Bank of England and Financial Services Bill [HL]
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Lord Tunnicliffe (Lab)
My Lords, I thank the noble Lord, Lord Sharkey, for filling my morning, because it took me a little time to work out what this amendment meant. It brought home once again the value of professionals in producing the consolidated version of the various Acts. Unfortunately, they did not produce a consolidated version of FSMA 2000, as amended, and it took me some time to find it on the website. It is worth doing because although this Bill intends to delete the appropriate provisions in favour of the Prudential Regulation Committee, what it does is bring out the essence of the point being made by the noble Lord, Lord Sharkey. Reference is made to paragraph 9(b), but first you have to read paragraph 8 of Schedule 1ZB, which states:
“The Bank must secure that a majority of the members of the governing body of the PRA are non-executive members”.
I stress that, because when one turns to the proposed replacement for this schedule to FSMA 2000, which is now Part 3A of what will be the Act as amended by this Bill, no equivalent reference is made to paragraph 8 about there being a majority of non-executive members. As the noble Lord, Lord Sharkey, alluded, it goes on to state:
“For the purposes of paragraph 8 and for the purposes of”,
the principles to which Section 3C requires the PRA to have, none of the following can be non-executive members:
“(a) the members referred to in paragraph 3(a), (b) and c), and
(b) a member who is an employee of the PRA or of the Bank”,
to which the noble Lord proposes to add proposed new sub-paragraph (c),
“the chief executive of the FCA”.
I want to bring out two points. First, I agree entirely that in no way can the chief executive of the FCA be seen as a fully independent non-executive. The Minister was at a very fine point the other day when he said that Martin Wheatley was not sacked. My understanding is that his term was to run until March 2016 but I believe that he departed in September, presumably on gardening leave. He did not exactly leave quietly. When addressing a meeting at the Queen Elizabeth II conference centre in London, he said:
“I am disappointed to be moving on”,
and that he was doing so,
“with a sense of unfinished business”.
He later listed the ongoing work as being to clean up markets through the Fair and Effective Markets review and the implementation of the Senior Managers Regime, which is intended to hold top bosses to account when things go wrong. The article reporting his speech added that the clean-up was prompted by the LIBOR rigging scandal.
Martin Wheatley had many critics and I am sure that he is not a card-carrying member of the Labour Party; I doubt whether he has ever voted Labour, but he was to many citizens who took an interest a man of the people. He took the banks on in a pretty robust way, and I think that an awful lot of people in society felt that the banks needed to be taken on in a robust way. I am sure that he was first leaned on and then eventually fired. It is interesting to note that if you look up the CV of his successor, she is listed as only an “acting” chief executive. In no way can this person be considered to be independent. I assume that when the noble Lord accepts the amendment, he will tidy it up and make a reference to the Prudential Regulation Committee which is to take over the responsibilities presently listed in FSMA 2000. That would introduce a new subsection to what is presently Section 30A of FSMA, which requires there to be a sufficient number of non-executives to outnumber the executives of the Bank plus the chief executive of the Financial Conduct Authority. I think that that is the intent of the amendment even if it is not what it actually says, and I support that.
The whole of the debate on this Bill has been about influence and independence. We will be moving on to the Prudential Regulation Authority or the Prudential Regulation Committee in the clause stand part debate, but I think that not making it clear that there should be a majority of NEDs on the committee is a retrograde step. It almost implies, through the wording of this subsection, that the chief executive of the Financial Conduct Authority is independent.
I have had the privilege of working for Her Majesty’s Government, not as a civil servant but in the public sector. I know about being leaned on and I have to recognise that it is very effective. The one thing you cannot say at the end of the exercise is that you are independent.
The Parliamentary Secretary, Cabinet Office (Lord Bridges of Headley) (Con)
My Lords, I thank the noble Lord, Lord Sharkey, for provoking this debate. Unlike the noble Lord, Lord Tunnicliffe, I have not had the enjoyment of spending my morning looking at FSMA consolidated Acts, but I have been looking into this matter. I do not want to go on at length and repeat ad nauseam what I was saying on Monday. As the noble Lord, Lord Tunnicliffe, said, this comes down to a matter of independence. He is absolutely right to pinpoint that. Despite hearing the cases that he and the noble Lord, Lord Sharkey, mentioned, I remain in no doubt that the FCA CEO should be counted as an external member. She is not an executive of the Bank and the FCA is an independent body entirely separate from the Bank.
