Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(10 years, 12 months ago)
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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 Eatwell
“Duty of care
At all times when carrying out core activities, a ring-fenced body shall—(a) be subject to a fiduciary duty towards its customers in the operation of core services; and(b) be subject to a duty of care towards its customers across the financial services sector.”
Lord Eatwell
My Lords, as noble Lords will see on the Marshalled List, Amendment 165 would insert a new clause entitled “Duty of care”. Over the past several months, we have seen a variety of scandals which have, let us say, polluted the relationship between banks and their customers, particularly those holding household accounts or those which are small or medium-sized enterprises. We have had the PPI scandal, the scandal over the mis-selling of interest rate swaps and now newspaper headlines cover the accusations which come from within the Government that RBS has been winding up small firms and seizing their assets to its own advantage. Just yesterday, the Governor of the Bank of England, Mr Carney, referring to RBS, said that this behaviour is a fundamental violation of the integrity of the banking relationship.
The amendment is addressed directly towards the banking relationship. It is in the best interests of the banking industry and, indeed, of the UK economy as a whole, that that relationship is repaired and that trust is restored between the ordinary customer and his or her bank. The amendment is carefully drawn. It proposes first that, with respect to core services, a ring-fenced body will have a fiduciary duty towards its customers. Not being a lawyer, I went to the law library in my college to check that I knew exactly what “a fiduciary duty” actually meant. I quote from a law textbook, which says:
“A fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by one person is actually accepted by the other person. Mere respect for another individual’s judgment or general trust in his or her character is ordinarily insufficient for the creation of a fiduciary relationship. The duties of a fiduciary include … reasonable care of the assets within custody. All of the fiduciary’s actions are performed for the advantage of the beneficiary”.
The law textbook which I consulted also went on to describe the way in which the courts have interpreted this relationship, embracing,
“legal relationships such as those between attorney and client, Broker and principal, principal and agent”.
It is striking that the Securities and Exchange Commission in the United States has now passed a regulation which imposes a fiduciary responsibility on those regulated by the SEC.
The fiduciary duty to which I refer in the amendment is with respect to “core services”. I remind the House what that means. The core services are the facilities for the accepting of deposits or other payments into an account which is provided in the course of the core activity of accepting deposits, facilities for withdrawing money or making payments from such an account, and overdraft facilities. It is that relationship of depositing your money in the bank which then says that the bank has your best interests at heart in looking after your money. That is the case of the fiduciary responsibility.
The amendment goes on to say that, with respect to other financial services provided by a ring-fenced organisation, there should be a “duty of care”. I returned to the law textbook, just to make sure that I knew the difference between fiduciary responsibilities and “duty of care”. I was told that a duty of care is a,
“legal obligation which is imposed on an individual requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence”.
It goes on to discuss the case law and common law associated with the notion of duty of care.
Lord Phillips of Sudbury
Before the noble Lord sits down, why does he not propose extending his fiduciary liability to all banks rather than just the ring-fenced entities?
Lord Eatwell
That is because I think the distinction between commercial banking and investment banking is relevant in this case. One would expect investment bankers to behave honestly and in an appropriate manner in their business transactions. I would not expect an investment banker necessarily to display a duty of care and certainly not a fiduciary responsibility whereas I really would expect a commercial banker to exercise those responsibilities in all circumstances when dealing with families and small businesses.
Lord Sharkey (LD)
Before the noble Lord sits down again, I ask for a brief clarification. Ring-fenced banks may well have dealings with local authorities and pension funds, but I think that under the terms of the Financial Services Act 2012 and the FSA rules these are not legally customers; they are eligible counterparties. Did the noble Lord mean to exclude local authorities and pension funds from the protections he sets out in his amendment?
Lord Eatwell
I am very grateful to the noble Lord for his comments. I had overlooked that point. Once the House has accepted this amendment, we can move on, perhaps at Third Reading, to add the elements that the noble Lord suggests.
Baroness O'Neill of Bengarve (CB)
My Lords, before the noble Lord sits down again, I offer another friendly thought—I hope. I have it in mind because the Netherlands has reintroduced a bankers’ oath analogous to an oath for physicians. As part of that move, we should note that the relationship with the persons who are here designated as customers should, indeed, properly be that of a client. This is a professional service and the fiduciary duties are in place precisely because this is a relationship not to a customer from whom one might make money but to a client to whom one owes a service.
Lord Eatwell
I am grateful to the noble Baroness. I am sure that her suggestion and, indeed, the example of the Netherlands might well be followed here.
Lord James of Blackheath (Con)
My Lords, I have a reputation for introducing sidetrack issues which distract the House. However, I have just listened very intently to the noble Lord, Lord Eatwell, and I think that I disagree with most of what he said. I would like to cite a case history and then invite him to say how what he said would relate to it.
I was very concerned to read in recent weeks about the Royal Bank of Scotland being accused of deliberately pulling down companies. I believe that I have been involved in one of those cases as the person brought in from outside to engineer the kind of scenario that that bank has been accused of engineering. I shall explain what occurred and then ask the noble Lord, Lord Eatwell, how this relates to his perceptions of a duty of care and fiduciary responsibility.
Once upon a time in a muddy field in the Herefordshire area, a man who had come back from the war bought a caravan in which he lived with his wife. He hit upon the idea of a much more efficient process for aerating water for soft drinks and decided to go into production. He went from very small beginnings, with nothing more than his Army gratuity from the war, but by 1986 he was making £19 million a year profit and doing very nicely indeed. However, at that point his wife found him sleeping with his secretary and thought that that was pretty poor loyalty for nearly 40 years of dedicated support, so divorce proceedings were instigated but by this time they had a son. The son brought an action to prohibit his parents divorcing and dividing his asset between them. I believe that it is the only such action that has ever been brought.
He won his case so they had a settlement whereby the wife went to live in Monte Carlo, the husband stayed with the company and the son owned the company. However, the son now decided that his father had really not done very well with the company, although he had got it to £19 million a year, and that he could do a great deal better. So he went to Lloyds Bank. The company had nil borrowings at that time, not a penny. This is where I disagree with the noble Lord’s analysis, because it is not a question of what you do with the deposits—there is no cash being used from a bank at all here. He said, “Give me £75 million of borrowings and I will create a much bigger and better company out of this, in which we can all have a vast amount of earnings”. Lloyds Bank looked at his plan and his options and said yes. I challenge the noble Lord, Lord Eatwell, on this. The first breach in fiduciary responsibility was that the bank said yes. It was not a question of what happened with the deposit, but a question of an ill advised loan, because the company was quite adequate as it was.
Lloyds gave him the £75 million and he went out and bought the plushest factory and upgraded every bit of engineering he could to put into it. Finally, after two years he re-opened and immediately found that he was losing £600,000 a month, at which point Lloyds sent for me. I found that the company was not losing £600,000 a month. It was losing more than £1.5 million a month and at that level we would be way out. All that the bank wanted was to get its money back. One might say that it did not deserve to get it back—in some respects I would agree with that—but we got it back in the end because we were able to break the business up into its various components. The splendid factory could be sold to Mitsubishi for quite a lot of money, the business streams could be sold for another £30 million or £40 million, and then we discovered that the company had the most valuable crop of freshwater springs in the Lake District of any British company. We sold it for tens of millions of pounds and got the bank out 100%, whereupon the son decided that he wanted to sue the bank for failure of fiduciary responsibility for lending him the £75 million in the first place. He said that the bank had engineered to bring the company down so that it could strip it out, take all his money and ruin his family and descendants for all time.
This is the reality behind what noble Lords are hearing about the Royal Bank of Scotland at the present time. Banks are pressured into making bad decisions to lend and they then take appropriate defensive action on behalf of their shareholders and depositors. That is discharging their fiduciary responsibility, but they have been put under pressure by other market forces to invest in businesses which really do not know what they are doing and when the time comes to dismantle, dismember and unbundle them, we get the sort of consequence we have had here. This individual failed in his action against the bank for having stolen his company, as he put it. He is now very ill, I am sorry to say, and is unlikely to last long in this world. His family is ruined completely—it has lost everything. Is that a fiduciary responsibility? Yes. The bank should have looked much more closely at the options that were available to the business at the time and should have looked to see what expertise was going to be brought in, and it did not. As to whether there is a duty of care, that is a very simple and separate issue running alongside. I think that there is and that that is where the concentration should be.
Lord Eatwell
I should point out to the noble Lord that the case he has described would come, under the terms of my amendment, under duty of care, not fiduciary responsibility.
Baroness Cohen of Pimlico (Lab)
My Lords, as a lawyer I have always believed that I have a contract with my bank, inasmuch as it is making an offer capable of acceptance and I have accepted it, in the case of provision of deposit and current account services, which I believe are the areas which my noble friend Lord Eatwell is proposing to cover. I do, however, support the amendment. It never does any harm to repeat these things. By analogy with part of the criminal law, it has been illegal since 1861 to beat one’s wife, but it took the Domestic Violence and Matrimonial Proceedings Act 1976 to remind the general public and the police of their duties in the matter.
The real problem lies with how to enforce any of this. Through all these debates I have found myself wondering where our lawyers are. Why have we not been suing banks? In many cases there is a perfectly clear case of action against a bank. The answer, of course, is that they are many times bigger than us and have more resources than any individual. If the purpose of the amendment is to encourage, or indeed force, the regulators to take the action on our behalf, which we are not about to do because of the risk of very severe financial consequences, it will be well received by everyone. In any case, I support the amendment.
Lord Newby
My Lords, I am sorry that when we discussed this amendment on a previous occasion, the Government failed to convince the noble Lord, Lord Eatwell, that his amendment was not necessary. I hope that I will have more success this time because I believe that the amendment is neither necessary nor helpful.
We all share the objective of driving up standards in banking and improving the treatment of customers. That is why the Chancellor set up the Parliamentary Commission on Banking Standards and why we have accepted the vast majority of its recommendations. However, we remain unconvinced that the noble Lord’s amendment will add anything meaningful to these reforms.
The regulator’s FSA Principles for Business already includes what is virtually a fiduciary duty. Principle 10 states:
“A firm must arrange adequate protection for clients’ assets when it is responsible for them”.
As other noble Lords have mentioned, these high-level principles also already include the principle that:
“A firm must pay due regard to the interests of its customers and treat them fairly”.
I am not sure how the noble Lord’s amendment would improve standards or help bank customers; nor do I think that he has explained what the new duties on firms really mean. When he spoke in Committee, he said:
“This will increase consumer protection and help to restore confidence of the retail customer in banks. It will raise standards of conduct because banks will know they are responsible for acting according to these duties”. —[Official Report, 23/10/13; col. 1092.]
But my question is: how will it do that? How will it, as he hopes, stop the kind of scandals that we have had in the past? I think that that is an extremely difficult question for the noble Lord to answer in that neither “fiduciary duty” nor “duty of care” in this context describes a specific, precise obligation. As I have explained before, regulators’ rules provide very specific obligations.
I should add that the Official Opposition in the other place seemed to understand this difficulty. When an identical amendment was considered in Committee there, the opposition spokesperson, Cathy Jamieson MP, acknowledged the risk of unintended consequences or lack of clarity. She emphasised that the purpose of the amendment was to ensure that,
“customers are looked after and that banks are clear about their responsibilities and remember the part of the contractual relationship with customers that is about looking after their money”.—[Official Report, Commons, Financial Services (Banking Reform) Bill Committee, 16/4/13; col. 247.]
Of course, that is what we all want. That is why the Government introduced the regulatory reforms and new properly focused regulators. The FCA, in particular, will focus on protecting consumers and maintaining market integrity.
This Bill will take the process further by strengthening the regime of individual accountability and standards for those who work in firms, in line with the recommendations of the Parliamentary Commission on Banking Standards. These rules will be specific. They will be precise. They will set out the responsibilities of banking staff and senior persons to their customers. Moreover, they will be enforceable by the regulator. If they are broken, those people will be punished and could be subject to fines or public censure.
If we were to have the general duty of care or fiduciary duty as set out in the amendment, how would that be enforced? In law a fiduciary duty is enforced by the person to whom the duty is owed taking action in the courts. Does the noble Lord really believe that those people, some of the most vulnerable at the sharp end of bank practices, are likely to pursue their bank through the courts? Instead, the Government’s reforms have established a regulator with real teeth, of whom the banks will genuinely be scared—indeed, I think they are. Bolstered by a clear and binding set of banking standards rules, which specify codes of conduct and personal responsibility through the senior persons regime, this will mean a real change for consumers. The noble Lord referred to the SEC introducing a fiduciary duty in the United States. The proposed fiduciary duty in US securities law is not comparable. The proposal, on which incidentally the SEC itself has not yet taken any clear position, extends only to covering activities that involve giving advice. In any case, in the UK, when a firm provides advice to a customer, a duty of care already exists under the general law. In that respect, the US is simply looking to catch up.
To sum up, attempting to add duties of care or fiduciary duties of the kind proposed in this amendment would add nothing to the existing protections for customers. It is unnecessary and would not add any clarity to existing requirements. I hope, therefore, that the noble Lord will withdraw the amendment.
Lord Eatwell
My Lords, I regret that the Government seem to have learnt nothing since Committee stage. We have heard the repetition of high-level principles of the regulator protecting customers. What has actually happened? There have been successive scandals when customers were not protected by the regulators and successive scandals in which treating customers fairly was simply a joke.
The noble Lord also referred to a number of specific provisions. That is the great weakness of the regulatory structure. We have simply specified conditions. As we all know, that which is not specified is permitted. The whole point of having a fiduciary responsibility and duty of care in the terms that I set out when I moved the amendment is to create a general responsibility that will be enforceable in law by individuals and, indeed, by collective actions. Therefore, it seems to me that simply saying, “We have made things better by making them more specific and providing regulators with teeth”, is not the same as providing protection for the individual, which is exactly what the amendment would do. Given that the notions of fiduciary duty and duty of care are successful in other professions, why—the Government failed to answer this question—can they not be successful in the banking profession? That question was not answered. This is so important that I wish to test the opinion of the House.
Lord Eatwell
“Arrangements for consulting practitioners and consumers
After section 2L of FSMA 2000 (the PRA’s general duty to consult) insert—“2LA PRA duty to consider representations from the FCA Consumer Panel
(1) The PRA must consider and respond to representations made by the Consumer Panel established by the FCA under section 1Q of the Financial Services Act 2012.
(2) The PRA must from time to time publish in such manner as it thinks fit responses to the representations.””
Lord Eatwell
My Lords, Amendment 172 derives from, and is a response to, an amendment that the Government successfully moved in Committee, which gave the PRA a secondary competition objective directly related to issues of market structure and performance. We have developed in this Bill, and in the previous Financial Services Bill which we also considered in this Session, a twin-peaks approach to financial regulation, with the Financial Conduct Authority looking at conduct of business and the Prudential Regulation Authority looking at issues associated with the prudential behaviour of firms.
Given that the PRA now has a competition objective, we should not allow the twin peaks to isolate consumer representation. The FCA consumer panel has an important role in advising on and responding to FCA proposals with respect to conduct of business but, with the PRA now having a competition objective, the issues which affect consumers directly will involve the competition element of prudential regulation. It is important, and entirely appropriate, that the PRA at least considers and responds to representations made by the FCA’s Consumer Panel—that is all we are asking for—so that decisions which the PRA makes with respect to market structure and performance have an appropriate consumer input. I beg to move.
Lord Newby
My Lords, this amendment concerns the important issue of consumer representation at the PRA and requires the PRA to consider and respond to representations from the FCA’s Consumer Panel.
There is much to welcome in the approach suggested. It is important to ensure that there is sufficient regard to consumer concerns at the PRA, especially where there are specific issues of consumer protection that the PRA should take into account. I welcome the recognition that it will not require the creation of a completely new body in order to achieve this. We need, of course, to be mindful of maintaining flexibility on the best way for the PRA to take into account representations from consumers and the need to avoid overly burdensome arrangements.
Following the earlier discussions on this issue, the regulators have considered how best to ensure consumer interests are communicated to the PRA. The regulators have come to the view that there should be arrangements for the FCA Consumer Panel to be able to raise concerns with the PRA, and I believe that it is worth considering putting arrangements on a statutory basis. We will therefore consider coming back at Third Reading with amendments, subject to reflection on the best way to do that without incurring unnecessary costs or burdens for the regulators or the panel. We would be happy to discuss further with noble Lords opposite the most effective approach to doing this. In view of that, I hope that the amendment can be withdrawn.
Lord Eatwell
There I was with my notes saying how inadequate the noble Lord’s answer was going to be. I am delighted that the Government have recognised the power of this argument and I look forward to discussions with them and to the moving of amendments at Third Reading.
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.
Lord Lawson of Blaby (Con)
My Lords, I support strongly what the most reverend Primate the Archbishop of Canterbury and the noble Lord, Lord Eatwell, have said. I speak in support of them because this is a particularly important issue.
In constructing a safe banking system, a number of things are taken into account, including risk-weighted assets and other matters of that kind, but there is no doubt that the leverage ratio is the single most important element in having a strong and robust banking system. This amendment is not about what number it should be. I mention en passant that the Government say that we must not interfere with what the Vickers committee recommended, yet when the Vickers committee recommended a number which they did not like they disagreed with it. Nevertheless, that is water under the bridge.
The review is quite unnecessary—although it will probably not do any harm—because the issue of the leverage ratio is peculiarly simple. Who will be responsible for setting the leverage ratio, the Treasury or the Financial Policy Committee of the Bank of England? The amendment is important because it would give the Minister the opportunity to make a clear statement. There has been movement since Committee. The Governor of the Bank of England, Mr Carney, gave evidence to the Treasury Committee in another place only yesterday saying that his understanding was that it would be the responsibility of the Financial Policy Committee of the Bank of England. We would like to have that explicitly stated by my noble friend here today.
Lord Eatwell
My Lords, I was a member of the original regulatory decisions committee at the Financial Services Authority, which noble Lords may remember was set up after FiSMA ran head first into the human rights legislation because the regulator was in many cases judge and jury. The RDC was set up as a filter, to be an independent assessor of regulatory decisions by the various divisions of the FSA and to stand as a relatively simple procedure prior to the final stage of going to a tribunal if agreement could not be reached between the regulator and the regulated person. In that respect the RDC and the old FSA worked moderately well—but only moderately.
It did not work so well for two reasons. First, there was considerable confusion over its independence. The noble Lord, Lord Turnbull, has, in this amendment, quite rightly emphasised that the RDC should be independent of the various regulatory authorities. The second reason it did not work very well is, unfortunately, contained within the amendment, which states:
“A majority of the members of the Committee must be persons”,
with,
“no professional connection with … financial services”.
I am afraid that that, on the old RDC, caused us a lot of difficulty. Many of the cases which were quite complicated, with respect to financial services, took a long time because people who were very bright and committed but who had had no previous connection with the industry took a long time to get up to speed on the relevant issues that were considered. That condition in the old RDC arose because the FSA was succeeding the self-regulatory organisations. Therefore that was an overreaction to the role of the self-regulatory organisations such as the Securities and Futures Authority, which I also had the honour to serve on. That was abolished at that time and the reaction was, “Let’s have people from outside the industry in this particular role”.
Therefore, the idea of an independent RDC is a good one. That would avoid some of the very great expense of going to tribunal, where there might be disagreements, and it would also have the great advantage, which the noble Lord, Lord Turnbull, pointed out, of balancing the views of various regulators in any particular case. Of course, that was not necessary under the FSA, but it will be necessary under the new structure. This is worthy of very careful thought and consideration. It could be a very useful, positive step within the sequence of enforcement activities by the regulator.
Lord Deighton
In the spirit of the noble Lord’s approach, which was to move on from the specific amendment, I will not read out my speaking note, as entertaining and well structured as it is. I thank the noble Lord, Lord Eatwell, for his valuable experience here. I feel as the noble Lord does—something in here needs to be sorted out, but at the moment we are not exactly sure quite what the right thing is. However, it is certainly likely to involve a review, as is recommended as part of the amendment. Therefore I am more than happy, in preparation for Report—I am sorry, I mean Third Reading—to see what we can come up with together on a review.
Lord McFall of Alcluith (Lab)
My Lords, as a fellow member of the Parliamentary Commission on Banking Standards, I support the amendment moved by the noble Lord, Lord Lawson. The lack of a relationship with auditors is something that I have noticed since the beginning of the financial crisis. Indeed, at that time regulators told me that, when deciding what regulation banks should be subject to, they sent their less experienced regulators to the smaller banks and their more experienced regulators to the larger ones. By the way, when the regulators go to the larger banks they are sometimes taught by the people working in them because the quality is higher there. So the relationship between the regulators and the auditors is very important.
Martin Wheatley, who is now chairman of the FCA, is on record as saying that the FSA never looked at banks’ business models. In other words, it did not look at the profit and loss element of banks because it felt that it was none of its business. If the FCA is now to adopt the new policy of looking at business models, which tell you everything about a company, then the auditor is going to have a central role to play. I know that the audit profession has been rather taken aback by the criticism of the Treasury Committee and the Parliamentary Commission on Banking Standards, which posed the question, “What is an audit?”. The profession will have to do an awful lot of work on that because it has largely believed that audits cover something that has occurred in the past and not something that will happen in the future. It has not taken high-risk, low-probability strategies or low-risk, high-probability strategies into consideration. Auditors are in the unique position of looking at the business model and so can assist banks in having a forward look at that. They can also help regulators to understand what a business model is about. As the noble Lord, Lord Lawson, said, this measure was not put on the statute book previously and therefore lapsed by default. In the interests of being constructive on this issue and wanting to ensure that we have auditors who keep bank executives on their toes, I agree wholeheartedly with the noble Lord, Lord Lawson, that we need to see this measure written into the Bill.
Lord Eatwell
My Lords, I add the support of these Benches for the commissioners’ amendment. I was particularly struck, as I hope the Government were, by the account related by the noble Lord, Lord Lawson, of what happened when he made these meetings legal but overlooked the need to put them into statute law, with the result that they did not happen. We have an opportunity here to make these meetings take place and be effective. Both the Economic Affairs Committee of your Lordships’ House and the commission stand behind this amendment and the views that have been expressed, and I hope that the Government will as well.
Lord Eatwell
My Lords, I support my noble friend Lord Brennan in his attempt to remove subsection (2)(b) from Clause 124. As he has clearly told the House, it would enable secondary legislation to amend future Acts prior to the end of the Session—not this Act, but other enactments. This is an extraordinary power which was justified in Committee by using the argument that there are precedents. No precedents have been produced. It is shocking that the promise of a letter made over five weeks ago has not actually been kept on something which raised considerable concern in Committee. I think that the Government need to take this matter very seriously indeed and not palm it off with what seem to be entirely unsubstantiated stories of precedence.
Lord Newby
My Lords, I understand the concerns expressed by the noble Lord, Lord Brennan, and I assure him again that there is nothing unusual about the form of the power to make consequential amendments in Clause 124, and in particular, subsection (2)(b) does not extend the power unreasonably. My memory of exactly what I have written to whom, given that I have written to quite a number of people, is slightly hazy. I think I may have referred to this issue in what was a sort of portmanteau letter to the noble Lord, Lord Eatwell. It covered a whole raft of issues that had been raised not only by him but by other noble Lords. If I did not do so, I apologise to the noble Lord, Lord Brennan. However, in what I am about to say, I think that I can deal with the main point that he made.
Removing paragraph (b) would limit the power to make consequential amendments to Acts which are passed before the passing of this Act. That can produce unpredictable results depending on the progress of Bills and the dates on which they happen to reach Royal Assent. For this reason, powers to make consequential amendments to existing legislation often refer to Acts which are passed in the same Session as the Act in question. Noble Lords have asked for examples of this, and I can give them several. Such powers can be found in Section 51 of the Constitutional Reform and Governance Act 2010, Section 237 of the Planning Act 2008, Section 28 of the Welfare Reform Act 2007 and Section 118 of the Financial Services Act 2012—the provision on which Clause 124 was modelled.
The assumption is that Bills of the same Session are likely to have been prepared by reference to the existing law at the beginning of the Session, while the Bills of the next Session would have to take account of the change in the law produced by the Act in question. Where a Bill is amended significantly in its passage through the second House, it is particularly unlikely that Bills passed or made in the same Session will have taken account of all the provisions of the new Bill. That clearly applies in this case, as your Lordships know. The need to implement the recommendations of the Parliamentary Commission on Banking Standards has required very extensive amendments to the Bill in this House, and therefore it will not have been possible for the Bills which are being considered by Parliament in this Session to have taken full account of all the changes in the law which will be made by this Bill. Nor has there been time for the Government to consider all the Bills currently before the House to see if any consequential amendments may be required, or to follow all the amendments being proposed to these Bills. We have not, for example, had the opportunity to review the Pensions Bill, which may have provisions relevant to the subject matter of this Bill, or the Immigration Bill, which has some provisions on banking. We cannot rule out the possibility that it may be necessary for the Government to make consequential amendments to them.
I assure the House that the amendment introducing this power was considered by the Delegated Powers and Regulatory Reform Committee, and that committee has not expressed any concerns in relation to this power. I hope that, in the light of these assurances, the noble Lord will feel able to withdraw his amendment.
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(10 years, 12 months ago)
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Lord Phillips of Sudbury (LD)
My Lords, my name is on the 18 amendments in this group and I am the sole signatory on eight of them. I endorse entirely what the noble Lord, Lord Brennan, said. He speaks from great experience, which is of great help to the House.
One of the scandals—I think one can fairly use that word—of the past five years in terms of financial failings has been the extreme paucity of prosecutions for some of the greatest criminal failings, to use a neutral word, in the history of our or any country. It is rather staggering to think that over the past five years you can count on the fingers of your two hands the number of City malefactors who have been prosecuted, when during that time probably 20,000 or 30,000 people have been prosecuted for shoplifting at an average of £25 a time.
I tabled these amendments not in any spirit of vindictiveness—one can also say that, I am sure, of the noble Lord, Lord Brennan, and the other signatories—but to try to give real teeth to a very important clause, Clause 27, which is designed and put forward on the basis that it will be a significant deterrent to conduct arising in the future which is comparable to the conduct that has occurred in the past five or six years. The wording of Clause 27(1) in particular seems to those of us who have tabled these amendments to be so narrow—to cite the word used by the noble Lord, Lord Brennan—that the prospects of getting a conviction before a jury, or, indeed, starting to prosecute at all, will be remote. To give a simple, direct example of that point, Clause 27(1)(b) makes plain that a conviction can be secured only if the implementation of a single decision—“the decision”—causes,
“the failure of the group bank”.
When, except in the rarest of circumstances, did a single decision cause the failure of a bank? Life is much more complicated. Very often a series of decisions is involved and even then you cannot say that the decision or decisions cause the failure but rather that they,
“contribute directly and significantly to”,
the failure of a group bank, as I have put it in my amendment.
We have tabled these amendments to give practical effect to Clause 27 and other clauses. They are important clauses and we must not shackle them with such a narrow set of requirements that they will not serve their purpose. We should never forget that British criminal law is rightly strictly construed, and construed against the prosecution. If you think of that and you think of the wording in the clause, you will realise that it is not fit for purpose. I hope that if my noble friend the Minister does not accept the wording of these amendments—they could be drafted differently—he will at least undertake to come back at Third Reading with wording that the Government find acceptable and which will serve the purpose that we seek to serve in putting these amendments forward.
Lord Eatwell (Lab)
My Lords, having listened to my noble friend Lord Brennan and the noble Lord, Lord Phillips, I found this discussion quite disturbing. The creation of a criminal offence is one aspect of the Bill that pushes forward the regulatory regime in the UK and creates an environment more suited to the somewhat cavalier nature of finance in a global marketplace—in particular by identifying those activities that have inflicted enormous harm upon our fellow citizens. What I heard was that, as drafted, the probability of securing a conviction or even a prosecution, as the noble Lord, Lord Phillips, put it, is vanishingly small. Unless the terminology is clarified in a way laid out so clearly by my noble friend, this part of the Bill will simply bring that aspect of regulation into disrepute because it will be worthless. That is why I regard the remarks that I have heard from the two distinguished lawyers who have just spoken to be very disturbing. It is incumbent upon the Government not simply to produce a pat answer here this evening but again to produce a carefully written assessment of the case for an appropriate criminal regime and its implementation in order that the whole House has an opportunity to assess this important aspect prior to Third Reading.
