Financial Services and Markets Bill

Lord Archbishop of Canterbury Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[The Archbishop of Canterbury]

My Lords, I have joined the noble Baroness in supporting her Amendment 106, as I did her two amendments on this topic in Committee. This amendment seeks to prevent change which goes against the two years of work of the Parliamentary Commission on Banking Standards, which looked in detail at both issues and produced its final report, Changing Banking for Good, 10 years ago. I declare an interest: I sat on the commission along with the noble Baroness.

As I said in Committee on 21 March, the underlying motivation of this amendment is to ask us not to forget the hard lessons learned after the 2008-09 financial crash, for which the whole country, especially the poorest, paid, then and to this day. Recent events show that the memory in the markets is strong, even if it is not in the Government. Alarm spreads easily.

Both the ring-fence and the SMCR were designed to better align the incentives and risk calculations of the financial sector to avoid the privatisation of profits and the socialisation of losses, and to force the financial sector to be conscious of the cost its action has, not only on itself but on the wider economy. The SMCR enables us to make sure that those individuals who are making decisions which have significant consequences are held accountable. It goes some way to bringing individual incentives in line with high collective standards.

The electrification of the ring-fence, which the Parliamentary Commission on Banking Standards recommended, was designed to deter banks from the inevitable temptation to test it. The commission’s first report said:

“any ring-fence risks being tested and eroded over time”

and the new framework at that time

“will need to be sufficiently robust and durable to withstand the pressures of a future banking cycle”.

SVB showed that the concept of a non-systemic bank is a very dubious one, as even banks with good resolution plans, and of very moderate size in the global context and systemically, create a sense of contagious alarm. Banking, as we know—and some noble Lords know very well indeed—is not based on logic but on confidence. There is logic there somewhere, but the confidence is that the bank is secure, despite the fact that its equity is a very small part of its total balance sheet. The contagion caused by the failure of SVB is not yet over among US regional banks, which continue to fail or need rescuing. That moment may come, but let us wait and see.

The Swiss taxpayer is on the hook for Credit Suisse and the US taxpayer for several regional banks that were meant to be non-systemic. Not to learn from the past or the present is, frankly, reckless. Reform may come—there are good arguments for it—but it should not come outside a proper parliamentary process of primary legislation. People and sectors can have short memories. I urge the Government to accept this amendment, which would go some way to making sure that we remember the hard and bitter lessons learned and do not repeat the same mistakes.

[Baroness Bennett of Manor Castle (GP)]

I will speak very briefly to offer Green support for the amendment in the name of the noble Baroness, Lady Kramer, and the most reverend Primate. The amendment, in a way, is a smaller and lighter version of my attempt to strike out the competition clause, on setting a competitiveness objective, which has sadly remained in the Bill.

In November last year, City Minister Andrew Griffith told the Financial Times:

“The overall thrust of things is to allow more risk … you shouldn’t be risk”


averse;

“we just need to manage that in an appropriate way”.

He went on to say that the aim of reducing ring-fencing was

“to release some of that trapped capital over time”.

I acknowledge that the Minister said that before the collapse of SVB and Credit Suisse, and the other crunches in the American banking system.

In an April piece in the Financial Times, Martin Wolf said:

“A shock like this should make mindless deregulation less appealing to politicians”.


As has been clearly outlined already, the amendment does not actually make anything happen; it just ensures parliamentary oversight. When we get to the dinner break business, my noble friend will seek to ensure that parliamentary oversight is included there. Surely, this is what democracy is supposed to be about.

Financial Services and Markets Bill

Lord Archbishop of Canterbury Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

[The Archbishop of Canterbury]

My Lords, I have added my name to Amendments 241C and 241D tabled by the noble Baroness, Lady Kramer, and wish to speak briefly in support of them here. I am particularly grateful to the noble Baroness, Lady Noakes, who made some very helpful and powerful points.

As the noble Baroness, Lady Kramer, said, this marks 10 years since the publication of the Changing Banking for Good report from the parliamentary commission, on which I sat with her. The two amendments to which I have added my name are probing amendments to stress the importance of not forgetting the lessons of 2008-09, because people and sectors entirely can have very short memories.

As the noble Baroness has explained, the amendments seek to prevent alteration to two elements of the banking reform Act 2013 by statutory instrument without proper debate in Parliament, and to prevent changes which go against the recommendations of the parliamentary commission. Our memories have certainly been refreshed this week. If the debate on this group had been held when it was first scheduled two or three weeks ago, I think we would have had a very different reception. If one is grateful for anything in the present crisis, it is that we have been so warmly reminded of why we need a clear memory.

The ring-fence was first recommended by the Vickers commission in 2012, and it was “electrified”—in the words of the noble Lord, Lord Tyrie, in the Parliamentary Commission on Banking Standards report—to address the issue of banks seeking to test it. In our first report in 2012, we commended the coalition Government’s intention to introduce the ring-fence but said, as has been quoted, that it would be worn down in time, and that it had to be

“sufficiently robust and durable to withstand the pressures of a future banking cycle.”

After 10 years, we are now in a future banking cycle. We have gone through a long period of very easy money in which the banks have been able to make a great deal of money and to recover and increase their capital to much better standards than were around in 2008.

The very rapid increase in interest rates right across the western economies—particularly in the United States, which has the fastest increase for 50 years—has resulted in, as usual, the exposure of risks being taken that had not been foreseen. It is the “had not been foreseen” and possibly the “unforeseeable” that are important to stress when looking at this.

Electrification gives banks a disincentive to test the limits of the ring-fence. It is human nature—especially in a corporate entity—to test the limits of any regulation and see if they hurt when you hit them. But 2008-09 hurt far more people than simply the banks. It caused a global recession, and it hurt the poorest in the land more than anyone else. At that time, I was working in Liverpool and living in Toxteth, and we saw the impact on those who were least able to live with it. It is still hurting the whole economy, because for at least a generation after a financial crisis, as opposed to a normal economic recession, there is a deep fragility in confidence. The ring-fence and the other regulation of banks and higher capital are all about maintaining confidence, not about making it impossible for people to go bust.

The recent failure of SVB in the US, and the ease with which what is by global standards a major bank was reclassified as a systemically important bank and thus eligible to be rescued—even though there is a system for resolving banks which is meant to be robust—demonstrates that the issues of systemically important banks are very difficult to handle. Again, the problem is one of confidence: we are talking about the contagion of a lack of confidence, and not simply about the failure to observe rules and regulations.

The resolution of banks is part of the system in the USA. It applied to SVB and to Credit Suisse, but it was not enough to protect the taxpayers of the US or Switzerland from having to put in significant implicit and explicit support. This is all about confidence. If we go on bailing out the system as it is, one of the unintended consequences is likely to be further damage to confidence.

For me, one of the most memorable moments of the banking standards commission was hearing the very broken and tragic testimony of a former head of a global bank outside this country. He was a man of absolute integrity who had been brought to the point of complete breakdown—I suspect my colleagues remember it—by the impact of the failure of the bank he led. Right at the end of his testimony, I asked him, “When you wake in the night, what do you remember and wish you had done differently, because we all do that over events in our past?” He said, basically, “That’s easy. I remember that you can run a small, complicated bank safely, or a big, simple bank safely, but you cannot run safely a big, complicated bank”.

--- Later in debate ---

[Noble Lords]

Fiscal event.

[The Archbishop of Canterbury]

Going back to the fiscal event, a lot of the pension funds almost went bust. We learned a lesson from that, quite rightly, and I think it is a lesson that will be kept.

The ring-fence and the SMCR have been important for encouraging—not solving—improved standards and culture in the banking sector and for protecting the public from bearing the brunt of future banking failures. We cannot forget the lessons learned with such pain for so many outside the banking sector, who had no idea what goes on in banking but found that life suddenly just did not work any more.

