(10 years, 9 months ago)
Lords ChamberMy Lords, in Committee I promised the House that I would table amendments to debate the question of whether we should have separation rather than the present system. The arrangements under the Bill show that it may not work very well.
The speakers we had on the first day in Committee went to the heart of the issue. The noble Lord, Lord Turnbull, a distinguished former head of the Civil Service, told us that the amendment he moved dealt with the whole issue. In practice, I hope that my amendment deals with what I said it would deal with. However, given the problems with drafting amendments to this complex Bill, I had to use the services of a very excellent person in the Public Bill Office, Simon Blackburn. Between us we drafted the amendments, which I hope work. If they do not, and the House agrees, no doubt the Minister will be able to amend the amendments to make sure that they do what I want them to do—that is, reconstruction, not ring-fencing.
The noble Lord, Lord Turnbull, told us at col. 18 —and of course he knows about these things—that the Government’s response to the problem here, and what they plan to do, is to “change banking for good”. Of course, if that could be done, it would be marvellous. However, the plain fact is, as the noble Lord, Lord Turnbull, pointed out, that the reality is somewhat different. The Government have, of course, embraced some recommendations, but the provisions in the Bill make sure that they are heavily diluted. Speaking as a senior official, the noble Lord knows about dilution. Certainly, if you look through the Bill, there are all kinds of dilutions and provisions that make a nonsense of the original recommendation. However, with this complex new Bill it is good to have a former distinguished leader of officials tell us what it will and will not do.
The noble Lord went on to speak about the vigorous debate the parliamentary commission had on Glass-Steagall, which is the US separation of banking. He said that eventually they came down against it because the United States had abandoned it. He was followed by my noble friend Lord Eatwell, who spoke of the importance of reviews. He said that what is being proposed here is,
“a leap in the dark and we have no idea whether it will work”.
As it is, it is a “novel innovation” and we,
“cannot be sure whether it will … have … unintended consequences”.—[Official Report, 8/10/13; col. 20.]
I do not know what kind of unintended consequences those might be, but clearly all kinds of consequences could arise from not dealing with the real issue here.
We therefore have my new amendments, which I hope that the House will eventually approve. However, we are a long way at the moment from achieving what we all want to see. We started with a Bill of 37 pages; the noble Lord, Lord Deighton, paid a well deserved tribute to his staff, who had converted 37 pages to 170 pages—virtually a new Bill. By the time we finish it is likely to be more than 200 pages long, as he knows from his own amendments that have been tabled. I certainly share his approbation of his officials, who have done an incredible job in the most difficult of circumstances. I have never known a Bill of this kind before in either House of Parliament. However, I assume that the House of Commons, which gave us this 37-page Bill, will now have to have a Second Reading on a new Bill, because it will not be able to cope with it as it is.
My Lords, I am grateful to my noble friend for moving his amendment and for pointing out the extraordinary complexity and confusion about the procedure that the Bill has gone through to get to this stage. As he pointed out, it came from the Commons as 35 pages and is now 170 pages. Substantial matters were introduced in Committee. Substantial errors were identified in Committee—even, as we shall hear, regarding the definition of a bank in a Bill on banking.
More substantial material is now being introduced under the more restrictive circumstances of Report, and I hope that the government Whips will restrain themselves if the rules are bent somewhat in our attempt to scrutinise nearly 200 new government amendments effectively. Yesterday, on the “Today” programme, the Chancellor announced that further substantial amendments will be introduced at Third Reading with respect to payday loans. Then the Treasury was circulating extra material in e-mails after 9pm last night. We have received copies of correspondence dated today between the Chancellor and the Governor of the Bank of England that changes the perspective on leverage. These measures are relevant to the most important industry in this country, and are measures to which we are supposed to give our consideration.
The correct procedure for a Government who are serious about getting this legislation right is to recommit the Bill. If they undertake that responsible step then we on this side of the House will give them every assistance in ensuring that the passage is completed within the restrictive timetable of a carryover measure. I understand the nature of the restrictions and realise that the Minister cannot make this decision at the Dispatch Box. However, will he at least give the House an assurance that he will take this proposal seriously and ensure that the usual channels also take it seriously?
On Amendment 1, moved by my noble friend, will the Minister tell us exactly what the phrase which my noble friend wishes to have omitted actually means? Can he give the House an illustration of the circumstances in which the taking of deposits from UK households and SMEs would not be a ring-fenced activity as the phrase suggests?
My Lords, it is a great pleasure for me to resume our debates on the Bill. We do not believe that there is any need to recommit it. These are radical and important reforms—ring-fencing, bail-in, depositor preference, a new senior person’s regime and new criminal sanctions. The Government wish to put them in action, move forward and leave the period of deliberation behind. We wish to end the uncertainty for the economy, consumers and taxpayers that prolonged reviewing can bring. Where the reforms can be improved to increase their effectiveness, the Government have been prepared to listen, and you will see that we have responded. However, where the Government do not believe the proposals are backed by evidence, or are unreasonable, we have respectfully disagreed and set out our reasons. This is the approach that we have taken to all the amendments.
Specifically on Amendment 1, from the noble Lord, Lord Barnett, the ICB recommended that only retail deposits—that is, the deposits of individuals and small businesses—should be ring-fenced. This amendment would require all deposits to be ring-fenced. The ICB recommended that large organisations and wealthy individuals should be able—though, importantly, not obliged—to deposit with non-ring-fenced banks. This was because these depositors are sufficiently financially sophisticated to tolerate an interruption in access to a single bank, for example because they have multiple banking relationships. These sophisticated depositors therefore do not need the protection that is being mandated inside the ring-fence provides. They may choose to deposit in a ring-fenced bank if they wish, of course. It also provides a little bit more competition. It gives wealthy individuals and businesses the opportunity to shop around.
Large corporates and financial institutions also use complex financial products which ring-fenced banks will rightly be prohibited from selling. To obtain these products, such as complex derivatives, large companies or financial institutions will need to go to a non-ring-fenced bank. Given this, it is reasonable that these customers should be permitted also to deposit with non-ring-fenced banks, as the ICB recommended. The Government accepted the ICB’s recommendation. Therefore the Bill allows the Treasury to specify by order that a non-ring-fenced bank can accept deposits in certain circumstances.
The deposits of individuals—other than very wealthy and sophisticated ones—and small businesses will have to be within the ring-fence. There is no compulsion for large organisations or wealthy individuals to deposit outside the ring-fence, only the option for them to do so if they so choose. This option is provided for in secondary legislation. The Government published a draft of the relevant order for consultation in July this year. It is appropriate that detailed provisions such as this should be made in secondary rather than primary legislation to allow the legislation to keep pace with future developments in the market and to keep it fit for purpose. This approach was endorsed by the PCBS in its first report.
It is also important to highlight that under the Bill the Treasury does not have unlimited power to determine which deposits do not have to be ring-fenced. The Treasury may only allow deposits outside the ring-fence if it is convinced that doing so does not undermine the ring-fence and that the depositors concerned do not need the protection of the ring-fence. This is therefore a constrained power that is needed to implement the recommendations of the ICB. I therefore urge the noble Lord to withdraw his amendment.
My Lords, I do not think that the Minister has dealt with the central arguments about separation; he dealt mainly with something quite different and did not reply to my questions. Whether or not he has the information to hand, perhaps he could think about whether the staff of the FSA received millions of pounds in compensation for redundancy before they were reappointed to the FCA. Can he at least tell us that?
The central question of full separation is in Amendment 2, which we will address next, and we can go on to discuss it. With respect to the FSA redundancy arrangements, I would be delighted to write to the noble Lord with that information when I have it at my fingertips.
My Lords, can I ask the Minister for a little clarity on ring-fencing in terms of what is in this pot and what is in the other pot? The point he has made is that the ring-fenced pot will essentially be individual family deposits while commercial deposits would be outside the ring-fence; but what about the other side of the balance sheet in the sense of which part of the loan portfolio is to be in the ring-fence and which part is to be outside it? My previous understanding was that the ring-fence was going to be all deposit-taking and all lending. My reservations, if you like, with regard to the Glass-Steagall solution are that history has shown it is lending and not investment banking that has always caused banks trouble. This time round it was CDO lending and the unwise lending by HBOS and RBS that actually caused the banks trouble. The idea of separating absolutely banking and investment banking as a great protection for the deposits of ordinary citizens is entirely false in terms of economic history.
The clarification is that the ring-fence effectively operates on the liabilities side, so we are dealing with core deposits. Just to correct the point and make it clear, the most sophisticated investors can be either inside or outside the ring-fence, and they have the choice. However, the asset side of the bank’s balance sheet is unconstrained in the rules.
My Lords, I will withdraw Amendment 1 and then move Amendment 2, although I spoke to it generally in my first speech and I do not wish to detain the House for too much longer. But as the noble Lord, Lord Lawson, said at the time, these are two totally different cultures and it is going to be virtually impossible to put the two together—those were his words. I therefore suggest to the Minister that Glass-Steagall, which worked for 60 years in the United States, could be made effective here if we had stronger regulations to make sure that those banking lobbyists could not succeed in stopping the separation. That was the major point that I made, and will continue to make. That is also where I would like to leave it so that the Minister can reply to Amendment 2. I beg leave to withdraw the amendment.
My Lords, this Bill legislates for ring-fencing. That is the Government’s policy, not Glass-Steagall-style full separation. The Government support ring-fencing, but not as a compromise option or a lukewarm version of separation, and not as a watered-down policy. Rather, the Government have adopted the ring-fence after careful consideration of the recommendations of the Independent Commission on Banking. As noble Lords will recall, the ICB was established in June 2010. It deliberated for 15 months before making its recommendations in September 2011. As part of its deliberations, the ICB considered full separation as an alternative to ring-fencing, but it rejected that alternative and instead recommended ring-fencing. The Government have accepted the ICB’s recommendation, and the commission set out its rationale for rejecting full separation in its final report.
Let me remind the House of the ICB’s line of reasoning. The ICB argued that an effective, robust ring-fence would deliver the same benefits to financial stability as full separation, on the model of Glass-Steagall. A robust ring-fence will insulate vital retail banking services from shocks to global financial markets—for example, reducing the risk that British high-street banks will be brought down by swings in the prices of complex securities. Let us recall, too, that retail banking has its risks and that market discipline demands that badly run banks must be allowed to fail. If a retail bank fails, a robust ring-fence will enable the authorities to manage that failure in a controlled way, with essential services kept running with the core deposits we were talking about, but without any injection of taxpayers’ money. So, a strong ring-fence will minimise the chance that a future Government will ever be forced to bail out a failing bank. The moral hazard that encouraged excessive risk-taking before the recent crisis would be removed.
The ICB argued that a robust ring-fence would deliver the same benefits as full separation, and would avoid some of full separation’s main disadvantages. In particular, a ring-fenced bank that found itself in financial difficulties could be supported by other group members, such as a healthy sister investment bank. Full separation would not allow this. Essentially the ring-fence is a valve; it does not let any of the bad stuff get into the ring-fence but allows support to come in if it needs it.
Under ring-fencing, a banking group could offer a one-stop-shop service to customers, especially business customers, so there is a strong marketing advantage to the group. Deposits or simple loans could be arranged with the group’s ring-fenced bank, while more complex products are supplied by the group’s investment bank. Full separation would not allow this. Finally, the ICB estimated that by denying banks the legitimate benefits of diversification, full separation would impose higher costs—costs that would likely be passed on to banks’ customers and to lending.
In summary, ring-fencing will bring the same benefits as full separation, but with fewer disadvantages. A rational, sober evaluation of the two thus brought the ICB to identify ring-fencing as the superior policy. I would like to use this opportunity to put paid to some myths around ring-fencing versus full separation. First, some claim that full separation is simpler to legislate for, and there is no complexity. Any separation of banks’ business will inevitably involve detailed rules to specify where the line, whether it is a ring-fence or a complete separation, is to be drawn, and prescribe which activities must take place either side of that line. As banks’ business is complex and involves a wide range of different products and services, so drawing that line will inevitably be complex. But a line will have to be drawn and someone will have to decide what is in each separated type of bank. It is the same problem for ring-fencing and full separation.
