THURSDAY 10 JANUARY 2008

RT HON ALISTAIR DARLING MP, MR JOHN KINGMAN AND MR CLIVE MAXWELL

  Q1750  Chairman: Chancellor, good morning to you and your colleagues in this last evidence session on the Financial Stability and Transparency Inquiry before we produce our Report. Can you introduce your colleagues please.

  Mr Darling: Yes, of course. Today I am accompanied by John Kingman, whom you will know, who is the Second Permanent Secretary at the Treasury and has been playing the lead role amongst Treasury officials in relation to Northern Rock, and also Clive Maxwell, who is the Director of Financial Services at the Treasury and who has been doing a lot of work on our proposals for reform of the banking system.

  Q1751  Chairman: Now, last week you told the Financial Times that you intended to give new powers relating to failing banks to the FSA. Does that mean that you have concluded that the FSA was not responsible for regulatory failings and, maybe more importantly from this Committee's point of view, does that mean that we pack up and go or will the Treasury Select Committee Report recommendations, which we hope to produce before the end of January, be an important, integral part of your consultation exercise?

  Mr Darling: If I can answer the second question first, if I may, there may be many occasions when ministers might wish that select committees pack up and go, but this is not one of them, I can assure you. As I said to you when I came to you in October, you are conducting a fairly extensive inquiry into the circumstances surrounding Northern Rock's difficulties and, equally importantly, you are looking at what improvements might be made to the supervisory regime and also the arrangements were we to face a similar situation at some time in the future. I said to you in October that I wanted to publish our proposals after I had the benefit of seeing the Select Committee report. The only thing that has changed since then is that I want to get primary legislation on to the statute book, if at all possible, in this parliamentary session. Now, if you work back, that means we really have to have a Bill getting its second reading pretty soon after we come back after Easter. The proposals that I publish will have to be consulted upon because they are going to be far more wide-ranging than I think was anticipated even two or three months ago and we need to get them absolutely right. The Cabinet Office guidelines are that you have a three-month consultation and I think it is pretty important that we do. That means, bluntly, that I need to publish something by the end of this month. Now, when we met in October, I think there was some thought that you would publish your report in the middle of January and I understand it may be slightly later than that. I do not think that is a problem in the sense that, if we do get your report before we publish, it may be that there are some things which we may not have considered ourselves which we may be able to adapt, but, even if we did not, we will have during the consultation period the benefit of considering whatever your recommendations are and we are not going to agree on everything, I suppose, who knows, but we will certainly be able to take on board, I hope, a great deal of what you say, so the work that you are doing is extremely important because there is nobody else carrying out this sort of investigation at the moment and it is precisely what a select committee ought to be doing and it is very, very important. Now, before I go on to the first part, do you want to pursue the process?

  Q1752  Chairman: Well, Chancellor, you and I have had a discussion this week and, as a committee, we are very keen to get our report out before the end of January to inform, and to be part of, your consultation exercise and we certainly hope to do that. We may not be publishing all of the evidence at one time because of the immense amount of evidence that there has been, but the real meat of it will hopefully be published in time for you to consider it, and we will keep in contact on that.

  Mr Darling: Sure, and I think that would be very useful. If we can get a consensus in the House of Commons and the House of Lords too, that would make things so much better, but I really would like to get legislation, if at all possible, on the statute book by the end of this parliamentary session. Now, obviously we do not know how precisely that is going to end, but I think what we want to avoid is a situation where we simply cannot do it because we did not leave ourselves enough consultation to get a—

  Q1753  Chairman: Well, that is reassuring and we will keep in contact on that, Chancellor, so if you would like to go on to the first point.