I hope that the Government take a further look, certainly through the consultation, at the lessons of the last few weeks, and that the ring-fence is strengthened, not weakened, and improved. I agree with the noble Baroness, Lady Noakes, about both the ring-fence and the SMCR. Both are cumbersome and need rethinking, but not abolishing.

When asked why he had changed his mind, John Maynard Keynes—apocryphally, I think—replied:

“When the facts change, I change my mind. What do you do, sir?”


Given that the facts have changed over the last few weeks, the Government need to ask themselves whether they are going to change their minds and think harder about adequate protection for the basic financial structures that protect the weakest in our society.

[Lord Eatwell (Lab)]

My Lords, these three amendments project a peculiar background, which is an issue that this Committee debated in an earlier session—that of accountability. The first amendment of the noble Baroness, Lady Kramer, Amendment 216, is too detailed for primary legislation. On the other hand, I sympathise entirely with the noble Baroness’s goals. In a principles-based system, I would have expected these goals to be expressed in the principles and achieved by the rule-making regulator but, given the lack of accountability with which the Government seem so comfortable—I was impressed by the noble Baroness’s argument on Amendment 216—we cannot be confident that changes will be made at the necessary points. There is no vehicle for Parliament to ensure or inspect the rule-making of the regulators.

I think Amendment 216 is necessary because the Government are so weak on accountability. If we had strong accountability, whereby we could hold the rule-makers to account—both positively, in the sense that you are doing something that you should not be, and negatively, in the sense that you are not doing something that you should be—amendments such as this would not be necessary. Amendment 216 is necessary in the way so carefully described by the noble Baroness, Lady Kramer, simply because of the lack of accountability in the system.

This also applies to the other two amendments in this group. The noble Baroness, Lady Noakes, powerfully pointed out that, because of the peculiar circumstances in which it took place, the resolution of SVB UK required a relaxation of the ring-fence. I am entirely sympathetic with the goals of these amendments, which address the overall structure of the industry and therefore the overall risk appetite of this country for banking and financial services. That is what the ring-fence and the senior managers and certification regime are about.

The “but” is the important case highlighted by the noble Baroness, Lady Noakes, where some modification was necessary. If we had proper accountability, this could come to Parliament, which could then examine this example of relaxation to discuss whether it is appropriate to extend it to other banks, so that there is this mythical level playing field in the competitive relationships between them.

I am enormously sympathetic to the goals of these amendments: to the first because it is a practical issue of excessive risk-taking by insurance companies and, as we have seen, pension funds; and to the other two because they refer to the structure of risk which Parliament has decided is appropriate in this country’s financial services industry. It should not be modified wilfully—I am thinking of the marriage ceremony—and without due consideration of the consequences. Therefore, the Government would once again be well advised to reconsider the issue of accountability, which they have brushed away so casually, because it would provide the flexibility for Parliament to be involved in changing the risk appetite of the country as a whole.

Carers in England

Lord Archbishop of Canterbury Excerpts

Monday 6th March 2023 Lords Chamber

[Baroness Penn (Con)]

The Government have set out our long-term plan for the reform of adult social care. In the autumn, we announced that we were making additional funding of up to £2.8 billion available in 2023-24, and £4.7 billion in the following year. Those decisions also involved a delay to rolling out some of the reforms that we had set out, so we will be updating our plan to implement that vision this spring, setting out the path forward.

[The Archbishop of Canterbury]

My Lords, about three years ago, my most reverend friend the Archbishop of York and I commissioned the Reimagining Care Commission, which the Minister is probably familiar with. It published its final report the other day. It sought to reimagine social care for our time, particularly to answer the question of who is responsible for what, given that it is not just the Government. Will the Government consider the commission’s main recommendation—that a national care covenant be created to set out clearly the mutual responsibilities of the Government, communities, families, churches and other organisations around care and support?

[Baroness Penn (Con)]

The Government welcome all contributions and ideas to this space, and I am sure that we will consider the proposals very carefully. As I have said, the Government set out their own plans in this area last year. We will update those plans, looking to put people at the heart of the social care system, this spring.

Financial Services and Markets Bill

Lord Archbishop of Canterbury Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[The Archbishop of Canterbury]

My Lords, this year marks the 10th anniversary of the final report of the Parliamentary Commission on Banking Standards, Changing Banking for Good. I declare my interest having served on that commission, and I welcome the presence in this debate of the noble Baroness, Lady Kramer, who also served, as did the current Lord Speaker. I also welcome the maiden speeches of three noble Lords today: the noble Lords, Lord Ashcombe and Lord Remnant, and the noble Baroness, Lady Lawlor.

We need to remember that the extraordinary crisis in 2008—which led to the various commissions, reports and changes in regulations, including the financial services Act 2013, in which the Parliamentary Commission on Banking Standards played a part—caused huge and ongoing crises. While welcoming the Bill very strongly, I join some of the hesitations mentioned by the noble Lords, Lord Hunt, Lord Sharkey and Lord Vaux. It has been estimated that the financial services industry, and particularly the major banks, have an effective subsidy as a result of the implicit government guarantee that they receive, which is worth approximately £30 billion a year. If there is £30 billion a year going spare, many other industries and not a few churches would welcome that very warmly. However, that subsidy, which is at the risk of the taxpayer, as we saw in 2008 and 2009, is what gives the result of the banks having heavy social obligations; we must look carefully at that when the Bill reaches Committee, as has already been said. The issues of inclusion, stability and access at all levels, especially for micro-businesses, are very important, not least for levelling up.

I will raise three particular and short issues, the first of which is the human factor. The banking standards commission commented that, in the rapidly changing science of the financial markets, regulation is a vain hope, as the noble Lord, Lord Vaux, has already said. By the time regulation is brought in to address a problem, all but the doziest horses will have long since fled the stable. The commission highlighted that the question of culture is at the heart of good banking practice: attitudes of greed, the socialising of losses and the personalising of profits, the kind of legacy people wish to leave, and the issues of virtue. Is the mindset and approach of key leaders in the industry one of casino banking or banking for the common good? That is essentially a moral question.

Some of that is addressed very well in the Bill. I particularly welcome Clause 69, addressing credit unions, and the opportunity that that will give for levelling up and extending the range of financial access to small businesses. But we see in the recent crypto-market crash a perfect example of the failure of culture, as well of regulation, and of technology moving infinitely faster than any regulation. We need a system that is agile and keeps regulation light, so that the industry is competitive, but keeps principles tough and flexible, with heavy consequences for breaking them.

On the importance of capital adequacy and the ring- fence, this was clear at the time of 2008, when one of the major banks had 2% capital to support a more than £1 trillion balance sheet. We need to recognise that banks go under because of bad lending and bad dealing, and the remedy to that is adequate capital and adequate principles and culture—otherwise, we will get back to the point, as we did in 2008, where the taxpayer bears the burden.

Finally, we need competition and an effective industry but not a race to the bottom. There needs to be a race to the top, to the best-quality services, which serve people and the common good both now and in future generations through its green aspects. There has been a tendency over the years to say how much the City contributes, but let us be clear that, if we take into account the roughly £250 billion pumped into the banking system in 2008, it is not so obvious that the City is in credit to the taxpayer—it may well be that it is in significant debit. Nevertheless, this Bill is very positive. As long as it ends up reminding financial services that they are services for all and has principles at its heart, it will be welcomed and make a significant difference.

