HC Deb 22 January 1998 vol 304 cc1222-32 8.30 pm
Mr. Fallon

I beg to move amendment No. 15, in page 9, line 36, at end insert— '(2) In exercising the functions transferred under subsection (1) the costs of the Authority shall not exceed the costs incurred by the bodies previously responsible for exercising these functions, as adjusted for inflation.'.

Mr. Deputy Speaker

With this, it will be convenient to discuss the following amendments: No. 4, in clause 26, page 11, line 13, at end insert—

'(2C) Before exercising the powers contained in subsection (2A), the Authority shall consult those persons likely to be affected by the imposition of fees, and shall publish any representations it receives on that subject".'.

No. 23, in page 11, line 13, at end insert— '(2D) The power to charge fees under this section shall be exercised so as to ensure that the costs of regulation under this Act are proportionate to the benefits.'.

No. 5, in page 11, line 27, at end insert— '(3C) Before exercising the powers contained in subsection (3A), the Authority shall consult those persons likely to be affected by the imposition of fees, and shall publish any representations it receives on that subject".'.

No. 24, in page 11, line 27, at end insert— '(3D) The power to charge fees under this section shall be exercised so as to ensure that the costs of regulation under this Act are proportionate to the benefits.'.

No. 6, in clause 40, page 16, line 5, at end insert— '(2A) Regulations under paragraph 1 of Schedule 6 shall not be made unless a draft thereof has been laid before and approved by the House of Commons.'.

No. 8, in schedule 6, page 38, line 37, at end insert— '(3A) A condition of the imposition of fees under this paragraph is that in any year following 1998 they should not, taken together with the implied value of the cash ratio deposits for the time being required to be maintained under section 6, exceed the total amount of such fees payable in 1998, adjusted for retail price inflation, unless both Houses of Parliament, by resolution, have given their approval for that amount to be exceeded.'.

No. 35, in page 38, line 37, at end insert— '(3A) The power to charge fees under this schedule shall be exercised so as to ensure that the costs of regulation under this Act are proportionate to the benefits.'.

No. 9, in page 38, line 41, at end insert— '(aa) provide for the reduction of fees in cases where the expenses of the Authority incurred in carrying out the transferred functions are minimised by the record of the authorised institution.'.

No. 10, in page 39, line 17, leave out 'instrument in writing' and insert 'statutory instrument'.

Mr. Fallon

I acknowledge that this large group of amendments covers a subject that was raised at some length in Committee, but we make no apology for returning to it. There is widespread concern about the costs of supervision involved in the transfer of responsibility.

It is to the Government's credit that they have recognised that concern right from the start. Ministers have used phrases such as "bearing down on costs", and suggested that costs should be no greater under the new arrangements than under the existing arrangements. We need to find a way of translating those good wishes into the statute to ensure that a duty is imposed that will bring about the desired results.

If Ministers are sincere in wanting to bear down on costs, as I believe they are, they cannot possibly have any objection to amendment No. 15, which is one of the range of amendments that we suggest. It would simply cap costs at their existing level, adjusted for inflation as the years unfold. I cannot see how Ministers could resist that amendment.

Amendments Nos. 23, 24 and 35 would ensure that the concept of proportionality, which was also proclaimed by Ministers in Committee, and by the Economic Secretary in her speech outside the House last week, can be placed in the statute.

I understand why the earlier amendment on proportionality suggested by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) in Committee was felt to be incomplete, in that it was rather too narrowly drawn and covered only a certain sector. The new amendments on proportionality go much wider, and I therefore hope that they will be more acceptable to the Government.

I hope that there is no hang-up about the concept of proportionality. It is there in Ministers' speeches and is recognised in the consultation documents by the Financial Services Authority. I therefore hope to see a favourable reaction by the Economic Secretary.

Amendments Nos. 4 and 5 try to extend the consultation already provided for under schedule 6 to the fee-charging powers of section 43 of the Financial Services Act 1986 and section 171 of the Companies Act 1989. The reason is simple: if we do not amend the Bill in that way, we will have differing degrees of consultation under different statutes, and that is undesirable in principle. I would in any case want to see an improvement in the consultation, and the same should apply to all fees imposed under the provision.

