Bank of England and Financial Services Bill [HL]

Lord Ashton of Hyde Excerpts

Tuesday 3rd May 2016 Lords Chamber

6: Clause 11, page 11, line 24, at end insert—
“( ) In the case of an examination under section 7D(1)(b), subsection (1) also applies to documents in the custody or under the control of—
(a) the company to which the examination relates;
(b) the auditor or auditors of that company.”

[Lord Ashton of Hyde (Con)]

My Lords, I beg to move that this House do agree with the Commons in their Amendments 1 to 6. In moving them, I shall speak also to Amendment 12.

In the other place, the Government made small changes to the provisions relating to the National Audit Office’s powers to carry out value-for-money studies of the Bank. As we have discussed in previous debates, these clauses deliver an important increase in the accountability of the Bank and its operations.

The NAO’s new powers are subject to a bespoke policy carve-out, designed to protect the independence of the Bank’s policy decisions. The Government have made two small but important technical changes to ensure that the NAO’s new powers are applied consistently across all areas of the Bank. These changes have been agreed by both the NAO and the Bank.

The original drafting of the Bill did not give the NAO the power to carry out value-for-money reviews of Bank subsidiaries unless they were indemnified by the Government. This was not the Government’s policy intention.

The first change ensures that the NAO is able to carry out value-for-money studies, not only of the Bank itself, but also of all the Bank’s subsidiaries, whether or not they are indemnified by the Government. The amended clauses will also allow the NAO to carry out value-for-money studies of any other company in which the Bank has an interest, but only if that company is indemnified by the Government.

The second change ensures that the policy carve-out applies consistently across all areas of the Bank. Under the previous drafting, the NAO’s powers to review the Bank’s indemnified subsidiaries and other companies came from the National Audit Act 1983. That means that its review of these companies would not be covered by the policy carve-out. The Government have amended the Bill to address this inconsistency.

On Amendment 12, the Government also made a small amendment to the clauses in the Bill relating to the Monetary Policy Committee. The Bill reduces the minimum frequency of MPC meetings from monthly meetings to “at least 8” meetings in every calendar year. The Warsh review assessed that this new timetable,

“strikes the balance between timeliness and probity”,

and brings the MPC into line with other leading central banks, including the US Federal Reserve and the European Central Bank. The amendment made in the other place adjusts the reporting requirements of the MPC to match the new meeting timetable. At the moment, it is required to submit a monthly report and so, without this change, the committee would be obliged to produce reports even when it has not had meetings.

I hope that noble Lords will agree that these are sensible changes, and I commend the amendments to the House.

[Lord Higgins (Con)]

My Lords, I had not realised until now that I am a wild enthusiast for a bespoke policy carve-out. The amendments reflect the considerable extended debates that we have had previously in your Lordships’ House, and I am very glad that they are now effectively implemented by the amendments that we have in front of us. There was a real problem with the relationship between the National Audit Office and the Bank of England. It is very fortunate that that seems to have been resolved now in a way that is satisfactory to both sides.

In a former incarnation, I was much involved in extending powers of the National Audit Office so that it did not merely act as an auditor but could look into the economy, efficiency and effectiveness of the bodies that it was investigating. I certainly think that there is a strong case for it including the Bank of England in its remit. To clarify one point on this, there are some aspects of the Bank’s operation that really need to be looked at. The present Governor of the Bank of England has taken to issuing forward guidance on interest rates, which I must say has not been an enormous success. Anyone who has followed that advice will almost certainly have lost money, depending on the precise timing. I think that he should consider very carefully whether it is an appropriate approach for the Bank to take—and perhaps the National Audit Office should do so, too.

I am not entirely clear what is covered by the expression “Bank company”. In particular, does it include the body—I have forgotten its name for a second—responsible for managing the enormous quantity of gilts purchased as a result of the quantitative easing operation? Will the National Audit Office have the power to inquire into how that very substantive—indeed, enormous—quantity of gilts is managed?

Overall, however, this is a very welcome change—and I am particularly glad that the Treasury is proposing to finance the operation. As it pointed out in the notes that come with the Bill, it should increase the likelihood of a value-for-money study being undertaken relative to the Bank of England. This change reflects the work that your Lordships did at earlier stages, and is very much to be welcomed.

