provision of core services will the PRA be able to supersede? In terms of ensuring transparency, and renewing and restoring public confidence, will any overrule of the FCA be made public? Who will know that that has happened and when it happened? Will Parliament or the Treasury Committee be able to find out about such circumstances, and if so, how? I hope that the Minister will be able to answer those points.

Greg Clark (Conservative, Tunbridge Wells)

The Financial Services and Markets Act 2000 already gives the PRA a veto over a variety of the FCA’s activities, and clause 3 simply extends that veto. Given that the objectives of the PRA and the FCA now include the continuity objective for the provision of core services, we need to extend the veto to cover that objective. Not only is clause 3 in the spirit of FSMA, but it would create an anomaly not to extend the financial stability powers that FSMA gives the PRA over the FCA to cover the new objective. The clause allows the PRA to exercise a veto on the grounds that a particular activity threatens the continuity of core services.

The hon. Lady asked for examples. Such a power is to be used in a bespoke way for particular institutions if, in the judgment of the PRA, there is a threat to the continuity objective—in other words, to the stability of the banking system in the UK—but the nature of such matters makes it difficult to specify precisely what they might be. The whole reason for creating a forward-looking and more agile set of institutions is to allow a greater opportunity to spot things that are coming up.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

If the Minister gives an example, that might answer my question. In discussion of previous clauses, some concern was expressed about vagueness. I simply seek to understand, and to put on the record, the types of circumstances in which such a power would be used.

Greg Clark (Conservative, Tunbridge Wells)

The power would be used if, in the judgment of the PRA, a proposed action by the FCA would affect the continuity objective, which is to say that it could trigger a rupture in the continuity of banking services to the people of this country. Let me give an example. Suppose, on conduct grounds, the FCA were to propose immediately to ban particular products and the PRA were to judge that that would cause, perhaps because of the associated revenues, an immediate problem for the funding position of a bank. The judgment then has to be weighed up as to whether the necessary in due course requirements to change the way in which products are sold, or the products themselves, can be reconciled with the stability of the group. It is for the PRA to state and to certify that that, in its judgment, would threaten the continuity objective. In those circumstances, it would have the ability to stay the hand, as it were, of the FCA.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the Minister for giving way once again. He has obviously thought about the matter in detail. He provides the example of where products may have to be banned. What does he have in mind? From past experience or looking to the future, does he have any particular concerns?

Greg Clark (Conservative, Tunbridge Wells)

I do not have any particular product in mind, but one can imagine a circumstance in which a product is important to a bank’s current trading position and balance sheet. The purpose of getting banks to be more robust and to have better provision for capital, for which the Bill provides, is to reduce the circumstances in which the measure may be necessary, but it is theoretically possible that the sale of a particular product may be sufficiently important to a bank’s trading position that to interrupt it immediately could have consequences for its funding position and stability. The proposal is not expected or intended to be used frequently. Indeed, it is not intended to be used at all, as the Bill provides for greater resilience in the banking system.

However, as all hon. Members would accept, if there were a circumstance in which the perfectly proper in due course restrictions for conduct reasons of a bank engaging in a particular activity were to have, without regulators being able to do anything about it, huge and disproportionate consequences for the banking system, it is right to have the ability—it is why the two institutions were created—to have such questions available for separate determination. In those circumstances, the stability of the system and of the continuity objective has to—

David Wright (Labour, Telford)

That has serious consequences for the consumers of financial products. If the agencies are working together to sustain a bank, but consumers are using a rogue product, how will that work? It really is a serious point.

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman is right. We debated the arrangements for co-operation between the FCA and the PRA under the previous clause, and those arrangements are there to ensure that any prospective risk to the financial stability of one of the conduct aspects for which the FCA is responsible is made known to the PRA. Consequences can then be reflected back. The hon. Gentleman is absolutely right that the situation should never arise. The PRA ought to have, and is required to have at all times, a view as to the solvency and resolvability of the banks. However, if it came to the crunch and a bank was of such systemic importance that it would interrupt the PRA’s continuity objective, the action could not be indeterminate. There must be the ability and—the hon. Gentleman is quite right—FSMA establishes the precedent that the PRA has a veto in such matters over the FCA’s decisions.

Another thing that the PRA could do, for example, is to delay the imposition of a fine that the FCA might have determined was appropriate to levy on a particular firm. If the imposition of that fine with immediate effect would jeopardise the immediate position of the firm and drive it into failure, that is something that needs to be addressed. It does not in any way protect the institution from the consequences of its action, but it allows the PRA to take a view as to whether, in this case, the timing would be deleterious. That is the purpose of the amendment.

Nick Smith (Labour, Blaenau Gwent)

The Minister talked earlier on about a memorandum of understanding between the two institutions, and that was important, but he was not able to respond to a question from my hon. Friend the Member for Kilmarnock and Loudoun about the parliamentary oversight of the working between the two institutions. Could he tell us a bit more about that please?

Greg Clark (Conservative, Tunbridge Wells)

In relation to the oversight, the provisions in FSMA are, for these matters, not to be made public because to communicate the fact that, for example, it was necessary to delay the payment of a fine because otherwise a bank could fail, would be to release information that was very highly sensitive to the markets. It could trigger precisely the kind of reaction that these powers exist to prevent. Members of the Committee will know that the constitution of the PRA—through the Financial Services Act 2012—requires reports of its activities to be made retrospectively to the various committees of the Bank and the Select Committee that scrutinises the PRA. In due course, they will have the opportunity to review the policies and practices of the PRA, but in regard to the exercise of this power, to do what the hon. Member for Blaenau Gwent implies or what was, perhaps, behind the perfectly reasonable question from the hon. Member for Kilmarnock and Loudoun—to simultaneously publicise the exercise of this power; tempting and desirable in principle though it is—would have the perverse consequence that must be obvious to all.

The memorandum of understanding, of course, is subject to parliamentary scrutiny: it is laid before Parliament and subject to scrutiny by the Select Committee. Therefore, the arrangements in advance and the types of circumstances in which the PRA would exercise these powers are set out in advance and are subject to clear public scrutiny and should be agreed. The particular moment of exercise, however, is something that has to be between the regulators.

Alok Sharma (Conservative, Reading West)

My right hon. Friend will forgive me if I should probably know the answer to this, but where the PRA exercises this right, what will be the precise role of the Treasury? What will be the roles of the Chancellor of the Exchequer and the Financial Secretary himself?

Greg Clark (Conservative, Tunbridge Wells)

All these matters concerning the ability of the PRA to veto the activities of the FCA were considered and debated during the passage of the Financial Services Bill. We need to beware in our discussions of this Bill of the possibility of doing something to misalign that Act, which was considered and put into force, including the arrangements for the exercise of the power in question. It is important that through this clause, we should simply reflect on making a concomitant change to the powers of the PRA in respect of the exercise of the veto to mirror the proposed extension of the change in the objectives of the PRA. I think my hon. Friend is a veteran of that Bill committee, and he will know that there is no role for the Treasury in that; it is a matter for the regulators to decide.

It is possible to rerun the debates about the prospective powers of the PRA and the FCA across the board, and we can do that if that is what the Committee wants, but we need to bear in mind that this change that reflects a tweak to the institution’s continuity objective.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I do not wish, as I am sure other hon. Members do not, to rerun the whole debate that took place on the previous Bill. However, my hon. Friend the Member for Blaenau Gwent made an important point about what the memorandum of understanding covers. I am still unclear about how the Treasury Committee would find out about the circumstances in which the overruling would take place. The Minister has made it clear that that would not be publicised, and I can understand the reasons why, but I am not entirely clear about the process by which the Treasury Committee and Parliament would be able to scrutinise the workings of that.

Greg Clark (Conservative, Tunbridge Wells)

The memorandum of understanding is scrutinised in advance by Parliament. The Select Committee has the opportunity to suggest in public the inclusion of specific circumstances in which the powers are exercised. The reviews of the PRA’s performance by the Bank of England and the Treasury Committee can be concerned with ex post scrutiny or knowledge of decisions that the PRA has taken in pursuit of the objective. The Treasury Committee can request, from time to time, a report on whether and when the powers have been used. It would be a reasonable judgment by the PRA to disclose them once the moment of danger had passed, but the arrangements are available.

Mark Durkan (Social Democratic and Labour Party, Foyle)

Proposed new subsection (c) contains the phrase

“threaten the continuity of core services provided in the United Kingdom.”

Can that be read to include threatening the continuity of core services provided in a distinct part of the United Kingdom? Can it only be read as being about the UK as a whole, or can it apply to part of the UK where there is a distinct banking market that does not have the same range of players? Indeed, some players may well be shaken out of it, given the changes in Irish banking and so on. The clause is meant to deal with future-proofing and risk anticipation. Could it lead to the PRA requiring the FCA to refrain from products in a particular regional banking market, because there could be implications for other existing banks and their core services? Could the provision apply to a distinct part of the UK, as such an issue could arise in Scotland and certainly does arise in the context of Northern Ireland?

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman makes an important point. Before I respond to it, let me provide further clarification on some points made about the disclosure of information on decisions and directions that the PRA has made. The PRA is required to include information on directions under section 3I of FSMA in its annual report, which is laid before Parliament. Therefore, there is the ability annually to scrutinise the directions that have taken place.

The hon. Gentleman asked about the continuity objective, regarding particular parts of the United Kingdom. Clearly, the intention is that ordinary people should have continued access to their deposits. It is for the regulator to interpret that and, through the statutory instruments that implement the objective, we will set out the provisions in detail. However our view is that the area of the UK that he represents, and other areas such as Scotland, would be considered significant because an interruption in the continuity of service there would constitute a breach of the continuity objective.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I had not anticipated that we would have so much debate and discussion about those points, but I am glad that we have been able to get some clarity on issues that concern me and other hon. Members. In particular, it is helpful to have a reminder about the requirements regarding the PRA annual report, which the Minister mentioned.

It is also helpful to have had the Minister’s assurances about the memorandum of understanding and about the Treasury Committee’s potential role in requesting information and reports. No one is suggesting that Select Committees, or indeed Parliament, would want to do anything that caused further problems, but it is important that there is a degree of oversight so that Select Committees and Parliament have the ability to scrutinise. It is also important that they have the ability to give information and suggestions about how processes may be approved.

I recognise that the clause essentially does something that has already been done in other legislation, but it was important to put those points on the record. On that basis, however, I have no difficulty with the clause standing part of the Bill.

Clause 4 - Ring-fencing of certain activities

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I beg to move amendment 15, in clause 4, page 3, line 33, leave out from ‘order’ to end of line 35 and insert—

‘(a) would significantly enhance the stability of the UK financial system or provide other significant benefit to the economy of the United Kingdom, and

(b) would not pose a risk to the continuity of the provision in the United Kingdom of core services.’.

William McCrea (DUP, South Antrim)

With this it will be convenient to discuss amendment 16, in clause 4, page 5, line 13, leave out from ‘circumstances’ to end of line 15 and insert—

‘(a) would significantly enhance the stability of the UK financial system or provide other significant benefit to the economy of the United Kingdom, and

(b) would not pose a risk to the continuity of the provision in the United Kingdom of core services.’.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I think we are making good progress this morning, Dr McCrea. We now come to clause 4. For those following the twin tracks of the amendments to the Bill and the amendments suggested in the Parliamentary Commission on Banking Standards report, amendments 15 and 16 relate to Commission amendments E and F.

A number of amendments have been tabled to the clause, and I suspect it will take slightly more time to deal with than some others. If I can say this is a vegan, it is, in many ways, the meat of the Bill, and we must discuss many of the major changes to FSMA. The clause introduces the concept of ring-fenced retail banking and sets out the rules governing how it will work. Many hon. Members will want to make points about the whole principle of ring-fencing when we debate clause stand part. That theme has run through all the discussions on the Bill.

In the Bill, the Government propose that they should be able, in certain circumstances, to set out by order classes of financial institution that are to be exempted from the ring-fencing rules. The Parliamentary Commission on Banking Standards has voiced some concerns about those exemption arrangements. We discussed some of the issues involved on Second Reading, and the Committee gives us the opportunity to scrutinise them in more detail.

I want to put a number of points to the Minister, and I hope he will be able to respond in the same helpful and forward-looking way as he has on some of the other amendments. The Opposition see the logic of excluding smaller building societies, but proposed new section 142A(2)(b) makes provision for the Treasury to exempt other classes of bank, and those are as yet unspecified. Although the Government agreed with the Commission that the tests for exempted or prohibited activities needed to be tough, which is right and proper, the Bill needs to be amended to set out more clearly what those tests and thresholds look like. As the Commission said, merely saying that an exemption must not have a significant adverse effect on the continuity of core services is not adequate. Why should an exemption be made when there is any adverse effect, whether significant or not? Those are some of the issues we need to tease out in more detail.

Alok Sharma (Conservative, Reading West)

Looking at amendment 15, I have some sympathy with proposed new paragraph (b), but in proposed new paragraph (a), the hon. Lady suggests an incredibly huge burden of proof over whether an institution is enhancing the stability of the UK financial system. Will she explain how she would practically go about proving that? I cannot see how it will work in law.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the hon. Gentleman for that intervention. He was perhaps suggesting that I was suggesting that, but I remind hon. Members that the amendments come from the robust work of the Banking Commission. I support the amendments so that we can have further debate and discussion.

Alok Sharma (Conservative, Reading West)

That is fine, but the hon. Lady is the one who tabled the amendments, so she should explain the reasons why.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I take the hon. Gentleman’s point on board, but it is important to recognise that the amendments came from recommendations of the Banking Commission. I shall say more about that.

The amendments specify that any exemptions must positively enhance the stability of the financial system and have proactive benefits for the economy more broadly. In our view, that is a welcome and forward-looking suggestion, which is why we tabled the amendments— to support the Banking Commission’s work and its recommendations. The proposal is positive because exempting a class of financial institution would supplement the condition that any caveat does not pose a risk to core service continuity, which moves us forward from some of the issues that we debated earlier.

In order to be helpful and make progress, will the Minister give us his view? Does he agree that exemptions need be made only if a positive benefit flows as a result? There are concerns, which I think have been raised already, that exemptions should not be made merely because small institutions find ring-fencing onerous, which is the question here. After all, before a series of people say that it was all the fault of the Labour Government, it is worth looking again at the history of what happened in 2008-09 and at some of the smaller institutions that found themselves in difficulty during the global financial crisis.

We are grateful to the Banking Commission for its suggestions. I would like to hear what the Minister has to say before deciding whether it is appropriate to push the amendment to a Division or simply allow them to act us probing amendments that help us to understand the Government’s intentions and help them to come back with an amendment at a later date.

Jacob Rees-Mogg (Conservative, North East Somerset)

I fully support the Government. I hope that they do not accept the amendment. It would take us in completely the wrong direction. So as not to have unintended consequences, ring-fencing has to be treated extremely carefully. It is worth bearing in mind that had there been a ring fence prior to the financial crisis, it would not have stopped Northern Rock or HBOS from getting into trouble and it would not have allowed Barclays bank to get out of trouble. There must be an onus on the Government to say that somebody not being exempted would cause real harm.

Another point worth making is that although the Government are great, wise, noble and full of men and women of the finest intelligence—there are more brain cells in this Government than in any Government in the history of mankind—Governments none the less have an appalling record of picking winners in business. They have not been trying to pick winners in the financial sector, but they have tried to do it in other sectors. The positive requirement that the amendment would introduce would expect the Government to be able to work out to what extent an un-ring-fenced bank would work, in a way they failed to do with British Leyland, British Steel, the National Coal Board and so on.

Nigel Mills (Conservative, Amber Valley)

I hesitate to ask my hon. Friend a question on what he is saying, but the clause allows the Government to exempt a class of businesses, not an individual. I am sure that he would normally agree that for the Government to take such a power is slightly concerning. We are ring-fencing everything except for a whole class of things that we might choose not to at some point. Maybe his concern should be directed at whether that power is to the good.

Jacob Rees-Mogg (Conservative, North East Somerset)

Whether the power should exist at all is a good question, but we do not have an amendment to get rid of the power altogether, though I suppose we could come to that argument on clause stand part. The exemption for a particular class brings us to the point about trying to avoid a fundamental risk to the economy. We may want to exempt a class that could not under any circumstances be fundamental to the economy, or a class of international banks that would simply close down operations in this country if it was subject to a strict ring-fence clause. The flexibility that the Government are allowing themselves by requiring a negative test is much better than the proposal of a positive test, so I hope that the officials are sending the Minister notes saying “Resist, resist, resist”.

