Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(10 years, 9 months ago)
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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 Lawson of Blaby (Con)
The noble Lord, Lord Eatwell, said something which I think is profoundly wrong, but I can understand why he said it. Will my noble friend the Minister make it absolutely clear that it is not the position of Her Majesty’s Government, and it is not the purpose of this Bill, to ensure that no ring-fenced bank will ever be allowed to fail? That is not the position; it must not be the position and I do not believe that it is the Government’s intention.
Lord Newby
My Lords, I can confirm what the noble Lord, Lord Lawson says. It is not the intention to have a situation where it is impossible for a ring-fenced bank to fail. What we are doing, particularly through the guarantee scheme, is ensuring that ordinary depositors are protected in those circumstances. Through these potential provisions we hope to ensure that there will be continuity of activity, which might not be the case without them.
In terms of the scope of these provisions, they are the fourth of what are now four options in the Banking Act for dealing with a bank that is in danger of failing. One is sale to another bank; one is the bridge bank and the other is nationalisation. Those measures apply to all banks covered by that legislation. I believe that that extends the measures beyond the ring-fenced banks.
Lord Lawson of Blaby
My Lords, I do not want to go into the issue of money-laundering; we have had a good debate on it and I am sure that my noble friend may have some further observations to make in the light of what has been said.
I endorse very strongly what the noble Lord, Lord Turnbull, had to say when speaking to this group of amendments. The Government are indeed to be commended on this series of amendments. However, as the noble Lord, Lord Turnbull, pointed out, in certain important ways, they do not go far enough. There is also the critical question of the definition of a bank in government Amendment 55. We would like to hear very clearly what is the definition of a bank and we would like the Government to look again at the points that the noble Lord, Lord Turnbull, my fellow commissioner on the banking commission, made. Although the Government have made a huge advance, there are still important areas where they have not gone far enough.
I should also like to address what lies behind this and what my noble friends Lord Trenchard and Lord Flight said in casting doubt on the whole drift of the provision. We have sought to say that there must be personal responsibility on members of the senior management in banks. It is not good enough for there simply to be fines on banks when things have gone wrong and there has been culpability. What happens if there are fines on banks? Who bears the burden? It is the owners of the banks, the shareholders. The shareholders are the innocent victims here. There must be individual responsibility on the management where such behaviour can be demonstrated or where the management neglectfully failed to exercise responsibility.
As the noble Lords, Lord Turnbull and Lord McFall, said, in hearing evidence, the commission heard one of two things: either, “It wasn’t me; it was a collective board decision, so no individual is responsible”; or, “It wasn’t me; I had no idea what the traders in my bank were doing; it was all them”. Of course, we strongly suspected that the reason that they had no idea what the traders were doing was that they took great care not to know. The point is simple: if they did not know what the traders were doing, they were culpable. It is their business to know what their traders are doing. That will not wash either.
Then we have heard the excuse: “What about the regulators? The regulators were at fault”. So they were; that is beyond dispute. The Government have introduced a new system of regulation and supervision which they hope will be better than the one that preceded it. We will come to this later, but we have suggested ways in which that, in our judgment, needs to be further strengthened. That does not exculpate the bankers.
It has also been suggested that the Bank of England was pursuing an inappropriately cheap money policy and, therefore: “What were the bankers meant to do? It is the Bank of England’s fault”. I shall not detain the House by going into this now, but it is arguable whether the cheap money policy was wrong or right at the time. I think that you could make a very good case that it was appropriate at the time, but anyhow, whether it was wrong or right, it is no good a banker saying, “I couldn’t help making a bad loan. I couldn’t help taking excessive risks. I couldn’t help being reckless”. That is absurd and pathetic.
Of course, others were culpable. The auditors were culpable. They never raised a finger to warn the boards of the banks of the risks that they were running. Again, we all know that the ratings agencies were culpable. The ratings agencies made mistakes in calling rubbish derivatives triple-A. But at the end of the day, the buck stops with the bankers. It is their responsibility. That is what they are paid to do. It is their judgment that they are meant to exercise.
