Bank of England and Financial Services Bill [HL]

Baroness Kramer Excerpts

Tuesday 15th December 2015 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I am somewhat puzzled by the amendment, because it seems to be a power which the Treasury Select Committee already has and already exercises. I will give noble Lords three examples. It called for a report from the Bank into Northern Rock, another one into RBS, and then—with some delay, appearing only three days ago—finally into HBOS. Therefore the Treasury Select Committee, led by the people who lead it now, does not need this power. It is perfectly capable of forcing the Bank to undertake a review and to reveal the contents to that committee.

[Baroness Kramer (LD)]

My Lords, I have no wish to detain the House. The Government have listened to the concerns that we raised at previous stages of the Bill and in the discussions that the Minister generously agreed to. The amendment that the Government have brought forward does not go as far as we would like but we feel that it addresses the most essential issue, which is the independence of the non-executive directors of the court, and that it provides a mechanism so that they can resist capture by officials of the court. For that reason, we are satisfied.

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[Lord Young of Cookham (Con)]

My Lords, I also welcome the progress that my noble friend has made since we discussed this matter on 9 November, when concern was expressed that we had not got the interface between these two independent institutions in the right place. I was delighted to hear that peace has broken out between these two institutions. My noble friend said that the memorandum of understanding would be published in due course. My noble friend Lord Higgins pressed him a little further. Will it be available during the passage of the Bill, which started in this House and will go to another place, because I am sure that it would be of interest? Finally, does one really need proposed new paragraph (d) in Amendment 9 in the memorandum of understanding? If under proposed new paragraph (c) a procedure has been established,

“for resolving in a timely fashion any dispute”,

why does one need paragraph (d), which asks for a procedure where the dispute has not been resolved?

[Baroness Kramer]

My Lords, I will not detain the House very long. The National Audit Office and the Bank of England are crucial institutions. It is absolutely necessary that both are not only independent but perceived to be independent. In earlier stages of this Bill, we asked that those two organisations should be brought together to come to a common understanding and agreement of how we could go forward. That has been achieved and, with that, we are pleased that “peace has broken out”—to quote what has just been said. It was essential that that should be done and I congratulate the Minister on the role that he played in this.

[Lord McFall of Alcluith (Lab)]

My Lords, I add my thanks to the Minister and others on this issue. I have had a letter from the Comptroller and Auditor-General, who clearly says that the Government listened to many of the concerns at Second Reading and that the threat to his role as Parliament’s auditor has been reduced. That aspect is very important.

The power of veto was one of the first things on which people came to their senses. It was explained to me that the Bank would publish its view when it refused the NAO, to which I said, “Well, it means that it would go before the Treasury Committee, and the NAO would probably go before the Public Accounts Committee”. If the Treasury Committee and the Public Accounts Committee felt that that was not very good, they would probably have a Joint Committee. I think they thought that it was the best idea to drop the power of veto, which was a good outcome.

I accept that the Bank of England’s independence is essential, particularly in the former role I had as chair of the Treasury Committee. That was very important, particularly during the financial crisis. But the democratic accountability element is important. I see this memorandum of understanding not as something set in stone but as something that can adapt to time as we go along. The noble Lord, Lord Higgins, made a point about whether it would be public. I am sure that it has to be public if there is to be credibility. If there is no intention to have it be public, that would be a backwards step on that issue. If it is not going to be public, the Treasury Committee and the Public Accounts Committee need to have sight of this as it goes along. Let us hope that we do not have that second aspect and that the memorandum of understanding is a public document. As the noble Lord, Lord Young, said, it should be here before we finish the passage of the Bill.

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[Lord Ashton of Hyde (Con)]

My Lords, this amendment provides for the Treasury to issue remit letters to the FCA, a measure first announced in relation to both the PRA and FCA in the Government’s productivity plan in July. The Bill already makes provision for the Treasury to issue remit letters to the PRC and the amendment will enable Peers to consider provisions for the FCA and PRC remit letters together. As the House will know, the Bank of England and Financial Services Bill generally relates to the governance of the Bank, rather than the FCA. However, we have been considering the best legislative vehicle for the FCA remit letter provision and have decided that it would sit best alongside the PRC remit letter provision. As to the remit letter’s content, the productivity plan outlined that remit letters will provide information on the Government’s economic policy and will make recommendations about aspects of that policy to which the FCA should have regard. The recommendations in the letters will not be binding and will not compromise, modify, or override the FCA statutory objectives in any way; neither will they relate to individual firms or cases.