Amendment No. 6 can be considered with amendment No. 10. It raises an important point which I believe was not considered in Committee, which may represent an inadvertent lapse in the drafting of the Bill. Unlike many of the other instruments that set the new fees structure, the instrument under schedule 6 is not subject to parliamentary scrutiny.

That is wrong. The supervision fees represent substantial sums, and it is wrong to give the Financial Services Authority virtual freedom to raise taxation. If the Bank's regime for cash ratio deposits will be subject to affirmative resolution under schedule 2, the authority's regime should also be subject to proper parliamentary scrutiny. I should be most surprised if that amendment were thought unacceptable.

Finally, amendment No. 9 introduces a new concept in that it provides for remission or reduction of fees for good compliance. In other words, it would ensure that well-established institutions with good track records of compliance that had not troubled the authorities would have their fees progressively reduced—or at least the authority should have the power to reduce their fees. That is because the costs of supervising them will be lower. It is not only sensible in itself but builds into the new system a strong incentive for better compliance as the system beds down.

I fully accept that the amendment may not be as perfectly drafted as parliamentary counsel would wish, but I hope that the Economic Secretary will at least react positively to the idea, even if she does not like the amendment.

I notice that paragraph 18 of the Financial Services Authority's consultation document says: The charge made should be proportionate to some measure of the size of the bank and the nature and extent of its business. We should take the hint and build into the fee-charging mechanism some incentive for banks to ensure that the costs of supervising them are kept as low as possible.

Mr. St. Aubyn

I believe that I can tell the House what happened when the third chapter of the Bill was first announced. I have it on the reliable authority of a book called "Blair's Hundred Days"—the inside story of that period. According to that book the Governor of the Bank of England, who is referred to as "George"

has gone through an experience that all bankers dread—being robbed in broad daylight. The purpose of the amendments is to ensure that the Government, having shown their capacity for grand larceny, do not proceed to go on robbing banks in London in broad daylight. They have only themselves to blame for the fact that we feel it necessary to table the amendments.

If the entire concept in part III of the Bill had been thrown open to the type of consultation that would have been appropriate—at the very least, some sort of consultation with the Governor of the Bank of England—perhaps by this stage we would have had more confidence in the protestations, promises and general charm offensive that we experienced from the Economic Secretary in Committee and from her colleagues.

I agree that we are disappointed not to have the Paymaster General by the hon. Lady's side. There was nothing more charming than watching them working in harness on the Bill. We raised some important questions about part III with the Paymaster General in Committee and hoped that by now he would be in a position to answer them, particularly those relating to the activities of banks in offshore tax havens and how they might impact on banks in London. Who knows, he may pop up unexpectedly—as he did in Committee—before the Report stage is over and provide us with some illumination.

The point about cost is that we are not sure that the Government and the Bill demonstrate an understanding of what has driven the extraordinary success of the financial market in London. Underpinning that success was the good judgment of the Bank of England in administering a light touch to the wholesale market that is based in this city. It is fair to say that there were some failures of the banking system—there are always failures. If one tries to devise a system in which no failures can take place, one removes the principle of moral jeopardy and, as a result, people are simply tempted to chase the highest rates of interest from the most dubious, highest-risk-taking financial institutions, with the result that the entire system comes under threat.

The risk of failure always has to be there and, as we all know, there have been at least three major failures in the past 18 years. I suggest to the House that each of those teaches us a lesson about the three guiding principles for the supervision of banks under part III. Our amendments would enable the new head of super-S1B to focus on those guiding principles, while reassuring banks in London that he would do so in a way that would not impose unnecessary and unreasonable costs on their operations.

The first major failure in London in the 1980s was that of Johnson Matthey. That experience taught the Bank of England that the old way of doing things had to change. Indeed, the Government responded with the Banking Act 1987, as well as changes in the regulation of financial services in London. We needed to create a new legal framework for banks operating in this financial centre, which is what the previous Government did.

8.45 pm

The second major failure was that of Bank of Credit and Commerce International and on that subject I can do no more than quote carefully the words of the former Chancellor, now Lord Lawson, who said in his memoirs: it is very rare indeed for there to be a major supervisory problem in which fraud is not involved". He goes on to explain that, even where the problem in the system originates elsewhere, fraud is often the means by which it is concealed and therefore it grows to be a much bigger problem when it finally hits the news.