Lord Newby (LD)
My Lords, these amendments essentially aim to make three changes to the criminal offence: first, to allow defendants to be prosecuted under the offence when a number of decisions taken together cause the bank to fail; secondly, to enable the offence to be made out when the decision or decisions in question were a significant contributory factor to the failure of the bank, rather than its sole cause; and, thirdly, to include within the definition of bank failure the systematic failure of the bank to prevent liability with regards to broader criminal offences.
On the first two issues, while I understand noble Lords’ concerns, I assure them that these amendments are not necessary to deliver the effects they intend. First, I assure noble Lords that, as a matter of law, under Section 6 of the Interpretation Act 1978 words in the singular include the plural unless express provision is made otherwise. The term “decision” includes “decisions”, plural. Therefore, where appropriate, it will be possible to prosecute on the basis of the implementation of a number of decisions. The Interpretation Act 1978 ensures that it is not necessary to repeat the defined terms or make express provision for the singular to include the plural in every single statute. The case for abandoning that practice seems rather minimal in this instance.
Moreover, in practice we generally expect a prosecution of the offence to focus on one individual decision in order to maximise the ability of the prosecution to make its case effectively when asking the jury to consider what are likely to be very complex events. This would enable the prosecution to focus on the causal relationship between the implementation of one decision and the failure of the bank, where that relationship seems to be most clear. In these cases, any other relevant decisions would be taken into account by the jury as the circumstances in which the key decision was taken, when the jury was deciding whether the defendant’s behaviour fell far below that which reasonably could be expected of him or her. For example, a decision to take on a risky acquisition may be more or less reasonable depending on earlier decisions to strengthen or weaken the bank’s capital position.
These amendments also include references to agreeing to the carrying on of activities by a firm. This would add nothing to the offence as currently drafted, since the reference to agreeing to the firm carrying on certain activities assumes that those activities in some way require authorisation and this must involve taking a decision, or agreeing to the taking of a decision, by or on behalf of the firm, and is therefore already included in the offence.
Moving on to Amendments 94, 95, 100 and 102, under general principles of criminal law the test for an action having “caused” an event to occur is that, had that action not been taken, the event would not have occurred. Therefore, in this specific offence the test is that, if the decision or decisions in question had not been implemented, the bank would not have failed. The implementation of the decision need not be the sole or even the main cause of the bank’s failure. In practice, because of the evidential standard that applies to criminal cases, we expect that cases will be prosecuted only where it is very clear that the implementation of the decision or decisions in question was a significant contributing factor to the failure of the bank.
In addition to these general points, the Government oppose some aspects of the amendments in principle. As well as including reference to “activity”, Amendment 97 would lower the bar of the reasonableness test for when the offence would be committed. As set out in Committee, the Government do not think this is appropriate. Referring to conduct which is far below that which would be expected has precedents in the Law Commission proposal for a statutory offence of killing by gross carelessness and in legislation creating the offence of corporate manslaughter. We have used this particular phrase knowing that it works and can be effectively interpreted by the courts. There is no precedent in UK criminal law for criminalising behaviour that is merely unreasonable. To do so would amount to an indiscriminate diffusion of criminal liability, in a way that made it hard for individuals to know with sufficient certainty when they might be committing an offence.
Amendment 118 would expand the definition of institutional failure that would trigger the offence to include occasions where there was a systematic failure of the bank to comply with a range of laws imposing criminal liability in connection with the conduct of financial services business. A similar amendment was raised in Committee, focused specifically on compliance with the Fraud Act 2006, the Proceeds of Crime Act 2002 or the Money Laundering Regulations 2007. The Government’s position on this remains unchanged—this offence has been introduced to plug a gap in existing legislation where there are no criminal powers available to sanction senior managers who have recklessly caused their banks to fail. By definition, criminal liability can arise where offences already exist that individuals can be convicted for and appropriately punished, depending on the seriousness of the breach. In certain cases, they can also be charged with consenting to or conniving in such activities. It is difficult to see how this amendment strengthens the offence.
The noble Lord, Lord Brennan, raised the question of the definition of “way”. The expression includes both the activities in the business and how those activities are carried out. This makes the offence broader. The noble Lord also suggested, if I understood him right, that in some cases the real risk is that people did not know what risk they were taking or wilfully turned a blind eye. While it might appear attractive to include incompetence by senior managers in the offence, doing so could introduce unwelcome and potentially damaging uncertainty into the sector. Further, to comply with the European Convention on Human Rights, the offence must be sufficiently certain to enable individuals to know when they are at risk of committing the offence. However, this does not mean that it is possible for a senior manager to simply close their eyes to the risk the bank is taking. In some cases a court may decide that it can be inferred that a particular person had knowledge of a risk. In the case of a director, ignorance of a risk to the bank’s existence may, in some cases, be to admit to breaches of the duties under the Companies Act 2006. Accordingly, there are cases in which an argument that a defendant had no knowledge of a particular risk would carry very little credibility and could even expose the defendant to criticism for breach of duty.
We take this offence extremely seriously as a key part of the new infrastructure that we are putting in place and we believe that it meets the test we have set out. On that basis, I hope that the noble Lord will withdraw his amendment.
Lord Watson of Invergowrie (Lab)
My Lords, the noble Lord, Lord Selsdon, makes an interesting and important point about those people who are in the situation where they see this as a last resort for receiving credit. If any noble Lords were watching “Newsnight” yesterday evening, they would have seen a disturbing feature concerning Wonga; the noble Lord, Lord Selsdon, did not want to name companies, but this company was named in the programme. It turned out that people who had had loans from Wonga, and had then gone to try to get a mortgage, had been told by their financial adviser, or by the mortgage company, that they were not going to get a mortgage simply because they had had a loan. I am sure that would apply to any payday loan company.
It seems perfectly wrong that somebody who takes out that kind of loan and pays it back within the defined period at no additional cost and without extending it or anything—in other words, someone who has done nothing wrong or outwith the agreement—is then penalised. It seems that this stain on their record remains for six years. It seems fundamental that any payday loan company ought to be saying on its website, or telling people over the telephone, “Yes, we are happy to give you this money, but we have to tell you that some mortgage companies and some lenders will not lend to you for a period of six years simply because you have taken this loan”. This seems to be a nefarious practice, and it also seems quite wrong that those companies are not obliged to state unequivocally and perfectly clearly that this could be the case.
Lord Eatwell
My Lords, we of course look forward with interest to the amendments that the Government will put down at Third Reading. However, I was somewhat disturbed by newspaper reports suggesting that the Government are going to ask the FCA to formulate a policy on the level of the cap. That would be entirely inappropriate. It is for the Government to formulate and to define the objectives of the policy and for the FCA to then implement it. The FCA may, on the basis of research, be charged with setting the level of the cap in relation to principles defined by the Government, but it is up to the Government to specify those principles, specify the objectives and, indeed, design the policy. We do not want to hear a cop-out, where the Government declare, to general acclaim, that they are going to cap payday loans and then hand the whole design of the policy over to an organisation which is a regulator and not designed, in and of itself, for the formulation of policy.
I hope that the Minister can give us some reassurance that when these amendments are brought forward at Third Reading, they will contain clear objectives, principles and processes that will define the approach and policy that the Government are prepared to implement with respect to payday loans and that the responsibility that is then handed to the FCA will be one of implementation, not of policy design.
Lord McFall of Alcluith (Lab)
My Lords, Amendment 178 concerns continuous payment authorities. This is an issue that I raised during the passage of the Financial Services Act 2012. Continuous payment authorities are a recurring payment mechanism involving a debit or credit card where the debtor gives his or her card to the company and they contact the bank. Unlike direct debits or standing orders, this allows a firm to take regular payments from a customer’s bank account without having to seek express authority for each payment. When I made this point to the Minister, the noble Lord Lord Newby said that,
“abuse of the CPA is one of the most concerning practices of payday lenders”.—[Official Report, 28/11/12, col. 235.]
Consumer groups, the Law Society and the OFT have expressed ongoing concerns about this issue. The real issue is that the debtor—the customer—is not in full charge of their affairs. The continuous payment authorities do not offer the same guarantee as direct debits or standing orders. In effect, they give the company authority about how much is taken from an individual’s account and when. This is hugely important to those who take out payday loans, whose financial position is tenuous. Unlike direct debits and standing orders, there is no written communication between the individual and the bank. This situation has led to the banks reviewing up to 30,000 complaints from customers since 2009. According to the Financial Conduct Authority, quite a number of those will be eligible for compensation. That authority has said that many of the banks or providers are not cancelling recurring payments to payday loan firms.
Last December, the OFT warned that businesses should not lock customers into CPA traps because people did not know what they were signing up to. The OFT opened formal investigations last November into several payday lenders over aggressive debt collection practices. Their progress report focused on concerns regarding unfair or improper practices:
“Using the CPA in a manner which is unreasonable or disproportionate or excessive in failing to have proper regard to the possibility that a debtor is in financial difficulties”.
This includes,
“seeking payment before income or other funds may reasonably be expected to reach the account”.
The Financial Ombudsman Service was seeing 50 new cases a month at the end of last year. My information is that that number has increased since.
Such blatantly unfair treatment of consumers should not be restricted to a matter of guidance. The new clause that I am proposing ensures that debtors are informed about their rights and that only the debtor may cancel or vary a CPA in communication with the bank. Furthermore, the debtor’s bank is obliged to comply with the debtor’s instructions, as they do with direct debits and standing orders. I suggest to the Minister that in these austere times we ought to legislate to protect such debtors and to ensure a level playing field between the lender and the debtor.
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(10 years, 12 months ago)
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Lord Eatwell (Lab)
My Lords, I am grateful to my noble friend for moving his amendment and for pointing out the extraordinary complexity and confusion about the procedure that the Bill has gone through to get to this stage. As he pointed out, it came from the Commons as 35 pages and is now 170 pages. Substantial matters were introduced in Committee. Substantial errors were identified in Committee—even, as we shall hear, regarding the definition of a bank in a Bill on banking.
More substantial material is now being introduced under the more restrictive circumstances of Report, and I hope that the government Whips will restrain themselves if the rules are bent somewhat in our attempt to scrutinise nearly 200 new government amendments effectively. Yesterday, on the “Today” programme, the Chancellor announced that further substantial amendments will be introduced at Third Reading with respect to payday loans. Then the Treasury was circulating extra material in e-mails after 9pm last night. We have received copies of correspondence dated today between the Chancellor and the Governor of the Bank of England that changes the perspective on leverage. These measures are relevant to the most important industry in this country, and are measures to which we are supposed to give our consideration.
The correct procedure for a Government who are serious about getting this legislation right is to recommit the Bill. If they undertake that responsible step then we on this side of the House will give them every assistance in ensuring that the passage is completed within the restrictive timetable of a carryover measure. I understand the nature of the restrictions and realise that the Minister cannot make this decision at the Dispatch Box. However, will he at least give the House an assurance that he will take this proposal seriously and ensure that the usual channels also take it seriously?
On Amendment 1, moved by my noble friend, will the Minister tell us exactly what the phrase which my noble friend wishes to have omitted actually means? Can he give the House an illustration of the circumstances in which the taking of deposits from UK households and SMEs would not be a ring-fenced activity as the phrase suggests?
Lord Eatwell
“Full separation142VA General requirement of separation
(1) Where the members of any group include one or more ring-fenced bodies and one or more other bodies, the members of the group must, before the end of the period of five years beginning with the relevant commencement date, take steps to secure that there are no members of the group that are ring-fenced bodies.
(2) If in the case of any group steps to secure that there are no members of the group that are ring-fenced bodies are not taken within the period specified in subsection (1)—
(a) at the end of that period the Part 4A permission of each member of the group that is a ring-fenced body shall be treated as having been cancelled to the extent that it relates to a core activity, and(b) after the end of that period the appropriate regulator must refuse to give any member of the group a Part 4A permission to carry on a core activity.(3) At the end of the period specified in subsection (1)—
(a) section 142H, subsections (1)(b) and (4) to (7), and, in subsection (8), the definition of “specified”, and(b) sections 142K to 142V,cease to have effect.(4) In subsection (1) “the relevant commencement date” means the day appointed for the coming into force of section 4 of the Financial Services (Banking Reform) Act 2013 so far as it inserts this section.”
Lord Eatwell
My Lords, noble Lords will notice that Amendment 3 is identical to Amendment 6, which is in the name of the group of people who we could perhaps call the commissioners—members of the Parliamentary Commission on Banking Standards who have considered these matters with care and at great length. It is interesting that the noble Lord said just now that no evidence had been provided about issues associated with separation. The parliamentary commission provided extensive evidence, to which I would refer the Minister.
In speaking to Amendment 3, I will argue that the “reserve power” of full separation, as it was described by the parliamentary commission, is a logical and coherent part of the entire strategy of ring-fencing, which consists of three parts. First, there is the provision of the ring-fence itself. Secondly, there is electrification of the ring-fence in the case of individual groups that transgress and are subsequently required to separate. Thirdly, there is the measure put forward in Amendments 3 and 6, under which there is full separation where the process has not been followed successfully or appropriately by the banking industry.
The whole thrust of the commission’s report is about the need to maintain these three stages. Each reinforces the other. The noble Lord argued just now that the Government had seen no case at all for separation. Why then did the Government accept the case for the separation of individual groups should they transgress? That case came from the commission and the case for full separation came from the commission. If he accepts one, he should accept the other. It is quite ridiculous to suggest that the commission’s processes were somehow less rigorous than those of the ICB. Indeed, the whole package put forward in this group, which consists of the case for full separation as the final reserve power and the case for review, is a single coherent package. The case for review and the case for full separation, if that review should argue that ring-fencing is not working successfully, is a coherent structure set out by the commission. The Government are lopping off an essential leg of a three-legged stool.
Let us examine the arguments made against this amendment when it was first put by the commissioners in Committee. As well as the argument that it was somehow less rigorous—an argument that I think is almost offensive to the commission—the Government put forward the suggestion that, should the ring-fence not work, other options might be considered. The Minister raised the red herring of the possible introduction of a Volcker rule. Surely this is spurious, as here we have a coherent, structured package of three nested sets of measures to ensure the stability of the banking industry, which rely on and strengthen each other.
What I found most surprising in the Government’s rejection of the argument for full separation is that they rejected the idea that the ring-fence will consequently be made stronger by self-policing. The banks will have a major concern that others do not transgress lest they be caught in a final decision for full separation. The noble Lord said:
“The notion that banks will watch each other is not how the industry operates”.—[Official Report, 8/10/13; col.51.]
I must tell the noble Lord that that is exactly how a competitive market operates in a capitalist economy—everyone watches each other. The banking market is no different. Each pursues its own interest. As Adam Smith put it—the Chancellor of the Exchequer has taken to quoting him—it is not the benevolence of the butcher or baker that provides us with meat and bread, but the pursuit of their own interest. If the banks see it as being in their own interest to avoid full separation, we can be sure that they will take all necessary steps, including mutual surveillance, to ensure that full separation does not take place. That is why the commission’s proposal is such a strong one. It strengthens the ring-fence by giving those within it the incentive to ensure that it be maintained and be not transgressed. That is why this is a coherent package.
The Minister omitted to mention that the proposals for full separation are predicated on a thorough, independent review of the progress of ring-fencing. We have not only a nested structure, which strengthens at each stage, but, in the amendments put forward by the commissioners, a process of independent review that suggests when each stage should be introduced. That is why, for example, Amendments 15 and 195 are consequential on Amendment 3 and, with respect to Amendment 6—the identical amendment put forward by the commissioners—Amendments 15 and 196 are consequential. Those amendments involve the review of the entire procedure.
If we are to have a successful ring-fence, what better than to have a structure that incentivises the banks within it to maintain the integrity of the ring-fence? That is what the commission’s three-stage process does. I beg to move.
Lord Eatwell
My Lords, I am very grateful to the Minister for that expert summary of a complex set of amendments. However, I hope that I may ask him one question before he sits down. He referred to our Amendment 12, which would shorten the period before a review takes place, and said that he was very sympathetic and receptive to that point. Will he therefore accept Amendment 12?
Lord Deighton
I think the right thing for us to do is to discuss it together with our colleagues from the PCBS. The noble Lord is, of course, entitled to take the amendment to a vote, but I have not yet had the chance to discuss it with PCBS colleagues. The Government have an open mind on the relevant period, so I would prefer a fuller discussion.
Lord Eatwell
Does the Minister mean that he is content to return to this issue at Third Reading?
Lord Eatwell
Thank you very much.
This is a complicated set of interrelated amendments. I congratulate the Government on their Amendments 11 and 16 in which they have moved towards the commission’s position in proposing an independent review. By the way, I did not find any evidence that new Section 142J had been deleted, which was the previous requirement that the PRA conducted the review. Is there supposed to be a PRA review and an independent review? Surely that is not the case. It is not an important point but we should not leave both of them on the statute book. As I say, I did not detect that new Section 142J had been deleted.
We have a coherent package with the nested structure of the ring-fence, the electrification applied to individual groups and the electrification applied to the whole structure of banking—the so-called complete separation. That seems to me a coherent, rational structure which is supported by the review. Therefore, there will be the opportunity to take into account the detailed scrutiny by the ICB and the commission and consider which stage of this nested structure should be accepted. It seems to me that that coherence provides certainty as regards the way forward—not uncertainty, as the noble Lord, Lord Hodgson, suggested—because the review will not throw everything up in the air and lead to more years of parliamentary debate. We have been doing this for three years already, leaving the industry in a state of uncertainty. We should not throw it up in the air again but create a clear, rational structure that has been carefully put together by the ICB and the commission to provide for the review and separation.
The ordering of amendments before us makes our consideration a little awkward because we first have to consider my amendment on separation, Amendment 3 —which is identical to the commission’s amendment, Amendment 6—and then talk about the review. However, in the light of the care and consideration that the commission has given, I am content to fully support the commission’s position on the triumvirate of ring-fencing, group separation and full separation. I therefore wish to test the opinion of the House on Amendment 3.
Lord Eatwell
Lord Eatwell
My Lords, given the assurance given by the Minister that we will return to this matter at Third Reading, I beg to withdraw the amendment.
Lord Eatwell
“Professional standards
After section 65 of FSMA 2000 insert—“65A Professional standards
(1) The regulator will raise standards of professionalism in financial services by mandating a licensing regime based on training and competence.
(2) This licensing regime must—
(a) apply to all approved persons exercising controlled functions, regardless of financial sector;(b) specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules;(c) make provisions in connection with—(i) the granting of a licence;(ii) the refusal of a licence;(iii) the withdrawal of a licence; and(iv) the revalidation of a licensed person of a prescribed description whenever the appropriate regulator sees fit, either as a condition of the person continuing to hold a licence or of the person’s licence being restored;(d) be evidenced by individuals holding an annual validation of competence;(e) include specific provision for a Senior Persons Regime in relation to activities involving the exercise of a significant influence over a controlled function under section 59 of the Act.(3) In section 59, for “authorised” substitute “licensed” throughout the section.””
Lord Eatwell
My Lords, Amendment 21, and Amendments 50 and 51 from the commissioners, refer to the professional standards to be required in the banking industry—particularly to licensing bankers who have attained the required professional standards and, of course, not licensing those who have not. With respect to the conduct and skills of members of the banking industry, the Bill currently refers to “rules of conduct”. Amendments from the commissioners use the words “licensing regime”, but continuously refer to the adherence to rules.
The notion of a licence surely refers to some level of professional competence or professional standards. The Co-operative Bank may have obeyed the rules, but we now know it would have failed even the simplest test for professional competence. Rules may require the attainment of professional qualifications, but we cannot be sure and, as the Government regularly argue, certainty is important in this legislation. The clause in the Bill as drafted refers to rules of conduct. The commissioners’ amendment refers to,
“training in the effect and application of the rules of conduct”.
However, neither of them seem to convey the true context of professional standards.
As an academic, I am perhaps rather overly keen on examinations and the attainment of professional standards. Doctors have professional standards because they are required to pass examinations, undergo rigorous professional training and be thoroughly trained in ethical standards. Lawyers have professional standards because they are required to pass examinations, undergo rigorous professional training and be thoroughly trained in ethical standards. Of course, doctors and lawyers may, on occasion, not maintain the standards we would expect.
Lord Phillips of Sudbury
I hate to interrupt the noble Lord but I cannot resist saying that, unfortunately, the training of solicitors at this time does not involve rigorous ethical training. In fact, it involves little ethical training at all.
Lord Eatwell
I am sure that the noble Lord, as a distinguished solicitor, would attest to that, as indeed he has done. It seems to me that if members of the professions are required to pass examinations to show professional competence and to undertake rigorous training, bankers should do the same. That is what Amendment 21 seeks to achieve. For example, proposed new Section 65A(2)(b) says that the licensing regime must,
“specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules”.
Lord Eatwell
Being a “fit and proper person” would perhaps be appropriate. If the noble Lord is not aware of the phrase, it is the standard regulatory threshold which anybody operating in financial services must attain.
Amendment 21 seeks to capture the need for proper training, continuous development and the maintenance of proper professional standards via a licensing regime. I have enormous sympathy with Amendments 50 and 51, tabled by the commissioners, but I am afraid that they do not capture the need for professional qualifications.
With respect to the government amendments in this group, they are mostly concerned with the correct definition of a bank. I am delighted to see that we now have a definition of a bank. It may be of interest to the House to know which banks are now included that were excluded in the past. Barclays Capital, Citigroup, Credit Suisse Securities and Goldman Sachs International were not included in the previous definition of a bank, but I am glad to say that they are now. I congratulate the Government on appropriately incorporating them. However, those government amendments stand slightly aside from the issue of professional standards addressed in Amendment 21 and in Amendments 50 and 51, tabled by the commissioners.
I suggest to your Lordships that this House asserting that the banking industry must maintain appropriate professional standards is the minimum that the public expect of us. I beg to move.
Lord Newby
My Lords, that is the key focus of the senior managers regime—that, for the first time, senior managers and their banks will have to tell the regulators what the specific responsibilities of those people are, and we are introducing enhanced penalties if people do not stick to those responsibilities and break the rules. I think that we are indeed doing what the noble Lord requires us to do. I hope that when the noble Lord, Lord Lawson, and the most reverend Primate see our amendments, they will feel that we have done everything we can to meet their requirements.
Amendment 21, proposed by the noble Lords, Lord Eatwell and Lord Tunnicliffe, is an amendment which we saw in Committee. As I explained on that occasion, it would really just rename the existing approved persons regime as a “licensed” persons regime. The only extra feature in the proposal is for annual validation of competence by the regulator. This would have the effect of increasing the number of approved person applications from around 30,000 to around 150,000 a year. This would mean an unnecessary and costly extra burden on firms and regulators.
The Official Opposition’s amendment would not deliver the real reforms proposed by the parliamentary commission, which Clauses 14 to 26 of the Bill deliver and which we will enhance. It would just add to regulatory burdens without producing any real improvement in standards of conduct in the industry. I hope, therefore, that the noble Lords, Lord Eatwell, will agree to withdraw his amendment.
Lord Eatwell
My Lords, I was intrigued by the proposals which the Minister suggests will be brought forward at Third Reading and I look forward to having the opportunity to see them—perhaps in good time—before we have to debate them.
The key issue in Amendment 21 is that of qualification: professional qualification, minimum thresholds of competence and continuous professional development. These are fundamental to any serious professional standards and are vital if we are to have in the future the sort of people who can deliver a banking industry of which we in Britain can once again be proud.
I should make it clear that Amendment 21 is not in any way contrary to Amendments 50 and 51 by the commission; it is complementary. It adds to the overall structure of the requirements to be met by those who seek to pursue a banking profession. It is that word “profession” which we regard as central. It is no accident that we have labelled our amendment “Professional standards”. That is what this amendment seeks and that is what I believe it would achieve in addition to, and complementary to, the amendments by the commission and, as I hear it, the endeavours by the Government to develop a framework of rules which ensure that standards are met. The professional standards must be the bedrock. That is why I have moved Amendment 21 and why I wish to test the opinion of the House.
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.
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(11 years, 1 month ago)
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Lord Phillips of Sudbury (LD)
My Lords, Amendments 98A and 98B stand in my name. They seek to tease out a little more detail in relation to the amendment just moved by the noble Lord, Lord McFall, on whistleblowing. I say at once that I am wholly in favour of that amendment. The position of whistleblowers in our country is not satisfactory. Amendment 98 would widen the portal to offer assistance and compensation for whistleblowers by giving the appropriate regulator the power of initiative with regard to getting appropriate compensation for whistleblowers.
My amendment is designed to widen the scope of that initiative as, at present, I feel that it is unnecessarily limited in that the whistleblower is defined by proposed new subsection (2) in Amendment 98 as a person who gives information directly to the appropriate regulator or gives it to a colleague. I notice that the amendment does not define “colleague”. Suffice it to say that many of the circumstances in which whistleblowers are sometimes encouraged—and feel morally compelled—to speak out are extraordinarily complex.
I have had the good fortune to do work for the charity Public Concern at Work. Indeed, I set it up 20 or so years ago. That charity continues to do extremely valuable work. I spoke to people at the charity a couple of days ago and, believe it or not, they had been approached by roughly 2,500 whistleblowers in the past year. Astonishingly, I think that scarcely any of the whistleblowers were from the City. There are particular issues around that and we can underestimate the extraordinary pressure that a whistleblower or would-be whistleblower feels under in the context of the City, particularly as it is a very tight community in many ways. At the moment, the only recompense that a whistleblower can get, if he or she is discriminated against and suffers loss, is by using the provisions of the Public Interest Disclosure Act 1998. However, the whistleblower has to take the initiative. This amendment, as I say, gives the initiative to the regulator, which can be of enormous help and assistance to the whistleblower.
The Public Interest Disclosure Act 1998 scores over this amendment by having a much wider entrée to the remedies than is provided by the amendment. In particular, my amendments put the words “directly or indirectly” into the beginning of the two subsections that define how a whistleblower gets into the circle of potential compensation when they talk about giving information to the appropriate regulator or to a colleague. This is because—and I have checked this with Public Concern at Work—a lot of those who want to speak out are really anxious, if not fearful. What very often happens is information gets to the regulator in a really indirect, round-the-houses way, sometimes anonymously. My simple amendment is designed to open up the door but it is also a probing amendment in the hope that between now and Report we can have discussions with the Government on the optimum way of finding the remedy which the amendment seeks to supply.
I finish by giving some idea of how much wider the Public Interest Disclosure Act is regarding “getting into the remedy”. Clause 1 of the Act inserts a four-page amendment into the Employment Rights Act 1996 and provides a multiplicity of definitions of who is a whistleblower for the purposes of the remedy. An example of its sensible provisions is that a “qualifying disclosure” is one that is made in good faith, is substantially true, is not made for personal gain and,
“in all the circumstances of the case, it is reasonable for him to make”,
and so on.
It may be possible, at the next stage of the Bill, to import some of the language of the 1998 Act or, indeed, insert this amendment as an amendment to the 1998 Act.
Lord Eatwell (Lab)
My Lords, I am sure that the Treasury has studied carefully the experience of a measure developed in the United States which is very similar to this and which has been remarkably successful over the past three or four years in bringing forward very important information to the regulatory authorities. When the noble Lord replies, perhaps he would reflect on the American experience and say how valuable it might be to replicate it here.
Lord Eatwell
“Duty of care
At all times when carrying out core activities, a ring-fenced body shall—(a) be subject to a fiduciary duty towards its customers in the operation of core services; and(b) be subject to a duty of care towards its customers across the financial services sector.”