Finally, we were told, “Oh, there may be other jurisdictions, such as Hong Kong”, or wherever, “where standards are lower, so we cannot afford to have higher standards and more direct responsibility than in Hong Kong”. That is no good at all. The standards in the City of London should be the highest in the world. The whole thinking behind the commission on banking standards was that we wanted to clean up banking, not to destroy it, so that British banking can be even stronger and make an even greater contribution to the British economy than it has in the past. That is what we were about.
Personal responsibility is not the whole of the solution, but personal responsibility of the senior management is a vital and necessary element. Therefore, as I said, I commend the Government for having moved a long way in that direction, but a little more needs to be done, as the noble Lord, Lord Turnbull, pointed out.
Lord Watson of Invergowrie (Lab)
My Lords, I am proud to have my name associated with that of my noble friends Lord Brennan and Lord McFall in this group of amendments.
I certainly agree with much of what was said by the noble Lord, Lord Lawson, not least when he said that we have covered the question of money-laundering in some detail. Indeed we have, but I shall not apologise for reinforcing some of the points made and, I hope, finding one or two that have not been made. At its mildest, it is disappointing to hear the Minister say that the amendments are unnecessary and that what they are intended to achieve is largely covered in the Bill or in the government amendments
My noble friend Lord Brennan called that naivety. Yes it is; I would say that it is also complacent in the extreme. The examples given by my noble friend Lord McFall show that the current system for British banking is not working. The huge fines levied on HSBC and Standard Chartered by the US authorities showed that the US authorities do not think that British banking standards are high enough. I absolutely concur with the view of the noble Lord, Lord Lawson, that the standards of British banking should be the highest in the world. If that puts off some people from working in this country, so much the better.
It should be stressed that money-laundering regulations in the UK are designed to protect our financial system. That is primarily why they are there. Money-laundering is more widely defined in the UK than in several other jurisdictions, notably the USA and much of Europe. UK money-laundering offences are not limited to the proceeds of serious crimes, nor are there any monetary limits. Financial transactions need no money-laundering design or purpose for our laws to consider them a money-laundering offence. A money-laundering offence under existing legislation need not even involve money, since the money-laundering legislation covers assets of any description. The law applies to a person who by criminal conduct evades a liability such as a taxation liability, and that individual is deemed to have obtained a sum of money equal in value to the liability evaded. That is a very important point. Just a week ago HMRC announced that every year some £35 billion of taxes due in this country is not collected.
With that in mind, we should be careful about setting aside the idea that money-laundering is an issue. I suggest that it is very much an issue. My noble friends have rightly outlined a number of reasons why we really cannot afford to miss the opportunity the Bill provides to deal with failures in anti money-laundering compliance. Not only would that compromise the outstanding work and considerable efforts of the Parliamentary Commission on Banking Standards, it could have a tragic human cost. Some of the most vulnerable people in poor countries around the world suffer in many ways as a result of the effects of money-laundering.
I want to stress the matter of our own economy. The parliamentary commission rightly argued that good standards in the banking industry are important for not only the health of that sector, but the wider UK economy as a whole. Correspondingly, failures in standards jeopardise the health of our economy. That may seem self-evident, but surely the banking sector in this country has been responsible for enough damage to our economy in recent years.
It is vital that we take the opportunity to ensure that failures to comply with anti money-laundering laws and other financial regulations do not lead to any further damage. I suggest that there is a real risk of that, notwithstanding that, as was highlighted by the noble Lord, Lord Flight, HSBC has taken rather stringent measures as a result of being hauled over the coals in the US. If as a result some individuals have lost out or been inconvenienced, as he seemed to be suggesting, then that is regrettable. However, it is really pretty small beer compared to some of the issues involved in and the amounts affected by money-laundering throughout the world, often with the involvement of parts of the British banking sector.
