Economy: The Growth Plan 2022

Lord Carrington of Fulham Excerpts

Monday 10th October 2022 Lords Chamber

[Lord Carrington of Fulham (Con)]

My Lords, I start by congratulating my noble friend the Minister on her appointment. I add a note of sadness as well, because we will miss her excellent leadership on the Built Environment Select Committee, but I am sure that we will get great things from her going forward.

There are many lessons to come out of the mini-Budget, perhaps the most important one well understood by people who have worked in the financial markets, is “No surprises”. All markets get spooked when the unexpected happens. Global financial markets lurch into panic when they see and hear the unexpected, as traders need to react very fast to protect their financial positions.

The other lesson is that everyone—or at any rate nearly everyone—agrees that growing our economy is the way out of our economic problems. The debate is about the best way of bringing about that growth. It is a debate that has been going on for as long as I have been aware of politics and economics. Indeed, it goes back to well before the Second World War, or possibly even before that, as it underlay the economic debates before the First World War in the famous tariff reform campaign.

Sadly, there is no simple formula to kick-start economic growth. In the past we have tried many different ways; they have all failed. We have tried laissez faire. We have tried central government planning. We have had direct investment in struggling companies. We have tried saying, “Let’s get rid of our companies and bring in the foreign companies because they know how to do it better”. We even tried that with the Bank of England, to no notable success. Each time we try something different, it has ended up the same way: our GDP growth rises briefly but then, after a short time, drops back down.

So what can we do? First, let us agree that there is no simple answer, because there is not. I have no doubt that businesses in the UK are just as capable of achieving success as any companies in our competitor countries that have higher growth rates, but we have to create a business environment where they can compete domestically and internationally. That means getting our tax framework right. It is far too complex. When I first started working in finance, our corporate tax laws were one volume of the yellow tax handbook. There are now five stout volumes. Instead of adding to them, we must simplify drastically. The same goes for the regulations and controls that we put on businesses of all types, including banks and other financial services companies.

As for employees, there seems to be a belief that people work in business for the fun of it. There is very little fun in hard-driving successful companies. Successful companies are run by people who do it for the money. To misquote Dr Johnson, no man but a blockhead ever worked in business except for money. If the UK tax and regulatory systems penalise employees and they find that they can keep more of their money by working in the USA or Singapore, they will do so. Having uncompetitive rates of tax and silly caps on bonuses are a UK own goal, encouraging successful businesses to relocate to friendlier climes and running the risk of severely damaging one of the few successful internationally competitive industries that we have: financial services.

In short, I think the mini-Budget was on the right lines and I encourage my noble friend the Minister to persevere with the ideas in it but, in future, to take a little more time to avoid spooking the markets.

European Union (Withdrawal) Bill

Lord Carrington of Fulham Excerpts

Tuesday 30th January 2018 Lords Chamber

[Lord Carrington of Fulham (Con)]

My Lords, I am delighted to welcome the Bill. After the debate that we have had today and the many interventions, I may be among a small minority in doing that. The Bill is not without its problems, as we have just heard from the noble and learned Lord, Lord Morris, but it is one that we can all welcome because it brings a degree of confidence in terms of what is happening in our leaving of the European Union. Business needs the certainty that the Bill starts to bring to where we will end up after the end of the negotiations.

We can all agree that, in leaving the EU, we wish to do so with as little disruption as possible. Perhaps the Bill is an important part of that, although a fairly small part. It is clear that both the other 27 members of the EU and ourselves will prosper from a mutually beneficial exit agreement. I hope that the Bill will strengthen our hand in our negotiations in persuading the other 27 that there is no point in a punishment-beating type of exit, and bring both sides to a grown-up recognition that it is in everyone’s interests for trade to carry on very much as it does now. There is one area where that is more of a problem than for physical exports, and that is for services—particularly financial services and the related support services such as the legal and accountancy professions. We need to be clear on the way forward for these important industries.