My colleagues and I are deeply concerned that, in the construction of part III and the later clauses to which the amendments relate, little is explained or put into effect in relation to how the new regime proposes to attack fraud. There is a great deal to be said for the new super-SIB, in its operations in the London market, being given the power to root out fraud wherever it suspects it may exist.

I would very much welcome the considered comments of the Economic Secretary and her assurance that, having studied the matter carefully, she is completely confident that sufficient powers would exist as a result of the enactment of the Bill to deal with any possibility of fraud in the banking system in London.

The Barings crisis is the third factor that comes across from the lessons of recent years. The collapse of Barings was partly the result of fraud—the result of a dealer in another centre opening up what he called his, "Six, six, double six account", which involved fraud. Above all, the Barings collapse came about through a lack of understanding, first, on the part of the directors of the bank, but also by those who supervised them. It was either a market risk that led Barings to pay out hundreds of millions of pounds from London to its operation in Singapore—a risk on a scale that it should have known was way beyond its legal powers or what the Banking Act enabled it to do—or the money sent to Singapore must have constituted a credit risk. Again, it was a risk on a scale that it was not empowered to take under the terms of its banking licence. The directors of Barings should have understood that, and so should the supervisors of Barings at the Bank of England.

That brings us to one of the most important points. Whatever supervision system is constructed under the Bill, it must employ people who understand how the system works. Having such people costs money, but it is important for the Government to ensure that, under the new regime, the money is spent on having the right people, but so efficiently that the burden on banks in London is not excessive.

Many of the burdens would result from demanding information. What matters is not the cost of the people at the centre of the new investment board, but the costs imposed on the banks in terms of the amount, the precision, the regularity and the detail of the information that they are required to submit. It is far more important that the key figures are given accurately and regularly to the Bank of England than that the minutiae of the operations of each bank in London are demanded of them. In Committee, the Economic Secretary was very helpful. She made some important statements about how the Government intend to bear down on the costs of banks in London.

Although he was too modest to press the point, in amendment No. 24, my hon. Friend the Member for Sevenoaks (Mr. Fallon) took care to quote the Economic Secretary's exact words. Through the amendment, we are simply asking her to put her money where her mouth is, because it says exactly what she said at column 298 of the Hansard of our Committee proceedings. I would be curious to know why she should have any reluctance to accept that amendment.

Unfortunately, proportionality alone is not enough. Smaller banks in London have a vital role to play. They may often be the motors of innovation and new products. This is where the idea of proportionality comes unstuck. Mr. Howard Davies, who is to be the head of the super-SIB, explained to a Back-Bench meeting at the House before Christmas that one way in which it is proposed that the burdens of regulation will be limited is that banks are to be allowed to take some risks with a modest proportion—about 5 per cent., I believe—of their capital.

The difficulty is that small but sound institutions in London would need to use more than 5 per cent. of their capital to launch a new product and make it succeed. They would have to go over all the expensive regulatory hurdles that the new framework threatens to impose, at a time when no one knows whether the new products, services or markets are worth that investment of time and money; if, indeed, such a small institution could afford it.

I hope that the Government will show that they accept that, while no system of regulation can be perfect, in a sound regulatory system the good will drive out the bad. London is an excellent financial centre for a bank to establish itself in, but it is by no means the cheapest or the easiest. Indeed, it is an extremely competitive marketplace.

For a bank to survive in London it must have a profitable operation and a first-rate reputation. If either factor fails, the bank's borrowing costs will go up, its ability to do business will shrink, and the pressure of its overheads will oblige it to withdraw gracefully from the scene.

It is the job of other banks to know which are the safe and the less safe banks. That is the market intelligence that drives the strength, security and reputation of the London market as a whole. No regulatory system, however expensive, can do better than that market system and that market intelligence. The Government should have no hesitation in accepting some constraints—that is all that the amendments would impose—on the charges that may be imposed on banks, which by and large will rely on their own market intelligence to ensure that they do not lend to other banks in London at an unacceptable risk.