  Mr Darling: On to your point about the FSA, when I appeared before you last October and on many occasions since in the House, I made it clear that I think the essential architecture of the system that we have in this country is sound and that you have the Financial Services Authority which is responsible for the prudential supervision of financial institutions, including banks, in this country. It is a single regulator, it has been fully operational now for seven or eight years, it is a model which most of the world is seeking to follow and I do not subscribe to the view that we should go back to where we were before that when, frankly, we had seven or eight different regulators; I do not think that makes any sense. So we have got the FSA responsible for prudential supervision on the one side and we have got the Bank of England which has two core responsibilities. One is monetary policy, and we are proposing nothing that will interfere with the Bank of England's independence in monetary policy, and I think that is absolutely fundamental, but its second responsibility which is of equal importance is to maintain the financial system itself, and that is very important and I think the Bank should have that. What I was talking about last Friday is that I believe that there are a number of changes that are necessary and, when we set out our proposals at the end of this month, people will see them in full and the details, but I do think that one of the gaps in the supervisory regime at the moment is that it is not clear that the FSA has all the powers that I think it needs in order to get information from institutions and, crucially, when it looks like an institution is getting into difficulty, I think it needs more powers along the lines of the systems in America and Canada which intervene earlier to help a bank that might be in trouble and perhaps at a later stage even help with restructuring if a bank is getting into real difficulties or a reorganisation, even a merger or acquisition. Now you ask, does that mean that I have concluded that nobody was to blame at the FSA and, as I said, I think, in October and as I have said in the House, Callum McCarthy, the Chairman, has made it clear that, in retrospect, looking back, the FSA should have taken more action when it saw the extent to which Northern Rock was exposed because of its particular business model, but I do not think it follows from that, therefore, that you dismantle the FSA or you do not give it the tools to do the job. The FSA has got to learn from any mistakes that it made just as the rest of us have to do, but I think it makes sense to give the FSA additional powers. I should say that the changes that I envisage will affect the Financial Services and Markets Act and they will almost certainly need amendment to the Banking Acts as well. They will be pretty wide-ranging because I think what is clear from this whole episode is that we do need to make improvements to strengthen the various tools at our disposal so that, in the event of this sort of thing happening again, we can take action and we can take it in a way that is effective.

  Q1754  Chairman: In his evidence to us, Sir Callum McCarthy suggested that it would be better to pursue options for private ownership for Northern Rock, and I think that is widely agreed, before discussing any nationalisation proposals. Does the Government have any plans in place for taking over Northern Rock if it deems it necessary?

  Mr Darling: Well, I have made it clear right since my statement in November when I set out the principles that would underpin our approach to the future of Northern Rock that all options, including nationalisation, are on the table, and I have always been clear about that because, if we cannot find a private sector solution, then we have got to keep all those options on the table. Now, I think all of us believe that a private sector solution would be highly desirable and indeed even many people who advocate nationalisation always point to it as being a stepping stone between where we are now and an ultimate private sector solution, but I think it is important that people understand that all options are on the table and they have been on the table.

  Q1755  Chairman: During our visit to America as a committee, we looked at the Federal Deposit Insurance Corporation, that being the rescue body for banks. In America, quite a number of banks go under, the relatively smaller banks than exist here, but one of the issues there was that they take the bank over for a very short period of time and have private management managing it where the FDIC are not involved as managers or investors in it, but then pass it on. Does that hold any attractions for you here in the sense that you have given consideration as to who would manage a publicly administered Northern Rock and would you see it being temporary in nature if it did happen?

  Mr Darling: I think there are a lot of attractions from the experience in the United States and also Canada, it is a similar there. Obviously the situation there is different, as you correctly say. There are about 8,500 banks in America and they do tend to go down more often than in this country. I would not say it is routine, but it is not unusual and a lot of these banks are very small and based in states, in big cities and so on. Therefore, the United States has this standing body, the Federal Deposit Insurance Corporation, which you referred to, and it stands ready and is used from time to time. As I said in my interview with the FT last week, I have my doubts as to whether or not we would want to maintain here a standing body that might never be used, and I think actually in America it is 14 years since this was last used, but I do think that the philosophy behind it whereby at an early stage the FSA could put in the equivalent of a company doctor to help a bank that may be getting into difficulty to turn it around and make the necessary changes and then perhaps see it through or, if it goes beyond that, to be able to insist on restructuring or, if the bank gets into very severe difficulties, actually take over the running of it prior to passing it on, but the object must be, if at all possible, to pass it on. I do not think any of us are in the business of the state acquiring banks; I do not think that would be a very good idea.

