Freedom works.

My Financial Services (Regulation of Derivatives) Bill has now been printed, ready for second reading on 10 June. You can obtain the PDF here and track the Bill’s progress here. The press release, including links to background evidence and press coverage, is here.

When I introduced my Bill on 15 March, I explained how the accounting rules for banks incentivize trading in derivatives by enabling unrealized profits to be booked up-front, leading to large but unjustified bonuses and dividends.

On 30th March, the House of Lords Economic Affairs Committee published a report recommending that the Government reassert prudence as a guiding principle. That is what my Bill does and I hope the Government will adopt it.

While complying with the rules, banks are producing accounts that grossly inflate their profits and capital in three ways. First, using IFRS mark-to-market and mark-to-model accounting, banks record unrealized gains in investments as profits. Second, IFRS prevents banks from making prudent provision for expected loan losses by allowing recognition only of incurred losses. Third, IFRS encourages banks not to deduct staff compensation from profits. Taken together, these flaws mean that banks’ accounts under IFRS are at once rule-compliant and dangerously misleading.

By way of example, we have deduced from the accounts of the UK Asset Protection Scheme that RBS may be overstating capital by as much as £25bn.

Boards take decisions based on their accounts. If the accounts are misleading, is it any wonder that boards and regulators are failing shareholders and taxpayers? The public are furious about the injustices manufactured by the banking system, and they are right to be, but how much greater is the injustice if grotesque bonuses are based on false profits?

Banks are living in a fools’ paradise in which their boards cannot get a firm grip on vital measures like capital and profit. That is plain wrong.

Thanks to the European Union, the UK cannot simply mandate prudent accounting in compliance with UK Companies Law but we can require parallel accounting to British standards while international negotiations proceed. That is why I am calling on the Government to adopt my Bill.

I attended much of the second reading debate on the Protection of Freedoms Bill today, conscious that liberty is still the subject about which I have written most, judging by the tag cloud, bottom right.

There’s much in the Bill to be glad about and I shall certainly support it but of course I would have liked it to do more. I discover that many of my colleagues are less concerned about these issues than I might have liked: we have come a long way since Pitt, Gladstone and Disraeli.

For example, from Pitt:

Necessity is the plea for every infringement of human freedom. It is the argument of tyrants; it is the creed of slaves.

Reagan was quite spectacular:

You and I know and do not believe that life is so dear and peace so sweet as to be purchased at the price of chains and slavery. If nothing in life is worth dying for, when did this begin — just in the face of this enemy? Or should Moses have told the children of Israel to live in slavery under the pharaohs? Should Christ have refused the cross? Should the patriots at Concord Bridge have thrown down their guns and refused to fire the shot heard ’round the world? The martyrs of history were not fools, and our honored dead who gave their lives to stop the advance of the Nazis didn’t die in vain. [...]

[...]

You and I have a rendezvous with destiny.

We’ll preserve for our children this, the last best hope of man on earth, or we’ll sentence them to
take the last step into a thousand years of darkness.

And indeed in our own country, we have departed far from the commitment to liberty which Churchill expressed here:

If you will not fight for the right when you can easily win without bloodshed; if you will not fight when your victory will be sure and not too costly; you may come to the moment when you will have to fight with all the odds against you and only a small chance of survival. There may even be a worse case: you may have to fight when there is no hope of victory, because it is better to perish than to live as slaves.

Still, lets take the improvements we can get…

I just completed my first act of scrutiny of legislation in committee for The Conduct of Employment Agencies and Employment Businesses (Amendment) Regulations 2010, which was drafted under the last government. It was an unedifying experience.

Having obtained and read the instrument beforehand, I considered that:

• The Instrument was well-intentioned and thorough, or at least extensive, but imperfect.
• A page of simple law might have been more effective.
• Scrutinising ten pages of amendments to legislation is difficult to do without the context of the amended legislation (let’s call this “the Lisbon trick”).
• There wasn’t time to thoroughly deconstruct the regulation beforehand.

So, about 20 MPs turned up, listened to two speeches and a response then nodded the SI through. Hardly inspiring for the man in the public gallery who has spent 13 years of his life campaigning to stop the exploitation of eager models through up-front fees, something the SI probably won’t stop, thanks to a loophole.  I suppose we will see.

It was all very “Yes, Minister”. Change required…