Mr. Tim Loughton (East Worthing and Shoreham)

Does my hon. Friend agree that the risk to banks operating in London will be heightened by what is happening on the continent? It is generally recognised that London is one of the more costly places in which to operate, because of the regulatory costs placed on the many hundreds of foreign banks in the City. At a time when the financial system on the continent is being liberalised, it would be easier and, indeed, cheaper for many of those banks to up sticks and move to the continent, especially in the context of a single currency, if that ever comes about. By not being more liberal on charges on banks in London, the Government can only encourage that movement.

Mr. St. Aubyn

That is a concern which we must all share. It is immensely encouraging that so many international banks, especially German banks, are concentrating operations in London. They might have been expected, in the build-up to the creation of the euro and a Euro-central bank in Frankfurt, to want to move there. Far from it: they have been scaling down operations in Frankfurt and coming to London because, as the global world of financial services becomes ever more competitive, economies of scale must be achieved.

Provided we have control over the costs of supervision, the natural advantage that London has built up in this vital part of our economy will ensure that those banks remain here. It would not take a great deal to drive them out to another centre. Because of the lack of consultation before part III was unveiled to the world last May, banks in London are concerned that there may be more surprises in store once the Bill is enacted and some of the other instincts that we have seen betrayed under the skin of new Labour come to the surface.

Either the amendments should be accepted or we should get some cast-iron assurances, perhaps from the Chancellor himself—I am delighted to see him here tonight—about the costs that will be inflicted on banks in London.

There is another risk, which I thought that my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton) might be about to allude to: the risk in transition. It is well known that, when the supervision of savings and loan institutions in the United States moved merely hundreds of miles, I believe, the disruption caused to staff and to the information-gathering process was identified by many who later studied the problem as a key cause of the institutions' immensely expensive collapse. Unless we have strict control over the administration costs of the new supervisory body, there is a real additional risk that the transition costs will be extremely high for banks in London.

My hon. Friend the Member for East Worthing and Shoreham mentioned banks on the continent and I have mentioned those in the United States. It is striking, and a point worth making, that, although there were regulatory or banking failures in the London market under the old system from which we are moving away, they cost the British taxpayer scarcely a penny. In contrast, the collapse of Credit Lyonnais in France cost taxpayers there the equivalent of billions of pounds. Indeed, the scale of collapse of savings and loans institutions in the United States was measured in hundreds of billions of dollars.

It is an extraordinary achievement in a fast-changing world that, whatever deficiencies or mistakes may have been made in the Bank of England's supervision under the old regime, the cost to the British taxpayer was virtually nothing. It is incumbent on the Economic Secretary to the Treasury to assure us that she does not envisage any circumstances under which the taxpayer might be forced to make up for mistakes in any market upset under the new regime, in which she and her colleagues are taking a much more pivotal role.

When we discussed such regulatory matters in Committee, the Economic Secretary suddenly launched into a discussion about pensions. We are dealing primarily with wholesale markets. I look forward to debating with her the Conservative party's record in government on pensions at an appropriate time, but she should resist the temptation to do so on this occasion. We have a proud record of building up pensions provision in this country. I hope that she will—

Mr. Deputy Speaker (Mr. Michael Lord)

Order. The hon. Gentleman is asking the Economic Secretary not to do what he is starting to do. The amendments are quite tightly drawn, and I would be grateful if he would stick to them.

Mr. St. Aubyn

I am grateful to you, Mr. Deputy Speaker, for that point.

We believe that the Government are trying to win credibility through introducing the Bill and through what they have said during the passage of it, but unless they accept the amendments, they will not establish sufficient credibility to reassure the banks in London.

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Mrs. Liddell

I commend the hon. Member for Guildford (Mr. St. Aubyn) on his after-dinner speech. I hope that he gets the job.

On a couple of occasions during the debate, I found myself checking the subject matter of the amendments. We are talking about the cost of regulation, which the Government take extremely seriously. I am delighted to note that Conservative Members have been reading the collected speeches that I have been delivering over the past few weeks. I hope that they find a cure for their insomnia soon.