Greg Clark (Conservative, Tunbridge Wells)

Given my performance on the previous clause, the officials are probably going to wrestle me out of the room before I have the chance to respond. I agree with my hon. Friend about the reason for being careful about the exercise of these provisions. In essence, it relates to the point that the hon. Member for Telford made. There are objectives to be balanced. We need to have the necessary safeguards that the Bill provides, but not gold-plate them so much that we prevent new banks, perhaps smaller banks, from coming in to provide competition to the incumbents by imposing on them regulatory burdens that will make no particular contribution to the stability of the system.

James Morris (Conservative, Halesowen and Rowley Regis)

The Minister is making an important point. One of the unintended consequences of the amendment may be to increase large banks’ market concentration and preclude the improvement of the competitive market that we are all seeking.

Greg Clark (Conservative, Tunbridge Wells)

My hon. Friend is right. Later in the Bill we will consider some of the measures to promote further competition in banks. One of the things that we are concerned we do is ensure that the barriers to entry are as minimal as they can be, consistent with the protection that depositors and the financial systems need. That is the essential balance that we are discussing.

It is important to reflect, as the hon. Member for Nottingham East did, that the ring-fencing provisions in the Bill are not the only recommendations of Vickers on reforming the banking system. Not everything that Vickers has recommended is to be pursued through the ring-fencing route. The capital requirements of banks and the resolution plans that are required are measures that will helpfully put in place a raft of different arrangements to provide the greater certainty and reassurance that is needed.

The Vickers report, as members know, is written in a very readable way—in fact, I think it is a compelling read—and the Vickers Commission produced a good table going through examples of some of the failed banks of recent years and considering which of its recommendations would have prevented or mitigated the failure of those different banks. Ring-fencing applies particularly to the bigger banks, rather than to the small ones which, nevertheless, can cause problems in that regard. It is for that reason that we have introduced this de minimis clause, which the Commission itself has agreed with.

The amendments pertain to the power to make exemptions, which is being given to the Treasury. Amendment 15 is about the definition of the ring-fence body, and amendment 16 is about the excluded activity of dealing in investments as principal. The case for making an exemption for small banks is clear. There are fixed costs of ring-fencing, which will be proportionately greater for smaller banks than for larger ones. Without an exemption, those higher costs could place smaller banks at a comparative disadvantage, and therefore at a competitive disadvantage, compared with their larger rivals. Meanwhile, the benefits to financial stability of requiring small banks to ring-fence are obviously quite limited, because the failure of a small bank is less likely to have systemic consequences and more likely to be manageable through these other arrangements by the authorities.

Indeed, as the Parliamentary Commission acknowledged, a de minimis exemption from ring-fencing for smaller deposit-taking institutions represents a sensible compromise between maintaining financial stability and encouraging new entrants into the banking industry. The Government propose to set the threshold for the exemption at £25 billion of core deposits. As the Committee will have seen from the draft statutory instrument that I made available on 7 March, that will be subject to further scrutiny in due course.

The PCBS recommended that the factors that must be considered in creating an exemption should be in the Bill, and that the impact on competition should be explicitly included among those factors. We agree with the PCBS that clarity over the circumstances in which an exemption may be created or varied in future is important, to give as much certainty as possible about how the powers in the Bill will be used.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

The Minister is referring to some of the issues that were in the Government’s response to some of the Banking Commission’s work. That response expressed particular concern about the tests for exemptions under proposed new sections 142A(2)(b) and 142D(2) and said that the Government would consider further amendments to ensure that the tests deliver the policy intention. Can he explain what deliberation there has been? Is it still his intention to bring forward further amendments?

Greg Clark (Conservative, Tunbridge Wells)

Yes, we will keep under close scrutiny the provisions that are required. We started with the minimal requirements, which I think is the right approach to take, and we have sought to provide clarity in the Bill. As the hon. Lady mentioned, we made clear in the Government’s response to the PCBS the conditions we think should be met before an exemption is created. New section 142A(3) requires that before the Treasury creates an exemption it must be satisfied that doing so would not be likely to have a significant adverse effect on the continuity of provision of essential core services, which under the current definition would be access to deposits and the like. Because of that requirement, the amendment is unnecessary. The safeguard is already there.

There is a danger that the amendment could prevent the Treasury’s ability to balance the need for financial stability against economic considerations such as competition. The and/or formulation implies that the possibility of judging the relative importance of those things is taken away. The amendment would require the Treasury to be satisfied that an exemption would either actively advance financial stability or provide some significant economic benefit. It is contrary to the logic of requiring the balance between those forces to be met.

Similarly, as proposed, the requirement would be that an exemption would actively promote financial stability rather than doing no harm to it. We should reflect on the fact that that is quite an increase in the height of the test. The provisions of the Bill are intended to ensure that banks are resolvable and that core services continue to be provided. However, if the test is to promote financial stability actively, demonstrating that might be quite a high hurdle for a small bank to overcome.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I hear what the Minister says, but I refer him back to the wording of the Bill, which states that:

“An order under subsection (2)(b) may be made in relation to a class of UK institution only if the Treasury are of the opinion that the exemption conferred by the order would not be likely to have a significant adverse effect on the continuity of the provision in the United Kingdom of core services.”

The Banking Commission raised the issue of what a significant adverse effect is, how that would be decided and how that process would be gone through. Will the Minister explain the difference between an adverse effect and the point at which it is scaled up to being significant enough for the Treasury to have to act under this type of order?

Greg Clark (Conservative, Tunbridge Wells)

We have put the power in the Bill, and that is right; it was required by the Commission. When it comes to the exercise of that power, the de minimis threshold will be set in secondary legislation. That is the place where the proposed use of the power has to be made. That decision will be vested with Ministers in the Treasury, and there will, of course, be parliamentary scrutiny of the order that would implement that. That is the test there.

The amendment would increase the height of the hurdle, going beyond the Hippocratic principle of doing no harm to a higher test of positively doing good. I think that is unnecessary. Setting the principles for the future exercise of the de minimis power, which have to be justified before the House when it comes to it, is the right balance to strike between the objectives expressed by both sides of the House—of allowing and encouraging banks to enter the financial system, while protecting financial stability.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

The Minister is being generous in dealing with these points, but it is important to have them on the record. Will he again pick up the point, made earlier by the hon. Member for Amber Valley, about the difference between an individual institution and a class of institutions? What type or class of institution does he have in mind?

Greg Clark (Conservative, Tunbridge Wells)

Let me give an example. There could be a class of small banks, which we often think of as challenger banks. Rather than having institution-by-institution exemptions, it may be possible to define them in such a way. We should also reflect on our hope that, if the Bill becomes an Act of Parliament, it will endure for some time.

In the past, this country has had financial innovation that led to institutions coming into existence that, by definition, were not there before. In future years, there may be a new set of bodies, just as we have had a building society movement that has been very important to financial services in this country. Through the entry of new institutions, different types of bodies may emerge and cohere over time into a class that can be identified as such. Subject to statutory instruments being brought before the House to exempt such classes of institutions, to take provision for the ability to do that seems a sensible piece of future-proofing for a world in which institutions and the character of institutions may change.

Again, it is important to emphasise that the Bill’s provisions do not themselves create the exemption, but empower the House and indeed Parliament to consider it in future.

Nigel Mills (Conservative, Amber Valley)

I gently say to the Minister that we have a tradition of an annual Finance Bill; if a new entrant was greatly attractive to the UK economy, we would have an annual chance to change the Bill to allow them without needing such a broad secondary power. People are concerned about what exactly could be done with that power, and that is perhaps not quite what Parliament thinks it is doing at the moment.

Greg Clark (Conservative, Tunbridge Wells)

It is important to have the essential architecture of the future regulation of financial services in the Bill. The Bill sets out the provisions for ring-fencing; addressing in it the possibility that individual institutions and institutions by size may be exempted, and also that potential new classes of institution may be exempted, makes the provisions self-contained and is the right way to proceed.

The Parliamentary Commission was pretty exacting in its recommendations for parliamentary scrutiny of various aspects of the Bill, and we have been able to agree with it on a number of matters. The Commission agreed with the point that it is appropriate to have details for these matters brought forward in secondary legislation in future, because the area is one that is subject to change. It is also important to bear in mind that when it comes to a future class that might be exempted from being ring-fenced, the same logic and criteria in terms of their limited impact on the stability of financial services will apply to the decision to exclude that class. There will not be a blanket get-out for any institution of that type.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I do not want to go back to previous Bills, but there have been concerns before, which I think are reflected here, about giving fairly wide powers to the Treasury to do things by secondary legislation without being entirely clear about what consultation and what processes will come into play. The Minister has given us assurances on that, but, for the record, does he intend those statutory instruments to be brought forward under the negative or affirmative procedure, given that such instruments could be very significant?

Greg Clark (Conservative, Tunbridge Wells)

The hon. Lady is right that this is a significant area. The Government’s intention is to follow the recommendations of the Delegated Powers Committee for each measure.

Relatively close to the beginning of the Committee’s work as we are, this is an appropriate point to reflect on the fact that the Bill is designed to establish the essential architecture of regulation. There is some recognition of and support for the fact that getting that architecture in place is the business before us; the details of how the powers will be exercised will be subject to debate when we come to the statutory instruments.

It is absolutely the Government’s intention that those statutory instruments, which are by no means a trivial matter, should be subject to the fullest possible debate, and in each case, as I say, we will follow the views of the Delegated Powers Committee. [Interruption.] In terms of the exercise of this particular power, inspiration has just struck me that it will be subject to the affirmative procedure, so it will enjoy the scrutiny that that particular procedure allows.

Mark Durkan (Social Democratic and Labour Party, Foyle)

The Minister has referred to the fact that the Bill’s provisions are very much designed to future-proof in not too exacting a way, without trying to over-prescribe or over-predict what may happen. Will he say how far the possible changing face and form of what might be termed “supermarket banking” is in the Treasury’s thinking in this regard?

Many supermarkets and retail chains offering so-called banking services do so in partnership and are fronting for other established, conventional banks, but some are doing so on their own, which may become increasingly common. That was seen to be allowed for specifically in the Financial Services Act 2012. How far is the Treasury thinking about the new forms and set-ups of banking that might be established?

Greg Clark (Conservative, Tunbridge Wells)

We are keen to have new entrants to the sector. We know that some supermarkets have made some steps in that direction and it is important to maintain an openness to new entry. We need to reflect on the types of institutions that might come in.

Some of the new entrants are unlikely to want to engage in the kind of universal banking—investment as well as retail—that ring-fencing will, because of the abuse that we have seen, provide safeguards against. There are other provisions, not least the powers that the PRA and FCA have, to ensure that even core retail-focused banks operate in a way that is safe for their depositors; that is what we want to see.

The same logic would apply to new entrants of the type that the hon. Gentleman described as it would for any other bank: an exemption can happen only if it would not harm the requirement that there should be the continuity of core services. That test applies to all entrants, no matter what their character.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We have had a useful discussion to consider this group of amendments. We brought them forward because they were recommended in the Banking Commission report. I was struck by the fact that—I have asked the Minister about this—in the Government’s response to the recommendations, they said that they

“will consider further amendments to ensure that the tests deliver the policy intention.”

So the Government and the Minister seem to be in a thinking mode and are prepared to consider further amendments, and that is why it is important to tease out issues on the amendments.

I did not want to reopen the debate we had in Committee on the previous Financial Services Bill on whether a growth agenda should be built into the requirements of legislation, or whether it is enough simply not to harm the economy. However, the principles here are similar in terms of the Banking Commission’s report: should the legislation be constructed in such a way to ensure that the actions encourage a positive impact on the economy, or is it simply about trying to avoid damage?

I was particularly interested in the definition of whether the Treasury has the decision on something that would “adversely affect” or have a “significant adverse effect”. That may seem like semantics, but it is quite important, as it is also to understand what the process would be and what Ministers have in mind.

I was heartened to hear the Minister—when inspiration struck him—give confirmation that an order-making power would be subject to the affirmative process, because something as significant as looking at exempting a whole class of banking or financial institutions ought to be subject to proper parliamentary scrutiny in an open, detailed process. That confirmation is helpful.

I hope that the Minister will consider the points raised during the course of the discussion. I will not push the amendment to a vote, but a number of points have been made that we may wish to come back to on implementing the spirit of the Commission’s report as well as improving the legislation. I am sure that we will have further discussions on that in the next set of the amendments. In light of that, I beg to ask leave to withdraw the amendment.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I beg to move amendment 26, in clause 4, page 3, line 35, at end insert—

‘(3A) In making an order under subsection (2)(b) which—

(a) provides an exemption for UK institutions holding deposits below a specified amount, or

(b) varies the amount previously specified for the purposes of such an exemption,

the Treasury must aim to enhance competition among UK institutions which have a Part 4A permission relating to one or more core activities (in particular by having regard to the likely effect on the number of UK institutions applying for or obtaining such a permission for the first time).’.

Amendment 26 relates to Commission amendment P, for those following this in the report. It talks about the impact of de minimis exemption from ring-fencing rules on competition in the sector.

I will explain a couple of points and the context of the amendment. When and if Ministers decide, under proposed new section 142A(2)(b) of FSMA, that a set of banking institutions should be exempted from the ring fence, that will clearly have an impact on the operation of the financial services market and the choices presented to consumers.

We discussed previously whether we should be looking for the positives or simply trying to avoid the negatives. However, the reality is that—this is why I was so keen to tease out what the process would be and whether it would be affirmative—whenever the exemptions from ring-fencing are used, there will be such an impact. We are trying to tease that out in some more detail with the amendment.

We have already heard about issues around competition in the banking sector, and I am sure that other hon. Members will want to speak about that. We know that competition is already limited. The big five banks—HSBC, Barclays, RBS, Lloyds and Santander—dominate the current account, mortgage and loan markets. One reason why the banking system needs reform is to tackle that near-monopoly scenario, which can have an impact on those seeking credit and those who want a return on their savings and investments. This discussion is timely, given what is happening in the wider world at the moment; of course, we discussed much of this on Second Reading.

The Parliamentary Commission on Banking Standards suggests that the Bill needs to ensure that due consideration is given to the impact of the de minimis exemption rule on the market and choice for consumers. Once again, if we look at the Government’s responses to the Commission, they have indicated that they accept that in principle and may want to bring forward amendments—perhaps the Minister will say something on that—but it is important that we test the issue in Committee in some further detail.

I want to put it on the record and stress that we want new entrants in the banking sector. It may be that the de minimis exemption rule needs to accommodate all the hurdles and obstacles that can prevent challengers from coming on to the scene. We had some reference to that during the previous debate.

Without wishing to jump ahead to matters that we will discuss at a later stage, and assuring the Government Whips that we do want to reach our new clauses, we have already tabled a new clause that would require a review to be conducted into the obstacles and issues preventing new entrants into the financial services retail market. When we reach that point, we will suggest that it should be a priority for the Treasury.

Amendment 26, requiring the de minimis exemption arrangements to aim for enhanced competition, is a positive way to view the impact of ring-fencing on the nascent banking entities wishing to enter the market. I appreciate that time is short in this sitting, but I hope the Minister will be able to elaborate on Government plans to start up banking institutions, to get more people into the market and, of course, to encourage new mutuals. We have heard much discussion and comment in the past about that, and there is at least apparently tacit support from the Government for the mutual sector, although we are yet to see exactly how that translates into practice, particularly in terms of new entrants.

I would like to hear from the Minister in the time available not only about his views on the amendment, but also about the context of what we need to do get new entrants into the banking sector in a way that will give better deals and security for customers. Several hon. Members mentioned that on Second Reading and in Committee this morning.

Members of the public looking on, and those moved to read the record of the Committee’s proceedings word by word afterwards—I am sure at least one or two people will do that—will want to see not only that the Opposition have proposed the amendments suggested by the Banking Commission, but what the Government intend to do about them.

Stephen Doughty (Labour, Cardiff South and Penarth)

My hon. Friend is making a strong point about the importance of mutuals, co-operatives and other banks coming into the sector. Like me, she has no doubt reflected on the situation in other countries—particularly in Germany and Canada, where such organisations are much stronger. That underlines why we need to move towards such a system to allow new entrants to come in and create a much stronger, more diverse banking sector.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend is right. We must put our house in order in respect of the banking sector, and I come back to the issue of the culture.

I refer back to the comments made earlier by my hon. Friend the Member for Nottingham East. The public will not be convinced that things are moving on until they see a change in the culture of banking. Issues continue to be raised with all hon. Members about bonuses and people perceive many, although not all, of those at the top of the banking sector as being out of touch with what the public want.

