Parliamentary Connections

The financial chaos around the world is obviously going to dominate the first few weeks of the new Parliamentary session. I noticed a few commentators wondering why Parliament wasn’t recalled early – maybe yesterday’s response to the Chancellor’s statement provides sufficient answer.
The markets are so very jittery – nervous wrecks might be a more apt description – that any word out of place by the wrong person and calamity follows almost immediately in its wake. In the case of Alistair Darling’s statement yesterday it seemed to be more about which words didn’t find a place in his statement, rather than any that did. The markets wanted to hear that the government had found a magic wand, one wave of which would solve all their problems. In practical terms they were probably looking for a huge injection of capital with as few strings as possible attached. They really were in fairyland.
It looks ever more likely that there will be a further offer of public funds to shore up British banks but it will have tough conditions attached to it. These may come in the form of high dividend expectations, profit shares that guarantee and eventual benefit to the public purse and tough restrictions on the levels of pay for executives and traders. It is simply impossible to imagine anything less getting through Parliament. After all, the political centre of gravity of our Parliament is several paces to the left of that of the US Congress and they extracted a heavy price for backing the $700bn bail out package
Another parallel with the US that we can expect to experience here is a severe grilling of anyone with any taint of guilt when it comes to causing the crisis by any Parliamentary committee that can get its hands on them. Yesterday’s grilling by House of Representatives oversight committee of ex-Lehman boss Richard Fuld gives a very appetising taste of what is to come on both sides of the Atlantic: it certainly won’t be for the squeamish.
I relish the prospect of John McFall’s Treasury Select Committee sinking its teeth deep into assorted regulators, bankers and traders during the autumn; it will be real political blood sport. Given the recent record of that committee, it should also be quite revealing and give us some idea whether any of them have a clue as to what they have unleashed, let alone ideas for controlling it.

The cataclysm sweeping across global financial markets is moving so fast that no-one can keep up. That includes readers of this blog.
I was chided last night for my comment of a few weeks ago that AIG was a dead man in chains. A few weeks ago that is what is honestly looked like. The nationalisation of AIG by the US government looked to be just a way of postponing the inevitable demise, of managing its departure from the scene. Who, it did not seem unreasonable to ask, would want to be insured by AIG? State owned insurers simply had no place in the financial firmament.
Now state owned financial institutions are almost commonplace. We have woken up this morning in the UK to the news that many of our banks are going to join Northern Rock and Bradford & Bingley on the list of banks wholly or partially owned by the taxpayer, a solution that seems not to have ended the panic on the markets – perhaps we should close the markets down for a few days and throw a bucket of cold water over the lot of them.
Anyway, where does that now leave AIG? I still think it is in chains - just look at the exchanges over its jolly for top salespeople in Congress yesterday if you think it can just carrying on as before. But it is alive and will be kept alive simply because the alternatives are unthinkable.

There is a rising chorus of criticism of the ineffectiveness of Parliament during the current crisis. Today in The Guardian for instance, Simon Jenkins launches a stinging attack on the failure of the House of Commons to break away from its grouse-shooting long summer recess and compares it unfavourably with the American and Icelandic legislatures which he says, with some vindication, have stepped up to the mark.
I think he is being unfair in suggesting that MPs were roaming the moors looking for game as I suspect a majority of them don’t even have a passing familiarity with a grouse, dead or alive. The reason for the recess stretching all the way through September is the party conference season, still plonked in its traditional place in the calendar and still kicked off by the TUC at the beginning of September as it has been for over half a century. It has long looked an irrelevant circus, well past its sell by date, with none of the main parties daring to allow anything approaching genuine debate (let alone dissent) they are pointless talking shops.
This year they looked even more irrelevant as the financial storm clouds gathered and the winds of chaos blew with ever greater force. They should have been at Westminster, creating a sense of genuine purpose, articulating the fears and concerns of ordinary people – as the US Congress did so effectively – and injecting some much needed urgency into the Treasury, Bank of England and Financial Services Authority.
They missed that opportunity, however. So, what now?
I think Parliament has to look very hard at how it will scrutinise these newly nationalised – whether partially or wholly – financial institutions. I think the House of Commons Treasury Select Committee will do a good job in probing the regulatory triumvirate that looks to have been sleeping on the job and the bankers whose lack of understanding of their own businesses tipped the world into crisis. People will expect blame to be apportioned and will want to see those most responsible squirm and be punished: John McFall’s team is well placed to do this and to take it to the next, more constructive, level which is trying to understand what we have to do better to prevent such disasters befalling us again.
What I do not think they are well placed to do is to scrutinise how taxpayers’ stakes in financial institutions are being managed. This needs a fresh approach. No-one outside of a few City boardrooms expects the government to sign a blank cheque to bail-out institutions that have created, participated in and exacerbated the global collapse of financial markets. They need to be held to account and to have someone constantly looking over their shoulders on our behalf.
Parliament should set up a new Financial Institutions Select Committee made up of both MPs and Lords and chaired by Vince Cable, the Liberal Democrat’s widely respected Treasury spokesman. This committee should have extensive powers to demand that the directors of banks appear before it, that the institutions benefiting from public subsidy produce top quality financial information for it and also that they submit plans for major investments to it. This would breathe new life into Parliament, demonstrating that it has a new found determination to protect and promote our interests.