Secondly, either form of separation will, unless vigilantly maintained, be vulnerable to erosion or bank lobbying. There are plenty of examples of that through history. I do not, therefore, accept that full separation is either more simple or more robust than ring-fencing. As I have already said, the ICB conducted an exhaustive and detailed investigation of the case for different types of structural reform before coming to its recommendation in favour of ring-fencing. That recommendation commanded a wide consensus—including regulators, industry and the Opposition. Let me quote the shadow Chancellor speaking in the Commons when the Government first responded to the ICB in December 2011. He said that,
“we, too, support the commission’s radical reforms on ring-fencing”.—[Official Report, Commons, 19/12/11; col. 1074.]
Of course, no matter what the weight of evidence, there will always be some who disagree with the consensus. But to those who advocate full separation as an alternative, we need to ask: what is the evidence that supports this alternative policy? Throughout this process so far, the Government have openly invited others to give their views and present new evidence. We consulted widely, and submitted this Bill to pre-legislative scrutiny by the PCBS to seek its input. I do not think that the PCBS produced hard evidence in favour of full separation. It presented nothing that compared the two proposals, although it elicited some strong expressions of scepticism on whether it would work. Those are valid. It is certainly a new way of doing things.
My Lords, I have spoken before against ring-fencing and for full separation. We may not be in any kind of agreement on that, but what we ought to be in agreement on is that ring-fencing will require particularly scrupulous and detailed regulation. It will require more of our regulators than full separation, because institutional separation to some extent requires less regulation.
I wonder whether we are quite sane in putting so much faith in our regulators. The people who gave us Mr Flowers as chairman of the Co-operative are hardly those I feel very confident about exercising the very complex regulation that ring-fencing will require. It is complex and it is difficult. It is more difficult than it needs to be than with the policy of full separation. I therefore continue to support my noble friend Lord Barnett in his amendment.
My Lords, the Minister has told us that the Government consulted widely and got agreement. Well, more recently, there were 300 professionals who were consulted in a survey and only 35 of them thought it would work. I do not know who he consulted. He also talked about the robust regulations. Who is going to supervise these robust regulations—the old FSA, now called the FCA? Is he confident that it can? I am certainly not clear myself, nor do many people have a lot of confidence that the old FSA, now the FCA, can do that job. He is confident, however, that it can.
My noble friend Lord McFall pointed out what Volcker said to that committee: the chairman of a holding company, of which some part got into trouble because of the lack of regulation or whatever—what would he do? I know what he would do. He would seek to save it. These merchant banks may lose money at times—indeed they have done—but most of the time they make a lot of money and do not want to lose it. They want it separated, but under the same roof, with one holding company. That is what they have got and are going to get under the new administration.
I cannot see this regulation working and would like to hear the views of any other Member of the House who has an interest in this.
My Lords, can I ask the Minister whether I am right in thinking that the PRA would be the main regulator of the balance sheets of the two entities under ring-fencing, and not the FCA, which is about protecting customers? Secondly, if there were a Glass-Steagall separation, is the job not exactly the same, in that you would need to look carefully at a separate investment bank and a separate banking bank to make sure that one did not have things in it which ought to be in the other? I would have thought that the job of regulating would be exactly the same as under a ring-fenced structure.
I agree with my noble friend’s explanation of the roles and responsibilities of the respective regulators in each case.
Does the noble Lord wish to withdraw his amendment?
If the House is no longer interested in the matter, I beg leave to withdraw.
My Lords, noble Lords will notice that Amendment 3 is identical to Amendment 6, which is in the name of the group of people who we could perhaps call the commissioners—members of the Parliamentary Commission on Banking Standards who have considered these matters with care and at great length. It is interesting that the noble Lord said just now that no evidence had been provided about issues associated with separation. The parliamentary commission provided extensive evidence, to which I would refer the Minister.
In speaking to Amendment 3, I will argue that the “reserve power” of full separation, as it was described by the parliamentary commission, is a logical and coherent part of the entire strategy of ring-fencing, which consists of three parts. First, there is the provision of the ring-fence itself. Secondly, there is electrification of the ring-fence in the case of individual groups that transgress and are subsequently required to separate. Thirdly, there is the measure put forward in Amendments 3 and 6, under which there is full separation where the process has not been followed successfully or appropriately by the banking industry.
The whole thrust of the commission’s report is about the need to maintain these three stages. Each reinforces the other. The noble Lord argued just now that the Government had seen no case at all for separation. Why then did the Government accept the case for the separation of individual groups should they transgress? That case came from the commission and the case for full separation came from the commission. If he accepts one, he should accept the other. It is quite ridiculous to suggest that the commission’s processes were somehow less rigorous than those of the ICB. Indeed, the whole package put forward in this group, which consists of the case for full separation as the final reserve power and the case for review, is a single coherent package. The case for review and the case for full separation, if that review should argue that ring-fencing is not working successfully, is a coherent structure set out by the commission. The Government are lopping off an essential leg of a three-legged stool.
Let us examine the arguments made against this amendment when it was first put by the commissioners in Committee. As well as the argument that it was somehow less rigorous—an argument that I think is almost offensive to the commission—the Government put forward the suggestion that, should the ring-fence not work, other options might be considered. The Minister raised the red herring of the possible introduction of a Volcker rule. Surely this is spurious, as here we have a coherent, structured package of three nested sets of measures to ensure the stability of the banking industry, which rely on and strengthen each other.
What I found most surprising in the Government’s rejection of the argument for full separation is that they rejected the idea that the ring-fence will consequently be made stronger by self-policing. The banks will have a major concern that others do not transgress lest they be caught in a final decision for full separation. The noble Lord said:
“The notion that banks will watch each other is not how the industry operates”.—[Official Report, 8/10/13; col.51.]
I must tell the noble Lord that that is exactly how a competitive market operates in a capitalist economy—everyone watches each other. The banking market is no different. Each pursues its own interest. As Adam Smith put it—the Chancellor of the Exchequer has taken to quoting him—it is not the benevolence of the butcher or baker that provides us with meat and bread, but the pursuit of their own interest. If the banks see it as being in their own interest to avoid full separation, we can be sure that they will take all necessary steps, including mutual surveillance, to ensure that full separation does not take place. That is why the commission’s proposal is such a strong one. It strengthens the ring-fence by giving those within it the incentive to ensure that it be maintained and be not transgressed. That is why this is a coherent package.
The Minister omitted to mention that the proposals for full separation are predicated on a thorough, independent review of the progress of ring-fencing. We have not only a nested structure, which strengthens at each stage, but, in the amendments put forward by the commissioners, a process of independent review that suggests when each stage should be introduced. That is why, for example, Amendments 15 and 195 are consequential on Amendment 3 and, with respect to Amendment 6—the identical amendment put forward by the commissioners—Amendments 15 and 196 are consequential. Those amendments involve the review of the entire procedure.
If we are to have a successful ring-fence, what better than to have a structure that incentivises the banks within it to maintain the integrity of the ring-fence? That is what the commission’s three-stage process does. I beg to move.
My Lords, this is a very important Bill indeed. We all know the great damage that the banking meltdown in the western world has caused, not least in this country. This Bill seeks to deal with that. There are few more important matters—there may be more important matters in the world but they are not susceptible to legislation. This is a vital matter that we can do something about by legislation, and that is what this Bill is about.
In chronological order, I thank the noble Lord, Lord Barnett, for the kind things he said about points that I had made in earlier debates on this Bill. I agree with much of what he said. I also agree with much of what the noble Lord, Lord Eatwell, has just said. I congratulate the Government on setting up the Vickers commission, on having accepted the recommendations of the Vickers commission and on their amendment endorsing part of the recommendations of the Parliamentary Commission on Banking Standards, of which I was a member. The most reverend Primate the Archbishop of Canterbury was a distinguished member; I hope that he will contribute to our debate. The noble Lords, Lord Turnbull and Lord McFall, whose names are on Amendment 4, were also commissioners. I congratulate them on suggesting that there needs to be a review.
The Government have moved a very long way—and I am delighted—but not quite far enough. That is what we are discussing in this group of amendments. To get to the core of the issue, what the Vickers commission concluded and what the Government have accepted is that there is a problem with the relationship and, indeed, the mixing of commercial and retail banking with investment banking. The Vickers commission accepted that; that is why it introduced the ring-fence. The Government accepted that; that is why they accepted the recommendation of the Vickers commission for the ring-fence.
I have always been in favour of full separation—I came out publicly in favour of it long before the Vickers commission was even set up. We know that this works. It worked in the United States for many, many years under the Glass-Steagall arrangements and it is no accident that serious problems emerged after the Glass-Steagall Act had been repealed. Indeed, the Glass-Steagall Act would have worked for a great deal longer had not successive American Administrations been lobbied by the banks to introduce loopholes in one place and another. Anyhow, that is water under the bridge.
What is the danger? The danger accepted by the Vickers commission and the Government is twofold. First, although my noble friend Lord Flight is absolutely right that ordinary, plain, vanilla banking is a very risky business and often goes wrong, there is one particular range of risks in lending: the bad lending. In investment banking you had a whole new and very complex range of risks. It is not the case that nothing has ever gone wrong there; for example, there have been huge problems with derivatives that are a product of the complexity of investment banking. So there is first the question of whether it is sensible—when straightforward, plain, vanilla banking is risking enough —to add to that a whole new range of risks, a whole new complexity, which can make it more likely that the retail deposit-taking banks will get into difficulties. It must be unwise to do that.
The other problem is about the cultures. The Vickers commission did not talk about this, or think about it; it did not raise the issue of culture. But culture is very important. I was glad that when my right honourable friend the Prime Minister introduced the setting up of the Parliamentary Commission on Banking Standards, he explicitly said that it needed to look at the culture of banking, because something had gone wrong with it.
The culture of retail banking and the culture of investment banking are two quite separate things. One is, or should be, a culture of caution and prudence; the other is a culture of creativeness—which is very desirable—and risk-taking of a totally different order. That is another thing that the Vickers commission did not look at.
Now we come to the question of whether the proposal for a ring-fence will do the trick. We do not know. In the Parliamentary Commission on Banking Standards, we decided that although we had our doubts, it should be given a chance—but that there should be a proper review process, so that if it is proved not to be working, we shall move to something that will work.
Another of the things that the Vickers commission did not consider is the problem of governance. The ring-fence is a curious system, because there is one company with two subsidiaries—the retail bank and the investment bank—and we are told that they are completely separate, yet they are together. There is a real question whether that model of governance is workable. I know of distinguished bankers—at least one of whom is present in the Chamber as I speak—who have grave doubts on this score.
There is also a problem within the law. Boards of directors are responsible to the shareholders, so if there is complete separation it is clear that the board of the retail bank has responsibility to the shareholders of the retail bank and the board of the investment bank has responsibility to its shareholders. But under the ring-fence proposal there are two entities that we are told are completely separate, yet there is a single group of shareholders to whom they are responsible. We do not know whether this will work. We do not know whether there might be cultural contamination across the ring-fence. There is no legislation that can prevent cultural contamination, and that would be a very serious matter.
In the commission, we said that two kinds of review powers were needed. The first would look at individual institutions. If, after a number of years, we find that an institution has found a way round, or has burrowed under, the ring-fence and found a way of evading what the Government and Parliament decided, it should be obliged to separate its retail banking and its investment banking. But we also said that a second kind of review power was vital. The proposed system is a right idea of the Vickers commission. A number of the Vickers commission are friends of mine, they are very clever, and I have nothing against them—but they do not know whether it will work either. It has never been tried anywhere in the world, whereas complete separation has been tried, and it has worked. So it is vital that if the system proves not to do the trick, we move to complete separation.
Therefore, we need two kinds of review. The first is a review of an individual institution behaving in a way that undermines the ring-fence, and the second is a review to consider whether the system itself does the trick. The government amendment accepts in principle the first kind of review, but it does not accept the second kind.
I ask my noble friend to give a firm assurance that, as part of the review, the Government will look at whether the system is working and, therefore, whether full separation will be moved to. With the best will in the world, I know that he will wish to make it work, that the PRA and FCA will wish to make it work, and so will Uncle Tom Cobley and all. But if it is not working, will the Government look at full separation? Unless that undertaking is given here, in this House, I will seek to take the opinion of the House on Amendments 5 and 6, which are linked. Amendment 6 derives from Amendment 5, as noble Lords will know.
Given that the Government have gone so far, which I welcome, I hope that they will be prepared to make this further step and give this clear undertaking to the House.