We want to ensure that the Government have not only fully understood that, but actively undertaken work to ensure that new entrants can come into the process and, as my hon. Friend the Member for Cardiff South and Penarth suggested, to encourage the setting up of new mutuals. It would not be appropriate for me to go into all the international examples, but there are opportunities for co-operative and mutual solutions in the banking sector. We could also look more broadly at how not only new entrants but existing small institutions can be supported.

I would be happy to hear the Minister’s view of the amendments and what plans the Government have to encourage new entrants, support consumers and ensure that we make the changes so desperately needed to the culture of banking.

Greg Clark (Conservative, Tunbridge Wells)

That is a lot to fit into two minutes, but I dare say we will have a chance after the break to cover the points that have been raised.

I find myself back in my previous mode of being tempted by the hon. Lady’s amendment, although it is fair to say that she could have given her speech, commendable though it was, in opposition to her previous amendments. Nevertheless, she has arrived at the right point: we should strengthen competition in the banking sector, and I hope that one theme of this Committee, and indeed of the Bill’s passage through both Houses, is that we will make it unambiguously clear in what we say and what we put in the Bill that new entrants should see the British banking industry as an attractive place to compete and put some of the existing institutions under pressure. I therefore have no difficulty in accepting the Parliamentary Commission’s pressure and encouragement in that direction.

Amendment 26 would make it explicit in the Bill that the Treasury should be mindful of competition in banking when creating or varying the exemption from the ring fence for small banks. As I said, the goal of promoting competition is central to the logic of a small banks exemption; that is why we had the debate this morning about the de minimis level. When setting an exemption, the Treasury would therefore naturally have to consider the impact on competition. As the Government made clear in their first response to the PCBS, we accept the case for including competition among the conditions for setting exemptions from the ring fence in the Bill.

William McCrea (DUP, South Antrim)

May I draw Members’ attention to the fact that copies of the Financial Services and Markets Act 2000, as amended by the Financial Services Act 2012, together with other amended statutes, are now available in the room?

Clause 4 - Ring-Fencing of certain activities

Greg Clark (Conservative, Tunbridge Wells)

We were having an interesting debate about the importance of competition in banking. Before lunch, at least, I was feeling accommodating to some of the views that have been expressed. I am pleased to say that my lunch has not changed my mood in this respect. In fact, it might even have fortified the direction in which I was inclined. We will come on to talk at various points about various measures to strengthen competition, including in the important area of payment systems.

Amendment 26 suggests that the Treasury, in determining exemptions from the ring-fencing de minimis procedure,

“must aim to enhance competition”.

I find myself wondering whether the hon. Member for Kilmarnock and Loudoun is not going far enough; I would encourage her to be more demanding when it comes to the requirements to promote competition. The amendment gives rather too much leeway to the intentions of Treasury Ministers and officials in years to come, and I would have thought that it could be more robustly expressed. The hon. Lady will know that it is sometimes hard to measure intentions and it is harder still to determine whether those immeasurable intentions have been met in practice. That rather lets us off the hook here.

Amendment 26 also refers to

“UK institutions holding deposits below a specified amount”

and seeking this as an area where competition should be encouraged. As we have debated already, that is certainly a desirable area in which competition should take place. But there might be an opportunity here, not least because the Bill allows for activities other than deposit-taking to be included in future through a particular statutory instrument. However, to constrain the Bill to refer only to competition among UK institutions holding deposits is probably too narrow. It might be better for it to apply to the banking system more generally.

I have reflected on the amendment and the contributions so far and it is my firm determination to use the Bill to drive competition through the system. I will therefore reflect further on the amendments with a view, more than simply accepting their spirit, to ensuring that they go further and are more robust in their requirements on the Treasury in addressing these matters. I hope that satisfies the Committee.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am not quite sure what the Minister has had for his lunch. Whatever it was, it seems to have given him strength of purpose in coming back ready not only to take on the points made in the debate but to suggest that he will go even further.

I do not want to be churlish or to cast any aspersions on the Minister, but it might have been nice to have seen some of that resolve in the form of Government amendments tabled at this stage, so that we could have considered them in the context of the amendments we tabled as a result of the recommendations from the Banking Commission.

Given that the Minister seems to be in positive mode, I will resist the temptation to press that particular point any further. I welcome the fact that he has listened to what the Banking Commission has said. It very clearly recommended a specific requirement for a decision imposing or revising a de minimis requirement to have regard to its effect on competition in retail banking—new entrants in the market, in particular. That is why the amendment has been framed as it has.

It would certainly not be the intention in any circumstances to give the Minister too much leeway. We obviously want there to be checks and balances to take account of how Ministers come and Ministers go, as we often say. Future Ministers might not set such a positive tone as the Minister is setting or has set until now—although he may, of course, be reined in before the end of the sitting.

I hear what the Minister says about what would be on the face of the Bill, which would potentially constrain opportunities for the future. The Minister appears to be not only in listening mode, but also prepared to act in terms of the principles of what is outlined in the amendments. Indeed, if I understood him correctly, he will bring forward amendments in the future.

Greg Clark indicated assent.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

He is nodding. On that basis, I beg to ask leave to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 6, in clause 4, page 5, line 35, at end add—

‘(8) Within six months of this Act receiving Royal Assent the Treasury shall carry out a review of the regulated activities of dealing in investments as principal, the purposes of which review shall include consideration of—

(a) safeguards that may be required to prevent the mis-selling of investments as principal as part of the core services of each ring-fenced body;

(b) a definition of “simple derivatives”, will reference to their size, maturity and basis, the dealing of which will be permitted under section 142C;

(c) the establishment of a maximum ratio, relevant to the size of the balance sheet of a ring-fenced body which provides core services, for the value of investments as principal held as financial assets or liabilities on its balance sheet;

(d) the establishment of a maximum gross volume on the balance sheet of a ring-fenced body which provides core services, for the value of investments as principal held as financial assets or liabilities on its balance sheet; and

(e) the information that may be required for an independent valuation of a financial institutions’s assets or liabilities in respect of relevant investments as principal.

(9) The Chancellor of the Exchequer will—

(a) lay before Parliament a report of the review in subsection (8); and

(b) provide, by Order subject to an affirmative resolution of both Houses of Parliament, such safeguards as may be set out in the review in subsection (8).’.

We now come to the amendment to new section 142(d) of the changes to the Financial Services and Markets Act suggested by clause 4. Members will be delighted to know that this is the first of the Labour party’s very own home-grown and drafted amendments; it is not at all cut and pasted from the back of the Parliamentary Commission on Banking Standards report, but is very much inspired by the work that the Commission has undertaken so far.

We felt it was important to press the point a little further. We are talking about the sale of derivatives, as well as the activity of providing or selling what are sometimes called investments as principal, or financial instruments such as futures, options or other forms of derivative. The scenario of when that takes place within the context of a ring-fenced retail bank has received considerable attention and discussion.

I am sure hon. Members will be familiar with the original stance taken by the Vickers Commission in its independent report in September 2011, which basically said that derivatives trading should not be allowed—full stop. It was very firm on that. The Commission thought that such trading was a problem for a number of different reasons, and that it should be countenanced by a ring-fenced retail bank only if it was acting as an agent for products sold by others, certainly not if it was acting in its own right as principal provider.

The Parliamentary Commission, however, has subsequently looked into the issue in further detail. Vickers spent a lot of time looking at the capital adequacy of the structural issues, and perhaps did not drill into the derivatives questions as much as the Parliamentary Commission has. It recognises that there are certain services on the margins where some very simple derivative products might be permissible, but they underline the caveat. They caution that

“Allowing ring-fenced banks to sell derivatives other than as an agent creates additional prudential and conduct risks.”

The prudential risks are self-evident because of the historic growth of derivatives activities, particularly in the last decade. The mention of conduct risks is an allusion, no doubt, to the mis-selling of derivative products, such as interest rate swaps and hedging instruments, in which many small businesses found themselves entangled. We all know the story—compensation worth billions of pounds has been agreed for such customers. The Commission has been pretty sensible on the matter, and the Opposition agree with its stance.

Clearer protections are needed to prevent abuses from occurring in the ring-fenced retail banks, where derivatives will be allowed in limited circumstances. The mis-selling of interest rate swap products to small and medium-sized enterprises illustrates the danger of information asymmetry, where one party to a transaction is very savvy and knows what the returns will be but the other party—perhaps the purchaser—is not as informed or as aware of the risks.

Financial services practitioners have exploited such asymmetry between customer and vendor for far too long. More broadly, a key lesson we have learned is that to place the financial services sector on a more sustainable footing, we have to leave behind the era in which firms thought they could extract profit on the basis of customer ignorance or lack of information. The practices of that era have to go, and the financial services sector must make its returns on the basis of genuinely added value and the professional acumen that financial intermediaries add to products.

We are in a period of transition from the previous era to a new one, and derivatives are an important aspect of that. They are a lucrative business for many banks, which will, no doubt, attempt to test the boundaries and see what can be done on the margins.

The Parliamentary Commission made it clear that three tests should be met if derivatives are to be permitted in the ring fence. First, the Commission wanted there to be adequate safeguards against mis-selling, and in drafting amendment 6 we were guided by the Commission’s recommendations:

“Within six months of this Act receiving Royal Assent the Treasury shall carry out a review of the regulated activities”

of derivative trading within the ring fence. It is essential that we consider what safeguards might be required to prevent the mis-selling of derivatives.

The Government have attempted to reflect the Commission’s views, particularly those expressed in the first report, and the Minister has published some draft secondary legislation on the matter. From what I have seen of it, however, it does not really get into the detail of the mis-selling safeguards that might be needed. It covers other aspects, but it does not give the FCA or the PRA any new powers of enforcement in relation to mis-selling. We are still disentangling the issue of interest rate swap selling. The FSA has done a lot of work on that and on ensuring that the big five banks make arrangements for compensating their customers, which is the immediate mis-selling problem. There are, however, risks of mis-selling in future, and the secondary legislation does not really deal with those risks.

The second test that the Banking Commission set out was that there needed to be a clear definition of a simple derivative. If we are going to allow simple derivatives, versus complex derivatives which, by extension, are going to be disallowed, then we have got to make sure that we have a line drawn on that.

Again, the Treasury and the Minister have published draft orders on what those particular changes are going to look like, in which they define what they regard as a derivative. First, they say that derivatives should include

“instruments designed to tackle interest rate risk”.

We can all imagine those fixed-term mortgage products which I suppose you could say were a simple form of derivative because they are normally sold through the banking environment, but a lot of people might not realise that there is a hedging flavour to those.

The Treasury then adds on other types of derivatives that it thinks come under this definition—exchange rate risk, default risk, liquidity risk or dealing in assets included in the liquidity asset buffers that those banks themselves may need to manage. As I said on Second Reading, that is quite a broad definition of derivatives. In fact, at the time I suggested that it would probably be more useful if the Minister could say what would not be included in that definition. It would be helpful and would give a bit of colour and flavour to the Committee, if we could bring this to life. Give us an example of particular products that would be on the wrong side of the line; what sort of products are permissible derivative activities? That definition is still untested.

We have put in our amendment that we need, within six months, a proper final report on what that definition should be, particularly with reference to the size and maturity of those derivatives and the basis on which they have been agreed. The third test that the Parliamentary Commission set in respect of derivatives was this question about limits on the proportion of a bank’s balance sheet that it can expose to derivative activities. The Parliamentary Commission talks about different ways to achieve that. First, it says that there should be a maximum ratio of derivatives to core services relative to the size of the balance sheet. That is a way of devising a metric to test what that maximum limit ought to be. They also say that derivatives should represent a maximum gross volume on the balance sheet of a ring-fenced body that is providing core services. So it has two tests for that and I would be grateful if the Minister would elaborate on that point.

As I was flicking through the draft statutory instrument—you can imagine me with my candlelight late at night, 1 am— I lighted upon the small print that says this is the level, this is the cap, this is the maximum volume. As I recall, the draft order has a percentage figure, but the actual number is missing. It is just one of those frustrating moments when preparing for these things. The Minister has produced the draft order, but they have not quite got to what they feel the figure ought to be. I hope, now that we are in Committee, that the Minister will be able to say, “What should that maximum ratio and volume be? Can we put a figure it?” That would be helpful to get a sense of the Government’s thinking.

The other aspect that we have put in our amendment is that we feel that, as a way of assisting the regulator, the Treasury needs to set out more clearly the information that might be required for an independent valuation of a financial institution’s assets or liabilities in respect of derivatives. Trying to understand, measure and get a sense of quite how vast derivative exposures are, whether they are mark-to-market or on whatever basis, is a big task. It is important that we get a sense of what the definitions are, how we are going to get the information necessary and what the basis of the evaluation process will be, and we also put that in our amendment.

The amendment is pretty straightforward. It simply calls for the Treasury to do more work, but with a deadline attached; we hope that that is not controversial. We need some assurances from the Minister because some very strong views have been expressed on the matter. In the evidence about derivatives within the ring fence that he gave to the Parliamentary Commission, Martin Taylor said:

“I can’t see the point of having a fence round the chicken coop, electrifying it to keep the foxes out and then inviting a family of tame foxes to live inside it.”

That is a good way of saying that we have to be very careful about this issue. Vickers clearly had a suspicion about derivatives within the ring fence, which is why he said that that was absolutely forbidden and we had to keep them out.

We can see that there are some questions, on the margins, about ordinary products; that is why the situation needs to be tested. We want to tease the issues out a little more. Setting the deadline of a six-month period after Royal Assent would be the best way of approaching a review. It is reasonable to ask for clarification on the questions covered in the amendment. The Minister will no doubt say that the Prudential Regulatory Authority will review the whole process annually, and that there is a separate Commission recommendation that the PRA’s annual review should also look at some derivatives issues and test how derivatives are working within the context of the ring fence. However, that is a separate issue from establishing a baseline from which to measure how far derivatives activities should be allowed. We need the Treasury to lead on that and to come to a conclusion. Of course, we then need the PRA to keep an eye on it, monitor it and audit how things are going, but that is not a substitute for a review.

The public and the business community will want to know—especially as we have had such a scandal about mis-selling of interest rate swap products—what steps the Government are taking to prevent mis-selling. It is not simply a question of mopping up the problem that has occurred; we must prevent difficulties arising again. That is why we have tabled our amendment, and I hope that hon. Members will support it.

Greg Clark (Conservative, Tunbridge Wells)

Here is another novel twist for the Committee. We spent the morning debating amendments suggested by the PCBS and tabled by the Opposition, and now we have the Opposition anticipating amendments that the PCBS might have suggested had it got to that point in its deliberations.

It is useful to be able to debate these matters, which, I think, have been one of the more difficult things both for the Independent Commission and the Parliamentary Commission to reach a settled view on. There have been discussions backwards and forward around this issue. The Government referred the matter to the PCBS and asked it to advise us in its most recent report, and it has thrown it back to us to make the detailed rule. The issue is clearly exercising all sides.

As the hon. Gentleman said, the PCBS has said that there should be three safeguards: adequate protection against mis-selling; a durable definition of what is and is not a simple derivative; and a limit on the proportion of such products on a bank’s balance sheets.

There are a couple of outstanding issues that the Committee needs to reflect on. The first is that, as the hon. Gentleman acknowledged, the Parliamentary Commission itself is continuing to reflect on some further aspects, including conduct. He rightly said that that was very important, not least for our constituents, many of whom have been mis-sold interest rate swaps and so have a keen interest in this matter. The Parliamentary Commission has said that it will opine on what the provisions should be on the conduct of the sale of derivatives, and it is appropriate that it should do that.

The other factor that the hon. Gentleman mentioned was that we have published a draft statutory instrument. Given that those recommendations from the PCBS followed some time after some of its other recommendations, the consultation in line with its report will take place in the summer.

Nick Smith (Labour, Blaenau Gwent)

I listened carefully to what the Minister said about the difficulty of reaching a settled view on some of these issues. Indeed, in the Treasury’s note on this, there is talk in paragraph 2 on page 18 of further consideration at a later date. However, as we are here in the Bill Committee, will he give us some examples of the types of safeguards that will be needed to protect the consumer? We need more detail, please.

Greg Clark (Conservative, Tunbridge Wells)

Indeed I will; I hope that the Committee will be satisfied. The amendment proposed by the hon. Member for Nottingham East calls for a review six months after Royal Assent is attained. In effect, we propose to consult in detail over the summer, including on the points raised in the Parliamentary Commission’s recent report that are reflected in the amendment before us. All of those points will be subject to a formal consultation to allow us to establish those positions not six months after Royal Assent but six months before. That is the right way to do it.