John Greenway's dire warning at the Post Magazine Business Leaders Forum Parliamentary Reception on Tuesday evening that the Financial Services Compensation Scheme could be sending some large bills in the direction of insurance brokers, IFAs and insurers next year and the year after moves closer to reality every day.
Promises are being made by government as knee-jerk reactions to the unprecedented crisis that grips our banking system. It is simply a matter now of doing anything necessary to put out new fires before they engulf yet another institution that just weeks ago looked fireproof. Pledges to compensate those who put their money (foolishly?) into collapsed Icelandic banks are made without stopping to think who will pay or how. This all reaches far beyond what the FCSC was designed for or can reasonably be expected to cope with.
Fortunately, there will be an early opportunity for Parliament to survey this wreckage as the Banking Reform Bill is about to set off on its legislative passage. I expect the issue of who compensates the depositors and savers in failed banks to feature prominently in this debate and it may offer an opportunity for the insurance industry, especially the broker and IFA sectors, to lobby hard for some cast iron ringing fencing of banking liabilities.

There was a useful bit of scene setting yesterday by John McFall, the combative chairman of the Treasury Select Committee as it prepares for its first foray into the violent storms gripping the financial markets.
Showing a perceptive awareness of his reputation, he said financial stability should be everyone’s number one priority, adding: “We could all have fun and games but it might only add to instability”. This dampening down of the expectation that the select committee’s sessions this autumn could be akin to a political fireworks display will be welcome news to the senior figures from the housing and mortgage markets invited to appear before Mr McFall and his fellow interrogators on Tuesday.
If those giving evidence on behalf of the markets play it right on Tuesday they should be able to illicit more sympathy than hostility by shifting the blame to the wholesale markets and regulators for creating the conditions that led the chronic overheating of the housing market. I retain a healthy degree of scepticism, however, about the ability of the Treasury Select Committee to refrain from going for the jugular when it gets senior bankers and regulators in front of it later in the month.

I want to leave the global banking crisis to one side and turn to the rather more parochial matter of the breakaway of the London Market Brokers Committee from the British Insurance Brokers’ Association to form the London International Insurance Brokers Association (LIIBA). I find this almost unfathomable in the context of the current state of the financial markets and regulation. Clearly no-one has applied the “How do others see us test?” to this.
The last thing insurance intermediaries need at the moment is further fragmentation of their representation. Just how do these London market brokers think news of yet another trade association to deal with is going to be greeted in the Treasury and at the Financial Services Authority with everything they have to deal with at the moment? A groan or two would seem to be the mildest reaction. More likely, they will be cursing, that is when they even have time to notice a new acronym appearing on the outer fringes of their radar screens.
It does seem that unity in the world of intermediary representation is an elusive goal. Just as BIBA and the Institute of Insurance Brokers start moving closer together so the London market brokers fall off the other end. And if you consider the independent financial advisers also have their own trade bodies, it looks as if there will be four (or more) organisations pushing the intermediary case with government and regulators.
This really does seem a step back into the past. Thirty years ago there were four intermediary bodies that briefly came together to form BIBA, a rare moment of unity before regulation started to change the world and the new breed of IFAs emerged as the general and life markets drifted apart. Now we have a potential return to that ludicrous multiplicity of trade bodies.
Intermediaries and brokers often complain they get a bad deal from government and regulators: do they really wonder why? Are there really people out there who believe that by having more organisations representing what most of the rest of the world sees as one market they will get a better deal? It is a spectacular piece of self-deluding naivety if they genuinely think that.
While the Treasury and the FSA will be groaning at the prospect, other market bodies that brokers might find themselves at loggerheads with will be quietly relishing the prospect of being able to play the broker trade associations off against each other. The skilled and experienced lobbyists among the really powerful trade associations like the Association of British Travel Agents and the Association of British Insurers will be quietly very content at the disunity in the world of insurance broking.

