Financial Services (Banking Reform) Bill

Mark made the following contribution to a debate on the Financial Services (Banking Reform) Bill:

Mark Field (Cities of London and Westminster, Conservative)

I shall endeavour not to stray quite so far from the Financial Services (Banking Reform) Bill as Frank Dobson has just done.

No one could accuse the Treasury or the coalition of rushing into banking reform; nor, to their credit, has there been anything other than the most comprehensive consultation with—and without—the banking industry here in the UK. I shall not repeat the timeline that other hon. Members have referred to, save to say that I accept the concern expressed by my hon. Friend Mr Tyrie that the Bill will not be considered directly in tandem with the report of the Parliamentary Commission on Banking Standards.

Above all, we all need to face up to our complacency. The conventional wisdom of the day, to which I fully signed up in the first half of the last decade, was that financial services would thrive best with light-touch regulation. What a difference half a decade makes! It was also during that period that the present Chancellor fatefully nailed his colours to the mast. Despite clear evidence that we were collectively living well beyond our means during the previous Administration, and amidst growing public and private debt, he decided to stick to the outgoing Labour Government’s spending plans and characterise our fiscal aspiration as “sharing the proceeds of growth.” I regret the fact that as a result, when the

crisis hit home, my party was unable to make the orthodox Conservative case that the seeds of that financial destruction had been profligacy and the leverage that was referred to earlier. Instead, the established view was, and continues to be, that regulatory failings—of which there were undisputedly many—and reckless actions by the bankers were the primary, if not the sole, cause of the financial calamity. Hence the persistent demand for more extensive and punitive regulation of the banks, and the constant chatter of hostility towards bankers and all that they do.

My contention remains that the core issue that we need to tackle is global imbalances, many of which are still worryingly in place after a half decade of near stagnation economically. Alongside this, a generation of Britons—as well as Americans and continental Europeans—have lived and continue to live miles beyond their individual and collective means. We are still mortgaging the future of our children and grandchildren.

The Chancellor’s recent declaration that any UK bank failing to adhere to the Vickers safety regime would run the risk of being broken up was an understandably uncompromising response to the Treasury Committee’s demand for an electrified ring fence. Similarly, few could criticise the populist insistence that RBS would have to fund LIBOR—and, presumably, other future mis-selling—penalties from senior executive bonus pools. At a stroke, however, the Treasury has inadvertently imposed a permanent impairment on the value of the UK Government’s still huge stakes in the banking business. Our £66 billion investment in RBS and Lloyds is currently worth two thirds of what we paid for it. Nothing in the Bill will bring forward the date on which we, as taxpayers, will be compensated.

It is often claimed that the banking lobby, here and on Wall street, has used its considerable muscle to water down, undermine or even cast aside moves by politicians and public interest groups to rein in the banking system. Several Members have mentioned that tonight. Ironically, much of the criticism comes from the self-same media outlets that have placed intense pressure on elite politicians to dismantle the proposals for their own industry, as set out in the Leveson report. As a matter of fact, the banks have taken much of what has been proposed on the chin. Many have privately expressed great concern to me about the wisdom and practical application of ring-fencing, but they feel that they have no choice but to accept Vickers virtually in its entirety.

Ironically, existing financial services players could reap the unanticipated benefit that comes from erecting ever more onerous barriers to entry for potential new banks. Sadly, as Alison McGovern suggested, the zest of competition has been largely ignored in an effort to make banking safe and to punish banks for their past wrongdoing.

The City of London’s size and global reach continues to make the UK economy especially vulnerable to turbulence in the financial markets. The centrepiece of the Bill’s reforms—the plan to ring-fence domiciled banks’ retail arms from their investment ones—is based on the notion that the less risky retail operations require protection from the so-called casino excesses of investment banking. The aim to reduce the burden on the British taxpayer in the event of banking failure is, of course, a

laudable one. Many in the financial fraternity are simply glad that the reforms fell short of a return to a full-blown plan along the lines of Glass-Steagall, to which my right hon. Friend Sir Peter Tapsell referred. That was the US legislation that separated commercial and investment banking for almost seven decades until 1999. In addition, the big banks will now need to raise capital and loans equivalent to 20% of the part of their balance sheet for which UK taxpayers would be liable in a crisis.

The coalition Government were swift to accept the Vickers recommendations almost without reservation, giving British banks until 2019 to install their ring fence. However, I fear that the question of the separation of banks’ retail and investment arms has still not been successfully settled here in the UK. Fears have been raised that the Vickers reforms will tie up billions of pounds in additional capital and impose on banks a requirement to overhaul compliance and corporate affairs—a burden that will, I am afraid, have to be met by our constituents, the general public, in higher interest rates and in the sharply reduced amounts that banks are willing to lend.