One of the matters to be consulted on will be the types of contract that would apply. The hon. Gentleman asked about what should be included in that, and what should not. Again, that will be put out for consultation, but we have limited the types of derivative products to those set out in the current FSA handbook; that is to say that it is principally swaps at the exclusion of option-based derivatives. In other words, there should be a role for hedging against the most common risks that apply and a clear relationship between the price of the underlying asset and the swaps. We would expect anything more complex than that to be outside. However, these matters are reflected in the draft.

In terms of restrictions on the complexity of the instruments, article 4(2)(b) places restrictions on the pricing of derivatives: there should be a clear relationship that means that it is possible to value the portfolio by an objective standard. There are various other aspects: the availability of a market price for the contract is one of the tests that should be there, as is the question of whether a ring-fenced bank can have a limit on exposure. That overall limit of exposure is something that the PCBS said we should consult on over the summer. Valuations are important, but the main purpose is to make sure that the regulator is powerful and competent enough to do its own valuations; it will, in effect, make that decision.

Stephen Doughty (Labour, Cardiff South and Penarth)

Will the Minister share with us what the Government have learned from the Markets in Financial Instruments Directive process and the MiFID II talks that have been ongoing? Those are a wider set of regulations that will cover a wider set of issues, but much of that has looked at the status of derivatives and issues that have come out of the financial crisis. To what extent have the Government taken what they learnt in that process to address this? It would be helpful to have a comment on that.

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman makes a good point. We have been learning from—and, of course, influencing—that process. The progress that we have made on MiFID in terms of transparency of some of these products is important. They are a very narrow subset of products to the customers of ring-fenced banks and the degree of complexity anticipated in MiFID and the debate on transparency, dark pools and the various technical and sophisticated investment opportunities are absolutely excluded from this purpose.

The intention is to consult over the summer on both the draft statutory instrument and the recommendations made by the PCBS. I confirm that all the points raised by the Opposition amendment will be included in the consultation, so we will have views from stakeholders across the board. For reasons that hon. Members have expressed, it is right that we have that consultation during the Bill’s passage, rather than beyond the end of Parliament’s consideration of the Bill. In effect, the consultation will be six months before Royal Assent, rather than six months afterwards. The results of the consultation will be reflected in the final statutory instrument, which I confirm will be under the affirmative procedure, so there will be every opportunity for debate.

Nick Smith (Labour, Blaenau Gwent)

The Minister says that the consultation is important, but I do not think we should, to use a fashionable phrase, kick the can down the road for too long. We need to firm up some of the important issues. Do the Government have a view yet on the proportion of a bank’s balance sheet that should be taken up by such products? Do the Government have a working position?

Greg Clark (Conservative, Tunbridge Wells)

The PCBS is inquiring into that, and we asked it to advise us. When we referred the matter to the PCBS, it reflected the range of responses to the Government’s consultation on the original Vickers review, which was fairly balanced. We thought that the opportunity of having an expert commission consider the matter, of having another pair of eyes, was sensible. The Commission is considering that, and its advice will be included in the consultation.

I totally agree that we should get those matters tied down. It is right to get agreement in advance, and I understand the reasons for that. The amendment gives us an opportunity to debate the intention of the arrangements for derivatives, but I think everyone would agree that it is better not to wait to finalise such things until six months after Royal Assent but to finalise them in advance.

We have a consultation, and it will include the points that have been raised, as well as further reflections, hence the timing of this summer, which will give the Parliamentary Commission further time to complete its inquiry.

Chris Leslie (Labour, Nottingham East)

I am slightly worried that a pattern is emerging in the attitude towards the legislative process, and towards this Committee, in pinning down some of those things. The Minister says there will be consultation over the summer, but can he tell us by what date the Treasury will conclude those issues? For the sake of trying to hold the Treasury’s feet to the fire, we have suggested a date six months after Royal Assent, but can he give us a firm date by which the Treasury will publish such a review, as we have requested?

Greg Clark (Conservative, Tunbridge Wells)

Yes. Our intention is to debate those things before the Bill passes to the House of Lords, so there will be plenty of opportunity to consider that and to be informed by the consultation. As hon. Members know, that will give plenty of time for the Parliamentary Commission to complete its recommendations. There is no hidden Government agenda. We have been explicit in asking the Parliamentary Commission for its advice, and it has given some of that advice, but not all of it. This is an area on which we want to proceed with consensus, if possible, but we certainly want to proceed with the expert advice of the Commission and the consultation on which we are about to embark.

Chris Leslie (Labour, Nottingham East)

I appreciate that the process is difficult, and I appreciate that the Parliamentary Commission has a lot of work, but, nevertheless, I am left feeling as though we have been given a holding reply. As hon. Members may know from tabling named day questions, a Minister will reply, “I will answer the hon. Member shortly,” and then the hon. Member has to wait and wait. It feels like the Minister is treading water.

We specifically want to know certain things that will be further considered by the Commission, and I accept that pinning down some of those issues is difficult, but it would help if the Treasury gave its view. That does not necessarily have to be a final, conclusive view, but it could be a range: “The maximum ratio will be something between 10% or 30%”—or whatever it happens to be. That would give us some guidance, if the Minister has a sense of what the range will be. That would give a starting point for the Parliamentary Commission to reflect on. Given that the Treasury has even more resources than the wonderful resources that the Parliamentary Commission has—although it has quite a few resources; we will find out about the bill for that at some point in the future—it would help if the Treasury stuck its neck out a bit and said, “If you agree with these particular parameters, then in what ballpark are we talking?” Moreover, some of these suggestions relate to issues where there is a lot of public pressure, particularly on the conduct side. It is not necessary simply to wait for the Parliamentary Commission to talk about action to prevent mis-selling from occurring in the future. This is a more urgent question.

I am left in two minds about whether to test this issue and to press the need for a review six months after Royal Assent, though clearly, the Minister said that his intention was to have it before that process, so I feel as though it would be slightly inadequate to do that. The Minister did not give examples of derivatives that he thought should be in the ring fence versus those that should not be. He did not give us a range of where he felt, in broad terms, those ratios or gross volumes ought to be, so I am in a quandary as to what to do with this particular amendment. On this occasion, it might be sensible to give the Minister the benefit of the doubt, because he is such a genial fellow and I know—I think—that he means well. I might come to regret that statement, but my hon. Friends should not hold that against me.

I will be happy to withdraw the amendment on this occasion, but it would help if the Minister would consider writing to the Committee or to the Chairman of the Parliamentary Commission as a result of this debate to say, “We are consulting and do not want to impede that consultation process”, but, to coin a phrase, he is not starting with a blank sheet of paper on this issue; he has a view, broadly speaking, that this is the sort of scale we think derivative activities ought of be and these are the sorts of instruments that we think could or could not be in there. That would be helpful and if the Minister were able to give a little inflection or a nod in that direction then I would feel more satisfied—none has come. I shall not withdraw the amendment just yet; I will keep it on the table if that is alright.

Greg Clark (Conservative, Tunbridge Wells)

I am entertained by the hon. Gentleman’s speech, because it is customary to speak in favour of one’s amendment. He makes some valid points about wanting to have these things clear and upfront—we all have an appetite to do that—but the Committee will want to study the terms of his amendment. He did not address that at all: quite the opposite. All that the Opposition amendment would do is, within six months of the Act receiving Royal Assent, require the Treasury to carry out a

“review of the regulated activities” .

It then deals with the various headings of that review. There is nothing in what the hon. Gentleman is putting before the Committee that would, in any way, speed up the answering of those questions. It is rather the reverse—it is remitting it until after the legislation has left the House.

The Government’s intention is in line with what the hon. Gentleman is arguing for—rather than what he is proposing in his amendment—and that is to move as quickly as possible to clarify what the precise arrangements will be while the Bill is still before the House. We have already given him some examples of the products that will be in and out: interest rates, hedging and foreign exchange risks—obviously for small businesses engaged in overseas transactions. That is one of the arguments that has been made in favour of these products being available within their ring-fence, so that exchange rate risks can be hedged and covered off. We do not expect to see here credit default swaps, options and the various derivatives that do not have sight of the underlying assets. These will be set out in the consultation. I am happy to reassure hon. Members that when the consultation is published, which will be in the summer before the Bill goes to the Lords, we will put forward the number we feel should be consulted on about what the exposure of a bank would be. In short, we are certainly going a long way further than the amendment requires. It will be an exhaustive consultation and will reflect the points made but it would be an eccentric decision to approve an amendment that would require these questions to be answered six months after Royal Assent rather than during the passage of the Bill.

Chris Leslie (Labour, Nottingham East)

I am grateful for those clarificatory remarks. I appreciate the Minister’s helpful interjection. He will forgive me for drafting an amendment that sought to put a long-stop date on the process. In drafting these things we tend to consider what would be reasonable. One month after Royal Assent sounds pretty quick, so we chose six months. We were trying to find a device to tease out from the Treasury its view on the dimensions of the saga. I still wish we were having a Committee stage of a fully formed Bill so we could test and scrutinise those dimensions. We are legislating in the dark a little bit here. So we are saying, “Yes, all these powers should be allowed but we are not really sure quite what those powers are. Just trust us. It will come in due course in secondary legislation.”

I know there is an affirmative procedure but the Minister and I both know that that is not necessarily the most satisfactory form of scrutiny of these very complex issues. We have therefore tabled another amendment about a different form of scrutiny process for those complex statutory instruments. I will seek to withdraw the amendment because I think the Minister has said that it is his intention to do exactly what it proposes before Report. We want more specificity from the Treasury before Report, even if it is in terms of the ranges of what we are talking about. Otherwise the House of Commons will be legislating without any sense of the broad parameters we are talking about. I beg to ask leave to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 3, in clause 4, page 6, line 24, at end insert—

‘(1B) If the order confers powers on a regulator or authorises or requires the making of rules or other instruments by a regulator, then those powers, rules or instruments are to be subject to annulment in pursuance of a resolution of either House of Parliament.’.

This is another of our very own homespun amendments. We are starting to look at this rather peculiar new section 142F, which introduces a set of order-making powers for the regulators. This is not simply creating quasi-legislative powers, which we often delegate to Ministers to do on the detail, but in turn, as I read the Bill, Ministers will be able to delegate to the regulators to make rules, to make the law and essentially to say this is how certain activities must be done. This is apparently known as tertiary legislation.

Members will be familiar with secondary legislation and how we have an affirmative procedure where there is an active vote of Members to approve an order that Ministers want to have if it is a serious issue. There is also the negative procedure. Essentially an order is made by a Minister and is taken as being enacted. It lies on the Table for Parliament to take note. If a certain number of Members—although quite how many is not defined—pray against that process, the Minister can be so moved as to agree to a debate on a negative resolution. That is the secondary legislative process.

We are talking, however, about a tertiary set of legislation here, one that is essentially delegated to the Prudential Regulation Authority and the Financial Conduct Authority—at least, as I read the Bill. Ministers make the orders, and in turn those orders can give order-making powers to the regulators, so there is a sort of trickle-down. That is perhaps something we have grown used to from this Government, but it raises a number of questions about who makes the rules and what those rules are.

It would be useful if the Minister could take this opportunity to elaborate a little and help the Committee by setting out a few examples of the sorts of order-making powers that might be delegated to the regulator, so that we can at least envisage, in an anecdotal way, what might be under consideration here. Until we have a sense of what those powers are, we suggest that it would be safer—and I know that various hon. Members will feel strongly about parliamentary process—to take steps to ensure that the delegated regulation is brought back a step. It should come under the auspices of the parliamentary process, albeit, to be fair, under the negative resolution procedure, whereby the House of Commons and the House of Lords do not necessarily have to debate and vote on each statutory instrument, but if the instruments are prayed against there is a chance that they could be brought forward by the Minister for debate. We feel that would be a better and neater process, and would make sure that Parliament still has a role and some oversight.

We need a sense of what exactly is being talked about here; it is almost as though this small new section is a catch-all, with the Government saying, “Oh well, if we have left anything out the regulators will be able to do whatever they like in terms of rule changes and legislative changes—we will just leave that to them;” I am not sure what the scrutiny process would be for that. We are starting afresh, with new regulators, in about 10 days’ time; will the Minister help us by saying what the intention of the regulators will be in terms of telling the wider world about their order-making activities? Will the PRA or the FCA’s practice simply be to put such things on a website? Will they take out advertisements in the Financial Times saying that they are about to legislate in their own little way? What is the process for regulators making those changes? Or will this measure essentially be supplementing rule-making powers that they already have? Given that we have new regulators coming on stream, it would be useful to have a sense of that.

Our amendment would make a slight change to proposed new section 142F of the Financial Services and Markets Act 2004 as inserted by clause 4. That change would not be massively significant, but would be significant insofar as there would at least be a process to ensure that there was a little more potential for scrutiny than there is in the Bill. It would safeguard the accountability of rule makers. We are already vesting a phenomenal amount of power in the Bank of England, in particular—let’s face it, when we talk about the PRA we are essentially talking about the Bank of England; even if we are talking about the FCA, there are provisions in the Bill and in the Financial Services Act 2012 to the end that the PRA can direct the FCA, so we are talking about the Governor and the Bank being able to direct the regulators—and so we need a few checks and balance to help counteract that. That is the gist of amendment 3, and I hope hon. Members will support it.

Greg Clark (Conservative, Tunbridge Wells)

I am grateful to the hon. Gentleman for his speech, because I am struggling to understand the basis of his amendment. From what he said, however, I think he may be labouring under a misapprehension: there is no order-making power for the regulator in the Bill. The regulator will have an ability to make rules under orders that have previously been agreed by Parliament. Those rules are the normal rules that regulators apply, all the time, to turn the purpose they have been given by legislation into action. That explains why the hon. Gentleman has moved the amendment that he has, if he thought that regulators were directly able to make orders—something that is not possible.

What the hon. Gentleman proposes is an extraordinary innovation. In the House we sometimes debate Henry VIII powers, which are given to Governments to do things and repeal things that are unspecified during the consideration of a Bill. Here we have the converse of that. If this measure were adopted, it would give unrestricted powers to Parliament to annul any rule that a regulator might make—it is more of an Oliver Cromwell power than a Henry VIII power in that sense. Not only that, but it would apply in either House, so a vote in the House of Lords or the House of Commons could suddenly strike down any rule made under orders that have been legitimately entered into. I am sure that was not the hon. Gentleman’s intention, but I understand from what he said that that may be slightly awry.

I think everyone agrees, and certainly the Parliamentary Commission on Banking Standards agrees, that the precise details of the ring fence should be in statutory instruments—[Interruption.] Perhaps I should take an intervention from my hon. Friend the Member for North East Somerset on Cromwell. The precise details should be set out in statutory instruments and of course the regulator has to promulgate particular rules to apply those. They are the bodies that we vest with that; we set them up as the bodies with the technical knowledge and details to be able to undertake their work. The hon. Member for Nottingham East asked for an example of this. Let me take an order that has been published for scrutiny before it has been properly debated in this House, which is the draft ring-fenced bodies and core activities order. It provides for cases where depositors who were eligible to bank with a ring-fenced bank may no longer be eligible to do so. The order allows the regulator to make rules specifying what information a bank may need from a depositor to be able to ascertain whether they qualify to bank in a ring-fenced bank or not. The terms of that order are narrow, technical and operational rather than concerned with conduct or policy.

The process for the regulator ultimately being able to introduce rules should be at the end of a cascade of measures that involves parliamentary scrutiny at every stage, and that is what we doing; we are debating the overall architecture in this Bill, there will then be statutory instruments that then give particular requirements and responsibilities to the regulators, but as is always the case in financial services regulation, these are requirements or invitations on regulators to make rules. There is nothing unusual about that. I am sure it is not the hon. Gentleman’s intention, but a veto exercised in this way by either House would be totally unprecedented. None of the wide range of financial services regulations, whether in Financial Services and Marketing Act 2000 or others, is subject to this.

In response to the Delegated Powers Committee, we have accepted its recommendation for the order-making powers that give the power to make rules. It is satisfied with the way we have discharged that. It is an affirmative procedure; it was originally proposed to be a negative procedure. This is a different matter and I hope that the hon. Gentleman will be reassured as to the contents of the Bill.

Chris Leslie (Labour, Nottingham East)

I know that hon. Members will be interested in where the boundary line is being drawn regarding the role of Parliament in scrutinising Executive activities; whether that is the Executive in the form of ministerial Departments or in the form of the regulators. I do not regret tabling the amendment because I think that it is important to test what scrutiny there should be of those order-making powers. I am glad that the House of Lords Delegated Powers Committee did look at this particular issue and I think it is useful to have seen what might have been negative statutory instrument arrangements dragged into an affirmative process, if they were themselves delegating rule-making powers in this particular way. That is one safeguard to be welcomed, but I do not have any regrets about trying to reverse-engineer the Henry VIII powers. The Minister may accuse me of having Oliver Cromwell tendencies, but, if I am a roundhead, there are certainly some cavaliers in the Committee, such as the hon. Member for North East Somerset. At this point in time, however, roundheads and cavaliers would probably agree that we need to keep an eye on what Ministers are doing, in the name of either the Crown or the people, so it is important that we safeguard Parliament’s role on these issues.