As we said repeatedly in Committee, it is important to recognise that the Bill is about the transfer of the existing structure of banking supervision from the Bank of England to the new Financial Services Authority. I stress again that the Bill is about the transfer of the existing structure of banking supervision. The Government's proposals for financial services regulation comprise a two-part process. We are taking the opportunity to transfer banking supervision at the moment because we have a Bank of England Bill before us. It is about 40 years since the last such Bill was before the House. We are currently consulting and drafting a financial services reform Bill, which will be introduced in the next Queen's Speech. Several points raised in the debate relate to that next stage of reform of financial services regulation.

I am grateful to Opposition Members for recognising the strength of the Government's view on the cost of financial services regulation. We have made numerous statements both in and outwith the House on the need to contain the costs of supervision.

Conservative Members have on a couple of occasions alluded to the costs of financial services regulation in this country. We have had extensive discussions with the banking community and the wider financial services industry in this country and internationally. They pay tribute to the benign nature and cost-effectiveness of this country's banking supervision. That is what we want to continue. We want to continue a regime of financial services regulation for the banks which allows them to thrive in the City of London—and, indeed, in the city represented by the Chief Secretary to the Treasury, my right hon. Friend the Member for Edinburgh, Central (Mr. Darling).

I regret that I do not find it possible to accept the amendments tabled by the hon. Member for Sevenoaks (Mr. Fallon) and his right hon. Friends. To some extent, they go against the intention fully to consult the financial services community on the future structure of the cost of financial services regulation. At present, we are operating within the structure that was laid down by the Conservative Government in the Financial Services Act 1986. We take on board the stated intentions of the Financial Services Authority on costs.

As for amendments Nos. 8 and 15, as the hon. Member for Sevenoaks pointed out, my right hon. Friend the Chief Secretary to the Treasury was specific in Hansard, column 77, of the Standing Committee proceedings about the lack of wisdom of putting in the Bill a ceiling on costs or fees that would be unnecessary and inflexible. We have already said explicitly that we expect the Bank and the FSA to bear down on costs. I am happy to repeat the Government's intention that the overall burden on the relevant institutions in aggregate should be no greater than it is today. We would prefer it to be lower.

Mr. St. Aubyn

Can the hon. Lady give a further assurance that the proportion of the burden borne by smaller banks will not grow—that the proportions borne by the smaller and larger will remain roughly the same?

Mrs. Liddell

We have made a statement about proportionality. Later this evening, we shall discuss cash ratio deposits, which are another element of the costs on banks and other financial institutions, including the building societies. A consultation process is taking place. We believe that the financial services community is best placed to advise the FSA on the costs that should be levelled and the relationship between costs and effectiveness. If costs are disproportionate to the effectiveness and the nature of regulation, the overall impact of regulation is reduced.

As for amendment No. 9, the FSA has already made it clear that, this year, it will consult on its longer-term proposals for a comprehensive charging regime covering all the types of firms that will be regulated by the FSA. I imagine that any right-minded person would accept that that is a logical way to proceed. I reiterate what my right hon. Friend the Chancellor said when he launched the FSA in October last year. There will be a specific statutory requirement on the FSA to be efficient and effective.

We have also concluded that we should give specific responsibility to the FSA to deal with financial crime. The Solicitor-General and I have already made extensive speeches on the matter and there can be no doubt about the Government's view on it.

Mr. Fallon

I fully take the point that the FSA is to consult on the final regime, but, as the Minister referred earlier to the Government's intentions and wishes, will she say that the Government support the principle of amendment No. 9?

Mrs. Liddell

In general terms, we have already made that clear in the debates in Committee. I would not wish anyone to assume from that that we have any attraction to the concept of caps. Caps can sometimes be used as targets. That would be a most unacceptable way to proceed. If we were to set a cap, people might believe that that was the figure aimed for. That is one of the reasons why we have a reservation about the use of caps in relation to fee setting.

Amendment No. 9 would also require the FSA to reduce its banking supervision fees for banks with good track records. The amendment does not specify whether it is the cost of regulation or the inherent riskiness of the business that should be taken into account when setting the level of fees. The FSA has again undertaken to consult this year on the future charging regime. That is a more acceptable way forward, as that consultation will take into account the costs of regulation and the riskiness of the business. I assure the House that there will soon be a whole new framework for financial services regulation, which will include a statutory responsibility on the FSA to take costs into account.

