Financial Services Bill

Baroness Hayter of Kentish Town Excerpts

Monday 12th November 2012 Lords Chamber

Moved by

[Baroness Hayter of Kentish Town]

25B: Clause 6, page 20, line 41, after “codes” insert “, including a code of conduct, as set out in section 1LA (Code of conduct), for the financial services industry”

[Baroness Hayter of Kentish Town]

My Lords, there can be little doubt that an enforceable code of conduct is sorely needed in this industry. Many banks publish so-called codes of conduct that read impressively. The Barclays code of conduct says:

“We … expect every Barclays employee, and others who work on our behalf, to conduct themselves according to consistently high professional and ethical standards. This expectation applies equally to all, whatever their role”.

This from the bank that sold PPI and whose employees fixed the LIBOR rate. HSBC encourages employees to make decisions based on,

“doing the right thing but without ever compromising the ethical standards and integrity on which the company was built”.

Yes—that is the same HSBC that we learnt on Friday had been facilitating tax and AML-avoiding bank accounts in Jersey. Some integrity.

The Chartered Banker Code of Professional Conduct, which sets out the ethical and professional attitudes and behaviours expected of bankers, has been endorsed by virtually every major high street bank. But there is clearly something missing. The words are there, but the behaviours do not follow. The code does not have the necessary sanctions to strike people off the register, nor does it have governing structures independent of the industry.

Other professions have codes of conduct which are independently supervised and enforced. In the case of barristers and solicitors, the functioning and enforcement of these are overseen by the Legal Services Board. In the case of accountants, auditors and actuaries, they are overseen, and in the last resort enforced by, the Financial Reporting Council, which I noted before, sadly, gets no mentions in this Bill, despite the importance of its role. But here we are concerned with those bankers, and others, who do not belong to one of those professions and therefore have no individual code of conduct to cover integrity, the avoidance of conflict of interest and other behavioural matters. For them, there is no supervision of their individual behaviours, and no professional enforcement procedure; action kicks in only when specific rules are broken. This is not good enough for an industry that has shown itself lacking in the very attributes that this vital sector should have engraved in its DNA. The evidence read out about the last amendment by the Minister is ample evidence of that. It is an industry where conflicts of interest are too rarely identified, declared and avoided. LIBOR and PPI are examples.

There is a Bank of England code for members of the FPC, but there is no requirement for a code for directors and senior executives of banks and other parts of the financial services. Yet as the noble Lord, Lord Turner, acknowledged, bank directors bear responsibilities to the public which go beyond those of other private sector directors. Any failure on their part is therefore,

“of public concern, not just concern for shareholders”.

Hector Sants, then of the FSA, told the Treasury Select Committee that,

“we should change the regulatory regime to … ensure that people who have shown … serial misjudgment are not allowed to run financial institutions again”.

However, where does this Bill stop them? Simply relying on the significant influence function procedure may not be enough and, anyway, it is a slow burn. If the person concerned moves abroad, no penalty is exercised and no bonus returned. Or if they apply for a significant influence function after some years, there may be no current or warm evidence or witnesses on which to base a decision. A code of conduct is needed to which these people must individually sign up and a breach of which should expose them to investigation and possible action. Without this, we will continue as before with all our interests at risk.

I should note that the Government have accepted the need for a code to cover one aspect of banks’ day-to-day work—the submission of rates for the LIBOR benchmark. Amen to that; we will welcome that shortly. However, surely it is nonsense to agree the need for a code for just one aspect of the banks’ work, because it has been found wanting, but not to the myriad other decisions which banks and their staff take every hour of the day. The exact name of such a code may be debated: John Kay’s review spoke of good practice; some professions call it a code of ethics. The principle is that it governs behaviours, outlaws conflicts of interest and is enforceable. It governs the profession of stewardship, which is what most of this industry is about.

Since the Parliamentary Commission on Banking Standards was established, the BBA has launched a taskforce to investigate a code of conduct. However, I believe that a standards board run by the BBA—the organisation that administered LIBOR—would have zero credibility. A standards board must be independent of the industry, with the ability to set high standards, the tools to supervise the code and the power to strike off those who breach the code. The other professions’ codes of conduct lay down exactly what is expected of people and we need the same for banking. Anyone who breaks the conduct code should be struck off, whether for market manipulation, gaming indices or deliberate mis-selling. People should not be allowed in banking again if they have mis-sold a product.