To my great regret, I do not think that we, as Members—especially when in opposition—actively scrutinise the Order Paper sufficiently to look at the negative statutory instruments that the Government churn out on a daily basis. We need to be schooled in making sure that we keep a beady eye on what exactly is being done in those prerogative powers, though trying to figure out what the instruments are is a big process. I was reassured when the Minister said that those powers will be used only for narrow, technical and operational purposes, which is a good way of constraining what might be done through those rule-making arrangements.

Importantly, we have had the opportunity to say that we want Parliament to scrutinise such matters in this way and we have seen some movement on to the affirmative process, which I will take as a positive development. For those reasons, I will not press the issue to a vote, so I beg to ask leave to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 4, in clause 4, page 6, line 38, at end insert—

‘(c) has attempted to carry out an excluded activity or to contravene any provision of an order under section 142E.’.

We are still on page 6 of the Bill, but now we are down to the depths of line 38 on that page. We move into proposed new section 142G, which is a provision in respect of the restrictions on ring-fencing bodies and how they may not carry on excluded activities or contravene certain prohibitions. It is the prohibition aspects that we want to look at in particular. The first subsection states:

“A ring-fenced body which…carries on an excluded activity or purports to do so, or…contravenes any provision of”—

any of the other orders provided—

“is to be taken to have contravened a requirement imposed on the body by the appropriate regulator under this Act.”

Essentially, we are talking about part of the enforcement process that makes sure that breaches of the rules are punished. We felt that it was important to add a third category into the subsection that was about not just having contravened any particular process, but having attempted to carry out an excluded activity, because attempts to breach the rules also need to trigger enforcement action.

It is important that we look at the test that we place on the behaviour of banks to make sure that, when they look at the ring fence rules, they do not go right up to the letter of the boundaries of impermissible activity but, as was said earlier, adhere to their spirit. If earlier we were legislating about the letter of the rules, perhaps this issue is about the spirit of the rules, with the banks adhering to the system with enthusiasm and not trying to game it or find ways around it.

We all know that the profit incentive probably means that banks will test the ring-fencing rules and attempt to get around them. We therefore tabled this amendment, which is one of several at the heart of tackling banks’ attempts to game the system in that way.

We do not think that regulators should, in absolutely all cases, need to identify a specific reason to take action, whether that happens to be a warning notice or anything else. It is a bit like tax avoidance regimes; there are schemes that have been dreamt up that are possibly for avoidance purposes. If there is a sense that there are attempts to game the system, a precautionary principle should be taken in respect of how those are pursued.

The amendment seeks to introduce that precautionary principle into the definitions of a contravention of those regulatory requirements. The Parliamentary Commission on Banking Standards said in paragraph 133 of its first report:

“It is essential that the new framework for the ring-fence and the secondary legislation and rules that flow from it are not seen by the banks merely as a basis for negotiation…The regulator’s decision-making, in line with its judgement in pursuit of its objective in relation to the ring-fence, should not require it to identify a specific breach of rules in order to take action to maintain the integrity of the ring-fence.”

It is very much in the spirit of the Parliamentary Commission’s own recommendations that we bring the amendment forward about that particular point of clause 4. In our view, it is part and parcel of the electrification of the ring fence. Indeed, the Chair of the Parliamentary Commission on Banking Standards and the Treasury Committee, the hon. Member for Chichester (Mr Tyrie), said in a recent interview:

“What we’ve done with the Commission proposals is to put back some of that stiff separation into the ring-fence and then make clear that the key problem—that banks are going to be at the ring-fence all the time, which will be a nightmare for regulators—needs to be dealt with”.

That is absolutely what I think the amendment would help to achieve. The former chief executive of Barclays, Martin Taylor, said:

“Now you know you need them [the bankers] in the debate about the future because they understand it better than anybody else does. On the other hand you don’t want them to be able to game the new regulatory settlement it seems to me.”

That was in the report of the Future of Banking Commission, back in March 2010, which I think was commissioned before we got into this particular process. The rules should imitate aspects of the criminal law in this area, so regulators can punish not only breaches but also attempts to breach or conspiracies to breach the rules. That is why our amendment imposes that standard on the bank, and also sends a message about attempts to game the system.

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman rightly refers to the memorable phrase of the Parliamentary Commission on Banking Standards—it wanted to see the “electrification” of the ring fence. That is something on which we agree with the Parliamentary Commission.

The analogy is apt, because the point of a ring fence is that if you touch it you get an electric shock. You do not get a shock if you go near an electric fence, and so this is going rather further than the Parliamentary Commission has advised to date. The points that the hon. Gentleman makes are therefore novel in respect of how banks and other financial services organisations have been regulated to date.

Criminal law has taken a different view of these things in the past, but I will come to some reflections on how we might take the matter forward. There would clearly be a contravention of regulatory requirements, for which the regulator can impose sanctions. A contravention of the requirements can clearly trigger a bank’s being forcibly separated. It is very important that the ring fence is strictly enforced.

Proposed new section 142G provides that any breach is a breach of regulatory requirements, with unlimited fines and in some cases withdrawal of permission to operate as well as the separation of powers, which we will come to. It is very important that those powers should be there. Banks’ past conduct is also a factor that the regulator should be able to consider in deciding whether to use its power to require separation. As we have made clear, an amendment about separation will be brought forward on Report.

For the purposes of today, how the hon. Gentleman’s amendment is constructed would introduce something unprecedented in financial regulation. In no other case is attempting to contravene a regulatory requirement a contravention in itself. Establishing whether a firm has attempted to do so might be problematic.

However, the Commission, and indeed the whole House, is concerned with the spirit of adherence to the rules as well as adherence itself. These are matters relating particularly to the conduct and the culture of the banks, on which the Commission is continuing to deliberate. It will produce a report about the issues. As I said earlier, if it has recommendations that pertain to the conduct of banks in this regard, of course we will consider them seriously. We have made commitments that we will ensure that Parliament has the chance to consider them. The amendment is not right in terms of the Bill as it stands.

Chris Leslie (Labour, Nottingham East)

I am sorry that the Minister is taking what sounds a little like a gentlemen’s club attitude here—“If you chaps test the boundaries a little, well, good luck to you; as long as you don’t cross that particular line you are fine. Just do what you can to get under it or round it.” Surely he would accept that in lots of areas of the law there are other instances of criminal or other offences and lesser offences of attempts to do something. The ability to prove attempted contraventions is well established in our legal processes.

Greg Clark (Conservative, Tunbridge Wells)

I invite the hon. Gentleman to reflect on the purposes of ring-fencing. We have debated them this morning. The purposes of ring-fencing are to provide that there is continuity of services to core depositors, for example, and that there is the ability to resolve the bank successfully. Those are tangible requirements and either a ring-fenced bank has breached a prohibition or it has not. If it has not, it has not exposed the financial system to risk in quite this way. It is important that we and the legislation should be clear that there are consequences, with the full force of regulatory action behind them, if a bank breaches a prohibition.

Such questions of intent are tied up with cultural aspects. There would be a risk of a lack of clarity in the legislation. The analogy of the electrification of the ring fence was, I am sure, deliberately chosen. I dare say it was in the Commission’s mind that the consequences come from touching or breaching the ring fence. The Commission deliberately reserved a right here—indeed, it is coming on to talk about the general aspects of the culture and standards in banking in particular. There will be the opportunity to consider what it says there. These are different circumstances.

Stephen Doughty (Labour, Cardiff South and Penarth)

My hon. Friend the Member for Nottingham East made a very strong point about the attempt function in other parts of the law. Does the Minister not agree that what our constituents find so frustrating about the banking and financial sectors, or in taxation, is these constant attempts to duck and dive and wheedle around? They want to see tough action and they want those who attempt to circumvent the system to be punished and also to face some sort of sanction or prohibition.

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman is absolutely right, and the Commission is producing its next report on precisely those subjects. There are the hard rules and it is important that they should be clear and enforced; then there are the important aspects of the cultural deficiencies—or, as the Commission Chairman put it, the standards in banking.

Those are important matters, and they give rise to precisely the questions that the hon. Gentleman raised about a connection that is fairly common in the criminal law—namely, that conspiracy and intent carry consequences and are subject to sanction in themselves. That is not part of the financial regulations we have—it is alien to them—but the Commission may make recommendations to the effect that more of that approach is fed into the Bill.

Nick Smith (Labour, Blaenau Gwent)

I hear what the Minister said about clear rules on conduct. He went on to the more difficult issue of trying to change culture and how we do things round here, which is often a big problem for large organisations. What suggestions does he have for a more straightforward, more consumer-oriented culture in the institutions he is talking about?

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman raises a big and important matter. A number of things contribute. One is the leadership from the top and the consequences that have been visited on the banks for the failure of their culture. The taxpayer has footed the bill for a lot of the failures, but so have the banks’ shareholders. Quite rightly, some of the managers have formed a view that operating against the interests of its customers and shareholders is not the best way for a bank to prosper. That is, I think, the beginning of a change in attitudes.

The regulator also has an important role to play. Another contribution will come from the fact that we have made changes to the regulatory system—that includes the Treasury Committee, on which many hon. Members have served—to allow the regulator to look in a more nimble and forward-looking way for prospective breaches of the spirit of the rules. Greater shareholder activism is another aspect that can contribute.

There is an acceptance, which we should reinforce—I am sure the Parliamentary Commission will want to reinforce it—that we should get away from what I am told Bob Diamond said about culture, which is that culture is what people do when nobody is looking. There is a requirement for cultural change, and it is important that the Commission is now devoting itself to addressing that. However, in looking at clause 4, we need to set out the hard and fast rules.

Chris Leslie (Labour, Nottingham East)

The Minister has been generous in giving way. He said, and he has said this on other occasions, that he wanted to support the letter and the spirit of the ring-fencing concept. He is now putting the spirit element purely into the standards, culture and governance box, but it is important that we enforce not only the letter but the spirit of the ring-fencing rules. We know what the letter of those rules is, and the Minister has talked about touching the ring fence and getting a shock from it, but how will he enforce the spirit of the ring fence?

Greg Clark (Conservative, Tunbridge Wells)

As the hon. Gentleman knows from the Bill, there is an explicit responsibility on directors of ring-fenced banks to maintain the integrity of the ring fence, so it is reinforced in other ways.

However, the hon. Gentleman is wrong to imply that standards and culture—the spirit of the rules, as it were—are somehow a secondary aspect of the considerations we will come to. The Commission has started with specific aspects of the hard rules, and we need to get those in place, but I will attend closely to its recommendations on other ways to embed and enforce the change in culture required. Members of the Committee should not be under any illusion that the Commission’s recommendations will not become an important component of the Bill when we come to consider them.

Chris Leslie (Labour, Nottingham East)

I am afraid we have hit upon a big difference of opinion between the Government and the Opposition. Having gone to the trouble of building a firm and sturdy ring fence, it is surprising that there is resistance to ensuring that we do more than simply deal with actual breaches. Once somebody has attempted to vault over the fence or throw a blanket over the barbed wire, it seems that those attempts to break out are going to be disregarded. There are too many “Great Escape” analogies in my mind right now, but my point is pretty simple: conspiracy or intent to breach the rules should carry some sort of sanction. I am not saying it should be the same sanction as for an actual breach—it might be of a different order—but similar measures are discernible in other areas of the law and so I do not see why we should not have a precautionary principle here.

Jacob Rees-Mogg (Conservative, North East Somerset)

I wonder whether the hon. Gentleman is being a little negative in his approach to the spirit of the Bill. It seems to me that a respectable retail banker who has a request from a customer for, perhaps, a currency derivative to help that customer’s business, could find that that was not allowed under the ring fence. However, it would be perfectly reasonable to investigate whether or not it was allowed. If the regulation was so tight that any attempt to help a customer in that situation was automatically an offence, it would mean that somebody who wanted to abide by the spirit of the ring-fencing measures—a Captain Mainwaring-style bank manager—would be caught out by the enforcement of unduly harsh regulation. I therefore wonder whether the spirit of the ring-fencing proposals is not perhaps best supported by the Government’s clause rather than by the amendment.

Chris Leslie (Labour, Nottingham East)

I would say, “Don’t panic, Captain Mainwaring,” because there are defences for people whose behaviours are misinterpreted in the way the hon. Gentleman describes. We should really also be talking about appeals processes for that innocent banker who is accused either of breaching or of attempting to breach the ring fence. There needs to be a proper process so that if someone is acting in an innocent and well-meaning way a defence can be mounted.

I do not think, however, that the hon. Gentleman’s example negates the point that we are considering, as we can also think of the malign bank manager, trader or executive. In 10, 15 or 20 years’ time banking will have changed; financial instruments will have morphed and could have a character that is totally different from the one they have today—and heaven knows, they are evolving at a very quick pace—so we should ensure that the rules are set out and that the regulators have enough power to deal with the devices being used to plot to get around the ring fence.

This is an important principle. We should have some sanction for attempts to carry on excluded activities, as well as for actual breaches. I would therefore like to test the view of the Committee on the amendment.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 28, in clause 4, page 7, line 45, at end insert—

‘() provision requiring that shares or voting power in a ring-fenced body are held only by another member of the ring-fenced body’s group which is not carrying on an excluded activity or by other members of that group none of which is carrying on such an activity;’.

We now turn the page and find ourselves right at the bottom of page 7 of the Bill, albeit still on clause 4, which is the meat of the legislation. We are now into the detail of the ring-fencing rules. What would our amendment mean? It was suggested by the Parliamentary Commission, so I cannot claim credit for it; our inspiration was very much taken from its most recent report but one. It focuses on the ways in which we can ensure that a strong level of independence is given to the new ring-fenced bank bodies.

The Commission suggested that an amendment was needed to ensure that the ring fence operates effectively and cannot be easily undermined. Proposed new section 142H sets out the rules that must be made by the regulator in relation to the ring fence. Proposed subsection (4) creates a series of ring-fencing purposes and proposed subsection (5) sets out the ring-fencing rules that must be made for those ring-fencing purposes.

Those provisions include restrictions and requirements on ring-fenced bodies and are all intended to ensure the effectiveness of the ring fence through the independence of ring-fenced bodies and their ability to continue to provide core services that are minimally influenced by other members of their groups. The amendment would add to the list of required rules by restricting the bodies that could hold shares or voting powers in a ring-fenced body to members of the ring-fenced body group who were not carrying on an excluded activity. The intention is to require ring-fenced bodies to be held by a holding company rather than by an investment bank.

In the Government’s response to the Vickers Commission report, they said:

“The ring-fenced bank should be legally and operationally independent from the rest of its corporate group”.

The amendment is, therefore, absolutely necessary to achieve that aim and to ensure that ring-fenced bodies are capable of acting independently of other group members.

It is here that we get into the joys of corporate law, control and other governance issues, and we will look specifically at how that applies to banking structures. It is always good to have a homespun family analogy, so a sibling structure, as opposed to a parent-child structure, between retail and investment banks—in other words, for retail and investment banks to be siblings, rather than having the investment bank as the parent, directing the retail bank—would be a preferable corporate construct, and that was the strong recommendation of the Parliamentary Commission.

That structure would also ensure that retail banking businesses were better insulated and would allow for different resolution tools to be used for each branch. If an investment bank owns a retail banking arrangement and gets into difficulties, it does not take a genius to figure out that there will be swift downstream consequences for the resolution and recovery of that investment bank, which could impinge on the viability and the sustainability of the retail bank.

If, however, the investment bank and the retail bank are in a more independent relationship, there is a better prospect that we can have safety and continuity of business for that r retail bank. That is, after all, what the changes that we are making to the law are designed to achieve. The Parliamentary Commission says that it is disappointing that the Government have not adopted that approach more vigorously.

The Vickers Commission commented on some of the arrangements in question, but I am told that Sir John Vickers is now in favour of such a provision. When he gave evidence to the Parliamentary Commission on Banking Standards on 16 January he said that he now doubted his earlier, more permissive views on investment banks owning retail banks, and that preventing that was sensible. Therefore, having looked at the Commission’s suggested arrangements, Vickers has modified his view. If Vickers and the Commission are of that view, we surely have to consider it with great seriousness.