When dealing with this issue it is important that we do not easily say that it is all right, that the legislation covers everything we need, and that there is no need for amendments such as these. In preparing for this part of our discussions this afternoon, I looked at the Bill in detail. I was able to find a total of eight separate pieces of legislation mentioned in the Bill, as it was originally published. Not once in the Bill did I find any mention of the words “anti money-laundering”, for a start. Nor did I find any mention at all of the three pieces of legislation—the Proceeds of Crime Act 2002, the Fraud Act 2006, or the Money Laundering Regulations 2007—in some of the amendments we are discussing. Apparently the Government do not think that there is any need to link, at least explicitly, those pieces of legislation with the Bill. That is a grave mistake.
My noble friend Lord Glasman came up with a phrase that struck a chord, certainly with me and I suspect also with other noble Lords: without incentives to virtue, you get incentives to vice. That is absolutely the case, and I very much hope that the Minister will reconsider what I believe to be his rather complacent position on these amendments.
Lord Newby
I will take it back to the Treasury, but I want the noble Lord to be in no doubt as to what the Government are currently proposing.
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.
Lord Newby
My Lords, I will try to sum up some of those points. One of the big challenges that we faced in producing the exact terms of this amendment was to produce a sanction which is a credible offence and could be successfully prosecuted. Setting the conditions to include that in all the circumstances the individual’s conduct fell far below what could reasonably be expected of them and that they were aware of the risk that a decision could cause the bank to fail gives us the clarity that we need. This will capture behaviour which in normal parlance or in normal view would be considered reckless.
The noble Lord, Lord Brennan, said that he was keen that this new offence should make people think. It will make people think, but equally it must have within it a degree of certainty that means that an offence could be prosecutable. This necessarily circumscribes the way in which we define it.
I can confirm to the noble Lord, Lord Eatwell, that his interpretation of the provisions in the Bill is correct.
Lord Lawson of Blaby
May I ask my noble friend one question? The commission’s recommendations refer to this as reckless misconduct. The word “reckless” is very important. Speaking to this, the Minister used the word “reckless”, but I do not see it in the amendment. Can he explain why?
Lord Newby
Yes, I hope I can. As I was just saying, we had to put in the Bill a form of words that would create a credible offence that could be successfully prosecuted. The two requirements that an individual’s conduct had to fall far below what could reasonably be expected of them and that they were aware of the risk they were taking, would, in the view of the lawyers, capture recklessness. It is a definition of recklessness without the use of the word. The wording gives a greater chance of having a credible offence than using the word “reckless”. It is an attempt to make sure that we have got something that we could use, while capturing the concept.
The noble Lord, Lord Phillips, asked about the difference between the heading and the text. My understanding is that headings of sections of the Bill do not constitute part of the Bill for legal reasons. It may be possible to improve the heading, but the noble Lord should not worry about it. The noble Lord asked whether any restrictions on conditions which were imposed might be made public. At first sight, I cannot see any reason why that should not be the case, but I will write to him to confirm the position.
We have had a good debate on these amendments. I commend the government amendments to the House.
Lord Sharkey
My Lords, I have two simple questions. One is to do with the innovation objective. Government Amendment 60M states:
“The innovation objective is to promote the development of, and innovation in, payment systems”.
It just occurred to me to ask whether there is any example of a regulator successfully promoting innovation. I would be interested to hear the Minister’s reply to that.
Lord Sharkey
Government Amendment 60U is headed, “Power to require disposal of interest in payment system”. New subsection (2) states:
“The power conferred … may be exercised only if the Payment Systems Regulator is satisfied that, if the power is not exercised, there is likely to be a restriction or distortion of competition in—
(a) the market for payment systems, or
(b) a market for services provided by payment systems”.
How is that a remedy for anything? When it comes to divestment or disposal, is it the Government’s notion that someone will pick up the shares that have been disposed of; and, if so, who will it be? What would be the incentive for anyone to pick them up?
Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(10 years, 9 months ago)
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Lord Lawson of Blaby (Con)
My Lords, I listened very carefully to what my noble friend the Minister said. I am extremely grateful to him for the extent to which he has accommodated the points made by the Parliamentary Commission on Banking Standards, of which I had the honour to be a member and to which the noble Lord, Lord Turnbull, referred—and I entirely endorse his remarks. However, the remarks that the Minister has just made simply do not stack up. Before going into why that is so, let me put a little perspective on what we are doing today. It sounds very dry, arid, tedious and tiresome in many ways. Indeed, it is not a model of how to construct legislation, as my noble friend Lord Higgins pointed out. Nevertheless, it is testimony to the fact that the Government have listened attentively to what the parliamentary commission had to say, and what was said in the other place in response to it.