Banking: Parliamentary Commission on Banking Standards

Lord Archbishop of Canterbury Excerpts

Thursday 5th December 2013 Lords Chamber

Moved by

[The Archbishop of Canterbury]

That this House takes note of the Reports of the Parliamentary Commission on Banking Standards (1st Report, Session 2012–13, HL Paper 98), Banking Reform: towards the right structure (2nd Report, Session 2012–13, HL Paper 126), Proprietary Trading (3rd Report, Session 2012–13, HL Paper 138), “An accident waiting to happen”: The failure of HBOS (4th Report, Session 2012–13, HL Paper 144) and Changing Banking for Good (1st Report, Session 2013–14, HL Paper 27).

[The Archbishop of Canterbury]

My Lords, your Lordships are asked to take note of the work of the Parliamentary Commission on Banking Standards. I speak not only on my behalf but on that of some of the commissioners who, for various reasons, cannot be here. I should add that it is coincidental and owing to constraints of the diary that this debate falls so neatly between Report and the Third Reading next week of the Financial Services (Banking Reform) Bill. I am particularly looking forward to the maiden speech of the noble Lord, Lord Carrington of Fulham. I am sure his contribution will be significant given his vast experience in another place, especially on the Treasury Select Committee.

In 2008, the Chancellor of the Exchequer found himself faced late one night with the choice of commitment of large sums of money—hundreds of billions of pounds—or of the collapse of almost everything in our society that makes money real, as the banks ran into a collective wall. In the years since, scandal after scandal has become apparent. Out of these vast events arose what was described as,

“a profound loss of trust born of profound lapses in banking standards”,

and thus the formation of the Parliamentary Commission on Banking Standards. The breadth of the task laid at the commission’s feet is hard to overstate. As one can read on the first page of each of the five reports published by the commission, it was appointed,

“to consider and report on professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process, lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy and to make recommendations for legislative and other action”.

As further incidents came to light and Bills came forward, the commission was tasked with investigating the incidents and with pre-legislative scrutiny of the Bills. It was initially said that it would be all over by Christmas—last Christmas. I hope we shall hit it this year. The work was extensive. It involved many hundreds of hours of oral evidence and thousands of questions asked, with a majority answered. Seven volumes of our final report, Changing Banking for Good, are dedicated entirely to the written and oral evidence received.

Neither the quantity nor the quality of the material produced could have been achieved had it not been for a commission made up of such outstanding colleagues, with a great deal of experience, who worked so determinedly together. Their dedication and insight has been immense. I pay special mention to the Member for Chichester, under whose chairmanship we were led with great expertise and forthrightness, and a certain amount of sheer nerve and chutzpah in the way that the commission went forward. I also put on record the enormous debt of gratitude that I and my colleagues at both ends of the Palace owe to the staff that supported the work of the commission. They came from government and the private sector and included counsel. They worked night and day, in a new form of inquiry. We are also much in debt to the work already done by Sir John Vickers and his Independent Commission on Banking, whose recommendations on structural reform were the foundation of our own work.

Our first report provided the pre-legislative scrutiny for the Financial Services (Banking Reform) Bill. We made recommendations to strengthen the proposed legislation, as well as suggesting further necessary measures to enhance the stability of the banking system.

In our second report, Banking Reform: Towards the Right Structure, we considered the Government’s response to our first report and, somewhat unusually, proposed amendments further to improve the Bill in a number of key areas, many of which have now been accepted. Our third and fourth reports focused on specific examples from the banking system that were especially concerning to us.

In the report entitled Proprietary Trading, we examined the effect of one particular banking activity on the culture and standards in banks. We welcome the breadth of the review into proprietary trading that the government amendments announced today appear to allow for. We hope that nothing will delay the timetable that is set out within the amendments, so that the PRA and independent reviews of proprietary trading can be completed most effectively and any necessary action taken as quickly as possible. I will return to that point in a few moments.

The next report, ‘An Accident Waiting to Happen’: The Failure of HBOS, is a case study of bank failure—and one of remarkable quality. The work on this was led exclusively by the noble Lord, Lord Turnbull, whose vast experience and forensic skills were stretched considerably as the paper mounted up, but whose work is foundational to understanding this crisis. While not making specific recommendations, it serves as a stark reminder of the many aspects of poor banking standards and culture that pervaded the industry in the run-up to, during and following the great crisis of 2007-08.

Our fifth and final report, Changing Banking for Good, outlines the radical reform required to improve standards across the banking industry and presented Government, the regulators and the industry with a package of recommendations which, taken together, will raise standards and drive positive cultural change, ultimately changing banking for good.

Although we have made progress on structural and regulatory aspects of banking reform, through an enormous amount of work by your Lordships in this House, if we think that by changing the law we have solved the problems revealed by the crisis, we are profoundly mistaken. In this light, I wish to focus on those parts of our work that cannot be implemented through legislation or regulation but require cultural change within our banks.

As any vicar will tell you, a sermon should have three main points. I hope that your Lordships do not feel that you are being preached at today, but I wish to ask three questions which must be answered if we are to cut to the heart of how the rotten culture was found to be in the banking industry and how it can be changed for good.

The first question is the most essential: what is our vision for banking? We—not only the commission but legislators, regulators, bankers and society at large—have been tasked to find a once-in-a-generation leap of imagination that does not simply attempt to repair what was destroyed in 2008 but to replace it with something that is of substantial and lasting value. A vision for banking that is sustainable and of value needs to offer the possibility of a flourishing society at every level of the economy, through investment, lending and understanding the communities in which the banks work—a vision that enables all banks to respond better to their customers and to the well-being of society. Without good banking, savings stagnate in fetid pools of hoarding, and good ideas and entrepreneurial vigour wither without the water of capital and liquidity. Such is the state into which we have been growing for many years, which is one—although only one—contributory factor to inequality, social immobility and areas of the country being condemned to generations of poverty and deprivation.

However, secondly, when we asked witnesses, “What is the social purpose of banking?”, worryingly, it seemed to be a question that often stumped them and which they had never asked themselves. Activity without social purpose is ultimately anarchy. The work of the commission, in my view, fundamentally has been about enabling the financial services industry to retrieve its basic purpose of supporting the common good and social solidarity. Banking is ultimately a utility function. It is of course one that is especially important to our economy, but there is a danger in treating the industry entirely differently from other utilities. It is necessary that a culture of service and social purpose is renewed in our banking industry. Banks must assert their roles in both national and local economies for without their investment in and service to local communities everywhere, there will be no durable and universal recovery.

Finally, we must ask: what ultimately will drive cultural change? Taken together, the commission’s recommendations are an effort to encourage positive cultural change. Proprietary trading, in the opinion of many of us—and it is subject to review—should be banned. Remuneration should be reasonable and proportionate. Regulation should be effective and accountable. The implementation of the ring-fence is a clear and welcome effort to ensure that distinctive and possibly irreconcilable cultures are kept separate. The ring-fence will, we hope, make the development of good culture more possible—and with the right safeguards, we hope also that it will be more durable than the walls of Jericho, so that not even the trumpets of Joshua’s army could find a way through.

However, it is clear that law and regulation cannot cause people to be good: making people good by law has been—to put it mildly—tricky since the days of Moses. Read the Epistle to the Romans to see why. Culture is set by leadership, training and implementation. In a recent report, the City of London emphasised remuneration and shareholder activism. Such recommendations illustrate the problem. Good culture is good through virtue, not out of hope of reward alone, although of course that must play a part. Shareholder activism also has had little or no impact historically, with the average share traded five times a year.

For a culture to become dominant, it was clear to us that it must be internalised by employees at all levels. A set of values governed by a deeply-held belief in what is right and wrong is foundational to long-lasting cultural change. Such beliefs are caught and also taught. If no one inside a bank believes that some of the practices we have heard about, some as recently as last week, are wrong, or if they believe it has no adequate way of expressing their concerns—the commission, by the way, has recommended improvements to facilitate whistleblowing—then cultural change will never take place, and poor standards will continue to fester.