[Lord Davies of Oldham (Lab)]

My Lords, we have come a considerable distance from what was in the original draft of the Bill that came before us on the role of the National Audit Office. Quite rightly, the Government have responded to the very strong opinion of this House that the proposals in the Bill were far from satisfactory, and we are grateful to them for the extent to which they have moved on these issues. This House played a significant role in identifying the real difficulties in their original Bill for the National Audit Office being remotely able to carry out its proper duty in assessing whether on all occasions the Bank of England was providing value for money.

The noble Lord, Lord Higgins, has moved across an important boundary in indicating that the NAO ought also to look at issues of policy regarding the Bank, which we know the Bank is resistant to. The Government still maintain that position, although we sought to press that here and my colleagues in the Commons were interested in the issue as well, not least if issues cropped up under freedom of information queries, where the role of the NAO in relation to the Bank would inevitably be limited under the proposal.

Nevertheless, the Government have moved a considerable distance on this matter. We are pleased to say that although not all our proposals, here and in the other place, were accepted by the Government, we nevertheless feel that significant progress has been made in that the NAO has been able to draw up with the Bank of England a memorandum of understanding on how these issues are to be tackled in future. We appreciate the fact that the Government have moved a considerable way from their original proposals to a much more satisfactory position, although I will listen with great interest to the Minister’s response to the noble Lord, Lord Higgins.

[Lord Ashton of Hyde]

My Lords, I am grateful to my noble friend Lord Higgins and the noble Lord, Lord Davies, for their comments and for their support for these amendments. My noble friend’s views on the governor’s role in giving forward views are well known; he has expressed them before in debate on the Bill. We have listened to his views but they are not specifically a part of this Bill. On the question of whether “Bank company” includes the asset purchase facility and therefore allows the NAO to make value-for-money reviews, the answer is yes. Amendment 3 is the amendment that deals with that.

I am glad that the noble Lord, Lord Davies, has acknowledged that we have been in listening mode and that we have moved. We are always happy to listen to sensible suggestions, and I am grateful for his acknowledgement of that.

Motion on Amendments 1 to 6 agreed.

--- Later in debate ---

Moved by

[Lord Ashton of Hyde]

That this House do agree with the Commons in their Amendment 9.

9: After Clause 27, insert the following new Clause—
“Money laundering
(1) In any regulations or orders transposing money laundering measures contained within Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 (or in relation to any subsequent EU amending or successor measure) the Secretary of State shall have a duty to ensure, insofar as such regulations relate to institutions regulated by the Financial Conduct Authority—
(a) reasonable regard and due prominence is given to—
(i) Preambular (33),
(ii) Article 13(2),
(iii) Article 15, and
(iv) Article 16 and Annex II;
(b) clarity is achieved with respect to the meaning and interpretation of “prominent public function” in the context of money laundering;
(c) reasonable regard and due prominence is given to Article 22 which recognises that a PEP may have no prominent public function; and
(d) any interpretation of “adequate” in Article 20(b)(ii), and “enhanced” in Article 20(b)(iii) takes account of, and gives due prominence to, the provisions in Article 13 on risk sensitivity.
(2) The Financial Services and Markets Act 2000 is amended as follows.
(3) After Part 20B insert—
“PART 20C
MONEY LAUNDERING
333U Anti-money laundering: guidance
(1) The FCA must, prior to relevant regulations coming into force, issue guidance to regulated entities on the definition of one or more categories of “politically exposed persons” (“PEPs”).
(2) Guidance under subsection (1) must include, but need not be limited to—
(a) a requirement to take a proportional, risk-based and differentiated approach to conducting transactions or business relationships with each category of PEP that may be defined; and
(b) specified categories of persons to be—
(i) included and
(ii) excluded
from any definitions of PEPs.
(3) The Secretary of State may, by regulation, make provision about—
(a) the guidance issued, amended and/or reissued under
subsection (1);
(b) arrangements for complaints about the treatment of individuals by regulated entities to be received, assessed and adjudicated by the FCA, where—
(i) a person was treated as though he or she was a PEP (and he or she was not),
(ii) a person who is a PEP was treated unreasonably in disregard of guidance under subsection (1), particularly in regard to specific elements required under subsection (2)(a), or
(iii) a person was refused a business relationship solely on the basis of that he or she is a PEP,
(c) circumstances in which—
(i) compensation payments are to be required from, or
(ii) financial penalties are to be imposed on regulated entities where complaints under paragraph (b) are upheld.
(4) For the purposes of subsection (1), “relevant regulations” means regulations transposing into UK law measures that EU Member States are required to implement to combat money-laundering (or subsequent regulations amending those regulations) that contain references to PEPs.
(5) The power to make regulations under subsection (3) is exercisable by statutory instrument which may only be made after a draft of any such instrument has been laid before, and approved by a resolution of, each House of Parliament.””