As to the timing and frequency of the publication of the letters, we are aiming to publish the first FCA remit letters following Royal Assent for the Bank of England and Financial Services Bill, after which they will be published at least once per Parliament. The letters will be used to provide a steer on the Government’s economic strategy over that period, but letters could be sent more frequently if particular issues arise.

Finally, the Treasury must publish its recommendations and lay a copy before Parliament. I beg to move.

[Baroness Kramer]

My Lords, our one concern with this amendment was that it could in some way compromise the statutory objectives of the FCA as laid down by Parliament. The Government wrote to us with an assurance that that was not their intention. Today, the Minister read into the record the text of the letter. He said that the recommendations would not compromise, modify or override the FCA’s statutory objectives in any way. Given that a Minister’s statement in Hansard is a weighty commitment, we are satisfied with the amendment.

[Lord Davies of Oldham]

My Lords, I was going to make almost exactly the same contribution and my question was exactly along those lines, so I am happy to endorse what the noble Baroness, Lady Kramer, said and look forward to the Minister’s response.

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Moved by

[Baroness Kramer]

14: Before Clause 18, insert the following new Clause—
“The FCA’s competition objective
In section 1E of the Financial Services and Markets Act 2000 (the competition objective), after subsection (2)(e) insert—“(f) how far competition is delivering diversity of provision, including diversity of ownership, geography, community and size.

[Baroness Kramer]

My Lords, once upon a time not so long ago, small local banks and building societies—some of them mutual, some of them not—served our local communities. They knew their local communities, the individuals and the businesses, and were themselves tied to the economic health of that community, thriving only when the community itself thrived. It was not utopia—I think that most of us in this House would not like a loan decision to be made by Captain Mainwaring—but those banks and building societies played an incredibly important role in making sure that we had a sector of banking that supported both the real economy and local development and regeneration. We have lost that layer of banking. The United States and Germany have retained it. During the last, very severe recession, it was notable that that layer of banking provided ongoing funding to individuals but, even more importantly, to small businesses, and a mechanism for the Government to support those small businesses. It also contributed to financial stability. Here in the UK our Government had to go through the most extraordinary contortions to funnel funds to small business.

We need to restore that level of banking. Banking is changing dramatically. Online banking and FinTech are largely disintermediating the big banking sector, which the main high street banks thought belonged to them. Online is very successful. I am delighted to hear that in the third quarter of last year Funding Circle became the third largest lender to small businesses in the UK. That is phenomenal for a company which did not exist five years ago. Although that successful change is coming, there is new competition. For many small businesses, online is not necessarily the answer. They need that partnership which was on offer from a community bank, community building society or community mutual, which could help them through the early stages of development and with many of their difficulties. Very few of the online providers take on that role. I can think only of ThinCats, and it is very small. Therefore, I can see no way in which we can restore that missing layer of banking without an effort by both the Government and the regulator. That is the purpose of this amendment.

The Government often talk about diversity, and I very much support Amendment 15, tabled by the noble Lord, Lord Naseby, which is in this group. But when the Government talk about diversity, they focus on making sure that the regulator treats diverse entities appropriately, which is entirely right. It should not attempt to fill the gaps and deal with the current market failure. I have named one significant area: that of local and community banks.

I am not going to press this amendment today, but I want to make sure once again that this matter enters the conversation, because it is a neglected area. In every conversation I have with government, the Treasury or the regulator, diversity is merely a fashion of regulating particular kinds of business. That does not recognise the significance of that gap and market failure. For that reason, I beg to move.

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[Lord Ashton of Hyde]

My Lords, I am grateful to both the noble Baroness, Lady Kramer, and my noble friend Lord Naseby for raising this important issue. I will take each of their amendments in turn.

The amendment in the name of the noble Baroness, Lady Kramer, would add diversity of provision, including diversity of ownership, geography, community and size, to the list of factors to which the Financial Conduct Authority may have regard as part of its competition objective. The Government agree that access to suitable and affordable banking services is important for communities across the UK. The Government want to see greater competition in our banking sector, with more banks challenging the large incumbents. If communities or entrepreneurs want to set up a bank, either to serve their local community or to compete nationally, and can do so responsibly, Government and regulators should not be an obstacle to this.