Noble Lords should also be aware that the legislation further reinforces external representation on the new Prudential Regulation Committee, as compared with the PRA. The majority of external members, as has been said, is increased compared with the PRA board with at least seven external members, at least six appointed by the Chancellor in addition to the FCA CEO, compared with only five internal members: four officers of the Bank and one appointed by the governor. So, for the PRC, external members will be in the majority by at least two. This compares with a requirement for a majority of one on the PRA board.
It could be argued that if you use the power to add an extra deputy governor to the PRC, that majority of externals is lost. I would argue that the power to add an extra deputy governor to court and to the committee requires secondary legislation, so Parliament will have its say. Furthermore, Clause 1 provides that if secondary legislation is used to add a deputy governor to the PRC, it may also provide for an equal increase in the minimum number of members appointed by the Chancellor of the Exchequer to ensure a continued balance of internal and external members.
I shall leave it at that. I hope that the explanation I have provided satisfies the noble Lord and that he will withdraw his amendment.
Lord Sharkey
I start by thanking the noble Lord, Lord Tunnicliffe, for his support, and for reminding us that if the Government get their way in Clause 12, we will need to revisit the provisions governing the number and the definition of external directors of the new arrangements. I remain unconvinced that the CEO of the FCA can in any reasonable way be described as independent. The Government seem to be relying on the force of simple assertion rather than evidence, but I am sure we will come back to this on Report. In the mean time I beg leave to withdraw the amendment.
Lord Tunnicliffe
My Lords, again, I support the noble Lord, Lord Sharkey, on his general thrust in this debate. I come at it from a slightly different direction, although I think that the fundamental proposition is, “If it’s not broken, why are we trying to fix it?”. In fact, the supporting paperwork says that it is working well. We need to go behind that—back to the 2012 Act, the FiSMA 2000, as amended, and all that sort of stuff—to look at how the Bank is now going to work.
I think the Bank will move its emphasis from the Monetary Policy Committee towards the FPC. Regarding the control of interest rates and the Government’s injections of cash, depending on which textbook you read, it was the actions of banks in creating credit that formed the bubbles that caused the crisis of 2008-09. I believe that is the technical reason and that we are seeing many bubbles emerging again. As to the process of the FPC, by reading through the consolidated Act we see that its many powers—to make recommendations about new tools, for example—and all the things it is able to do to control the creation of credit, among other things, are absolutely fundamental to how efficiently the money system supports the economy, and hence are fundamental to the economy.
Now, what is the thing that keeps this clean? The thing that keeps it clean is the fact that the PRA is a subsidiary—an independent company, as mentioned, governed by company law—and, therefore, there has to be an arm’s-length relationship between it and the FPC. Under the various terms of the Act, the FPC can create various macroeconomic tools, which it then hands down to the PRA. It hands those down not through some side-channels or influence but, because of that independent legal status, in a very formal way to its subsidiary, and I think that is healthy. I do not believe that in effect moving the PRA closer to the Bank—and, by definition, closer to the FPC—is a good thing. The present separation is working, and I think we should continue it.
The reform included in the Bill ends this subsidiary status. The PRA board will be replaced by the Prudential Regulation Committee and, as I said, that must have the right balance. The Government so far, frankly, have not come up with a good reason for this change. The noble Baroness, Lady Kramer, made the point that mechanisms for information transfer are there, and therefore that is not at risk. The whole purpose of being in a subsidiary company—I headed a subsidiary company of a large organisation—is to get focus on its business, so that there are very clear responsibilities. I think that the move in the Bill away from its being a subsidiary is a bad thing, and I hope that the Government will reconsider the inclusion of this clause.
Lord Bridges of Headley
My Lords, once again I thank the noble Lord, Lord Sharkey, for provoking a very interesting debate and for the thoughtful contributions that he, the noble Baroness, Lady Kramer, the noble Lord, Lord Tunnicliffe, and my noble friend Lord Carrington of Fulham have made.
The noble Lords, Lord Tunnicliffe and Lord Sharkey, absolutely got to the nub of the matter here. We are seeking a PRA that is effective and independent, and getting the balance right between those two aims, and making sure that we achieve both, is absolutely crucial. I would argue that the proposed changes will increase the PRA’s effectiveness—making it better still, to address the point made by the noble Lord, Lord Tunnicliffe—but do not undermine its independence.