It matters very little whether financial services benefit from what is called passporting, which is likely to end on our departure from the EU, or from mutual recognition of the EU’s and UK’s regulatory regimes—what is sometimes, and rather controversially, called regulatory equivalence. They both give reciprocal market access, enabling EU firms to continue trading services in the UK and UK firms to continue trading in the EU. Both passporting and mutual recognition come to the same thing in broad terms and are both to the advantage of the providers of the services and to the client.

Under either system, a bank operating out of London providing services to a French client, say, will benefit from not having to create artificial structures such as setting up a subsidiary in Paris with staff and capital to channel the French client’s financial and trading needs through to London or New York. Equally, the French client will benefit from reduced costs in meeting their banking needs. After all someone, inevitably the client, will pay for the additional costs of setting up artificial structures. The client will also benefit from the increased competition, and therefore lower costs, of having the maximum number of banks prepared to offer global services in France.

The real cost of erecting artificial barriers to the trade in services will be met by an additional group of people. It is not just the client at the bank who will lose out; it will also be damaging to the employees of the bank. If banks are required to open subsidiaries in Paris, say, which they would not otherwise have done, the staff who would be transferred there would predominantly be French staff currently working in London and servicing French clients. There is a good reason we have so many EU nationals working in financial services in London. Part is due to lifestyle and part is due to our still-benign personal tax regime, but it is principally because, if you work in financial services and are ambitious, there are only two cities in which to build your career: one is New York and the other is London. I know very few EU nationals working in financial services in London who would see it as a good career move to return to their home countries.

The need for easy access to the financial markets of the other 27 countries after we leave varies greatly from one financial institution to another. Some, such as insurance companies and brokers, have always operated from subsidiaries and will continue to. Many banks already have subsidiaries, which enable them to meet any regulatory requirements with, perhaps, a little tweaking of their capital structures. Asset managers tend to operate offshore in any case and sell their products on the basis of their performance. While the financial service industry will continue to prosper regardless of any changes to our relationship with the EU, there are many things we can do to make that more certain and a lot cheaper. I hope that, when we come to consider this Bill in detail, we will be able to explore ways to make the transition for the financial services industry seamless.

Higher Education and Research Bill

Lord Carrington of Fulham Excerpts

Report: 3rd sitting (Hansard): House of Lords
Monday 13th March 2017 Lords Chamber

[Lord Gordon of Strathblane (Lab)]

My Lords, I too will speak very briefly in favour of the amendment. It seems that there is no ideological objection to the proposal from the Government. What has happened is that it has lost priority. That loss of priority may be for perfectly innocent reasons but surely everyone recognises that it is capable of being misinterpreted adversely from the point of view of good relations in the United Kingdom. I simply urge the Government to restore it to the priority it had when it was first announced.

[Lord Carrington of Fulham (Con)]

My Lords, I had not intended to speak in this debate but I have been encouraged to do so. First, I remind your Lordships of my interests as declared in the register: I am chairman of a sharia-compliant bank in London and therefore have some knowledge of the problems, but I have also spent my professional lifetime in sharia banking.

I encourage the Government to move ahead as rapidly as possible in providing these loans. Clearly, there are no real problems in doing so from a sharia point of view. All those problems are well understood and are easily addressed by conventional techniques in sharia banking. There are problems, however, in the way that the Bank of England treats those types of loans and in the way that the Treasury looks at them. I suggest that the Government really need to move ahead to resolve those issues as quickly as possible because the benefit to the Muslim community of providing these types of loans outweighs any difficulties I can see that the Government could face.

[Lord Stevenson of Balmacara (Lab)]

My Lords, with all the voices in accord around the Chamber it seems almost otiose for me to join in and add my support. I had a conversation with the noble Lord, Lord Sharkey, just after he had tabled his amendment; I suggested that it was a rather weak amendment and he ought to sharpen it up because I thought there would be a lot of interest around the House. I have been proved right in that, to the point where a vote would perhaps be sensible. I am sure his intention in speaking today is not to force a Division on the House because the arguments are so all-encompassing and completely unanswerable.