My Lords, I have broadly been in support of a Glass-Steagall separation of investment and banking banks, but there seems to me something slightly wrong with the concept of having a review and prejudging the outcome of that review. Playing devil’s advocate, I make a point on the other side of the coin. Europe has had universal banking for a long time; that is the banking tradition in continental Europe and there is still a case for universal banking to continue, although it is right out of fashion now. I repeat my point that, to a fair extent, the profits of investment banking have subsidised ordinary banking and benefited ordinary retail customers; the losses have generally come from bad lending. So it is slightly premature to prejudge the review. I cannot see what is wrong with having a review with the understanding that the Government will act on the basis of the recommendation of that review at the time. We will have moved on from the present and other factors may have come to light as well. I do not see what is gained by prejudging the result of the review.
My Lords, as did the noble Lord, Lord Lawson, I begin by expressing my gratitude to the Government that they have listened to the speeches of many noble Lords and my PCBS colleagues on the need for a full and independent review of the ring-fence. I hope that they will realise that the amendments that have been tabled today are the final pieces of the puzzle in this regard. This work, combined with the vast improvements that we have seen to the electrification of the ring-fence—what is officially known as the first reserve power—is most welcome. The noble Lord, Lord Eatwell, put the case very clearly, not only for them but for the second reserve power. The Government’s approach to that is so far disappointing.
The Minister said that he believed that a robust ring-fence will work, and so do we, as the commission. It is just that we do not think that it is robust—that is the problem. The point of the second reserve power is to make the ring-fence sufficiently robust that it will carry the day if the first one is over a period of years overwhelmed.
The swirling floods unleashed in 2008 with the banking collapse continue to cause eddies all over our economy, particularly in the most vulnerable parts, which so many of us on these Benches are so deeply involved in supporting. Both the ICB and the PCBS concluded that the most appropriate way in which to reform the structure of the industry today is to have the ring-fence within a parent company. It is experimental —we hear the arguments, and we know so. This partial structural separation, with the added provision of ring-fence, should create a disincentive for banks to attempt to test the limits or game the ring-fence, but “should” is not sufficient.
The advantage of the second reserve power and the first reserve power together, in addition to the ones that the noble Lord, Lord Eatwell, put so eloquently, is that they give a second shot to the gun. If the first reserve power fails, and a bank or two has been forced into full separation but the whole industry is still gaming the system, then you have still got the second reserve power. It appears that the Government’s policy on this is to have only one shot and then to say, following that, “We’ll do something. As yet, we know not what. But we will do something, and it will be something very, very serious”.
My Lords, I have not so far taken part in the debate on this Bill, although I participated during the passage of the earlier Financial Services Act. I therefore need to declare my interests as the chairman of two regulated entities and an as approved person under FiSMA.
I have listened carefully to the arguments deployed on both sides of this complex debate and have a couple of concerns about what is being proposed. The noble Lord, Lord Eatwell, described his amendments as designed to provide—I think that I have got the words right—a three-stage, self-reinforcing regulatory process. In doing that, he may have overlooked the degree of uncertainty that his amendments may cause. If I may follow his analogy further, I think that it is his amendment that may remove the third leg from the three-legged stool that he mentioned.
I agree with my noble friend Lord Lawson about the importance of reviews, particularly in cases where the likely outcome of fundamental legislation is so uncertain. In a parallel case in the Transparency of Lobbying Bill, I have tabled amendments that would have that Bill reviewed in a couple of years when one can begin to distinguish reality from supposition. I therefore favour reviews, but—and it is an important but—a review, as my noble friend Lord Flight said, must not begin with any presuppositions as to its outcome. If I may use a rather vulgar card-playing metaphor, one must not play with a loaded deck. Listening to some of the arguments so far, I formed the impression that these amendments could lead to a loaded deck because of the implicit power of the review to trigger separation without further primary legislation and therefore to introduce radical change without serious parliamentary consideration. As I read it, this would be the result of the House accepting Amendment 196. I think that this implication—and, of course, it is an implication—will weigh heavily on the banks and their executives and, as a result, be by no means to the advantage of the financial services industry specifically or the United Kingdom generally.
It is an oft-repeated truism that financial markets hate uncertainty. Perhaps I may offer at a rather lower level an example from my experience of what I mean. I was for a number of years a chairman of a network of independent financial advisers. For a prolonged period, the IFA sector suffered in the shadow of the uncertainty caused by the drawn-out processes of the retail distribution review. I have absolutely no doubt that the savings regime of this country, a very important part of our body politic, was set back by this elongated debate. I feel the same may be true for the banking sector if these amendments are passed.
Further, I am not quite clear how this approach will impose discipline, unless it is intended that some could suffer full separation and others would not. I have not yet heard that suggested by the noble Lord, Lord Eatwell, although I may have misunderstood him. If I, as a good guy, obey the ring-fence but am treated in exactly the same way as my competitor, a bad guy who has jumped the ring-fence, what incentive is there for me to follow the prescribed path?
My second area of concern can best be summed up by the well rehearsed argument that generals always plan to fight battles that are like the ones of the last war. Of course, we have discovered egregious examples of corporate and personal behaviour that took place in the period leading up to 2008, but it is by no means clear, to me at least, that ring-fencing or not ring-fencing will have any relevance to solving the next financial crisis—and, if history tells us anything, one will be along in due time.
Having listened to the arguments, I am forced to the conclusion that there should be a review but that it should be a review without preconceptions, and that, in any case, to trigger a move to full separation on the basis of secondary legislation, of which the ability of this House to scrutinise and amend is in my view woefully weak, would not be the right way to proceed.
My Lords, there are a lot of very interesting propositions in this group. Am I right in thinking that what is in due course printed in Hansard will be one amendment which is moved, with other amendments not printed because they are part of a single group? If so, how can one proceed with that?
My Lords, surely there is no more important issue in relation to this banking situation than whether to go with ring-fencing or with separation—we have had that very clearly debated today. The noble Baroness, Lady Cohen of Pimlico, raised an issue in relation to that, which my noble friend the Minister placed some emphasis on in responding earlier, as he did at the last stage of this debate—namely, to state that the cost of total separation would be exorbitant. The noble Baroness rightly made the riposte that the cost of policing the ring-fence will not be a one-off, as the cost of a separation would be; the cost will be year after year. The task of the regulators in policing a ring-fencing arrangement will be intensely difficult. It is easy to jibe at the regulators, but we may underestimate the extreme difficulty of doing a thorough job in this field, where you have a single holding company and two companies under it. I take the point made vividly by the noble Lord, Lord Lawson of Blaby, about cultural contamination that can easily infect a group, such as the one that the ring-fenced company will be part of.
I hope that my noble friend will feel able to accept Amendment 5. We are all speculating madly. To have a review of how this has gone, and to look at it coolly, objectively and professionally in the period prescribed, must make absolute sense. Frankly, it is not worth taking the risk of not having such a review. The cost of getting this wrong will be insupportable. We are apt to underestimate, in what has happened over the past five years, the cost to this country in all sorts of non-financial ways. We must not let it happen again. The review that Amendment 5 proposes must be prudent, sensible and ultimately economical.
My Lords, I support my noble friend Lord Lawson’s amendment as well. Like him and the noble Baroness, Lady Cohen, I have always been a believer in Glass-Steagall, and in the complete separation of investment banks from clearing banks as the only way in which you can guarantee that there will be no contamination.
My noble friend the Minister described the ring-fencing as robust. I do not know how he can speak with such confidence about the robustness of the ring-fencing. I do know that many people in the City today are, as we speak, working on ways to get round the ring-fence and to make sure that money held in clearing banks can be used in investment banks. The problem is that there is an enormous financial incentive to get round this ring-fence. If that incentive remains when you do not have separation, it is only a matter of time before the clever people employed in the City will find a way round it.
I agree with my noble friend Lord Phillips. Much has been made of the cost of separation, but there is also the cost of ring-fencing. There are a one-off cost and a continuing cost. It would be regrettable if we did not support my noble friend Lord Lawson’s amendment and I intend to do so.
My Lords, before I turn to the substance of these amendments, I would like briefly to pause and reflect on the process that has brought us to this point. Throughout the course of this Bill the Government have consistently tried to adopt the most constructive approach possible, welcoming contributions from all sides to help us get this right. I am particularly grateful for the constructive comments to that effect from my noble friend Lord Lawson and the most reverend Primate. I thank them for those.
Our ambition has just been to get this right. Even before the Bill was introduced to Parliament, we asked the PCBS to conduct pre-legislative scrutiny. We considered seriously its recommendations both on the draft Bill and on banking conduct and standards more generally. Almost a third of the Bill before us today was either added or heavily amended in response to its recommendations. We have also showed ourselves to be open to considering ideas proposed by the Opposition, both in the Commons and in this House. Where we have been convinced by the points made, we have been willing to amend the Bill to reflect that. I think that the sentiment of the House has demonstrated that. That includes changes to the process of scrutiny of the ring-fencing proposals, introducing the single bank separation power, putting the so-called Haldane principles in the Bill and clarifying the regulator’s objectives.
My Lords, I am very grateful to the Minister for that expert summary of a complex set of amendments. However, I hope that I may ask him one question before he sits down. He referred to our Amendment 12, which would shorten the period before a review takes place, and said that he was very sympathetic and receptive to that point. Will he therefore accept Amendment 12?
I think the right thing for us to do is to discuss it together with our colleagues from the PCBS. The noble Lord is, of course, entitled to take the amendment to a vote, but I have not yet had the chance to discuss it with PCBS colleagues. The Government have an open mind on the relevant period, so I would prefer a fuller discussion.
Does the Minister mean that he is content to return to this issue at Third Reading?
Thank you very much.
This is a complicated set of interrelated amendments. I congratulate the Government on their Amendments 11 and 16 in which they have moved towards the commission’s position in proposing an independent review. By the way, I did not find any evidence that new Section 142J had been deleted, which was the previous requirement that the PRA conducted the review. Is there supposed to be a PRA review and an independent review? Surely that is not the case. It is not an important point but we should not leave both of them on the statute book. As I say, I did not detect that new Section 142J had been deleted.
We have a coherent package with the nested structure of the ring-fence, the electrification applied to individual groups and the electrification applied to the whole structure of banking—the so-called complete separation. That seems to me a coherent, rational structure which is supported by the review. Therefore, there will be the opportunity to take into account the detailed scrutiny by the ICB and the commission and consider which stage of this nested structure should be accepted. It seems to me that that coherence provides certainty as regards the way forward—not uncertainty, as the noble Lord, Lord Hodgson, suggested—because the review will not throw everything up in the air and lead to more years of parliamentary debate. We have been doing this for three years already, leaving the industry in a state of uncertainty. We should not throw it up in the air again but create a clear, rational structure that has been carefully put together by the ICB and the commission to provide for the review and separation.
The ordering of amendments before us makes our consideration a little awkward because we first have to consider my amendment on separation, Amendment 3 —which is identical to the commission’s amendment, Amendment 6—and then talk about the review. However, in the light of the care and consideration that the commission has given, I am content to fully support the commission’s position on the triumvirate of ring-fencing, group separation and full separation. I therefore wish to test the opinion of the House on Amendment 3.
My Lords, in the light of the clear and explicit assurance given by the Minister that the independent review will be able to recommend full separation, I will not move the amendment.
My Lords, these amendments make a number of minor and technical amendments to the Bill. Amendments 7 and 8 amend new Section 142W, which gives the Treasury the power to require that ring-fenced banks make arrangements to ensure that they cannot become liable for the pension liabilities of any non-ring-fenced entity, and that they minimise such potential liabilities if they cannot entirely prevent them arising. In the process of making these arrangements, the pension scheme trustees may wish to transfer assets or liabilities between schemes. These amendments clarify that the Treasury can make regulations enabling trustees or managers to transfer to another pension scheme all the pension liabilities arising in connection with persons’ service before the date on which ring-fencing comes into effect, together with all the scheme’s assets and not just part of those liabilities and assets.
The Government’s intention is to give banks and trustees flexibility in how they carry out any segregation or separation of pension schemes. If trustees judge that transferring all such liabilities or assets is in the best interests of scheme members, the legislation should not prevent that. The trustees have a duty to act in the best interests of scheme members throughout any restructuring that takes place to comply with ring-fencing. As an added safeguard, we are taking the power under the Bill to require the banks by regulation to do all they can to get clearance from the pensions regulator for their scheme restructuring.