Introducing informal mechanisms to catch poor standards early on was one of the commission’s recommendations—it can be found in paragraph 786 of our final report—but in situations like this, once the principle of the recommendation has been accepted, the responsibility for bringing it about must be on banks themselves. That is why the commission recommended that, as well as the essential reforms to regulation and law, the industry must professionalise the sector in a similar way to the medical and legal professions. This recommendation has been much overlooked, but provides a convincing long-term answer—complementary, not an alternative, to the other things in the report—as to how culture can be shaped and styled, and virtue measured, understood and valued.

The banks have started on this work and it is especially clear that the chief executives of the major British banks are working very hard in this area. The struggle to change the culture has begun. It will be a long one. In our view, we are talking of years—decades, a generation perhaps—to embed a completely different culture to replace the one that seeped slowly away over the years after big bang. On the outcome of this struggle hangs to a considerable extent the flourishing of our society and the re-establishment of the reputation of our most successful industry.

For all these reasons, Parliament must hold regulators and market participants to account, not only for their adherence to written laws and regulations but, perhaps more importantly, for their commitment to the common good and to a culture of virtue, so that, possessing extraordinary power and influence, they may enable extraordinary good and development.

I wholeheartedly commend the work of the Parliamentary Commission on Banking Standards to the House. I hope that its work will not be in vain but will continue to be drawn upon as a new system is built in place of its failed and discredited predecessor. I beg to move.

--- Later in debate ---

[The Archbishop of Canterbury]

My Lords, I add my thanks to all noble Lords who have contributed this evening. A number of striking comments and speeches have been made, notable among them that of the noble Lord, Lord Carrington, with his description of a Sharia-compliant bank and the impact that that can have and his deployment of his experience both in the other place and in the banking industry over many years.

The debate has ranged far and wide. I want to draw on two characters. One is Dracula. We have the threat of reincarnation—or, if one is into “Doctor Who”, regeneration—of the Parliamentary Banking Standards Commission. I saw the blood drain from the face of the noble Lord, Lord Turnbull, as I sat from this distance. I hope that we can find some stake and clove of garlic that can put it into its grave and that someone else will have the pleasure of reincarnating it at some point.

The speech of the noble Lord, Lord Eatwell, clearly reminded us that financial services are immensely connected and that what you squash down in one place pops up in another—to put it less elegantly than he did—often with great force, little regulation and usually much danger. His exceptional speech should be noted and thought about. I fear that there will be need for continual monitoring of what happens over the next few years.

I have a couple of comments. I shall be brief, because we are at the end of our time and it has been a long day. The comments made by the noble Lord, Lord Sharkey, about size were also strong reminders of the difficulties that we face. One of the most memorable comments in evidence for me was from a former head of UBS, clearly deeply affected personally by the pain of what he had gone through. He was one of those bankers who came who had borne the whole weight of it on his shoulders and suffered greatly as a result. There was no lack of responsibility from him. When asked if, in the depths of the night, he looked back and thought that he might have done differently, he said that you can have a big simple bank or a small complicated bank; you cannot have a big complicated bank. He said that if he had his time again, he would have kept it simple.

When I listened to the noble Lords, Lord Sharkey and Lord Eatwell, I was reminded of the extraordinary statistic anticipating the banking industry at nine times GDP. I was reminded of the need for banks to be kept to a size where they do not threaten everything else. They are not the only goose laying golden eggs in our economy. We cannot be a “monocrop economy”, as Martin Wolf described us in a notable article in the Financial Times in January 2009.

I cannot go through all the other points raised, but I heard with gratitude the comments about education. Competition is obviously essential, but, as the Minister said a few moments ago, competition must be to be the best supplier of the customer, not the most profitable bank going. You may get the second through the first, but if you aim solely for the second, you will never get the first.

Finally, the quality of finance—to which the noble Lord, Lord Eatwell, referred directly and indirectly—is that which sustains our communities and enables the talent of our nation to flourish, grow and develop jobs. He used a phrase, “financial services”, that has been used many times in the debate. All these industries, banking and the others, are there to serve, not to rule. They are, as I was taught as a child by my grandmother, when talking about fire, good servants and very bad masters.

Motion agreed.

Financial Services (Banking Reform) Bill

Lord Archbishop of Canterbury Excerpts

Wednesday 27th November 2013 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, I confess I was a little puzzled by the introduction to the amendment of the noble Lord, Lord Phillips. He portrayed it as being so broad as to cover virtually all derivatives trading, whereas I had presumed that he was focusing on those derivative trades that are classified as gambling—in other words, financial spread betting. The crucial issue with respect to financial spread betting is that it is free from capital gains tax and stamp duty, and that traders are typically free from income tax. This is a really extraordinary form of tax avoidance within the financial services industry. If that was what the noble Lord really sought to focus on, a review of such forms of transaction would be very useful, particularly in light of the fact that the Australian Government have now declared that those forms of contracts are not exempt from tax. Indeed, they are subject to both income tax and capital gains tax under Australian tax law. What is remarkable is that the number of these contracts being traded in Australia has dropped dramatically.

If the noble Lord, Lord Phillips, hopes to reduce the scope of what he referred to, especially in quoting Keynes, as the financial casino, it would perhaps be valuable if there were a review—I would encourage the Government to think about having one—of the designation of particular derivative contracts as gambling, which has had these unfortunate consequences, including a significant loss of revenue to the Treasury.

[The Archbishop of Canterbury]

My Lords, I add my support to what the noble Lord, Lord Eatwell, said in specifying these particular contracts, not only for their tax avoidance capacity but because participation in them within the trading community leads to obvious conflicts of interest between their main work during the day, for their employer, and any potential gains or losses they have through the spread betting operations which they are capable of undertaking. In other words, it is very much a cultural problem and it is specifically to do with contracts that are considered to come under the purview of the gaming Acts. That is how I understood this amendment to apply, rather than more generally. From my point of view, I am not certain that it needs to be in the Bill, but it would certainly be useful if the Government were to say that the scope and impact of this should be looked at.

[Lord Newby]

My Lords, the purpose of the amendment is to require the Treasury to undertake a review of the consequences of exempting certain gaming contracts from the rule that used to provide that no gaming contract or wager could be enforced in a court of law. Such a review would consider the national, commercial and economic effects, in addition to the social, cultural and ethical effects, proposed in the equivalent amendment in Committee. I understand my noble friend’s desire to know more about the consequences of what appears to have been an extensive gambling culture in the City of London, which flourished in the derivative markets that expanded significantly following the gaming contracts rule change but was not limited to those markets.

The financial crisis exposed serious problems in derivative markets—particularly, as the most reverend Primate pointed out during our last debate on the equivalent amendment, in OTC activities. Clearly, the proliferation of such activities and the lack of adequate regulation showed up a need for change.

Following extensive international regulatory debate, a set of significant international reforms was agreed by the G20 to address these concerns. It may be helpful if I provide noble Lords with a short update on what they are. They include measures to ensure transparency by requiring all OTC derivatives transactions to be reported to trade repositories, and the requirement for all standardised derivatives to be centrally cleared and, where appropriate, traded on electronic platforms. These reforms are now being implemented in the UK and should go some way towards limiting the risks associated with these instruments.

So far as the wider effects of gaming in the City are concerned, the PCBS undertook an extensive and wide-ranging examination of the professional standards and culture of the UK banking sector. Its final report made a number of findings on the existing standards and culture in the banking sector, and recommendations as to what might be done to improve the position. We are seeking to give effect to those recommendations in this Bill. As the noble Lord will be aware, we will have a debate on the broader cultural aspects of the PCBS’s report next week.