I hope the Minister will be able to make a firm commitment, as previously suggested: first, that he supports the intention of introducing this measure as quickly as possible; and, secondly, that he will not allow the apparent problems with the supply line to hold up the provision of sharia-compliant loans. After all, a touch of competition from those experts in the field who might be able to step in might be a way for the Government to get themselves out of the hole. But it is a very sorry tale. The idea that students who could benefit from these loans cannot because of a conflict between faith and their ability to operate within the system that is currently available seems so utterly shocking that it just needs the Government to say that it will change.

Higher Education and Research Bill

Lord Carrington of Fulham Excerpts

Report stage (Hansard - continued): House of Lords
Monday 6th March 2017 Lords Chamber

Moved by

[Lord Carrington of Fulham]

53: Clause 15, page 9, line 19, at end insert—
“(3A) The principles must include principles applicable to an unincorporated designated institution.(3B) In subsection (3A)—(a) “unincorporated designated institution” means a designated institution which is not a corporate body;(b) “designated institution” has the same meaning as in section 129A(10) of the Education Reform Act 1988.”

[Lord Carrington of Fulham (Con)]

My Lords, this is a probing amendment to clarify a situation which concerns, pretty specifically and possibly uniquely, the Guildhall School of Music and Drama. The Guildhall school is a very unusual institution, partly because of its history, and partly because of its ownership. It is an unincorporated body. It does not have the legal structure common among higher education colleges. It was set up 137 years ago, in 1880, by the City of London Corporation as a conservatoire, and has never changed its corporate structure since. It is owned by the City of London Corporation, its court of governors is appointed by the City of London Corporation and close to a third of its funding comes from the corporation. It is, indeed, an integral part of the whole structure of the City of London, in the same way that Hampstead Heath, Epping Forest, and various other schools are run.

This gives the problem under the Bill that the Guildhall is a body that does not really fit into the definitions of what the White Paper was trying to create. The White Paper, which informs the Bill, indicates that the governance principles of the Office for Students, under the powers conferred on it under Clause 15, will be,

“comparable to those currently required of HEFCE-funded providers in line with the HE Code of Governance”.

This code has been developed by the Committee of University Chairs, and has been deployed successfully by the Guildhall. There is every reason to assume that the governance principles envisaged by Clause 15, which the Office for Students will be developing, can be applied to the Guildhall with equal success. The clause, however, introduces statutory backing for the principles, and the concern is that in moving to this more formalised position, some of the current flexibility will be lost and the ability to take account of the possibly unique governance structure of the Guildhall will no longer be applicable.

The amendment is to try to flush out whether it is possible to have sufficient flexibility under the new structure to enable the Guildhall to continue in the way that it has in the past—in other words, to be an integral part of the Corporation of London. I am trying to work out whether things can go on as they are or whether they have to change for the Guildhall, possibly with unfortunate consequences. On that basis, I beg to move.

[Lord Young of Cookham (Con)]

My Lords, I am grateful to my noble friend who, not for the first time, has raised in your Lordships’ House interests of concern to the City of London Corporation.

Clause 15 enables the OfS to take over the responsibility of scrutinising providers’ governing documents against the list of public interest principles. I can reassure my noble friend that we do not anticipate any impact on current higher education institutions being recognised by the OfS as higher education providers in the future. The intended practical application of the current and future list is to ensure best practice within already existing and recognised higher education providers’ governing documents, and it is not the intention of these principles to prescribe the corporate form of providers. I hope that gives my noble friend the comfort he is seeking.

The OfS must consult on the new list of principles. With the exception of the requirement that there should be a principle protecting academic freedom for staff, which I am sure the Guildhall has no difficulty with, the Bill does not prescribe what should be included in that list. There is nothing in Clause 15 that should concern the Guildhall School of Music, and it should be able to continue doing the valuable work it has been doing for so long. Against that background of assurance, I hope that my noble friend will be able to withdraw his amendment.

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[Lord Carrington of Fulham]

I am most grateful to my noble friend for that reassurance, because that is precisely what the Guildhall School of Music is looking for in terms of some sort of guidance as to how things will develop as the implications of the Bill become apparent. On that basis, I beg leave to withdraw my amendment.

Amendment 53 withdrawn.