Lord Eatwell
My Lords, Amendment 101 in my name and the names of my noble friends Lord Tunnicliffe and Lord McFall goes to the heart of the change in culture which all of us wish to see in the relationship between banks and their customers, particularly their retail customers. Our objective is for banks to see their relationship with their retail customers as ensuring the financial success and security of those customers as far as may be possible, rather than seeing them as entities from which to make profits. A ring-fenced body should have a fiduciary duty towards its customers in the operation of core services, and a duty of care towards its customers across the financial services sector with respect to other duties.
Following the passing of the Financial Services and Markets Act 2000, the Financial Services Authority developed the notion that customers should be treated fairly. It did an enormous amount of work developing various rules, instructions and procedures whereby customers would be treated fairly. This was a dismal failure. PPI and the interest rate swap stories demonstrate that beyond all reasonable doubt. This was not a failure because of the failure of the regulators as such and their intentions. They were well intentioned, and they were focused on important issues. It was a failure because the culture of the banks was to see customers as entities with which to trade and from which profits would be made. We need to change that.
The amendment will put us in tune with developments that have also been perceived to be necessary in the United States, where the SEC now has the authority to impose a fiduciary duty on brokers who give investment advice. It is the same thematic development. A stronger duty of care would ensure that industry has to take customers’ interests into account when designing products and has to provide advice and support throughout the product life cycle, something which has clearly been lacking in recent scandalous events. This will increase consumer protection and help to restore confidence of the retail customer in banks. It will raise standards of conduct because banks will know they are responsible for acting according to these duties.
I am well aware that there is a general common law responsibility for duty of care, but the importance of this amendment is that the fiduciary duty would be reflected in the activities, responsibilities and powers of the regulators, not simply something enforceable under common law. That is why a fiduciary responsibility akin to that elsewhere in financial legislation, but here expressed generally within the context of the ring-fenced bank, would add significantly not just to consumer protection but to the character, behaviour and culture of ring-fenced banks. I beg to move.
Baroness Noakes
Can the noble Lord, Lord Eatwell, explain how this fiduciary duty and duty of care would be enforced? I think he mentioned a moment ago that it would somehow draw regulators in, but I cannot find anything in his amendment that places any corresponding powers or duties on regulators. I cannot see that a duty of care will make any difference whatever if ordinary consumers—ordinary customers of the banks—are expected to litigate personally on the basis of it.
Lord Eatwell
Surely the point is that by establishing a fiduciary duty a regulated entity would be expected to pursue exactly those duties. Therefore a regulated entity or other authorised person would be deemed by the regulator to be required to follow exactly those duties. If the noble Baroness thinks that this is too weak, I will be very happy to bring a stronger duty of care back on Report.
Lord Phillips of Sudbury
My Lords, the noble Lord, Lord Eatwell, asked an extraordinary question because there is no more onerous duty than the fiduciary duty. It is a novel and maybe a highly effective way of dealing with a great many of the concerns that have occupied this House over the last few days in Committee. An important part of the amendment is that the core activities and services are subject to a fiduciary duty, and other services to a duty of care. Given the big difference in responsibility, is it sufficiently clear what is and what is not a core duty?
Lord Eatwell
My Lords, that was a very unsatisfactory answer. It was both analytically weak and unsatisfactory in terms of the noble Lord’s argument. Let us first deal with the economics. As the noble Lord well knows, in the face of asymmetric information, competition is not necessarily efficient. He knows that: he learnt that at Cambridge. In those circumstances, to argue simply that competition will be an effective means of establishing a satisfactory relationship between the bank and its customers is simply analytically wrong. We ought to take that into account.
Then the noble Lord said that there was a series of relationships: contractual duties, the relationships set out in FiSMA and the senior manager regulations. The first two of those have existed since 2000. They did not work, so let us not rely on contractual duties which have been there all the time and have been happily beavering away. Did they protect the customer from PPI? No, they did not do that successfully. Did they protect the customer from interest rate swap selling? No, they did not do that either. It is no good relying on these contractual duties or on various elements of treating customers fairly in FiSMA. The senior manager regime, although it stiffens up the responsibilities of managers, does not change the actual structure of the relationship.
The noble Lord said something towards the end of his reply that was really quite extraordinary. He said that if bankers were told that they had a fiduciary duty and a duty of care, they would not have a clear understanding of what they were required to do. I find that quite astonishing. I have a sense that trustees have a very clear understanding of the fiduciary issue of what they have to do and all these terribly clever bankers ought to be able to suss that out as well. The idea that they do not have a clear understanding is just unbelievable.
Then the noble Lord said, “But of course, the trustee relationship applies to a situation which is appropriate only when one person is acting for another”. The majority of retail customers who deposit their money in the bank think the bank is going to be operating for them. They think that is what is happening. I know that many bankers therefore regard them as naïve, but that is what people actually believe. That is what we, on this side, believe should actually be the case. The noble Lord then said, “Well, of course, I do agree there should be a duty of care, but it should be specific and focused”. We all know that when you try to make specific lists of issues, the endeavour goes wrong because of the things left off the list. The things that are left off the list are the areas where we will see further consumer scandals appearing.
It is the responsibility of this Government to protect consumers in this country and to protect bank depositors within ring-fenced banks. It is a responsibility that this Government are clearly shirking. This amendment would provide a significant cultural change within the banking system—a cultural change which is desperately needed. I can assure the noble Lord that we will return to this forcefully on Report. For the moment, I beg leave to withdraw the amendment.
Lord Eatwell
“Sale of state-owned banking assets
(1) Before any sale of banking assets in the ownership of HM Treasury, the Treasury shall lay before Parliament a report setting out—
(a) the manner in which the best interests of the taxpayer are to be protected in connection with such sale;(b) the expected impact that any sale might have on competition for the provision of core services, customer choice and the rate of economic growth; and (c) an appraisal of the options for potential structural changes in the bank concerned including—(i) the separation of the provision of core services from the provision of investment activities,(ii) the retention of a class of assets in the ownership of HM Treasury,(iii) the impact of any sale on the creation of a regional banking network.(2) A copy of the report in subsection (1) shall be laid before Parliament and sufficient time shall be given for the appropriate committees of both Houses of Parliament to consider its findings before any sale decision.”
Lord Eatwell
My Lords, I have commented on a number of occasions that despite all the considerable endeavours since the financial crisis by the Treasury itself, by the FSA as it then was—not by the Bank of England—by the Independent Commission on Banking and now by the parliamentary commission, there has been no significant thought applied to the manner in which the banking system could be fundamentally restructured. All those discussions have taken place within the context of the banking system as it is currently structured. There has been no, let us say, Standard Oil approach to breaking up that company or an AT&T approach to say that there should be some fundamental restructuring of the overall banking system. Instead, we have taken the structure as it is and examined how we can make it work better: for example, by a ring-fence, bail-in clauses, resolution regimes or whatever. The only significant change in the structure of the banking industry—the separation of TSB from Lloyds—was done under the instructions of the European Union. It was not a policy developed here in the UK.
This amendment does not propose anything dramatic such as a break-up of the larger banks so that they are small enough to fail, but instead says that when there are sales of banking assets which are in Treasury ownership, the Treasury ought at least to go away and think about this. It ought to tell us how the structure of the sale is in the best interests of the taxpayer and think about the impact on competition—I am sure the noble Lord would like that—on customer choice and, indeed, on the rate of economic growth. It ought also to look at the relationship to the ring-fence and whether there might be a development of regional banking, an idea suggested by a number of commentators. All that the amendment seeks is to say, “Let us please have some thought about the overall structure of the banking industry in this respect”.
We know that the industry consists of entities which are too big to fail. We have one degree of separation with the TSB. There is an endeavour to encourage entry into the banking industry but we all know that it will take a long time for new entities to achieve the scale to be significantly competitive, except perhaps in the occasional niche of the industry. Before we rush further into selling the state-owned banking assets, let us at least consider whether those assets could be used and deployed in a significant restructuring of the banking industry. That would achieve the goals of making the industry more stable and a more effective entity in the overall operation of the UK economy. I beg to move.
Lord Deighton
The first thing we have to determine is what we are proposing to do with the good bank/bad bank. Does the split make sense and on what basis does it work? We will subsequently look at what we do with the separate parts.
Lord Eatwell
My Lords, that was not a very satisfactory answer. First, market sensitivity is an extraordinary red herring. Whoever wrote that bit should not be allowed to write any bits again. This is not about market sensitivity: it is about the overall structure of the banking sector and any issues of market sensitivity would, of course, be kept carefully out. Anybody would do that, so it is a really silly argument.
Turning to the good bank/bad bank story, value for money with respect to the disposal of assets is obviously an important component, but so is the future of the banking industry and its performance in relation to the UK economy as a whole, especially its support of the real economy in the provision of financial services. That aspect does not seem to have been considered. After all, the good bank/bad bank story is essentially a defensive move. It is dealing with a bank which is hampered—or potentially hampered; we will see what the report says—by its current mixture of assets and liabilities, particularly non-performing assets. The good bank/bad bank split is a defensive measure; a device for ensuring that you have an operation in the good bank which we hope can start increasing lending, as the noble Lord, Lord Lawson, said, particularly to the SME sector.
However, Amendment 103 is asking for something different, which the Minister did not actually address. It is asking for some thought about what the structure of the banking industry should look like in future. Are we simply going to repair what we have in the best way we can or do we want something really different? Could progress towards that “something different” be made in the sale of state-owned assets? It seems to me that that was what the noble Lord, Lord Turnbull, was talking about when he referred to the second element of the banking commission’s recommendations. Clearly, this recommendation has not been taken on board by the Government. Perhaps it has simply been overlooked; they might look at it now and think more seriously about it. I am sure that we will be returning to this issue later. In the mean time, I beg leave to withdraw the amendment.
Lord Eatwell
“Portable account numbers
(1) Within 12 months of the passing of this Act, the Treasury shall lay before Parliament a report considering—
(a) the adequacy of voluntary arrangements made by UK ring-fenced bodies to facilitate easier customer switching of bank account services; and(b) legislative options for the introduction of portable account numbers and sort codes for retail bank accounts provided by UK ring-fenced bodies.(2) The Chancellor of the Exchequer may, by affirmative resolution procedure, confer powers upon the appropriate regulator to require UK ring-fenced bodies to comply with any specified scheme to establish the use of portable account numbers and sort codes.”
Lord Eatwell
My Lords, this amendment refers to portable account numbers. I am sure that noble Lords will have read in yesterday’s Financial Times the story about the voluntary endeavour by the banks to increase the possibility of customers switching their accounts from one bank to another. The current switching drive does not include portability of account numbers. As the Financial Times boldly declared:
“Account switching drive fails to dislodge customers”.
The general assessment is that the complications associated with the non-portability of account numbers—that is, the complications of changing account numbers—are a significant disincentive to customers to switch their account from one bank to another. This is of course a considerable diminution of competition. The Government have argued very strongly that they are in favour of competition and choice in the retail sector. The noble Lord has repeated that position in discussing some of the amendments that we have already looked at this evening. However, here there is a clear opportunity to increase the possibility of competition in a very concrete way through the portability of account numbers.
The noble Lord will recall how successful this process has been in the telephone industry. The portability of telephone numbers has very evidently provided a significant competitive boost, which suggests that being able to move a number would increase competition significantly in the banking industry as well. I understand that this would be more difficult within the banking industry. For example, the amendment refers specifically to both portable account numbers and sort codes. That makes the issue more difficult because two individuals who bank at different banks may have the same account number but, of course, different sort codes; their entire identification is in the combination of the two. Therefore, a new means of identifying the core bank would have to be developed, and I understand that that would have various knock-on effects.
However, the idea that this would all cost £5 billion, as has been argued by the banking industry, seems to be vastly overstated. We had the same situation with telephony. We were told that this process was going to cost an enormous amount but, in the end, introducing transferable telephone numbers resulted in a tiny proportion of the costs which the industry had said it would need to incur.
Therefore, if we are really going to get competition and choice for the consumer, this seems to be a necessary step. The attempt to develop such competition through facilitating switching but without portability has, it seems, failed. Given that, if the Government are really going to put themselves on the side of the consumer in a competitive market, it is their responsibility to require the possibility of portable account numbers. I beg to move.
Lord Newby
My Lords, it goes without saying that the Government are fully behind the objective of increasing competition in banking and making sure that customers who wish to switch banks can do so without impediment. The notion of portable account numbers was considered by the Independent Commission on Banking and in its final report the ICB chose to recommend a new account switching service over portable account numbers. It considered that such a service, if designed correctly, would provide the majority of the same benefits as portability, but with significantly reduced risk and cost.
The Government acted quickly on this recommendation to secure a commitment from the banking industry to deliver current account switching in two years. This was an ambitious timetable for such a big project, but the banks have met the challenge. The new current account switching service was launched on schedule in September and covers almost 100% of the current account market. It has been designed to meet all the ICB’s criteria for tackling customer concerns over switching and to give customers the confidence they need to make the banks improve their services by ensuring that their customers can vote with their feet.
However, it is important that the new system delivers on its promises. That is why the Government continue to engage closely with the Payments Council, which has delivered the service on behalf of the industry, on the progress of switching.
Lord Newby
My Lords, I did not mention the parliamentary commission; I was referring to the Independent Commission on Banking. None the less, I shall come to the substantive point that the noble Lord has just made.
As I was saying, to aid transparency we have asked the Payments Council to publish statistics regularly, including switching volumes on a monthly basis and more detailed statistics every quarter, which include data on awareness and confidence in the new service. The Government consider that making this information public is the best way to hold the current account switching service to account. As has been mentioned, the Payments Council has just published the first set of data, covering the four-week period following the switching service becoming fully operational. The numbers show that 89,000 switches were completed—an 11% increase on the 80,000 completed during the same period last year. I am a great fan of the Financial Times, but to describe a scheme that has been running for a month as a failure, when it has already got 9,000 extra people to switch, is clearly complete rubbish.
Account portability is a more complicated issue. I am not necessarily disagreeing with the noble Lord, Lord McFall, but the only way to make a properly informed assessment as to whether, or how, steps towards portable account numbers should be taken is to conduct a comprehensive analysis. I must say, almost in parenthesis, that I do not believe that the analogy with telephone numbers takes us as far as might appear at first sight. For a start, as an individual I am quite happy if lots of people know my telephone number —but I am very unhappy if anybody knows my bank account details. This means that I have a completely different view about how I want to deal with that account. That is one of a number of different reasons why this is a complicated issue. It is not, however, an issue that the Government have just pushed to one side. We have made a commitment to ask the new payment systems regulator to undertake the comprehensive analysis that is required.
There has not yet been a proper study of account portability in the UK, but it is clear that operating the payments systems alongside account portability would be one of the significant challenges. That is why we think that the payment systems regulator is the right body to carry out this work. It will have the appropriate expertise and will be able to give an independent view. To be clear, the payment systems regulator will have the powers described in subsection (2) of the proposed new clause. There would be no need to confer new powers on the regulator in order to implement the recommendations of a review. In order to get a complete picture of what benefits account portability could bring, the experience of the current account switching service will need to be fully considered. Therefore, the Government expect the success of the switching service to be firmly within the scope of the payment systems regulator’s view of portability. The switching service is new and the regulator is not yet established. In our view, the logical step is to let them both become properly established and bedded in and then have a proper and comprehensive analysis. On the basis of that, a decision can be taken.
Lord Eatwell
The noble Lord just said that the payment systems regulator is going to be asked to do this. What timetable is the regulator going to be given?
Lord Newby
The regulator will be asked to make this one of its top priorities once it has been established, but it is impossible to say at this point that it will have to do it within three or six months. We think that that would be overly prescriptive. However, it is one of the priority tasks that it will be given from its inception.
Lord Eatwell
My Lords, that is why the amendment specifies 12 months. It seems that what the Government are saying is that they are behind the concept of competition but they are not behind the means of making that concept actually work. However, I must say that it is encouraging that the payment systems regulator is being asked to study this matter. It would be more encouraging if we were given some clarity that this will not simply be kicked into touch but will actually be presented to Parliament within a given timescale.
This is a matter of considerable importance if the Government are serious about competition and giving competitive advantage to consumers. It is therefore a matter to which we must inevitably return. In the mean time, I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, I am delighted that the Liberal Democrats are coming behind the proposals developed by my noble friend Lord Mitchell. I hope they acknowledge his success in having the various clauses limiting payday loans and high-cost credit agreements inserted during the passage of the Financial Services Act 2012.
Given that that Act is now in place and the measures advanced by my noble friend Lord Mitchell are on the statute book, the argument of the noble Lord, Lord Sharkey, as I understand it, is about why nothing is happening and why there is a lack of movement towards getting appropriate regulation in place. If he is indeed correct that things are moving so slowly—I have no reason to believe that he is not—the Government owe him an explanation as to why that is the case. Obviously, one is sympathetic to getting my noble friend Lord Mitchell’s measures going as fast as possible, but I have a couple of questions about the amendment.
First, do we really feel that there is a simple read-over between state government in the United States and a local authority in the UK? It seems that we pile responsibilities on local authorities without giving them sufficient funding, in many cases, to fulfil their responsibilities. I do not see that the amendment provides for any resources to go to local authorities to enable them to do the job.
Secondly, as far as I understand it, quite a lot of payday lending is done online. The amendment will do absolutely nothing to address loans that are made online because it is all geographically defined. A payday lender may have a registered address but that may have absolutely nothing to do with the location of the customers of that payday lender. The disjuncture between the registered address and the location of the customers suggests that knowledge of local needs would not necessarily be very relevant in such a case.
I am very sympathetic to the need to get things moving and look forward to the Government telling noble Lords how energetic they are being and giving us some concrete evidence of how my noble friend Lord Mitchell’s measures are being effectively brought into being. I would also like the Government to consider whether the noble Lord, Lord Sharkey, has, with the notion of the local authority—or indeed any other authority—identified a means of getting things moving more quickly.
Lord Newby
My Lords, the Government wholeheartedly agree with my noble friend that consumers must be protected when they borrow from payday lenders and use other high-cost forms of credit. As noble Lords have pointed out, the Government fundamentally reformed the regulatory system governing these lenders to protect borrowers by transferring the regulation of consumer credit to the Financial Conduct Authority in the Financial Services Act 2012.
The FCA takes up this new regulatory responsibility on 1 April but has already demonstrated that it is serious about cracking down on high-cost lenders. It is absolutely unfair on it to say that nothing has happened since the Act was passed last year.
On 3 October, as the noble Lord, Lord Sharkey, has pointed out, the FCA set out an action plan on high-cost lending to protect consumers, with tough new rules covering a number of issues, including a limit on rollovers and restricting the use of continuous payment authorities. These proposals have won widespread support and will profoundly change how this industry operates. I completely agree with the noble Lord, Lord Sharkey, that self-regulation has failed, but the industry is not going to be self-regulated any more.
Turning now to the noble Lord’s amendment specifically, I am surprised that he thinks that local authorities should be given additional responsibility for regulating high-cost lenders. I can see why it might work in the States, and having looked at the Florida scheme I completely agree that it has been an extremely successful scheme there. I hope that there are a number of additional elements of that scheme that might, in time, be introduced into the UK. However, I frankly cannot see the case for duplicating regulatory effort within such a small geographic area of the UK, especially as consumers will find this confusing. Nor can this be considered a good use of public funds, given that the FCA, which is fully funded by the industry, already has this responsibility.
Most payday lenders have a national reach, especially the biggest players which dominate the market and, by definition, those which are online, so it does not make sense to permit scores of local authorities, in addition to the FCA, to all regulate the same lender. We believe that a well-resourced and empowered single national regulator will provide the best outcome for consumers. Consumers will be better protected by having a regulator with the resources, expertise and national consistency of the FCA. I am not convinced of the benefits for consumers of a federal approach to regulation. In fact, this could lead to more consumer harm; payday lenders are more likely to target consumers in local authority areas where the authority is less active.
The nub of the amendment is, of course, that the noble Lord has framed it to ensure that the Secretary of State imposes a cap on the cost of high-cost credit. While I entirely support the noble Lord’s ambition to bring down the cost of such loans, I am not convinced that the best way to do that is via a mandatory cap. The Government do not believe that current evidence provides sufficient justification to support a cap on the cost of credit.
The noble Lord has referred to the work commissioned by the Government from the University of Bristol. It does not, as he says, say that the main arguments against a cap on the rate relate to loan sharks. It does point out that although that may happen in some cases, lenders may try to bypass the cap by introducing other charges or fees which are not subject to it. Evidence shows that, with a cap in place, lenders may be less likely to show understanding if customers get into repayment difficulties.
While the Government are not convinced that a mandatory cap is the best overall solution for consumers now, they have made it clear that the FCA has a specific power to impose a cap in future, should it decide that it is needed to protect consumers. The FCA has already committed to start analysis on use of this power from April 2014.
Capping the cost of credit is a major intervention with potentially profound consequences for consumers, so it is right that the FCA contemplates use of this power in a responsible and evidence-based way, which is what it will now do. Noble Lords should not be in any doubt about the FCA’s commitment to using its powers to protect consumers whenever it feels it is necessary. The Government stand ready to support the FCA to ensure the best overall outcome for consumers.
I know it is extremely frustrating that we have not got a comprehensive solution in place, but the Government have moved with considerable alacrity in setting up a new, effective regulatory framework. The regulator has acted quickly to set out proposals and on that basis, I hope that the noble Lord will feel able to withdraw his amendment.
Lord McFall of Alcluith
My Lords, while many aspects of competition, culture and behaviour in the industry are addressed by the Financial Services (Banking Reform) Bill, these amendments focus on the lack of transparency and public disclosure of poor products, practices, individuals and institutions, which remains unaddressed. The focus of these amendments is to open up this aspect of transparency. The amendments would enable the FCA to publish the instructions it gives to firms when it finds that consumers have been unfairly treated. It would improve the accountability of the regulator and of the regulated firms.
Most people are agreed that the FSA was not a transparent regulator. Indeed, in 2009, when the Treasury Select Committee investigated the treatment of customers in mortgage arrears, it concluded that,
“the balance between disclosure to the public and the need to protect firms before they have been found guilty of wrongdoing may have tilted too far towards the interests of the industry”.
More importantly, Section 348 of FiSMA placed a blanket prohibition on the FSA publishing information received from firms without the firms’ permission. The question has to be asked: are any banks going to voluntarily agree to the publication of their poor practice? I would suggest that is highly unlikely.
I will give one example. In the case of PPI, HFC Bank was fined by the FSA in 2007 for mis-selling of PPI. It issued instructions about the steps the bank needed to take to contact customers and review its previous conduct. However, when consumer groups asked for full details of the instructions, the answer given was that the instructions issued by the FSA contained information from HFC and the FSA was therefore prohibited from disclosing them by Section 348 of FiSMA.
This amendment empowers the FCA to release the instructions given to firms. Genuinely confidential information still will be protected, but the regulator will no longer be able to use Section 348 as an excuse for not disclosing the instructions it gives to firms. There are safeguards for firms, requiring the regulator to consult firms on the notice it will issue and to take account of their representations. Indeed, when the managing director of supervision at that time, Jon Pain of the FSA, appeared before the Commons Treasury Committee in March 2010, he was asked if he would like to have the ability to publish names of firms to which the FSA has sent a warning notice on disciplinary process. He said that that process struck the right balance between transparency and process.
The FSA itself would like that facility to be looked at. Indeed, when the Parliamentary Commission on Banking Standards looked into it, we stated that:
“Amendment of Section 348 … is likely to be required to facilitate the publication of appropriate information about the quality of service and price transparency.”
The amendment argues that the definition of “confidential information” should be modified to exclude firm-specific results of mystery-shopping exercises and thematic work. That would prevent consumers being kept in the dark and ensure that firms are not able to get away with not treating their customers fairly without suffering any practical penalty.
The definition should also be modified to exclude price data for certain markets, such as annuities—a very hot topic at the moment—which would make it easier for consumers to shop around to get the best rate and spot when they are getting a bad deal. It would also assist consumer organisations in warning consumers about products to avoid.
Complaints data for individual firms should also be excluded, which would allow the FCA to react swiftly to emerging problems by disclosing specific information about individual product areas to consumers. The legacy of mis-selling which exists happened because of a lack of speed in telling consumers and ensuring that individual companies undertook the remedies which the then FSA asked them to undertake.
If the definition also excluded enforcement activity against firms, that would allow for greater regulatory transparency. That must include the FCA publishing information on the number of cases referred to enforcement, broken down by subject—including product and practice involved—and industry sector; the outcome of cases, including how many resulted in a fine, public censure or were dealt with informally; and the names of firms and individuals involved in cases.
As I said on an earlier amendment, the balance is tilted too much towards the industry. The asymmetry of knowledge is in the industry’s favour. This amendment would help redress that by improving transparency. I ask the Minister to consider the long-standing commitment that I have had to that.
Lord Eatwell
My Lords, my noble friend has made a very strong case. He needed to add one other element to persuade the Government, which is that this would enhance competition. If one improved information in this way, then, given the enhancement of consumer choice, the competitive objective of the Government would be better served. This would be a diminution of some of the severe problems of asymmetric information that distort competition in financial services, especially retail financial services. If it was developed with care it would be a considerable boost to the overall efficiency of retail financial services in this country.
It is very easy to say, “The time is not ripe; it is not really quite the time; there are unintended consequences”. All that is required is a consistent bias towards transparency. The Government should approach this issue by saying, “In principle, we are in favour of transparency”. The argument should be made for not being transparent. In other words, the strong case has to be made for not revealing something. The fundamental prejudice should be that this information should be transparent. Effective transmission of information is a key element in creating an efficient market and enhancing the competitive goal that the Government claim to be their own.
Lord Newby
My Lords, as the noble Lord, Lord McFall, pointed out, we debated this issue at great length during proceedings on the previous Financial Services Bill. Sections 348 and 349 of FiSMA govern the treatment of confidential information obtained by the regulators and the ability of the regulators to disclose such confidential information. The noble Lord argued at the time, and repeated today, that there was inadequate transparency and insufficient disclosure of information in the financial services regulatory regime. This led to the argument that Section 348 should be amended to make it as unrestricted as possible.
In response, the Treasury undertook a careful review of Section 348 and its associated provisions. The review concluded, first, that it would be difficult to amend Section 348 without negative consequences. Scaling back Section 348 would increase the risk that firms would become less willing to share information with the regulators, undermining those important relationships and the regulators’ ability to protect consumers. Secondly, even with Section 348 in place, the FCA could and should do more to increase transparency.
With that in mind, the Government decided at the time not to amend or delete Section 348 but agreed with the FSA, as it then was, for it to carry out a fundamental review of how transparency would be embedded in the new FCA regime. This was published as a consultation in April of this year and received positive feedback from consumer groups—that is, the very people the new or changed approach was intended to benefit. The review covered use of disclosure as a regulatory tool by the regulator, disclosure of information by firms, both voluntarily and as a result of FCA rules, and transparency on the part of the regulator.
In terms of publishing details of enforcement action, the FCA is already required to publish details and information about decisions and final notices that it considers appropriate. It can also publish the fact that a warning notice has been issued in respect of disciplinary action. In response to the recent PCBS recommendation that it should require firms to publish more information, the FCA has outlined its plans to issue a call for evidence next year on data that it should require firms to publish to help consumers better understand the firm and product quality.
I hope the noble Lord will agree that this is exactly what the PCBS was seeking to achieve and that it can be done without further amendment to Section 348.
Lord Eatwell
Perhaps I can be of help to the noble Lord. I do not know whether he has had the opportunity to see the Bank of England response to the final report published today, where the Bank of England provides the answer which the noble Lord, Lord Newby, was unable to provide. It says:
“For the present, the Government’s legislative proposals in this area will apply only to deposit takers”—
Earl Attlee (Con)
My Lords, we are slightly out of order because the noble Lord has not moved his amendment and started the debate. Perhaps the noble Lord would like to finish moving his amendment.
Lord Turnbull
I thought that I had started by begging to move Amendment 104E, but if I have not I shall do so now, and if that allows the noble Lord, Lord Eatwell, to offer his clarification I should be very grateful. I beg to move.
