Greg Clark MP: We must tackle big business excess as well as big government excess

Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.

There’s was something odd about the clash between Ed Miliband and David Cameron at last week’s PMQs.

The exchange opened with a question about the final report of the Parliamentary Commission on Banking Standards. This wasn’t surprising as the report’s publication was one of the main stories of the day – however, it soon became apparent that Mr Miliband’s plan of attack was based on the assumption that the Government wouldn’t support the report’s major recommendations. And, so, with the Prime Minister making crystal clear that the Government did indeed welcome and endorse the report, the Labour leader was left with nowhere to go.

What made the whole thing even odder was that Government ministers, including myself, had appeared on the broadcast media throughout the morning making it perfectly plain that we backed the report.

Perhaps the problem was one of cognitive dissonance rather than mere inattention. It can’t be easy for those on the left to admit that it is a Conservative-led government that is reforming the financial services sector. They should get used to it – the future of Conservatism is all about putting right the problems caused by excesses that can happen in big business as well as in big government.

In the three years since it came to power the current Government has already made substantial progress on banking reform.

Firstly, we have passed the Financial Services Act 2012. It which has replaced Gordon Brown’s disastrous regulatory set-up, which Peter Lilley warned as Shadow Chancellor at the time “would cause regulators to take their eye off the ball, while crooks and spivs have a field day”.  Instead, the Bank of England is once again in charge of ensuring the stability of the UK banking system, and a dedicated financial conduct regulator is charged with taking a forward-looking, rather than tick-box, approach to monitoring the behaviour of firms,.

Secondly, we are implementing the recommendation of Sir John Vickers’ Independent Commission on Banking – in particular, by ring-fencing those bank activities that are essential to the smooth running of the economy from inherently riskier investment banking.

The recommendations of the Parliamentary Commission on Banking Standards represent the third leg of our reform agenda, because while reforms to the regulation and the structure of the banking sector are essential, its standards and culture needs to change too.

The Commission’s report has as its foundation the essential point: the UK’s banking system depends totally on the trust it commands.  If it cannot count on the trust of its customers it cannot effectively serve the businesses and people, which is the only purpose of banking.  If it cannot count on the trust of our own businesses and people it cannot possibly sustain a reputation for international pre-eminence.

The Commission makes an acute observation when it comments that banks have too often looked to outsource judgements – and ethics – to the regulator rather than developed their own standards and corporate conscience of how to treat customers.  Successful businesses do not gouge their customers because the regulator tells them they shouldn’t, but because it is against their ethos and long-term interests to do so. 

The Parliamentary Commission’s report is a serious, substantial and impressive piece of work. The Government will respond in full next month but we have already supported the recommendations on new criminal sanctions and cancelling bonuses where banks are bailed out. And, as the Chancellor said last week during his Mansion House speech: where legislation is needed, the Banking Bill currently before Parliament will be amended to ensure the recommendations can be quickly enacted.

Of course, there were those who’d originally demanded a public inquiry into banking reform and who complained that having a Parliamentary Commission wasn’t good enough. If we’d taken their advice we’d still be months and months away from a final set of recommendations – which, in any case, might not have been as widely welcomed as those produced by Andrew Tyrie and his fellow Commissioners.

The United Kingdom is not the only country in which trust in the banking industry collapsed during the financial crisis. But the fact that scandals have happened elsewhere is of absolutely no comfort.  In a world where trust has been lost, we should be a haven of confidence and security.  This won’t happen unless we earn higher standards of trust than apply elsewhere.

The overwhelming – and urgent – imperative is to rebuild that trust.  It will not be done through a single factor, but by several, including effective regulation; meaningful sanctions; clarity and simplicity of organisations; pay that rewards success rather than underwrites failure; and, above all, an all-pervading culture of integrity.

The reforms that have so far been made take us a long way, and further than our competitors.  The Tyrie Commission lays out the next steps necessary to restore the reputation – and with it the prosperity – of Britain’s banking industry.