My noble friend the Minister has already raised matters wider than the amendment that we are discussing. He started to talk about the industry-wide separation power, which we were concerned about but which was not part of this group of amendments. We will come on to that later. In this country, we are suffering, as part of the wider world’s suffering, the after-effect of a most appalling global recession. There were a number of causes of that problem, but it is generally agreed that right at the heart of it was a banking meltdown. Nothing is more important, therefore, than to do whatever we can to ensure that a further banking meltdown in future is unlikely to occur and to ensure that, if it does occur, the damage will be much less than that caused in 2008 and thereabouts.
There are few pieces of legislation going through Parliament that are more important than this Bill. I am not saying that you can do everything with legislation—there are a number of wider issues. But you have to do whatever you can. It is a long time since this House has had such an important role in trying to ensure that it is put right. It is clear that the legislation that was introduced in the Commons and went through the other place was wholly inadequate, and as a testimony to that are all the amendments that we are discussing today and all the amendments that the Government have moved. It is up to this House to get the legislation right; that imposes a very great responsibility on us and we should look at the legislation in a non-partisan fashion.
The Minister rested his argument on the fact that the Vickers commission came up with this wheeze of ring-fencing. It was a compromise between full separation of commercial and retail banking and investment banking and just leaving it as universal banking. There are a number of problems with the idea of the ring-fence. As the noble Lord, Lord Eatwell, and others have pointed out, this is new territory and has never been done before. We do not know whether or not it will work. We know that separation can work. There was separation in the United States under the Glass-Steagall legislation from 1933 to 1999 when it was repealed and for most of that time it worked very satisfactorily. It was weakened as time went on as a result of the success of the American banks in lobbying various authorities in the United States to make exceptions here and amendments and changes there. We need to watch out for that. It was also weakened to some extent by the ingenuity of investment bankers in finding ways round it, to which the noble Lord, Lord Turnbull, referred. Nevertheless, separation worked pretty well in the United States and in the United Kingdom.
I speak with some experience. It is now more than half a century since I was the principal writer of the Lex column in the Financial Times and I have been a close observer of the banking scene throughout that period. I recall that for most of that period we had a separation between what were called the joint stock banks, which engaged in retail and commercial banking for small businesses and so on, and the investment banks, which were not called that in those days—they were called merchant banks. They were completely separate and it worked very well, so we know that separation can work, and has worked, in the two major banking centres in the world.
It is true that the continent of Europe has always gone in for universal banking. That is so in Germany in particular but is generally the pattern in continental Europe. However, it is no accident that the two major banking centres of the world, London and New York, had separation. That worked. Whether this halfway house can work or not is very uncertain. Although the remarks of my noble friend Lord Blackwell on this amendment showed that he got completely the wrong end of the stick on it, as the noble Lord, Lord Turnbull, pointed out, he was absolutely right to point to one of the problems, although not the only one, with the governance structure. It is a very curious governance structure in which the two subsidiaries of the holding company are together but separate. They are meant to be completely separate even though they both, as boards of directors, have responsibilities to exactly the same group of shareholders. It is a very odd system and we do not know the workings of it.
I say that my noble friend the Minister is unconvincing because his whole point rested on the fact that Vickers said the ring-fence is the right answer and that because Vickers said that we must stick with it and not change it. What we are saying, which is surely much more reasonable, is that we will, of course, give Vickers a chance. Indeed, we will try to reinforce his proposal by means of the so-called “electrification” procedures. However, if it is seen not to be working, we will have to go to separation. One member of the Vickers commission is already convinced that we should go to separation without any intermediate step but I am quite sure that nobody on the Vickers commission wishes to see a failure. Let us give Vickers a chance and see how it works but if it does not work—it has to be kept under review—we should go to full separation. That must be sensible. The fact that the Vickers commission said what it did is really no argument at all.