Lord Eatwell
I usually try to be difficult. When I try to be helpful I am stopped. I was referring to the Bank of England response, published today, in which it says that,
“the Government’s legislative proposals in this area”—
this is referring to the senior persons regime which we talked about last time—
“will apply only to deposit takers but not to investment banks and insurance companies”.
So the Bank of England is clear that both the senior persons regime and, I presume, also the offences issue—for which I remember the same issue arose as to the definition of a bank—do not apply to investment banks.
Lord Newby
My Lords, these are technical amendments relating to a number of the new powers introduced to the Bill as a result of the Government’s amendments in your Lordships’ House.
Amendment 113A amends Clause 17 of the Bill to specify the procedures applying to statutory instruments made under the new powers. It provides that the affirmative resolution procedure will apply to: orders made by the Treasury to exclude certain systems from the definition of “payment systems” for the purposes of the new clauses establishing the new payments regulator; orders to make amendments, which are consequential to the Bill, to other primary legislation, under the power introduced by the second amendment in this group, to which I will return in a minute; and orders made under paragraph 6 of the schedule on the conduct of financial market infrastructure administration, which allows the Treasury to make further modifications to primary legislation to make appropriate provision for FMI administration. Orders made under other provisions of the Bill will be subject to the negative resolution procedure, unless they are required to be made using the affirmative procedure, or they are commencement orders.
Amendment 114 enables the Treasury to make amendments consequential to the Bill—and any statutory instruments made under it—to other primary and secondary legislation. For example, it is likely that this power will be used to bring other legislation in line with the terminology of the new senior managers regime. This power can be used only in certain circumstances and the Treasury can make orders under the power only if it considers it necessary or expedient to do so as a consequence of a provision in the Bill. Furthermore, the power applies only to legislation which is made before the Bill is passed, or which is made in the same Parliamentary Session in which the Bill is passed. I beg to move.
Lord Eatwell
My Lords, first, with respect to Amendment 113A, it is useful to see the use of the affirmative procedure here. However, the noble Lord will recall that the Delegated Powers Committee recommended an amendment which referred to the amendment of clauses that deal with ring-fencing. I asked more than two weeks ago how the Treasury would react to the Delegated Powers Committee in this respect and was told that I would receive a reply. I have not, as yet, received a reply. As we are now reaching the end of the Committee stage, it would be very helpful to know whether the Government are simply ignoring the Delegated Powers Committee, in which case we would require an explanation, or what the Government intend to do about this.
On Amendment 114, these powers are sometimes referred to as Henry VIII powers. Given this new clause, the good King Henry would regard it as rather excessive and would be taken aback by the power that the Treasury takes,
“amending, repealing, revoking or applying with modifications any enactment to which this section applies”.
The enactment applies to,
“any enactment passed or made before the passing of this Act”,
so, presumably, since the birth of Henry VIII. The new clause then refers to,
“any enactment passed or made on or before the last day”.
That I understand. What scrutiny will be given to these measures? We have been through a Committee stage which has identified a consistent rejection of proposals by the banking commission and particularly of the amendments that have been put forward. I have not heard the Government accept a single amendment put forward on behalf of the banking commission—not one—so there has been a consistent rejection of those. Now we are told that we will have the possibility of,
“amending, repealing, revoking or applying with modifications”,
a series of quite controversial measures in which the Government have attempted to water down the proposals of the banking commission. I would like to feel that I could get some reassurance that this power is to be used sparingly and is to be used only if there is some oversight or accountability to Parliament when it is used.
Lord Newby
My Lords, three issues have been raised. The first is whether we have responded to the Delegated Powers Committee. I explained at some length last week what the Government’s response was. Subsequently, I wrote to the chair of the committee, reiterating what I had said. I am sorry if noble Lords have not seen the letter; I will make sure that it gets to them. I will repeat what I said and what the letter said.
The Government’s view, bearing in mind that the committee said it was for the House to decide and did not make a recommendation on the procedure to be followed, is that, given the technical nature of these statutory instruments, the best way forward, in the light of the Government’s response to the consultation process that they have just completed, is to invite noble Lords who are interested in the secondary legislation to the Treasury to have an informal discussion on the issues, and to see what they feel might be done, and whether any amendments are required. The Treasury does not have a fixed view on the detailed provision of that secondary legislation, and would welcome the further views of Members of your Lordships’ House.
Secondly, I find literally incredible the suggestion of the noble Lord, Lord Eatwell, that the Government took no account of the recommendations of the PCBS.
Lord Newby
The noble Lord may or may not remember that at the start of today’s discussions the noble Lord, Lord Lawson, pointed out that the size of the Bill had expanded multiple times. I admit that part of this relates to the Government’s amendments on bail-in. However, every other amendment is in order to implement a recommendation of the PCBS. That is what we spent nearly all of last week discussing.
Lord Newby
My Lords, I am sorry; with the exception of the bail-in provisions, the expansion of the size of the Bill is specifically in order to implement recommendations of the parliamentary commission, such as the senior managers regime, the criminal sanctions and the enhanced electrification power. The reason that the Government have not today accepted everything that the PCBS has recommended is that we have already accepted the majority of the commission’s recommendations and put them in the Bill. It is simply not the case that we have accepted no recommendations of the parliamentary commission—quite the opposite.
The final issue is specifically about the powers in this amendment. The powers can only be used to make consequential amendments—that is, those which are needed to deal with the provisions passed in the Bill. The example I gave was in relation to the senior persons regime, and I can reassure the noble Lord, Lord Brennan, that there is nothing sinister or unusual in what is being proposed. These powers are commonly taken in Bills which make significant changes to existing law. I am very happy for Treasury lawyers to set out in a letter the precedents that these powers exactly replicate. The hour is late, but I can assure the House that we are not doing anything here that is in the slightest way unusual.
Lord Eatwell
Will the noble Lord agree that Amendment 114, at least, should be withdrawn until it can be considered by the Constitution Committee and the Delegated Powers and Regulatory Reform Committee? He has plenty of time to bring it back on Report if he then has substantial justification for it, and it would give considerable comfort to the Committee.
Lord Newby
My Lords, I do not think that we need to withdraw the amendment. As I say, it is a standard provision. Interestingly, the specific reason that I gave for requiring it relates to the implementation of a recommendation of the Parliamentary Commission on Banking Standards. However, as I say, this provision is not in any way unusual. Therefore, I do not believe it needs the process that the noble Lord suggests.
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(11 years, 1 month ago)
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Lord Blackwell (Con)
My Lords, I do not think anyone can disagree with the arguments put forward by my noble friend Lord Lawson that the regulators should have access to the best available information from the auditors and should be able to request the information relating to the accounts that they want. What I am less clear about from this discussion is whether there is a need for that to be built into this legislation. I should be very grateful to my noble friend the Minister if he would clarify whether there is anything in the current law that prevents regulators doing exactly what these amendments suggest.
Like my noble friend Lady Noakes, I sit on the board of a bank and on its audit committee. Things have moved on considerably since 2008. It is clear to me that as regards the major banks, the PRA has frequent confidential discussions with the auditors; and those are perfectly proper. It is also clear to me that the PRA can, and does, request information from the relevant bank in any form that it feels it needs to have to perform its duties. Therefore, the question is whether there is anything in the current legislation that would allow an auditor to refuse to meet the PRA or to refuse to provide information on the grounds of commercial confidentiality or conflict. Are those powers extant in existing legislation? Is there anything that allows a bank to withhold financial information if it is requested by the PRA? If those powers are already available, I am less clear what these amendments would add.
Lord Eatwell (Lab)
My Lords, it is clear from remarks made around the House that noble Lords support the intention of these amendments—that there should be regular dialogue between the regulators and auditors, and that accounts submitted to the regulators should be fit for purpose and provide the relevant information to inform their decision-making. I understand that the contested issue is whether these meetings take place at the moment, and whether there are sufficient codes of practice—or simply what is regarded as normal practice—to enable these meetings to take place. However, I do not think that that is enough. As my noble friend Lord Hollick said, we have a responsibility to the taxpayer to ensure that these meetings take place and that the appropriate accounts are provided to the regulators.
When he replies to this debate, the noble Lord, Lord Deighton, will have to tell us that he can guarantee that these meetings will take place and that accounts will be provided in appropriate form: not simply relying on codes of practice, but on the force of statute.
Lord Eatwell
My Lords, this amendment, which I hope will become a new clause in the Bill, is probably the most important in the Bill. It defines whether we are really serious. If we are not serious, we will reject the idea of having a leverage ratio as one of the armaments of the FPC. If we are serious, the Financial Policy Committee must have this tool.
As the noble Lord, Lord Lawson, has argued, risk-weighted assets have been discredited as a measure of risk within the banking system. It is regrettable that so much legislation both here and in some of the discussions in Basel and in the European Union still use this discredited measure as a means of devising appropriate regulatory measures.
The leverage ratio is simple, it is clear and it provides a protection to the overall stability of the financial system; it provides protection for a resolution regime; and it provides protection for depositors because, with the regulatory determination of the amount of capital relative to the asset base of the bank, that regulatory determination pursuing those goals will have the effect of reducing an important component of systemic risk. It is not me who makes that argument; the Government did so in the Financial Services Act 2012. In defining systemic risk, that Act defines one of the characteristics of systemic risk as “unsustainable levels of leverage”.
If the Financial Policy Committee is supposed to be managing systemic risk and a component of systemic risk is unsustainable levels of leverage, why cannot the Financial Policy Committee have the tools to do anything about it? At the moment the Government are telling us that they will review whether the FPC should be given this particular tool in 2017. They will review it: we are not even sure that the Financial Policy Committee will receive the ability to manage the leverage ratio in 2017-18.
By the way, even if it does appear in 2018, the Financial Policy Committee and the Governor of the Bank of England will be given this tool just as Mr Carney gets on the plane back to Canada. We have managed to secure someone who the Government tell us—and I think is generally acknowledged—is a highly skilled central banker and we are not giving him the tools to do the job which he is asked to do in the 2015 legislation. I notice that it was said in the Commons Public Bill Committee that:
“The Financial Policy Committee cannot be expected to work with one hand tied behind its back”.—[Official Report, Commons, Financial Services (Banking Reform) Bill, 26/3/13; col. 207.]
Not giving the Financial Policy Committee this particular power ties both its hands behind its back because it is, as I have already said, required to take account of unacceptable levels of leverage and yet it has no tool to do anything about it. The amendment of the noble Lords, Lord Lawson and Lord Turnbull, and of my noble friend Lord McFall, achieves that goal. Surely this is what is necessary if we are serious and are not overwhelmed by the lobbying of the banks.
Lord Turnbull (CB)
My Lords, I support the amendment and the account given by the noble Lord, Lord Lawson. I shall add a bit of background to this matter. For probably two decades, up to about 2004, the leverage ratio of the British banking system fluctuated between 20 and 25. It then rose, reaching a peak in 2008 of somewhere over 40. The Government’s wish that the number of the leverage ratio should not be greater than three implies that the limit of their ambitions is to get this leverage ratio back to 33, which is still, by historical standards, a very high ratio.
A very interesting chart in the Vickers commission report shows how risky people thought assets were. It shows that they fell—this is the assessment that banks put into their own models—between 2004 and 2008. How can anyone believe that 2008 was a year of greater financial stability? I believe the way this came about was as follows. You said in 2004, “I have a portfolio of commercial property and have not lost a penny on it in the past 10 years, so I will give it a weight of X”. You come to 2008, four or five years later, and say, “I have still not lost any money on this, which tells me that this portfolio is not as risky as I thought it was in 2004, so I will give it a lower risk rating”. What is happening all the time when you have an upswing is that, as the upswing gets riper and riper, the risk weights go down and down, until there is a crash. The whole purpose of having a leverage ratio is to provide a backstop to that. One or two people argue that we should run on basic leverage ratios alone but, in my view, both the leverage ratios—unweighted and risk-weighted—should run in tandem. Each provides a check on the other. Relying solely on risk-weighted assets leads you into the farce of banks marking their own homework and doing the opposite of what they should be doing by marking things as less likely at precisely the moment in the cycle where they become more likely.
Another argument that has come up in relation to 3% and 4% is that we must not get out of step with regulation abroad. However, when it comes to risk-weighted assets, the Government have accepted that they want to impose a higher figure—partly because we have more systemically important banks and it is important for a medium-sized economy running a very large banking sector for that sector to be safe. When you say, “Does that not mean that what we thought was a 3% figure should move pari passu”, the answer is, “Oh no, we can’t do that because we will get out of line with what everyone else is doing”. But if you can do it for one of these measures, why can you not do it for the other? I find that argument completely unconvincing.
There was a view in the commission that higher leverage ratios were a good thing. However, that is not what this amendment is about. Although we thought that, the amendment says that it should be the FPC that makes the judgment. As my noble friend Lord Eatwell has pointed out, the absurdity of hiring this super-duper, global-standard central banker and then not giving him this essential tool until the very point at which his contract ends is beyond belief. It seems an absolutely simple point that the FPC should start this. Elsewhere in the world, other people will be thinking about this and it seems very strange indeed to leave the Bank and the FPC unable to start deploying this measure.
There is an argument that certain kinds of banks, particularly those with low-risk assets, will find that this 4%, or the leverage ratio, becomes the binding ratio. People making that argument cite, principally, various former building societies. You have to look around and ask where the biggest failure in Britain was. It was former building societies thinking that they had a portfolio that was a good deal safer than it really was. Some of them also got into quite a lot of commercial real estate. Northern Rock, for example, would have been well advised to have followed a leverage ratio of this kind. If it turns out that the supply of mortgages is not adequate—although we are doing lots of other things to promote it—you might want to differentiate between one kind of organisation and another. That should be done by the regulator as a derogation from a world in which we are working with higher leverage ratios than the Government currently envisage.
Lord Deighton
My Lords, I welcome the engagement of noble Lords on this critical issue of the leverage ratio and the FPC’s toolkit. Everybody agrees the importance of making sure that our financial institutions are appropriately capitalised. There is no dispute about that and the lessons we should have learnt from the financial crisis. The real question—and again my noble friend Lady Noakes hit the nail on the head—is about the journey we take to get there, how it integrates with what is going on in global standards, and what powers the FPC and the regulators already have to ensure that we are in the right place in the mean time. I think that also comes back to the points made by the noble Lord, Lord Brennan.
I shall try to give some context, particularly for those who are not so familiar with all the aspects. With each of these amendments, I ask myself what the point of substance is between the amendment and the Government’s position and whether I can reconcile the two with the existing actions we are taking. In this case I have been able to comfort myself that adequate protections are absolutely in place, given the objectives of this amendment.
The FPC has two main sets of powers at its disposal. The first is a power to make recommendations. This includes recommendations to both the PRA and the FCA. They can be made on a “comply or explain” basis. The second set of powers, which we are talking about here, is to give directions to regulators to adjust specific macroprudential tools. Amendment 93 proposes that the Government give the FPC direction powers to implement a minimum leverage ratio in the UK. Before explaining why the amendment is not necessary or desirable, let me explain the international and domestic context, beginning with the international.
In order to address recognised problems with the system of risk-weighted capital requirements—which we have all talked about and acknowledged—the Basel III accord recommends a complementary binding minimum leverage ratio. Again, we have all agreed that the right way ahead is for the two to work together, so there is no dispute about that. That standard comes into force in 2018, following a final calibration of the leverage ratio in the first half of 2017 so that we get it right. Separately, at the European level the European Banking Authority will undertake a review of the leverage ratio with a view to the European Commission introducing legislation in 2017. The Government agree, and have consistently argued, that banks must be subject to the binding minimum leverage ratio requirement, which supplements the risk-weighted capital requirements as set out by the Basel III accord. Therefore the Government fully anticipate the development of internationally agreed minimum standards of leverage.
The Government take the view—and we believe that the regulators agree—that the optimal approach to creating a lasting binding minimum standard is to work towards international agreement and its implementation through legislation. As Mark Carney wrote in the Financial Times on 9 September:
“Yielding to calls for unilateral action to protect domestic systems would risk fragmenting the global system, slowing global growth and job creation”.
Once that minimum is agreed domestically, the Government propose—and this directly addresses the point made by the noble Lord, Lord Eatwell—to furnish the FPC with a specific macroprudential tool to vary the leverage ratio, through time, obviously subject to it not falling below the minimum.
However, the question raised by the amendment is: what powers do the regulators have to take action on leverage between now and 2018 in advance of the introduction of that internationally agreed binding minimum requirement through European legislation? Let me reassure noble Lords that the regulators already have extensive powers to address the issues raised by this amendment. The FPC has broad powers to make recommendations to the regulators, on a “comply or explain” basis, including on leverage. The PRA has all the powers necessary—which we have talked about—under Section 55M of the Financial Services and Markets Act 2000 to require individual firms to take specified actions, including on leverage. Under Section 137G of FiSMA it may make rules in pursuance of its general functions, including rules on leverage ratios.
The killer fact, if I may call it that, is that on 20 June—interestingly, one day after the publication of the PCBS report containing this recommendation—the PRA announced that it would require eight major UK banks to meet a tougher leverage ratio than that prospectively required by Basel III. They have already done that. That action followed a March 2013 recommendation from the interim FPC to the PRA to consider applying higher capital requirements to any major UK bank or building society with concentrated exposures to vulnerable assets, or where banks were highly leveraged relating to trading activities. Put simply, the regulators already have the powers to do what the noble Lord appears to be suggesting in advance of international agreement.
Lord Eatwell
I am intrigued by that argument. The noble Lord started off with a powerful argument for the necessity of a leverage ratio that is allied with risk-weighted assets and other measures. He is now saying that we do not need it because it is all there already. Why, then, are we even bothering to think about introducing it in 2017 or 2018? As he said, we have all the powers already. He is absolutely contradicting himself in a single speech. Will he also address the fact that the Bank of England’s response today to the banking commission’s final report states that the FPC will publish its assessment of the appropriate level of the leverage ratio by the end of this year? When the FPC publishes that assessment, what will the regulators and the Treasury do about it?
Lord Eatwell
My Lords, will the Minister answer the question I asked about the statement that the Bank of England has made today that the Financial Policy Committee will publish its assessment of the appropriate level of the leverage ratio by the end of this year? When it publishes that assessment, who is then going to act and what are they going to do?
Lord Eatwell
My Lords, I support the noble Lord, Lord Lawson, in this amendment. It seems a modest amendment, calling for a review in three years’ time when the appropriate information from the United States will be available. It will be valuable to have this clause in the legislation to ensure that that review takes place, because it is so easy—given the exigencies of the moment—for major issues, which were recognised as major in the past, to be neglected because of day-to-day pressures. Therefore, having done all our work on banking in the Bill, if we set this process in motion so that the review happens, we will be performing a valuable service.
Lord Phillips of Sudbury
My Lords, I, too, support the amendment. I moved Amendment 91B at the close of our second day in Committee, which overlapped to a considerable extent with this amendment. In my amendment, I also talked about looking at the cultural as well as economic effects of this mass of gambling, as it is, within the financial markets. I hope that the Government will smile upon this; it may be that if it comes back on Report I will try to amalgamate my amendment and this one.
Lord Turnbull
This amendment stands in my name and in the names of the noble Lords, Lord Lawson and Lord McFall. It seeks to legislate for a remuneration code for banks administered by the PRA and the FCA and to provide some headings on its content. I shall speak also to Amendment 96 which seeks to establish a more stringent regime for clawback.
We can analyse this remuneration issue at several levels. Is a special regime needed for banks? We already have a regime for remuneration in UK corporates, partly determined by BIS regulations and partly enforced by the guidance issued by investors and investor groups such as the ABI and the NAPF. This remuneration structure has recently been reinforced by increasing the amount of disclosure and by increasing the voting power of shareholders. We also have—or have had—a remuneration code for financial institutions—going wider than banks—administered by the old FSA. Why should we go to something more stringent for banks?
The Parliamentary Commission on Banking Standards took the view that a special regime for banks beyond that required for other financial institutions and listed companies generally was justified. Why was that? We identified a number of characteristics that make banks special. They are responsible for an essential service which has to be operated continuously and has, hitherto at least, created a presumption of being too big or too complex to fail, thereby creating an implicit guarantee which can be exploited. Banks are highly interconnected and can fail very quickly, damaging not just themselves but affecting people’s confidence in other parts of the banking industry and the wider economy. Banks are also very highly geared, as has been mentioned today. Their capital structure is not at all like that of the general run of FTSE companies. Equity counts for low single figures. Like the noble Lord, Lord Flight, I read Essays in Money and Banking in Honour of R S Sayers, and the ratios were vastly higher in those days. As a result, those running banks are incentivised to take risks and their shareholders are incentivised to support them. Therefore, I think you can rely less on countervailing pressure from shareholders to achieve restraint in bank remuneration.
Banks are also special in the way they behave. Total remuneration has increased hugely and takes a very high share of the total surplus compared with dividends, taxation, retentions, building up capital and so on. As has also been said today, cash bonuses have been paid on the basis of mark-to-market profits which, in the end, proved ephemeral. There is unlimited upside when remuneration takes the form of equity but, unlike the old partnerships which have gradually been superseded, there is limited downside.
If you accept the premise that there should be something special for banks, what should be the content of this regime? The first thing that should not be there is what the EU and the European Parliament are trying to put in: a limit on the ratio of variable pay to base pay. That is likely to be counterproductive, pushing up base pay and reducing the quantum which is provisional and, therefore, at risk of clawback. What should be there is something about the proportion of variable pay that is deferred and the time period over which it is deferred. The commission recommended that some, not necessarily all, could be deferred for up to 10 years, in recognition of the cyclical nature of banking.
Amendment 96 seeks to strengthen clawback. The terms “clawback” and “malus” sometimes get muddled up. Most of what people have said is strengthening clawback is better described as malus. It is where remuneration has been conditionally offered but not yet vested and there is still the option of cancelling the vesting. This clause suggests that, in the really serious case of a bank being run so badly that it fails and ends up being taken into public ownership or requiring the commitment of public money, even sums that have been vested should be at risk. Some of this could be pension money. If someone has paid for a pension regularly, through contributions, I would, by and large, say it was their money. However, we have seen instances where very large, discretionary amounts are paid into people’s pension funds precisely in order to put them somewhere where, hitherto, they have had immunity.
Those are the principal components of the amendments. You could go further. For example, Charles Goodhart has argued that it is a mistake, in the case of banks, to make variable pay take the form of shares because the shares are highly geared and it would be better if a significant amount was not in shares but in bailable bonds. This would limit the upside but that value would not be transferred if the bank failed.
What is the scope of these arrangements? How far down the bank should they go? They should certainly cover the senior managers’ regime. What is offered below that is not the licensing regime that we suggested which should apply to people who had the ability to damage the bank in some way. As it is set up at the moment, it could be any employee, which is a much less focused scope in terms of who is covered.
The other issue is about which parts of banking should be covered. We came across this argument and are still uncertain about whether it is those people who work in entities which take deposits or whether it should also cover people engaged in investment banking, which is the common sense view. Another amendment in my name attempts—probably unsuccessfully—to produce a definition which is wider than simply those who are in banking entities which take deposits. However, the noble Lord, Lord Newby, has written to a number of noble Lords recognising this problem and undertaking—I hope he will confirm this—to work with us to find a definition which covers the kind of people and activities that we want it to.
The final question is whether this all needs legislation. I can confidently predict the noble Lord’s response as we have had it at least three times today. I think he will say, “We agree there is a need for a special regime for banks and we agree on lots of the components that should be in it. We will work with you to agree the coverage, but we do not agree that it needs to be in legislation as the PRA has all the powers that it needs”. I think that is pretty much what is in his folder. Why is the commission pressing for legislation? In the whole of the financial crisis, two issues have infuriated the general public. The first, which we dealt with last week, is the absence or extreme weakness of personal accountability. The second is the sense that the bankers made the money but did not lose it in the bad times. They were incentivised to excessive risk-taking: too much upside, not enough downside. The public find the existing regime incomprehensible and they want something done about it. In particular, they want assurance that it cannot happen again. The way to ensure that there is no backsliding is to provide the powers proposed in my amendment. We should also set some of the parameters of what that covers.
Lord Eatwell
My Lords, we have already, on some previous amendments, begun to discuss the issue of the culture within banks and the culture which contributed significantly to the disaster in the banking system of the past four or five years. Nowhere does that bite become more evident than in the issue of remuneration. There has been considerable disquiet about the sheer scale of remuneration but this amendment, particularly in terms of the elements listed under subsection (3), goes to the heart of the matter which is the relationship between remuneration and risk-taking and the way in which remuneration systems incentivised, to an extraordinary degree, risk-taking which went way beyond the ability of the financial institution to manage it effectively.
If we are to persist with the banking structure we now have in this country, with very, very large banks—which are extremely difficult to manage—dominating the banking scene, then it is necessary to de-incentivise the risk-taking which did so much damage. That is the most valuable element in this amendment. The elements to which the noble Lord, Lord Turnbull, referred are also important, but we need to provide a clear statement that a remuneration code will be developed which does not incentivise selling insurance or financial instruments that individuals or firms do not need. This has been a characteristic of banking in this country over the past four or five years and has been directly incentivised by remuneration structures. We have to remove that sort of structure by giving the FCA and the PRA the responsibility to develop a code, expressed here in quite flexible terms, without the excessive rigidity in current European Union proposals. This is a very flexible structure but it focuses on the exact issue of incentives and risk-taking. In that sense, I think that it could achieve an enormous amount in changing the culture in British banking and in ensuring that banking is more stable and significantly safer than it has been in the past.
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(11 years, 1 month ago)
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Lord Eatwell (Lab)
It would probably be helpful if I spoke now, and also introduced the amendment which is grouped with this one. I am grateful to the noble Lord, Lord Sharkey, for mentioning the comments that I made at Second Reading, but I feel that his amendment, while it raises a series of valuable issues, conflates some of them in a way which is not entirely helpful.
The first point is the one that he also made, which is that there has been no fundamental thinking at all about the structure of banking in this country. The whole discussion about ring-fencing which occupied us last week is a modification of the existing structures of ownership, rather than encouragement to develop an entirely different and more competitive banking structure. That is a key issue which underlies the amendment in the name of the noble Lord, Lord Sharkey, and the one that is in my name and that of my noble friend Lord Tunnicliffe. Where the issue has been conflated is that regional banking, to which he referred, should be separated from the issue of competition. Either or both can be promoted, but they have to be seen as separate entities. For example, the chief executive of Santander has recently written in the Financial Times that she would like to see a significant increase in regionalisation in its activities. That, of course, is not necessarily an increase in competition, but is a more regional focus of the single entity.
It is, however, encouraging, with respect to the regional issue, that the Governor of the Bank of England argued in Leeds a couple of weeks ago that he was very much in favour of an increase in regionalism in British banking, and I wonder whether the Government agree with him in this respect. The key issue underlying this is not regionalism so much. After all, if we look across Europe, it was the small regional banks which failed in their dozens, particularly of course in Germany. The issue is of relationship banking, and the return to a close relationship between the lending entity—which used to be the manager of the bank—and the community in which he or she is located. For example, that was an important force in the development of the science park in Cambridge. At that time, Barclays Bank played an important role in the funding of the science park. The manager, who took something of a punt in this respect, was of course then promptly moved on, because it was felt that he had overstretched his remit. I am very sympathetic to the idea of regionalism, but we have to see it in the context of a secure structure, without creating the rather weak structures which collapsed in other countries. We have to focus especially on the issue of relationship banking.
I now turn to the amendment in my name and the name of my noble friend Lord Tunnicliffe. This amendment seeks to look in particular at competition, with which the noble Lord, Lord Sharkey, began his discussion. As he pointed out, while at the beginning of the financial crisis it was argued that banks were too big to fail, they are now much bigger than they were then as a proportion of the overall UK market. The “too big to fail” issue is even more important today than it has been in the past.