Housing and Planning Bill

Lord Carrington of Fulham Excerpts

Wednesday 23rd March 2016 Lords Chamber

[Lord Young of Norwood Green (Lab)]

My Lords, I rise primarily to speak to Amendment 102D, to which my name is attached, but I cannot resist commenting on the paean of praise from the noble Lord, Lord Deben, for landowners. I could not help thinking that he might have a desire to involve the local planning authority if a large basement were being dug underneath his property or someone was proposing a building that did away with most of the light that fell on his property. I think then he might develop a bit of enthusiasm for planning, as opposed to the rights of landowners.

I accept the right to experiment, but to say that, because we, on this side of the Committee, suggest that there could be some problems with the idea and that we would like to subject it to scrutiny, it somehow means that we are totally Luddite or that we are opposed to any experimentation whatever, is a trifle over the top. I do not know whether my name says that I am young enough to meet that compliance, but I hope that my attitude is, anyway; so on the assumption that this might go through, the purpose of the amendment is to raise a perfectly legitimate and necessary concern. Whoever it is contracted to, the final decision—and legislation should be very explicit on this—must come back to the local authority. It must come back to the elected people to make that decision. That might be infuriating—on many occasions it is. There is a development going on in my area that has taken three years up till now. I would not blame the planners; a group of nimbys are doing their best to ensure that this development does not take place, but that is what you get with local democracy.

It is right to be sure. I looked at the phrase in the Bill that I assume the Government put in as a safeguard. It says:

“The regulations must provide that the option to have a planning application processed by a designated person … does not affect a local planning authority’s responsibility for determining planning applications”.

I can see that that is what this is about. The phrase, “does not affect” ought to be stronger than that; that is why I am supporting this amendment.

Finally, I hope that the Government will ensure—after all the consultation and the pilots—that there is clear government guidance for whoever is to carry out this work. There should be declarations of interest and an ethical responsibility in the way the work is carried out. Those are legitimate concerns, some of which were expressed by the noble Lord, Lord Greaves, and my noble friend Lord Beecham.

[Lord Carrington of Fulham (Con)]

My Lords, I do not intend to detain your Lordships’ House for very long on this; everything that needs to be said probably has been said. However, I want to add my voice in support of my noble friend Lord Borwick on Amendment 102D. This is not because I think that this amendment is probably necessary; I am sure the Government have no intention of ensuring that developers can prejudice the decision that is taken by the local authority by choosing a contractor to undertake the work who will produce a report—which the developer has paid for—that is in the developer’s favour. Although I am sure that that is not the intention, it is a clear misconception that is accepted by a great many people outside this House. We need to make it perfectly clear that the designated people who are producing the planning report are doing it on a highly professional basis and that all they are doing is undertaking the mechanical work of processing a planning application. What they are not doing is prejudicing the decision that will be taken by the local authority. If they are prejudicing or influencing that decision, we are going slightly too far in the Bill. The decision on planning has to be a democratic decision that is taken by the councillors in the local authority. It could be argued that too often in local authorities those decisions are delegated to officers, and ought to be retained by the planning committee and the councillors themselves.

I am looking forward to receiving the reassurance that I think many people in this Committee are looking for. All we are proposing is to provide additional resources to the council, however they are paid for, for the mechanical process of taking a planning application from its initial lodging with the council through to the point at which it is capable of being assessed by the planning committee. I agree totally with my noble friend Lord True that privatisation in that regard is fine, but privatisation which privatises the democratic decision is, in my view, unacceptable.

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Debate on whether Clause 183 should stand part of the Bill.

[Lord Carrington of Fulham]

My Lords, before we proceed, I have a question on Amendment 183. I do not intend to delay the House very long. The Corporation of London has a specific problem with Clauses 183 and 184. The Corporation is very much a hybrid body, in that it is both a local authority and a corporation under the corporation Acts. It is unclear, in these clauses, whether it is covered in its private capacity as well as in its public capacity. I would like reassurance that that will be covered in the regulations.

[Lord Bridges of Headley]

My Lords, I sense that an answer is winging its way to me. I am aware of these concerns, and we will specify its functions as a local authority. I will meet the noble Lord to discuss this issue, but we are very alert to it and will address it.