Amendment 9 is a minor and technical amendment which clarifies the definition of a qualifying parent undertaking for the purposes of Part 9B of FiSMA, which deals with ring-fencing. A qualifying parent undertaking is defined in proposed new Section 142L(4), and this amendment ensures that this definition will apply wherever the term is used in Part 9B.
Amendment 173 is a minor and technical amendment which clarifies that the definition of regulator in Section 3A does not apply for the purposes of Sections 410A and 410B, which deal with the Treasury’s power to impose fees on the financial services industry to cover the costs of UK participation in certain international organisations. The amendment ensures that the definition of regulator that applies to these sections includes the Bank of England, rather than the definition given in Section 3A of FiSMA, which is limited to the FCA and the PRA.
My Lords, this amendment removes Clause 5 from the Bill. It will leave the regulators, the PRA and the FCA to decide among themselves which one of them designates board members of ring-fenced banks as senior managers and which directors should be designated. Clause 5 requires that the PRA on its own designates all directors of a ring-fenced bank as senior managers under the new senior managers regime. This clause was introduced originally before the senior managers regime was proposed. It now needs to be updated to reflect those changes.
The PRA is considering how to implement the PCBS’s recommendation of focusing the new senior managers regime to strengthen individual responsibility for actions of the firm. The PRA wants to develop the new regime in a way that improves its ability to bring enforcement action against individuals when things go wrong. To achieve this, the PRA thinks that it may be best to limit the number of board members it designates as senior managers, to narrow the scope of accountability. Those directors designated senior managers by the PRA will need to comply with conduct standards that will further the PRA’s safety and soundness objective.
Clause 5 would force the PRA to designate all board members of ring-fenced banks as senior managers. It prejudges the outcome of the regulators’ policy development and could result in the application of the senior managers regime to ring-fenced banks being less focused than for the rest of the sector. A focused regime should improve the ability of the PRA to take enforcement action against individual directors by making clearer which senior managers are responsible for different aspects of the firm’s business. The Government therefore agree with the PRA that Clause 5 should be removed.
Some directors not designated as senior managers by the PRA may be more appropriately designated by the FCA. The precise calibration should be left to the regulators, who will consult on this next year. The removal of the clause also brings the application of the senior managers regime to ring-fenced banks into line with how it will be applied outside the ring-fence. Outside the ring-fence the PRA or the FCA can designate directors as senior managers.
Moving on, the minor and technical amendments to Schedule 2 will help to ensure that the bail-in provisions can be used effectively and as intended. Following the introduction of these provisions in Committee, we have discussed them with various stakeholders and experts. These amendments are the result of those discussions.
First, we have specified that special bail-in provision can be made to release guarantees which are not provided directly by the bank, but by other companies in the banking group, in consequence of the application of the powers to make special bail-in provision in relation to the liabilities of the bank under resolution. This ensures that guarantee arrangements can be adjusted in line with any write-down or cancellation of a liability of a bank covered by that guarantee.
Secondly, the amendments will give the Bank of England the ability to make an agreement with the director or directors of a bank with regard to the preparation of the business reorganisation plan. The existing drafting already allows such an agreement between the Bank of England and the bail-in administrator when appointed to prepare the plan. This is simply an extension of the arrangement to cover the case in which a director is appointed to perform that task.
Thirdly, we have clarified that where any person is acting under the direction of the Treasury for purposes related to state aid, that person is granted immunity from liability in damages save in relation to action in bad faith or in breach of the European Convention on Human Rights. There is a minor linguistic change to subsection (3) of new Section 48D to be inserted into the Banking Act.
Finally, the exercise of any of the stabilisation powers under Part 1 of the Banking Act 2009 to reduce a bank’s debt may lead to taxable loan relationship profits that would hinder its rescue. Consequently we will bring in measures in the next Finance Bill, with retrospective effect to this date, to relieve any such taxable profits that arise. I beg to move.
My Lords, given the assurance given by the Minister that we will return to this matter at Third Reading, I beg to withdraw the amendment.
My Lords, Amendment 21, and Amendments 50 and 51 from the commissioners, refer to the professional standards to be required in the banking industry—particularly to licensing bankers who have attained the required professional standards and, of course, not licensing those who have not. With respect to the conduct and skills of members of the banking industry, the Bill currently refers to “rules of conduct”. Amendments from the commissioners use the words “licensing regime”, but continuously refer to the adherence to rules.
The notion of a licence surely refers to some level of professional competence or professional standards. The Co-operative Bank may have obeyed the rules, but we now know it would have failed even the simplest test for professional competence. Rules may require the attainment of professional qualifications, but we cannot be sure and, as the Government regularly argue, certainty is important in this legislation. The clause in the Bill as drafted refers to rules of conduct. The commissioners’ amendment refers to,
“training in the effect and application of the rules of conduct”.
However, neither of them seem to convey the true context of professional standards.
As an academic, I am perhaps rather overly keen on examinations and the attainment of professional standards. Doctors have professional standards because they are required to pass examinations, undergo rigorous professional training and be thoroughly trained in ethical standards. Lawyers have professional standards because they are required to pass examinations, undergo rigorous professional training and be thoroughly trained in ethical standards. Of course, doctors and lawyers may, on occasion, not maintain the standards we would expect.
I hate to interrupt the noble Lord but I cannot resist saying that, unfortunately, the training of solicitors at this time does not involve rigorous ethical training. In fact, it involves little ethical training at all.
I am sure that the noble Lord, as a distinguished solicitor, would attest to that, as indeed he has done. It seems to me that if members of the professions are required to pass examinations to show professional competence and to undertake rigorous training, bankers should do the same. That is what Amendment 21 seeks to achieve. For example, proposed new Section 65A(2)(b) says that the licensing regime must,
“specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules”.
Being a “fit and proper person” would perhaps be appropriate. If the noble Lord is not aware of the phrase, it is the standard regulatory threshold which anybody operating in financial services must attain.
Amendment 21 seeks to capture the need for proper training, continuous development and the maintenance of proper professional standards via a licensing regime. I have enormous sympathy with Amendments 50 and 51, tabled by the commissioners, but I am afraid that they do not capture the need for professional qualifications.
With respect to the government amendments in this group, they are mostly concerned with the correct definition of a bank. I am delighted to see that we now have a definition of a bank. It may be of interest to the House to know which banks are now included that were excluded in the past. Barclays Capital, Citigroup, Credit Suisse Securities and Goldman Sachs International were not included in the previous definition of a bank, but I am glad to say that they are now. I congratulate the Government on appropriately incorporating them. However, those government amendments stand slightly aside from the issue of professional standards addressed in Amendment 21 and in Amendments 50 and 51, tabled by the commissioners.
I suggest to your Lordships that this House asserting that the banking industry must maintain appropriate professional standards is the minimum that the public expect of us. I beg to move.
My Lords, Amendment 50 is in my name and those of the noble Lords, Lord Turnbull, Lord Lawson of Blaby and Lord McFall of Alcluith. It clarifies the scope of who the new senior persons regime will apply to, to ensure that it is rightly focused on material risk-takers, not on all bank employees. I will also speak to Amendments 51 and 60 which stand in my name and those of the noble Lords as colleagues on the commission. Amendment 51 sets out the duties relating to the application of the new licensing regime for the banking regime. Amendment 60 also deals with clarifications in the scope of the senior persons regime.
In Committee, on a day that I was unfortunately unable to attend owing to having to baptise someone, my noble friend Lord Turnbull welcomed many of the Government’s proposals relating to the functions of senior managers in banks, including ensuring that senior managers have a statement of responsibilities and the reversal of the burden of proof on whether a person is fit and proper to take up a senior management position. We are very grateful for that. However, my noble friend Lord Turnbull also raised a number of questions that I hope can be adequately answered today, although I realise that there is still a lot of reflection going on in this area.
At that stage, the Bill made no reference to the second tier of the two-tier system proposed by the Parliamentary Commission on Banking Standards: the licensing regime. As the Bill stands, it simply allows the regulator to,
“make rules about the conduct”,
of any “employee of the bank” if it,
“appears … to be necessary or expedient”.
As both Amendment 50 and Amendment 60 deal with our concerns around the application of these rules to any “employee of the bank”, let me turn to the issues that this language raises.
The commissioners argued that a two-tier system is the right way to deal with the issue. The expectations on senior managers must be high. However, it is also right that those who are not part of the senior management of the bank should have high standards. The noble Lord, Lord Eatwell, has addressed this. By making it explicit that the rules of conduct and the definition of misconduct in Clause 22 refer to,
“employees whose actions or behaviour could seriously harm their employer, its reputation or its customers”,
the amendment is aimed at ensuring that the FCA and the PRA focus their regulatory duties on those employees who could inflict the most significant and material damage on their institutions and on the banking system as a whole. These are not always the most senior employees. They could be a junior dealer, fairly new in the business, who, ignoring his internal limits, deals in a way that does great damage both to customers and to his employer. He can be fired and even sent to prison, but the deals are still the responsibility of the bank.
It is therefore necessary to have an amendment that not only widens beyond the senior management, obviously, but narrows so that it does not try to cover all the employees but has a very focused look at those who are going to be able to do the most damage the most often, and who are at highest risk. In our regular and ongoing conversations with the regulators and in the light of their official responses to our work, the commission has not yet been convinced that they would go far enough to ensure that this specific group of material risk-takers would be central in any further regulation and thus that neither the spirit nor the letter of the commission recommendations would be implemented.
Amendment 51 seeks to correct the failings of the approved persons regime that this new two-tier system replaces. The noble Lord, Lord Turnbull, also stated previously that this regime operates mostly as an initial gateway to taking up a post rather than serving as a system through which regulators can ensure the continuing exercise of responsibility.
The amendment also deals with another concern articulated by the noble Lord, Lord Turnbull, that there is still no requirement that the regulator operate a licensing regime. The Bill states that the regulator may make rules relating to conduct if it appears “necessary or expedient”. By setting out explicitly that the,
“relevant authorised person has a duty to ensure that all relevant employees comply with rules of conduct”
made by the regulator, the amendment makes it clear that the rules of conduct for material risk-takers who are not senior management are just as seriously applied as those governing senior management. This gives a clear identity to the new second tier of the system, which is vital if it is to be taken seriously by regulators and banks.
As I said a few moments ago, I am aware of ongoing conversations between my colleagues and the Treasury over a few remaining issues around the implementation of the licensing regime. I believe that these are mostly in relation to the most appropriate names for the licensing regime and the senior persons regime and, I hope, to some of the matters that I have raised this afternoon. I hope that the Minister will be able to update the House on these areas and that the news can be welcomed by myself and my colleagues.
My Lords, I remind the House that for a number of years I was a director of a quite large British investment bank—in those days called a merchant bank. We had a substantial lending book as well as a much bigger investment banking business. The firm was the basis of the present London activities of Deutsche Bank.
The noble Lord, Lord Lawson, said earlier that we were focusing on an area where we could actually use legislation to address effectively a major human problem. It is not always possible to address human problems with legislation—he is absolutely right about that. We have spent much of the afternoon talking about separation and ring-fencing, which is important because there is a theoretical risk that any institution could be destabilised for example by speculation in high-risk instruments such as derivatives and that could undermine the rest of the business. That is a theoretical risk; it is sensible to address it and think about it. It has to be managed. It is not actually the reason why we had the collapse in 2008 or any of the recent banking difficulties.
Similarly, the much praised Glass-Steagall regime, which existed in America between the 1930s and 1980s, was premised on the theoretical risk that if an institution could be involved in both underwriting securities and making loans, and that if the underwriting losses were such as to compromise the capital of the bank, the deposits of the bank would be at risk. Again, that is a straightforward, plausible, coherent risk that it is sensible to address but that was not the reason for the banking crisis in America in the 1930s. I will not waste time by going into the reasons for that crisis. Nevertheless, it was a sensible thing to do.
We have been talking up to now about theoretical risks. I do not resent or reject that and I very much agreed with—and just voted for—my noble friend Lord Eatwell’s amendment to try to deal with some of those risks. Now, however, we are on the really key ground, because Amendments 21 and 51, in the names of my noble friend Lord Eatwell and the most reverend Primate, address the real problem that we have encountered face to face in this country in the past few years. That is human error, and even worse than human error, human negligence—and even worse than that, systematic human negligence and systematic human incompetence. I do not think that those words are in any way excessive to describe the activities of the British banking system, and banking systems elsewhere, in the past decade and a half.
