My Lords, I thank the Minister for introducing these two orders. The Minister and I meet like this quite regularly, just the two of us. I thank the noble Lord, Lord Ashton of Hyde, for
making the government side look a bit more multiple, but only two of us are going to speak. Often we discuss rather minor orders, but I do not think that these are minor; they are absolutely fundamental to the work that we have done in the Chamber with the various financial reform Acts and in the creation and designing of powers of the FPC. These are probably the key ones that have come before us. I thought that they were the first, and possibly I am wrong about that, but I certainly do not remember any as important as this. I do not want in any way to suggest that we are other than supportive of the orders, but I have a few queries and the odd complaint.
The Lords Secondary Legislation Scrutiny Committee commented on what it saw as the inadequacies of the Explanatory Memorandum. It particularly pointed out the very trivial summary of the consultation. I agree with the committee in the sense that the explanation of these orders needs quite a narrative. I would have appreciated it if that narrative was in the EM, but in fact one has to go into the impact assessment—and then, really to understand, I found that I had to go back into the minutes of the Financial Policy Committee and its interesting review of the leverage ratio. As a Committee, our considerations would have been enhanced if we had been led down that path rather than having to discover it. In the middle of this process, I realised what a different world it is, because 10 years ago without the internet I would not have had the faintest idea what we were talking about. It is really very complicated to get at if you cannot get back to those source documents.
The one thing that I did find in the Explanatory Memorandums from the Treasury was a name and telephone number. I have to say that my experience of ringing those numbers has been very impressive under previous orders. This time, because his name came up first, because it is attached to the second order, I publicly thank Christopher Woodspeed for spending 40 minutes taking this amateur politician through the intricacies and giving some signposts as where to go.
I shall be slightly repetitive for the Minister, to set the scene. In creating the FPC and the other institutions, we said to the FPC that it could have two toolkits—a recommended and a directional toolkit. The recommended toolkit is a “comply or explain” toolkit, while the directional toolkit is a “do it” toolkit. As I understand it from going back into the minutes of the Financial Policy Committee of 17 and 25 June, written up as one, the committee discussed the world and particularly alighted on the UK housing market. I do not suppose anybody reads what we say, so it does not matter, but I commend whoever produced the minutes of that meeting, because I found them very readable. They are a good read; they fit together and are pleasantly discursive.
When discussing the housing market, in paragraph 11 of the minutes, the FPC reminds itself what its job is—which I thought was quite clever to put into its minutes. It states:
“Under its primary objective, the FPC was required to ‘remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system’; legislation defined one source of systemic risk as ‘unsustainable levels of leverage, debt or credit growth’”.
Then the minutes describe a debate, which seems to have been a proper and interesting one. The paragraph that sums up where the committee got to says:
“Taking this evidence together, the Committee assessed that there was the potential for a large and diverse impact on aggregate demand from household indebtedness, with this risk more marked in relation to borrowers with higher levels of indebtedness. The Committee judged that the size of that impact on aggregate demand was sufficient to warrant intervening now”—
that is, in June—
“in the mortgage market, given current conditions and the potential upside risks to the FPC’s central view of the possible future path of the share of mortgages extended at high LTI multiples and hence to overall indebtedness”.
So the MPC had this conversation and produced a couple of recommendations. One was a stress test—about 3% over a period of years, and so on, which all makes sense—and the other is that:
“The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5”.
Then there is a de minimis bit of it, and so on. As I understand what the Minister has said, those recommendations did their work. My understanding from reading the various documents and from what he said is that there is not a concern with the housing market at this moment, and I do not think it is seen as a concern in the future. I do not know whether I can confess this, but I actually read the Daily Telegraph this morning—it happens. In an article, Roger Bootle, chief executive of Capital Economics and, as far as I know, pretty politically neutral, says:
“Time and again governments take measures that boost the demand for housing without doing anything to increase supply. The result is higher house prices without accommodating a single extra family—hard-working or otherwise”.
I would like the Minister to confirm that the increased demand that the Budget put into the housing market is not expected to create any destabilising effect.
So we think that the FPC has stabilised the market. However, in October 2014—no, sorry, that was the other stuff; perhaps it was September 2014—the committee determined that it wanted to move its powers from the recommendation toolkit to the direction toolkit. Does the Minister feel that that is because the FPC envisaged instability; is it just going to take the directional power and put in the same figures as in the recommendation, to tidy things up; or is it going to do neither of those things but simply put it in a drawer, with the marketplace knowing it is in a drawer and that it can be drawn out at any time to direct the marketplace away from an unstable path? I would be interested in which of those three options the Government envisage the FPC using these powers for.
I turn to the other order. I read lots of stuff on this but found one document particularly useful. The Minister has the advantage of me as he works in the Treasury; for my part, I end up understanding a bit of this legislation for about a day and a half before we discuss it and then it goes out of one’s mind. The nice thing about the Financial Policy Committee’s review of the leverage ratio is that it takes you through all the background so you can see how all the bits fit together.