Let me first address the issue of increasing effectiveness, and I will try here to steer clear of management-speak. The governor has explained the links—I have crossed out the word “interdependencies” that was in my brief—between monetary and financial stability and why, therefore, it is right that both these macroeconomic policy responsibilities should rest with the central bank. The Bank is also committed to implement a set of changes to its internal organisation, aiming to ensure that different parts of the Bank work even better in pursuit of its twin aims of monetary and financial stability. The Bill builds on and reinforces these organisational reforms.
Ending the subsidiary status of the PRA will reinforce the Bank’s efforts to strengthen its capacity to work effectively across its responsibilities. At Second Reading, it was suggested that ending the PRA’s subsidiary status and creating the Prudential Regulation Committee might represent a downgrade of the prudential regulation function—a point that has been alluded to. I entirely disagree with that. I would argue that this change will have the precise opposite effect. Placing the Prudential Regulation Committee on the same footing as the MPC—and, with our changes, the FPC—means elevating the microprudential role to the same level as monetary policy and macroprudential policy.
This is, I would argue, an upgrade that reinforces not just to the Bank staff but to the wider public, to whom the Bank must be transparent and accountable, that the Bank is not simply an organisation dedicated to setting interest rates but one with equally important macro and microprudential responsibilities.
The Bank has told us that closer integration has increased the feeling among PRA staff that they are an integral part of the Bank’s mission and have broader opportunities for progression across the whole Bank. This can only assist recruitment of the best people to the supervisor, which I am sure is something that all your Lordships will support.
Lord Teverson
As we are in Committee, I will briefly come back to the noble Lord opposite about whether the Bank of England or the PRA is the right organisation for this. The Green Investment Bank is the Green Investment—I emphasise—Bank, so it seems to me appropriate. I want to make clear that we are open to other suggestions to solve this, if the Government and Minister do not believe this is the best way.
For instance, I am involved in an organisation called Regen SW, which used to be a wholly owned subsidiary of the South-West of England Development Agency. It was privatised and is very successful. I am one of three trustees who look after it. If there were a hostile takeover by a non-green organisation, there are three of us who can exert power to make sure that the original aims of Regen SW are maintained. If something creative can be done in that way, I would be absolutely delighted and we would like to hear it.
Lord Bridges of Headley
My Lords, I thank the noble Baroness, Lady Kramer, and the noble Lord, Lord Teverson, for their extremely constructive remarks—and, indeed, the noble Lord, Lord Davies, who on Monday offered me sympathy for my position and today offered to be very constructive. Where do we go next? It is going to be very interesting.
Lord Davies of Oldham
My Lords, I would be prepared to exchange sides, if the Minister can arrange that.
Lord Bridges of Headley
The noble Lord can come and join us. I fully understand the intentions behind the amendment. Indeed, I have read the debate that took place last week with my noble friend Lady Neville-Rolfe on the Enterprise Bill, in which the noble Lord, Lord Teverson, set out his party’s position eloquently. I believe that all parties are agreed, as the noble Lord, Lord Teverson, and the noble Baroness, Lady Kramer, said, that the Green Investment Bank has been a real success story, and we need to build on that success. That is why the Government want to allow the Green Investment Bank to continue to go from strength to strength by moving it into private ownership. As part of our work to achieve this, it has become apparent that the existing legislation which governs the bank, the Enterprise and Regulatory Reform Act 2013, would very likely constitute government control over the bank and result in its remaining classified to the public sector. That is why, as the noble Lord and the noble Baroness said, the Government intend to repeal that legislation through an amendment to the Enterprise Bill, which will remove control and ensure that a privatised Green Investment Bank will have the freedom to borrow and raise capital without affecting public sector net debt.
I note, as my noble friend Lady Neville-Rolfe noted, the concern that the repeal would remove the Green Investment Bank’s statutory lock over its green mission, and that is where these amendments come in. The noble Baroness, Lady Kramer, eloquently drew a parallel with the privatisation of Royal Mail and its regulation by Ofcom, and whether the Government might replicate that kind of arrangement for the Green Investment Bank. First, there is a difference between regulating a company such as Royal Mail, which provides a public postal service and is a utility, much like energy or water, and the Green Investment Bank. As a country, we regulate mails as an industry, and the regulator for postal services, Ofcom, has designated Royal Mail to provide a universal postal service for the whole of United Kingdom, as set down by Parliament under statutory obligation. That means that, regardless of the nature of its ownership, for as long as Royal Mail holds the role of universal service provider, it must comply with specific regulatory conditions imposed upon its operations for the purpose of providing a universal postal service throughout the United Kingdom, as well as other regulatory conditions which apply to all postal operators in the market. If Royal Mail was not the designated universal service provider, its operations in the postal market would be subject only to those general market regulations that apply to all other postal operators.