Amendments Nos. 4 and 5 relate to a large extent to the wholesale market. In that respect, we seek to rely on section 43 of the Financial Services Act 1986, which was passed by the Conservative Government and which provides for a special wholesale markets regime, with lighter-touch regulation than for retail financial services. I understand that that is sometimes referred to as the "grey paper". Section 171 of that Act makes similar provision for settlement arrangements for the wholesale money markets and, at present, only one body is regulated under that section.

The amendments would also impose a requirement to publish representations. I do not see that it would be helpful to introduce another bureaucratic requirement, because that in itself would be costly; but I can assure the House that the FSA has made it clear that it is of a mind to make available any representations it receives, provided those making the representations have not said that they wish them to be treated in confidence. I hope that, on the basis of those assurances, the House will reject the amendments.

I have to make it clear that the FSA has undertaken a major process of consultation, which is going on at the present time and which will be extended throughout this year. When we reach the next stage of reform of the financial services sector, the Government will publish the Bill in draft. It will be published in spring or summer this year so as to give the financial services community an opportunity to comment on the structure of the legislation. [Interruption.] I see that the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) is worried by the words "spring or summer". I am a Scot, and summer comes rather later to my part of the world, so I am always a bit variable about when spring and summer actually begin.

I accept the points made by the Opposition and recognise that they have paid tribute to the Government's determination in respect of costs. However, I must emphasise that we are currently transferring the existing structure of banking supervision from the Bank of England to the FSA and that we are in the process of a much bigger reform. We do not want to constrain the consultation that is to take place as we structure the FSA for the future, so I ask the House to reject the amendments.

Mr. Fallon

I have to say that I am somewhat disappointed, but first I want to correct the Economic Secretary on one small point. Time has passed more quickly than she thought: it is not 40 years since the last Bank of England Act was passed, but 51 years.

I am particularly disappointed that, from the point of view of the Government, the hon. Lady did not accept the principle underlying amendment No. 9. I do not believe that she addressed amendment No. 6 at all, although that omission might have been inadvertent. She may not be allowed to speak again, but I shall give way if she cares to intervene in my speech. I asked why schedule 6 alone was not subject to affirmative resolution. That would strengthen the statutory protection and give comfort to those who have to pay the fees, so there is a case for parliamentary scrutiny.

Mrs. Liddell

I inadvertently missed out the references to schedule 6. I was conscious that colleagues on both sides of the House were beginning to look at the clock.

Under schedule 6, the relevant procedures are set out and state what the regulations can cover, as well as the consultation requirements. To repeat what I said earlier, we are transferring existing functions. The hon. Gentleman should reflect on the fact that this approach was adopted by his Government in the Financial Services Act 1986, and that is the model which we have followed. The purpose of providing for fee regulation to be made by the FSA is to mirror schedule 9 to the 1986 Act, which governs the collection and use of fees by the FSA under that Act. We do not see any sense in applying a different system in the Bill.

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Mr. Fallon

I am grateful to the hon. Lady for that intervention. The only difficulty is that it leaves us with two different regimes. There is an affirmative resolution procedure for the fees recovered through the cash deposit system, whereas the order to be laid according to the FSA procedure under schedule 6 will be not be subject to any parliamentary scrutiny.

Be that as it may, we have tried to tempt the hon. Lady with a range of different methods of cost constraints. We have suggested capping, indexation, proportionality and the reduction of fees for good compliance. The amendment would not have required reduction, but merely provided for it. It would have been up to the FSA to devise its own scheme.

Our amendments even offered the hon. Lady the possibility of using her own words as a form of cost control, because, in the end, that is all that we and those who have to pay the fees have to fall back on. We have heard the speeches of the Chief Secretary and the Economic Secretary. We have heard about her wishes, and we even heard about something else that she called "an explicit statement". We have heard her say that it is the Government's intention to bear down on fees. In the end, however, they are not the Government's fees to set; they will be set by the authority. That is why we think that it is important to get it right and put it in statute.

The debate has quite convinced me that this is a matter that may well attract attention in other place. In the meantime, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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