  Q1756  Chairman: There has been comment in the press by some players in the market that perhaps any legislation that you have would not be compatible with the European Convention on Human Rights. Do you have any comment to make on that?

  Mr Darling: Well, as you know, legislation has to be compatible with human rights and indeed the Minister introducing the Bill has to sign a certificate to that effect and, if not, they have to say it explicitly. Shareholders' rights are important, but at the end of the day, if you are talking about the position that we are in at the moment, say, with Northern Rock, the Government, the taxpayer have a huge interest in this and I made it very clear in November that our principles are clear, that we want to look after the depositors and that is very, very important, and we want to make sure that we get the money back that the Bank of England has lent. Shareholders, I think, always accept that, if you buy shares, they can go up or down and it is especially the case that some of the people who have been buying shares since Northern Rock got into this difficulty must have been aware that there were certain problems with this bank and a lot of the people we see commenting are not the sort of people who do these things with their eyes shut, their eyes were very open indeed, but the Government will at all times behave properly, but the Government has to look after the taxpayer interest, it has to look after the depositors' interests and I think shareholders have always understood that, when you buy shareholdings, they can go up, but they can also go down.

  Q1757  Mr Brady: The Governor told us that the wording of the Market Abuse Directive was ambiguous. Did the Treasury or any of the Tripartite Authorities contact the European Commission for a clarification of the Directive before ruling out covert intervention?

  Mr Darling: No, because the situation did not arise. Again, there are two aspects to this question. I will come on to the Market Abuse Directive, if you would like, because there is some clarification that might be helpful for future occasions, but in relation to the Northern Rock situation, you may recall that, when I spoke to you in October, I made two points, firstly, that Northern Rock felt they would have to make some form of statement, if not at least a profit warning, because the situation had changed dramatically since they had last spoken to the market, and also it was thought to be quite a material consideration that they were going to be getting lender of last resort facilities. The other consideration to my mind, and here I was proved absolutely right on everything bar the timing, is that I was pretty sure this was going to leak, therefore, the chances of it being maintained as a covert operation were likely to be slim. I may say, going back to Mr McFall's first point about the role of this Committee, I would very much welcome your collective views on the ability to mount covert operations because I think the present situation where there has to be almost immediate disclosure for lender of last resort facilities does make things rather difficult, which brings me on to the Market Abuse Directive because there there is some flexibility, provided you can keep it confidential, and in today's world that is a big ask maybe, and the second thing is that you have got to be sure that you are not misleading people. Well, you have to ask yourself the question: when do you get to the stage where you might be doing the misleading? I think some clarification from the Market Abuse Directive would be helpful anyway, but, in relation to this Directive, it was not a thing that drove us to make an announcement on the Friday morning as opposed to trying to keep it quiet.

  Q1758  Mr Brady: But there was no contact with the Commission during that period. Had there been any contact with the Commission on this subject following the crisis management exercises that were undertaken in 2005/06 by the Tripartite authorities?

  Mr Darling: I will ask Clive to comment on that in a minute, but, when these things were tested in the second half of 2006, I think whole consideration was given to a whole range of matters, the compensation, the tools available in relation to getting control of deposits and so on, but can you deal with the point, Clive?

  Mr Maxwell: I am not aware of specific contact with the Commission on that particular subject on the Market Abuse Directive.

  Mr Darling: From my direct experience, never mind what happened before, this was not seen as something that was so material that it was almost, if you like, a showstopper. The Market Abuse Directive is there for very good reasons, to stop people being unaware of the true circumstances of a company, but I think, of all the things we needed to fix, as looked at in 2006 and 2007, I would not put this top of the list. It is a consideration, but no more than that.

  Q1759  Mr Brady: But it was not really a material factor in ruling out covert intervention?

  Mr Darling: On the Northern Rock case? No, it was not.