I am very glad to see the most reverend Primate the Archbishop of Canterbury in his place. He was a most distinguished member of our Parliamentary Commission on Banking Standards and I hope that he will contribute to our debates. One of the things that he has emphasised strongly—I have tried to explain the importance of this—is the problem around the culture of banking. This was accepted by Parliament when it set up the commission and, indeed, my right honourable friend the Prime Minister explicitly said that it was to deal with the culture.
One of the key problems is that retail and high-street banking—commercial banking—and investment banking are two completely separate cultures. It is very difficult, with the best will in the world. I am not against investment bankers, but I do not think they should be bailed out by the taxpayer. We may, from time to time, need to bail out the commercial banks, with their retail depositors and their responsibility for the payment system. They may need that, even though they have enhanced capital funds, but it is wrong, I think, ever to bail out investment banks; they should be like hedge funds, with a fear of failure restraining what they do. They will be imaginative, they will be adventurous, they will be creative, they will be exciting for those who are excited by this kind of thing, and they will have a totally different culture. To assume that you can get two quite separate cultures in the same entity is stretching it a bit. Therefore, we have to see how this will work. It may not work. If we are going to address this cultural problem we have to make sure we address it effectively.
We shall come on to the other amendments in the name of the noble Lord, Lord Turnbull, to which I have added my name, but on this major issue we have to strengthen the Bill in the way that the noble Lord highlighted, endorsed by the noble Lord, Lord Eatwell, for the Official Opposition. We have certainly not heard any good reason from the Minister why we should not do that.
Lord Barnett (Lab)
My Lords, I have enormous sympathy with the noble Lord, Lord Turnbull, who said in his introduction that he has never seen such a shambles presented to any House. As Chief Secretary to the Treasury, I had the misfortune for five years, as the noble Lord will know, to take two Finance Bills a year through, mainly because the first Bill had to be amended because it had not been properly scrutinised; it had been guillotined by all successive Governments. Yet I have never seen anything remotely like this Bill and I am grateful to the noble Lord, Lord Deighton, and his staff, who have done a tremendous job in trying to present to us what exactly is going on here. It is very difficult when one is working without a group of secretaries, let alone one, to understand what the devil is going on.
It seems to me that every speaker we have heard so far, apart from the noble Lord, Lord Lawson, is stumbling towards the only real solution. We will have to debate fairly soon to settle whether the House agrees to separation—call it Glass-Steagall, call it what you like. However, while we are stumbling in this direction—I am not sure from what my noble friend on the Front Bench was saying whether our Front Bench is stumbling towards it as well—it seems inevitable to me that we have to decide this one, major issue. However many times this is reviewed, ring-fencing can never be the solution to the different cultures that the noble Lord, Lord Lawson, referred to. It is quite impossible.
I do not want to take too much of the Committee’s time on this occasion, but we have to settle, once and for all, whether we agree with this ring-fencing idea. It is so complex that it makes the situation even worse, as we have heard in a number of debates. Until we settle this matter, we will go from amendment to amendment for years on end, and have reviews for years on end, getting nowhere at the end of it. I hope that we can have the major debate as soon as possible so that the House can decide.
Lord Deighton
My Lords, these amendments streamline the procedure for the group restructuring powers—the so-called electrification powers. In another place, following the recommendations of the PCBS, the Government introduced amendments adding new Sections 142K to 142V. These sections give the regulator the power to require a banking group to restructure if the regulator believes this necessary to ensure the objectives of the ring-fence. As the PCBS recommended, the regulator will have the power to require the group to divest completely either its ring-fenced bank or its non-ring-fenced bank, or transfer specific business units out of the group. These extensive powers may be exercised if the regulator believes that the group’s ring-fenced bank is insufficiently independent or if the group’s conduct is such as to threaten the regulator’s ability to meet its statutory objectives. The amendments made in the Commons thus provide for the power to require the separation of an individual banking group that the PCBS recommended.