Nigel Mills (Conservative, Amber Valley)

I can see the attraction in what the hon. Gentleman is arguing—that a sibling structure with a neutral holding company is better than an investment bank having all the power over the ring-fenced one. However, I am not clear that the wording in the amendment would actually work. There is no mention of shares or voting power being held directly or indirectly, so I think it would allow a shell holding company to be sat between the investment bank and the ring-fenced bank. That would meet the terms of the amendment but not actually achieve anything.

Chris Leslie (Labour, Nottingham East)

I will be happy to hear what the Government have to say about the arrangement. The Commission’s view was that a holding company would be a better parent than an investment bank. That would make a resolution arrangement simpler to achieve, because the ultimate liability would fall on the holding company and would be one step away from those in the retail bank. The wiring is still there, and I am more than open to hearing alternative views, but given the nature of limited liability and corporate law, having that one step of protection would provide a greater degree of integration than if we had a parent-child relationship in the corporate structure. In addition to weakening the ring fence, allowing investment banks to own their retail divisions would risk throwing some doubt on the credibility of the separation arrangements that have been designed in the ring-fencing rules.

We think that the Commission’s proposals are sensible and would help reinforce the ring-fencing process. If Ministers do not feel that they can accept the amendment, it is important that they do not just take issue with its drafting but really get into the detail. Can we not use corporate governance structures to ensure that we add to the separation and insulation of the ring-fenced banks? That is important, and we want to achieve it.

Greg Clark (Conservative, Tunbridge Wells)

In responding to the hon. Gentleman I would say that it is not the drafting of the amendment that causes any problem for the Government in this instance. It is really of whether the benefits of such a change are worth the candle. The Government have moved some considerable way, quite rightly, in respecting the views of the Commission regarding the institutional separation of ring-fenced banks from investment banks and the embedding of the Haldane principles. Those principles are the important requirements that Andy Haldane suggested in evidence to the Commission, which constitute a pretty rigorous set of required aspects of separation.

I am aware that the sibling structure has been proposed. It was not in the Independent Commission’s report. The ICB did not consider the proposal to be one of its core recommendations; in fact, it did not make any recommendations about it. Clearly, however, the objectives of separation need to be clear and understood. The ICB recommended that ring-fenced banks should be legally, operationally and economically independent of their corporate groups. The Bill already provides for that by requiring the regulator to make rules to ensure that ring-fenced banks are not adversely affected by the acts or omissions of other group members; that they are able to take decisions independently of other group members; and that they do not depend on another group member for financial or other resources that would cease to be available if that other group member became insolvent.

To achieve those outcomes, the Bill will require the regulator to make rules to ensure that ring-fenced banks have independent governance, including their own boards, independent directors, separate human resources and remuneration policies and separate risk management policies, in addition to the separate balance sheet management that is inherent in ring-fencing. The Haldane principles are an explicit response to the PCBS’s recommendation. The Bill will also require the regulator to make rules to ensure that ring-fenced banks deal with other group members only on an arm’s length basis.

Given that the Bill already includes such requirements, it is not clear—I would be interested to hear contributions from members of the Committee on this—what additional value there would be in requiring groups to adopt a particular corporate structure, either for ensuring the independence of ring-fenced banks or for separate resolvability. There would seem to be no consequences relating to resolvability.

Stephen Doughty (Labour, Cardiff South and Penarth)

It is a point of principle that we ought to make the safeguards as strong a bolster as possible. We do not want to be in a situation a few years down the line where we find that banks or others have circumvented the procedures and that we have to try to amend the law again. If we can spot holes now, why not bolster the safeguards as strongly as we can, so that we can have as safe and secure a system as possible, rather than wait and have to do that retroactively? We know that people try to exploit holes; we see it in other forms of corporate governance. My hon. Friend the Member for Nottingham East has made a clear case of where he thinks that is likely to happen, so why not act?

Greg Clark (Conservative, Tunbridge Wells)

It is not clear what the hole is to which the amendment would be the solution. That is the difficulty. If there were a hole that the amendment would fill, I would be the first to say that we ought to contemplate it. However, it is not clear, given the commitment in the Bill to the five required principles of separation, which the regulator will have powers to enforce, whether the amendment would add anything.

It will always be open to the Committee to consider further requirements, tests and provisions. However, we have to ask ourselves questions, lest we reach the end of the debate in Committee, let alone the complete consideration of the Bill, with provisions for which we have not identified a particular case but that we have chucked in anyway, and end up with measures that go beyond what is necessary to achieve the Bill’s objectives.

I am happy to consider suggestions from the hon. Gentleman or any other hon. Member on whether there is something specific that the structural solution in the amendment would give us, over and above what is already in the Bill.

Stephen Doughty (Labour, Cardiff South and Penarth)

People want to see steel cladding around this, not some sort of rough netting. They want us to cover every possibility, even the most hypothetical. I appreciate the Minister saying that he does not see the hole, but we do see a hole and we want to see it covered up. We ought to present the strongest possible structure, particularly given what we have seen over the past few years.

Greg Clark (Conservative, Tunbridge Wells)

I am still not clear from the hon. Gentleman’s answer what the hole is. If he can identify it, we might be able to talk about whether the amendment is a solution to it. It is necessary to be rigorous, and we have many weeks and months to consider the Bill. If we can identify the hole I will happily consider it, but I do not think we have reached that point yet.

Nigel Mills (Conservative, Amber Valley)

Can I give the Minister one scenario? Say the ring-fenced entity urgently needs to raise some equity capital to bring its balance sheet back into line. That cash would presumably have to be raised by its parent company and then flow down through the structure. I think it would be preferable if it came only through clean, non-trading entities, rather than having to be routed through some investment bank with its own liabilities and issues, which might impinge on the ring-fenced bank. It would seem to be much cleaner for there to be a clear structure right up to the end of the group, rather than cash having to be routed through risky casino activities.

Greg Clark (Conservative, Tunbridge Wells)

The requirements is that the arrangements should be at arm’s length and transparent. One of the arguments made by the original Vickers Commission, the Independent Commission on Banking, for not having a Glass-Steagall type solution of the total separation of groups is that it should be possible for funds to flow from the investment bank to the retail bank, especially in times of stress, but obviously not the other way round. To insist on the structure suggested in the amendment could only put obstacles in the way of the choice of debt issuance, to no particular advantage. If the requirements are as expressed in the Bill—to have separation of the principal functions, including balance sheets, of the ring-fenced bank and the non-ring-fenced bank—I do not think the amendment is necessary.

Chris Leslie rose—

Greg Clark (Conservative, Tunbridge Wells)

I am happy to take representations as to whether it is, including from the hon. Gentleman.

Chris Leslie (Labour, Nottingham East)

The intervention of the hon. Member for Amber Valley was helpful in one respect. We can imagine the converse scenario—an investment bank that owns a retail bank going into administration. Of course, its assets would then come into play to a degree. I want the Minister to say with a straight face that he does not think that would in any way be a threat or a problem to the ring-fenced retail bank that was owned by that investment bank.

Greg Clark (Conservative, Tunbridge Wells)

Of course. It will be part of the obligation of the regulator to ensure that the conduct of the bank, including every director there, is not vulnerable to those circumstances. That is the entire point of ring-fencing. If the hon. Gentleman is sceptical that that is meaningful, that goes to the heart of whether we should have a ring-fencing approach whereby it is possible for funds to flow from an investment bank into a retail bank but not the other way round. The Independent Banking Commission, and indeed the Parliamentary Commission following the scrutiny that it has given the idea, accept the basic premise that it can be useful and economical for that arrangement to be possible.

This is not an abstract question. The ability of banks to fund themselves efficiently is ultimately transmitted to people with mortgages, people with business loans and people who operate bank accounts. It is important that we do not put in place unnecessary obstacles that would add cost without any benefits. The point of the Bill is to ensure that we put in place exacting requirements where they are of benefit and where they are required to aid either resolvability or the protection of public funds. However, we have to be clear that we should not proliferate them unless we can see that there will be a benefit. I am not persuaded that that is the case at this point, but we will have other opportunities to debate the matter during the passage of the Bill.. There is no objection to the idea as a matter of principle, but the job is done by the measures we have taken since publishing the draft Bill, by including the Haldane principles of separation that were recommended to us.

Chris Leslie (Labour, Nottingham East)

I am sorry, but I find it surprising that before we have even filled the Bill with specific protections and seen some of the secondary legislation, the Minister is already starting to say things such as, “Well, maybe we are in danger of throwing too many things into these safeguards. We do not want a proliferation of such safeguards.” That is a very weak attitude to take towards what we now know to be potentially some of the most dangerous institutions for consumers, for taxpayers and for the economy at large. It is right to take time to think through how we can protect our economy and our public finances from the banking system.

Greg Clark (Conservative, Tunbridge Wells)

I agree with the hon. Gentleman’s analysis. Of course it behoves us to take time to consider what protections we need to put in place to prevent the consequences he describes. I issue an invitation to him to say what the problem is, to which this is the solution, that is not covered by other features of the Bill. I am genuinely eager to hear from him on that.

Chris Leslie (Labour, Nottingham East)

This is not just the Labour party speaking. I do not wish to stain this notion by attributing it to one political party that the Minister may not warm to. This was the view of the Parliamentary Commission across all parties. It is something that will undoubtedly come up in the House of Lords when the Bill is considered there. The Minister needs to bear in mind that there will be a lot of force behind the arguments of members of the Commission in the other place when they look at this issue. Sir John Vickers himself reflected on the notion of this corporate structure and the added protections that that one step removed might give. These are all serious considerations.

Essentially, the potential benefit is having that relationship between the riskier investment bank at one step removed from the retail bank rather than having it in an ownership capacity. Ownership and the influence of ownership are imperative. They are phenomenally powerful forces. If one company owns another, then no matter what rules are written down, the sunflower will turn to face the sun in the normal course of its ecology. Similarly in a corporate structure we all know that these are potential risks.

I throw the Minister’s question back at him but in reverse: what harm would come from not having this sibling relationship in this way? He has not really given a reason for saying that there are some onerous costs involved here, and that there is a problem with having that holding company arrangement and making sure that there is that sibling relationship. I have given him examples of the ownership issues about which I am concerned, particularly when an investment bank goes into administration. Those are indirect anxieties that were felt by the Commission and by Sir John Vickers in his evidence.

I have forgotten, Dr McCrea, whether I am intervening or making a speech. I think I am summing up. In which case, I will continue. The Minister has not really given enough reasons why not to have this safeguard put in place. It is not good enough to say, “Don’t throw everything in. Too many protections got in. We are overdoing it with protections.” I still think we should err on the side of caution. The Minister should bear in mind that the jury is still out on ring-fencing. This is an untried arrangement. It is better to take a precautionary approach in these circumstances rather than saying it all sounds very onerous. Anti-regulatory tendencies exist, I know, in some hon. Members who are starting to bristle a little now, but they should learn the lesson of history: regulation is necessary and it needs to be tougher. All Conservatives now have to swallow that particular pill.

Jacob Rees-Mogg (Conservative, North East Somerset)

Will the hon. Gentleman give way?

Chris Leslie (Labour, Nottingham East)

Of course. I knew that would provoke the hon. Gentleman.

Jacob Rees-Mogg (Conservative, North East Somerset)

It is not a question of more and tougher regulation but of right and effective regulation. In 2008, masses of regulation had been introduced by the previous, socialist Government, which turned out to be useless.

Chris Leslie (Labour, Nottingham East)

I wait to hear about the speech that the hon. Gentleman made when he was campaigning in that Mercedes around his putative constituency, in which he said that we needed more effective regulation of the banking sector.

It is clear that we need tougher regulation. I have no compunction in saying that, as the argument has been won in that regard. However, I do not want to digress too far from the amendment. It is not a measure that we devised, as it was drafted by the Commission, but I am minded to test the Committee on the amendment.

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman, like all members of the Committee, has to consider the provisions in the Bill, rather than considering an imaginary Bill with problems to which the amendment would be a solution. The different parts of the bank—the ring-fenced bank and the investment bank—are not simply one step removed; there is an electrified ring fence between them. That is the import of the Bill. The electrification of the ring fence is rigorous and maintains that separation, as well as maintaining a requirement on directors to enforce that separation. We should not be lulled into thinking that the amendment is in some way necessary to enforce the separation that we want. We want to see lots of safeguards to make sure that people, whether they be depositors or taxpayers, are not exposed to the consequences of the failure of banks, in particular, the failures of investment banks. However, those safeguards should be ones that work. We should not be adding purely symbolic measures to the Bill simply to make a rhetorical point. The Bill’s purpose is to have rigorous safeguards that are effectively implemented.

When it comes to imposing corporate requirements, we know that maintaining separate corporate structures has a cost for banks. To have to migrate debt up to the holding company is a potentially costly measure. Having the powers in the Bill to enforce an electrified ring fence is surely the way to maintain the confidence needed in the system.

Chris Leslie (Labour, Nottingham East)

The wonder of moving an amendment is that the mover gets the last word; there is sometimes competition over who gets the last word, but on this occasion, I do, which is very rare. I do not agree with the Minister, and I do not think that we will reach a consensus on this issue. I do not think that the amendment would be purely symbolic. I accept that there are other rules in place to govern the ring fence, but the amendment is a necessary supplement to those rules and safeguards. I urge the Committee to support the amendment.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 17, in clause 4, page 8, line 34, at end insert—

‘(7A) The Treasury must make regulations prescribing requirements with which ring-fencing rules made for the group ring-fencing purposes must comply.’

William McCrea (DUP, South Antrim)

With this it will be convenient to discuss amendment 18, in clause 4, page 12, line 31, at end insert—

‘() section 142H(7A);’.

Chris Leslie (Labour, Nottingham East)

Amendment 17 looks again at the question of the ring-fencing rules, which follows on neatly from the debate that we have just had because it is very much to do with how we make and enforce rules regarding the height and strength of the ring fence, and the quasi-separation between retail and investment banking purposes. That amendment is accompanied by amendment 18, which relates to how we define the independent character of ring-fenced banks and how we scrutinise those arrangements.

The Parliamentary Commission on Banking Standards can claim credit for the amendment—thank goodness my hon. Friend and I decided to table this amendment; otherwise, what else would we have to discuss and while away the hours this afternoon? We cannot claim credit for the idea, but we were convinced by the weight of the Commission’s argument. After all, its members include not only a former permanent secretary, a former Conservative Chancellor of the Exchequer and a former Treasury Committee chair, but the Archbishop of Canterbury, no less—[Interruption.] I know that that provoked a reaction from the hon. Member for North East Somerset, but let us not dwell on exactly what that reaction was.

Jacob Rees-Mogg (Conservative, North East Somerset)

For the sake of the record, I am all in favour of that; I think that it is rather wonderful that we are seeing clerics come back into the centre of British life, just as we see one chairing our debate.

Chris Leslie (Labour, Nottingham East)

I feel the spirit of the rules coursing on through me, not just their letter. In our view, it is important to add the weight of parliamentary backing to rules made by the regulator on the height of the ring fence that is to be created, to ensure the independence of the ring-fenced bank from the rest of the group. The rules on the height of the ring fence, as it has been characterised in shorthand, are designed to protect the core activities of a ring-fenced bank, such as deposit taking, from future problems in the riskier operations outside of the ring fence.

Originally, the draft Bill left the question of the extent of separation between the ring-fenced retail bank and the rest of the group in the hands of the regulators, together with issues on how independent the ring-fenced entity would be. Even the regulators themselves, however, expressed doubts about delegating that much power in the evidence that they gave to the Commission.

The Commission’s first report said that the height of the ring fence should be determined not just by the regulator alone; it would have greater authority if backed by Parliament. In paragraph 139, the report states:

“A regulator enforcing rules of its own creation will have less authority in doing so than a regulator giving effect to a clear mandate in legislation with parliamentary authorisation. There is a compelling case for strengthening the regulator’s hand when it makes ring-fencing rules through such a mandate.”

The Government then moved to ensure that there was more explicit guidance for the regulators on these issues in the Bill. So far, the height of the ring fence has been dealt with only in the proposed new section 142H. It makes much sounder common sense, however, for all issues relating to the height of the ring fence to be determined in a statutory instrument at the very least.

The Commission wanted to add this amendment to test the Government’s approach to the whole issue of the independence of ring-fenced retail banks from their group and investment bank owners. Andrew Bailey, the chief executive of the new Prudential Regulation Authority said in his evidence to the Parliamentary Commission:

“What we have to get right is the balance between giving us the job of implementing a rule book essentially—the short version of it—and Parliament having sufficient hands on in terms of the objectives so that the legitimacy and authority of Parliament is very clearly behind it. That is a balance. At the moment, this is a very short piece of legislation in a sense. It says, "We'll define some objectives and then send you off to police them"”.