The parallel here would be for the PRA to regulate the green investment market, could such a thing be defined. Not only would this amendment increase regulation at a time when the Government are trying to reduce it, but increasing regulatory costs in the sector would be likely to reduce overall green investment. I am sure that is not something that the noble Baroness, Lady Kramer, would wish. I must reiterate that the Government are implementing the repeal of legislation only as a necessary measure in allowing private capital into Green Investment Bank, reflecting advice from the Office for National Statistics. As I have said, to be classified to the private sector, an organisation cannot be subject to significant government control, and that includes control through excessive regulation. The decision on whether an organisation is classified to the public or private sector is made by the ONS on the basis of EU-wide rules. The ONS looks at all factors of control when deciding whether a corporation can be declassified from the public sector. If the Green Investment Bank was not free to change its articles because of public sector control, it would very likely remain classified to the public sector. Similarly, if the bank as a single entity were to be regulated in this way, it would still be likely to be considered as under public sector control, so this would not provide the solution that noble Lords are seeking.
The Government want to work constructively with noble Lords across the House to secure the future of the Green Investment Bank. I totally agree with the noble Baroness, Lady Kramer, that we need to work across government as a whole, and I shall make sure that all parts of the Treasury are aware of her remarks and see the debate. However, I hope that the noble Baroness, Lady Kramer, the noble Lord, Lord Teverson, and, should he so wish, the noble Lord, Lord Davies, will meet my noble friend Lady Neville-Rolfe at BIS to discuss this matter further. I hope that the noble Baroness will agree to withdraw the amendment.
Lord Teverson
I am that sure my question is as much of a concern to the Minister as it is to me. The purchasers of this bank could just buy it as an asset to wind down—just to buy the cash flow into the future—which none of us would want. But if there was a public sale, it could indeed happen. That is separate from the ongoing green credentials. Do the Government have an approach to how that might be solved or prevented?
Lord Bridges of Headley
The noble Lord makes an extremely good point, and one that the CEO, Shaun Kingsbury, was asked directly. I am not going to prejudice what my noble friend the Minister in BIS is working on, but that is clearly something that we need to look at. I note that Mr Kingsbury himself said that he believed that the purchasers of or investors in the Green Investment Bank would look expressly to ensure that the specialisms that the bank currently has would continue, and we would want to make sure that that specialism and focus are the core of their investment. That said, I heed entirely what the noble Lord says and will draw it to my noble friend’s attention.
Baroness Kramer
My Lords, I was actually quite heartened by the Minister’s reply, although I suspect not in the way that he intended. He suggested that there were very few obstacles to using the PRA as an appropriate regulator in this case—so perhaps there is an avenue there to be explored. Can the Government look seriously at this issue? I know from having been in government very briefly that to direct the lawyers to look at a way to achieve rather than stop something is a very significant challenge. I hope that now the energies of the Treasury will be focused on this, as well as the energies of BIS. Frankly, if we lose the Green Investment Bank in the role that it plays, we will all be losers. It would be very frustrating to think that that was unnecessary and had only required some significant legal effort to avoid it. I beg leave to withdraw the amendment.
Lord Davies of Oldham
My Lords, this has been an excellent debate and the Minister has a great deal to which he needs to respond. It is little surprise that we have been exercised with these amendments, because they go to the very heart of people’s trust and confidence in the financial services industry.
I would suggest that perhaps one reason why this change has been effected by the Government is because of the lack of transparency in the government proceedings. That is why the controversy has arisen. None of us has been privy to the process whereby the Government produced this significant change to the senior managers and certification regime. Clearly, decisions have been taken behind the scenes and without consultation. I do not think that there is much of an email trail on either of those factors.
The fact is that the Government did not even consider that this might be much of a problem, and today’s debate identifies just why that is. I hope, therefore, that the Minister will be able to demonstrate the thought processes behind these changes. The age-old argument that it is not working in practice scarcely holds, because the SM&CR never had a chance to work in practice—so the Government will have to come out with a better argument than that. What advice did they get that convinced them that these changes were the best approach? Did an event occasion the change? Are the meetings that the Minister had on such a significant issue as these proposed changes on the public record?
