7 February, 2012 11:19
Matthew's speech in support of the Financial Services Bill
Matthew spoke in support of the Financial Services Bill at its Second Reading yesterday. Matthew argued that the need to reform Labour's failed 'tripartite' system of financial regulation could not be more pressing.
During the speech Matthew said:
"I think this Bill is one of the Government’s most important pieces of legislation so far.
"It is an attempt to draw the right lessons from the economic crisis, and to set out a regulatory structure that will last for years to come.
"Our aim must be to embed a culture of responsibility into the big balance-sheet banks, while also encouraging and supporting the broad multitude of smaller City firms and companies that are not underwritten by the taxpayer and that make up the vast majority of firms in the City—and that ensure that our financial services industry leads the world.
"The debate about whether there was too much or too little regulation is sterile and defies the facts. Instead, we should be seeking the right regulation. Between 2001 and 2008 the number of pages in the Financial Services Authority rulebook increased from 2,700 to 9,300, yet, as we know from the report into the failure of RBS, not a single FSA rule was broken at RBS.
"The world we face is as we find it, not as it is written in the rulebook. Indeed, the very complexity of the system calls for simple rules, because the more complex the rules applied to a complex system, the more likely somebody is to try to game it.
"I hope that that change, the changes in this Bill and other changes will allow those of us who support the free market, enterprise and innovation to support, unabashedly and with enthusiasm, the wealth creators, who make our prosperity possible."
You can read the full text of the speech below:
Matthew Hancock (West Suffolk) (Con): It is a pleasure to follow the hon. Member for Walthamstow (Stella Creasy). She speaks with passion and determination about consumer credit issues.
We have heard much about consumer credit and accountability, and, indeed, about culpability for what went wrong. Those are important questions, but I want to concentrate on the substance of the Bill and its impact on financial and economic stability.
We did not hear much from the Opposition Front-Bench spokesperson about the question of substance, but I think this Bill is one of the Government’s most important pieces of legislation so far.
It is an attempt to draw the right lessons from the economic crisis, and to set out a regulatory structure that will last for years to come. I am therefore very pleased that the debate has taken place almost entirely—almost, I repeat—in a spirit of constructive criticism.
It is said that the next financial crisis occurs when the last person to witness the previous crash retires. I hope that that will be a long time from now—and I also hope that that last person may be sitting here in the Chamber today.
It is important that there is a long time frame, because the Bill must be right not only when memory of the recent crash is vivid, but when the boom is booming again and once more people are saying, “This time it’s different.”
Our aim must be to embed a culture of responsibility into the big balance-sheet banks, while also encouraging and supporting the broad multitude of smaller, energetic, innovating, enterprising, exporting, wealth-producing, vitality-bringing, tax-paying City firms and companies that are not underwritten by the taxpayer and that make up the vast majority of firms in the City—and that ensure that our financial services industry leads the world.
Before turning to the substance of the Bill, however, I want to deal with the two questions that have dominated the media debate: accountability and culpability. To those concerned about accountability, I add only the following few comments to the long exchanges that have already taken place. The Bill represents an important step forward.
At present, the Governor of the Bank of England reigns imperial on questions of financial stability. Executive action is vested in him and him alone. By creating the Financial Policy Committee, the Bill ensures that the Governor will be the chairman of a powerful committee, but instead of his being imperial, a committee decision will carry the day.
On the question of culpability, I do not know whether the Opposition admitted that they got things wrong, but it falls to us to learn the lessons from the failures, as well as the successes, of the past. My central argument on this question is as follows. Our financial system is complex, ever-changing and interconnected. We must therefore treat it as a system and understand the human behaviour of the people in it, rather than treat it like a textbook.
First, instead of segregating the regulation of the banks from the management of the economy as a whole, as the tripartite system tried to do, we must treat them as one part of the whole system. The attempt to turn the Bank of England into a monetary authority and to leave the FSA as a micro-regulator was bound to fail because no one was in charge of the size of bank balance sheets not only in the bust—as we well know—but in the boom, too. Monetary policy works through the banking system.
Banks create money and transmit interest rates to the wider economy. As finance and money are deeply intertwined, their regulation must also be intertwined. That is the first lesson to be learned from the crisis, and this Bill addresses that point.
The second lesson is not about who regulates, it is about how they regulate. The debate about whether there was too much or too little regulation is sterile and defies the facts. Instead, we should be seeking the right regulation. Between 2001 and 2008 the number of pages in the Financial Services Authority rulebook increased from 2,700 to 9,300, yet, as we know from the report into the failure of RBS, not a single FSA rule was broken at RBS. There are some vivid examples of the FSA’s box-ticking mentality.