That is an important point from the regulator himself, so we have to listen to what the regulator says would help him in that particular process.

Most commentators—and the Government—have welcomed the proposals by one of the directors of the Bank of England, Andrew Haldane. He set out what he felt were the necessary ingredients to be able to say genuinely that ring-fenced banks were deciding things “independently”. The Haldane principles that the Minister mentioned are that the ring-fenced banks should have separate governance; separate risk management; separate balance sheets and balance sheet Treasury management; separate remuneration structures; and separate human resources arrangements. Sir John Vickers added to those Haldane tests and said that separate capital and liquidity provisions should also form part of the test of whether an entity was independent in that particular way.

While we welcome the Treasury placing many of these issues on the face of the Bill in proposed section 142H, I would be grateful if the Minister could also say that he expects that last Vickers test for separate capital and liquidity provisions to be part of that definition of independence. That seemed to form part of that discussion as it was developing on those Haldane principles—Haldane plus, if you will. Will the Minister say whether that concept will form part of the secondary legislation? It would also help if the Minister could say if he thinks it would be sensible to place responsibility on directors of a ring-fenced bank firmly in statute, to preserve the integrity of that bank. A lot of changes have been made on that already, so I think we have an indication of movement on that particular issue.

Amendment 18 is consequential in that it adds proposed section 142H(7A) to the list of subsections that would be subject to the affirmative resolution procedure. Again, I would be grateful if the Minister said whether he thinks that would be a sensible arrangement.

The Committee can see where we are coming from on this particular issue. The Commission made a sensible suggestion, and I would welcome the Minister’s response to its suggested amendments G and H, as it characterised them, which appear as amendments 17 and 18 today.

Greg Clark (Conservative, Tunbridge Wells)

I do not think there is any substantial difference between the Government and the Parliamentary Commission on Banking Standards on this point. The new subsection would require the Treasury to make rules to set out the parameters, within which the regulators own rules would operate. As the hon. Gentleman said, the amendment appears to stem from the recommendation of the Parliamentary Commission in its December Report that

“section 142H of FSMA be amended either to define the parameters of the rules to be set by the regulator more fully or to require that secondary legislation made by the Treasury and subject to the affirmative resolution procedure defines the parameters”.

The Government have accepted that recommendation and we have done two things, and the hon. Gentleman has made reference to this. First, we made a commitment to put on the face of the Bill the so-called Haldane principles, so it is clear what constitutes the separation that the regulator is required to enforce. Secondly, we have introduced a new power in new section 142I that would do precisely what the PCBS has asked for. This new section enables the Treasury to require the regulator to include in its rules any further matters not included in section 142H and to set out more detailed requirements in relation to the matters already covered in section 142H(5).

In fact, the PCBS said in its second report—its most recent report—that the Government had gone further than it had recommended. It said:

“We strongly support the Government’s decision to place on the face of the Bill some of the key parameters for ensuring the operational and economic independence of ring-fenced banks.”

We have made the change that the PCBS requested. We have consulted the regulator on the drafting of the section, with which the regulator is happy. The Treasury has the power to add any additional requirements in relation to the ring-fencing rules, which may prove in time to be necessary.

In answer to the hon. Gentleman’s question on the Vickers capital and liquidity provisions, yes, we are following the recommendations, which are provided for by these powers. Given that everyone is happy that we have gone further than the Parliamentary Commission advised, I hope he can accept those assurances and withdraw his amendment.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister for those comments, all of which describe perfectly sensible concessions made by the Government in response to the Commission. It is important that the Haldane principles are set out in that way—it would be nice to have a set of principles named after me, and we might come to characterise these as the McCrea principles at a later point in our consideration of the Bill.

As we said in earlier debates, we still think there are other ways to supplement those safeguards on the independence of a ring-fenced bank, and we will return with other safeguards beyond those already proposed, particularly in relation to ownership and corporate control, but, for the time being, the Minister has made the point about new section 142I, which is very welcome. I beg to ask leave to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 24, in clause 4, page 9, leave out lines 8 to 21 and insert—

‘Reviews

Nick Smith (Labour, Blaenau Gwent)

We want the reviews because our constituents are still very cross about the effects of the banking crisis. If there is going to be an electrified ring fence, our constituents want to ensure that its related enforcement measures, for example, on anybody who behaves badly, are as strong as possible and that anybody who misbehaves ends up black and charred from trying to get around the ring fence. It is important to our constituents that the reviews are regular and attended to carefully.

Chris Leslie (Labour, Nottingham East)

That is why we wanted to alter the Banking Commission’s proposals so that, instead of a review on a four-yearly cycle, a two-year period should elapse between the reviews and when they must be completed. That is why we made the second set of adjustments to the review arrangements suggested in Commission amendment M. First, we propose that the review should be set out and approved by Parliament and done in a parliamentary context. Secondly, it should be conducted every two years, not every four years. If a week is a long time in Parliament, four years is a lifetime in banking.

Stephen Doughty (Labour, Cardiff South and Penarth)

On that point, such measures are crucial due to the rapidity of change in the financial services sector over the past 10 to 15 years and how quickly the products were developed and grew into use. The regulatory system simply was not able to keep up with that level of complexity and change. I was surprised when I read in the Bill that there was a five-year period, because so much can change in that time. We need much more regular reviews to reassure our constituents and players in the economy more widely, as my hon. Friend the Member for Blaenau Gwent said.

Chris Leslie (Labour, Nottingham East)

Absolutely, and our constituents would expect nothing less than that we put the issue higher up the agenda to which Parliament and Government attend. It needs to be there. As we know, with many political issues, events happen and agendas change, so things quickly fall off the edge of media concerns. Ensuring that these matters remain at the heart of the Treasury’s concerns and that Parliament has a regularised ability to debate and discuss the adequacy of the ring fence is essential. After all, if we are going to have the threat of partial or full separation if ring-fencing fails, in order for it to be an effective backstop to the arrangements, it must be supported by regular reviews of the conduct of the banks in relation to the ring fence.

The more robust review process that we suggest would replace Government proposals for a review carried out by the Prudential Regulation Authority. Those proposals are not sufficiently substantial, and our suggestion would ensure that we have a periodic, independent review process. It is independent to ensure that, while the regulators are policing the arrangements day to day, there is the prospect of an independent group, sanctioned by Parliament, coming together every couple of years to oversee the stocktake of how everything is working.

The Commission itself said that the jury was still out on the issue. We do not want it to fall out of the spotlight. The Government’s current provisions for the reviews are unsatisfactory on several counts. Making the regulator who broadly creates the ring fence and the ring-fencing rules responsible for reviewing their effectiveness strategically is obviously not an ideal form of scrutiny. As the hon. Member for Chichester (Mr Tyrie), the Chairman of the Treasury Committee and the Chairman of the Banking Commission, said, it is “wholly inadequate” and amounts to nothing more than

“the regulator marking its own examination paper.”

In another context, we have discussed who marks the homework. There also needs to be a stocktake of how well the regulators are able to police this ring-fence arrangement, which is why an independent process is important. The Commission is quite clear in this regard.

Secondly, the new review still enables input by the PRA, by requiring it to publish a joint assessment with the Financial Conduct Authority on the operation of the ring-fencing rules. An independent review process would supplement the findings and the suggestions of the PRA and the FCA. The independent review would not be conducted instead of their work; it would be conducted as well as it.

Thirdly, the scope of the current review suggested by the Government under the PRA is confined to the ring-fencing rules, but we believe that is an inadequate means of properly monitoring the operation of the ring fence. The amendment creates a review of all the provisions in relation to ring-fenced bodies, including assessments about the continuity objective and the desirability of implementing full separation. In other words, the technical deficiencies of ring-fencing should not be looked at as the be-all and end-all of everything. The independent review needs to weigh up the balance of that particular structure and protection, versus what could be gained if full separation was also on the table.

Our amendment provides for reviews every two years. That is preferable to the current provision for review every four or five years. Given the constant innovation of financial services products, a report every four or five years is inadequate to ensure effective supervision. In the Government’s document on “Banking Reform: Delivering Stability and Supporting a Sustainable Economy”, they themselves commented that monitoring is increasingly important in these particular areas, but they have chosen to do it by what I think is an inadequate form of regulatory review. An independent process is needed for proper scrutiny, and also of course to boost public confidence. The Government’s response to the Commission’s first report said that:

“The Government agrees with the PCBS that it is essential to preserve the robustness of the ring-fence”.

The Government have of course conceded that. In order to do that, we need the electrification process, and we need this review to form part of that arrangement. Ministers should support the amendment, which I hope would give credibility and strength to the policing of the ring fence, and take systemic reviews out of the hands of purely the regulators and into those of independent, experienced figures. Those people would not merely be parliamentarians, because the amendment offers the means to appoint senior people with substantial experience in central banking or financial regulation to form part of the group of

“five persons to conduct a review”.

We also suggest that

“A person may not be appointed to chair a review unless the chairman of the Treasury Committee of the House of Commons has notified the Treasury that, in the chairman’s opinion, the person is likely to act independently of the Treasury, the PRA and the FCA in carrying out the review.”

A lot of thought has gone into the Commission’s amendment. We have added our own changes to that, which I hope build upon it. I commend the amendment to the Committee.

Greg Clark (Conservative, Tunbridge Wells)

Success breeds success. The Vickers Commission and the independent Commission have established a reputation for a good job done well and effectively, and this has created a respect—and indeed, an appetite—for independent reviews of the important matters before us. Certainly, that is a reflection on the contribution made by the Vickers Commission and it is a tribute to its impact. However, we need to bear it in mind that we should be careful not to review reviews constantly, or have different bodies conducting different reviews when other bodies have just concluded their reviews.

Let us think back to the reasons for establishing the Vickers Commission in the first place. The Chancellor said in evidence to the Parliamentary Commission in November last year:

“I well remember, in my previous job as the Opposition spokesman, going to a Mansion House dinner and hearing the Chancellor of the Exchequer say one thing and the Governor of the Bank say something else, at the same time that the then Prime Minister was saying a third thing and the chairman of the regulator was saying a fourth thing. So creating the Vickers Commission, and trying to bring together all the disparate voices into one place where we could try to form a consensus and get to the best possible solution, was the approach I undertook.”

It is worth reflecting on that aspect of the success of the Vickers Commission. Painstakingly, over a long period time, through the publication of an issues paper, the call for evidence, its interim report and the consultation on that report, through to its very well received final report and the consultation the Government undertook on that, there has been a serious and sustained consideration of the issues that we are debating today, in a way that has not been outside the process that has been established but instead has involved parties from right across the different sectors of the economy feeding into it.

We therefore need to pause before prescribing too much in the way of very specific reviews at this stage. We must consider whether we might not be in danger of undermining the very purpose of the Commission, which sought to establish a consensus and to bring all voices together, after careful and expert consideration. We must avoid establishing a cacophony of different voices in the future, all speaking about an issue on which we have so far had an orderly process that has commanded respect. That is the background which we need to bear in mind when approaching these matters.

The hon. Gentleman’s amendment is very detailed in terms of specific arrangements, membership and timing. It is not right, at this stage, to put in the Bill such a detailed set of prescriptions for having reviews in the future. It is always open to the Government and to Parliament to initiate a review in the future. That does not require such specificity in the legislation at this stage.

In his evidence to the Parliamentary Commission recently, the Chancellor said that he is not set against independent review, but that we need to consider its scope, remit and composition very carefully. During the passage of the Bill we will of course do that. However, the Committee should remember the reviews that are already envisaged and are in place—reviews, in fact, that the Bill builds into the process. The regulator will report annually on the operation of the ring fence. The PRA will be required to report every five years to the Treasury and, through the Treasury, to Parliament—and no doubt specifically to the Select Committee—on how it is discharging its duties. However, that is different from binding a future Government to ongoing reviews, especially if there is a risk that they would revisit, at too frequent an interval, the very premise of the policy on which Parliament has legislated.

Members ought to reflect that we need to balance the need for reviewing whether things are working against the very reason that the ICB was set up, which was to have arrangements that will endure in the banking sector and to settle uncertainty over the future of that sector. Constant reviews would create constant uncertainty and would require the Government to revisit the very premises of the policy. That would not be the right approach.

David Wright (Labour, Telford)

What is the Minister’s thinking on the assurance the amendment would provide to the sector? The amendment lays out fairly comprehensively for those who would be subject to review what would happen and what would be reported. If we look at the Bill, new section 142J is pretty open in terms of what review activity could take place. That does not provide much certainty for the sector about what is going to happen during a review, whereas the amendment would give a concrete platform upon which reviews could be undertaken. Which specific elements of the amendment is the Minister opposed to?

Greg Clark (Conservative, Tunbridge Wells)

This is one review among others. A wholesale review of whether this is the right mechanism is different from a review that the PRA should carry out about whether the operation of the rules is properly conducted. When we come to consider this later we need to specify precisely the intention of the reviews, whether it is about policy or whether it is the implementation of the policy. There is a danger that through a review, no doubt consisting of the experts to whom the hon. Member for Nottingham East referred, we would reconvene the Independent Commission on Banking in perpetuity. We had a commission to look into this. To have a committee of wise men and women who have the authority of Parliament to constantly revisit these arrangements would not be conducive to the stability that we have in mind.

Nick Smith (Labour, Blaenau Gwent)

What would the Minister say to our constituents who want us to keep a really beady eye on this? I have listened carefully to what he has said today. He takes a fairly iterative approach to all this with the reference to responding to the response to the response and so on. I accept that this is tricky ground, that it all has to be considered and that we need as much input as possible. But our constituents want us to bear down on this topic very carefully. That is why I think a two-year review would be helpful, particularly in the first few years after the establishment of these new institutions. It would give our constituents some comfort that we are keeping a beady eye on all of this.

Greg Clark (Conservative, Tunbridge Wells)

The hon. Gentleman is right. We need to keep a beady eye on it. We need to make sure that the provisions work. But one of the aspects of the amendment that is difficult is that it expressly requires the terms of reference for the review to include the case for full separation, for example. That, in effect, reopens the question that we are debating here, which came from the repeated iterations that the Vickers review obtained during its public consultation. We need to have enough certainty here. While the PRA should account for and report on its effectiveness in operating and maintaining the rules, setting in train already a review that would require full separation would not be the right approach.

We should bear in mind that it is an annual review of the ring fence that the PRA is required to engage in, specifically with regarded to firms’ behaviour. When the hon. Gentleman says that our constituents want to be reassured and to know that a beady eye is kept on the behaviour of particular firms, that is expressly provided for. But that is why to conflate that with a commission of experts looking at the underlying premise of the policy would be unhelpful at this stage.

We have already established during the course of the morning and the early part of the afternoon that we want to leave the Bill with a sensible set of provisions. Clearly this needs to involve the right reviews. The Chancellor told the Parliamentary Commission that he was not set against the case for an independent review but that we need to consider how that coheres with the other aspects.

This is at an early stage. We will reflect on recommendations that the Commission have made. We will need to consider carefully during the passage of the Bill how at every juncture we can have the most appropriate review for the purpose so that the PRA reports to Parliament on the discharge of its responsibilities in terms of maintaining the ring fence that is there. We should look at the performance of the system overall. I do not think that it is the right approach to set that out at this stage in such detail, conflating those objectives.

Mark Durkan (Social Democratic and Labour Party, Foyle)

Does the Minister accept that the five-year review of the ring-fencing rules in new section 142J will probably take place in the latter half of the next Parliament? The chances are that there will be issues of contention and assessment of how some of the aspects are working and whether there needs to be further separation. Is it really feasible that a new Government in 2015 will simply say, “We can do nothing until the five-year review”? Surely, as the Minister has implied, the Treasury Committee might seek to look at the matter before then, in which case it will be accused of undermining, interfering and cutting across the proposed five-year review by the PRA. Would it not be much more stable for the Government to front-load an independent review into the plan to ensure that the matter will be reviewed independently early in the next Parliament, which will allow them to make any adjustments that they need to make in the light of earlier experience?

Greg Clark (Conservative, Tunbridge Wells)

There is a provision for a five-year review as well as a one-year review, and the hon. Gentleman is right to say that it is always open to the Treasury Committee—as to any other Committee of Parliament—to take evidence and to make inquiries. Between the one-year review and the five-year review, we have provided for an appropriate time frame in which to consider the matter. That is one of the reasons why it is difficult to envisage being so detailed and prescriptive about the content of the review, in particular the premise of ring-fencing. We do not know whether our successors in a future Parliament will want to look at that, but they will be perfectly able to conduct a review to address the issues that pertain at the time.