Before 2008 there were an enormous number of bankers who appeared to be able to persuade themselves, and their boards, that when yields were coming down in the market, they could somehow preserve their yields without increasing their risk. In other words, fantastic sums of money were paid to people who appeared to be competent, whom the regulators seemed to trust—as we now know, the regulators were asleep at the time—and who appeared to have completely forgotten the first rule of financial theory, which is that there is always a positive relationship between reward and risk: if you get more of one, you will always have more of the other. That is an extraordinary state of affairs to have in a sophisticated society, but that is exactly what we had.
Again, this was systematic. It was not just one bad apple, or one bad individual. In the process of trying to preserve their yields, banks were putting enormous amounts of their assets into new instruments such as CDOs—collateralised debt obligations, which were, basically, securitised mortgages and other loans—without ever investigating what they actually contained. They acted simply on the basis of endorsements by rating agencies that were themselves incompetent. It is hard to imagine the state of Denmark being more rotten than the state of the City at that time. It was an extraordinary systematic problem. People were, for example, lending on real estate with 5% or less equity. They were making absurd and dangerous mistakes, doing things we cannot imagine they were not told about when they were 25 and doing their accountancy exams, or an economics course. We have to focus on that human area and ensure that we have procedures, filters and incentives that are robust and not perverse. Evidently, in this area we have been absolutely inadequate up to the present time.
We are making some progress this afternoon. These two amendments are moves in the right direction. We must ensure that we have the right professional qualifications and the right conduct standards, so that people are being properly monitored. We could—indeed, we should—go further afield and do more, particularly in terms of making individuals responsible. In the United States, when there are serious cases of negligence and breach of the rules, not only is the institution fined—institutions are fined here—but individuals are regularly fined. Individuals are never fined here. In this country, the people making the appalling mistakes that I just referred to have got away scot-free, without paying a penny. That is a national scandal; indeed, it is a national stupidity. It means that there is a real moral hazard: if you can get away with the irresponsibility, the money is for you—“Well done, congratulations”—and if you do not get away with it, you still will not pay anything.
That is why we had the appalling culture of bonuses, in which people in lots of institutions were regularly piling on to their book a whole lot of supposedly high-yielding rubbish and then taking massive bonuses based on the discounted present value of the supposed yield over future years. Then, when they got a large bonus on that completely bogus basis, they would move on to another institution and spread their poison further through the system in that way.
I have described this in dramatic language, and I do not think that I have exaggerated in any way. That is the awful reality of the situation. It is something that regulators—and the public—ought to think about. It is certainly something that legislators must think about. I congratulate the most reverend Primate and my noble friend on their amendments, which we should put to the vote. I hope that they do so, and I look forward to supporting them.
My Lords, I support Amendments 21 and 51 as strongly as I can. We all know that the vast majority of people in the City of London and other financial centres are decent people who try to do good rather than bad, but the system of which they are part has been largely stripped of its ethical underpinning. Although you cannot inculcate morality by statute law, you can at least provide support for the forces of good and truth in dealing.
These two amendments are the very minimum required. I wonder whether the wording of Amendment 51, which refers to “rules of conduct”, is ideal. As a lawyer, whenever I see the word “rules”, I slightly draw back, because lawyers spend their time avoiding rules on behalf of their clients.
I would have hoped, and still hope, that if either or both these amendments were incorporated into the Bill, they would be construed in a wide way. There is no shadow of doubt but that too many people arrive in positions of responsibility without regard to these rules. As the most reverend Primate said, you can have a junior dealer who can cause devastating damage to a bank or other firm. So I hope that the Government accept these amendments or agree to come back at Third Reading with something comparable, bearing in mind the astonishing fact that the vast majority of our business schools have no ethical component in their curriculum at all. I do not think that 10% of them do anything in terms of ethics. If anyone says to me that it is a waste of time and a lot of hot air, they need only glance back at where we have come from. As other noble Lords have said, the degree of cynicism manifest in the policies and actions of so many financial institutions is stunning.
I hope that, if these amendments are brought into the Bill, they are construed widely by those who have to implement them. I am particularly happy that Amendment 51 would require any breach of standards of conduct to be reported to the relevant authority, because that is a real deterrent. People would be anxious about that. This proposal must be the absolute rock-bottom minimum to provide some underpinning for the future of financial services.
My Lords, I come down to a very practical issue. In the territory that we are discussing, pre-approval is absolutely necessary for dealing with staff and anti-money-laundering requirements.
My Lords, I support this amendment, which we have heard is really at the heart of the disasters of 2008. I have felt a creeping horror since the 1980s, when I was head of a college. People would frequently come up to me and say, “I’ve changed my mind, I’m not going to go on to a further degree or teach classics—I have had an offer that I can’t refuse”. This would be a young man or woman of about 21. You could see that their ethical standards had dropped away; they did not exist anymore. That was a shock to me then and it has been a shock to me ever since, so I very strongly support the amendment.
I shall add just a bit, particularly to what the noble Lord, Lord Phillips, was saying. When I entered the legal profession about 40 years ago, the branch that I joined had no rules of conduct at all, and gradually we appreciated that the public would not stand for that. The position now is that the legal profession has rules of conduct, although they are sometimes called codes rather than rules for the reason that was mentioned. I support the amendment against that background. I also suspect that, if we do not take that step now, we will have to take it in five or 10 years’ time when some other crisis emerges. It is an important step and, I respectfully suggest, an inevitable one, in line with what all the professions have had to deal with over the past 10 or 20 years in modernising how they behave and making their behaviour acceptable to the public. There is a lot to be said for the amendment against that background.
I do not think that we should run away with the idea of codes of conduct because, if you look back over the past 10 or 20 years, you will have seen a proliferation of codes of conduct and ethics from banks. When they had rules, they circumvented them, so we must have something deeper here.
On the Parliamentary Commission on Banking Standards, if we heard the phrase, “This time it’s different”, once, we heard it 10,000 times. We were told that there was new management and a new executive, that the past was behind us and the future here, with new staff—and that everything would be better. Since we have taken evidence, tumbling out every month there has been another scandal. So we need to attest to something deeper here.
The lack of individual responsibility at the top is at the core of the problem. I say this with no understatement: many of the very senior individuals who came before the Parliamentary Commission on Banking Standards were economical with the truth. I give an example on PPI, where we now have a scandal of about £25 billion to £30 billion. There was a “no see, no tell” policy from those at the top. Why? Because they preferred to be seen as incompetent than to have any responsibility. There was a hiatus of responsibility from the top to lower down.
My own view was not accepted by the banking commission, which was fair enough. I thought that every year there should be an individual meeting between the chairman and chief executive of a bank and the regulator. That meeting would be recorded but it would not be made public—but they would have to attest to the regulator that they were responsible for their institution and what went on in their institution was their responsibility. If we implement a code, we will only repeat the mistakes of the past; there has to be a deeper cultural change.
Culture has been mentioned. Again, we had individuals coming before us saying, “Look, we have a new chief executive and a new culture—everything is okay”. You would ask how many employees were in that organisation and be told that it was 150,000. When we asked how long it would take to change the culture, they said, “Oh, three months”. That is for the birds. So the responsibility needs to start at the top.
The example I give of PPI is of a chief executive who came along to the commission and said, with a straight face, “As far as PPI is concerned, my organisation is on the side of the angels”. That organisation is the one with the highest PPI penalties in the United Kingdom. So do not let us kid ourselves that we can sort this problem with codes. We need to give the regulator authority—and we have seen a regulator that was captured, cowed and conned by the industry. There should be someone to go to in the organisation to whom we can say, “That was your responsibility”. If we are told, “Well, that person left”, we need to ask for the handover document that indicates that there was a transfer of responsibility that can be understood.
The director of enforcement at the FSA came before the commission at the time of the UBS scandal, which cost the bank billions of pounds. We had four from the top management of the bank before us and, when we asked them if they knew who the individual was, they said that they did not know at all. Then we asked them how they found out, and they said, “Bloomberg wires”. That is how corrupt the institutions are in terms of accountability.
We need to change. I am happy for the Government to accept this amendment, but I am certainly not happy for warm words or for anyone to say, “This time is different”. This time ain’t different. The scandal has kept going and will continue, and we need to do something severe to ensure individual accountability by those at the very top of those organisations.
I have enormous respect for the noble Lord, Lord McFall, but I think the idea of legislating to be more responsible—in fact, legislating for human character—is a very dangerous path. It is why I intervened on the question of minimum standards of integrity: you are either honest, or you are not honest. It is quite dangerous to keep loading the statute book with matters which attempt to affect human characteristics. I think that there should be some caution about some of these amendments.
My Lords, this is a very large group of amendments dealing with another key aspect of the Government’s reform-namely, how to drive up standards across the banking system. The Government’s amendments in this group, and in the following group, widen the range of firms covered by the reform. They respond to points made in Committee, and I am grateful to the noble Lord, Lord Eatwell, for his welcome for them, but we will deal with them in more detail when we come to the next group.
I would like first to respond to the concern that the Government’s Committee stage amendments did not implement the commission’s recommendations for what it calls the licensing regime. To be completely clear, the Government are committed to implementing the vast majority of the commission’s recommendations on the regulation of individuals in banking, including its recommendations to introduce a licensing regime. The regulators, in their responses to the commission published in October, confirmed that they would do this.
The Government’s amendments in Committee put in place all the essential features of the commission’s licensing regime proposals in Clauses 22 and 23. These clauses give the regulator power to make rules of conduct imposing binding standards on employees and ensure that the regulators can take action when there is any breach of these rules. The relevant provisions would form part of FiSMA and confer powers on the regulators in the normal way.
However, we recognise that this may not be seen as giving the full weight and impetus to the commission’s proposals, so we are looking to see whether we can bring forward at Third Reading amendments which will highlight the proposals more and put beyond doubt the determination which we all share to see real change in this area. In the light of this, the Government are looking to introduce amendments at Third Reading to impose obligations on banks and PRA-regulated investment firms, first, to verify before appointing someone as a senior manager, an employee in a role that could do significant harm to the firm or another role requiring regulatory pre-approval that the person is fit and proper to perform that role in the firm; secondly, to maintain up-to-date lists of such persons which could be made available to the regulators when required; thirdly, to notify the appropriate regulator when they take formal disciplinary action against such persons—formal disciplinary action could include giving a formal written warning, dismissal, suspension or clawing back remuneration; and, fourthly, to notify all such persons of the banking standards rules that apply to them. All these obligations will be regulatory requirements under FiSMA. Failure to comply with the obligations will be a breach of regulatory requirements, and actions could be taken against the bank concerned by the regulators. In addition, deliberately or recklessly submitting a materially false or misleading list of persons to a regulator will be a criminal offence.
The Government will also look at tabling amendments requiring, rather than simply empowering, the regulators to set out those functions for which a bank must do the above. We anticipate that this class will match the category of staff defined in the PCBS report as being those whose actions or behaviour could seriously harm their employer, its reputation or its customers. I hope that when we produce those amendments they will satisfy the concerns addressed by the most reverend Primate.
There are certain detailed respects in which the Government have decided not to follow the recommendations of the commission. These do not change the substance of the impact of the regime, but they will ensure its effectiveness. First, the commission envisages that the licensing regime provisions would entirely replace the regime of regulators, giving pre-approval to people below senior management level. That would mean dropping regulatory pre-approval for all appointments below senior management level, including in areas such as money laundering, with which the noble Lord, Lord Brennan, and others were particularly concerned in Committee.
Before my noble friend sits down, can he give an undertaking that he will produce the further amendments he proposes to introduce at Third Reading in good time so that we can thoroughly evaluate them and decide whether they go far enough in meeting the commission’s requirements? There has been a tendency recently—I know that a lot of work is involved—to produce complicated amendments at the last minute which do not give noble Lords time to assess them properly.
I have a great deal of sympathy with what the noble Lord says, and I can give an assurance that we will bring the amendments forward at the earliest possible point. I cannot say what day that will be, and we may of course have different definitions of “giving short notice”, but we will do our best to give the noble Lord several days’ notice. We hope that, as we get towards Third Reading, the number of amendments we bring forward will be much lower than at the previous stage.