Bank of England and Financial Services Bill [HL]

Lord Carrington of Fulham Excerpts

Wednesday 11th November 2015 Lords Chamber

[Lord Sharkey]

My Lords, Clause 12 abolishes the existing PRA. It defines the Bank as the new PRA, exercising its function through the PRC. The key questions here are why, and what is the benefit? I asked these questions at Second Reading. The Minister, in his letter to me, received last Thursday, answered by saying:

“Bringing micro-prudential regulation more fully into the Bank will support the Bank’s aim of installing a unified culture and flexible and co-ordinated working across its twin aims, aims of monetary and financial stability”.

That is very nearly weapons-grade corporate speak.

I invited the Minister at Second Reading to say what that means in plain English and to give concrete examples of how it would operate. I again invite him to do exactly that. I also invite him, having explained what it means, to say why it is better than what we now have. Andrew Tyrie asked the governor a similar question on 20 October at the Treasury Select Committee. He made the point that the PRA had been successful and asked why this change was needed if the PRA was not “broke”—if it wasn’t broke, why change it? The governor said that no one had made that point to him but he agreed that the PRA had been successful.

Clause 12 brings about a significant change. It brings the PRA directly into the close embrace of the Bank. Despite unevidenced assertions to the contrary, it must reduce the practical and cultural independence of the PRA, and this is absolutely not desirable. Doing all this without a convincing or even intelligible reason is surely the wrong thing to do.

The Treasury briefing paper for the Bill hints at another reason for absorbing the PRA into the Bank—that is, to conform with the governor’s “One Bank” strategy aimed at breaking down barriers within the Bank,

“that could stand in the way of a unified culture and impede flexible and coordinated working across the Bank”.

There are two worrying things about that statement. The first is the “One Bank” strategy itself. As my noble friend Lady Kramer said at Second Reading, the Parliamentary Commission on Banking Standards had many conversations about the importance of ensuring that,

“the Bank was not one single monolith and that there should be an opportunity for real challenge rather than groupthink”.—[Official Report, 26/10/15; col. 1073.]

The “One Bank” strategy appears to be in danger of doing exactly that—moving the Bank back to monolith status, suppressing opportunities for real challenge and recreating the conditions for groupthink.

The second worrying thing about the Treasury briefing note statement is the reference to breaking down,

“barriers that could stand in the way of a unified culture and impede flexible and coordinated working across the Bank”.

Leaving aside the question of whether a unified culture is always desirable, one has to ask, “What are these barriers?”. What barriers have been identified in the workings of the Bank with the PRA?

The position on Clause 12 is that the Government have simply not put forward any compelling reasons for the changes that it produces. We have seen no strong, or even fairly strong, or evidenced argument that either the current situation is unsatisfactory or that the proposed changes would be better. Absorbing the PRA into the Bank is an important and radical step. It should not be taken without strongly evidenced arguments. In the absence of such arguments, we are left with only weakening of the independence of a vital organisation, with no assurance of any real benefit. Like my noble friend Lady Kramer and my former noble friend Lord Flight, I would prefer to see the PRA more independent rather than less. However, if we cannot have a more independent prudential regulator, we can at least try to stop it becoming a less independent prudential regulator.

[Lord Carrington of Fulham (Con)]

My Lords, I refer noble Lords to my interests as declared in the register of interests. It seems to me that these clauses come to the nub of bank regulation in the Bill. The real question that we are looking at is whether it is better to have a stand-alone regulator or one which is integrated into the Bank of England, albeit with Chinese walls, a separate committee structure, independent directors and so on. To answer that question we have to consider why the FSA failed. The FSA was set up very much as a stand-alone organisation with its own rulebook, structures and independence from both the Treasury and the Bank of England, yet it completely failed to identify the problems that were building up in the banking system prior to 2008 and was unable to take action if it did identify those problems. However, there is increasing evidence that it was not even aware that problems were being created.