There is no doubt whatever that the regulatory system itself—as well as various other aspects of banks’ activity, including the payments system, to which we will return later—has been a very effective barrier to entry. Only one significant deposit-taking bank—Metro Bank—has been introduced into the UK system over the last five or six years. We need to tackle this issue of competition. It was striking that the banking commission argued in the second volume of its report that,
“a market study of the retail and SME banking sector, with a full public consultation on the extent of competition and its impact on consumers”,
should be commenced immediately. It continued:
“We make this recommendation to ensure that the market study is completed on a timetable consistent with making a market investigation reference”,
to the competition authority,
“should it so decide, before the end of 2015”.
The Government’s response to the parliamentary commission on this point does not state that they reject this recommendation. Instead, they imply that they will fulfil it. However, what has happened? Nothing; absolutely nothing. They are bringing forward the OFT market review of small business banking, but this was not talking about small business banking. They are not putting in place a market review of the retail banking sector as a whole. Why on earth not? That is what is necessary, and what this amendment calls for.
The Government say that they are in discussions and that they are engaging with the problem. We would like to see some evidence of that. It is just not enough; it is too piecemeal, and not transparent. A proper review of competition in the banking sector is required. This amendment would secure that review in the manner which the commission recommended.
Lord Flight (Con)
My Lords, I declare an interest as a director of Metro Bank. I support Amendment 102, in the name of the noble Lord, Lord Eatwell. The Government are now well aware of the competition issue, but no particular policy has been formulated for how to deal with it. This legislation offers the opportunity to require that that should be prescribed. I will say more about competition in a minute.
While I support the principle behind the amendment in the name of the noble Lord, Lord Sharkey, I have strong reservations about regional banks. I remind noble Lords that, going back to the second half of the 19th century, when an industry got into trouble the regional bank failed and the whole region became depressed, often for a decade or more. The principle at that time, led by individuals such as Walter Bagehot, was to create national banks to spread the risk. Therefore, I am not sure that regional banks are particularly the answer.
Government policy has been anti-competition going back to at least Barings. I remember more than 10 years ago having an extensive debate with the late Sir Eddy George when he was Governor of the Bank of England, because it was stated policy that lender of last resort facilities would apply only to banks that were too big to fail. It seemed to me completely the wrong way round in that it gave smaller banks a disadvantage in terms of what they had to pay for deposits. Lots of them, such as Hambros, closed down. It created the great risk, for which we subsequently paid the price with the banking crisis. Elements of uncompetitive measures have been the big—very much higher—capital ratios that smaller banks have been obliged to have in relation to mortgage lending; the costs of the payment system; and the difficulty of getting a banking licence. If I may boast, I think that Metro Bank is the first new high street bank to have been set up in 120 years.
However, I therefore have some sympathy with the second part of the amendment of the noble Lord, Lord Sharkey. What he is saying, in my language, is that we want high street banks that will get dug into their communities and will naturally get involved with sponsoring activities in those communities. That is exactly what Metro Bank is doing. It is very good business to do it and very popular. When we open branches, there are queues of people waiting to come in and open accounts because they are so fed up with the appalling service that they have had from the banking oligopoly for the past few years. It was, indeed, very much an oligopoly. I think it was Lloyds that first decided that you could cut all service and just leave people with telephone numbers to dial. The other banks all followed, with a very substantial boost to profits as a result. For customers, however, it has been one of the biggest factors in making the large banks so unpopular.
I think the outlook is encouraging. Metro Bank plans to have something like 6% of the nation’s deposit base by 2020, which is not that far away. There are other new banks coming up. I believe that the face of the banking scene, even if the Government do not do much about it, will look very different in some 10 years’ time. One of the issues is that the big banks are simply too big to manage. The have archaic silo systems, which are an enormous problem to them. Their activities are simply too large. The requirement for increases in capital will lead to them shrinking their balance sheets and, rather like the old-fashioned huge department stores in the US, it is inevitable that business pressures will lead to their decline.
I attended an interesting meeting that was addressed by Andrew Bailey, the head of the PRA, this morning. He made the point that perhaps the regulator had been wrong to require small new banks to have much higher capital ratios against certain forms of lending. The logic for that was that new banks were more risky—fair dice—but its net effect simply increased the oligopoly strength of the existing large banks. The PRA is looking constructively at making capital ratios, as far as possible, the same across the board, whether banks are large or small. So the PRA is very much on to the need for more banking competition and for it to be supportive and helpful to new banks, as opposed to having rules that hinder them.
The Government, too, have seen the point and are keen on more banking competition. It seems to me, however, that they have not thought about it adequately and have not made up their mind about what more should be done, other than expressing a wish for more competition. That is why a requirement to look into the subject would be no bad thing. However, as I said, while I fully support the principle of more high street banks doing the things that high street banks always did, I am less comfortable with the amendment of the noble Lord, Lord Sharkey, which I think is overprescriptive.
Lord Newby (LD)
My Lords, it is a great pleasure to respond to this fascinating debate. I should say at the outset that the Government are committed to greater competition and diversity in the UK banking sector, both locally and nationally. Effective competition is essential for ensuring that customers get suitable and affordable products.
It is not true to say that there has been no fundamental thinking by the Government on the structure of banking and the need for greater competition. That is why we asked the Independent Commission on Banking to investigate competition issues in the UK as a key part of its work. Half of its report covered competition issues. It identified a number of issues and areas which needed action and we are taking forward its recommendations for dealing with these. For example, we are removing the competitive advantage big banks get from being seen by the market as too big to fail through the ring-fence. We have secured a new seven-day switching service, delivered by industry to tackle inertia in the personal current account and SME business account market. This service was launched on 16 September. We have introduced a strong competition regulator by giving the FCA an objective to promote effective competition.
The new regulators have already brought forward big changes on the regulatory side through their barriers to entry work. I commend the report that they produced earlier in the year to the noble Lord, Lord Phillips, in particular. This will make it easier for new banks to enter the market, to grow and to compete with the large incumbent banks. These changes have been greatly welcomed by the industry and will make a big difference going forward for those who want to start a new bank, be it to serve the local community or to compete nationally.
I should highlight here the PRA’s consultation on an initial capital exemption for some small specialist banks. The proposed exemption would allow some banks to gain authorisation with minimum capital of as little as £1 million, and to do so much more quickly than has ever been the case in the past. These are not small changes. Within the narrow world of bank authorisation, these are revolutionary changes which will make it much easier for new entrants to come forward. There have been some extremely successful new entrants. Metro Bank is one of the most successful and I suspect that its competitors consider that it is being disruptive by making a number of changes in the way it does banking which will affect the whole system, in many cases for the better.
The actions that we have already taken will be supplemented by what we are doing in the Bill. We are creating a new payments regulator to ensure fair and transparent access for new and smaller banks to the payment systems. We shall discuss that later today. The Government have announced that they will ask the new payments systems regulator to look at the case for and against introducing full account portability as an early priority, as well as the case for requiring the big banks to give up, in whole or part, ownership of the payments systems.
We are giving the PRA a secondary competition objective to strengthen its role in ensuring that we have competitive banking markets. We will provide the FCA with further competition powers so that it has even more appropriate tools in that area.
As to the OFT, it has brought forward its investigation into SME banking and the competition issues affecting these markets. This is arguably the most contentious area in terms of the lack of appropriate products and volume for that market. The study is part of its ongoing programme of work to investigate concerns over competition in banking and to inform the decision on whether key banking markets should be referred to the Competition Commission for a formal market investigation. In January it reported on its review of the personal current account market, so it is not true to say that no work is being done on looking at competition on current accounts.
The review raised significant concerns over concentration levels. However, it concluded that the important changes being implemented, such as the ring-fence and the new account switching service, meant that market referral was not appropriate at this time.
The OFT aims to conclude its programme of work by 2015 and will make a decision then as to whether a market referral to the Competition Commission is needed. In consideration of the significant measures currently being implemented to improve competition, along with the importance of allowing the OFT to complete its current investigations, I hope that the noble Lord, Lord Eatwell, will feel that his Amendment 102 is not necessary and will not seek to press it.
Turning now to Amendment 43, I have already detailed the extensive action the Government are taking to improve competition.
Lord Eatwell
I wonder whether the Minister will allow me to comment on the series of measures he just outlined. All are worthy in their little way, but will he acknowledge that the Government have actually rejected the commission’s recommendation that there be,
“a full public consultation on the extent of competition and its impact on consumers”.?
This is what the Government are not giving.
Lord Newby
The Government are saying that the OFT is in the process of undertaking a series of pieces of work. We believe that the appropriate way forward is for it to complete that work and to decide whether it wishes to make a referral. We think that that is a sensible approach; it is already in train and we think it should reach its logical conclusion.
To help increase diversity in business lending, the Government have introduced several important schemes, which include the business finance partnership and the introduction of the business bank. The Government are promoting alternative finance to boost overall lending through investments and various innovative non-bank channels, including two peer-to-peer firms, Funding Circle and Zopa, as part of a small business programme. Peer-to-peer platforms enable people to lend money directly to businesses and consumers; they can therefore offer a more effective way for businesses to access finance. They are certainly disrupted in terms of the way in which finance is going directly into many small businesses.
The business bank is drawing together existing government initiatives under one roof and deploying £1 billion of capital to address gaps in the supply of finance to SMEs. So far, £75 million is being invested in venture capital and £300 million in new sources of lending. The Government are also taking action to support local banking—for example, through a credit union expansion project which includes a £38 million funding package from the Department for Work and Pensions.
Community development finance institutions are also providing loans in support of those struggling to access finance from the commercial banks. The regional growth fund is supporting their work through £60 million of wholesale funding and the Government also provide tax relief worth up to 25% on investments. Both credit unions and CDFIs typically operate in quite a tightly defined geographic area and have that special focus.
At national level, both RBS and Lloyds are already in the process of divesting part of their UK banking businesses as a requirement of EU state aid rules, creating new challenger banks. The divestments are part of a package designed to improve competition in the banking sector. The Government have taken the first step to return Lloyds to the private sector and are actively considering options for further share sales. The reintroduction of the TSB brand on the high street is a major step forward for retail competition. This action is further evidence of the Government’s stated aim not to be a permanent investor in the UK banking sector. This is an important step in further normalising the sector and continuing the process of removing government from the extraordinary measures taken during the crisis.
For RBS, the Government are already investigating the case for creating a so-called “good bank/bad bank” split. We will report the findings of this review shortly, later in the autumn. We do not believe that the case for breaking the core operations of any bank in which the Government have a stake into regional entities meets the objectives of maximising the bank’s ability to support the British economy, getting the best value for the taxpayer while facilitating a return to private ownership. The cost of any reorganisation would be attributable to the banks, and, as a result, to the taxpayer. In addition, the time required to execute such a reorganisation would be lengthy, further delaying the Government’s ability to return the banks to private ownership. As a result, the amendment would run directly contrary to the Government’s stated objectives.
This does not, however, mean that we do not see a role for regionally or subregionally focused banks. I have been impressed, for example, by the work of the Cambridge & Counties Bank, which is based in Leicester and is using its local expertise to support SMEs in Leicester and the broader East Midlands region. Its capital comes from a combination of a Cambridge college and a local authority pension fund, which seems to me a model that could with benefit be replicated elsewhere.
I was extremely interested to hear from the noble Baroness, Lady Liddell, about the success of the Airdrie Savings Bank. I am happy to work with officials to see how that bank is faring and whether anything that the Government are doing is making its life unnecessarily difficult.
The challenge, however—looking at that model on the one hand, and on the other saying that in Germany there are a lot of regionally successful banks—is that that is not where we are starting from now. It is very difficult for government to change a culture single-handedly. If banks such as Cambridge & Counties are successful and other people see that they are, we will see more regional banks, but I do not think that government either can or should try to impose a new overall structure on the banking sector against competitive forces and what people in the banking sector want to do.
I do, however, welcome the news that Santander wants to regionalise decision-making. RBS has for some time been trying to re-educate its SME bank managers about the virtues of relationship banking. It is amazing that that was lost, but the penny has dropped, and I very much hope that the statement by Santander is part of a broader process to push down decision-making to regional and local levels.
I hope that I have been able to persuade my noble friend that the Government have considerable sympathy with his amendment, but that much is already happening to bring greater diversity into the banking sector. Frankly, the pace of change—the number of new entrants, the change in the way that the system is operating and the way that people are doing banking—is quicker than at any previous point in our lifetime. I hope that, on that basis, he will feel able to withdraw his amendment.
Lord Eatwell
My Lords, we can forgive the noble Lord, Lord Newby, for taking some time to introduce the amendment and schedule; I believe that they are by themselves longer than the original Bill. It has been one of the significant matters that those of us who wish to comment on this legislation have had to digest.
An issue that the noble Lord did not address, which has been a major concern in the academic literature that has been looking at the issue of bail-ins and resolution regimes, is that the bail-in regime may in itself create contagion and systemic risk. One has to consider that well over 50% of the liabilities of a typical large bank consist of some form of interbank loans and investments. Therefore, by bailing in one particular bank you are spreading the contagion to the banks that will consequently be bailed in. Could the Minister brief us on the Government’s thinking on that issue?
I have a number of questions on particular points about the bail-in schedule, and I will try to address them in a reasonably logical direction. The first point is that there seems to be no satisfactory transition arrangements for those who might be bailed in. In other words, people who have purchased financial instruments or made investments in advance of this legislation will, as I understand it, subsequently be at risk from the legislation even though, at the time then they made the investment, that risk did not exist. That seems unreasonable. Would it not be appropriate for them to have some grandfathering that would allow them to escape this risk if they had acquired the instrument in advance?
On the other hand, so to speak—of course, economists always like to be two-handed in these respects; I believe it was President Truman who asked to have one-armed economists—the principle of no less favourable treatment is equally unreasonable. If an individual purchases a financial instrument knowing the nature of the risk to which he or she is exposed, why should they then be protected by the principle of no less favourable treatment from bail-in or insolvency? They are aware of the risk and should surely take responsibility for it.
On the theme of the conditions for bail-in, the Minister noted that liabilities representing protected deposits were excluded liabilities. That means that ordinary people with bank accounts with sums in them that are below the Financial Services Compensation Scheme limit are appropriately protected. However, now and again ordinary people will typically go way over that limit, even people who usually have quite modest accounts. For example, in the process of property purchase and sale one sometimes has peculiar large deposits in one’s bank account for a short period, or when receiving a lump sum in connection with a pension scheme you typically have a peculiarly large deposit for a short period. Will these people be at risk? The schedule suggests that they would be. What measures are available to ensure that they would not?
The next point I wish to turn to was raised by the Minister with respect to banking groups. The bail-in option refers to a stabilisation power in respect of a “banking group company”. That suggests that they might be companies outside the ring-fence. Why is this necessary outwith the ring-fence if the ring-fence is deemed to work? If the ring-fence is protecting depositors and the maintenance of financial services in the way that the Government have argued, why are these measures necessary outside the ring-fence? Perhaps the Minister will enlighten us.
To move on to a couple of issues that are less serious but might become important, the schedule reads:
“A deposit is ‘protected’ so far as it is covered by a scheme which … operates outside the United Kingdom, and … is comparable to the Financial Services Compensation Scheme”.
What does “comparable” mean? Does it mean that it is of the same ilk or that it is of the same scale? There is a variety of such schemes operating around the European Union and in other jurisdictions closely associated with this country that, for example, are quite different in scale even though they may be of the same ilk. So what does “comparable” actually mean?
As the noble Lord pointed out, the Treasury has the ability to amend by order the crucial terms in Sections 48C and 48D. I asked the noble Lord, Lord Deighton, when we considered the earlier part of the ring-fence legislation, what position the Government were going to take on the recommendation from the Delegated Powers and Regulatory Reform Committee for the enhanced scrutiny of certain affirmative procedure orders. The Delegated Powers and Regulatory Reform Committee proposed an amendment; I asked Lord Deighton what the Government’s attitude was to it, and I was promised an answer. I hope that the noble Lord can give us an answer today.
Lord Newby
I had not realised that the noble Lord, Lord Eatwell, was thinking of the Crown Dependencies. I will write to him about that.
The noble Lord asked whether the concept of no less favourable treatment was appropriate. This concept relates only to the insolvency counterfactual. It is reasonable that an investor should be no worse off due to an action of the authorities than in an insolvency. That is the option that might be facing investors if the bail-in was not taking place.
The noble Lord asked about temporarily high balances. This is an issue that we have debated over the years. As far as bail-in is concerned, the bank will have discretion not to bail in certain liabilities. In terms of the general issue about temporarily high balances, this is being pursued within the context of the EU. There is a very widespread recognition that it would be desirable to get protection for people who have such temporary high balances.
The noble Lord asked about transitional arrangements. The issue of bail-in has been debated at international level for some time. Markets know that bail-in is now an acceptable, and indeed a leading, tool for dealing with large banks in the European fora. We have agreed that there should be no transitional agreements, especially as the counterfactual would be insolvency.
The noble Lord asked about our response to the Select Committee. My noble friend Lord Deighton, as the noble Lord knows, is in China this week, so he will be replying formally when he returns. But the approach that the Treasury has taken so far in terms of working with parliamentarians who have a close interest in these matters has been to circulate draft secondary legislation at the point at which it has gone out for wider consultation. The current consultation exercise on the big draft statutory instruments under this Bill has, I think, now closed. We are drawing up a response to all the stakeholders who have made comments and the intention is that at that point the Treasury will directly contact noble Lords who have expressed an interest so that we can discuss where we have got to and consider any suggestions that noble Lords might have on the secondary legislation.
My view, having looked at it, is that this is highly technical legislation and the best way of getting an input is to have a conversation around it. The Treasury is very open at this point to any suggestions from your Lordships, or indeed Members of another place, in terms of the details of the secondary legislation. They are not set in stone. We are trying to get the best outcome. We think that that more discursive approach in the context of these highly technical instruments is the best way of getting the maximum positive involvement with parliamentarians in the process. As I said, my noble friend Lord Deighton will be writing to the noble Baroness, Lady Thomas of Winchester, about that.
The noble Lord, Lord Higgins, asked whether bail-in would mean that taxpayers would not have had to make any contribution. It is difficult, if not impossible, to say definitively since we do not know how much could have been bailed in. What is clear is that we would have substantially reduced any government contribution. Loss-absorbing capacity provisions in the Bill will further strengthen that concept. The ICB said that the 17% PLAC proposals would have been sufficient to deal with the problem last time in all but the most extreme cases.
The noble Lord, Lord Higgins, asked about the creditor hierarchy and whether it will be stated in the Bill. We have not stated it in the Bill, but we will be working on the statutory code of practice under the Act when it is enacted. The aim is that it will be set out more fully there.
The noble Lord, Lord Blackwell, asked what protection there was against inappropriate use of the powers by the Bank of England. The conditions before which the Bank can intervene are pretty stringent; they are that the bank is failing or likely to fail and that it is in the public interest to do so. If the Bank operated vexatiously or against the public interest, that would be an inappropriate use of its powers—but so it would if it acted in that manner under any other of its powers. Our view is that the conditions are clear enough and give the Bank sufficiently clear steer that we are reasonably confident that the problem that the noble Lord anticipated would not arise in practice.
The noble Lord, Lord Flight, asked whether the bail-in could work for big international banks. We believe that it could; the UK authorities are working with international counterparts to put in place resolution plans for large banks to ensure that the tool can be applied effectively. We see bail-in as being the leading tool for such banks.
The noble Lord, Lord Eatwell, asked whether bail-in was necessary for all banks, including those outside the ring-fence. The truth is, obviously, that all banks can encounter difficulties, not just retail banks. We believe it appropriate that the Bank of England has the tool available for dealing with non-retail banks as well as retail banks, which this provision would do.
I am not sure that I have answered every last question that I have been asked. To the extent that I have not, I will write to noble Lords.
Lord Eatwell
I just take up the Minister on that last point. Surely one of the key arguments about the ring-fence is that there is an implicit guarantee from the public authorities not to allow institutions within the ring-fence to fail. That implicit guarantee is worth a lot of money to those banks that have been too big to fail. Surely the whole point about the ring-fence is that those outwith it would not benefit from that form of public continuity guarantee. But is the noble Lord saying that the Government wish to retain such measures, which would allow them to implement such continuity guarantees?
Lord Higgins
I come in on the same point, if I may, because my reaction was the same as the noble Lord who has just spoken. Am I right in thinking that all these bail-in provisions apply only to ring-fenced banks? Is that the case, or not, or are they extended to banks that are not within the ring-fence? Perhaps the Minister could make absolutely clear what the position is, because it was not clear earlier.
Lord Flight
I clearly did not make my point correctly. I was simply trying to say that I have seen reactions to anti money-laundering arrangements, namely HSBC sacking all its US clients and 26 embassies in the UK being blacklisted by the FATF and having problems getting bank accounts. By the way, 10 of those embassies belonged to members of the EU. It is right to focus on anti money-laundering for the reasons which noble Lords correctly pointed to, but people do not take account of the other side of the coin. What is happening, as I described—and it will increasingly happen—is that people who come from countries that have been FATF-blacklisted will find it impossible to get a bank account, although they may be completely innocent.
Lord Eatwell
My Lords, I have an amendment in this group and it may be for the convenience of the Committee if I speak to it now. Before doing so, I would like to make two comments about the discussion that has gone on so far. First, Amendment 55 in the name of the noble Lord, Lord Deighton, which includes the meaning of what is a bank, requires very careful exposition by the Minister, because if it says what it appears to say then it seriously undermines the whole discussion about the senior persons regime that we have been having up until now.
Secondly, on the amendments tabled by my noble friend Lord Brennan and his colleagues, it seems that it is incumbent on the Treasury between now and Report to produce a written report demonstrating the noble Lord’s claim that these amendments are unnecessary; showing that the current regime is fully in accord with the latest FATF principles; and therefore providing the comfort which my noble friend might seek if his amendments are indeed unnecessary. Perhaps the noble Lord could also take in some of the points made by the noble Baroness, Lady Noakes, as there are areas that the noble Baroness wants to be sure are equally well covered. Particularly with respect to the issues raised about anti money-laundering and prevention of terrorism principles, it is crucial, as those principles are conveyed into legislation, that we are absolutely clear—and the legislation is clear and explicit—on this matter.
Amendment 100, which is in my name and that of my noble friend Lord Tunnicliffe, proposes to introduce a licensing regime to apply to all approved persons. The noble Lord, Lord Newby, made the extraordinary remark that this would weaken what was elsewhere in the regime as set out in the Government’s amendments. However, I was heartened to hear the noble Lord, Lord Turnbull, use the word licence as I did, and to hear him quote almost word for word the specification of,
“minimum thresholds of competence … integrity, professional qualifications, continuous professional development”,
and so on, which is included in our amendment.
Amendment 100 would significantly strengthen the requirement for approved persons to be suitably qualified in this country, to be licensed and to face the possibility of having the licence removed. Doctors, teachers and lawyers all require some form of professional licence, so why not approved persons in banking? If the noble Lord really undertook to understand this amendment he would realise that it fits precisely with the goals of the commission and would significantly strengthen the quality of regulation and approval of those working in the banking sector in this country.
Lord Desai
My Lords, I support what my noble friend Lord Eatwell said and speak in relation to what the noble Lord, Lord Lawson, said. People who are supposed to be responsible for the conduct of, as it were, their inferiors in the bank sometimes do not understand what is happening below them. Certainly, in the case of Baring Brothers the management did not understand what Nick Leeson was doing. This is a matter of competence. I very strongly support this amendment because we ought to have periodic examinations of people in charge of banks, and see whether they pass those examinations, because the profession is changing and they are way behind a changing business.
Lord Lawson of Blaby
May I reinforce what others have said? I am horrified by the Minister’s explanation. He must take it back to the Treasury and get the Treasury to think again. I refresh his memory, for example, about the evidence that we took from UBS. Not only was it culpable to an extraordinary degree in the LIBOR scandal but its top management also said that it knew nothing about what its traders were doing. This was in spite of the fact that when it had its capital-raising exercise, it presented to all the funds that its great profit centre was trading in LIBOR derivatives. Then it said, “We know nothing about it”. This made it immensely culpable. The Minister is saying that if you had a bank that was not taking retail deposits but was doing just that, there would be no individual responsibility at all under this Bill. I am afraid that he must look at that again.
Lord Eatwell
I would like to reinforce the position of the official Opposition on this. We are totally behind what the noble Lords, Lord Lawson and Lord Turnbull, have said. It is disgraceful to suggest that investment banks that are not deposit-taking but offer a wide range of financial services should not come under this senior persons regime.
Baroness Noakes
Was the Minister talking about retail deposits, as I believe my noble friend Lord Lawson has interpreted him saying, or, as the legislation seems to me to say, about deposit-taking more widely? Deposit-taking is not confined to retail banking on ring-fenced operations. Deposit-taking occurs across the whole range of banking activities, as far as I am aware. Will he clarify to what kinds of activity he intend this to apply?
Lord Eatwell
As clarification, given what the Minister has said about wholesale deposits, if there was an organisation providing banking services on a fee-based basis, would it be alone? Would it be exempt?
Lord Newby
My Lords, unless it was taking deposits it would be exempt under the amendments as they stand. It is fair to say that I have heard what the House has said and I will relay it with all force to my colleagues in the Treasury, who will not have had the privilege to hear it directly.
Lord Eatwell
My Lords, my noble friend Lord Brennan has made some powerful points. I draw the attention of the House to the fact that, as in the previous group of amendments we were discussing, these offences will apply only to institutions that accept deposits. It therefore leaves out a whole series of institutions that I believe the noble Lords, Lord Turnbull and Lord Lawson, would also feel should be included under these offences.
Lord Phillips of Sudbury
My Lords, I commend the Government on bringing forward Amendment 58. It has been a source of great public disaffection that over the past few years the number of people in the City responsible for some really gross acts of criminality who have been brought to book could be measured on the fingers of two hands; indeed, the noble Lord, Lord Turnbull, referred earlier to the pathetic enforcement statistics. This provision is therefore vital. However, I have two thoughts regarding the way in which this is framed: first, that it is too severe, and secondly, that it is too light, or slight.
The title of the clause is:
“Offences relating to decision”—
I suppose they mean “a decision”—
“that results in bank failure”.
I note that in two places in the clause itself it talks about a decision that “causes” a bank failure. There is a difference in the meaning of the words, “resulting” in a bank failure and “causing” it. The word “causing” is absolutely direct in a way that “resulting” is not. Perhaps the Minister might like to look at that.
The other point that strikes me about the wording of this clause is in Amendment 58(1)(c) and (d). Paragraph (c) says,
“in all the circumstances, S’s conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person in S’s position”.
The noble Lord, Lord Brennan, has already made points on this. That is unsatisfactory in another sense. However, if we are—as we are—making criminal offences out of the conduct defined in this new clause, there should be a clear indication that no one can be convicted unless there is a want of integrity or honesty on the part of the person convicted. That is a fundamental principle of British criminal law. However concerned we are, and I certainly am, to bring to book the many malefactors who have ruined the reputation of the City in recent years, one cannot do it at the cost of changing or undermining that fundamental test of criminality, intent, bad faith, dishonesty or want of integrity—call it what you like. The language here does not clearly require that intent and want of integrity. There are cases that would fall within Amendment 58 that would not satisfy the normal test of mens rea in criminal offences.
I will refer briefly to Amendment 60 in this group, which is about the institution of proceedings. Subsection (4) says:
“In exercising its power to institute proceedings for an offence, the FCA or the PRA must comply with any conditions or restrictions imposed in writing by the Treasury”.
Those are the words. I cannot see anywhere, in this amendment or elsewhere, a requirement for the conditions or restrictions imposed in writing by the Treasury to be made public. Surely it is a fundamental requirement of restrictions or conditions that will potentially lead firms and individuals into the criminal courts that those conditions or restrictions be made public.
Lord Newby
My Lords, these amendments will create a new competition-focused utility-style regulator equipped with the full range of powers to tackle the deeply rooted issues in the market for payment system. The Government have serious concerns about the structure of the payment systems market, which sees problems in three main areas: competition, innovation and responsiveness to consumer needs.