It is not saying a huge amount, but it is saying something, and I hope that because we are talking about a much smaller number of amendments we will be able to concentrate the entire brainpower of the Treasury on them so that we can bring them forward with the maximum possible notice.
Does the noble Lord agree that if we are to make a real difference this time—and he will sense a scepticism about that, which we face in this country and even in this House as a result of the appalling situation that we have had—we will need to emphasise, and really substantially emphasise, the issue of personal responsibility? Would it not in that context be necessary that individuals in this country should in future be subject to fines for regulatory breaches, as happens elsewhere?
My Lords, that is the key focus of the senior managers regime—that, for the first time, senior managers and their banks will have to tell the regulators what the specific responsibilities of those people are, and we are introducing enhanced penalties if people do not stick to those responsibilities and break the rules. I think that we are indeed doing what the noble Lord requires us to do. I hope that when the noble Lord, Lord Lawson, and the most reverend Primate see our amendments, they will feel that we have done everything we can to meet their requirements.
Amendment 21, proposed by the noble Lords, Lord Eatwell and Lord Tunnicliffe, is an amendment which we saw in Committee. As I explained on that occasion, it would really just rename the existing approved persons regime as a “licensed” persons regime. The only extra feature in the proposal is for annual validation of competence by the regulator. This would have the effect of increasing the number of approved person applications from around 30,000 to around 150,000 a year. This would mean an unnecessary and costly extra burden on firms and regulators.
The Official Opposition’s amendment would not deliver the real reforms proposed by the parliamentary commission, which Clauses 14 to 26 of the Bill deliver and which we will enhance. It would just add to regulatory burdens without producing any real improvement in standards of conduct in the industry. I hope, therefore, that the noble Lords, Lord Eatwell, will agree to withdraw his amendment.
My Lords, I was intrigued by the proposals which the Minister suggests will be brought forward at Third Reading and I look forward to having the opportunity to see them—perhaps in good time—before we have to debate them.
The key issue in Amendment 21 is that of qualification: professional qualification, minimum thresholds of competence and continuous professional development. These are fundamental to any serious professional standards and are vital if we are to have in the future the sort of people who can deliver a banking industry of which we in Britain can once again be proud.
I should make it clear that Amendment 21 is not in any way contrary to Amendments 50 and 51 by the commission; it is complementary. It adds to the overall structure of the requirements to be met by those who seek to pursue a banking profession. It is that word “profession” which we regard as central. It is no accident that we have labelled our amendment “Professional standards”. That is what this amendment seeks and that is what I believe it would achieve in addition to, and complementary to, the amendments by the commission and, as I hear it, the endeavours by the Government to develop a framework of rules which ensure that standards are met. The professional standards must be the bedrock. That is why I have moved Amendment 21 and why I wish to test the opinion of the House.
My Lords, this group of amendments, and similar amendments in the previous group, respond to concerns expressed in Committee that the scope of the reform of the senior managers and banking standards regime should be extended beyond ordinary banks to cover what are known, in common parlance, as investment banks. A number of noble Lords were concerned about this point and I undertook to relay the feelings of the House to ministerial colleagues. These amendments are the result.
The definition that we propose is that of the UK investment firms that are regulated by the PRA as well as by the FCA. This captures all those investment firms the activities of which—above all, substantial wholesale market dealing in securities as proprietary traders—are systemically important. These are the most important City firms, and consequently would be treated by the senior managers and standards regime in the same way that banks are. It therefore excludes all investment firms that are regulated solely by the FCA.
The noble Lord, Lord Turnbull, tabled an amendment to a different part of the legislation that would have used the existing definition of “investment firm” in FiSMA. This would have encompassed investment firms solely regulated by the FCA. As explained in Committee, that would cover a wide range of ordinary investment firms—several thousand, in fact. This would include firms far outside what most people would think of as investment banks. The Government have shared this definition with the members of the PCBS and are hopeful that the scope now captures those firms that the PCBS had in mind.
Noble Lords who have had the opportunity to read the paper placed in the Library yesterday know, as the noble Lord, Lord Eatwell, has pointed out, that it covers only nine further firms. They also know that it covers the investment banks that everybody has heard of and would expect to see covered. The small number may be surprising, but the reason for that is simple. Many firms that would be thought of as investment banks will already have a deposit-taking permission, so they will already be covered by the definition in Clause 24. That definition is already broad enough to catch all retail and wholesale banks, whether ring-fenced or not. It covers any UK institution which has the permission to take deposits. It does not cover big City institutions which are not deposit-taking businesses. These amendments will bring them into the scope of the senior managers and banking standards regime. I beg to move.
My Lords, I declare an interest, as I have done before, as chairman of Global Financial Integrity. In Committee, the Minister, the noble Lord, Lord Newby, said:
“The scale of money-laundering is very large, and the Government and the regulators are determined to cut it down”.—[Official Report, 15/10/13; col. 406.]
The phrase “cut it down” was prudently chosen. Money-laundering, in its widest sense, never goes away. By “its widest sense”, I mean any attempt to create an illicit flow of money for illegal objectives: money-laundering, drugs, terrorism, bribery—whatever it might be. I will use the term in that sense throughout what I am about to say.
The purpose of this group of amendments in my name and that of my noble friend Lord Watson is to identify as clearly as possible a legislative framework within which our banks can be regulated and monitored so as to achieve one of the Financial Conduct Authority’s objectives: to preserve the integrity of the British banking system. I will deal with them briefly. Amendment 26 deals with a scope of responsibility of senior management so as to specify, in a very broad phrase,
“a relevant financial scheme giving rise to criminal liability”.
That is carefully chosen as an omnibus phrase to cover all the kinds of money-laundering activities that I have just described and relates such irresponsibility directly to senior management.
Amendment 28 deals with two issues: redundancy and specificity. “Redundancy” is in inverted commas because it was suggested in Committee that these changes were entirely unnecessary. Plainly, the Financial Conduct Authority and everybody else have a duty to obey the law—of course they do. However, equally, legislation has a component in it that should be designed to relate the existing law to the specific responsibilities to be carried out. No harm is done by such identification, and clarity is achieved. Nobody can say that they did not know. On specificity, subsection (4)(a) of proposed new Section 59ZA in Amendment 28 deals with a general provision for dealing with these schemes that might produce criminal liability. Paragraph (b) sets out the main statutes under which such activities can arise. Paragraph (b)(viii) makes clear that the FCA and the PRA themselves can refer to other relevant statutes, regulations or the like as they think appropriate and are specified in their rules.
Amendment 30 is an attempt, in substance, to achieve the objective of making all persons responsible who engage in money-laundering activities, so that there are no loopholes between different levels of staff and management. Amendments 45 and 47 would provide that the FCA and PRA should, in the banking standards rules, make rules about money-laundering similar to the effect of what these amendments seek to achieve.
My Lords, in the past, anti-money-laundering legislation tended to be associated with crime, typically drugs or gun-running. These days it has achieved a much greater importance in the sense that it is also associated with terrorism. Therefore, the need to maintain the strictest anti-money-laundering rules and to ensure that they are adequately enforced is an element not only of the maintenance of the law, but of national security. Therefore, I would like to commend my noble friends who have put forward these amendments to strengthen the anti-money-laundering regime and to ensure that appropriate levels of criminality or criminal conduct are so defined within this area that suitable penalties for ignoring anti-money-laundering legislation or laundering money in various ways can be enforced.
I hope the Government will accept these amendments; they are hugely important and send a very important signal to the world that London is not a place in which money-laundering will be tolerated in any shape or form. If the Government are not able to accept them at this stage, I hope they will commit to providing in writing both a commentary on the amendments that my noble friend has put forward and a discussion of the relationship between the new personal responsibility mechanism for bankers and the AML compliance. Surely AML compliance should be included as one of the areas of responsibility that is allocated to a named senior banker under the new senior person regime; it should be in the banking standards rules to which all staff at banks will have to adhere, and one of the conditions of the new remuneration code, which makes deferred pay and bonuses contingent on upholding standards. There is no more important standard than those which my noble friend has dealt with in his amendments. I hope that the Government will be able to accept them—if not actually in form, then in spirit—and commit to bringing forward the appropriate form, if necessary, at Third Reading. The best move, however, would be to accept them now.
I want briefly to add my support to the amendment of the noble Lord, Lord Brennan. Money laundering affects not only the areas that have been mentioned, but in my 10 years’ experience of dealing with conflict management and mitigation work in Africa, it was particularly significant in the ways in which illegal regimes or militias managed to fund and supply themselves. My experience, particularly in some parts of Africa, has shown that London, over time, as one of the deepest and most liquid financial markets on earth has, contrary to the impression given by many senior bankers, played a significant role—not through their collusion in any way at all, but because of its size and the complexity of preventing it. I believe that this amendment and the suggestions put forward by the noble Lord, Lord Eatwell, will contribute extensively to restricting that.
My Lords, all Members of this House are what is known as PEPs for the purposes of anti-money-laundering. This means that any bank has to pay extra-special attention to any of our transactions. It is perfectly justified. The thought crossed my mind—and I have great sympathy with the noble Lord’s aspirations—that money laundering for corrupt purposes, for armaments, for terrorism and the rest of it, does not particularly come from an ordinary British family living in a suburb. It comes very much from parts of the world where such things are more prevalent. There is a case for requiring a more judicious anti-money-laundering regime for any form of transfer that comes from such parts of the world in an analogous fashion to a PEP if we really want to get to grips with the horrific money-laundering that can come from some parts of the world, causing misery to citizens there. As arrangements presently stand, there is no difference between an evil regime somewhere and an ordinary British citizen living in Birmingham.
As I understand it, the money-laundering regulations specifically exclude British citizens, including parliamentarians, from their scope. What has happened is that the banks, as a matter of policy, following what they expect to be European directives on this subject, treat British parliamentarians as though they are politically exposed persons. The actual regulations do not.
I think the noble Lord may be right, but in practice, we are thus treated as a more dangerous category. I was merely using that as an example of how the more obvious areas of money-laundering offences might be more carefully policed.
My Lords, I am pleased to associate my name with all five amendments in this group, but I also want to speak to some extent about the FCA note which appeared at about 9 o’clock yesterday evening—typically late in the day, not just literally, as regards the progress of this Bill. I reiterate the point made by my noble friend Lord Brennan that the Government have provided no grounds for reassurance that their amendments adequately deal with the serious issue of anti-money laundering. The fact that the Minister’s promised letter of comfort has not materialised demonstrates that the House should be concerned by the absence of any coalition assurances on this crucial issue. I am not sure whether the FCA note is intended to be in place of such a letter, and I will come on to that later. However, I said in Committee that not only were the Government naive to assume that the amendments we tabled then were unnecessary, they were also complacent. I very much regret to say that the failure to produce the letter setting out the Government’s position which my noble friend Lord Brennan was promised clearly suggests that that complacency remains intact.
We also heard in more general terms in Committee about the devastating human cost caused by the banks’ failure to comply with anti-money-laundering laws. That has not been mentioned this evening but it bears repeating: it is not just a question of what happens in relation to the financial sector in this country but also of money laundering that often amounts to the state looting of developing countries’ aid and haemorrhages billions of pounds from their national budgets, trapping millions of the world’s poorest people in extreme poverty. However, as mentioned in the previous debate, it also threatens the economy of the UK. The integrity of our financial system is hugely compromised by banks failing to prevent access by the worst types of criminals from around the world, whether they be corrupt dictators, drug smugglers, arms dealers or terrorists, as other noble Lords have said. This shows that the stakes could not be higher. I wish that that were reflected in action taken by the Government to counter this problem. It makes their lack of willingness to deal meaningfully with the issue quite unfathomable. Their continuing naivety is potentially dangerous. I apologise for using the word “naivety” again but I feel that I have to do so.
As the noble Lord, Lord Phillips, rightly noted in Committee, should there be any doubt, following the Minister’s letter, about whether the Government’s amendments adequately dealt with money laundering or not, the House should err on the side of caution and choose the alternative amendments. We now know that no such letter has materialised. My noble friends and I have taken great care to move new and refined amendments which reflect the extensive and helpful debate in Committee. In stark contrast the Government have not even offered the explanation they promised. This should leave the House in no doubt as to which set of amendments should be favoured.