However, some concerns were expressed both in the other place and in this House that the procedure for the regulator to exercise its group restructuring powers was too complicated and drawn out. It was argued that the number of steps involved and the length of time required from start to finish created a process that was so cumbersome as to be difficult for the regulator to use in practice, and that this risked undermining the group restructuring powers as a deterrent against attempts by banks to subvert or game the ring-fence.
The Government took these concerns very seriously. As noble Lords will recall, I committed at Second Reading to bringing forward amendments to simplify and streamline the process for exercising the group restructuring powers. These amendments do exactly that. Amendments 7, 9, 11 and 12 replace the requirements for three preliminary notices with just one so that if the regulator is considering exercising its powers it need notify the target group only once, stating its reasons for considering requiring restructuring and the action it is proposing to take.
Amendment 8 removes the requirement for the Treasury to consent to a preliminary notice. Previously, Treasury consent was required for each of the original three preliminary notices. Under this amendment, the regulator need give the Treasury only a copy of a preliminary notice. Treasury consent will be required only later in the process for the issue of a warning notice.
Amendment 15 clarifies that any notice of a decision by the regulator not to exercise its powers must be given in writing. Amendment 16 provides that a copy of such a notice be given to the Treasury.
Amendment 17 shortens the warning notice period from 12 to 18 months to three to six months. This period is intended to give a bank about which the regulator has concerns, and to which it has issued a preliminary notice, an opportunity to address the problems identified by the regulator of its own accord. The Government still believe that it is right to give a bank the chance to tackle any problems, but agree that the period originally provided for was too long.
Amendments 13, 18 to 20 and 38 are consequential on the other amendments being made to these sections. Amendments 21 and 22 remove the requirement that the regulator must allow at least five years for any restructuring or divestment to be completed. Now it will be up to the regulator to set whatever deadline it considers appropriate.
These changes will bring the procedure for using the group restructuring powers into line with that proposed by the PCBS. One point on which we continue to differ from the PCBS is the inclusion in the procedure for requiring the restructuring of an external review, which Amendments 10, 14 and 116 would have inserted, and which we have already debated.
As for the total time involved to require the separation of a group, following the Government’s amendments, the minimum total time will be slightly shorter under the Government’s provisions than under the PCBS’s. Under the Government’s amendments, the minimum time from the regulator’s first notice of its intention to require restructuring to the actual imposition of a requirement to separate will be approximately four months, compared to approximately five months under the PCBS’s amendment. These amendments will therefore make the group restructuring powers—the “electrification” powers—an effective reinforcement to the ring-fence.
Some will argue that the Government should have gone further and should also legislate for the option of full separation across the entire UK banking industry. The Government do not agree with this suggestion. To provide for a targeted deterrent against members of an individual banking group that seeks to game or evade the ring-fence is a sensible reinforcement for the ring-fence. To legislate for industry-wide separation, however, would not be a sanction; it would be to abandon that policy. The logic of requiring all banks to separate would have to be that the ring-fence had failed to achieve its objectives of delivering greater financial stability while preserving the legitimate economic benefits of universal banking. It could in no way be described as a deterrent.
Lord Lawson of Blaby
My noble friend has talked about the great advantages of universal banking that need to be preserved. Will he explain to the House what these unique advantages are?
Lord Deighton
The first point that I would make in response is that it was the position of the ICB, which did an enormous amount of work on this, that the ring-fence was not in any sense a compromise but was in fact superior to full separation because of some of the synergies available in the universal bank. The essence of the argument is that the other parts of the bank that may not get into financial trouble actually provide benefits of diversification and scale that can protect the ring-fenced entity from any of the problems that they may have. It is essentially the diversification and scale advantages that universal banking may bring.
I have some sympathy with my noble friend’s underlying suggestion; in much of the discussion so far we have talked about how ingenious bankers are but, given what they have done to their organisations and the industry over the past five years, you have to question exactly how ingenious they are on a consistent basis.
To come back to the point, others are of course perfectly entitled to the view that the ring-fence will fail—we have heard that point of view from many Members here—and a future Government would be entirely within their rights to propose an alternative policy to ring-fencing. However, the only proper way to legislate would be for the Government to conduct research and analysis to match the calibre of the Vickers commission in support of full separation. I note that the PCBS produced no such evidence. Let it build a consensus around its conclusions, and let it come to Parliament with new legislation to be subjected to the full scrutiny and debate that such a step would require.