Under the existing self-regulatory framework, there is no systematic oversight holding the big banks, payment scheme companies and infrastructure providers to account. Large banks jointly own the payment system companies and the infrastructure provider, and they dominate the Payments Council, the pseudo-regulatory body responsible for setting industry strategy. This allows the incumbent players to erect barriers to entry, preventing challenger banks from competing on a level playing field. It also limits incentives for the systems to innovate and respond to consumer needs, as there is no competitive advantage to any bank in doing so. There are also competition concerns in the international card schemes, as highlighted by the European Commission’s proposed regulation capping multilateral interchange fees. The card schemes have an incentive to increase interchange fees to encourage banks to issue their cards, but merchants have little opportunity to influence this process, and have no real option but to accept the major payment cards.
The first objective of the regulator will be to address the problems arising from imperfect competition. To tackle barriers to entry in banking arising from access conditions for the payment schemes, the payment systems regulator will have powers to tackle anti-competitive fees, terms and conditions, and to mandate access to the core systems. If deemed necessary, it will be able to break up the current ownership structures to create a landscape where fair competition can thrive. Secondly, the regulator will examine issues relating to innovation. Payment systems are characterised by strong network effects. Just as owning a telephone brings little benefit if no one else has one, each user gains added value from a payment system with the addition of further users. The shared ownership of the interbank payment systems by the banks reinforces this, because no single bank stands to gain an advantage over the others by investing in and developing the systems. This tendency to underinvest means that, while there have been some important innovations in recent years, they have too often required the Government’s or the OFT’s intervention to drive change, and the industry has taken too long to realise their full benefits.
The Government want to challenge underinvestment and lack of innovation in the co-owned systems. They want a payments industry that rewards entrepreneurial behaviour and develops systems that are innovative, efficient and effective. Therefore, the regulator will have an objective to promote the development of, and innovation in, payment systems.
The third problem identified in the market is the failure of the industry to respond to end-user needs. This, too, stems from the market’s network characteristics and ownership structures, which mean that failing to respond to end-user needs incurs no competitive disadvantage to any of the banks. This makes it possible for the banks to take decisions about the provision of services, even if this is directly against the interests of the wider public, as we saw in 2009 when the industry attempted to abolish cheques. The Government want to see a market where payment systems work for end-users, rather than one that serves only the self-interest of the big established banks.
Successive Governments and UK regulatory authorities have been trying to find a viable solution for these problems for more than a decade, dating back to Sir Don Cruickshank’s report to the Treasury in 2000 recommending that the Government create a utility-style regulator for payment systems. Instead, however, the process resulted in the creation of the industry-dominated Payments Council. In February, the Chancellor announced that the Government would introduce a new regulator to open up payment systems. Over the summer, the Parliamentary Commission on Banking Standards endorsed the Government’s commitment to bring payment systems into formal regulation. In their response to the final report of the PCBS, the Government confirmed that they will ask the payments regulator, once established, to urgently examine account portability.
I turn to the details of these amendments. They establish the payment systems regulator as a separate legal entity established by the FCA. This provides bespoke objectives and powers to address the distinctive problems in the market for payment systems, and allows for the benefits of close co-ordination with the FCA. The objectives of the regulator will be to promote competition, innovation and the interests of service users. The payment systems regulator will oversee all domestic payment systems brought into scope by being designated by HM Treasury. Initially, it is expected that the main interbank schemes and international card schemes will be designated. Once a system is designated, the regulator will have powers over that system’s operators, infrastructure providers and payment service providers that provide payment services using the system. This new regime will not affect the existing role of the Bank of England under the Banking Act 2009 in overseeing recognised interbank systems for stability purposes. The Bank will be excluded from the scope of regulation in its current capacity as a payments system participant. There will also be a duty for the co-ordinated exercise of functions between the PSR, FCA, Bank and PRA, and a memorandum of understanding setting out how this will happen.
The payment systems regulator will be equipped with a toolkit of regulatory powers enabling it to address the deep, structural issues causing problems in the market for payment systems. To open up access and encourage greater competition, the regulator will be able to intervene and require changes to any anti-competitive fees, or terms and conditions of an agreement for access to a regulated system. It will have powers to require the provision of both direct and indirect access to payment systems. It will also have competition powers to enforce Competition Act 1998 prohibitions against anti-competitive agreements and abuse of dominance, and to make market investigation references to the Competition and Markets Authority. These competition functions will be exercisable concurrently with the CMA. Ultimately, if the payment systems regulator determines that the current ownership structures need to be broken up to achieve adequate competition, it will have the power to require disposals of interests in operators of regulated systems.
In furthering access and competition, the regulator will also address underinvestment by the industry and the slow pace of innovation. There is no shortage of players who want to be able to innovate in this space, and with greater access to the core systems and infrastructure, inventive, entrepreneurial players will be able to bring propositions to market when they have previously been blocked from doing so. Greater competitive pressure on industry participants can be expected to drive up standards and force payment system owners, operators and payment service providers to deliver improvements in the payment systems space. However, in cases where market forces are still unable to play out, if the big incumbent banks resist, the regulator will have powers to drive through improvements as it sees fit, by issuing directions that require or prohibit action by participants in regulated systems, and this includes requiring specific developments to be pursued.
In advancing its service-user objectives, the regulator will be able to require or prohibit the taking of action in the operation, management and development of payment systems. This means that it can prevent the industry ignoring the legitimate needs of consumers—for instance, by trying to abolish cheques. The payment systems regulator will be able to publish details of a compliance failure and to impose financial penalties; if deemed necessary, it will be able to require owners of payment systems to dispose of their interests in them, subject to Treasury approval.
Taken together, these amendments create a strong, competition-focused regulator, which will have the right objectives, functions and powers to ensure that conditions in the payment systems market are such that challenger banks and innovative non-bank players are given a level playing field to challenge the big incumbent banks; innovation takes place to facilitate useful new services for businesses and consumers; and decisions on the provision of payment options are taken in the interests of all users of payment systems, not just the interests of the big banks. I commend these amendments to the Committee.
Lord Eatwell
My Lords, I have a number of queries about another set of amendments that are longer than the original Bill. First, I support entirely the notion of establishing a payments regulator, but why is it being established as yet another independent regulator? Surely, covering the activities that it refers to—the nature of markets and settlement systems, which are akin to clearing and settlement in business and financial services in general—is the clear role of the FCA. Why are we establishing an extra organisation? After all, one thing that we have learnt through the financial crisis is that communication between organisations is less than perfect, even in the best of all possible worlds. Surely it would be better if this was simply a division of the FCA rather than an organisation having, as the schedule makes clear, an entirely separate board and chairman. This seems to be a proliferation of institutions with no purpose when we already have the FCA there to do the job.
Secondly, I want to explore the competition objective a little more. It is very clear that enhancing competition by giving access to payment systems is highly desirable. It is also clear that users might benefit from competition. What is not terribly clear is whether we want to have very diverse structures in the fundamental architecture of the payments system, which is absolutely core to the banking system. It recalls to me the early days of the railways when there were more than a dozen railways from London to Brighton, as they all competed with one another. This was not conducive either to the effective development of the railway companies or the provision eventually of a proper service to passengers. Therefore, I am a little puzzled, given the essential role of the payments architecture as being absolutely fundamental to the operation of the banking system, as to whether we want to see diverse structures and how they might be related to one another. I wonder what the Government’s thoughts are on this.
My third point also refers to the nature of fundamental market infrastructure. Within these new clauses it is the responsibility of the regulator to assure maintenance of service. However, another part of the Bill, which we will look at next, is labelled “fundamental market infrastructure” and is also devoted to the maintenance of market service more generally. The responsible authority for maintaining market service is different in the two cases. In one it is the Treasury; in the other it is the Bank of England. Why do we have two different authorities responsible for the maintenance of fundamental market infrastructure when the payments system is undoubtedly part of fundamental market infrastructure? It seems to me that, in inserting this desirable measure into the Bill, the fact that it has created some ambiguities and inconsistencies has not been noticed.
Lord Newby
A number of noble Lords raised the same question and have come down on different sides. Should we have a separate regulator or should it be just a division in the FCA? In the end, it was a question about how important we thought the issue was. A division in the FCA would be a division among a lot of divisions. The staff of a division in the FCA would probably be at a somewhat more junior level than that of a chief executive of an important regulator. The priority that the overall body, namely the FCA, would give to this would obviously be somewhat less than a body on its own could give, because the sole concern of the people working for it would be to make the scheme work.
It would have been possible to do it in the FCA. In a sense, you literally pays your money and takes your choice. Our view is that this is a fundamental element of the system that needs shaking up and the best way to do it is to have a group of people whose sole interest—and whose career interest—is associated with making this thing work. That is why the body is being established on its own.
The second question of the noble Lord, Lord Eatwell, was about the definition of competition. As he said, competition in terms of access and users is clearly desirable. Will it be desirable or possible to have diverse structures for all elements of the system? Almost certainly not; some parts of it are a natural monopoly. That is one reason why a regulator is needed. At the moment, you have a natural monopoly controlled by a small group of banks. What we want to do is open up that access but give more scope for looking at options, which at the moment are closed down by the structure. My personal view is that it is highly unlikely that the basic plumbing of the system will replicate the situation in the railways; it would make no sense. However, there may be elements of the payments system, including new forms of payment, which may be susceptible to competition, and we want the regulator to have that in its purview and look at it. There is no suggestion that we are seeking to break up those elements of the system that form a natural monopoly.
The noble Lord also asked about maintenance of service. There is a difference between what the regulator will be doing on a day-to-day basis in making sure that the whole system works effectively and what happens if the whole thing is failing. That is the difference in the second provision, which we will come on to later, about resolution. The people to look after resolution when something has failed are not necessarily the best people to be doing the day-to-day management of it.
Lord Eatwell
My Lords, I beg the noble Lord’s pardon, but the question related to a possibility of interruption of service. Amendment 62 states:
“The Treasury may by order designate a company”,
and so on, to maintain the service. We then move on to the next section relating to fundamental market infrastructure, which states that the maintenance of service is the responsibility of the Bank of England. There is an inconsistency here. As regards the issue of the infrastructure as a payments system and the issue of all other aspects of back-office infrastructure, the Treasury is responsible for one and the Bank of England is responsible for the other. However, they are so interrelated and interdependent that it does not really make sense. You have either one or the other. I do not mind which. I would prefer the Bank of England to be responsible because it is closer to the payments system, but you do not have both.
Lord Newby
It will cover the UK end of international transactions. The counterparty in another country is regulated by that country’s operations, not by the UK end of it. Obviously, close working between both countries is required but we are dealing with the pipes that leave the UK. Once they have left the UK, the pipes are regulated by someone else. As far as cheques are concerned, if there were to be a decision or view expressed that cheques had come to the end of their useful life, it will not fall under the purview of the regulator to effect that change. I think that I am right in saying that the budget forms part of the FCA’s overall budget, as set out in the legislation. Therefore, the overall financial services sector pays into the FCA for a whole raft of specialist functions. This is no different from anything else that is funded by the FCA.
Lord Eatwell
Perhaps I may follow that. The overall financial services industry, or that bit of it which is regulated by the FCA, some of which has nothing to do with banking and payments systems, has to pay for this regulator. On top of that, let us remember that he who pays the piper calls the tune. All this stuff about separate careers and career paths is subsumed by the fact that the financial controller of the FCA will control the funds going into this organisation. I take the argument of the noble Lord, Lord Turnbull, about the focus on this role, but I really do not understand why you cannot have a division with a senior figure in charge of it, and therefore some clarity within the FCA.
Lord Newby
My Lords, I am extremely sorry that the noble Lord does not understand. We just have a difference of view about that. The noble Baroness, Lady Noakes, asked about the kind of action that the regulator could take and whether it could, in effect, behave unreasonably. The answer is—
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(11 years, 1 month ago)
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Lord Newby (LD)
My Lords, these amendments establish a special administration regime that will apply to operators of recognised interbank payment systems, operators of securities settlement systems and crucial service providers to those operators.
The establishment of this new administration regime, to be known as financial market infrastructure—FMI—administration, is the latest in a series of measures that this Government are bringing forward to ensure that the failure of a single financial institution is not allowed to put UK financial stability at risk.
Underpinning the financial sector are a number of critical pieces of infrastructure that, if allowed to fail, could severely disrupt markets and the normal functioning of the wider economy. The need to ensure that some of these systemically important pieces of infrastructure continue to operate in times of crisis has already been addressed in legislation passed by this Government. However, there remain other pieces of systemically important market infrastructure that have not yet benefitted from statutory provision designed to ensure continuity of service in times of crisis. With that in mind, the amendments forming Part 6 have been tabled in order to ensure the continuity of service provision of recognised interbank payment systems, which facilitate or control the transfer of money between banks and building societies, and securities settlement systems, which enable the title to units of securities to be transferred electronically. These systems are integral to the efficient operation of the financial system, processing transactions worth hundreds of billions of pounds a day. As things stand, in the event that the operator of an interbank payment system or securities settlement system was to become insolvent, it would be likely to enter the normal administration procedure. In such cases, the administrator would be under a duty to look after the interests of the company’s creditors, without concern for implications for the wider economy. In these circumstances, the continued operation of crucial payment and settlement services could be threatened.
Part 6 introduces a special administration regime, known as FMI administration, which prioritises continuity of critical service provision during administration. The key features of this administration are the appointment of a special administrator, who will have an overarching objective to continue critical services during administration; the Bank of England’s ability to apply to a court to place a relevant company into FMI administration with the court appointing the FMI administrator—no one else will be able to institute insolvency proceedings against one of these firms without giving the Bank prior notice; the Bank of England’s power of direction over the FMI administrator; the availability of powers allowing for the property, rights and liabilities of the relevant company to be transferred; and restrictions on early termination of third party contracts.
In addition to operators of relevant systems, FMI administration will also be available in respect of companies that the Treasury designates as crucial service providers to the operators of the relevant systems. Service providers will be designated if the Treasury is satisfied that an interruption in the provision of services would have a serious adverse effect on the effective operation of the relevant system. Insolvency rules made under the powers in Part 6 will be made in due course. These will prescribe certain procedural details relating to the conduct of FMI administration. Different rules will be made in respect of England and Wales, Scotland and Northern Ireland. Any rules made under this power that apply to England and Wales will need to be cleared by the Insolvency Rules Committee before the Lord Chancellor may proceed to make them.
We believe that the likelihood of these powers ever being needed is extremely small. However, if an interbank payment system did get into financial difficulty, it would clearly be in the interests of financial stability that it was able to continue in operation as its financial problems were resolved. The special administration provisions in these amendments would allow this to happen, and I therefore commend them to the House.
Lord Eatwell (Lab)
My Lords, I believe that these measures are valuable as an ultimate backstop, as the noble Lord has suggested. I just wonder, as I intimated earlier, whether there is some confusion in ultimate authority, as between the discussions of the payments systems regulator, and the role here, involving the Bank of England and the Treasury, given that the payments regulator will lie outwith both.
Lord Newby
My Lords, I will write to the noble Lord on that point. My officials do not believe there is such confusion in reality, but we will seek to clarify this before Report.
Lord Newby
My Lords, the Government want to see a competitive banking sector that delivers good outcomes for consumers and are taking steps to make that happen. Much has happened already.
We worked with the banking industry to secure from it a new seven-day current account switching service. This service, which launched last month, has made it easier, simpler, safer and faster to switch accounts, and will help to stimulate competition between providers. We also asked the regulators to undertake a review of barriers to entry and expansion in the banking sector. The review, published in March, introduced a range of changes to capital and liquidity requirements and to the authorisations process to make it easier for new banks to enter the market and for smaller banks to compete.
In addition to this, as noble Lords will be aware, we are introducing a ring-fence to remove the competitive advantage that big banks have received, we are creating a new independent payments regulator, and we have already put competition at the centre of the Financial Conduct Authority’s responsibilities by making competition one of its three objectives and giving it a separate competition duty.
However, we believe that more can be done. In addition to giving the PRA a secondary competition objective, we will provide the FCA with new competition powers. These new powers include Competition Act 1998 enforcement powers that are used to address restrictive practices which are engaged in by companies operating in the UK that distort, restrict or prevent competition—for example, ordering that offending agreements or conduct be stopped. They also include power under the Enterprise Act 2002 to carry out market studies and make references to the Competition and Markets Authority for a decision on whether action should be taken.
The FCA wrote to the Chancellor to request those powers. Since being given a competition objective last year, the FCA has worked hard to increase its technical, legal and economic skills and expertise on competition, building its capacity to identify and address competition issues in the financial services markets. The Government are therefore confident that such powers will strengthen the FCA’s ability to ensure competitive banking markets that deliver good consumer outcomes. These changes, which bring the FCA in line with other sector regulators, will enhance the credibility of the FCA and make it easier for it to persuade firms to alter their behaviour voluntarily.
Finally, the changes will enable the FCA to become a member of the European Competition Network, leaving it much better placed to engage with regulatory issues at a European level. In short, giving the FCA these powers is another step taken by this Government that is good for competition. I beg to move.
Lord Eatwell
My Lords, I am grateful to the Minister for introducing these amendments. However, can we reflect a little on the rush towards competition? A competitive system, if it is working effectively, is likely to result in the elimination of institutions from time to time, a process that was famously described as “creative destruction”. That sort of process can be seen quite clearly in countries that have large numbers of relatively small banks. Banks fail regularly in the United States—it is quite a common process. The process is, of course, managed effectively because these banks are relatively small. Has some thought been given to the relationship between the size of banking institutions in Britain and the effectiveness of competition? If competition were truly enhanced, one bank managed to eliminate another and both were relatively large, that could be extremely disruptive. This is not to argue against a competitive process but simply to say that it should not be regarded as an exclusive guideline with respect to what are desirable policies. Has the FPC been consulted on these clauses, and what is its view?
Lord Phillips of Sudbury (LD)
My Lords, there is an assumption that competition is essentially and necessarily good and that more competition is better. We have had manifest evidence in the past six years in the City—and indeed much longer than that— that there is a point at which competition turns in on itself. Indeed, the values of out-and-out aggressive competition are inimical to the values of integrity and honesty. I want to strike a note of caution, because this word is overdone in terms of its necessary public benefit.
Lord Turnbull (CB)
I speak to Amendments 89 and 90 in my name. A recurrent theme in the reforms to which we have come back several times this afternoon and this evening has been to increase competition in the banking system. This should engage not just the banks but their regulators too. We tabled these two amendments, Amendment 89 relating to the FCA and Amendment 90 relating to the PRA.
The proposal for the PRA is to add an additional objective to promote competition in a way that is as far as possible consistent with its main duty of providing financial stability. The difference between the amendment tabled by the Government and my amendment is sufficiently small that I think we can accept their measure as taking us forward on that front. However, the parliamentary commission also believed that a change was needed to the architecture of the FCA’s objectives. I wish to put the other side of the case. A fear, which many in the financial world share, is that the FCA will give too much emphasis to bringing about change through enforcement, will wait until something goes wrong and then intervene heavily. However, the FCA, when properly directed, can be a very powerful force for improving competition.
As the Minister has set out, the present architecture has the overall strategic objective of ensuring that relevant markets function well, and has three operational objectives below that: namely, the appropriate degree of protection for consumers; enhancing the integrity of the UK financial system; and promoting competition in the interests of consumers. We queried whether the strategic objective did anything or even whether it could be unhelpful and could be used to trump or confuse the clarity of the operational objectives. Our preferred solution was to drop the strategic objective and promote the other three to primary objectives by deleting the word “operational”, thus ensuring that the competition objective comes into the front rank along with the other two. I am rather surprised that the Government have not supported this, particularly as they accepted the pro-competition logic in the PRA case. I was not convinced by the Government’s response with regard to providing a mission statement. My riposte to that is that the chief executive of the FCA thought the strategic objective,
“added little or nothing to the three operational objectives”.
He continued:
“You could argue that promoting effective competition in the interest of consumers and the market, enhancing the integrity of the system and ensuring an appropriate degree of protection encompass everything that is in the phrase ‘ensuring markets work well’”.
Therefore, if you can achieve something in fewer words and with fewer objectives, and the other one is largely redundant, I would dispose of it.
In my view the aspect of FCA culture that most people feel needs to be bolstered is competition. The current architecture is weaker in that respect than the proposed amendment. We have heard the opposing view from the Minister, but that is the logic behind the position which the commission took.
Lord Eatwell
My Lords, I remember discussing this at length during the passage of the previous Financial Services Bill. At that time, I commented that one could often detect whether a proposition made any sense by proposing a negative outcome. If we suppose that the duty is to make the markets work badly, that does not make any sense at all. Therefore, it seems to me that the strategic objective is entirely redundant and serves no useful purpose. Indeed, the idea of changing what were previously operational objectives into prime objectives places competition at that prime level and achieves the objectives which the Government themselves have argued are necessary. For some reason, this issue was never satisfactorily explained previously and has not been satisfactorily explained now. We should apply Occam’s razor and take it out.
Lord Newby
My Lords, I am sorry that the noble Lord does not think that the matter has been satisfactorily explained. All I can say is that it has been explained and was debated at great length when we took the Financial Services Bill through the House. Martin Wheatley made it clear that the operational objectives are the key drivers for the FCA’s actions. After taking legal advice, the FCA has subsequently written and confirmed that it is happy with the strategic objective. On that basis, we are happy that the FCA is happy and wish to retain it.
Lord Turnbull
I shall speak also to Amendments 84, 85 and 86. I believe that my colleague, the noble Lord, Lord Lawson, may speak to Amendment 87.
For those who took part in proceedings on the Financial Services Bill in 2012 these clauses will be Groundhog Day—fighting old battles all over again. The arguments about accountability are familiar, were set out in great detail in the Treasury Committee’s report Accountability of the Bank of England, and rehearsed again in the report of the banking commission. This is not surprising, given the overlap in membership of the two groups.
The dispute can be briefly summarised. The Bank of England’s responsibilities have been hugely enhanced, and its accountability has changed—one has to concede that—but not kept pace. Not only has the scope of the Bank’s responsibilities grown but so has its nature. It is now not just responsible for generic policies such as monetary policy or financial stability; it also has powers over the lives and livelihoods of individual citizens and individual businesses. It is therefore important that its accountability keeps pace with those changes.
Just as important as the Bank of England’s accountability to Parliament is its ability to be self-critical. This is the key feature about which people were dissatisfied. The Bank should be ready to review what it has done, consider how successful it has been and draw lessons from that. One can see that at some time in the not-too-distant future, the Bank will need to review the whole exercise of QE, which involves the spending of billions and billions of pounds, and be able to review the policy candidly, even when the results may not be entirely satisfactory or the Bank thinks that it can make improvements.
Amendment 84 would abolish the Court of the Bank of England and replace it with a board of directors. This is the most eye-catching measure—after all, the court has existed for 319 years—but not the most important. In a sense, it is what you would do last, having made the other changes to signify that the Bank’s governance had conclusively changed. The court has some desirable features, which were noted in earlier discussions. It is a unitary board and is no longer chaired by the governor. When I worked for the Treasury, I had to recommend appointments to the court. However, it has come a long way from the old 16-member court, which was like an in-house focus group on which every region or interest imaginable was represented. It has been replaced by a 14-member court with five executives and nine non-executives.
The Financial Services Act 2012 genuflected in the direction of improving internal review by creating an oversight committee of non-executives. I would contend that that still does not go far enough. The central recommendation in Amendment 86 is not about whether the court should be a supervisory board or a board of directors; it concerns the abolition of the oversight committee and the transfer of its responsibilities from a committee of non-executives to the whole board—as I will call it—of the Bank.
We are seeking this change because we believe that the responsibility to be self-critical should not reside solely with the non-executive directors but should be fully embraced by the whole board, including the governor and deputy governors. Looking critically at one’s own work should be something that the governors embrace enthusiastically and not have imposed on them. It is illogical to praise the court for being a unitary board but with regard to this particular function —the function of review—to assign self-examination to the non-executive directors.
I should make it clear that, as with the oversight committee, it is not implied that the commissioning of a review is to be done internally. The board should determine in each case how best to conduct it—whether it is to be done internally with help or to be done externally.
The next important element of the amendments relates to expertise. The chairman of the Bank has hitherto been a highly experienced, highly respected, all-purpose FTSE chairman with an industrial rather than a financial background. Amendment 84 requires that whoever is appointed should have experience in financial matters and financial markets. However, looking at the advertisement that has just been issued for the new chair, I wonder whether it has really caught up with the change in the nature of the work that the Bank is now involved in. The words “prudential” and “macro” do not appear in the advertisement; nor do the words “central bank” or “knowledge of central bank work” or “knowledge of international financial policy”—for example, familiarity with the work of the Financial Stability Board. It still looks pretty old fashioned. Therefore, we are trying to change the nature of the people who are appointed to this organisation to reflect the new, wider role that it is taking on.
With regard to the new arrangements, this proposal is not meant to trample over current operations. The review work would always take place at a time when the operation was no longer critical, so there would be a clear difference between reviewing performance in the past and day-to-day operations.
Finally, the Treasury Committee and the parliamentary commission recommended that the board, or whatever it is called, should be smaller than the current one of 14 members. It was recommended that there should be a board of eight, including three internal members—the governor and two deputy governors—and four external members. Although the governance of the Bank has moved somewhat, my contention is that it still does not fully reflect the change in the nature of the work that it has to do.
Lord Eatwell
My Lords, we had a considerable discussion about the creation of the rather unfortunately named oversight committee, given the dual meaning of the word “oversight”, during the passage of the Financial Services Bill, now an Act. I am broadly in sympathy with the argument that the noble Lord, Lord Turnbull, has made, which carries through the logic from the ICB or the Treasury Committee—I cannot remember which had the initial discussions—through the banking commission, looking at the overall problem of Bank of England governance in the 21st century, particularly now, given its greater responsibilities.
I should like to make only one major point, which the noble Lord, Lord Turnbull, and his colleagues, including the noble Lord, Lord Lawson, might like to consider, and that is the business of expertise. I entirely agree that the chairman should be a non-executive with considerable experience of prudential or financial matters. That is fine. However, Amendment 84 then says:
“The persons appointed to be non-executive members of the Bank must have—
(a) experience in the running of large organisations and financial institutions”.
That would exclude a lot of people who would be highly desirable. It would exclude Sir John Vickers, for example, and that seems to me to be undesirable. I am very much in favour of academics being in these organisations, such as Sir John Vickers, and I would not like that area of expertise to be ruled out.
Lord Newby
My Lords, this amendment modernises building societies legislation and enables them to compete on more of a level footing with banks.
In the Government’s founding document, the coalition agreement, we set out our commitment to,
“promote mutuals and foster diversity in financial services”.
This commitment underscores the importance that we attach to the contribution that mutuals make to the economy and shows our determination to support them.
Building societies play a central role in the mutual sector. They provide vital services for their members, taking savings deposits and providing mortgages. Indeed, the sector has come through the financial crisis in good health, and has been responsible for much of the new mortgage lending and lending to first-time buyers in the UK in recent years. Building societies also regularly outperform the other retail banks in terms of customer satisfaction.
The Government are keen to ensure that the sector continues to play an integral role in our financial services sector. That is why, in last year’s consultation The Future of Building Societies, the Government asked the building society sector whether there were any changes to the Building Societies Act which would remove unnecessary limitations or barriers to growth, while preserving the distinctive and traditional building society model. Following that consultation, the Government now propose to make several amendments to the Building Societies Act.
The amendments will, first, make it easier for building societies to communicate with their members electronically rather than by paper. This is obviously in line with what banks can do. Secondly, they will allow societies to create floating charges. At the moment, societies can create fixed charges, but are not permitted to grant security over fluctuating assets. This causes practical difficulties, because floating charges are commonplace in financial services. The ban was originally introduced in 1997 to prevent holders of floating charges taking control of a building society, but due to changes in insolvency law this threat no longer exists.
Thirdly, the amendments will change the classification of small business deposits for the purposes of calculating the proportion of a building society’s funding from wholesale sources. Under the Building Societies Act, no more than 50% of a building society’s funding can be wholesale funding. This amendment will mean that a certain amount of small business deposits will no longer count as wholesale funding. The amendment will give societies greater freedom to source wholesale funding, and creates a bigger incentive for societies to compete for small business deposits.