I believe that confidence will not return until we strike off those whose conduct has let us all down. The details of the code need not detain us here. Amendment 31A, which is consequent on Amendment 25B, allows for the code to be drawn up by, we hope, the FCA and the PRA in consultation with relevant stakeholders. No one, I am sure, can argue against the intention of this amendment. I trust that the Minister will not argue against its wording. I beg to move.

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[Baroness Hayter of Kentish Town]

My Lords, I thank noble Lords who have spoken on the amendment. I will give one specific answer to my noble friend Lord Peston: there would be a range of penalties possible under an enforceable code, from working under supervision to requalifying or even paying fines

It is disappointing that the Minister, if I heard him correctly, accepted the problem and—I think—the need for a code but simply said, “Not yet”. I do not think that is the right answer. We need to have stronger regulation. I do not agree that the approved persons regulation system worked—if it had, we would not have had all these problems. We need action now. It was not lack of regulation that led to PPI mis-selling, it was the banks’ lack of concern for their customers. It was not the absence of regulation that led to the LIBOR manipulation, it was, in the words of the noble Lord, Lord Phillips, a lack of morals.

Until we have an enforceable code of conduct across the whole of the financial sector to govern internal behaviours, we will not see the difference between the past and the future, to which I believe the noble Lord, Lord Phillips, also referred. I feel certain that the House will support the inclusion of a code of conduct within this Bill. We do not want to wait for a commission that may not have a unanimous report and whose findings the Government have said they will only consider, not endorse. Therefore, I would like to test the opinion of the House.

--- Later in debate ---

Moved by

[Baroness Hayter of Kentish Town]

25C: Clause 6, page 21, line 8, at end insert—
“( ) As part of upholding the FCA’s consumer protection and integrity objectives, and in order to support a cultural change across the UK financial system, the FCA shall also have a general duty to take into account firms’ professional standards.
( ) This must include—
(a) an assessment of firms’ competencies including the extent to which professional qualifications and continuing professional development are embedded across core functions; and(b) an assessment of firms’ conduct including adherence to a code of conduct or code of ethics, and the extent to which employees are members of a recognised professional body.”

[Baroness Hayter of Kentish Town]

My Lords, historically, bank managers were much trusted to act in the best interest of their clients, especially when I was a child. Sadly, however, today consumers and small businesses no longer retain that trust. Bank staff have been incentivised to sell complex and sometimes worthless financial products, such as interest rate swaps or PPI. Lloyds alone, for example, has had to set aside £5.3 billion to make good those mis-sellings. We need a banking system which is trusted: a return to old-fashioned stewardship banking which serves every region, business and family in the country. This demands professionalism, which this amendment seeks to embed within the Bill.

Ministers and regulators have both spoken about the importance of instituting cultural change within firms. The then FSA Chief Executive Hector Sants argued that regulators should,

“ensure firms have the right culture for their business model—the right ethical framework—to facilitate the right decisions and judgements”.

Earlier this year, in setting out his vision for a “new orthodoxy” in financial services, Martin Wheatley said that he wanted a world,

“where the culture of firms, from product governance to sales, is aligned with the best interests of the customer”.

These amendments seek to promote such a cultural change by ensuring that FCA supervisors judge professional standards when assessing the conduct risk posed by firms.

Professional standards are vital. The higher a practitioner’s commitment to professional standards, the lower the likelihood of customer harm. Likewise, high levels of professional standards are linked to increased consumer trust and confidence. However, the Bill makes no reference to professional standards, despite the recommendation of the Joint Committee and the evidence of incompetence and even dishonesty. This is a significant omission. Were they written into the Bill, the regulator would have greater persuasive powers and there would be a power incentive for firms to embed higher standards at every level. This would enhance consumer protection and underpin the integrity of the UK financial system. I beg to move.

