Financial Services (Banking Reform) Bill

Debate between Lord Bishop of Birmingham and Lord Phillips of Sudbury

Wednesday 23rd October 2013 Lords Chamber

[The Lord Bishop of Birmingham]

My Lords, I rise to speak on behalf of the most reverend Primate the Archbishop of Canterbury. He regrets very much that he cannot be in his seat today, but it is seldom that one has the opportunity to offer Christian baptism to a young couple, particularly when their child is a future heir to the throne of this country. None the less, I know that he, like me, would want to echo the support for these amendments, which have been spoken to by the noble Lords, Lord Turnbull and Lord Eatwell. In a sense, I now regret that I am here doing my duty, because I could not have put it better myself.

In the wake of the economic debacles following 2008, one of the greatest areas of concern among the public was the apparent lack of change in the financial fortunes of those whom they viewed as being most responsible for the banking crisis. As we have heard, the salaries of senior bankers seem to remain high and bonus levels have quickly regained their old levels, while for many ordinary people and ordinary businesses across the country, it has been a matter of tightening the belt and looking very seriously at difficult household and commercial budget decisions. The submission of the Church of England’s Mission and Public Affairs Council to the banking commission said of this disparity between what I am going to talk about as two cultures that it,

“has gravely harmed the public perception of banking”.

Recognition of the disjunction between these disconnected groups—the wider public, who need the services of good banks, and those who lead those banks—is, I believe, at the heart of what these amendments seek to achieve. It is about implementing sensible measures, and we have been very sensible this afternoon, one with another, about what needs to be done: striking an appropriate balance between risk and reward; looking to the long-term benefits of decisions made by key figures in the banks; and giving incentives for a trustworthy and productive culture, rather than one that promotes excessive risks, ending in disaster. Deferred remuneration, which we have in this proposal, and clawback provisions —central components of the proposed remuneration code—are technical terms, but at the heart of these principles is a simple question: what sort of culture, as has been mentioned by several noble Lords, do we want to establish in these organisations? As the most reverend Primate the Archbishop of Canterbury has already pointed out to the Committee, one rather well known former banking executive said that there had been a culture in the banks focused on what happened when people were not looking.

There is now an increasing interest, including in your Lordships’ House, in culture, and we heard from the noble Lord, Lord Lawson, about the two principles of prudence and customer-centred or customer-focused culture. I hope that both the Government and the banks will give a high priority to insisting on these profound changes in culture. Indeed, at a regional level—and this may seem a little parochial for the high level of discussion that we are engaged in this afternoon—in Birmingham and the Midlands, well resourced bank employees from well resourced organisations, their banks, are already looking way beyond their computer screens and boardrooms to wider and deeper responsibilities in the community. They are looking at simple things such as finding and supporting young entrepreneurs, and giving basic financial skills to local citizens—I have said before in your Lordships’ House that there are 100,000 citizens in Birmingham who do not have a bank account—and they are even getting involved in making sure that future employees of the bank in our local primary schools have enough food at breakfast so that they can learn the basic skills of their education.

These tentative cross-cultural relationships and initiatives give me hope not only that executives in banks will run sound businesses but that, as they experience and affect for good the lives of ordinary citizens, including those who are much less protected than themselves in ordinary life, the worthy values printed in the foyers of the headquarters of many of our large banks may at last begin to enter not just the policies of the banks and their structures and cultures but the policies, structures and cultures of the leading executives in those banks. I shall mention just one of those banks where these values appear; in fact, I may not mention which bank it is because I think that noble Lords should try to work out which one I am talking about. Those values read: “Serving Customers”; “Working Together”; “Doing the Right Thing”—a new one that has been inserted; and, fourthly, “Thinking Long Term”. It is in the policies, structures and cultures of the leading executives in those banks that I believe culture change will really happen. We have high expectations of that change but, as many noble Lords have said, it needs to be undergirded by legislation. It cannot be left simply to hope or chance or to the individual motivation of altruistic colleagues.

Therefore, I welcome that in both amendments we find provisions to limit sales-based incentives at both the individual and business unit level. In the PPI scandal, we saw what happens when banks come to value the sale of financial products as the objective of the whole exercise, with little or no thought for customers’ needs. Banks are now having to take responsibility for this culture of “selling at any cost” and the new remuneration code before us seeks to make explicit the realisation that an excessively sales-based culture can be very damaging both to the financial well-being of customers and to the reputation of the banks.

I hope that my noble friend the Minister will recognise that this amendment is not seeking to overly restrict remuneration, devalue the work that our senior bankers undertake or unduly affect the competitiveness of our world-beating banking sector. What it does is to set out some of the values and virtues that should underlie the banking system: long-term risk management; a fair balance between risk and rewards; valuing customer needs above the sale; and, above all, valuing collective interest beyond the individual or the unit, or even the bank itself. This will be good for both business and society.

[Lord Phillips of Sudbury]

My Lords, I commend the mover of the amendment, the noble Lord, Lord Turnbull. If, as I assume, this matter is brought back at Report, I should like to raise two questions. The first concerns the fact that the code is to be solely the responsibility of the FCA and the PRA. I wonder whether it should have a broader base than that. The City is a real bubble. The two authorities are part of that bubble, as are most of the people working in them. Everybody—particularly the noble Lord, Lord Turnbull, in moving the amendment—has said that we have to break out of this small enclave to understand the wider national, social and cultural impact of what is going on in the square mile. I just throw that idea out.

My second question concerns proposed new subsection (3)(a) in the amendment, which requires that those subject to the code shall,

“receive a proportion of their remuneration in the form of variable remuneration”,

although it does allow specific exceptions. For the life of me, I do not see why that is being insisted upon. Twenty-five years ago, most of the senior bank executives and those on the boards of banks did not receive a variable element in their remuneration at all. The problem that the amendment seeks to address was not present then, or at least not remotely to the degree that it now is. Therefore, again, if this matter is to be brought back at Report, I should be grateful if more thought could be given to the need for subsection (3)(a).