[Lord Ashton of Hyde]

My Lords, the amendment addresses the important question of how the banks are treating politically exposed persons, or PEPs, in the light of new global standards for anti-money-laundering and counterterrorist financing. I know that this issue has interested many noble Lords, directly and in respect of their families and close associates. I can tell the House that the Government share those concerns, which is why we have accepted this amendment to the Bill.

The Government intend to implement new money-laundering regulations by June 2017 at the latest. We will consult on the new regulations later this year. Organised crime, international corruption and terrorism cross national borders, so co-ordinating with our neighbours and Governments around the world is vital. We do this through the Financial Action Task Force, which revised its global minimum standards in 2012. At the same time as being robust, the UK’s anti-money-laundering and counterterrorist financing regime must be proportionate if it is to be effective and command public support. Resources must be focused on higher-risk areas and individuals, in line with accepted practice.

The Government have always encouraged banks to take a sensible and proportionate approach to this issue. They should apply appropriate “know your customer” measures that are tailored to reflect the risk posed by individual customers. I believe that several Members of this House and the other place have experienced difficulties with their bank accounts. No one should have their banking facilities refused simply because they have been identified as a PEP.

In addition to its focus on proportionality, the amendment addresses guidance on PEPs and the handling of certain PEP complaints. The Government will consult later this year on new money-laundering regulations and we will ask specific questions about the provision of guidance and the adjudication process. We will fully consider the letters that noble Lords have already sent to us on this topic when preparing our response to the consultation.

The Government’s anti-money laundering and counterterrorist financing regime is making the UK a more hostile environment for illicit finance. The amendment will ensure that a strong message is sent out about applying the rules in a proportionate and sensible manner and I commend it to the House. I beg to move.

[Lord Sharkey]

My Lords, as the Minister said, this House has frequently discussed the problems with the banks’ treatment of customers under their interpretation of the EU PEP rules. Each time we have done so, it has been quite clear that there are plenty of examples of banks frequently acting aggressively and disproportionately. It is quite clear that by unreasonably closing accounts, or threatening to, they cause real distress and the Government agree, as the Minister said, that the banks are ultimately at fault. In response to an Oral Question from my noble friend Lord Clement-Jones on 14 October 2014, the Minister, the noble Lord, Lord Deighton, said:

“I absolutely accept the criticisms that are made where banks behave disproportionately. It happens too often and we should work with them to fix that”.—[Official Report, 14/10/14; col. 115.]

It clearly has not been fixed and is probably getting worse as the banks anticipate the new EU directive.

Discussing this amendment on Report in the Commons on 19 April, Harriet Baldwin said that,

“if the transposition of the EU directive into domestic legislation is mishandled, a wide range of other people could be affected. It could adversely affect tens of thousands of people, including civil servants, city workers and even, as has been described, the families of armed forces officers serving our country abroad”.—[Official Report, Commons, 19/4/16; col. 853.]

The Minister was right to warn of this possibility.

On Sunday, the Sunday Times ran a large and prominent article on the case of Alan Charlton. Mr Charlton retired from the FCO three years ago after 35 years’ service. He is our former ambassador to Brazil. His bank threatened to shut down his account as part of what the paper describes as the bank’s “crack-down” on PEPs. It is a little ironic that the bank in question is HSBC, so recently fined $1.9 billion for being what the US Senate described as,

“a conduit for drug kingpins and rogue nations”.

It is a case of closing the wrong stable door.

--- Later in debate ---

[Lord Tunnicliffe (Lab)]

My Lords, I, too, have some sympathy with the concern about PEPs. My bank managed to be very surprised that my son had repaid a debt. There is no question that banks have overreacted in this area. In general, banks seem to overreact to regulation. They do not seem properly to understand proportionality at individual level. It reminds one that one does not have a right to a bank account, and suddenly one realises that one would be a non-person without one. So it is right that we look for some protection for politically exposed persons—who could be in a very widespread group.

However, one must not lose sight of the fact that the Panama papers revealed just how widespread money laundering is and how much of it happens among politically exposed persons. As far as I know, no politically exposed person has been revealed in the UK, but in the wider world money laundering is a fact and it feeds terrorism and corruption.