--- Later in debate ---

[Lord Sassoon]

My Lords, I spoke about the role of the Parliamentary Commission on Banking Standards when discussing the previous group of amendments. I am sorry that the noble Lord, Lord Barnett, doubts the seriousness with which the Government intend to take its recommendations. It is a joint commission of the two Houses—something that any Government would take extremely seriously. We acted to initiate the setting up of the commission so I am disappointed that the noble Lord seeks to tweak my tail on this one. When it comes to a legislative vehicle, I could not have made it plainer that we have already published a draft Bill. The Financial Services (Banking Reform) Bill is on its way. That provides potentially a perfect legislative vehicle if there are things that come out of the commission, as no doubt there will be, that require legislation. The issues raised by Amendments 25C, 25E and 26C are firmly within the remit of the commission and it would be wholly inappropriate for us to jump the gun in a semi-considered way rather than waiting for the magisterial output of the commission in a short time.

Amendment 26D would add a new paragraph (f) to proposed new Section 1D(2) to be inserted in FiSMA 2000 under this Bill. It refers to,

“the fairness and integrity of policy and conduct of those directing or operating in the financial markets”.

That is on the same theme but seeks to place specific emphasis on issues of integrity and fairness by making changes to the FCA’s objectives. As we have heard from my noble friend Lord Phillips of Sudbury, Amendment 27A would specify that, in considering the effectiveness of competition, the FCA may have regard to the extent to which the,

“methods or culture of any competition may undermine the integrity objective”.

I sympathise with the amendment to the extent that it is clear that when the FCA considers taking action, it will need to consider all its objectives. Recent events have demonstrated how important it is that the regulator has a mandate to take action to protect and enhance the integrity of the UK financial system.

The Government have given the FCA the three operational objectives, as we have been reminded, of competition, consumer protection and integrity so that it determines the right balance between them in individual cases. The regulator cannot unduly prioritise any one objective and neglect to consider the others. My noble friend Lord Hodgson of Astley Abbotts has already given another construction, which perhaps is more balanced, of proposed new Section 1B(4) and I am grateful to him for that.

This is a complex interaction of provisions. In one case we are talking about a competition objective but also, in the context of proposed new Section 1B(4), a duty designed to ensure that the FCA considers competition as a means to, and in the context of, delivering other objectives. But that needs to happen only as far as it is compatible with the integrity and protection objectives. I believe that it is a keenly balanced series of interlocking provisions here, of which these are only two. Of course, there are further elaborations of just what the integrity objective and the other objectives involve. Further, it is important to “have regard to” under this new section. I believe that the balance is right and that there is no need to adjust the structure of the competition objective to require the FCA to consider integrity in the way proposed here.

Similarly, the FCA’s integrity objective will come into play when the FCA is exercising its general functions in relation to conduct. While it must think about whether competition is working in the interests of consumers, I do not believe that it is for the FCA to police the markets to establish and enforce what fairness is. I do not believe that fairness should form part of the explanation of the term “integrity”. It is a separate issue.

There are other issues about the interrelationship between the two new authorities. Proposed new Section 3D requires the PRA and FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or wherever one may have a material adverse impact on the objectives of the other. This means that, while it is right that the PRA must focus on its safety and soundness objective, where its actions may impact adversely on consumer protection it will have to listen to the FCA, which has a strong consumer protection objective.

In summary, I accept the wider point about the importance of these issues. As this short debate has teased out, these issues are very complicated. They are best addressed through the Parliamentary Commission on Banking Standards. In the light of that, I ask the noble Baroness to withdraw her amendment.

[Baroness Hayter of Kentish Town]

I thank noble Lords for their support on the amendment. I actually think that the Minister is wrong. This is not complicated; this is about integrity. The noble Lord, Lord Hodgson, had it right. We are not talking about how to impose rules. We are talking about something within the people who work in this industry. The problem is that the significant influence function has not worked. Sir Fred Goodwin was appointed under it. It was not working, it has not worked, and we need something different. We need it in the Bill.

The Minister talked about the report of the Parliamentary Commission on Banking Standards and what is going to come out of that, but that was not set up when the Bill was written. Would the Minister have accepted the code and the amendment on professional standards if Libor had not happened and if a banking commission had not been set up? The Bill was intended to mean no more failures and no more of that behaviour. We are talking about integrity. I had not planned to divide the House on this. However, as the Government have just voted against a code of conduct, I am so tempted now to put it to them that we should vote on professional standards to see whether they really want to say that they have a Financial Services Bill to make changes to the way we regulate but they do not want professional standards in that. For once in my life I will resist temptation. I beg leave to withdraw the amendment.

Amendment 25C withdrawn.