Along the watchtower

Article by Simoney Girard in April 2008
in Securities and Investment Review


PROFILE: JOHN MCFALL MP

The Rt Hon John McFall MP, chairman of the Treasury Select Committee, talks to Simoney Girard about the need for integrity among financial services firms

The Right Hon John McFall does not, in person, resemble the media’s portrayal of him as the hard-nosed chief inquisitor for the Treasury Select Committee (TSC).Whether it is coverage of inquiries into split capital investment trusts, income and capital funds, private equity or Northern Rock, the media has used his incisive questioning as chairman of the TSC to cast him as the guardian of the City’s integrity.

But he does have alarming perspicacity and no qualms about pointing out here things are wrong; one gets a sense of the schoolteacher he started out as in the 1970s. Indeed, the member of Parliament for West Dunbartonshire has made a career out of standing up for the consumer (one thinks of his strongly worded letter to the banking industry in 2006 urging it to contribute to the Farepak Response Fund so that low-income families would have Christmas hampers) and defending the principles of sound practice on which the UK’s financial services industry is founded.

It’s this emphasis on fair treatment for all that interests him most about the TSC. McFall says: “Our work on financial inclusion has helped bring about change that will directly benefit many low-income families. For example, the TSC’s work on ATMs led to the introduction of 600 new cash machines in low income areas. So far, 543 of these either have been, or will be, installed in the first half of 2008, benefiting 1.2 million residents. We have produced four reports on financial inclusion. more than on any other subject, even if other issues such as private equity and financial stability have grabbed more headlines.”


Fairness for all

Financial inclusion is at the heart of shat the TSC does, McFall asserts, and one of the reasons why its work is so important to the healthy operation of London’s financial services regime. He claims: “One of the principal reasons for the TSC’s existence is to scrutinise the policies and actions of the Treasury, its agencies and related authorities. The Bank of England and the FSA are accountable to Parliament through the TSC; we also have the rare opportunity to question ministers and officials and so inform the decisions of Parliament. In questioning the chancellor about the budget, or the governor of the Bank of England about the inflation report, or chief executives of some of the largest financial institutions, the TSC covers the subjects at the top of the country’s economic and political agenda.”

He emphasises that the Northern Rock affair illustrated how important it is that these regulatory authorities are held accountable, as their failure can have consequences for the whole financial system.

“The committee has the ability to move important issues up the political agenda. One example of this is financial inclusion. Before our enquiries, financial inclusion was largely off the political radar at Westminster. Following them, the government created a financial inclusion taskforce, set up a financial inclusion fund and provided extra impetus on issues such as basic bank accounts and affordable credit.”

“The recklessness and greed which drove many banks to deal in sub-prime loans resulted in huge losses to the person on the street”

Rock for ages

He can’t get away from Northern Rock: its effect on the market has been deep and will have significant repercussions to come. McFall explains: “The investigation into Northern Rock was the most high-profile investigation undertaken by the Committee during this Parliament. The pictures of long queues of depositors trying to withdraw their money from Northern Rock branches up and down the country put this issue, and subsequently our inquiry, very much in the media spotlight.”

According to McFall, the crisis at Northern Rock highlighted a gap in financial regulation and the expectation is that the TSC’s inquiry and subsequent report ill he crucial in informing the debate on how to make the right changes to banking supervision to safeguard financial stability in the future. “It is crucial that banks are alloyed to fail, hut only in an orderly manner that does not disadvantage depositors,” McFall says.

The inquiry also showed the worrying attitude not just of Northern Rock, although it had “a reckless business model”, he claims, but of the wider banking industry worldwide. McFall declares: “The recklessness and greed that drove many banks to deal in sub-prime loans and increasingly complex financial instruments has, ultimately, resulted in huge losses to the individual banks and, most importantly, to the person on the street. It has caused massive disruption to the world economy and we must pursue this issue on the international stage.”


Prudent practice for London

He avers that the most pressing issue is that the UK maintains its reputation as a financial centre. McFall explains: “The damage done by the Northern Rock debacle was described to me as no more than a flesh wound. I believe this is true and that our financial institutions have the strength to overcome it.

“This will require a focus on prudent business practices, fairness to consumers and transparency. It will also depend largely on a revised regime for sensible financial regulation that addresses the concerns about the current tripartite system, which failed both to prevent and to deal effectively with disaster. But the behaviour of financial institutions themselves will be equally important in restoring the UK ‘s reputation.”


What’s in store?

McFall states that the key phrase for the financial services sector over the next few years must he risk management. Banks and financial institutions must reappraise the way they view it. “The focus this year may turn to financial institutions’ treatment of consumers. The cost of the troubles in the sector should not be passed on to consumers in all cases and the TSC will be monitoring this carefully,” he states.

McFall adds that the TSC will be conducting an inquiry into the re-attributions of with profits funds. 2008 is going to he a busy year. Let’s hope the City takes note.