In the circumstances, I am not sure that a formal Treasury review, as proposed by the noble Lord, is the best way forward. In Committee, I suggested to him that a more appropriate way forward to address his concerns might be for him and, possibly, other Members of your Lordships’ House to work with a think tank that specialises in financial services to undertake such a review. The precedent I had in mind was the review of the banking sector undertaken in the previous Parliament. The Future of Banking Commission was chaired by David Davis MP and included not only my colleague Vince Cable but the noble Lord, Lord McFall. That report had a major impact at the time in influencing the consideration of how we should be looking at the banking sector. The advantage of such a structure over a formal Treasury structure is that it enables a wide range of individuals, including serving politicians, to sit on it. That is much more likely to happen if it is done under the aegis of that sort of think tank than if it is initiated by the Treasury. As a result, when the report came out, it commanded a broad degree of public respect.

I take the point made by the noble Lord, Lord Eatwell, and the most reverend Primate the Archbishop of Canterbury about the specific consequences of potential tax avoidance or evasion by people involved in this sector. I undertake to discuss that with my colleagues in the Treasury in the context of measures that might be brought forward in a future finance Bill. I agree that at first sight it appears to be a loophole that we should have a look at. As noble Lords know, the Government have devoted considerable resource and attention to these issues. I am sure my colleagues in the Treasury will be happy to have a look at the issue.

With those suggestions, I hope my noble friend will feel able to withdraw his amendment.

--- Later in debate ---

Moved by

[The Archbishop of Canterbury]

175: Before Clause 119, insert the following new Clause—
“Leverage ratio
(1) The Treasury must make an order under section 9L of the Bank of England Act 1998 (macro-prudential measures) enabling the Financial Policy Committee to give a direction under section 9H in respect of a leverage ratio for relevant authorised persons.
(2) The direction above may specify the leverage ratio to be used.
(3) For the purposes of this section “leverage ratio” has the meaning which the Financial Policy Committee considers that it has in European Union Law or procedure from time to time.
(4) The order under subsection (1) must be made within the period of 6 months beginning with the day on which this Act is passed.
(5) In this section, “relevant authorised person” has the meaning given in section 71A of FSMA 2000.”

[The Archbishop of Canterbury]

My Lords, this amendment stands in my name and in the names of the noble Lords, Lord Turnbull, Lord Lawson and Lord McFall. The issue of leverage ratios may at first sight be less emotionally gripping than some of the other things that we have been discussing over the past few days, but it is central to the recommendations made by the commission. The leverage ratios that banks employ are a vital backstop in ensuring that they hold adequate capital, and ensure the safety and security both of individual banks and the industry as a whole.

A remarkable lecture given by Andy Haldane of the Bank of England sets out the necessity for this amendment. It is called The Dog and the Frisbee and I warmly recommend it, not least for its light humour. Essentially, as the Basel process has gone on through Basel I, Basel II and Basel III, there has been an exponential increase in the complexity of the internal measurements of different categories of loan for the amount of capital that had to be set against them. This opened the way very effectively to banks using different internal measures and to the inability of regulators to audit and examine adequately the ways in which banks were setting aside capital for particular risks.

A leverage ratio, because it is relatively if not absolutely simple, acts as a backstop which sets minimum levels of security and safety. The debate around a similar amendment in Committee was rather confusing. Although, as I have mentioned previously, I was unfortunately not able to be in the House that day owing to other duties, I have looked at the Hansard and concluded that the Government’s position on this recommendation seems unclear. On the one hand, the House was told that the amendment was not needed, as the Financial Policy Committee had the power to set the leverage ratio; on the other, the Minister indicated that responsibility for setting the leverage ratio would be considered once the international levels were implemented through Basel III, which would be some time in 2017 or 2018.

In the light of this, the commission warmly welcomes the clarity of an announcement made yesterday that the Financial Policy Committee will conduct a review into the role of the leverage ratio within the capital framework of UK banks, as this indicates that the Treasury and the Government recognise that they are an important part of the structures that guide the banking system and that it is necessary that we move forward without delay. My commission colleagues and I are grateful to the Government for their willingness to allow the FPC to conduct a thorough and wide- ranging review of its current powers and to make recommendations on further powers it needs. We would welcome a clear statement that the review will not seek to establish whether it is right for the FPC to request this power but that it will have the power and the review will be about how it will exercise it.

We also welcome warmly the accelerated timetable set out in the Government’s announcement. It is right that this power should be available to the FPC as soon as possible and the expectation that the Bank of England will complete its review within 12 months reflects this need. I hope that the Minister can confirm these points. I beg to move.

[Lord Eatwell]

My Lords, I support the sentiments expressed by the most reverend Primate, in particular in pointing out the considerable confusion in the Government’s position in Committee when they told us, on the one hand, that the FPC had this power already and, on the other hand, that they proposed to give the FPC the power in 2018. We were told both things at once and it was not at all clear that the Government really knew what was happening with respect to the development of the use of the leverage ratio as an important element in the FPC’s toolkit.

However, the matters have been clarified by the correspondence between the Chancellor and the Governor of the Bank of England which was made available to us yesterday. I would like to hear confirmation from the Government that this is a case not of whether a leverage ratio will be available to the FPC, nor of whether the FPC will have that within its macroprudential toolkit, but simply of when this power will be available—I hope that it is sooner rather than later—and perhaps how it might be exercised. However, given that the use of macroprudential tools is already set out in great detail in the previous Financial Services Act, even that may be unnecessary.

--- Later in debate ---

I hope that on the basis of all the background information that I have provided, which I hope gives the context for a very specific answer to a specific question, your Lordships will be comfortable in withdrawing this amendment.

[The Archbishop of Canterbury]

I am very grateful to the Minister for such an extremely technical answer and I beg leave to withdraw the amendment.

Amendment 175 withdrawn.

Financial Services (Banking Reform) Bill

Lord Archbishop of Canterbury Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Flight]

My Lords, I have broadly been in support of a Glass-Steagall separation of investment and banking banks, but there seems to me something slightly wrong with the concept of having a review and prejudging the outcome of that review. Playing devil’s advocate, I make a point on the other side of the coin. Europe has had universal banking for a long time; that is the banking tradition in continental Europe and there is still a case for universal banking to continue, although it is right out of fashion now. I repeat my point that, to a fair extent, the profits of investment banking have subsidised ordinary banking and benefited ordinary retail customers; the losses have generally come from bad lending. So it is slightly premature to prejudge the review. I cannot see what is wrong with having a review with the understanding that the Government will act on the basis of the recommendation of that review at the time. We will have moved on from the present and other factors may have come to light as well. I do not see what is gained by prejudging the result of the review.

[The Archbishop of Canterbury]

My Lords, as did the noble Lord, Lord Lawson, I begin by expressing my gratitude to the Government that they have listened to the speeches of many noble Lords and my PCBS colleagues on the need for a full and independent review of the ring-fence. I hope that they will realise that the amendments that have been tabled today are the final pieces of the puzzle in this regard. This work, combined with the vast improvements that we have seen to the electrification of the ring-fence—what is officially known as the first reserve power—is most welcome. The noble Lord, Lord Eatwell, put the case very clearly, not only for them but for the second reserve power. The Government’s approach to that is so far disappointing.

The Minister said that he believed that a robust ring-fence will work, and so do we, as the commission. It is just that we do not think that it is robust—that is the problem. The point of the second reserve power is to make the ring-fence sufficiently robust that it will carry the day if the first one is over a period of years overwhelmed.

The swirling floods unleashed in 2008 with the banking collapse continue to cause eddies all over our economy, particularly in the most vulnerable parts, which so many of us on these Benches are so deeply involved in supporting. Both the ICB and the PCBS concluded that the most appropriate way in which to reform the structure of the industry today is to have the ring-fence within a parent company. It is experimental —we hear the arguments, and we know so. This partial structural separation, with the added provision of ring-fence, should create a disincentive for banks to attempt to test the limits or game the ring-fence, but “should” is not sufficient.

