Parliamentary Commission on Banking Standards

Baroness Kramer Excerpts

Thursday 8th September 2016 Grand Committee

[Baroness Kramer (LD)]

My Lords, I will miss the noble Lord, Lord Ashton of Hyde, and it is a privilege to be at his last venture into this portfolio. I know he has an exciting set of portfolios in front of him. I congratulate the right reverend Prelate on obtaining this debate. I was privileged to be a member of the Parliamentary Commission on Banking Standards; the most reverend Primate is also here, and the noble Lord, Lord McFall, is listening to this debate. Members of the PCBS often voiced the fear that their recommendations would make a big splash and appear to be accepted but, as time passed and memories faded, Governments, regulators and the banks would return to business as usual.

Some of those fears have been realised. The FCA last year abruptly scrapped its work to challenge the culture of individual banks, its CEO was undermined and morale collapsed. We shall see now if Andrew Bailey can demonstrate the FCA’s independence and its effectiveness. It is crucial that he does. Then the Bank of England Act last spring absorbed the PRA—the prudential regulator—back into the Bank of England, removing a small but significant opportunity for challenge. The same Act also diluted the capacity of the courts to oversee the Bank’s performance and, most significantly, scrapped the reversal of the burden of proof for civil misconduct—a presumption that senior managers are responsible for the banks they run—greatly to the relief of bank CEOs and senior managers.

I know that the most reverend Primate and I disagree on this issue but I felt that it went right to the heart of the PCBS’s work on identifying the importance of culture and making sure that senior managers could not escape a sense of responsibility for everything that happened within their organisations. We must see if the new senior persons regimes give the regulators enough powers that the big players take on that responsibility, take it seriously and achieve the cultural change that is so essential.

I realise I have lost the argument on reversal but I suggest the Government pursue a “one strike and you’re out” policy: if we have one occasion when yet again the regulators are hampered in exposing wrongdoing and senior management walks scot free, we restore the reversal clause. One could say that the banks have proved themselves very effective at lobbying and, indeed, the pace is gathering. In the world of financial services I scarcely hear a speech that does not first stress the importance of not returning to the world of light-touch regulation and then in the same breath calls for a review of regulation because it is evidently too burdensome for the health of the industry.

I think we can safely say that many banks now facing reduced revenues will be arguing for their capital buffers to be lowered. Some also see Brexit as an opportunity to roll back the very regulation in which the UK was a leading force. I do not deny that these are tough times for the banks, but the British public are still suffering the consequences of the abuse of light regulation and the new rules were not intended just for the easy times. I hope the Government will stand firm, not just on their own actions. The EU brought in the cap on bonuses for senior management, limiting them to only one times salary. The British Government did not like that but it has been extremely effective and I hope we do not see that as a quid pro quo for some of the Brexit measures. We must not repeat the past where, salami slice by salami slice, regulation to curb bank misconduct was subtly and gradually weakened.

There are just a few areas in which I particularly want to raise questions with the Government. The first is the issue of the change in bank culture. Frankly, I am rather underwhelmed by the industry’s efforts to bring about change. Will the Government tell us how effective they think voluntary industry efforts are? To what degree are we seeing new blood on bank boards? Has whistleblowing increased? What evidence do the Government have of a shift in power towards audit and compliance? How have recruitment and training changed?

Ring-fencing was a compromise with the industry to find a way to prevent the cross-contamination of retail and investment banking without total separation. Where are we in that process, especially in establishing a framework for the electrification of ring-fencing? I have always been concerned about the viability of bail-in bonds—a key element, we have always been told, in reducing future risk to taxpayers. What assessment have the Government made of the bail-in bond market and has it been undermined by indifference from many of the sovereign funds?

Perhaps most importantly, is the banking sector now meeting the needs of the real economy? The Government have always rejected my party’s arguments to use RBS to create a backbone of local and community banks to serve SMEs and lower-income people, so they must now demonstrate that the conventional banking system is stepping in. My conversations with SMEs suggest that credit is still hard to obtain, and that fits the findings of the Federation of Small Businesses. Export finance for small companies seems virtually unobtainable from UK banks. Charities working with vulnerable people suggest that their banking options have hardly improved, and the Competition and Market Authority’s timid resistance to capping overdraft fees is, frankly, discouraging.

I know that we are making progress with challenger banks and alternative forms of finance, such as peer-to-peer, but those need time to mature. The PCBS report is now two years old. Here is an opportunity to hear from the Government how its implementation has progressed and for them to reassure us that backsliding is not part of the agenda.