One of the causes of this paralysing uncertainty that has enveloped the UK’s big banks is the mixed messages coming from the Treasury on the one hand and the central bank on the other over the dual requirements to recapitalise, and thus reduce the risks of future taxpayer bail-outs, while also being ready to lend to credit-starved UK plc as if it were 2006 or 2007 all over again.

Meanwhile, at EU level, the Liikanen report has recommended to the European Commission a similar, Vickers-style ring-fencing of retail banking from investment banking. This has given a small crumb of comfort that the UK might not be going down this path alone. However, I fear that the Liikanen proposals are sufficiently different from the Vickers proposals to heap further uncertainty on financial services here in the City.

Since there is likely to be precious little consensus between the EU, the UK and the US authorities any time soon as to whether the structure of banking is best under Liikanen, Vickers or indeed Volcker, how should banks realistically now prepare? Once again, I fear that the cost of all that uncertainty will be borne by the consumer and the wider economy, not to mention heavy job losses throughout the financial services industry. In this regard, it is important to nail the understandable public misconception, also heard here tonight, that it has been “business as usual” in the City since 2008. It would be fair to say that particularly over the past two years, volumes of business have collapsed, state financial support has been largely withdrawn and there has been and will continue to be a huge jobs cull. If we couple that with falling salaries and bonuses for the vast majority of workers, it means bad news all round, as Treasury receipts from financial services have plunged to what I suspect will be a new norm for the future.

Aside from the issue of commercial uncertainty, there are, I believe, question marks over whether the ring fence will actually work. The Bill’s template is based on a somewhat simplistic and outdated division between what amounts to wholesale and retail banking. There are numerous transmission mechanisms between the two that make a hard-and-fast split between high street and casino investment banking very difficult to achieve.

Historically, the City of London has repeatedly benefited from arbitrage with Wall street, from the withholding tax under President Kennedy over 50 years ago, which precipitated the creation of the eurodollar and eurobond markets, right through to the “big bang” in the mid-1980s and the effects of Sarbanes-Oxley in 2002 in the aftermath of the Enron and WorldCom collapses. If the UK is to prevent its competitors from benefiting from unilateral action along the lines set out by Vickers, it must continue to press for international agreement on the future landscape of the financial services world.

There is, in my view, a danger that the UK and EU regulators will somehow look at the Bill’s ring-fencing as a panacea, and will sell it as such to the general public. Instead, in light of the pitfalls of the ring-fence options, it might prove more effective to look at an alternative dual system when it comes to ordinary deposit accounts. This would allow those who desire a risk-free place to store their money to place it in savings banks, while those happier to take a risk—unprotected, of course, by any Government guarantee—could have an account with a fractional reserve bank, as used to be the case in the UK until the mid-1980s.

Tighter regulation, newfangled restrictions and imploring banks to behave ethically as set out in this Bill and future legislation will no doubt do little to restore the City’s reputation for integrity. I fear that the spate of mis-selling scandals still has a hell of a long way to run, especially as, in fairness, 20:20 hindsight now deems that almost any novel financial product created and marketed by our banks since 2000 will be regarded as being mis-sold against consumers’ interests.

Andrew Love (Edmonton, Labour)

If I may characterise the hon. Gentleman’s argument, it seems to be that a race to the bottom in terms of regulatory cover will be to the advantage of the City of London. Many, however, including the witnesses who gave evidence to the parliamentary commission, have said that there should be a race to the top to provide safety and security, which will attract investors to London. Why does he not accept that argument?

Mark Field (Cities of London and Westminster, Conservative)

I am afraid that the hon. Gentleman has mischaracterised what I was trying to say. What I would say is this: we do not know—we cannot be sure, so it is better to approach the problem by trying to organise international agreements rather than by “a race to the bottom”, as he puts it. I do not believe that either. Much of the evidence taken by the parliamentary commission has played an important part in ongoing thoughts about the whole landscape of international financial services for the future. It is wrong to mischaracterise what I said, but there are risks and, given the importance of the financial services industry, whether we like it or not, we need to ensure that we go into this with our eyes fully open.

If Governments of any political colour continue to take ultimate responsibility when consumers purchase products from our banks, a whole set of unhealthy and perverse incentives will continue to plague our financial services industry. It is imperative to remember that regulation is often the sworn enemy of competition—one of the other avowed goals in the Bill. Public confidence and ethical foundations will slowly and surely be restored in financial services only when the landscape becomes

far more competitive. That means, in my view—whether we like it or not—that consumers of financial products need to take a far greater level of responsibility. No amount of banking reform or new regulation will otherwise create the conditions for free-flowing capital to build the successful businesses of the future, let alone restore the reputation of our nation’s most important invisible export, which is and remains financial and business services.