Banking (No. 2) Bill [HL]

My Lords, first, I join in welcoming the noble Lord, Lord Smith of Kelvin, to this House and in congratulating him on an excellent maiden speech. It spoke to his experience and wisdom, to the great benefit he will bring to this House and to a subtle sense of humour that we will all, no doubt, come to enjoy and appreciate. He is truly welcome. This Second Reading has shown this House at its finest. The range and quality of the contributions were exceptional. They were of a standard of which the other place can truly be envious. The competence and understanding of those in this Chamber has thrown great light on the importance of this legislation and on the issues to which we will have to give careful consideration in Committee. I welcome the spirit of the opening comments made by the noble Baroness, Lady Noakes. We will not abuse the good will that the opposition Benches have shown towards this legislation. I confirm to her and to the noble Lord, Lord Howard of Rising, that we will listen with great care to comments made in Committee. We will not be disrespectful. We will provide reasoned responses and will give consideration to the points that noble Lords make in Committee. The noble Baroness, Lady Noakes, made a number of excellent interventions that spoke powerfully of the experience she gained in her professional life and in her time on the court of the Bank of England. The time that this House customarily expects a winding-up speech to take does not permit me to reply to the richness of her contributions or to those of other noble Lords. However, at one stage I thought that, in a possible act of hubris, the noble Lord, Lord Oakeshott, was practising doing a summing up and that it might not be necessary for me to do anything other than sum up the speech made by the noble Lord, Lord Howard of Rising, who came after him. However, I fear that the noble Lord, Lord Oakeshott, may have to wait some time before he has an opportunity to sum up from the government Benches. The noble Baroness, Lady Noakes, spoke about the need for the Bank to monitor debt levels. I completely agree. Indeed, one reason why we have put a statutory duty for financial stability on the Bank of England is because although it was aware of the growth of credit and referred to it regularly in its commendable financial stability reports, somehow those reports were not listened to. That is an important issue that we need to reflect on to ensure that we do not repeat the mistakes or failures that led to the banking industry globally being in such a difficult situation. Several noble Lords referred to the use of secondary legislation. We await with interest the report from the Delegated Powers and Regulatory Reform Committee. We hold that committee in the highest regard, and we will take due and proper consideration of its report. The noble Baroness, Lady Noakes, referred to EEA branches operating in this country. She will no doubt be aware that the Chancellor of the Exchequer has raised this with our colleagues in the European Union. Much was said about Clause 7, and I shall come to that in a moment. The noble Lord, Lord Newby, observed that the banking crisis came upon us with few people forecasting it. It is worth making the point that that was true of other jurisdictions as well. Very few observers in France, Germany, the United States of America or Australia, where similar problems have been experienced, foresaw the true scale of the difficulties that the banking sector was going to experience. The noble Lord made a number of interesting and valuable observations relating to governance and cyclicality of capital. Those are worthy and important and they should not be lost, although their relevance to the Bill is rather limited. I was pleased that the noble Lord, Lord Newby, welcomed and supported the expert liaison group, which would appear to be a valuable utility available to us in developing complex legislation; I say that as someone new to the House. My noble friend Lord Barnett made what could be described as an expansive speech. He came to my support, and although it was late in the day, I am grateful for his support for this legislation. He referred to the £100 billion that I mentioned in my opening speech, which we have given in insurance support for medium-term lending to our banks. I advise my noble friend that there has not been an issue about the price of insurance. In the discussions that I have held with the banks, they have been much more interested in currency and in the maturity of the scheme than they were in price. Noble Lords will know that we announced some modifications and improvements to that scheme yesterday. We judge that the insurance premium that banks are paying to have their liabilities guaranteed by the Government is appropriate. My noble friend asked about the £37 billion that has been invested in ordinary and preference shares of a number of banks. It is important to recognise that these are investments, and there is a matching asset. The noble Lord, Lord Oakeshott, deduced from the specification for non-executive directors for UK Financial Investments that there was some urgency about disposing of these investments. I advise noble Lords that that is not the case. We are committed to ensuring that we get appropriate value, and judicious and careful decisions will be made as and when it is appropriate to seek to sell all or part of the investments that we have made. I confirm to my noble friend Lord Barnett that the price we pay to acquire shares in Royal Bank of Scotland and, in due course in Lloyds-TSB and HBOS, will be appropriate, based on the circumstances prevailing when that commitment was made. I have previously advised the House that we should become accustomed to further losses in banks, both here and overseas. The reality of the situation in which the world finds itself, and the previous excesses, mean that we will see continued reported losses from our banks. I have previously said as much to this House, but I did not speculate on the amounts of such losses, as I am not in a position to do so. I am simply making an observation as a