Lord Turnbull
If the drafting does not say that, we will have to amend it. The clear intention is for this to be a power and not a requirement. I beg to move.
Lord Lawson of Blaby
Perhaps I may say something about this. As the noble Lord, Lord Turnbull, mentioned, we retrenched on this in discussions on earlier groups. This is something to which I attach great importance. The noble Baroness, Lady Cohen, said that the commission had got it all wrong, that ring-fencing could not possibly work and that there would have to be complete separation. I agree with her—and this is no surprise. I was speaking out for complete separation long before almost anybody else I can think of, certainly in this country. For five years I have been writing and speaking on this: before the parliamentary commission and before the Vickers report. It remains my view that this is most unlikely to work, partly for reasons that the noble Baroness gave and partly for others.
Of course, as the noble Lord, Lord McFall, pointed out, we on the commission decided that it would be sensible to have a unanimous report. There was no majority on the commission—and certainly not unanimity—for complete separation. Therefore, we proposed what we proposed. One thing we proposed, which is what this group of amendments is about, was a route to complete separation. This is what the amendment is about: a process by which, if it is seen, and events prove, that the noble Baroness and I are correct, along with many others who think the same, this procedure, which the Government at the present time refuse to accept—something I regret—is a way in which we might get there.
When I asked the Minister what the great advantages were of universal banking, from which we should in no way depart, his main argument was that diversity was a form of strength. I am old enough to remember when industrial conglomerates were extremely popular. In the late Lord Hanson’s group, and others, there were a whole lot of disparate industries in the same holding company, and the argument was that this diversity was a form of strength. In fact, of course, it was a disaster and nobody argues the case for industrial conglomerates any more.
Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(10 years, 12 months ago)
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Lord Lawson of Blaby
My Lords, I am particularly happy to follow the excellent speech of the right reverend Prelate the Bishop of Birmingham, not least because he stressed the importance of changing the culture of banking. That is accepted across the board. It is certainly accepted in the United States and it is accepted by everybody in this country. Indeed, when the Parliamentary Commission on Banking Standards was set up—like my noble friend Lady Kramer, I was a member of that commission—the Prime Minister said that we needed to address standards and culture. That is a problem that I was concerned about.
Unlike the right reverend Prelate the Bishop of Birmingham, I do not have the ability to preach, so we had to decide how to change the culture by legislation. It was not so easy, but we tried a whole battery of proposals that we hoped would do something to help change the culture. I will mention one or two specific things during the course of my remarks. In speaking about the Parliamentary Commission on Banking Standards, I shall say some things that are slightly critical of my noble friend Lord Deighton. I was sorry that he did not find time to pay tribute to our chairman, our honourable friend the Member of Parliament for Chichester, Andrew Tyrie. It was an extraordinary effort. We produced an enormous number of recommendations in a large number of reports. Incidentally, my noble friend Lord Deighton said that the commission produced some important recommendations in its report last month. We produced five reports and there were important recommendations in most of them. I am sure that that is what he meant to say. We all worked quite hard, including incidentally the most reverend Primate the Archbishop of Canterbury. He, too, worked very hard, despite the fact that he also had a day job. Nobody worked harder than Andrew Tyrie. It has a lot to do with him that, with all parties represented, we managed to secure a unanimous report. That gives it much greater weight than would otherwise be the case.
I shall focus on certain areas, some of which, although not all, have already been discussed in the debate. One of them that has not been discussed explicitly, on which we made a recommendation and which has on the whole been accepted by my right honourable friend the Chancellor of the Exchequer, George Osborne, concerns the split of the Royal Bank of Scotland Group into a good bank and a bad bank. He has agreed to set up an inquiry, which will report very soon. I very much hope that it will come to the right conclusion. That is very important indeed to our economy in its present condition.
