Karl McCartney MP, Lincoln’s Member of Parliament, has welcomed a speech by the Chancellor on the Government’s radical overhaul of banking reform and financial regulation.

The speech included the new announcements that the Government would implement an ‘electrified’ ring-fence between the retail and investment arms of banks and would break open the monopoly on payment systems held by big banks to re-introduce competition and modernise the way we bank.

Mr McCartney said: “In the East Midlands, 73,900 people work in financial services, which contribute £7.3m to our local economy.  But the financial crisis and its aftermath destroyed people’s trust in the banking sector.  We need radical reforms to restore strong regulation, a reformed culture, and a financial sector that works for everyone – these announcements and our wider reforms will deliver that.”

George Osborne, Chancellor of the Exchequer, commented: “The fire alarm was ringing, but no-one was listening.  And when the crisis hit, the fire was then so great that the whole economy was sacrificed to put it out.  The British people need to know that lessons have been learnt. And they have.”

Notes

·         Introducing a new system of regulation, centralised in the Bank of England. In April 2013 the Bank of England will take full responsibility for financial stability. Two newly created regulators, the Prudential Regulation Authority and the Financial Conduct Authority will respectively take responsibility for micro-prudential regulation and the behaviour of the financial services industry towards customers. The Financial Policy Committee will have the task of monitoring the stability and risk in the financial system as a whole.

·         Electrified ring-fence to separate retail and investment banking. We are ring-fencing high street banks and investment banks. This ring-fence will be ‘electrified’ – the regulator and the Treasury will have reserve powers to separate the two parts of an individual bank completely if it flouts the rules.

·         Reintroducing competition by opening up the market for new banks. The Government will end the monopoly of the existing big banks on the power to regulate so-called ‘payment systems’. This will help open up the market and give people more choice – by making it easier for new banks (or non-banks wanting to offering banking) to come into the market. This will introduce a similar independent regulatory regime for the banking system as there is for the electricity and gas grids and communications networks.

·         Using technology to transform the way we bank. Opening up the payment systems will mean money should be able to move around faster, more banking should be able to be done on mobiles, and people should be able to have more control over their banking. The Government will consult in the Spring, and add to the legislation being introduced tomorrow to make any necessary changes to the law.

·         Implementing additional measures to boost competition in the banking sector. We are introducing a ‘7-day switching service’ for current accounts, which will take effect in September. The new Financial Conduct Agency within the Bank of England will have the objective to promote competition from April. We have already made progress, with the sale of Northern Rock to Virgin Money by the Government, and the sale of over 600 branches from Lloyds to the Cooperative to create a new big high street player.

·         Introduced a permanent unilateral Bank Levy. The Bank Levy will raise £2.5 billion every year by 2014-15. The levy took effect on 1 January 2011 and is permanent. This raises more each year than Labour’s one-off bank bonus tax. 

·         Fines from financial sector firms being used to benefit taxpayers. Rules have been changed so that fines from banks and other financial services firms will no longer go to the industry. In October £35 million of fines imposed for LIBOR manipulation was used to support Britain’s Armed Forces community.

Contribution of financial services by region

(Financial Services in the UK by region, CityUK, accessed 5 February 2013, link)

Labour’s tripartite system was a complete failure

·         Gordon Brown has accepted Labour made ‘a big mistake’ on banking reform. ‘We set up the FSA believing the problem would come from the failure of an individual institution. That was the big mistake. We didn’t understand just how entangled things were… I have to accept my responsibility’ (Gordon Brown, The Daily Telegraph, 11 April 2011).

·         Mervyn King: Little real reform under Labour. ‘In the UK, in the form of direct or guaranteed loans and equity investment, it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy. To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.’ (October 2009).

·         Mervyn King: all we could do was write reports and give speeches. ‘We were given a statutory responsibility for financial stability in the Banking Act, and the question I put to you in February at this committee, to which I have not really received any adequate answer from anywhere, was: what exactly is it that people expect the Bank of England to do? All we can do at present, before a bank is deemed by the FSA to have failed, is to write our financial stability report and give speeches’ (Mervyn King, Evidence to Treasury Select Committee, 24th June 2009).

·         John McFall: Tripartite is ‘an old banger’. ‘[The tripartite system] may be a Rolls Royce when it sits on the shelf, turns into an old banger when it gets on the ground’ (John McFall MP, Chairman of Treasury Select Committee, 25 Sep 2007).