When the dust finally settles on the wreckage of the financial system once the current storms have subsided one area the spotlight of scrutiny and blame will fall on will be the ratings agencies.
Listening to several well informed MPs and peers talking last night it is clear that they are getting a little tetchy at hearing the very tired refrain "But the ratings agencies said they were AAA". They are entitled to feel this way.
How many times have we heard people hide behind the ratings agencies when financial institutions hit the rocks? And how many times have the ratings agencies failed to do their jobs adequately? I struggle to recall the collapse of an insurer, bank or savings fund clearly predicted by the ratings agencies. Yet, people have continued to put their faith in them, a faith that for so many has now proved cruelly misplaced suspect many politicians.
Should they be regulated? Should they be expected to contribute to the compensation of people who have lost money investing in the Icelandic banks festooned with those once comforting 'A's? Should their role be taken over totally by a regulator? These are some of the questions that MPs of all parties are asking.
The agencies need to reassess urgently what their role is going to be in the future and how they are going to perform it better because these questions - and the grave doubts about the competence and adequacy of the current system that lie behind them - will not go away.

‘Bonus’ has become a dirty word, certainly when mentioned in the same breath as banks and in the earshot of some Labour MPs.
Last night Lloyds TSB met around 20 Parliamentarians over dinner (arranged many months previously) to share its views on the state of financial services sectors, especially mortgages, pensions and small business banking. Inevitably, the news that chief executive Eric Daniels had on Monday reassured staff that their bonuses would be paid came up.
Lloyds TSB explained patiently that this internal announcement had been aimed at call centre, branch and back office staff on relatively low salaries who have an element of performance related pay or who have reasonable expectation of receiving some very modest bonuses based on reaching certain targets, even though they do not strictly speaking have performance related pay deals. To me the shocking fact was not that these people were going to be paid bonuses of a few hundred pounds but that the basic salaries quoted for some of the people covered by the announcement were as low as £11,000, with £15,000 apparently being a fairly typical figure.
You might have expected the more left wing Labour MPs and Labour peers with strong trade union connections to have been shocked by the base level salaries Lloyds TSB pays – but not a peep on that front. They remained angry at the thought that anyone working for a bank in the current climate might qualify for a bonus. You could sense the resigned exasperation among the Lloyds TSB management at the dinner at the realisation that this was an argument that they simply couldn’t win despite the more understanding noises made by the Tories around the table.
This argument has to be put into the context of the very low esteem in which the banks are held at the moment. Recent opinion polls have suggested that the overwhelming majority of ordinary citizens on both sides of the Atlantic lay the blame for the recent financial turmoil and our present economic woes firmly at the door of the banks. They want them punished and hackles rise from Detriot to Durham at the suggestion that any bonuses should be paid. This crude, knee-jerk reaction is understandable. To carry it through to wanting to punish low paid bank staff as far removed as my paper boy from the decisions that nearly brought the entire global banking system to it knees defies reasonable commonsense. This is not the fat cats of Wall Street trying to maintain their luxury lifestyles by paying themselves huge discretionary bonuses, as revealed over the weekend.
I am all for showing those at the top of financial institutions that gambled their fortunes and our future well-being the way to the dole queues without a penny of compensation. They should have known what they were doing and shouldn’t be surprised if they have to carry the can for corporate incompetence on an unprecedented scale. Many of their staff will have to share the pain anyway as banks struggle to cut their cost base, without denying them a few hundred pounds extra in their wage packets at Christmas. That would just be spiteful.