Fourthly, the amendments will allow owners of deferred shares, which are a type of mutual capital instrument, to be eligible to receive shares or cash payment on a demutualisation, irrespective of how long they have held the shares. This will provide an exception to the existing rule that shareholders must have held shares in the society for at least two years. This exception is necessary to remove the risk that deferred shares which are categorised as tier 1 capital would be degraded to tier 2 capital on a demutualisation, because the holder was not able to be given shares. Fifthly, I should add that our new provision makes it clear that the restriction applies to any right to acquire shares by members, and not just rights to acquire shares in priority to others, as is currently the case. The existing provision has not worked as intended and the amendments also correct that.
Sixthly, the amendments will allow building societies to change their financial year to any day in the year, not just 31 December. That is in line with banks. Seventhly, they will remove the requirement for building societies to provide new members with a copy of the latest summary financial statement. There is no equivalent requirement for banks, and this will have cost benefits. Eighthly, they will remove the requirement for societies to disclose information in their annual business statement about officers who are not directors. Such disclosure is excessive, time-consuming and costly, and there is no equivalent requirement for banks.
Taken together, these amendments provide significant modernisations to the legislative framework for building societies, and I commend them to the House.
Lord Eatwell
My Lords, in general these are desirable and beneficial changes, although they do not really represent the great boost to the growth of the mutual sector which we might have expected. However, I want to raise just two major issues. The increase in the use of electronic communication, particularly given the typical customer profile of building societies, raises the possibility that certain members will be disadvantaged with respect to the availability of regular information and of course the summary financial statement, which they should be able to receive in order to understand the overall status and security of their building society. Is the noble Lord content, and can he reassure the House, that there are suitable safeguards so that those who do not have ready access to electronic communication receive appropriate paper copies?
Turning to the issue of owners of preferred shares, can the noble Lord reassure me that the definition of ownership is the same as for those who have held shares for two years? The noble Lord may remember that initially when building societies were demutualised this caused problems, because if Mr and Mrs Smith held a joint account, in fact only Mr Smith was deemed to be the owner. If Mr Smith happened to die within the two-year period, Mrs Smith did not then gain mutualisation advantages. In a Private Member’s Bill which I helped take through the House, we changed that regulation so that in that circumstance both Mr and Mrs Smith would have the advantage if one of them was deceased. Even young Jimmy Smith would have the same advantage if his parents were killed in a car accident. Does the definition of ownership in this case have that broad scope that was specifically created for the demutualisation efforts—in other words, the owners are not the first-named person on the account but can include both a spouse or a partner and a first child?
Lord Higgins
As I understand it, the Government are proposing to remove the provision that on demutualisation people had to have held the shares for two years beforehand. Is there not some argument in favour of that? Otherwise, if it seems possible that a demutualisation will take place, there will be a sudden rush for people to benefit and obtain a purely short-term gain, as against those who have invested in the mutual for some time.
Lord McFall of Alcluith
My Lords, this amendment is about the regulatory decisions committee that the Parliamentary Commission on Banking Standards proposed, giving responsibility for banking enforcement decisions taken by the FCA and the PRA to a new, statutory autonomous body within the FCA. Unfortunately, to date the Government have rejected that proposal.
In our evidence sessions we took evidence from a number of bodies, such as the medical and legal professions. In these established professions, a number of steps are taken to separate disciplinary functions from the supervision of professional development. In the legal profession, for example, the Solicitors Disciplinary Tribunal is totally separate from the Solicitors Regulation Authority and has a mixture of lay and professional members. The SRA has no say in its composition. It is in effect a prosecutor before a tribunal.
We took evidence from Sir Peter Rubin, who chairs the General Medical Council, who described similar recent developments in the medical profession. He told us that following the Shipman inquiry, it was pointed out to the GMC that its previous arrangements, whereby it was the police, the Crown Prosecution Service, the judge, jury and everything else, in his words, were incompatible with Section 6 of the Human Rights Act. Essentially, no one should adjudge their own cause so last year, as he told us, they hived off the adjudication process under which cases against doctors are heard to a separate body in a separate building. It is still funded by the GMC but, crucially, a judge now runs the adjudication process. It is now petitioning Parliament to give the GMC the power to appeal when it does not agree with one of its findings. In his opinion, that would really get the complete separation going.
In our deliberations the commission noted that an entirely separate statutory body for enforcement could be a solution but we recognised that there were a number of obstacles to that, not least because it would generate a new regulatory body that could be a source of confusion and conflict. An independent enforcement body would still be reliant on supervisors for many referrals that could in effect result in fewer cases if there were any problems co-operating with the FCA and the PRA. The body that we mentioned should be chaired by someone with senior judicial experience.
We also recommended a joint review by the regulators of their enforcement arrangements in 2018 but to date the Government have been silent on that issue. In the debate in the House of Commons, our chairman Andrew Tyrie made the point that the Government have rejected the need to wind up United Kingdom Financial Investments, and that the regulatory reforms to provide statutory autonomy for the decisions committee are especially regrettable. I would like the Government to give us their views on that joint approach by 2018.
We are seeking a body to be appointed by agreement between the boards of the PRA and the FCA with a majority of members with a non-banking or financial services background, containing several members with extensive and senior banking experience. It should be chaired by a person with senior judicial experience. In that way, it could publish a separate annual report of its activities and of the lessons for banks that emerged from its decisions.
When the FCA representatives were giving us evidence, Tracey McDermott, the director of enforcement, told us that the FSA had still not solved the problem of ensuring that senior figures were properly subject to the enforcement process. She said:
“The focus on senior management is something that we have talked about a lot in the FSA but we have found it very difficult to bring home the responsibility, particularly in larger firms, to those who are further up because of confused lines of accountability and because of confused responsibility”.
I would ask the Minister to keep in mind that there is an inherent tension between the role of real-time regulators and the enforcement function that can involve reaching judgments on which matters supervisors were involved in at the time, and that regulators are focused on the big picture, such as maintaining financial stability. Again, from experience I have witnessed the enforcement process being devalued in that area. There were a number of areas where the FSA at the time should have been on to enforcement procedures, particularly in the 2004-06 period of the financial crisis. It avoided those areas.
The proposal that we are making here is quite a modest one. It is for a statutory autonomous body within the FCA, and in 2018 there should be a review. I hope that Government will take those propositions seriously, reflect on them and come back to us. I beg to move.
Lord Eatwell
My Lords, I was a member of the first regulatory decisions committee established under the Financial Services Authority. It was established at that time because it was felt that the FSA’s procedures would run counter to the Human Rights Act, in the sense that those procedures were both judge and jury. The role of the committee was to act as an independent assessor of the regulatory and enforcement proposals put forward by the FSA.
It worked reasonably well, at least from the perspective of a member of the committee, but not from the perspective of the FSA; we tended to give it a rather difficult time when we felt that its cases were ill prepared and ill focused. It played a particular role for a short period. Then, after a particular dramatic case was lost by the FSA in the tribunal, the FSA decided that it did not like the RDC being foisted upon it, and the role of the RDC was slowly downgraded. I think that was unfortunate—obviously I do, because I participated in the early days when I thought it was working rather well, but be that as it may.
The role here is slightly different from the challenge role that the RDC played. Will the Minister address the question of whether any effective enforcement role for a regulator is compatible with the Human Rights Act?
Lord Newby
My Lords, we have considered extremely carefully all the recommendations from the PCBS. They contain a number of observations about the importance of banking expertise, accountability, clarity of responsibility and consistency of decision-making, which we certainly agree with.
I shall explain how the current arrangements already deliver all those things in a way that is tailored to the regulators’ individual approaches. First, on expertise, the call to create a separate decisions committee solely for the banking sector partly reflects concerns about the level of banking expertise on the RDC. At the FCA, the regulatory decisions committee is responsible for taking enforcement decisions. Its remit extends beyond banking, but that does not mean that it does not contain banking expertise. Indeed, the FCA has recently addressed the balance of expertise on the RDC through the appointment of two new members with banking expertise. At the PRA, of course there is no lack of banking expertise on its decision-making committees.
Secondly, on clarity of roles and responsibility, Section 395 of FiSMA provides for the separation of supervision from disciplinary decision-making. Under the current arrangements, there is also a clear separation of the function of making enforcement decisions from that of judicial consideration of the issue.
I do not accept the argument that the fact that the PRA does not have an RDC gives rise to human rights concerns. We do not believe that there is a problem on that front. The prospect of decisions being appealed to the Upper Tribunal means that the system already provides an independent judicial challenge function to the decision-making process for all financial services cases. The proposed requirement for regulatory decisions to be made by a committee chaired by a person with senior judicial experience, on the other hand, would appear to give this new committee a quasi-judicial role more suitable for an external review tribunal than an internal decision-making body.
On consistency of decision-making, I understand that a key part of the recommendation was to encourage a greater consistency of decision-making across the PRA and the FCA. Unfortunately, I believe that the creation of an additional statutory committee for banks would create only new inconsistency. The new committee relates only to banking, so any enforcement decisions relating to a building society, insurer or investment firm would be made under the existing framework and the FCA would have to maintain the existing RDC. This would mean one body dealing with the breach of a rule by a bank and a different body dealing with the same breach of the same rule by a building society, with potentially different outcomes, which seems undesirable. While I think that the PCBS report contains some useful observations in this area, I believe that the current, flexible arrangements are the right ones. On that basis, I would be grateful if the noble Lord withdrew his amendment.
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(11 years, 1 month ago)
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The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, I will consider both Amendments 1 and 2, and I will talk first about Amendment 1, which has been proposed by my noble friend Lord Blackwell. I have much sympathy with the intention behind this amendment and I hope that I can provide some of the comfort that my noble friend seeks. Independent governance is of course key to the integrity of the ring fence to ensure that ring-fenced banks do not simply operate in the interests of their group’s investment bank, in this example, or indeed other parts of the bank, but it is important that any governance requirements are proportionate to the threat to the ring-fence. Where a ring-fenced bank makes up the great majority of a group’s business and the investment bank is therefore small, so the risk of the ring-fenced bank being dominated by the interests of the investment bank is also small.
The Independent Commission on Banking recommended that where the vast majority of a group’s assets were in the ring-fenced bank, requirements for independent governance should be relaxed. The Government accepted that recommendation, and in our June 2012 White Paper we supported,
“flexibility in governance arrangements where a ring-fenced bank represents the overwhelming majority of a group’s business”.
Under the Bill, the precise details of ring-fenced bank governance arrangements, along with other ring-fencing rules, are for the regulator to determine. The Bill sets the objectives that rules must achieve; the regulator then decides what exact structures or restrictions are needed to achieve those objectives. This is appropriate because of the highly technical nature of the issue, and in order to allow requirements to keep pace with developments in a fast-moving market. Rule-making will, of course, require the regulator to exercise its judgment, and proportionality will be central to how it does so. In particular, the regulator will be obliged to consider the costs and benefits of any rules it proposes to make, including ring-fencing rules.
In the case of ring-fencing and governance rules, the Bill also specifically gives the regulator flexibility to consider the proportionality of different requirements. The Bill requires the regulator to ensure “as far as reasonably practicable” that a ring-fenced bank is able to take decisions independently of the rest of its group.
The formulation “as far as reasonably practicable” specifically anticipates circumstances in which certain governance requirements might be impractical or have costs that are disproportionate to their benefits. The case where a ring-fenced bank constitutes the overwhelming majority of a group’s business may be one such circumstance. I hope the noble Lord can therefore feel reassured that the intention of his amendment is already reflected in the Bill. I therefore call upon the noble Lord to withdraw his amendment.
Government Amendment 2 corrects a minor and technical point in connection with new Section 142H, which imposes an obligation on the appropriate regulator to make certain rules requiring that a ring-fenced bank be independent of other members of its group. The clause as currently drafted defines the appropriate regulator only in relation to ring-fenced bodies. However, as new Section 142H also imposes an obligation on the appropriate regulator to make rules applying to authorised persons who are members of a ring-fenced body’s group, but are not themselves ring-fenced bodies, the appropriate regulator needs to be defined in relation to all authorised persons, not just ring-fenced bodies. This is corrected by this amendment, and I commend it to the House.
Lord Eatwell (Lab)
My Lords, I wonder whether, in his assessment of the amendment of the noble Lord, Lord Blackwell, the Minister might take into account the fact that it was exactly this sort of procedure that led to the steady erosion of Glass-Steagall over the years. There was a tendency continuously to say, “Well, if we have a particular subsidiary, then perhaps we don’t need to have the separation in this smaller subsidiary”. These steady erosions built up over the years, until by the early part of this century, before its repeal, the effectiveness of Glass-Steagall had been completely eroded. Perhaps the Government should take that into account. There is also the point that, if the investment banking services required by a ring-fenced bank are relatively small, they could, of course, always be purchased from another provider.
Finally, the Minister mentioned that the precise definition of the rules of extent and so on will be defined by the regulators and in secondary legislation. I wonder whether it would be appropriate at this moment to take into account the latest report of the Delegated Powers and Regulatory Reform Committee, which has expressed considerable concern about the scrutiny of secondary legislation that will follow from new Sections 142A, 142B and so forth as we are discussing in this particular context. Are the Government likely to accept the enhanced scrutiny proposed by that committee with respect to these particular sections?
Lord Blackwell
I am grateful for my noble friend’s comments on Amendment 1 and for his explanation that the flexibility allowed for in this Bill will be flexibility that the regulator will be expected to interpret. I note the comments of the noble Lord, Lord Eatwell, but clearly the regulator’s role will be to ensure that creep does not occur on the way and that the protection of the ring-fenced bank is the requirement as set out in this legislation. Therefore, with those assurances from my noble friend, I am pleased to withdraw the amendment.
Lord Eatwell
Lord Eatwell (Lab)
My Lords, I am in total agreement with what the noble Lord, Lord Turnbull, has said about the importance of the reviews of this process. We have to realise that we really are breaking new ground here. In a way, this is a leap in the dark and we have no idea whether it will work. Obviously a lot of effort has gone into trying to ensure that it will work, but it is such a novel innovation that we really cannot be sure whether it will, or indeed whether it will have a whole series of unintended consequences.
Accordingly, I feel that it is very important that the process be kept under virtually continuous review. The amendment in the name of myself and my noble friend Lord Tunnicliffe seeks to ensure that the first review and subsequent reviews take place within relatively short time periods of up to two years. The reason for that is that it is only five years ago, almost to the day, that Lehman Brothers collapsed, and let us think what has happened since then. If we were to retain the four-year limit, that would cover almost that whole period, with all the remarkable devastating changes that have occurred.
I agree with the noble Lord, Lord Turnbull, in his proposed new Section 142JA, that such a virtually standing group should act as an independent arbiter and assessor of these matters. It certainly should not be, as in the Government’s proposal, the PRA inspecting itself. That does not seem to be a very satisfactory structure at all. It is not appropriate in terms of giving confidence in the reviews, and it is not fair to the PRA. The PRA should be able to stand up and do its job, and then accept that it will then be scrutinised by the sort of independent group proposed by the noble Lord, Lord Turnbull. My amendment would simply ensure that that group had a virtually standing role in assessing these major changes to ensure that, once we have taken this leap in the dark, we land on firm ground. On Amendment 5, I shall simply reiterate the arguments that I have just made. I beg to move.
Lord Blackwell
My Lords, I must express some reservations about the arguments put forward by the noble Lord, Lord Turnbull. It is not that I do not understand the significance of having continuous and effective review of these ring-fencing procedures, but it seems to me that we have set up, with a lot of time in this House and the other place, a regulator that has learnt in that legislation and its constitution and objectives many of the lessons of the past, and we have entrusted that regulator with maintaining the stability of the financial sector and enforcing this legislation, if the Bill is passed. I think there is a danger in seeking to replace the regulation of an industry by an independent regulator with what might be in danger of turning into regulation by parliamentary committee. Parliamentary committees have many virtues and values, but they cannot engage dispassionately in the same evaluation of detailed analysis and commercial information that a regulator can, and they are more likely to be swayed by current opinions of the day. I pay tribute to the work of the commission on which the noble Lord, Lord Turnbull, and other noble Lords sat, which did an excellent job. I worry about the possibility of moving away from regulation by independent regulators, which are deliberately made independent of the Executive, towards regulation by parliamentary committees.
Lord Turnbull
My Lords, in responding to the points that have been made, I want to make it clear that the commission is not seeking to use this Bill to reopen the position we have reached and try to get us back to a policy of separation. What we have is a policy of ring-fencing plus safeguards plus vigilance. I listed some of those safeguards at the start. If that is the policy we are on, we have to make the safeguards and vigilance work. In response to the Minister, I do not think that a process in which the reviewing is done by one of the key players in it, which is the Prudential Regulation Authority, carries any credibility whatever. Its work is important and it should be a contribution to a wider study, and the wider study should be undertaken by someone who is independent of it.
The other argument used by the Minister was that we do not want a state of permanent vigilance. I do not think that it is possible, in an industry which is highly innovative—reference has been made to the term “half-life”—that you can find one system that will last for ever and therefore you need to be able to keep an eye on what you have created and make sure that you are taking steps to keep to that policy until such time—which may be the point of the amendments we shall come to in another group—that you conclude that it is not working. But the search for something which you can just do and then simply routinely maintain is an illusion. If ring-fencing is to be the policy, it is absolutely essential that it is backed by maximum vigilance and some high-powered mechanisms for review. I really do not think that what the Minister has promised us today meets that requirement.
The Minister pointed out that there are of course two reviews here. The other one is much less important and serves a completely different purpose. It is to safeguard a bank that has been threatened with separation against the arbitrary behaviour of its regulator. You could ask why that is needed because there are other safeguards, but if you do not have it, you come to the question of whether the Regulatory Decisions Committee, which is a step on towards the tribunal, should be beefed up. However, that is a recommendation we will come to, which the Government have not accepted. I do not think that the lesser review, the Amendment 10 review, can be taken off the table. If you do that, you increase the case for Amendment 91, recommending a new RDC. My conclusion is that we have not reached an agreement in this area. The debate is interesting, but what it means is that a lot more work has to be done between the opposition, the commission, other members and the Treasury to get to a point of resolution. However, it is essential that the point we reach has a much more high-powered review mechanism in it than is currently set out in subsection (6). I am content to withdraw the amendment on the basis that further discussions between now and Report will take place and that there will be flexibility on the part of the Government in their consideration.
Lord Eatwell
My Lords, as I have tabled an amendment to the amendment moved by the noble Lord, Lord Turnbull, I believe that it is for me to withdraw my amendment first and for him to follow. The noble Lord, Lord Deighton, has two objections to the process of review, both of which have, I think, been demonstrated to be false. He said that the first was to secure consensus. From the discussion today, he should be effectively disabused of the idea that the ICB has secured consensus. People have settled around the ICB as the best that can be obtained under the current circumstances, but there is a considerable degree of uncertainty about whether the ring-fence is actually a good idea.
The noble Lord also said that he wanted certainty, but he absolutely does not get certainty in this way because we are very uncertain as to whether this system will actually work. That is why his second objection—that time should be given for the system to settle down and work—is a very dangerous one. As we go through the process of implementation—if eventually Parliament agrees to these ring-fence proposals and implements them—we will discover by sheer practice where the lacunae may be, where things simply go wrong with unintended consequences, and so on. Unfortunately, we will be conducting an experiment and under those circumstances, it is very important that the sort of expert committee that the noble Lord, Lord Turnbull, has proposed, focusing on the particular question of whether this works, with growing expertise and experience, should be in place to review what is happening as the process unfolds.
That is why in particular I was very nervous about one aspect of the proposals of the noble Lord, Lord Turnbull, with respect to the review not taking place for four years and then taking place at five-year intervals thereafter. Although it is “up to” four years, I would be willing to bet that the “up to” will turn out to be about two. None the less, my amendments were intended to ensure particularly that we have the expert committee proposed by the noble Lord, Lord Turnbull, virtually in place as a standing committee with the expertise to guide us through what is going to be a very difficult and uncertain process.
Given the debate, and the views expressed around the House, this is a matter to which we certainly must return after significant negotiations have occurred between Committee and Report stages to try to achieve something of a consensus—at least on the issue of the nature of review. In the mean time, I beg leave to withdraw Amendment 4.
Lord Deighton
The resolution powers all relate to the Bank of England’s powers essentially to step in in advance of a bank’s insolvency so that it can change, for example, the creditor arrangements.
The PRA and FCA already have powers to require regulated entities to take actions that would facilitate the resolution of a firm in the event of its failure. This may include requiring it to raise additional capital, issue debt to the market or make structural changes to enable the firm to be resolved.
However, banks may be organised in a number of ways. Many have a structure whereby the bank is owned by a financial holding company, which may not be regulated. Banks may also be part of corporate groups which contain non-corporate banking entities. In these cases, the existing powers may be insufficient to deliver some of the changes that the regulator feels are necessary to make a bank resolvable. This is because the regulated entity may not have the level of control required to make the change. This may be the case where, for example, capital and debt are issued out of the parent undertaking before being downstreamed to a bank. It may also be operational in nature; for example, where a service company which is not owned by the bank but sits in another part of the group provides critical services in the bank.
The amendment will address these cases and ensure that the PRA and the FCA have the necessary powers to make banks resolvable for all types of corporate structure. It amends new Section 142J to ensure that any reviews by the PRA of “ring-fencing rules” under that section must also cover rules made under the power given in new Section 192JA in relation to parent undertakings of ring-fenced bodies.
Lord Eatwell
My Lords, I have enormous sympathy with the amendments and the struggle that the Treasury is having in having effectively to provide rules for parent undertakings in relation to the maintenance of the ring-fence. In many ways, the amendments go at least some of the way to achieving that. However, I should like to ask a question which I asked at Second Reading and which was not answered then. The Minister referred to capital and debt being raised at the level of the parent company and then downstreamed into the ring-fenced entity. If it can be downstreamed, can it not be upstreamed? If that were so, the ring-fence would not exist.
Lord Deighton
It is a valve which goes only one way; it cannot be upstreamed—otherwise the noble Lord is right that the ring-fence would not work.
Lord Deighton
The simple way to look at the amendments is that they are to ensure that both regulators have the flexibility to address every aspect of the group structure to ensure that the ring-fence works. That is why we are trying to give as much flexibility as possible to address even the non-regulated entities within the group.
Lord Eatwell
My Lords, the noble Lord, Lord Higgins, has raised a very important matter with respect to authorities outside the UK. The proposals under Glass-Steagall and under Liikanen are different from the ring-fence—the divisions appear in different places. In those circumstances, “similar powers” seems to be a very weak description, because they are similar but not the same. With respect to resolution powers, which are crucial in the relationship between the parent body and the ring-fenced entity, that seems to create a degree of uncertainty. Can the Minister clarify exactly what that applies to? Presumably, it applies to the home-host division in regulatory responsibility and therefore subsidiaries of UK institutions in other jurisdictions will be regulated by the home regulator. If the home regulator has different rules with respect to the divisions, it seems to me that there will be a degree of confusion as to what is actually being enforced.
I am grateful for the Minister’s clear answer about the valve that goes one way on the raising of debt and capital. I return to my previous question. Let us suppose that we have a group in which the liability structure of the ring-fenced entity is essentially provided from the parent through the one-way valve and then the parent simply stops providing. In those circumstances, the security and stability of the ring-fenced institution would surely be threatened. The ring-fence would not be working simply because the steady flow of financial support for the ring-fenced institution had been cut off.
Lord Higgins
My Lords, I am a little clearer now than I was a moment or two ago. It would be helpful if my noble friend could say what is the position in each of the countries that I just mentioned. As I understand it, the emerging EU proposals—I am looking at a brief from the Law Society—will,
“require banks to create separate entities (although they will be allowed to stay within the same group) in order to split proprietary trading and market making off from other banking activities”.
On the other hand, the United States scheme will require,
“complete separation of proprietary trading but the bank is allowed to undertake market making”.
Under the amendment, we will apparently have those outside bodies setting the rules for banks in the UK. Consequently, we may find that the ring-fence is being drawn in quite different places—the noble Lord opposite seems to agree—depending on which authority is exercising the powers of resolution.
Lord Deighton
I shall try to go through those points one by one. Just to be clear with respect to the foreign banks, the power we were talking about relates to the Bank of England’s rule-making power over parent companies. It allows the Bank of England to support a resolution being carried out by a foreign regulator where the bank is in a different country. It just allows the support of that resolution going on elsewhere so that we have the kind of international co-operation which is necessary for these resolutions. On the point about Liikanen and the convergence in how we are looking at this around the world, the general view of the officials who are working on the European legislation is that we are sufficiently in tune with where that is heading for these arrangements to work effectively.
I was not sure that I entirely followed the risk that the noble Lord, Lord Eatwell, was pointing out. However, risk-fenced banks can of course have equity provided by their parent and, once it is given, it need not be repaid, so the flow can still keep going into the ring-fenced bank.
Lord Deighton
That is part of the resolution process that needs to be sorted out but there is nothing to stop it continuing to go in.
Lord Turnbull
I very much welcome this simplified process. It took two steps for the Government to get there, but the prodigal son is welcome at any time. Let us pocket that. I said we would look again at this special review that the commission suggested inserting into the process. I noticed that the Minister was drifting on to the next group, and I thought I was going to introduce it, but let us come to that at the appropriate time.
Lord Eatwell
My Lords, I echo the words of the noble Lord, Lord Turnbull. I think this is a significant improvement on the procedures that were previously outlined. I have a number of exploratory questions about this procedure. First, the regulator essentially seems to be judge and jury in this respect. It was the role of the old Regulatory Decisions Committee and, I believe, the ambition of the commission with respect to its development of the Regulatory Decisions Committee to ensure that there was an independent step in any major regulatory enforcement. The main reason why that was introduced into FiSMA was because it was felt that otherwise it would contravene human rights legislation. Are the Government confident that this procedure does not contravene such legislation?
Secondly, with respect to the publication of notices, in the very thorough and welcome briefing that the Minister’s staff provided on these amendments, the Government argued that they would not accept the commission’s proposal that the existence of a preliminary notice or of various stages be publicised. Instead, it was felt that these matters should be kept “secret” until such time as any impact on Stock Exchange listing rules demanded publication that the group was being subjected to such a procedure. It seems to me that this is a slightly dangerous structure. It is a traditional structure of central banks. It has always been strongly opposed by securities regulators which believe much more in transparency in this respect. This lack of transparency is likely to produce rumour and false information in the marketplace. Consequently, if we are going to have this procedure—which I think is well thought out, apart from the one issue that I raised, on which I would like to have assurances—we should make it a transparent procedure because rumours and false information are really damaging to markets. Transparency is always to be preferred, even if that transparency may be extremely uncomfortable for the firm being subjected to this process.
Lord Deighton
On the question of the breach of human rights, we are confident. The RDC still exists, and under this procedure we still have the independent Upper Tribunal. We have looked into that.
On the publication of the initial warning, we are all trying to accomplish the same thing, and it is quite finely balanced as to which way you go. I point out, for the benefit of noble Lords, that of course the regulator has the discretion to publish the initial notice but is not obliged to do so. Therefore, in those circumstances in which it is in the interest of the market to do that, it would do so. One of the principal reasons why we are reluctant to do that is because if you have gone public with the initial warning it may make you reluctant to issue the initial warning and to begin a process because of the consequences of that being out in the public domain. This is a tricky area where the arguments are relatively well balanced. We came out with this option for the regulator to disclose it, which we thought was, on balance, the right thing to do. I beg to move.