·         House of Lords Select Committee: ‘it was not clear who was in charge’. ‘the tripartite authorities in the United Kingdom (the Bank of England, Financial Services Authority (FSA) and Treasury) failed to maintain financial stability and were found wanting in dealing with the crisis, in part because the roles of the three parties were not well enough defined and it was not clear who was in charge’ (House of Lords Select Committee on Economic Affairs, Banking Supervision and Regulation, 2 June 2009).

·         Treasury Select Committee: Governor couldn’t tell us who was in charge. ‘When we questioned the Tripartite authorities as to who was in charge, the Governor’s first reply was “What do you mean by ‘in charge’? Would you like to define that?”’ (Treasury Select Committee, The run on the Rock, January 2008).

Ed Balls’ role in financial crisis

·         Ed Balls was City Minister from May 2006 until June 2007. Ed Balls was Economic Secretary to the Treasury between 8 May 2006 and 28 June 2007.

·         Balls was Brown’s economic adviser when the tripartite system of regulation was created. Ed Balls was Brown’s economic adviser at the Treasury: ‘He was economic adviser to the Chancellor of the Exchequer, 1997–99; chief economic adviser to HM Treasury, 1999–2004’ (Ed Balls website, About Ed, 5 August 2010, link).

·         When he was City Minister, Ed Balls used to brag about the light-touch system of regulation he helped create. ‘Nothing should be done to put at risk a light-touch, risk-based regulatory regime’ (Ed Balls, City Minister, Bloomberg Speech, 14 June 2006).

Labour’s bonus tax raised less than the Government’s bank levy

·         Labour’s bonus tax only raised £2.3 billion. In net terms, the bonus tax raised £2.3 billion (Hansard, 20 January 2011, col. 57WA, link).

·         Darling said this could only ever be a one-off. Alistair Darling said: ‘it will be a one-off thing because, frankly, the very people you are after here are very good at getting out of these things and… will find all sorts of imaginative ways of avoiding it in the future’ (Alistair Darling, FT, 1 September 2010, link).

·         The government has introduced a bank levy which raises more every year. The permanent bank levy raises £2.5 billion in 2011 and 2012, rising to £2.6 billion in 2013 and 2014 (HM Treasury, Press Release, 8 February 2011, link).

Record bonuses were paid out under Labour

·         At least £66 billion paid out in bankers’ bonuses under Labour. Between 2001-02 and 2009-10 £65.9 billion in bankers’ bonuses were awarded in the City. This included over £11 billion paid out in two consecutive years (CEBR Press Release, 11 November 2012, link).

·         City bonuses more than tripled under Labour in five years. The total paid out in bonuses in the City more than tripled between 2002/03 and 2007/08, from £3.3 billion to £11.6 billion (Vince Cable, Executive Pay, 24 January 2012, link).

·         Labour knighted Fred Goodwin and James Crosby. Fred Goodwin, who was Group Chief Executive of Royal Bank of Scotland when it failed, was knighted in 2004 for services to Banking. James Crosby, the former Chief Executive of HBOS plc who resigned from the board of the Financial Services Authority over allegations he sacked HBOS head of risk Paul Moore because he warned that the bank was overexposed, was knighted in 2006 for services to the Finance Industry (Queen’s Birthday Honours List 2004; Queen’s Birthday Honours List 2006 ; BBC News, 11 February 2009).

Labour never used to support breaking up the banks

·        Gordon Brown said full separation is ‘not the best way to move forward’. ‘I do not think that he can assume that high street or ordinary retail banks and investment banks are not both sources of the problems that we have had, because high street banks had problems and investment banks had problems. His determination to separate the two is perhaps not the best way to move forward’ (Hansard, 23 June 2009, Col. 667, link).

·        Ed Balls insisted there’s ‘no need to break up’ banks. ‘The way that the commission was going about it is ring-fencing the retail banking side, strengthening capital controls there, that sounds to me to be the right approach, there is no need to break up institutions but there has got to be clear separation’ (BBC News, 11 April 2011, link).

·        Alistair Darling said plans for full separation ‘don’t fit the bill’. ‘It’s the interconnections between financial institutions that’s the problem which is why I think that the proposals you have advanced don’t actually fit the bill. It’s rather like a general fighting the last war rather than taking account of where we are likely to be in the future’ (Alistair Darling, The Evening Standard, 2 February 2010, link).

·         Alistair Darling said separating banks ‘doesn’t deal with the full problem’. ‘I have always thought to separate banks doesn’t deal with the full problem … It is the connections between institutions that cause problems not the legal entity. The large bank/small bank division – experience shows – does not answer the question either of Lehmans’ (Daily Telegraph, 28 January 2010, link).

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