I turn to the note from the Financial Conduct Authority that appeared yesterday evening. My noble friend Lord Eatwell said in his opening remarks on Amendment 3, I think, that everything seemed to be done at the last minute as far as the Bill is concerned, and that has been very much the pattern since it first appeared. It is unhelpful in terms of enabling noble Lords to respond meaningfully to new information or, indeed, to draft amendments. It is not clear whether the FCA note on its anti-money-laundering supervision and the new senior managers regime proposed in the Bill is in lieu of the Minister’s letter to my noble friend Lord Brennan, as I said earlier. That letter was intended to outline why the latter’s amendments seeking the explicit inclusion of anti-money laundering in the new senior persons regime and other personal liability mechanisms were unnecessary because the government amendments implicitly did this. However, I submit that the note does not achieve what is required; namely, a guarantee that the FCA will include anti-money-laundering compliance as a key risk and make every bank name a senior banker with personal responsibility for it.
The FCA’s note is largely about what it does and has done, and even refers to what the FSA did. There are just two paragraphs at the end which focus on the proposed new senior managers regime. As the Bill stands, this could give the FCA the power to hold named, individual senior bankers accountable for failures to uphold key standards and risks. However, it seems to me there is a loophole in the Bill which means that it will be left open to the FCA’s interpretation as to whether it uses this power and insists that anti-money-laundering compliance should be one of the issues covered. The note does not indicate that the FCA will include this. It uses terminology such as, “We will consult”, “This will allow firms”, and it, “will help regulators”. These are key phrases in any document but I suggest that they are weak, possibly ambiguous and certainly open to interpretation. I believe that the word “consult” simply means that the outcome is by definition not certain. We should require firms to do something, which is a stronger word than “allowing” them to do something.
My next example is fundamental to the way we deal with anti-money laundering. Instead of the phrase, “for example, anti-money laundering systems”, we should state unequivocally, “including anti-money-laundering systems”. The language that is used is permissive and uncertain rather than being mandatory, which is what I and the noble Lord, Lord Brennan, seek to achieve with these amendments. The content of the note is disappointing and it would be helpful to have clarification of whether it is provided in lieu of the Minister’s letter.
I believe that anti-money laundering compliance should be included as one of the areas of responsibility that is allocated to a named senior banker under the new senior persons regime, is written into the banking standards rules to which staff at banks will have to adhere, and should be one of the conditions of the new remuneration code which makes deferred pay and bonuses contingent on upholding standards. Will the Minister, on behalf of the coalition, ensure that these important requirements are included?
My Lords, we are dealing here with an issue that everybody realises is an extremely important one in terms of the way banks behave and the way that they are seen to behave. As the noble Lord, Lord Eatwell, pointed out, the importance of money-laundering in financing terrorism has given it an added twist.
These amendments are an expanded version of an amendment tabled by the noble Lord, Lord Brennan, in Committee. Since then, my colleagues in the Treasury have met the noble Lord and explained their view of his original amendment. I hope I can convince the House that the Government’s approach meets the requirements which the noble Lord, Lord Brennan, seeks to impose. These amendments would expand the scope of the senior managers regime to include all persons who are responsible for ensuring that a firm complies with specific obligations under the criminal law, irrespective of the level in the organisation at which they work.
No one doubts the importance of robust action to tackle financial crime such as money-laundering, but I can assure your Lordships that these amendments are not necessary to ensure that financial crime is adequately addressed under the reforms that the Government are bringing forward.
These amendments would bring subordinate staff with relevant responsibilities within the scope of the senior managers regime. That could lead to confusion at least and is contrary to the PCBS recommendation to narrow the senior persons regime to very senior people, and parts of the regime, such as the reversal of the burden of proof, make sense only when applied at the senior level. It is not necessary to bring subordinate staff with specific responsibilities for financial crime within the senior managers regime in order to ensure that these staff are subject to enhanced regulatory scrutiny. It will still be possible for the FCA to ensure that appointments of persons to be money-laundering reporting officers, for example, will be subject to prior regulatory scrutiny and approval under the approved persons regime, if that is considered appropriate, and then subject to rules and standards applicable to their role. This is because the approved persons regime is being retained for financial services firms that are not banks. It is also being retained within the banking sector for appointments below senior management level. The Government have always considered this necessary as there may be critical roles below senior management level with important responsibilities for consumer protection, market integrity or preventing financial crime where prior regulatory scrutiny of appointments remains necessary.
In addition, of course, the regulators will have the ability to make rules of conduct for bank employees who are not approved persons. This will mean that rules of conduct can be applied to staff with more limited roles in preventing financial crime in banks, as well as to approved persons and senior managers.
There is also no need to refer explicitly to breaches of the criminal law to bring senior managers with relevant responsibilities within the scope of the senior managers regime. Under the Government’s proposals, a function can be designated as a senior manager function if a person holding it would be responsible for aspects of the bank’s business that could involve serious consequences for the bank, or for business or other interests in the United Kingdom. There is no doubt that a serious breach of criminal law could have serious consequences for the firm as well as for other people. So senior managers in this area would be covered by this new regime.
The noble Lord, Lord Brennan, asked me three specific questions and for assurances on those points. First, he asked me to confirm that there was no reason to doubt the reliability of the conclusions of the FCA paper. There is no reason to doubt them. Secondly, he asked whether the FCA was properly financed to undertake the level of activity required for it effectively to fulfil its responsibilities under the rules on money-laundering. The FCA budget, as he will know, is funded by the sector as a whole. The FCA is therefore unconstrained, in practical terms, regarding its budget. It is for the authority to determine the resources that it thinks it requires and it can then get them. So no budgetary constraint is imposed on the FCA which reduces its ability to employ as many staff as it feels it wants in this area. Thirdly, he asked whether the FCA represented government policy. The FCA does represent government policy. I am sorry that the note was transmitted later than would ideally have been the case but that in no way undermines its significance as a definitive statement of government policy in this area.
I recognise the concern that noble Lords had in Committee, and still have, in this area. It may be of some minor comfort to know that since Committee I have had a meeting with one of the senior relevant staff at one of the largest UK banks to discuss whether, in its opinion, the FCA was pursuing money-laundering with greater rigour than had been the case in the past. The bank said that the FCA was doing so. It also said that the bank itself had recognised that it simply had to give greater priority to this area.
Two things must happen if we are to achieve the level of compliance that the noble Lord would like. The first, which the noble Lord has concentrated on now, is that the FCA has to do its job properly. As I say, it is putting more resources in and is being, as it states in its list of objectives, more intensive and intrusive. Secondly, as we have discussed in relation to a number of other areas, the banks have to accept that they must adopt a zero tolerance approach to money-laundering. It is clear from the evidence which the parliamentary commission received, and from much other evidence, that this has not always been the case. I believe that the banks are giving a priority to this that they have not done in the past. Is it adequate? It is a great improvement, but it will take some time to be fully clear about whether it is adequate. However there has been a sea change which has been effected in part by the regulatory regime and in part by the pressure put on the banks by a whole range of external stakeholders, not least your Lordships’ House.
The noble Lord, Lord Eatwell, suggested that a further letter might be of help between now and Third Reading to confirm the exact position. I am happy to agree to provide a letter in the terms that the noble Lord suggested. With that assurance, I hope that the noble Lord, Lord Brennan, will feel able not to press his amendments.
Perhaps the noble Lord could clarify something. He made it absolutely clear that the FCA note represents government policy. It therefore seems strange that that policy is allowed to be as—shall I say?—ambiguously worded as the FCA note is. It is of concern that it is left that way. Will he commit to write to the FCA before Third Reading to ask it to make anti-money-laundering explicit in the personal responsibility requirements of senior bankers?
My Lords, I will cover that issue in my letter. I am sorry that the noble Lord thinks that the FCA note is ambiguous, because the fact that it is giving greater priority to this issue and being more intrusive and energetic should give him some comfort. However, as I say, I will write to him.
My Lords, first, I had a meeting with officials from the Treasury, the content of which was, in short form, declaratory and, in long form, advisory. It was declaratory when I explained to them that I and my colleagues with whom I am working on this problem were convinced that these amendments were necessary and that the Treasury officials and the Home Office man who was there should revise their thinking accordingly. So they informed our side of the argument of nothing new, except that they felt that they were right. The advisory part of the meeting related to a simple proposition that took a little time to adumbrate. I invited them—both officials were, I am sure, competent young government lawyers—to take advice on this issue and on the terms of the offence, which we shall turn to shortly, from senior Treasury counsel who would be independent and objective as to whether the government views on the strength of the Bill on this point were correct. I do not know whether that has been done. The fact is that the meeting took place but was not productive.
There are times in legislative life when those who see cannot persuade the blind where they are going. In Amendment 30 no attempt is made to disadvantage junior staff and every attempt is made to ensure that senior staff are not allowed to use the fault of junior staff as an excuse for their own responsibility. That is what that amendment is plainly directed at. It makes the senior management’s job crystal clear. It is necessary to consider what the Minister has said in reply and, for the moment, I beg leave to withdraw the amendment.
My Lords, the amendment seeks to amend Clause 15, and I will speak to Amendment 49, which seeks to amend Clause 22.
When those clauses were introduced into the Bill in Committee they provoked a measure of interest and concern on the part of the Law Society of Scotland, which suggested amendments to be introduced on Report. For that reason, it is necessary that I declare an interest as having been a qualified lawyer in Scotland since 1971, initially as a solicitor and thereafter as counsel at the Scottish Bar.
I mention that with a measure of diffidence, having regard to the comments made earlier about the ethical training of lawyers in general. Joking apart, it is right that your Lordships should be aware that the introduction of these two clauses gave rise to the concern to which I have referred.
I offer no criticism about this because I am aware that on the second day in Committee a considerable volume of amendments were dealt with, but the amendments that introduced Clauses 15 and 22 took place without any detailed discussion. Clause 15 would add an additional section, Section 59ZA, to the Financial Services and Markets Act 2000, the terms of which are relevant to determining whether the carrying on of a controlled function in relation to a regulated activity of an authorised person is for the purposes of the Act “a senior management function”.
Clause 22 would add a further section to the 2000 Act, Section 64A, which gives the Financial Conduct Authority and the Prudential Regulation Authority power to make rules of conduct for approved persons. Clauses 15 and 22 have given rise to concern from the Law Society as to how their provisions impact on the duty of Scottish solicitors to maintain confidentiality in all their dealings with their clients. As your Lordships will be aware, solicitors in Scotland are regulated by the Law Society of Scotland. They are bound to observe their professional obligations and are liable to be sanctioned at the instigation of the Law Society if they fail to meet those obligations. The duty of confidentiality is set out in detail in the Law Society of Scotland’s Rule B1.6. It places a duty on solicitors not to disclose information about their clients, including communications between solicitor and client unless permitted by the client, or compelled by a court or Parliament to do so. This ethical duty of maintaining confidentiality provides for checks and balances, as a solicitor is never the final judge as to whether the information must remain confidential. Legislation and court process, as well as client consent, provide means by which information might legitimately be disclosed. The policy considerations behind this rule of confidentiality are that the rule affords full and open exchange between clients and their lawyers. It also helps to ensure that full and frank advice is provided.
Legal professional privilege, which is also mentioned in the amendments, has a similar, albeit not identical, effect. It protects from disclosure confidential communications and evidence of those communications between a professional legal adviser and their client, provided the communications are for the purposes of preparing for litigation or the client seeking and receiving legal advice. For these purposes, the tendering of legal advice is not confined to informing a client what the law is; it includes the solicitor or counsel involved giving advice as to what action the client should prudently and sensibly take in the relevant legal context.
The need for these amendments was, as I have indicated, identified by the Law Society of Scotland, having consulted a number of its members. It sent earlier drafts of the amendments to among others, the Treasury and the noble and learned Lord, Lord Wallace of Tankerness, the Advocate-General for Scotland. The Law Society and I are grateful to the Treasury and indeed the Advocate-General for responding to that approach and giving us an indication of the Government’s thinking on the issues involved. Before saying a few more words about the details of the amendments, I think it right to note that other regulatory bodies in the United Kingdom which have members who are either solicitors or counsel may have similar interests in the subject matter of these amendments.