Lord Blackwell
My Lords, given some of the recent speeches, I again sound a small note of caution. While I understand the need to electrify the ring-fence, the Government and this House should be cautious about legislating on a presumption that universal banking is the wrong commercial or organisational model. I share many of the concerns that have been expressed about the difficulty of having a common culture in an organisation that embraces too many different activities. However, it seems to me that it is primarily a commercial judgment for the management and shareholders to decide whether or not they can make that range of activities succeed. The primary duty of the Government and the regulator is to ensure that whatever is done is not a threat to the financial stability of the system. As I said in my introduction to the first amendment, I support ring-fencing which seems to me to be targeted at that purpose, which is to define the capital and risk exposure of the ring-fenced bank and ensure that it is regulated in such a way that the other activities of the group do not impinge on the capital and solvency of the ring-fenced activity. So long as the Government and the regulator can do that—I understand that people are raising questions about that—it seems to me that the question of other activities in the group is not something on which the Government should rush to legislate.
There are arguments which have not been put in this House about, for example, the ability to serve customers in a common way across different entities in the group, which would not be prevented by ring-fencing. There are arguments about the use of common resources such as IT resources, infrastructure and a whole range of central resources that can be used in a group structure. There may be good arguments or bad arguments but those are arguments that the management and the shareholders should primarily be in a position to consider. Some will succeed and some will fail but it is not up to this House to decide the commercial logic or otherwise of universal banking. The House should decide primarily whether or not the ring-fencing, the safeguards in the Bill and the electrification that is already built into the government amendments will do the job that is intended.
Lord Eatwell
My Lords, what is particularly striking about the commission’s report, especially its final report, is the way in which it presents a coherent package of measures. This amendment fits together with the review amendment that we considered earlier as those two elements reinforce each other. As Amendment 117 makes clear, the review element is the key trigger for Parliament to consider whether this measure of separation should be introduced. There is coherence here. What is distressing about the Government’s rejection of the nature of independent review and hostility towards this amendment is that by removing that internal coherence of argument they significantly weaken the overall approach to financial regulation which we are attempting to achieve.
In anticipating this discussion on separation, the noble Lord, Lord Deighton, asserted that the arguments for separation had not been considered and that if you wanted an amendment of this sort you ought to have another commission to consider the arguments. That is just not so as the arguments were considered extensively, first by the independent commission and then by the parliamentary commission. The main point that came out of those discussions was that there was a strong case for separation. However, the experiment of ring-fencing was felt to be worth while as, if it worked, the trauma of separation would not be required. The idea that this issue has not been considered is not the case as it has been considered very thoroughly. It has not been rejected but is seen as a backstop, if you like, to the ring-fencing proposal.
The most reverend Primate made the terribly important point, in a way which has not been brought out by other speakers, that this measure strengthens the whole structure of the ring-fence and will incentivise the banks to regulate each other. There will be an enormous incentive for all the banks to keep an eye on what everybody else is up to to ensure that they are not drawn into this final total separation. The people on the inside who really know what is going on will have a strong incentive to make the ring-fence work because if it does not work they know that there is a reserve power in the Bill. If you really want the ring-fence to work, you need this clause. It is a contingent clause and a reserve power but if we really want the ring-fence to work, the Government should wholeheartedly embrace the amendment of the noble Lord, Lord Turnbull.
Lord Eatwell
The point that the Minister seems not to have taken on board is that the arguments for review and this power have to be seen as a coherent package. The point is that there would be that review; there would be a continuous independent review providing exactly the information that he says is necessary.
Lord Deighton
Yes, there would be a review, but not a proper parliamentary process. The argument I am making is that this is such a switch from ring-fencing to full separation that it should benefit from that full process. While I obviously bow to the experience of my noble friend Lord Lawson, these things, if the circumstances dictate, can be done extremely rapidly, where the circumstances demand that kind of urgent move.
I think it is instructive to compare the process of developing the ring-fencing policy to that of this proposal for full separation. The ICB went through an extensive process of deliberation and analysis, carefully collected data, prepared a full cost and benefit analysis and compared that to full separation. It found that a robust ring-fence will insulate essential retail banking services from shocks originating elsewhere in the financial system. It will enhance the authorities’ ability to manage the failure of a ring-fenced bank, or its wider corporate group, in an orderly way. It will, therefore, deliver the financial stability benefits of separation. Ring-fencing will also preserve some of the benefits of universal banking. I made the argument of diversification and scale, not simply diversity. Customers will be able to access the full range of services from a single group: that is a marketing advantage as well. The frictional costs to the economy of ring-fencing are therefore lower than those of full separation. That is, of course, the reason we did not go for full separation. Further, in the event that the ring-fenced bank runs into trouble while the rest of the group is doing well, other group members can support it. That, of course, would not be possible under complete separation.
On a comparison of the costs and benefits, the ICB chose ring-fencing as the superior policy. The PCBS did not provide any new evidence to contradict this position. In this respect, the noble Lord’s proposal for an independent review of ring-fencing is an admission that the evidence base for full separation does not yet exist. The amendment asks us to put a policy into law and then establishes an independent review process in the hope that it might justify it. For us, this is lawmaking done backwards.
That brings me to the Government’s second and perhaps more powerful reason for rejecting this amendment. Let us imagine that a future Government decided that not ring-fencing, or full separation, but a third policy was appropriate. Imagine, for example, that it decided that a Volcker rule was the right policy, or a shift to full-reserve banking. In either case, a review that was limited to deciding whether to enact a reserve provision for separating ring-fenced banks from their groups would be no use at all, and the power would need to be repealed, along with much of the rest of the Bill. Coming back to Parliament would be the only way to give a future Government wanting to change policy the full range of options.
Therefore, on grounds of both substance and of proper legislative process, the Government continue to oppose a reserve provision for a move to full separation and I therefore urge the noble Lord to withdraw his amendment.
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(11 years, 1 month ago)
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The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, I turn to Amendments 24 to 37. A central principle of ring-fencing is that ring-fenced banks must be independent from the rest of their groups, so that the failure of another member of the group cannot spread to—and bring down—the ring-fenced bank. Under existing pensions law, if a ring-fenced bank continues to share a pension scheme with other parts of its group then, if another group member were to fail, the entire liability for the scheme could fall on the ring-fenced bank as the “last man standing”. If this liability were sufficiently large, it could then threaten the viability of an otherwise healthy ring-fenced bank. Allowing ring-fenced banks to remain liable for a group pension scheme would thus leave open a potential avenue of contagion from the group to the ring-fenced bank.
It is for this reason that the ICB recommended that ring-fenced banks’ liabilities to group pension schemes should be removed or mitigated. Proposed new Section 142W, as currently set out, therefore gives the Treasury the power to require that ring-fenced banks make arrangements to ensure that they cannot become liable for the pension liabilities of any non-ring-fenced entity, or that they minimise such potential liabilities if they cannot entirely prevent them arising. This could involve segregating an existing pension scheme into discrete sections, or splitting it into two separate schemes. Restructuring would largely be executed through the existing means allowed for under pensions legislation.
The amendments to the powers as currently set out do not change the overarching policy objective. They simply ensure that the powers are wide enough to make sure that that objective is met in all scenarios. Under the existing drafting, the Bill allows the Treasury to make regulations requiring ring-fenced banks to make arrangements in relation to potential statutory liabilities they have to multi-employer schemes.
These amendments expand the scope of the power, allowing the Treasury to make regulations requiring that a ring-fenced bank ensure that it cannot become liable for the pension liabilities of non-ring-fenced banks, or at least minimise its potential liabilities to them, whether the liabilities are statutory—such as those which arise under the employer debt legislation—or non-statutory, such as can arise under contractual arrangements such as guarantees. The amendments also allow the Treasury to make regulations including provisions to help the banks to achieve the required separation of pension schemes, such as enabling the trustees to split the scheme or transfer assets and liabilities to a new scheme; and providing that a ring-fenced bank can make an application to the court if it is unable to reach agreement with a third party about the terms on which it should be released from a contractual arrangement or guarantee giving rise to potential pension liabilities.
In addition, the amendments enable the Treasury to make regulations requiring banks to do all they can to obtain clearance from the Pensions Regulator for any restructuring undertaken to comply with ring-fencing, to ensure that pension scheme members are adequately protected. This strengthens the existing provision in the Bill which only allows the Treasury regulations to require that a bank apply for clearance.
Finally, the amendments introduce a power, allowing the Treasury regulations to modify, exclude or apply legislation—including primary legislation—for the purposes of achieving the required separation of pension liabilities. Pension arrangements are inherently long-term in nature, and the Government must be able to respond flexibly to unforeseen developments as banks restructure their pension schemes if they are to ensure that the economic independence of ring-fenced banks is preserved. Regulations made under this power, like all regulations made under proposed new Section 142W, will be subject to the draft affirmative resolution procedure, and can be made only for the specific purposes outlined above. These amendments therefore ensure that proposed new Section 142W is effective in making the ring-fence robust.
Lord Eatwell (Lab)
My Lords, I am grateful to the noble Lord for introducing this set of amendments about pension schemes. The argument for the amendments raises two significant questions. We are talking here about transitional arrangements: about moving from a group pension scheme to what might in future be deemed to be necessarily separate schemes for the ring-fenced and non-ring-fenced components of a group. There must therefore be other transitional arrangements as well—for example, property leases which are relevant to a group. Are they, too, to be separated and decomposed? What are we going to do about all those group liabilities similar to pension liabilities during the period between the implementation of legislation for ring-fencing and the conclusion when ring-fencing has been in place for some time? Over that period, there have to be transitional arrangements. Clearly, pensions are a very special case because the people will presumably stay where they are, but there must be other elements of liabilities which are also rather difficult to untangle. My first question is therefore: what is the Government’s thinking about such transitional problems?
The second question, which is much more specific to pensions and immediately arises, is whether the separation will be to the detriment of members of the pension scheme. This is precisely an area in which scale can become enormously important in a pension scheme, especially with respect to diversifying risk. The sheer scale of a pension scheme can be a component of the commercial success of that scheme. If the scheme is to be broken up, will it be to the significant detriment of the pensioners? There must surely be some consideration of whether it is to be their detriment and, if so, of what measures are to be taken to remove that detriment.
Lord Higgins (Con)
The role of the trustees will be very important in this context. Is it envisaged that the two parts of the bank will have separate trustees?
Financial Services (Banking Reform) Bill
Lord Eatwell Excerpts(11 years, 4 months ago)
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Lord Eatwell
My Lords, I am most grateful to the noble Lord, Lord Deighton, for introducing the Bill. In his introduction he acknowledged the work of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards in developing the thinking behind the policies that this Bill is intended to implement. The whole House is grateful to noble Lords who are members of the parliamentary commission for all the hard work they have done to formulate a new banking policy for this country. We look forward to hearing from three of them later today. The right reverend Prelate the Bishop of Birmingham is, I think, standing in for the most reverend Primate the Archbishop of Canterbury, from whom we hope to hear at a later stage. I hope also that we can hear at a later stage from the noble Lord, Lord Turnbull.
This Bill is the outcome of the Treasury’s intermediation, let us say, of the recommendations of the independent commission and, to a more limited extent, of the parliamentary commission. Less kindly observers might suggest that, instead of one of intermediation, the Treasury’s role might be described as watering down those recommendations. Every dilution by the Government increases the risk in the banking sector. It would assist the House enormously if, when the noble Lord, Lord Newby, sums up, he would list precisely those areas in which the Government have significantly toughened up on the recommendations that they have received.
Anyone who read this Bill without having studied the various documents issued by the independent commission, the parliamentary commission and the Treasury over the past two years would have absolutely no idea what the Bill is intended to achieve. The Bill essentially is an enabling Bill, which establishes the powers to do certain things—particularly with respect to the establishment of a ring-fence in the banking sector—without specifying exactly what is to be done. Noble Lords may search in vain for an indication of where the ring-fence might actually lie, how electrified or permeable the ring-fence might be, what would be the equity capital or primary loss-absorbing capital requirements and the leverage ratio—I prefer the British pronunciation—inside and outside the ring-fence, and so on. All those and many other matters are to be determined by order or handed over to the relevant regulator.
Yet those issues are central to any evaluation of the value of this legislation in the reform of one of Britain’s most important industries. The Government published last week a number of draft orders that illustrated how important aspects of the concept of a ring-fence will be made operational. That document illustrates just how fearfully complex those vital orders will be. To ensure that this crucial secondary legislation—and, indeed, what the parliamentary committee refers to as tertiary legislation—is suitably scrutinised, will the Government implement the parliamentary commission’s proposal that a small ad hoc joint committee of both Houses of Parliament be established on an ongoing basis to scrutinise secondary legislation and the proposed use of delegated powers?
It is clear that the Bill before your Lordships’ House today relates to but a fraction of the measures that either the parliamentary commission has recommended be included in it, or the Government have stated they intend to include. By the way, those are not the same thing, given that the Government have already rejected some of the parliamentary commission’s proposals.
We know that from the second report of the parliamentary commission there were 25 draft amendments. Some of those have been accepted but many have not. What is to become of those amendments?
There are then the important proposals on banking standards and culture contained in the remarkably thorough final report of the parliamentary commission. In their reaction to that report, the Government suggested that 13 of the conclusions will require implementation by means of primary legislation. There is a wide range of other matters that might properly be discussed at this Second Reading. So what will be accepted, and what will not? What form will all these amendments take? We do not know because we do not have them before us today. This Second Reading is being conducted largely in the dark. We wait for the Government to reveal their hand. When will this happen? When the Government publish their raft of amendments, will they publish a commentary on their significance to facilitate debate on this vital but complicated matter?
The Government estimate that the private cost of the Bill for the banking industry will lie in the range between £3.5 billion and £8 billion. Much of this cost is the removal of the implicit guarantee enjoyed by financial institutions too big to fail and is thus an economically appropriate reallocation of costs. Risk is being properly priced. In so far as the extra cost falls on ring-fenced banks, we can be sure that under current circumstances it will be passed on to retail customers and SMEs, increasing what is already an unreasonably marked-up cost of credit.
There is a serious need for increased competition in the banking industry to mitigate the impact of these extra costs. Since the crisis, defensive amalgamations and forced mergers have reduced competition from what was already a seriously inadequate level. This legislation introduces no fundamental change to the competition regime in banking. Account portability is a valuable addition to consumer choice, of course, but it is not a game changer in terms of competitive challenge. In addition, prudential regulation in our sensitive post-crisis world is proving an almost impenetrable barrier to entry for those who wish to establish new banks. The PRA will have competition as an objective, but where will that objective come in the hierarchy of objectives when it is considering a particular application? What are the Government going to do to bring about a game-changing shift in competition in retail banking in this country?
There are two major issues that do not seem to me to have been closely examined either by the independent commission or the parliamentary commission: regulatory arbitrage and the impact of banking structures on the performance of the real economy. In the run-up to the crisis, the activity of European banks raising deposits in the US and recycling them into the US shadow banking sector undermined the impact of US leverage regulations. The ICB refers tangentially to the importance of regulatory arbitrage, but I do not find its assertions convincing. Could the same recycling arbitrage happen to the UK’s ring-fence? Surely branches of EEA banks operating in the UK could undermine ring-fencing by providing the universal and potentially cheaper banking services that UK and EEA subsidiaries are no longer able to provide. What steps will the Government take to protect the UK ring-fence against such regulatory arbitrage?
Understandably, the thinking behind this Bill concentrated on the problems of the stability of the banking sector and, in particular, on ensuring that essential banking services are maintained during a crisis. This legislation also provides the opportunity to address a wider question: what structure of banking industry would best serve the needs of British industry as a whole, including manufacturing, the creative industries and internationally traded services aiding them to grow and compete in the global economy? Is the current structure that we are shoring up in this legislation really appropriate to the needs of the rest of UK plc? Is there a need for a British investment bank to supplement the Green Investment Bank and the infrastructure bank? Is there a case for regional banks? If the answer to both these questions is yes, will the Minister tell us how such institutions would fit into the ring-fenced structure proposed in the Bill?
An unfortunate aspect of the Treasury’s analysis has been the continued reliance on risk-weighted assets as the reference point for equity capital and potentially loss-absorbing capital and for the gradation of prospective measures with size. This reliance must be abandoned. As currently formulated, risk-weighted assets are a flawed and discredited measure. Consider, for example, the recent assessment by BaFin, the German banking regulator, on the capital requirements of German banks, as reported in the Financial Times on 28 May.
“Germany’s largest banks were €14bn short of the capital needed to meet incoming Basel III banking rules at the end of last year … BaFin’s estimates suggest that banks have mainly improved their capital ratios by … recalculating the risk weightings attached to some assets … Reducing the quantity of risk-weighted assets on the balance sheet means a bank can report a better capital ratio even if the amount of capital has not changed”.
If you do not like the numbers, just change them.
Three weeks ago, the Basel committee announced a major reconsideration of the role of risk-weighted assets, given that the measure is now so widely discredited. However, the Government’s response to the parliamentary commission’s final report states:
“The Government shares the concerns raised by the Commission and many other experts that flawed risk-weightings played a major role in the last crisis”.
That is all well and good, but after turning a single page, we read:
“Risk-weighted capital requirements should remain the primary measure of prudential capital regulation”.
This Government are deeply confused. A fundamental problem of risk-weighted assets is that they are excessively complex. As everyone knows, complexity is the friend of evasion, whether in taxation or regulation. However, a simpler measure is available: the leverage ratio. The parliamentary commission has recommended a leverage ratio of 4%. The United States has announced that it will be 6% in the US. The Treasury insists on sticking to 3%—why?
A higher leverage ratio of course reduces the return on bank equity—hence, by the way, bank bonuses—but it also significantly reduces risk. Why are the Government postponing handing determination of the leverage ratio to the Financial Policy Committee until 2018, despite the Bank of England repeatedly asking for this power now?
The vagueness of the ring-fence is exacerbated by the need to define various terms. What is an SME? If non-ring-fenced banks can inject capital into ring-fenced banks in times of need—a benefit claimed by the independent commission—cannot capital flow out when needed elsewhere, increasing the possibility of damaging contagion? If banks are also allowed to sell derivatives within the ring-fence, rather than act as agents, does this not reintroduce the fee-based culture that has already done so much damage in retail banking, whether in the form of PPI or selling to SMEs derivative protection that was anything but?
Surely it is not enough to claim that mandated activities do not pose a threat today, since activities that are safe today may prove very dangerous tomorrow. These dangers may even be part of systemic phenomena that are no fault of the individual firm. These and many more issues raise the core question of the permanence and permeability of the ring-fence. It is central to the attainment of the objectives of this Bill that the fence is impermeable; and it is vital for future confidence and investment in the banking industry that the fence’s location is clear, well-known and reasonably permanent.
The PCBS’s proposals on the electrification of the ring-fence are vital to the credibility. The Government have accepted the “first reserve power”, whereby a group containing a ring-fenced bank that is deemed to actively undermine the ring-fence could be forced to divest itself of the ring-fenced bank or the non ring-fenced bank—in other words, splitting them up. However, as we heard from the noble Lord today, the Government have rejected the inclusion of the second reserve power, whereby the ring-fence would be abandoned and full separation of all domestic and commercial banking strictly enforced.
Surely the Government have got the matter the wrong way round.The decision to split up a single group would have severe financial and competitive consequences and would undoubtedly entail a lengthy and expensive legal and political battle. It is such a nuclear deterrent that there will be a high expectation that it will never be used. It is not a credible threat. However, if banking as a whole might be split, there is a powerful incentive for mutual monitoring. Accordingly, the incentives motivating the sharpest minds in the industry, ensuring that their colleagues do not undermine the interests of the banking industry as a whole, would be aligned with the statutory objective. What could be better than that?
There are many more complex issues in this legislation which we will debate in Committee. I totally understand the Government’s desire to have this legislation on the statute book as soon as possible, and we on this side will do everything we reasonably can in support of that endeavour. However, this is the most significant reform of the structure of UK financial services in the past 40 years, and we must get it right. That is why we will scrutinise the legislation line by line and demand the early and comprehensive publication of secondary legislation to better judge the true implications of the Bill.
It is vital that this legislation succeeds. If it is watered down, or if it is too complex and does not succeed, it may well do more harm than good. As the parliamentary commission commented in its final report:
“The banking industry can better serve both its customers and the needs of the real economy, in a way which will also further strengthen the position of the UK as the world's leading financial centre. To enable this to happen, the recommendations of this Commission must be fully implemented in a coherent manner”.
Sadly, the Government’s response to the independent commission and the parliamentary commission has been anything but coherent. This incoherence has grave implications for Britain’s financial services industry. On this side, it is our intention in Committee to restore coherence to the Bill.
Baroness Kramer
I thank the Minister for giving way. The commission recommended some form of ad hoc committee to try to look at secondary legislation. The problem with secondary legislation is that you vote it up or down, so you cannot actually amend it. Given that it carries so much of the weight of the purpose of this Bill, is there a way in which there could be a more constructive discussion of its contents so that it could come finally and formally in an amended form after that discussion has taken place?
Lord Eatwell
Before the Minister stands up, can I firmly second what the noble Baroness, Lady Kramer, has said? It would be enormously valuable if there were an ad hoc committee which could consider the secondary legislation, write a suitable report and thus inform the House’s debate.
Lord Newby
My Lords, there is an issue about the timing of an ad hoc committee which produces a report to inform your Lordships’ debate. Agreement has been reached with the usual channels that we start Committee stage very soon after we come back and I am not sure that such an ad hoc committee would help. I will talk to colleagues in the Treasury and in another place to see how best we can facilitate proper discussion of secondary legislation, because, obviously, as everybody agrees, much of the meat is in the secondary legislation.
Can I reassure the noble Lord, Lord Barnett, that the banks had no part to play in drafting the Bill? It was produced by parliamentary counsel in the normal way. I should have said that draft secondary legislation was published on 17 July.
There was much discussion about standards and culture. The right reverend Prelate the Bishop of Birmingham talked about banks discussing doing what is right and about personal virtue. I agree with him that a wind of change is blowing through the banks and I am not as gloomy as a number of noble Lords have been about the extent to which the culture within banks may change. I would not put it any higher than that. I think there has been a big change in Barclays, and that is not a legislative change, it is because of the change of leadership and a change in culture.
In response to the commission, the Government propose to bring forward a number of amendments which specifically deal with standards and culture. These include a new senior persons regime for senior bank staff; introducing a new criminal offence of reckless misconduct; reversing the burden of proof, so that bank bosses are held accountable for breaches of regulatory requirements within their areas of responsibility; and giving the regulators new powers to make rules to provide enforceable standards of conduct for all bank staff.
Virtually every noble Lord who spoke has talked about the need to increase the degree of competition in the banking sector. I absolutely agree with the noble Lord, Lord Flight, that this is, if anything, the fundamental issue now facing the sector. I congratulate him and Metro Bank on its third birthday, and I congratulate him on the work that he is doing to increase competition in a very practical way.
Clearly, there is no simple way of getting to the state that most noble Lords would like, which is having a plethora of new banks providing effective competition to the existing big banks. What we have done, however, is to make it a lot easier for new banks to enter the market. In July last year, the Chancellor commissioned an FSA review of barriers to entry and expansion in the banking sector and the result of that review, in answer to the noble Lord, Lord Northbrook, is that for new banks we could see capital requirements fall by up to 80% over what was previously required. This is a big change and one of the many components that will be needed to transform the competitive landscape.
The noble Lord, Lord Eatwell, said that he was concerned about whether branches of EEA banks in the UK could arbitrage the ring-fence. EU passporting law makes branches subject to regulation and supervision in the home state, so UK branches of EU banks would not be subject to UK regulation or to ring-fencing, as the noble Lord said. The presence of EEA banks in the UK market at the moment is very small and we believe that domestic banks enjoy a strong home advantage, so there is not likely to be significant arbitrage. However, EU law has within it provisions to ensure that institutions cannot simply move to avoid regulation. We and the regulators will of course be keeping that issue very much under review.
A number of noble Lords talked about leverage—what an appropriate ratio should be, and where the power to set ratios should lie. There is a certain confusion about where powers lie at the moment. Although I am sure that we will discuss this at greater length later on, I would point out that the Government’s proposal, based on the Basel process, is that we would have a statutory minimum leverage level across the piece. However, the regulators already have the power to set a different leverage ratio for individual institutions, as we have already seen in the way that they have looked at Barclays and Nationwide—and completely without any political interference. That power will obviously continue.
The noble Lord, Lord Eatwell, drew a comparison between the 3% leverage ratio here and the 6% ratio in the US. We do not believe that these are even remotely comparable. Indeed, Mark Carney described comparing the two as being like comparing apples and oranges. I am sorry that I do not have time to explain in great detail why we believe that to be the case.
Electrification was possibly the issue that took most of your Lordships’ time. There are two issues here, given that we have agreed that in respect of an individual bank we will take powers in the Bill to enable that bank to be wholly separated. In respect of that, there has been considerable criticism of the provisions in the Bill on the basis that they provide too low a voltage, as the noble Lord, Lord Lawson, possibly said. We will be bringing forward amendments before Committee which seek to provide an appropriately increased level of voltage. I hope that they will commend themselves to your Lordships’ House.
In terms of total separation and a reversion to Glass-Steagall, our view is very straightforward. If ring-fencing were to prove ineffective, the only proper and democratic way to introduce full separation would be to return to Parliament with new primary legislation. However, given that it is a separate policy—not the same policy with a bit tacked on—we do not believe that the proposals in the Bill will be a failure. It would not be sensible to legislate for a failure that we do not think will happen; if we did that with every bit of legislation, the statute book would be many times its current length.
The noble Baroness, Lady Kramer, asked whether the Government had gone further than the PCBS on competition. It is a small thing, but we have recommended that the PRA and FCA review barriers to entry in a shorter time—the commission said two years; we have said 18 months—and that they publish annual statistics on the authorisation process so that we can see how things are going. The noble Baroness asked about game-changers in retail banking. The truth is that there will be no game-changer, but a series of small steps. The one step that will help is the seven-day switching service, which will be introduced in September and to which a number of noble Lords referred.
The noble Baroness also asked who will buy bail-in bonds. The Government have consulted on that; feedback suggested that there should be demand for bail-in debt instruments of the type that the ICB said banks should issue. Therefore we do not share her concern that there will be no effective demand for that.
The noble Lord, Lord Lawson, made a very eloquent argument for breaking up RBS into the good bank and bad bank. He knows that there will be a government response to that suggestion in the near future. He asked also about proprietary trading and believes that that is a bad idea. We believe that the ring-fencing method is superior to the Volcker-type rule in respect of prop trading and do not see a compelling case for a ban on prop trading in addition to the ring-fence. I can confirm that a difficulty in which an investment bank found itself would not threaten a high street bank. In terms of where funds can flow, it is a one-way valve: there would be no possibility of funding going from a ring-fenced bank back to an investment bank.
The noble Lord, Lord Flight, asked about the mis-selling of CDOs where that was being done, as I understand it, by foreign banks in this country. I can confirm that UK regulators could take action against any firm for mis-selling in the UK, including, obviously, foreign firms that were based here.
The noble Earl, Lord Caithness, talked about banks owning your money. He proposed what is essentially the same as full reserve banking and limited reserve banking, as it is known in the trade. The ICB has considered that issue and rejected the approach that he suggested.
The noble Lord, Lord Sharkey, asked whether the Government had gone soft on payday loan regulation: no, they have not. The FCA will be bringing forward proposals about how it intends to regulate the sector early in the autumn, which means that regulators are not waiting until next April to start to have impact. On central counter-parties, the noble Earl said that perhaps this is not the right Bill, and he is correct. The Financial Services Act 2012 extended the resolution powers in the Banking Act 2009 to systemically important investment firms, CCPs or group companies. Those powers will commence when secondary legislation has been laid in the autumn.
The noble Lord, Lord Northbrook, said that the SIs do not allow ring-fenced banks to provide export finance to SMEs. That is not the case. They can support UK businesses trading internationally. Obviously that is a very important issue for many small businesses.
I am extremely grateful to the noble Lord, Lord Tunnicliffe, for the constructive approach he took to the way we deal with this. I completely accept that we are asking noble Lords to work very hard over a relatively short space of time looking at a lot of new material. From the Government’s point of view, we will be making available all amendments and secondary legislation the moment we have them, and we are very keen that the House has the full opportunity to give all the proposals, not just those already in the Bill but those that will be coming forward, the maximum possible considered scrutiny.