The noble Lord, Lord Sharkey, suggested that there are no problems with the PRA. That may well be true. Certainly, the PRA has operated well since it was created. I have had personal experience of dealing with people of excellent quality in the PRA and, indeed, of better quality than people in the equivalent posts in the FSA. However, I warn that the PRA has not been tested in the way that the FSA was. There has not been a major financial crisis since 2008. The PRA has not had to face the same problems. Frankly, we do not know whether the PRA would be able to cope with a crisis of the magnitude of 2008 or whether indeed it would suffer from the same problems that the FSA suffered from.

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[Baroness Kramer (LD)]

My Lords, in response to the noble Lord, Lord Carrington, of course the FSA failed in its task as the problem developed over the several years leading up to the financial crisis of 2007-08. But I think it is very wrong to claim that the Bank of England did not also fail during this period, despite its access, as he reasonably said, to very extensive market intelligence. One of the frustrations of this House was that although the FSA recognised its failure, I am not sure that even up to this day the Bank of England has ever accepted that it played its role in an inadequate way during that period. Indeed, that has been part of the problem in putting remedies in place because, as many have said, a change in culture is an essential part of that process.

[Lord Carrington of Fulham]

The noble Baroness is failing to understand that there was a strict separation between the role of the Bank of England and the FSA, and there was no communication between them at the level which ought to have allowed that information to be passed. That was part of the problem. There was a great separation between the two. If the Bank of England understood what was going on, it did not see it as its job. If the FSA knew there was a problem but did not have the information, it could not communicate with the Bank of England. Bringing the two together—bringing the regulator together with the central bank and, I emphasise, with the Treasury as well—will find a solution.

[Baroness Kramer]

My Lords, I find it extraordinary that there is an argument that the Bank of England knew what was going wrong but sullenly kept its mouth shut because the constraints gave the key responsibilities to the FSA. We have to break away from that sort of cultural notion that one observes only the very narrowest interpretation of responsibility when we are talking about an organisation such as the Bank of England. I agree that that culture tends to continue. That is one of the frustrations and concerns that we have, particularly with the removal of the oversight committee, which is the one challenge to that ongoing attitude. Let us set that aside for the moment, although I find it a constant frustration not to recognise that the Bank of England did not act when it certainly had an opportunity to lay on the table the many problems it now says it saw with such clarity.

I go back to the underlying issue, which is that the PRA has been a success. The PRA has been absolutely key in establishing the kinds of regulations that have made the Bank safer for the future, setting standards for regulatory capital being an important part of that. In addition, in the period before we had the PRA, it was virtually impossible to get a new bank licensed in this country. We have had Metro Bank but essentially no new bank for 150 years. People had to find an existing banking licence, buy it and go for some sort of change of purpose. The PRA was a leader in changing that whole culture and recognising the importance of bringing in challengers and new players. Had it stayed tightly within the existing Bank family, which had resisted that approach over and over again, I very much doubt that we would have seen that kind of change. So the experience we have had since setting up a PRA which has some distance from the Bank—a small distance, I fully acknowledge, but separate responsibilities governed under company law—has been that it has brought forward change in a way that is not part of the history of the Bank. I am very concerned at the potential for losing that.

The noble Lord, Lord Carrington, also suggested that if we changed the existing structure it would not allow a proper flow of information from the Bank of England to the PRA. But look at the membership of the PRA: we have crossovers in deputy governors, and I believe that the Governor of the Bank of England is the formal chair of the PRA. If these individuals are unable to remember the meetings that they were exposed to and the memos that they read when they wore one hat, and bring that information into the meetings they have when they play their role within the PRA, I frankly find that extraordinary. As far as I understand it, there is no problem of information flow—and if there is, we would very much like to hear from the Minister what the instances are, where there has been that kind of breakdown, and why an individual involved in discussions in one particular part of his or her job has been unable to remember those discussions when participating in another part of it. Those are quite serious allegations. I would like to hear from the Minister where this communication has so badly broken down when it is quite frequently the same individuals who are involved.