businessman. Several noble Lords made observations about UK Financial Investments, the entity which is going to hold, at arm’s length, the shares that have been acquired on behalf of the taxpayer. I refer noble Lords to the letter from the Chancellor of the Exchequer to Mr John McFall, who sits in another place, which spells out why we believe that it is appropriate that these shares should be regarded as an investment, rather than an instrument for management direction. We must have regard to, and respect, the fact that these banks have other shareholders. They expect these banks to be managed in a competent and professional way, some might say in a more competent and professional way than has been the case in the past. However, there are agreements in place with the banks to which we have subscribed capital, which relate to making available and marketing credit, to providing advice to those who need it, and strengthening their boards. I should like to make it clear that we are not appointing government directors to these boards. In so doing, I can also answer some of the questions about governance raised by the noble Lord, Lord Smith of Clifton. We are working with the boards of banks in which we have invested public funds to strengthen those boards, so that they are able to perform the duties and functions that a reasonable person might expect of them. To the extent that we support the appointment of additional directors, those directors will not absent themselves from board discussion when the independent directors—as one noble Lord referred to them—discuss matters related to the Government’s investment. They will be part of a unitary board with full and equal responsibilities as other directors. The noble Lord, Lord Smith of Clifton, said that he did not expect to get an answer on the question of gender equality. I assured the House at the close of the debate on the economy that I would answer questions. It was only on reading Hansard that my team discovered how huge this commitment was, given the number of questions that had been asked during a seven-hour debate. I assure the noble Lord, Lord Smith of Clifton, that an answer will be forthcoming. In the mean time, I would say, on the issue of gender, that I once sat on the board of Marks & Spencer, which I think had more female directors than any FTSE company at that time and, conceivably, in the history of the UK stock market. When I stood down as chairman of Land Securities to accept my ministerial appointment, I was delighted that my successor was female. She thereby became, I think, the second female chairman of a FTSE 100 company. My own experience is that female directors bring an added dimension to boards. Importantly, they do not bring as much ego as men. They are less keen to speak and more willing to listen. That is a commendable quality. That said, I fear I will disappoint the noble Lord, Lord Smith of Clifton, having possibly raised his hopes, by pointing out that it is not for this or any other Bill to specify some gender obligation. I think that all our boards will have more female directors in due course because they prove to be better. Enlightened self-interest will see that trend continue. It is not for Parliament to direct private companies on the make-up of their boards. I should add that gender is just one aspect of diversity. I speak also to the noble Lord, Lord Oakeshott, in that respect and to my noble friend Lord Whitty regarding his comments about the consumer perspective of boards of directors. My belief is that it is for the boards of banks, not the board of UKFI which has a more limited function, to ensure that they have breadth of experience. Quite frankly, regardless of whether someone is male or female, if they were brought up in the same way, they went to the same schools and universities and read the same newspapers, they would be unlikely to bring a diversity of experience and look at the demands of the company through a separate set of lenses. The noble Lord, Lord Smith of Clifton, will find that I am a powerful supporter of the concept of more diversity on boards. The noble Lord, Lord Saatchi, made a number of important observations. He entertained us with the acronyms of banking. I might accept his invitation to dinner; I am a competitive soul and I think that I might do reasonably well, but I clearly would not qualify in the noble Lord’s social class if we really were to believe that anything outside 64th Street in New York constituted sub-prime. I understand that, in Committee and during proceedings on his Bill to which the House gave a First Reading today, the noble Lord will raise the issue of the current terms of the Monetary Policy Committee. Many people did know of some of the problems building up in the banking system, but few took any action. The noble Lord, Lord Blackwell, with whom I have worked in the banking industry and for whom I have the highest respect, also referred to the growth of leverage in the banking sector, which I believe went unnoticed by a number of bodies. It possibly went unnoticed by regulators, but, more importantly, it seemed to go unnoticed by boards of directors and institutional shareholders. When we talk about regulation and supervision, we should not lose sight of the fact that banks did not fail because of regulatory shortcomings; they failed because of the decisions that were taken by their boards of directors and senior managers. There is no evidence that any British bank or, as far as I am aware, any bank in any other jurisdiction, failed for reasons of regulatory shortcoming alone. The heart of this must be to promote a greater culture of self-supervision. Banks, as a number of noble Lords have said, are inherently prone to risk; the very nature of banking, the taking of short-term deposits and their advance as longer-term loans, even if we do not use the markets, as my noble friend Lord Peston said, has involved risk which is quite different from that of other industries. That risk from a societal point of view is compounded by how important banks are to the effective running of our economy. We cannot lose sight of the fact that it is not possible