We also need to consider the role of the regulators and how we can ensure that they are bold enough to spot when misconduct takes place. Has their job not been made harder by the fact that there will no longer be a duty on firms if they suspect wrongdoing? Can the Minister please go into some detail about how the Government propose to ensure that the regulators will be able to rule out ineffective management? We have had a refresher course today in just what ineffective management—and, indeed, corrupt management—has done in terms of damage to so many people’s lives. We ought not to forget that.
I hope that the Minister will be able to address these points in some detail. Of course, he has to take into context just what this debate has demonstrated: how difficult the issue is, but how fundamental it is to the welfare of our society. I expect the Minister to give a detailed response.
Lord Bridges of Headley
My Lords, it has been a very good debate and I thank all noble Lords who have spoken eloquently, and powerfully at times.
I start by taking a step back. As was mentioned by the noble Baroness, Lady Kramer, and many others, the financial crisis obviously exposed deep flaws in the functioning of parts of the financial services industry, with enormous consequences, as we all know, for the economy and people’s living standards. Since then we have also seen cases of malpractice and, at times, criminality—for example, attempts to manipulate benchmarks for personal gain. That is why, as the Chancellor said, the Government are entirely committed to ensuring that the UK financial services sector is the best regulated in the world with markets of unquestioned integrity and the highest standards of conduct. To that end the Government have made far-reaching reforms to financial regulation—reforms that form the backcloth of today’s debate and reforms that your Lordships know all too well.
I shall remind your Lordships of just a few. The Government have introduced a criminal offence of misconduct in the management of a bank. This means that senior managers who recklessly cause their institutions to fail may face a seven-year prison sentence. The UK’s regime for regulating the remuneration of senior staff who can pose risks to financial stability is now the toughest of any major financial centre. PRA-approved senior managers in banks will face deferral of a significant proportion of their remuneration for seven years, and possible clawback to their pay for up to 10 years where there is a material failure of risk management in their business.
These measures apply to exactly the individuals targeted by the amendment of the noble Lord, Lord Sharkey, and encourage the responsible management that he and of course we all wish senior staff in banks to display. To be clear, I am in complete sympathy with the outcomes that the amendment seeks to deliver. Before I turn to the senior managers regime in more detail, I make another point, which my noble friend Lord Hunt of Wirral made. To restore trust in financial services, strengthened regulation needs to be supported by industry action. That is why I welcome and wholeheartedly support the efforts by the financial sector to strengthen the culture and ethics of all staff. In particular, the Banking Standards Board, formed of the largest banks and building societies, is doing vital work. The fair and effective markets review established by the Chancellor is also prompting change. The review concluded that,
“markets require stronger collective processes for identifying and agreeing effective standards of good market practice”.
As a result, more than 30 firms from a broad cross-section of financial markets have combined to achieve these aims.
The extension of the senior managers and certification regime across the financial sector will support and reinforce all these initiatives to improve individual accountability and raise standards. As Andrew Bailey said,
“it creates the framework to establish effective responsibility within firms, while maintaining the role of the public authorities, the PRA and FCA, for supervising and enforcing the public interest”.
Under the current approved persons regime, the regulators can take action only against those individuals whom they pre-approve if they breach one of the statements of principle set out by the regulators—enforceable standards of conduct that apply on an individual level—or if they are knowingly concerned in activity that causes the firm to breach regulations. The range of approved persons covers significant influence functions, such as the chief executive and directors, and customer-dealing functions, such as sales staff. The new SM&CR focuses pre-approval activity much more closely on those at the top of the firm with enhanced powers for the regulators to impose conditions and time limits on these approvals. This is supported by an ongoing requirement for the firm to assess senior managers’ fitness and propriety annually. The regime requires these individuals to have statements of responsibilities to give absolute clarity about who is responsible for which parts of the firm. It will not be as impenetrable as the noble Baroness, Lady Kramer, said. Beneath the senior managers layer is the certification regime. This puts a statutory responsibility for ensuring the fitness and propriety of key staff below senior managers clearly on the firm both at the point of hiring and annually thereafter.
The new regime also enables the regulators to apply enforceable rules of conduct to all employees if the regulators judge that this will advance their objectives. For senior managers, this includes a rule on effective and responsible delegation, which addresses the “nothing to do with me” argument that the noble Lord, Lord McFall, eloquently talked about and the noble Lord, Lord Tunnicliffe, mentioned. The rule states:
“You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively”,
as well as requiring them to ensure that the area of the firm for which they are responsible can be controlled effectively.