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[Lord Carrington of Fulham]

My Lords, I had not intended to intervene on this amendment, and before I speak, perhaps I had better remind the Committee of my interests as set out in the register. I think that everything has been said about the natural justice and injustice of the reverse burden of proof, particularly on this side by the right reverend Prelate the Bishop of Southwark. I do not want to take that line because the argument is clear; rather, I want to add two practical thoughts. The first is that if there has been wrongdoing in a financial institution, I do not think that anyone in this House would support the guilty parties getting away with it, however senior they are in the organisation. The question is not whether they should get away with it but whether the powers exist to enable the regulators, and then the proper prosecuting authorities, to take appropriate action. I remind the Committee that the PRA has very extensive powers. If the authority considers that there has been malfeasance in a financial institution, it is able to go in and trawl through the records of that institution in great detail, to the extent of looking at email trails.

[Baroness Kramer]

I believe that the noble Lord, Lord Carrington, is referring to the FCA, but regardless of that, he has mentioned email trails. Is he aware that the absence of email trails was a fundamental part of the regulator’s decision that it was not able to pursue a single case to senior management level? There was an absence not only of email trails but of any other record which would enable pursuit of a trail from the bottom upwards. The evidence for that is very clear in the transcripts of the Parliamentary Commission on Banking Standards.

[Lord Carrington of Fulham]

I have not read those transcripts, but I have some experience of both the PRA and the FCA, and I can tell the noble Baroness that those powers exist for both bodies. If they do not, or if they need enhancing, I would be the first to say that that should happen

[Baroness Kramer]

I am sorry to keep bobbing up and down, but the point that was made was that those in charge are very careful that there is no email trail and no written trail. That is one of the points about the reverse burden of proof: in effect it requires senior managers to allow an email trail to exist, or indeed some sort of audit trail, because they would be in a position where they would be required to demonstrate that they had taken reasonable steps. When the burden shifts back to the regulator, the regulator is completely stymied at the point where all conversations and exchanges take place in an environment where there are no minutes, no emails, no memos and no existing trail.

[Lord Carrington of Fulham]

I will come on to that in a moment; that is the second point I wish to make. The first point is that the power does exist for the PRA—and, indeed, the FCA—to be able to go and investigate what has happened inside a financial institution in very great depth and in very great detail.

The consequence of the reverse burden of proof would be to make the situation to which the noble Baroness referred even worse. An organisation which knows that there is individual liability where they have to prove that they did no wrong will have lawyers crawling all over them to make certain that at every move, nothing is recorded, nothing is said and nothing is minuted which would put them in a position where they could do anything other than deny all culpability. That is what would happen—and to some extent does happen. But I can reassure the House that destroying email trails is extraordinarily difficult. In most institutions, email trails survive through even the greatest attempts to wipe the hard drives clean. I can assure the noble Baroness that if the PRA wishes to find evidence and has the resources, the determination and the suspicion, it will find the evidence to bring the prosecutions it needs.

[Lord Davies of Oldham]

My Lords, this has been an excellent debate and the Minister has a great deal to which he needs to respond. It is little surprise that we have been exercised with these amendments, because they go to the very heart of people’s trust and confidence in the financial services industry.

I would suggest that perhaps one reason why this change has been effected by the Government is because of the lack of transparency in the government proceedings. That is why the controversy has arisen. None of us has been privy to the process whereby the Government produced this significant change to the senior managers and certification regime. Clearly, decisions have been taken behind the scenes and without consultation. I do not think that there is much of an email trail on either of those factors.

The fact is that the Government did not even consider that this might be much of a problem, and today’s debate identifies just why that is. I hope, therefore, that the Minister will be able to demonstrate the thought processes behind these changes. The age-old argument that it is not working in practice scarcely holds, because the SM&CR never had a chance to work in practice—so the Government will have to come out with a better argument than that. What advice did they get that convinced them that these changes were the best approach? Did an event occasion the change? Are the meetings that the Minister had on such a significant issue as these proposed changes on the public record?

We also need to consider the role of the regulators and how we can ensure that they are bold enough to spot when misconduct takes place. Has their job not been made harder by the fact that there will no longer be a duty on firms if they suspect wrongdoing? Can the Minister please go into some detail about how the Government propose to ensure that the regulators will be able to rule out ineffective management? We have had a refresher course today in just what ineffective management—and, indeed, corrupt management—has done in terms of damage to so many people’s lives. We ought not to forget that.