The advantage of the second reserve power and the first reserve power together, in addition to the ones that the noble Lord, Lord Eatwell, put so eloquently, is that they give a second shot to the gun. If the first reserve power fails, and a bank or two has been forced into full separation but the whole industry is still gaming the system, then you have still got the second reserve power. It appears that the Government’s policy on this is to have only one shot and then to say, following that, “We’ll do something. As yet, we know not what. But we will do something, and it will be something very, very serious”.

--- Later in debate ---

[The Archbishop of Canterbury]

My Lords, Amendment 50 is in my name and those of the noble Lords, Lord Turnbull, Lord Lawson of Blaby and Lord McFall of Alcluith. It clarifies the scope of who the new senior persons regime will apply to, to ensure that it is rightly focused on material risk-takers, not on all bank employees. I will also speak to Amendments 51 and 60 which stand in my name and those of the noble Lords as colleagues on the commission. Amendment 51 sets out the duties relating to the application of the new licensing regime for the banking regime. Amendment 60 also deals with clarifications in the scope of the senior persons regime.

In Committee, on a day that I was unfortunately unable to attend owing to having to baptise someone, my noble friend Lord Turnbull welcomed many of the Government’s proposals relating to the functions of senior managers in banks, including ensuring that senior managers have a statement of responsibilities and the reversal of the burden of proof on whether a person is fit and proper to take up a senior management position. We are very grateful for that. However, my noble friend Lord Turnbull also raised a number of questions that I hope can be adequately answered today, although I realise that there is still a lot of reflection going on in this area.

At that stage, the Bill made no reference to the second tier of the two-tier system proposed by the Parliamentary Commission on Banking Standards: the licensing regime. As the Bill stands, it simply allows the regulator to,

“make rules about the conduct”,

of any “employee of the bank” if it,

“appears … to be necessary or expedient”.

As both Amendment 50 and Amendment 60 deal with our concerns around the application of these rules to any “employee of the bank”, let me turn to the issues that this language raises.

The commissioners argued that a two-tier system is the right way to deal with the issue. The expectations on senior managers must be high. However, it is also right that those who are not part of the senior management of the bank should have high standards. The noble Lord, Lord Eatwell, has addressed this. By making it explicit that the rules of conduct and the definition of misconduct in Clause 22 refer to,

“employees whose actions or behaviour could seriously harm their employer, its reputation or its customers”,

the amendment is aimed at ensuring that the FCA and the PRA focus their regulatory duties on those employees who could inflict the most significant and material damage on their institutions and on the banking system as a whole. These are not always the most senior employees. They could be a junior dealer, fairly new in the business, who, ignoring his internal limits, deals in a way that does great damage both to customers and to his employer. He can be fired and even sent to prison, but the deals are still the responsibility of the bank.

It is therefore necessary to have an amendment that not only widens beyond the senior management, obviously, but narrows so that it does not try to cover all the employees but has a very focused look at those who are going to be able to do the most damage the most often, and who are at highest risk. In our regular and ongoing conversations with the regulators and in the light of their official responses to our work, the commission has not yet been convinced that they would go far enough to ensure that this specific group of material risk-takers would be central in any further regulation and thus that neither the spirit nor the letter of the commission recommendations would be implemented.

Amendment 51 seeks to correct the failings of the approved persons regime that this new two-tier system replaces. The noble Lord, Lord Turnbull, also stated previously that this regime operates mostly as an initial gateway to taking up a post rather than serving as a system through which regulators can ensure the continuing exercise of responsibility.

The amendment also deals with another concern articulated by the noble Lord, Lord Turnbull, that there is still no requirement that the regulator operate a licensing regime. The Bill states that the regulator may make rules relating to conduct if it appears “necessary or expedient”. By setting out explicitly that the,

“relevant authorised person has a duty to ensure that all relevant employees comply with rules of conduct”

made by the regulator, the amendment makes it clear that the rules of conduct for material risk-takers who are not senior management are just as seriously applied as those governing senior management. This gives a clear identity to the new second tier of the system, which is vital if it is to be taken seriously by regulators and banks.

As I said a few moments ago, I am aware of ongoing conversations between my colleagues and the Treasury over a few remaining issues around the implementation of the licensing regime. I believe that these are mostly in relation to the most appropriate names for the licensing regime and the senior persons regime and, I hope, to some of the matters that I have raised this afternoon. I hope that the Minister will be able to update the House on these areas and that the news can be welcomed by myself and my colleagues.

--- Later in debate ---

[Lord Eatwell]

My Lords, in the past, anti-money-laundering legislation tended to be associated with crime, typically drugs or gun-running. These days it has achieved a much greater importance in the sense that it is also associated with terrorism. Therefore, the need to maintain the strictest anti-money-laundering rules and to ensure that they are adequately enforced is an element not only of the maintenance of the law, but of national security. Therefore, I would like to commend my noble friends who have put forward these amendments to strengthen the anti-money-laundering regime and to ensure that appropriate levels of criminality or criminal conduct are so defined within this area that suitable penalties for ignoring anti-money-laundering legislation or laundering money in various ways can be enforced.

I hope the Government will accept these amendments; they are hugely important and send a very important signal to the world that London is not a place in which money-laundering will be tolerated in any shape or form. If the Government are not able to accept them at this stage, I hope they will commit to providing in writing both a commentary on the amendments that my noble friend has put forward and a discussion of the relationship between the new personal responsibility mechanism for bankers and the AML compliance. Surely AML compliance should be included as one of the areas of responsibility that is allocated to a named senior banker under the new senior person regime; it should be in the banking standards rules to which all staff at banks will have to adhere, and one of the conditions of the new remuneration code, which makes deferred pay and bonuses contingent on upholding standards. There is no more important standard than those which my noble friend has dealt with in his amendments. I hope that the Government will be able to accept them—if not actually in form, then in spirit—and commit to bringing forward the appropriate form, if necessary, at Third Reading. The best move, however, would be to accept them now.

[The Archbishop of Canterbury]

I want briefly to add my support to the amendment of the noble Lord, Lord Brennan. Money laundering affects not only the areas that have been mentioned, but in my 10 years’ experience of dealing with conflict management and mitigation work in Africa, it was particularly significant in the ways in which illegal regimes or militias managed to fund and supply themselves. My experience, particularly in some parts of Africa, has shown that London, over time, as one of the deepest and most liquid financial markets on earth has, contrary to the impression given by many senior bankers, played a significant role—not through their collusion in any way at all, but because of its size and the complexity of preventing it. I believe that this amendment and the suggestions put forward by the noble Lord, Lord Eatwell, will contribute extensively to restricting that.

[Lord Flight]

My Lords, all Members of this House are what is known as PEPs for the purposes of anti-money-laundering. This means that any bank has to pay extra-special attention to any of our transactions. It is perfectly justified. The thought crossed my mind—and I have great sympathy with the noble Lord’s aspirations—that money laundering for corrupt purposes, for armaments, for terrorism and the rest of it, does not particularly come from an ordinary British family living in a suburb. It comes very much from parts of the world where such things are more prevalent. There is a case for requiring a more judicious anti-money-laundering regime for any form of transfer that comes from such parts of the world in an analogous fashion to a PEP if we really want to get to grips with the horrific money-laundering that can come from some parts of the world, causing misery to citizens there. As arrangements presently stand, there is no difference between an evil regime somewhere and an ordinary British citizen living in Birmingham.

--- Later in debate ---

Moved by

[The Archbishop of Canterbury]

50: Clause 22, page 35, line 43, at end insert—
“(7) This section applies only in relation to employees whose actions or behaviour could seriously harm their employer, its reputation or its customers.”