We welcome this amendment as an effort to produce proper proportionality on this subject, but the balance must be maintained—and, just as we must be concerned about PEPs, we must be concerned about potential crime and the maintenance of public confidence in officials.

[Lord Ashton of Hyde]

My Lords, I am grateful to noble Lords who have replied. There seems to be unanimity that this is a serious issue that needs addressing and at least a partial acknowledgement that this is a start. We have accepted this amendment because we acknowledge that there needs to be a sensible approach to this problem.

The noble Lord, Lord Sharkey, mentioned that guidance exists already. In many of my replies to noble Lords, I am going to fall back on the fact that, having begun the process with this amendment, a lot will depend on the consultation about the regulations that we will bring in before 2017. I urge noble Lords to take part in that consultation so that all the points that have been made today and the concerns that people have heard about can be brought into that consultation so that we can get a sensible set of regulations, which this House will be able to look at, in place before 2017.

The noble Lord, Lord Sharkey, mentioned penalties. Again, the degree of penalties will obviously be part of the consultation and will be included in the regulations when they come in due course.

[Baroness Browning (Con)]

Can my noble friend confirm to the House that the consultation will not be a three-week consultation issued in the middle of the long Summer Recess?

[Lord Ashton of Hyde]

The consultation will be conducted under the Cabinet Office rules for consultations—so it will be more than three weeks. I cannot today tell noble Lords when it is going to start. The Treasury accepts that this is an important issue and has accepted the amendment. It wants people to contribute to the consultation—so, although I cannot give an exact date for when it will start, it will be a proper consultation.

[Lord Naseby (Con)]

My noble friend says that he is not in a position to indicate when the consultation shall start—but we are in May 2016, nearly half way through the year. That suggests that, if we are not very careful, it will be the back end of 2017 before anything happens. The noble Baroness, Lady Kramer, raised a particular family issue; and the noble Lord, Lord Wright, who is not in his place, raised one last year, if not the year before, relating to one son in Singapore and another in the USA. This is not a matter that we can just put into the long grass. I know that my noble friend is not doing that, but it is getting very near the outfield. I suggest that he should come back to the House and tell us exactly when the consultation will start and when we will get some substantive recommendations out of it.

[Lord Ashton of Hyde]

I can reassure my noble friend, because the date that the regulations have to be brought in is June 2017, so the consultation will take place in the second half of this year. It will be implemented before June 2017. I think that that is pretty clear and there is no question of it being put into the long grass. I have subsequently learned that the consultation will be 12 weeks and it will be after July—so I hope that my noble friend will be reassured by that.

My noble friend Lord Flight basically implied that any enhanced due diligence for all Peers, MPs and MEPs would be ridiculous. The directive and the Financial Action Task Force do not agree. They think that anyone who is an MP should have some form of enhanced due diligence. Of course, there is a huge range that can take place within enhanced due diligence. The point of the amendment and the regulations will be to make sure that there is a true difference. A Back-Bench Peer who may not have the position to influence corrupt acts—although every Peer and MP has access to people, so they are not exactly like every citizen—will have some form of enhanced due diligence, but it should be proportionate. The way that this will be done will ensure that.

The banks are in absolutely no doubt about the Government’s view on this. The Chancellor has personally written to the heads of the large banks, and the Economic Secretary to the Treasury has written to colleagues. Every bank now has a contact person with whom Peers, MPs and MEPs can get in touch if they feel that the enhanced due diligence is too great.

[Lord Higgins]

Before my noble friend comes to his peroration, perhaps I could ask this. All this consultation is taking place against the background of an impending referendum on whether we remain a member of the European Union. Am I wrong in thinking that all this depends on European directives, and that if the vote were to go in favour of our leaving the European Union we would have to look at the whole thing again?

[Lord Ashton of Hyde]

Even if that took place, we would be a member of the European Union for at least two years under the arrangements. But this is based on our staying in; if we did not, we would have to look at a great many things in addition to anti-money laundering procedures—and I am not sure that this would even be top of the list.

I am sorry to hear about the problems that the noble Baroness, Lady Kramer, has had with her family—but, as I said, the proportional nature of the enhanced due diligence for politically exposed people will be taken account of. The amendment is a good start and I commend it to the House.

Motion on Amendment 9 agreed.