I hope that the Minister will be able to address these points in some detail. Of course, he has to take into context just what this debate has demonstrated: how difficult the issue is, but how fundamental it is to the welfare of our society. I expect the Minister to give a detailed response.

Bank of England and Financial Services Bill [HL]

Lord Carrington of Fulham Excerpts

Monday 26th October 2015 Lords Chamber

[Lord Carrington of Fulham (Con)]

My Lords, I start by declaring my interests as in the register which are, I am afraid, rather specific to the Bill. I am a non-executive director and deputy chairman of a small British bank regulated by the PRA and the FCA. As a director of a bank, I am also an approved person, so I potentially have some conflicts of interest in the Bill, which I fully recognise.

New to the debate on banking regulation, the Bank of England and so on, I rather naively thought that the Bill would be relatively uncontroversial. Listening to this debate has rather changed that view, and I look forward to our debates in Committee because they have every potential to be quite interesting. I express my sympathy to the Minister because he is obviously in for a difficult time.

I welcome the changes proposed to bank regulation. They almost look like a tidying up of the internal structure of the Bank of England, but potentially they do more than that by integrating still further the PRA into the Bank of England. I hope that this will give the Bank of England the opportunity to strengthen the regulation of the financial sector in the UK. One of the reasons London is successful is because foreign investors and institutions have confidence in our tough but flexible financial regulations. In my experience, one of the weaknesses of the late, not very lamented, FSA was that it was very rules-based. Its rules ran to several substantial volumes, as those who dealt with it will remember well.

Financial institutions, and banks in particular, are not easy to regulate. On the face of it what they do is very simple, so to make a decent living banks have to devise clever ways of adding value and of distinguishing themselves from the competition. Many are very innovative and pay key staff a lot of money to find new ways of providing services to their clients. They are always developing new products and new ways of doing business. Regulating them based on what they did last year, or last time there was a financial crisis, will guarantee that the regulator is behind the curve on the risks that banks are taking. Arguably, this was a major contributory factor to the crash of 2008. Regulators around the world did not understand, or if they did, they did not have the powers to stop the banks taking unreasonable risks or selling products whose risks neither the banks nor the regulators could assess. I do not know if fully integrating the PRA into the Bank of England will make this better come the next financial crash, but it should make it easier for the Bank of England to run financial regulation on a holistic basis rather than on rules designed to stop the previous financial scandal.

I am not advocating a return to regulation by a nod and a wink, which formed at least part of the regulatory system prior to 1998, but it is vital for regulators to have access to market intelligence and to be able to act on it. Maybe market intelligence is putting it too high; what I really mean is that regulators should be able to listen to gossip and rumour. Perhaps this is a similar point to the one made by my noble friend Lord Flight when he was talking about the Court of Directors. Regulators have to have the power to follow and act on leads that no self-respecting lawyer would consider evidence-based. This would be helped if the Bank of England could take back some of the day-to-day money market activities presently undertaken by the Treasury. As an aside, I hope that the closer integration of the PRA and the Bank of England will enable the regulators themselves to be paid properly. If they are not, the good ones will be sorely tempted to switch sides and work for the banks they used to regulate, weakening the ability of the regulator to regulate and enabling the banks to game the system.

The other part of the Bill I want to mention is the proposed extension of the authorised person regime to all financial institutions in the UK including:

“UK branches of corresponding foreign institutions”,

and all types of financial service firms. This has to be long overdue although I can see that it will be fraught with difficulties. We are seeing a convergence of the risks taken by investment banks, hedge funds, family offices, sovereign wealth funds and investment managers. I dare say that some of these will not be capable of regulation under this—or probably any other—Bill or, at any rate, not without severely damaging London as a financial centre, which would be throwing the baby out with the bathwater, so to speak.

I welcome the Bill. I hope that when it comes into force the Bank of England and the PRA will use it to develop ever-smarter means of controlling risk in the financial sector, while encouraging innovation and the growth of the UK as a worldwide financial centre. I look forward to our discussions in Committee.