[The Archbishop of Canterbury]

I have already spoken to the amendment standing in my name. The members of the commission are delighted that the Government are broadly finding agreement with their recommendations, and on all the areas on which the Minister spoke we hope and expect that the government amendments at Third Reading will reflect closely the assurances that we have been given. To ensure that we get this right, we re-emphasise the need to see the amendments as early as possible and reserve the possibility, if we are not content and feel that they do not reflect what has been said, of returning to them at Third Reading. If I have those assurances, I will be happy to withdraw the amendment. I beg to move.

[Lord Newby]

You have those assurances.

[The Archbishop of Canterbury]

I beg leave to withdraw the amendment.

Amendment 50 withdrawn.

Financial Services (Banking Reform) Bill

Lord Archbishop of Canterbury Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Newby]

My Lords, I would not want the noble Lord to think that the Government were being complacent at all about this issue. In particular, I would not want him to think that we were being complacent about the issue of culture. Of necessity, today we have been talking about legislative change but, as we said at an earlier stage, and as the most reverend Primate reminded us at an earlier stage in this debate, the whole question of culture is as important as legislation.

What constitutes culture is a broad, almost philosophical question, but one key thing that is already evident is that some of the more senior managers of some of the bigger banks have recognised that, if we are to get the kind of banking system that the population as a whole is looking for, they need to change their ways. The chief executive of Barclays set out his stall when he was appointed. The way in which he has sought to instil a new culture through the organisation is very impressive. But one challenge that he has, no doubt—we see this not just in the banks but across the world, whenever there is any big change in the way things happen—is how to get a cultural change trickling down the organisation. It is not just a matter of the chief executive, for whom making a statement about culture is relatively straightforward, making that statement; that is happening, to a very acceptable degree. But how can we ensure that the culture that we require of everybody in the banks changes?

One way in which that is going to happen is, one hopes, through the new statement of principles of banking practice that we discussed earlier. If everybody knows when they go into a bank that they are expected to behave in a different way than possibly they thought in the past and they know that, unless they follow a whole series of principles there on a piece of paper, they are liable for disciplinary procedure, they are likely to behave in a more acceptable manner. I am sure that that would be welcome across the country.

The other big thing that we believe can help in terms of culture is the promotion of the mutuals sector that we were talking about earlier. The Nationwide Building Society has always been at the top of the list for customer satisfaction levels, and that shows no sign of diminishing. To the extent that the building society movement continues to grow, so will the culture improve across the system as a whole.

I realise that I have strayed slightly from where the noble Lord started out in terms of derivatives contracts. But for most of the population, it is at the retail end that culture affects them.

[The Archbishop of Canterbury]

My Lords, I am slightly surprised that the Minister should be resistant to what seems to me a very reasonable amendment. One of the dangers that we have faced in the markets over many years is that of parallel markets. The derivatives markets are, as we know, opaque, as has already been remarked on, and we examined them in some detail in the banking standards commission. The computer-driven markets are also very opaque. We examined those markets and remarked that they would constitute the next great crash. When you have these gambling markets on the side that no one quite understands or knows who is participating in them, and which often take place offshore, it seems to me that at the very least there are grounds to hold an inquiry into the effect they are having on market prices through their impact on the shadow market—we should also examine the psychology of the dealers—and on those involved directly in the more regulated market.

One of the great lessons learnt from the events of 2008 was the ineffectiveness of the clearing system for over-the-counter derivatives, which there was no means of settling. That has been one of the major problems for the liquidators of Lehmans. The gambling markets have much the same problem. We are setting up mechanisms—they are being set up internationally—to deal with the settlement of derivatives contracts, but nothing is being done in this parallel market. The noble Lord, Lord Phillips, has made a very useful point, albeit that the hour is late and it is almost 10.40 pm, which may enable this issue to become slightly clearer in terms of understanding what can be done.

[Lord Phillips of Sudbury]

My Lords, I am grateful to the most reverend Primate and to the noble Lord, Lord McFall. However, I am not so grateful to my noble friend the Minister, as I thought that he rather missed the point. The fact that Tom, Dick and Harry can go down to the betting shop or the local casino, run up a debt and be sued for it has nothing whatever to do with the amendment that I propose tonight. As noble Lords have commented, and as is obvious, we are dealing here with huge sums of our money which are gambled, often to the excessive benefit of the gamblers. We do not know how they function and have not looked carefully and closely, as we should, at the impact of this. I refer not so much to the economic impact, although it may be found that the destabilising effects of this market are greater than we realise, but to the ethical, cultural and social effects. For the life of me, I cannot see why a liberal-minded Government should want to staunch such an investigation. I see no downside to it; it would not be expensive and would be simple to operate. It would all be within the purview of the Treasury and it might yield some surprising and valuable results. I therefore hope that the Minister will give this a little further thought, as I am very inclined to bring this back on Report.

Financial Services (Banking Reform) Bill

Lord Archbishop of Canterbury Excerpts

Tuesday 8th October 2013 Lords Chamber

However, it is not just a question of finding clever ways round or lobbying in this instance by particular banks but also, as has been widely pointed out, that the whole structure may not work. If it does not, we have to go for industry-wide separation and that is what this is about. I am not going to talk now about proprietary trading, because we are going to come to it later, but as the issue has been raised I will just mention it now even though it is not really relevant to this group. Proprietary trading has been separated out in the United States. We made recommendations about that too in an earlier report. The final report was not an attempt to sum up everything: we did it in tranches. This comes back to the question of culture. Maybe I am old-fashioned but I regard one of the essential elements of banking culture to be service to clients. As the whole essence of proprietary trading is that there is no client, the culture of service to clients cannot possibly exist. It is totally alien and the banks are literally in it for themselves. That is a separate issue. The important thing now is that there should be a route to complete separation if too much ingenuity is shown, if there is too much successful lobbying or if the whole system is shown to be flawed, which I suspect will be the case for a number of reasons which noble Lords have already mentioned. We will abandon this route at our peril. I fear that if we do, we will deeply regret it in the future.

[The Archbishop of Canterbury]

My Lords, I apologise that I, too, was not here for Second Reading as I was at the funeral of a close friend. I speak as a member of the PCBS, having had the privilege of a year of lessons from the other members, especially noble Lords here today, and the great pleasure of being rung up by the noble Lord, Lord Lawson, quite frequently at weekends, to explain how I should think about a particular subject, which he has done with great eloquence as well today.

I agree entirely with the speeches made by the noble Lord, Lord Turnbull, twice, and both speeches by the noble Lord, Lord Lawson, which have put the position very clearly. It must be a very long time—and my experience of this House is very limited—since a solution to a major problem was put forward with such a noticeable lack of enthusiasm. Almost everyone who has spoken about the ring-fence has damned it with faint praise, to put it at its most polite. The noble Baroness, Lady Cohen, simply eliminated it quite quickly and very clearly. We are in danger of getting lost in looking at the regulation and forgetting what the regulation is trying to do. This is about a question of a culture and ethics, not detailed rules. We all remember Bob Diamond, the chief executive of Barclays, saying that culture is what happens when no one is looking.

We know what happened when no one was looking in the culture of some parts of the banking industry—they fixed LIBOR, overgeared and gamed any system of regulation going. All of that was dealt with under regulatory processes that did not work. They still fixed LIBOR, gamed the system and did all kinds of other things. The force of culture in those institutions made it hard to challenge and it is very noticeable that over 10 years when this was going on at its worst the number of people who blew whistles on this was almost zero. The culture made it very hard to discern that what you were doing was not right.