This is exactly why the FCA is already required to promote effective competition in the interests of consumers of regulated financial services. We would expect its consideration of competition already to involve not just the number of competitors but the diversity of approach, including geographical location and community. In advancing its competition objective, the FCA may take account of various factors including barriers to entry for new providers of financial services, the needs of different consumers and the differences of businesses.

[Baroness Kramer]

Can I just add one point for the Minister? The FCA has recently completed a review of its competition objective, and he may be surprised to find that the word “diverse” does not occur anywhere in that review.

[Lord Ashton of Hyde]

After this, it will be alert to the need to look at diversity. I will come to how we deal with mutuals in a minute. On the last point about the needs of consumers and the differences of businesses, the statute is also clear that the regulators should recognise the different features of a diverse range of business models when pursuing objectives. This is achieved by the principle of good regulation whereby the regulators must have regard to,

“the desirability where appropriate of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons subject to requirements imposed … under this Act”.

As part of fulfilling the existing competition objective, the Government have worked with the regulators to lower barriers to entry. That is why the Government created the Payment Systems Regulator to ensure all banks can access the payments systems on fair and equal terms.

These reforms and others have already had a significant impact, which I hope answers, in part, the noble Lord, Lord Davies. Between May 2010 and May 2015, eight completely new UK banks, all of different sizes and locations, were authorised by the regulators, including two new banks during this Parliament, with several more in the pipeline. This compares to just one new authorisation of a UK bank in the preceding five-year period. The PRA and FCA will also launch their new bank start-up unit on 20 January next year.

Furthermore, to encourage banks to provide services across a broad range of geographical locations and improve access to finance for small businesses across the UK, a number of measures have been implemented, which I will briefly go through. There is now the SME appeals process and the Business Banking Insight survey. The Government have also established the British Business Bank. These improvements complement another initiative: the postcode lending policy, which has allowed for these alternative finance providers and challenger banks to target regional lending “black spots” through publishing lending data by geographical region. This makes the British banking industry the most transparent in the world.

Given all the activity already taking place in this field, it is the Government’s view that the amendment in the name of the noble Baroness, Lady Kramer, will not add to the existing work being conducted by the FCA. It is clear the regulators already take these factors into consideration when fulfilling their competition objective, so this amendment is unnecessary. I therefore respectfully ask the noble Baroness to withdraw it in due course.

Turning now to my noble friend Lord Naseby’s amendment, I indicated in Committee that the Government looked favourably on the intention behind his original amendment. I now welcome my noble friend’s current amendment, which we are delighted to accept. I am extremely grateful to him for raising this issue, and acknowledge the work he has undertaken in advancing the cause of mutuality. I hope that introducing the amendment, which puts consideration of mutuality and other types of business organisation into both regulators’ guiding principles, reassures noble Lords, including the noble Lord, Lord Davies, that the Government strongly support a diverse financial services sector and the part that mutuals play in achieving it.

Lastly, the noble Lord, Lord Davies, asked whether an amendment was needed to the FCA remit letter to reflect the amendment that we will accept. We do not agree, and I therefore cannot give that commitment, because the provision for the remit letter already allows the Government to make recommendations about aspects of their economic policy relevant to the application of the regulatory principles, which will apply to the principles as amended.

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[Lord Tunnicliffe]

Thank you very much—the implementation of the reverse burden of proof. If I go back to my script, I will get it right.

It is important not to underestimate, as the Government seem to be doing, just how significant a departure this would be from the previous regime, not only symbolically but practically too. There could be no denying the intent and commitment to bring about the most rigorous and thorough regulatory regime if the reverse burden of proof were introduced. We believe that knowing that there is nowhere to hide from failure, and that the burden is on you as a senior manager to prove that you took all reasonable and necessary steps, is a more powerful tool to bring about such change. That is why Labour has tabled this amendment to ensure that it comes into force next March, along with the rest of the SMCR.

We have been prepared to listen to the Government’s defence, and accept that they have put forward a very convincing point about why the reverse burden of proof might not be wholly acceptable in its current form. I speak specifically on the issue of proportionality. Given that the Bank of England and Financial Services Bill extends the scope of the SMCR to the entire financial services sector, we fully acknowledge that exemptions from the burden of proof for those not covered by the original proposals would be entirely sensible and necessary, but we do not regard a differentiation in regime as an insurmountable hurdle to overcome.