The arguments in support of Amendment 27 to Clause 15 can be put very shortly. They relate to the terms of the new Section 59 of the 2000 Act. Those provisions appear to open up the opportunity of legal advice given to a bank by a solicitor being deemed, whether by the Financial Conduct Authority or the Prudential Regulation Authority, as amounting to the taking of decisions or alternatively,
“to participating in the taking of decisions, about how one or more aspects”,
of a serious management function should be carried on. If such a view could be taken of the actions of a solicitor, such actions could be deemed to provide a factual basis for determining, in terms of new Section 59ZA(1) of the 2000 Act, whether a function within a bank is a “serious management function”. The Law Society is concerned that such events might lead to an erosion of the distinct professional relationship between solicitor and client and the obligations that solicitors undertake to provide advice to the client.
What is unclear from new Section 59ZA(3) is whether the Government intend that such solicitors, advising on legal issues alone, will also be considered as having participated in the taking of decisions. The Law Society of Scotland considers they should not be and it believes that that should be made clear in the Bill. That is what Amendment 27 seeks to achieve. If the Minister takes a different view, I am sure he will recognise that this issue is a concern to members of the legal profession in Scotland and I respectfully invite him to explain to your Lordships his reasons for doing so, so that those lawyers will be made aware of them.
The need for Amendment 49 arises out of Clause 22, which was introduced into the Bill on the second day in Committee. It would insert a new Section 64A into the 2000 Act, which would grant power to the regulatory authorities, the FCA and the PRA, to make rules of conduct for approved persons under Section 59 of the 2000 Act and persons who are employees of banks. Both categories could include solicitors, counsel and advocates in different parts of the United Kingdom. They would be under duties of confidentiality and legal professional privilege with regard to communication between agent and client.
It seems abundantly clear that the rules of conduct made by the regulatory authorities could conflict with the duty of confidentiality on solicitors and with legal professional privilege as they are understood and apply in Scotland. Amendment 49 is designed to resolve any potential conflict. In particular it provides in the proposed new Section 64A(12)(b) that in the application of new Section 64A of the 2000 Act in Scotland, no professional legal adviser, either advocate or solicitor, could be required, under the rules of conduct made by the FCA or the PRA, to answer any question that he would be entitled to refuse to answer by virtue of any rule of law relating to confidentiality. In that important respect, it adds to the protection currently afforded to professional legal advisers by Section 413 of the 2000 Act, which severely limits the extent to which a person can be required under the 2000 Act to produce, disclose or permit the inspection of protected items. What Section 413 does not do is make any reference to a lawyer refusing to answer a question.
There is concern that Section 413 of the 2000 Act as currently drafted would not entitle a solicitor in Scotland to refuse to answer questions posed in terms of rules of conduct made by either the FCA or the PRA, even though answering those questions would breach their duty of confidentiality to their client. The Law Society accordingly seeks to have this issue clarified. The society’s view, with which I agree, is that it is important to ensure that rules of conduct made in terms of new Section 64A of the 2000 Act do not place a solicitor who is either a senior manager or employee of a bank in a position where there would be a conflict between his or her duties under the rules of conduct and his or her duties as a professional legal adviser, duties that are regulated by the Law Society of Scotland.
I argue in terms of both amendments that these issues should be addressed now and not deferred until such time as the FCA or the PRA seek to exercise the new statutory powers they are to be given. Against that background, I beg to move.
My Lords, these amendments have the support of the Law Society of England and Wales as well as that of Scotland—certainly for Amendment 27. The issue is pretty clear. The objective is to ensure that the provision of legal advice is not to be construed as taking decisions or participating in the taking of decisions, and for situations where solicitors or other legally qualified professionals frequently give advice on decisions which a bank or other institution may take. They do not make the decisions, but purely advise on legal issues where the Bill is currently unclear as to whether advising would be included in,
“participating in the taking of decisions”.
Amendment 27 seeks to clarify the position.
There is an irony here in that, as I understand it, Clause 15 creates a broad definition of a senior management function, and the term,
“participating in the taking of decisions”,
as currently drafted will capture legal advice. This could have some perverse results and disproportionate consequences, and a danger that all legal advice is considered as participating in decision-making. If that were to be the case, all banks’ lawyers might need authorisation from the Financial Conduct Authority to give legal advice, whereas of course they are already regulated through the Solicitors Regulation Authority.
My Lords, I understand the concern of the noble and learned Lord and that of the Law Society about the position of lawyers under the new regime, and I hope very much to be able to reassure him.
Amendment 27 would amend Clause 15, which inserts new Section 59ZA into FiSMA, which provides the definition of a senior management function. A person becomes a senior manager only if they perform a function which has been designated by a regulator as a senior management function and have been approved to perform that function by the appropriate regulator on the application of the authorised person; that is, the firm concerned. A senior management function is one that will,
“require the person performing it to be responsible for managing one or more aspects of the authorised person’s affairs”,
and that,
“those aspects involve, or might involve, a risk of serious consequences—
(i) for the authorised person, or
(ii) for business or other interests in the United Kingdom”.
It is therefore highly unlikely that the regulators would designate being a legal adviser as a senior management function simply because giving advice does not constitute management as set out in the definition of senior management.
Clause 22 inserts new Section 64A into FiSMA, which allows the regulators to make rules of conduct for approved persons, including senior managers, and for bank employees. This implements the Parliamentary Commission on Banking Standards recommendation regarding the introduction of a “licensing regime”. This broadens the population who can be subject to the regulators’ rules, which could for example now apply to an in-house legal adviser in the capacity of an employee. In addition, the regulators already have a broad power to require firms to provide information, as set out in Section 165 of FiSMA. However, the regulators cannot make rules which would trump the protection of legal privilege. Section 413 of FiSMA provides expressly that no power under the Act can be used to require the disclosure of “protected items”. These are defined in terms which are materially identical to the definition of items subject to legal professional privilege in Section 10 of the Police and Criminal Evidence Act 1984. Consequently, FiSMA already prevents the regulator from obtaining legally privileged material.
The noble and learned Lord’s amendment would also introduce a protection against the disclosure to the regulator of “excluded materials” as defined in Section 11 of the Police and Criminal Evidence Act 1984. This includes personal records generated in the course of business and held in confidence, human tissue and journalistic material held in confidence. Clearly, the regulators would not request some of the categories of material included in this section. However, in relation to confidential information such as that compiled during the course of business, it might be appropriate, and indeed sometimes essential, for the regulators to receive it. However, FiSMA itself provides strong protection for confidential information received by the regulators when carrying out their regulatory functions. Section 348 of FiSMA prevents any such information being disclosed to a third party except for very narrow purposes. Further, where any such information constitutes personal data, it would be subject to the Data Protection Act.
The noble and learned Lord asked whether Section 413 of FiSMA covers communications as well as documents. I can give him that assurance. The section is not limited to documents, so regulators cannot require the disclosure of privileged communications. With those reassurances, I hope that the noble and learned Lord will feel able to withdraw his amendment.
My Lords, I am grateful to the Minister for giving a very clear and detailed explanation of the Government’s position in regard to these very complicated statutory provisions. I always think that when you start running out of enough section numbers so that you have to add letters to them, it makes the construction of the contents of those sections much more complicated than it might otherwise be. For these reasons, I beg leave to withdraw the amendment.
I have already spoken to the amendment standing in my name. The members of the commission are delighted that the Government are broadly finding agreement with their recommendations, and on all the areas on which the Minister spoke we hope and expect that the government amendments at Third Reading will reflect closely the assurances that we have been given. To ensure that we get this right, we re-emphasise the need to see the amendments as early as possible and reserve the possibility, if we are not content and feel that they do not reflect what has been said, of returning to them at Third Reading. If I have those assurances, I will be happy to withdraw the amendment. I beg to move.
This amendment is in response to government amendments to the Bill which amend the Financial Services and Marketing Act 2000. The amendment would require the Treasury to commission a review to provide an opportunity to evaluate the effectiveness of the regulators, particularly the FCA, in implementing and effectively enforcing new powers in relation to individual standards rules and the licensing regime.
The amendment should allow for recommendations that may include the removal of powers from the current regulators or further separation within the current body. That would potentially allow for aspects covering licensing and individual standards rules to be considered for moving across to an independent professional body, should that be appropriate. That echoes the amendment that we on the Labour Front Bench successfully moved a short time ago.
Given the competing priorities for resources—which have the potential to be compounded with the inclusion of consumer credit regulation in 2014 and the payments system regulation, if approved—there is the concern that the FCA may struggle to carry out this challenging role it faces. Therefore, an independent review can assess the effectiveness of the FCA and PRA in being able to implement the recommendations made by the Parliamentary Commission on Banking Standards and, in doing so, provide feedback on how this can be improved, and whether it is more effective for the oversight and enforcement of the professional standards to be undertaken by a genuinely independent professional body.
My Lords, I start by saying that we strongly agree with the last point made by the noble Lord; people who fall below the standards of conduct required of them should be held effectively to account. We have been discussing a number of ways in which the Bill will help to bring this about. I also appreciate the concerns of the noble Lord that we should take stock at some point and review whether the new system of rules of conduct has delivered an improvement in behaviour among bank staff—the kind of improvement that we are all agreed we want to see. I am not sure, however, that we need legislation to provide for that.
In the first place, the regulators themselves will keep their rules under review in the normal way. There will be no difference in that respect between rules of conduct for bank staff and any other rules that they make. They will similarly review their policy statements about taking action for misconduct under Section 66, and keep their policies and practices under review too. I expect also that the Treasury Committee in the other place, and possibly also the Economic Affairs Committee in your Lordships’ House, will want to keep such matters under review. Nothing, of course, stops the Treasury from commissioning reviews of these and other matters, if it thinks it appropriate. All these reviews can range as widely or as narrowly as is appropriate. They can cover the full range of matters in FiSMA or other relevant legislation—and any other matter as well.
I comment briefly on the point that the noble Lord made about the work of Sir Richard Lambert. We are putting great faith in Sir Richard Lambert to produce worthwhile movement. Having worked with him on other things in the past, I have considerable confidence in him to do that. However, we will have to see how that unfolds. It requires the banking industry to accept the need to take measures that it has not in the past. Sometimes that has been difficult for it. On the amendment, we do not need a mandate for such a specific review in the Bill itself.
My Lords, given the form of the regulators in the past, the Minister’s words that the regulators will keep the review under review in the normal way are not inspiring. However, I beg leave to withdraw the amendment.
My Lords, we now move to a group of government amendments which pertain to the scope of the offence relating to a decision that results in bank failure. This offence was introduced through amendments to the Bill in response to a recommendation by the PCBS. As tabled in advance of the debates in Committee, and building on the FiSMA definition of “bank”, the offence would have applied to retail banks and building societies. This meant that all deposit takers except credit unions were covered.
As discussed in earlier debates on the scope of the senior managers regime, the Committee debate on 15 October has prompted the Government to reconsider this position. In the light of the persuasive arguments put forward in that debate, we are amending these clauses so that the offence may be committed not only by senior managers of a bank, but by senior managers of relevant authorised persons. “Relevant authorised person” is defined by government Amendment 106 to include banks and those investment firms that are regulated by the PRA as well as the FCA. These are known as systemic investment firms, because their large size means they have a significant impact on the wider financial sector. Smaller investment firms will continue not to be covered by the offence. This is because, like credit unions, they do not represent a significant risk to taxpayer funds, or to financial stability, and their failure is very unlikely to lead to serious harm to customers.
The Government shared this definition with the members of the former PCBS and are hopeful that the scope now captures those firms that the PCBS had in mind. I hope that these amendments fully meet the House’s concerns on the matter.
The other amendments in this group make consequential amendments to Clauses 27 to 28 which are necessary to give effect to this change, and improve the drafting of the existing provisions. There was also some debate in Committee over whether the cross-heading as tabled properly represented the offence. In the light of this, I have asked the House printers to amend the heading so it now reads, “Offence relating to a decision causing a financial institution to fail”. I trust that this addresses the concerns raised. I beg to move.
I make one point of clarification on what my noble friend said. I apologise for my cold. It is absolutely necessary that the definition of “bank” should be extended in the way that the noble Lord has said. I am very pleased with that. He gave us a reason that these investment banks, or these investment institutions, might be a potential liability for the taxpayer. I hope he will withdraw that. It is very important that there is no taxpayer liability there. The reason we wanted it expanded is that we were concerned about banking standards, which was what this commission was all about: banking standards and culture. That is why it is necessary that there should be this regime for these banks, not because there might be a taxpayer risk or bailout.