As I understand it, the second order, which creates the leverage ratio concept, rules and “calibration”—the word that the FPC used—will not bite with most firms because the capital buffer, if that is the right term, derived from the risk-weighted analysis is in most cases greater than the leverage ratio buffer that will be recommended. In that sense, the new leverage ratio sits there as a floor rather than something that is biting and acting on firms. But I understand, or at least I hope I do—this will be a confirmation of whether or not I have understood it; please forgive me, but I think it is quite important—that some firms, particularly ones that have high-quality assets with low risk, may in fact be caught by the leverage ratio, and that particularly includes building societies.
My next question is: are any problems envisaged from the tightening of the market, for want of a better way of putting it, that the biting of this leverage ratio on those particular institutions is going to lead to? Will there be any adverse effects on housing finance as a result of these ratios being introduced? Finally, as I understand it, a firm could respond to the leverage ratio constraint by changing its asset mix; by moving between different levels of risk, it would change its risk-weighted buffer and come down to this buffer. It is an invitation for firms to look at their asset portfolios.
What I did not understand is the impact that this is going to have on lending to SMEs. I think there is a political consensus that SMEs need to be encouraged and funded in this country. I am curious about the extent to which it is envisaged—I got mixed messages when trying to understand it from the documentation—that this will impact on SME borrowing.
The two orders have the potential to have an impact on growth. The impact assessment has some worked-out examples. They are not forecasts, I accept that, but they illustrate scenarios where there may be some impact on growth through the use of the ratios. The leverage ratio could have a similar effect—a reduction in lending and hence some impact on growth.
It was a particular joy to read the Daily Telegraph this morning. I rather assumed it would be wall-to-wall praise. I take the Guardian to think but I take the Telegraph for therapy—that is one way of looking at it—and it is free at the club. The front page of the business section reads: “Osborne’s bank raid” and concludes that he has done a bank raid of £9.28 billion. The article refers to the OBR report. I have not a chance to read the OBR report—I am saving that for my holiday; I am covering everything in sight today, am I not? But I think it is an incredibly well constructed document which has developed well over the years, and I now find that it is genuinely worthwhile reading as one of the best documents to give you a feel for the economy as a whole. The article says:
“The OBR said in its review of the Budget that the higher levy could ‘affect banks’ ability to meet capital requirements … the measures could affect the supply of credit and therefore GDP growth’”.
So you have on the one hand the Budget with the high levy and on the other these leverage ratios, which if they bite could have an adverse effect. Given the central scenario—by that I mean the scenario that the OBR uses for its next five-year plan—are these orders
expected to have any adverse effect on growth? You can read stuff that suggests they do not but it does not definitely say that they do not. Given the central scenario that the Government are using—that is, the OBR scenario for the next five years—are these orders expected to have an adverse effect on growth and, if they do, did the OBR take account of that adverse effect in its documentation or would that need to be added?
This is the end of the Parliament. I am not going to say much about the next order because it is so reasonable I cannot find anything to say about it. We have had a lot of encounters and we are in a situation which I do not know how to remedy but I somehow feel is wrong. We have here some incredibly important orders but I am not sure that we are using the correct mechanism to do them justice. There are just the two of us discussing them. The noble Lord will have studied these orders carefully and been fully briefed and no doubt will hopefully have put his staff under some pressure in this respect, and I have put quite a lot of effort into it. However, I worry about the value of these encounters. I have been trying to think through the value of this encounter. One of the things you can do with an affirmative order is to resist it by voting against it. Realistically, that happens two or three times a Parliament. Very occasionally, you vote it down. In my recollection, that occurs once or twice a decade, so it is hardly our central business. You can seek clarification which sometimes tends to verge on a bit of a blood sport where you are trying to catch the Minister out. I would not try to do that because I know the Minister is so well briefed.
The real issue is scrutiny. One of the problems with scrutiny is that it is so difficult for the opposition to evidence the fact that they have put effort into scrutinising the legislation and making sure that it does not contain any faults. The value of scrutiny lies usually not so much in scrutinising the order but creating an atmosphere so that back at the ranch—back in the Treasury—people know that the orders that they bring forward are going to be carefully examined, and therefore they are encouraged to be that much more careful and thoughtful. In a sense, all one can do is stand up and say, “We have scrutinised the order”. These orders are particularly unhelpful in that regard, as I cannot find anything wrong with them. As far as I can see, they are well crafted. They sensibly add to the FPC’s powers. As I say, I am disappointed that I cannot find anything wrong with them.
I then glanced down at the first page of the report, which happens to list the membership of the FPC as being the Governor, four deputy-governors—for reasons I do not understand, three were there because they should be there and one was there because she was there; that is roughly what it says on the front page—the chief executive of the FCA, a man from the Treasury and four non-executives. They spent a year doing this work and, if they cannot get it right, we are in trouble. I think that they have got it right.
In summary, I thank the FPC for its efforts and commend it on the results.