We would be front-loading the arrangement unnecessarily if we anticipated—before the Bill has been enacted, let alone implemented—the aspects of the Bill that it will be important to review, especially given the fact that Parliament is unconstrained in its ability to choose what to review. If we did so, we would only undermine the purpose of the independent Parliamentary Commission on Banking Standards, which was to bring together the different voices, to establish a consensus as far as possible and to root it in the evidence that was submitted by expert figures. I do not think it would be right for us to set up a potential vehicle for second-guessing that, but that is not to say that Parliament will not be able to revisit the matter in due course.

David Wright (Labour, Telford)

I have a simple question. The Bill states that the Treasury would

“lay a copy of the report before Parliament.”

Will the Minister explain the procedure for doing that? Would there be a debate in Parliament, or would the report simply be placed on the Order Paper? Would it go before the Library? How exactly would that be done and what format would it be in?

Greg Clark (Conservative, Tunbridge Wells)

There are multiple ways of having such things debated, and anything that is put before Parliament is susceptible to debate. I will be able to advise the hon. Gentleman shortly about the envisaged route.

The provisions that we are debating, particularly in new section 142J, do not prevent a future Government from conducting a review before five years have passed if, in deference to what the hon. Member for Foyle said, they consider that the time has come to do so. There is nothing to preclude them from doing so. The only question is whether we should decide in advance to timetable a review at a certain point.

On the parliamentary scrutiny of these arrangements, inspiration is rapidly reaching me. The proposal would be that a written ministerial statement would be made, with the review placed in the Library of the House. Of course, an oral statement could be considered if that would be a more effective way to scrutinise the matter.

David Wright (Labour, Telford)

I thank the Minister for putting on the record exactly how the report would be made to Parliament, because government tends to have different mechanisms. His saying formally that he would envisage a written statement—at least—being presented before Parliament is welcome.

Greg Clark (Conservative, Tunbridge Wells)

I am grateful to the hon. Gentleman. I hope that he knows—he will be able to discern this over the weeks ahead—that the process of parliamentary scrutiny is important to us. I do not regard one of the Government’s objectives to be simply to get their legislation through. Legislation can be improved by the scrutiny of colleagues, and that is the appropriate way in which to proceed.

Nick Smith (Labour, Blaenau Gwent)

I have a similar question to that asked by my hon. Friend the Member for Telford. It seems to me that if the Treasury Committee has the opportunity to scrutinise this work, that will be important, but will other parliamentary bodies such as the National Audit Office and the Public Accounts Committee, which look for efficiency and value for money, equally have a role?

Greg Clark (Conservative, Tunbridge Wells)

It is for the Chairmen of the Committees and the Committees themselves to direct their inquiries. Their terms of reference are sufficiently widely drawn—I say this as a former member of the PAC—to be able to inquire into the proper use of public money. It is not, therefore, simply the Treasury Committee that can scrutinise the matter but also the other Committees established by Parliament. There are other means, too, such as the possibility of arranging debates. I am sure that the Backbench Business Committee will take an interest in these matters in the years to come.

I expect that, whatever we decide about timetabling reviews, the operation of the arrangements that we will debate during the weeks ahead will be much reviewed, much debated and much scrutinised by all of us in the House and by our successors. I do not think that there will be any absence of that. As I say, however, and as the Chancellor has said, during the passage of the Bill we will reflect more on the arrangements for scrutiny, and I will come back to the House with some suggestions.

Chris Leslie (Labour, Nottingham East)

I can see where the Minister is coming from: he wants to get this issue out of his hair and put it to bed. It is a royal pain in the Department for him and, essentially, he wants to move on to other issues, but I have to say to him that we need to keep the banks on their toes. It is absolutely essential to build in a device so that policy makers can evolve their approaches towards clever, affluent banking executives who have a strong motivation to test the rules and push the boundaries of the ring fence so that they can build their businesses in a way that is to their advantage.

The Minister expressed the notion of, “Oh well, I don’t think there will any absence of willingness to review these things in the future”, but he should learn that issues come and issues go; they can dive down the pecking order as politics flits around from issue to issue. That is why we have to build into the Bill a device to maintain a review that is strong, rigorous and comprehensive.

I am afraid that I disagree with the Minister’s assessment that the amendment is far too detailed. My hon. Friend the Member for Telford was spot on when he said that it is clear, specific and sets out for the financial services sector what will be expected by Parliament in an independent review process. We have not set out in the amendment issues that will be subsumed by other events in the future. We are simply saying, that we should look at the adequacy of the ring fence but juxtapose it with what might be on offer if full separation is needed.

The Minister’s argument gets into a real tangle. He says that the amendment should not include consideration of separation, but he has conceded that we should have separation on a firm-by-firm basis. That is not as much of a concession as I would want to see, and how on earth will we test it? Is he seriously suggesting that every five years, the regulators will have the strength to go for full separation without the rigour of an independent review that is sanctioned by Parliament and therefore has seniority and seriousness? The Government’s provision is a way of downgrading what everybody thought was a concession by the Chancellor when he said that he would allow a backstop reserve power for separation on a firm-by-firm basis. How do we test whether that separation is necessary? It can only be done by some sort of serious review process.

If we pull away the rug from under that review process, we essentially undermine the strength of that backstop, that reserve power that threatens, “If people breach the ring-fencing rules, this could be the consequence.” The amendment is part and parcel of that. We have carrots, but we also have need to have sticks hanging over the system just in case there are contraventions. The electrification of the ring fence has to be supported in that way.

The Minister started by saying that we should not constantly revisit the arrangements, because it would not be conducive to the conduct of business. I strongly counsel him against going down that route. He implies that it is all very tiresome and that we should simply deal with it, move on and put a lid on the whole issue.

James Morris (Conservative, Halesowen and Rowley Regis)

Is there not a danger in the approach that the hon. Gentleman describes of separating the operational review from the policy review? He seems to be mixing up the two in his description of how his review proposals would work. On the one hand there are operational questions about whether the rules are being implemented, and on the other there are policy questions about whether the market has moved on and whether ring-fencing remains a viable idea because of market changes. He seems to be conflating the two in what he proposes.

Chris Leslie (Labour, Nottingham East)

I do not think it should be either/or. Of course, we have to have operational reviews, and that is why the regulators do their day-to-day business. But who does the hon. Gentleman expect to do that policy review? Are we really going to trust that the regulators will have the strength of purpose, the wherewithal and the necessary political strength to do that? It would have to be quite strong to say, “We are going to go for a complete separation”, especially bearing in mind that the Minister has said that the Government do not want a review that even looks at the prospect of separation in contrast to what ring-fencing can deliver. It is a completely wrong approach to underpinning the strength of the ring fence. That is why the Commission came out with the recommendation that it did.

Greg Clark (Conservative, Tunbridge Wells)

Is the hon. Gentleman suggesting that the use of the separation power under the electrification provisions should not be exercised by the PRA, but should wait for the independent review that he has in mind?

Chris Leslie (Labour, Nottingham East)

No, obviously, if the PRA is confident that it is a clear-cut case, then it should be open for it to act. But in all reality, the Minister will know that particularly when there are so many other things going on and issues can fall off the media agenda, regulators are unlikely to have the political strength necessary to do that. It would be a big thing. Full separation, even if it was just for one bank, would require the capacity for an independent review to help put some weight behind a regulatory judgment of that sort every two years, as we have suggested. I see the amendment as supplementing what the regulators could bring to bear.

This is about strengthening the ring fence. That fence must have firm foundations to make it sturdy, one of which has to be a review process that is built into the protections for consumers, taxpayers and the economy at large. That is why it is important to have the arrangements that we have set out. As I have said, their detail has come not just from us but from the Commission. I hope that the Minister will at least think further about what a review could do, especially given that he is conceding on the separation issue. He has to accept that separation would be a big step to take, and leaving it wholly to the regulator would make it unlikely to happen.

We have other criticisms about simply going for separation on a firm-by-firm basis, but we are about to come to them under other amendments. It is important that we have a rigorous and strong review process, so I will press the amendment to a vote.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 20, in clause 4, page 9, line 21, at end insert—

‘Power to order full separation

William McCrea (DUP, South Antrim)

With this it will be convenient to discuss amendment 21, in clause 20, page 21, line 23, at end insert—

‘( ) No order may be made appointing a day for the coming into force of section 4 so far as it inserts section 142JC of FSMA 2000 unless the day is later than that on which the report of the first review under section 142J of that Act is published.’.

Chris Leslie (Labour, Nottingham East)

We now come to probably some of the most important debates on the Bill—on amendments 20 and 21, followed by amendments 22 and 23. It will be difficult to avoid straying into the latter group, as both groups relate to the concept of having a back-stop reserve power to create full separation between retail and investment banking if ring-fencing fails. Retail customers need a level of protection, which is why we have gone along with the ring-fencing process, but if the notion fails and the system can be gamed—if the system does not function and system failure is judged to have happened—we should move into an environment where we have full separation, which may well be necessary for the protection of customers.

We feel strongly that that needs to be part and parcel of the Bill. My right hon. Friend the Leader of the Opposition made that point in his speech at the Labour party conference in September 2012. The PCBS, which published its report in December 2012, also recommended that. If we are to have a ring fence, we must also have a back-stop power to reinforce it, and the amendments are an element of that.

I am grateful to the PCBS for helping to draft amendment 20. Hon. Members will see that it is quite substantial and may even have exceeded my own, amateur drafting capabilities. I am getting a little bit better at the legislative process, but I do not want to blow my own trumpet in any way, especially given that the people who do the work are sitting not too far from me.

The amendment would provide what we regard as the minimum power necessary to electrify the ring fence and prevent firms from trying to game the system by giving the regulator the ability fully to separate an independent banking group into totally different entities. In a speech on 4 February, the Chancellor of the Exchequer said:

“My message to the banks is clear: If a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether—full separation, not just a ring-fence”.

The Committee will notice that he referred to “it” rather than the sector as a whole. Since that is the Chancellor’s message, it seems strange that the Minister has not tabled an amendment to that end in time for consideration in Committee. Will he explain why he has not? Was he simply relying on the Opposition to come to his rescue again?

The Minister can give us the benefit of his views on the adequacy of the Commission’s drafting, but if such a provision is now central to the Government’s view, given the welter of advice and support available from departmental officials, why on earth have the Government not either put their name to the Commission’s amendment or tabled one of their own to introduce such separation on a firm-by-firm basis? Yet again, the Government seem to be dragging their heels over the implementation of some of the reforms.

David Wright (Labour, Telford)

It is crucial to think about people who work for the banks as well, not just the customers. One thing that shocked people in the financial crisis was that people who were working hard and diligently to serve customers in retail banks on the high street did not realise what some of their colleagues back at base were doing. Not only customers but people who work for banks must have confidence in the system so that we have a viable structure. It is important for employees in large banks to know that if something goes wrong of which they, as front-line service providers, are not aware, somebody will be dealing with the problem.

Chris Leslie (Labour, Nottingham East)

That is an incredibly important point to put on the record. We talk in shorthand about the behaviour of banks, but that should never be taken as a criticism of the front-line cashier or the junior bank manager in the local branch. We often talk in general terms, but even those who work in the banks have been aghast at some of the behaviour of their senior colleagues—the executives and the traders—who took enormous risks with billions and billions of pounds.

David Wright (Labour, Telford)

The point is simple. During the run on Northern Rock, the abuse that people working in branches took was appalling. Some of my constituents work in retail banks on the high street, and it is appalling how much abuse they received as a result of the actions of people whom they had never met and did not know, back at their corporate headquarters. We need to make it very clear that we are standing up for such people.

Chris Leslie (Labour, Nottingham East)

I am sure that Members on both sides of the Committee would all say “hear, hear” to that. I completely agree with my hon. Friend.

Amendment 20 would empower the regulator to require a group to sell off either its retail or its investment bank in certain circumstances. The power to trigger separation of a group needs to lie at the heart of a serious approach to reform. The Commission on Banking Standards has said that such powers are needed to

“provide adequate incentives for the banks to comply not just with the rules of the ring-fence, but also with their spirit”

and that failure to introduce such proposals would increase the risk of the ring fence failing. Separation is one of the ultimate sanctions available and would trigger fundamental change at a financial group with an impact far beyond that of fines, which, even in this era of LIBOR and PPI scandals, account for only a very small percentage of banks’ revenue. A number of approaches have been taken to drafting the back-stop, reserve power of separation. It is interesting that the Commission has concluded that the particular amendment should be drafted in this way. Some have said that we should draft a separation provision, so that something in statute is triggered if a number of tests are passed, but the way the provision works, and the reason why it is linked with amendment 21, is that the provision for separation is essentially put into law as though it is happening, but the commencement of the provision would be ultimately in the hands of Ministers, in case the circumstance arises. That provision is somewhere towards the end of the Bill. The statute essentially sits dormant until such time as it is needed. Ministers could activate those sections of the Act in response to the triggering process.

The Commission’s first report said that it found

“the evidence that it has received on the benefits for financial stability of some form of separation convincing. The evidence that there has been damage to standards and culture by having these activities side by side, an area not examined by”—

the Vickers commission—

“is comprehensive and a crucial consideration. There is evidence to suggest that, as well as supporting financial stability and reducing the risk to the taxpayer, separation has the potential to change the culture of banks for the better and to make banks simpler and easier to monitor.”

That is the direction in which the Commission was heading. The current Governor of the Bank of England, Sir Mervyn King, told the Commission, in paragraph 162 of the first report, that he had

“always felt that total separation was the right way ultimately to go.”

and that he was

“glad that many more people are now coming on board the idea that a move to some kind of serious separation is the right thing to do.”

As we have discussed however, the amendment does not necessarily lead to the separation of banking groups, but empowers the regulator or the Treasury to take such action, where necessary.

In addition, full separation remains the last resort. Steps can be taken under the Bill only if the regulator is incapable of advancing its objectives by any other means. The crises at various banks fell on both sides of what will become the ring fence. From the liquidity crisis at Northern Rock to RBS’s doomed acquisition of ABN AMRO investment bank and HBOS’s disastrous lending decisions in its corporate division, transactions show how a problem in one part of a bank spreads to another and underlines the importance of a power for separation.

We would of course prefer to implement fully all of the parliamentary Commission’s recommendations, including a full reserve power for the total separation of the entire retail and investment banking sectors, because there is so much interconnected behaviour these days between banks. That would be the real warning and caution to all bankers to beware of contravening the ring-fence rules. It is important that the power is available in statute, ready to be triggered by regulators with Ministers.

We know that there is strong support for such a power from the Government, so I would be grateful if the Minister set out the Government’s intention for the legislation. We are yet again in Committee with the amendment generated by the Opposition. What Ministers intend would trigger such a separation power or how they would have such power on a firm-by-firm basis always on the table is not yet clear. Nor is it clear how it would be reviewed. Hearing what the Minister has to say will help the Committee to test the Government’s commitment to the electrification process and backstop arrangements.

Jacob Rees-Mogg (Conservative, North East Somerset)

I oppose amendment 20 on a narrow, but important, constitutional ground. New section 142JC(5), proposed in the amendment, relates to the Treasury Committee of the House of Commons. That provision seems to me to go against the Bill of Rights, because it would bring the proceedings of the House into the ambit of the courts. Should the amendment be introduced by the Government at a later stage, or introduced by any other means, the proceedings of the House ought not to be part of statute law. There are other mechanisms, whereby statutory instruments may be used and those statutory instruments may be introduced according to the proceedings of the House. I strongly oppose the amendment, purely on the grounds of new section 142JC(5).

Greg Clark (Conservative, Tunbridge Wells)

As hon. Members will understand, we are amenable to the thrust of the amendment, if not to every particular detail of it. The Parliamentary Commission’s report has been extremely influential, and has persuaded us that the institution of a firm, specific electrification power can be important in sending a clear message to banks and to those who work within them that a repeat of the problems that brought down the banks in the past simply cannot be tolerated and will have severe consequences. As hon. Members know, the Government have agreed to table their own amendment to give the regulator the power to split up a bank under certain circumstances. We therefore welcome the amendment moved by the hon. Member for Nottingham East, which has allowed the Committee to consider those issues.

The amendment suggested by the Commission stayed our hand in producing our own amendment for debate in Committee. The Commission’s amendment is pretty well crafted and some time clearly went into it. It is worth reflecting that the Commission has the benefit not just of its own expert members but of expert parliamentary draftsmen. Rather than simply setting that aside, we preferred to consider the terms of the amendment in detail. As Members will know, it is important to get the details of the firm, specific electrification right, so we have taken the amendment very seriously. We are working with the regulator, and indeed with the Bank of England, to cast our amendment in precise terms.