Like many others in the Chamber and, as is clear, in the Treasury Committee, I welcome progress but have serious concerns about the Bill and, in particular, its role in the systematic gradual compromising of the independence of the two key regulators, the FCA and the Prudential Regulation Authority. Further to the Minister’s announcements in her opening remarks, which were touched on by many in this House, including my hon. Friend the Member for East Lothian (George Kerevan), I welcome the Government’s determination that more oversight is needed on the appointment of the chief executive of the FCA by the Chancellor. However, I have concerns about the new procedures, as
announced. Until this legislation is in place, this is very much open for debate and I sincerely hope we will debate it thoroughly, in the way described by my hon. Friend the Member for Kirkcaldy and Cowdenbeath (Roger Mullin).
Another consideration is this: if the Treasury Committee recommends the appointment to be put forward as a motion to the House, the Government could simply whip votes to approve the Chancellor’s appointment. Select Committees provide substantially more apolitical deliberation of key specialised issues. For that reason, a direct Treasury Committee veto of the appointment needs to be considered.
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Issues around Treasury Committee approval are even more pertinent given the controversy surrounding the appointment of the newest chief executive of the Financial Conduct Authority, Andrew Bailey, which was touched on by the right hon. Member for Chichester (Mr Tyrie). Before his appointment, Mr Bailey was the deputy governor of the Prudential Regulation Authority. Mr Bailey’s move between the two regulators, at the recommendation of the Chancellor, raises questions over whether a revolving door policy may exist. As many in this Chamber learnt in the wake of the 2007-08 financial crisis, separation of Church and state is of paramount importance when it comes to regulation of the banks. I fear that the current Conservative Government are ignoring that critical point.
One may wonder about the motivation of the appointment of Mr Bailey as chief executive of the FCA, given that his predecessor, Martin Wheatley, was allegedly forced out of the job by the Chancellor for reportedly being perceived as too tough on financial institutions. A lighter-touch approach to regulation could mean that selling Government shares in Lloyds Banking Group and Royal Bank of Scotland would be, shall we suggest, less troublesome for the Chancellor, particularly given the recent capping on losses from the mis-selling of the pay protection scandal.
As I have previously said in this Chamber, the Chancellor stated in the 2016 Budget that he expects the Government to be able to sell their share in RBS for £25 billion, despite the fact that the bank arranged £9.3 billion in high-yield energy loans between 2011 and 2014 alone and the fact that its share price currently stands at roughly half of what was paid for it by the taxpayer in 2008. Clearly, the Chancellor faces serious challenges.
Two clauses in the Bill as outlined are particularly detrimental to the maintenance of the independence of regulators from Government influence, which is well covered by Members in this House. In part 2, clause 18 states that the Treasury is required to make recommendations for the FCA regarding economic policy as it pertains to the advancement of the objectives of the regulator at least once per year. Similarly, in part 1, clause 13 states that the Treasury can at any time—although it is required to do so at least once per year—make recommendations to the Prudential Regulation Committee regarding economic policy as it pertains to the objective of the PRA, which is the maintenance of stability within the financial sector.
Although those recommendations made by the Treasury to the regulators are not binding, it is clear that they increase the level of political involvement in the function
of the regulators, which at their inception were intended to be independent of political influence. Given recent speculation that the FCA bowed to political pressure when it abandoned a probe into banking culture in the UK at the end of 2015, these two clauses, and the greater political influence on the independent regulators they entail, are concerning to say the least. In particular, the requirement in clause 13 that the Treasury make recommendations at least once a year to the PRC creates a greater onus of responsibility on the Treasury to remain aware of systemic risks in the financial system. I fear that, given the track record of this Government, they may well be asleep at the wheel when it comes to management of systemic risk.
As I have mentioned previously in this Chamber, during the debate on the 2016 Budget, this UK Government has thus far failed to address a source of substantial systemic risk inherent in the financial system and the wider economy—that of leveraged lending to the oil and gas sector by British banks and US banks active in the UK market, and the slice and dice repackaging of these loans into derivative products, such as collateralised loan obligations, which are then sold to investors.
Numerous publications have warned that, with the stagnating price of oil at the moment, that structure poses serious risk, with the Financial Times reporting in December 2014 that
“there is a stark parallel with the US property market collapse that heralded the start of the 2008 global financial crisis and upended banks along the way.”
There are already signs that the first dominoes may be falling, as default rates on these high-yield loans are rising at a startling rate. Wells Fargo announced just this month that 57% of the loans in its energy portfolio were categorised as at risk of default. As Wells’ energy exposure stands at $42 billion, $24 billion, based on that figure, is at risk of default. UBS analysts have since put a sell notice on Wells’ stock.
Notably, it is reported by Lynn Adler at Reuters that in the United States the Federal Reserve has stepped up its review into lending which could lead to systemic risk, due to concerns about leveraged lending in the oil and gas sector. The systemic risk involved in such lending has been ignored by the Conservative Government here, however.
Political influence on the regulators was a key factor, as mentioned by my hon. Friend the Member for Kirkcaldy and Cowdenbeath earlier, in the failure of the regime to protect the financial sector and the wider economy from the systemic risk that led to the 2007-08 financial crisis. The Government have already demonstrated that they are unable even to acknowledge systemic risks that are apparent to so many in the industry today.
In a final point on the composition of the court of directors of the Bank of England, if the Government truly believe in one-nation Conservatism, new clause 2, as tabled by my hon. Friend the Member for East Lothian, should be incorporated into the Bill. Finally, the Bill, as outlined, has serious potential to weaken the UK regulatory regime and compromise the independence of the regulators, bringing us back to a system wherein banks are seen as too big to fail—otherwise known as business as usual.