for this Bill or for any other form of regulation to produce for this House and this country a no-failure regime. That simply is not possible. We must seek to minimise the risk of failure and, when it occurs, to ensure that we have appropriate arrangements in place through a resolution regime, appropriate oversight by the various authorities and by a method—I respond here to a further question by the noble Lord, Lord Howard, about continuity of accounts—which is at the core of the arrangements that we are making to strengthen the speed and efficiency of the Financial Services Compensation Scheme. We are sensitive to the fact that failures will occur. When they do, we must be able to manage them rapidly, which is why the Bill seeks a considerable degree of flexibility in terms of the options open to us. This Bill is not just for today; it will not solve today’s problems. Perish the thought that this may sound presumptuous, but the Bill should anticipate and set in place solutions for problems that might emerge in the future. I cannot do justice to the contribution from the noble Lord, Lord Blackwell, except to ponder the inconsistency between on the one hand suggesting that all bank deposits should be guaranteed while on the other seeking an assurance that competition would not be limited. I am happy to confirm to the noble Lord, Lord Blackwell, and to the House that competition continues to be at the core of our belief about an effective banking system. Other legislation is designed to ensure that that is in place. The noble Lord, Lord Bilimoria, was one of a number of noble Lords to speak about the Bank of England. I have had the benefit, like the noble Baroness, Lady Noakes, of being a member of the court of the Bank of England. The proposals in this Bill will significantly strengthen the Bank of England. The court will be smaller. The court at the moment is too large and unwieldy to be as effective as it could be if it were smaller. The creation of a committee with responsibility for financial stability is a further significant improvement, although the existence of that committee will not alleviate or reduce the responsibilities of the governor and of the full court. The role of the Bank in monetary stability is different from its role in financial stability; the structure for the MPC, in which people vote individually, is not an appropriate structure for dealing with issues of financial stability. I am grateful to the noble Lord, Lord Eatwell, for reminding us that, while we are proud of the Bank of England, it has had moments when it has not performed as well as it would have liked. I came into the City of London in the secondary banking crisis in 1973-74. That was not the Bank of England’s finest moment—nor was Johnson Matthey, Barings or BCCI. I urge noble Lords to recognise that the competency in the Bank of England in bank regulation moved to the FSA. It was not just dropped; it was not converted to working in the staff canteen or in public relations. It moved under Mr Michael Foot—the other Michael Foot—to the FSA. From my perspective, the tripartite system is architecturally sound because it provides a forum in which different points of expertise and responsibility come together to address issues. The noble Lord, Lord Eatwell, made a number of important observations about the change in the nature of banking. I cannot do justice to those in the time available for my response. My noble friend Lord Williams of Elvel referred to the heavy workload that we face. The quality of this House, however, as admirably displayed today, and the efficiency with which people go about their business, means that there should be time to give the Bill appropriate scrutiny. My noble friend Lord Whitty spoke to the need to take into account the interests of the consumer. In my experience, all successful businesses are distinguished by customer focus. He also referred to the role of the regulators. We have had clear messages from the noble Lord, Lord Turner, that the style of regulation from the FSA will be different in the future. The noble Lord, Lord Northbrook, spoke about regulation, off-balance sheet items and Glass-Steagall, as indeed did the noble Lord, Lord Oakeshott. I am sure that the noble Lord, Lord Turner, would appreciate any views from noble Lords to inform the review that he is currently carrying out. I think that, in going forward, it will provide a very good opportunity to stand back and look at the challenges of defining an appropriate regulatory style and structure. The noble Lord, Lord James of Blackheath, alerted me to a number of highly technical points, with which we will no doubt grapple in Committee. He mentioned financial assistance, fraudulent preference and an issue relating to pension scheme eligibility for the PPF. I simply say from my own experience at the Treasury that I have found no one whom I would describe as either an anarchist or a totalitarianist. Furthermore, I found the information memorandum produced by my officials to be of a very high quality. However, we will no doubt learn more when we reach Committee. In conclusion, this is an important piece of legislation. I believe that, going forward, it sets a framework for strengthening bank regulation and that, importantly, it establishes a special resolution regime—a feature of other jurisdictions. That is something which we did not have when we needed it but we will have should we ever need it again in the future. Significantly, it also strengthens the functionality of the Bank of England and gives it additional responsibilities, which I think will only be of benefit to the performance of its duties. It addresses a number of technical issues surrounding the payments system and the issuance of notes from Scotland and Northern Ireland. That has been very carefully thought through and will no doubt be debated at some length in Committee. I look forward to the Committee stage. I believe we will have ample opportunity to discuss the Bill, and we will listen with care and consideration to amendments from your Lordships. With that, I beg to move that the Bill be read a second time. Bill read a second time.