Investment Bank Special Administration Regulations 2011

Debate between Baroness Falkner of Margravine and Lord Myners

Thursday 3rd February 2011 Lords Chamber

[Lord Myners]

My Lords, I support both the Investment Bank Special Administration Regulations 2011 and the Investment Bank (Amendment of Definition) Order 2011. The policy objective is to create a special administrative regime in the form of an administration procedure. The aim is to provide administrators with clarity and direction to resolve the firm without needing to approach the court on a frequent basis. These adjustments to current insolvency law will make the process less expensive and less disruptive for an investment firm, its clients and creditors and the market.

The Government have consulted widely and the response has been broadly supportive. It is important that we express our thanks to those who sit on the investment banking liaison panel for the time they have spent working on complex legislation and regulation to ensure that they achieve the Government’s purpose.

The regulations and the order are being made, of course, under the enabling powers in Sections 233 and 234 of the Banking Act 2009, which I had the honour to take through the House. This arose as a consequence of the insolvency of Lehman Brothers, when unanticipated complexities emerged in resolving that investment bank, particularly in connection with client money.

The Financial Services Authority has taken significant steps to improve the supervision of client money and to address a number of areas where there were shortcomings and deficiencies. In particular, it has put a very strong team under excellent leadership in place to be responsible for the supervision of client money. These regulations are important to maintaining public confidence in the stability of UK financial markets and the integrity of institutions and firms operating in these markets.

I have two questions for the Minister. When Lehman Brothers collapsed, one of the difficulties we experienced was that Lehman was holding money in client accounts which were appropriately designated as client accounts and, accordingly, should have been kept separate from the assets of Lehman Brothers when it came to administration. However, Lehman had placed this money on deposit with a separately incorporated Lehman bank in Germany. The German authorities, after the collapse of Lehman Brothers, passed legislation to say that client money held on the accounts of this German banking subsidiary, when placed by an affiliated Lehman body, would not be deemed to be client money under German law. Is the Minister aware of whether any progress has been made on that point? Has this been raised at ministerial level recently with the German Government? It seems to strike at the very heart of the concept of the segregation of client assets which is intended to make sure that those clients are protected from any failure on the part of the institution with which they thought they had an agency rather than a principal relationship.

My second question relates to omnibus accounts. Will the Minister reflect on whether omnibus accounts are in themselves a source of hazard, and whether the practice of using omnibus accounts is one that the regulators should review in favour of looking at the case for requiring all accounts to be designated? Certainly in my experience, omnibus accounts undoubtedly increase confusion over the ownership of assets and the execution of certain fiduciary responsibility including, in particular, the voting rights of shares in UK companies at shareholder meetings.

Finally, I also express my support for the measures that the Government are taking in respect of the continuity of service arrangements, another problem that emerged with Lehman. The House should support the measures that the Government are bringing forward.

In closing I wish to mention a very crude term that is currently being used: banker bashing. Many members of the Government are engaged in banker bashing. The Secretary of State for Business and the Chief Secretary to the Treasury have made wholly uncomplimentary remarks about banks. Last night I was watching BBC “Newsnight” and was surprised to find the Mayor of London making uncharitable comments about banks. It is quite a volte-face, although it really takes him back to where he originally started.

It is important that we recognise that we have very many talented people working in investment banking in this country. I have had the privilege of working with them—they are in very many cases the best in the world, and they do not work only for our own banks. I would happily hear names like Royal Bank of Scotland. It is very easy to regard that as a bank associated with failure, but there are extraordinarily good people working there. Likewise, many people here in London work for firms such as Morgan Stanley and Citicorp, or for our own pre-eminent investment bank, BarCap. We need to maintain context here. Of course some of these problems continue to be self-inflicted by the banks, and I wish the Government well in their talks under Project Merlin, which are intended to bring some sense to bank bonus decisions. However, we need to keep in mind that investment banking, and banking in general, are a source of incredible competitive and comparative advantage for the UK economy. These regulations are entirely consistent with providing the support for a reputable, solid and prudent banking sector of the sort that we should seek to encourage in this country.

[Baroness Falkner of Margravine]

In his defence of the banking industry, with which I broadly agree, will the noble Lord accept that the idea behind the Government asking bankers to be more responsible and to have a social conscience is not to imply that individual bankers are not worthy of their role and status in the industry, which is very important to us, but is directed at certain levels of remuneration? Irrespective of how talented an individual is, no single individual can add the kind of value-added that we have started to see in terms of remuneration and the bonus pool.

[Lord Myners]

I had almost concluded my speech but the noble Baroness’s intervention has provided me with an opportunity to carry on and say more. There are very talented people working in UK banking and some of them are among the world’s very best. They earn their remuneration. Sir Philip Hampton, the chairman of Royal Bank of Scotland, referred to a gangmaster culture in some of the banks. I put down a Question for the Minister on this subject, to which he gave his standard Answer on bank bonuses which I can now recite. Regardless of the Question I ask, I get the same Answer. Perhaps it will change at some point, but I am beginning to lose any great hope that the Minister will seek to answer the Questions that I ask him on these subjects.