Therefore, by way of consensus, if the Government would be willing to indicate their intention to bring forward amendments at Third Reading preserving the reverse burden of proof but making exceptions for smaller firms, we would be open to further discussions. However, if the Government fail to do that, it is our responsibility to stand up for the change that people desperately want to see in the banking sector. It is the difference between reform and the status quo—the difference between the path back to public trust and continued disbelief. It is the difference that we need and deserve.

[Baroness Kramer]

My Lords, I am going to speak only briefly on this issue. My noble friend Lord Sharkey, who is sitting beside me, is perhaps the greater master, with particular expertise of the detail, and I do not think that the House needs to hear the same speech twice. Still, I want to make a few remarks because this is such a crucial issue.

To pick up the point made by the noble Lord, Lord Tunnicliffe, I say that the importance of the reversal of the burden of proof is, above all, its cultural impact—the impact that it has on every chief executive and every head of department to understand that if things go wrong, if there is misconduct and bad conduct within their own department, they are essentially on the line. Historically they have not been, and they know that. This reversal of the burden of proof changes that impact. We can tell that from the many conversations that I keep hearing from the Government that, if there is a reversal of the burden of proof, it might be harder to recruit new people to these posts because of the burden that now sits there.

In a world where we are sure that regulation alone cannot ensure that the banking industry behaves properly, and where enforcement is exceedingly difficult, it is very hard to follow a paper trail when lawyers have been very careful to ensure that one does not exist. There might be no electronic trail either; in fact we have just seen an example of such behaviour by Barclays, which explicitly set up a scheme, for which it has since apologised, which was designed to have no electronic trail whatever. Where the trail is so extremely difficult to follow, what matters is that chief executives and heads of department and other key players lead that cultural change; that they appoint people who will challenge them; that they put people in positions where they will blow the whistle when things go wrong; and that they drive through their whole organisation an understanding of the importance of ethical behaviour and proper conduct. That is the best defence that we can have.

Frankly, government arguments for cancelling the reversal of the burden of proof—the sort of argument for a key reason—have constantly shifted over the past few weeks when we have been discussing this issue. To gather from the last set of conversations around this issue, the argument is now primarily that the senior managers regime, which identifies who is responsible for different activities and different tasks, is both much tougher than the existing regime and much tougher without the reverse burden of proof rather than with it.

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[Baroness Kramer]

I will just make a point of clarification, because a number of noble Lords have made this comment. The reversal of the burden of proof applies not to a criminal offence but to a civil offence.

[Lord Brown of Eaton-under-Heywood]

With respect, as I understand it, this is a punishable offence; therefore it is a criminal offence. I certainly understand that it is proposed that this offence should be on the statute book to bring blame on those who commit it and lower them in the estimation of the public so that a conviction or finding of guilt under this provision would be to their considerable disadvantage. I have little doubt that Article 6 would apply to how one proves this breach of the law. There is nothing very new in this either. The golden thread that for centuries has been said to run through our law is that it is for those who accuse to establish a case against those who are accused.

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I was a member of the Parliamentary Commission on Banking Standards. I signed up to its proposal, but I believe that the proposal now in the Bill is superior. Many philosophers have said, “Second thoughts are often best”—although I learned from Wikipedia that the noble Lord, Lord Skidelsky, claims that Keynes never actually said his famous dictum, “When the facts change, I change my mind. What do you do, sir?” But many other people have, including Cicero. This is a time to follow that dictum. In this case, second thoughts are best. I hope that the House will reach the same conclusion as I have put forward and not support the amendment.

[Baroness Kramer]

Perhaps I may ask a question of the noble Lord, Lord Turnbull. The FCA stated just over a week ago:

“The FCA may take disciplinary action against an individual where there is evidence of personal culpability on the part of that individual”.

Where does that differ from the regime before any of this is introduced?

[Lord Turnbull]

That is not exclusive. Elsewhere, there is still a duty of responsibility. There is still personal culpability where it can be proved, but there are many people to whom it does not apply—senior people—and, there, you will need to have recourse to the duty of responsibility to secure a “conviction”—that is, proof of regulatory breach.