In 2006 the FSA noticed that certain financial institutions were conducting biased stress tests on their balance sheet strength. In 2004 the FSA identified Fred Goodwin’s management style as a risk for RBS, yet nothing was done. No one was held to account. The FSA also failed to regulate balance sheets or check that business models were sustainable. There were 9,000 pages of rules, therefore, but there was no view on the sustainability of the business models of banks. In fact, FSA chiefs hardly ever met senior management.
The FSA had meetings with Northern Rock’s senior management eight times in the two years before the crash. Two of those interviews were conducted by phone, while five of them took place on the same day. In 2007 when Northern Rock went bust, it was on the at-risk register but the next set of meetings between its senior management and the FSA was scheduled for two years later, in 2009. The pendulum between sticking to the rulebook and allowing the authorities to exercise discretion had swung to the extreme end of using the rulebook and leaving no room for judgment.
Stephen Phillips (Sleaford and North Hykeham) (Con): My hon. Friend is making a powerful case. Does he agree that a key point is that flexibility is required for effective regulation of the financial services sector, and that one of the problems with the previous regulatory system was that the monolith that was the FSA simply imposed more and more rules without there being the flexibility to be able to tailor the rules to the circumstances?
Matthew Hancock: That is absolutely right, and I should also pay tribute to my hon. and learned Friend’s profession outside this House, because, as in the common law, every successful system of oversight that has stood the test of time allows room for both rules and judgment. The common law is an example of a system that has built up over time and that understands the complexities of human behaviour. It has strict rules in some regards, but it also allows the exercise of judgment in order to be able to adapt to modernity and circumstances. If we move entirely towards rules and away from the exercise of any judgment, we take away that ability to adapt.
Steve Baker: My hon. Friend makes an interesting point in comparing the approach under discussion to the common law. Does he agree that a key difference is that whereas in the common law anybody can look at previous judgments and know how the law will respond to their behaviour today, under this proposal to have flexible forward-looking, judgment-based regulation we cannot necessarily be sure today how the state will treat our current actions at some point in the future?
Matthew Hancock: It would be better if we had an embedded and long-standing system in which there were those precedents, but as we do not have about 800 years to put it in place it is better to have a forward-looking system. If my hon. Friend has a suggestion as to how we can use precedent built up over time, given that we are starting from a system that catastrophically failed, I would be very interested to hear it.
Steve Baker: I hope that my hon. Friend will stay for my speech.
Matthew Hancock: As I said, this pendulum swung too far, but why do we need to allow the authorities to exercise this discretion? It is because the world we face is as we find it, not as it is written in the rulebook. Indeed, the very complexity of the system calls for simple rules, because the more complex the rules applied to a complex system, the more likely somebody is to try to game it and, therefore, the more complex the set of rules that will need to be imposed again on the system to try to account for that behaviour.
We see the same thing in respect of other areas of Government policy, not least the tax system, where complexity has led to avoidance activity, which has led in turn to complexity, and so we now have the longest tax code in the world. This attitude towards regulation and oversight makes no sense in the modern world of complexity. Complex systems need simple rules.
Complexity also adds cost to businesses not targeted initially. Worse still, the complexity leads to a moral abdication, because the rules become a substitute for personal responsibility. Just as we need to allow for the exercise of discretion by regulators, we also need, within a system that promotes responsibility, to allow for the discretion of management. That is why I have concluded that we need to ensure, especially in such a high-paying business, that the sanctions for failure and for irresponsibility are strong. It is not a good enough sanction for someone simply to lose their job in an industry where it is easy to move into another one.
In the first instance, we need to move to a system where the debarring of directors is made easier, not least because when a bank is rescued it technically does not go through the current debarring rules. The FSA is right to regulate pay and introduce claw-back, but we also need, in extremis, to introduce a measure to ensure that for recklessness at the helm of a systemically important bank there is a stronger and, if necessary, criminal sanction.
I hope that such a measure would never be used but, as with other areas of life where these measures are hardly ever used, it greatly concentrates the mind to know that a deep sanction exists for reckless and deeply irresponsible negligence. I hope that such a measure would be a check on hubris and would last the test of time so that it would be in existence next time there is a boom and the associated hubris.
I hope that that change, the changes in this Bill and other changes will allow those of us who support the free market, enterprise and innovation to support, unabashedly and with enthusiasm, the wealth creators, who make our prosperity possible.