The noble Lord, Lord Lawson, referred to the dreadful effect of the meltdown we experienced in 2008—as was said earlier, five years almost to the day. The terrible cost of that catastrophe must not happen again. That is what we are trying to do. It has affected the City of London for a while but the far-flung areas of deprivation and poverty in our country suffered grievous blows of further damage from which they are still in the process not even of looking for recovery. The damage when the culture goes wrong is not localised. It is not just about the City; it is about people far away who know very little about what is going on there but find that they cannot raise money, that they cannot do their business and that their banking disappears locally. The vast structures of reform that have been and are being passed through Parliament, including this Bill, and that are passing through the regulators and the industry, show that there is a great failure of trust—and trust will be re-established not by regulation but by culture.

We have already heard the problems expressed very clearly about the ring-fence. The noble Baroness expressed herself very pointedly and precisely. But one thing that we found in discussing this issue in the Parliamentary Commission on Banking Standards is that separation is almost as hard to work out as a ring-fence, because you have to decide which bits get separated into which bits. The next thing that happens is that the brilliant merchant bankers, as it was put a few minutes ago, get between the wall and the wallpaper—that, I think, was the memorable phrase—and start putting other bits into the wrong bit. They game the system just as much with separation as with a ring-fence, so I do not think that that is a simple solution.

We have had the prodigal son and elements of faith from the noble Lord, Lord McFall, but we have the Trappist solution here. You live in the same community, but you do not talk; that is how the ring-fence is meant to work. The amendment—and this is why the element of culture is so important—increases vastly the voltage of the ring-fence. If it has to be used, like much of these forms of regulation, it will have failed to some degree. But it says that, if the industry loses its way in ethics and culture, as it did in the early years of this century, there is catastrophe in regulatory terms. Banks will be split up; people will come in and take them apart. The Government have argued that such a drastic step should require further primary legislation, but that argument seems to carry very little weight. The amendment is merely a rational extension to existing provisions and ensures that the banking industry realises that poor culture leads to fatal shocks, not to a little buzz in the fingers, or to lengthy debates in future on primary legislation. It will concentrate minds.

There is no doubt that we are seeing good things happen in the culture of a number of banking institutions. The new leadership in a number of banks is changing the culture very effectively. A professional standards body is being set up. I believe that this is not merely temporary self-interest but, in many cases, a deep sense that there needs to be a change of culture and values. But that is what is happening in this generation, now; it must be reinforced with firm boundaries to the ring fence, with very serious consequences if you walk into it to see what will happen. The amendment will reinforce that change of culture and act as a permanent reminder to the banking industry of the danger of slipping back into the bad old ways. Not to have that reality signalling the boundaries of acceptable ethics and culture is to encourage behaviour that looks first to what is legal, as has happened for a number of years, and never to ask the question, “What is right?”. To have banks ask what is right rather than what is merely legal would be good not only for the bank but for the whole society that it exists to serve, as the noble Lord, Lord Lawson, said.

[Lord Phillips of Sudbury (LD)]

My Lords, I entirely agree with what the most reverend Primate has just said. As a lawyer of far more years than I am willing to admit, I wonder whether sometimes the legislation that we pass in this place, with the very best of intentions, has in some strange and horrific way an almost contrary effect, for the reason given by the most reverend Primate—namely, that people look at the law rather than what is behind the law and look at the small print instead of the large issues. In my professional life, I have seen this get worse and worse.

One argument above all others persuades me that this amendment is a good one. By and large, I am persuaded that it will leave us with a simpler, more workable outcome than the ring-fence arrangements, which seem to me, even in my most legalistic frame of mind, to be of barbaric complexity. These will be bad enough, but they are significantly more straightforward, more comprehensible and, in a way, more down to earth than the ring-fencing. So I support the amendment.

Financial Services Bill

Lord Archbishop of Canterbury Excerpts

Wednesday 28th November 2012 Lords Chamber

[Lord Kirkwood of Kirkhope]

My Lords, if I may interrupt the exchanges between the two Front Benches, this is a very welcome development from the Government. I absolutely support the course of action that is being taken and I can assure the noble Lord, Lord Mitchell, that I have the same concerns as him in terms of the argument he mounted, but this is a more sensible way to proceed.

I was pleased that the noble Lord, Lord Mitchell emphasised the fact that access to credit for low-income households is an important part of some of the changes we are introducing to the benefit system over the next five to 10 years. As we know, because colleagues have had important discussions about this matter, one of the changes brought into being by universal credit is that credit for all benefits taken together is paid, not weekly or fortnightly—as we have been used to in the past—but monthly. It will be a dramatic change for many low-income households that are used to weekly or fortnightly management of cash budgets in order to get through payment of their weekly responsibilities without getting into debt. When universal credit is fully rolled out in 2018—so we have a little time to get this right—I am absolutely certain that families will need access to small amounts of money to see them through when benefits either run out or, as I think is inevitable, fail to be paid. At the moment, if you do not get your housing benefit, your jobseeker’s allowance can tide you through. If you do not get your universal credit, you get nothing. If you get nothing for one month it is really serious; if you do not get the benefit paid for two months, you are in penury. Controlled access to this kind of loan is an important part of the process and we must not throw the baby out with the bathwater.

I know, as well as anybody in this House, the effect of loan sharks and the many sharp practices which must be controlled. What I cannot understand—this is the reason why I rose at this moment, to say to my noble friend that his suggestion is very welcome—is why we do not have a statutory code of conduct for licensed practitioners who are members of the Consumer Finance Association. If they had licences and they breached the code of conduct, whether it was about inappropriate, usurious rates of interest or criminal methods of collecting outstanding amounts of money, their licence would be withdrawn. I am just about to finish a period as a lay member of the General Medical Council so I know what a regulator can do and what fitness to practise means to a medical practitioner who is on the shady end of clinical practice, and it works.

In taking away this amendment, I hope the noble Lord, Lord Mitchell, will look at the Bristol work, which is a serious piece of work—I know because I have checked—that will contribute a lot to the debate and which many colleagues in this House might like to get access to before they make a final decision on this matter. I hope that he will weigh that in the balance. I hope the Minister, when he comes to recast the amendment—bilaterally, I trust—will think seriously about whether there could be some way of at least not ruling out the FCA adopting a statutory code of practice which would meet all the legitimate concerns that are coming from all sides of the House. I hope common sense will prevail and I hope that the noble Lord, Lord Mitchell, feels able, in all conscience, to withdraw the amendment. I can assure him that there will be as much pressure put on from this side of the House as is coming from that side to get this thing right before the Bill is passed.

[The Lord Bishop of Durham]

My Lords, I welcome with other Members of the House the statement made by the noble Lord, Lord Sassoon. One of the points made by the noble Lord, Lord Mitchell, in his excellent speech was about the dysfunctionality of the market. As was said, interference and capping of interest rates normally drive people towards loan sharks with unintended consequences of a very serious order, as we see in many parts of the country at the moment. However, if you look at the profits being earned in this market, it is clear that the barriers to entry are so high that there is absolutely no way in which people can come in and start shaving off the abnormal rates being achieved through participation in this market. If it was working, the interest rates would drop—it is as simple as that. The rates are clearly usurious—to use an old-fashioned expression. It used to be said in the old days that you could not take away people’s beds and cloaks because they were essential for life—that is the Hebrew Scriptures; today, equivalent things are being taken away as a result of those very high rates of interest. It is a moral case, and it is bad for the clients and bad for all of us in this country when it is permitted to happen.

I hope that over the next few years, thanks to two other amendments that have been agreed by the Government over the past few weeks during the Report stage—one puts an obligation on the FCA to look at access to finance in areas of deprivation and the other, through other means, will enable the FCA to know exactly what is happening in terms of lending in areas of deprivation—we will put together in this House a package of measures that will enable this market to be effective. But that will take time. The proposed amendment that will come next week will be permissive, not obligatory, and will enable regulatory authorities to ensure that, in the interim, there is not this abnormal rate seeking which has been so damaging in so many of our areas, including many in my own diocese.