The idea of a good bank/bad bank split is not at all new. It was done in the case of Northern Rock recently; and it has been done on other occasions in this country and in other countries overseas. It is the classic answer to the sort of problem we are facing. It is particularly important in the case of the Royal Bank of Scotland Group. It is the biggest bank in our country that supports, or is meant to support, small and medium-sized businesses—SMEs. However, there is a problem with SME lending to which my noble friend Lord Deighton referred. It is one of the reasons why our emergence from the present recession is so slow. There is a real problem with lending to SMEs, which is inhibited by the fact that the banks have a huge amount of bad debts on their books—far more than they would ever admit. They are very nervous of lending because it might increase the amount of their bad debt. They already have more than they say they have and they are exercising what is known in today’s jargon as forbearance. They need to be strong. They will not lend unless they are strong. We hold between 81% and 82% as a taxpayer stake in the Royal Bank of Scotland Group. We should use that power to split the bad assets and put them into a bad bank. Then we would have a good bank with good assets which could help by lending to SMEs in order to help our economy. That is the most important single thing that the Government can do at the present time.
I very much hope that that will be done. I know that my right honourable friend George Osborne wishes that he had done that at the start. It is not too late; better late than never, and we should do it now. Our newest recruit to your Lordships’ House, the noble Lord, Lord King of Lothbury, better known as Mervyn King, former governor of the Bank of England, said:
“Formal accounting conventions should not be allowed to get in the way of what is best for the economy in general and for the SME sector in particular”.
That is the issue here. I very much hope that that will be done. I agree incidentally with my noble friend Lady Kramer and others who have spoken about reforms in the banking system, in the sense of having more banks and more competition, being necessary, but that cannot happen overnight. However, this could be done virtually overnight and it would do enormous good.
I shall now refer to the so-called ring-fence. I was very happy with what my noble friend Lord Deighton said. Let me back-track a bit. I have been arguing for the best part of five years for complete separation between what used to be known as high street banking and investment banking. To call it retail banking is slightly misleading because it is also SME banking. We always used to have that in this country. I have been a close observer of the City of London ever since I wrote the LEX column for the Financial Times more than half a century ago. For most of the time we had the high street banks and the merchant banks. They were completely separate and we did not need legislation to keep them separate; they were separate by custom and practice. I know the people at the top of both kinds of bank. They were different kinds of people with different cultures. The system worked and served this country very well.
The Vickers commission accepted the problem and thought that the ring-fence would be the solution. We on the commission were concerned that the ring-fence would not be robust enough. There are all sorts of problems with the ring-fence. I shall mention three quickly, if I may. One of them, which is perhaps the least of the problems, but which has been put to me by a number of senior bankers, is that the governance structure is impossible. There has to be two totally separate governances of a single entity, which would have an overall holding governance with another governance with responsibility to the same group of shareholders. Many bankers have said that that cannot possibly work. The other problems, which are perhaps more fundamental, are that it is likely to be gamed; there will be a huge incentive to game it if it is in the interests of the bank concerned to find ways around the ring-fence. The third problem goes back to what the right reverend Prelate the Bishop of Birmingham was saying. The cultures of high street banking and the cultures of investment banking are totally different. It is very difficult, with the best will in the world, to see how we can have two totally separate cultures in the same organisation.
We decided that we should give the Vickers ring-fence a chance but make sure that it was fully electrified—that was the jargon we used. So, if it were seen not to be working in one particular bank, it could go to full separation. If it were seen not to work on a wider scale we would have complete separation for the banking sector as a whole. The Chancellor of the Exchequer and the Government said that they would accept the first part of that but not the second. I think they are wrong on that. Moreover, the voltage which they have put into the electrification of the ring-fence is so lamentably low that it will have no effect at all. I was therefore glad to hear my noble friend Lord Deighton say that they would take it away and come forward with an amendment closer to what the commission recommended.
Incidentally, that points to the fact that this House has an unusually important part to play in this legislation. It has passed through the other place and it falls to us to get it into the shape it should be. I hope—this is not a party political issue—that if the Government do not bring forward the requisite amendments there will be a cross-party agreement which will help the Government to do the job that needs to done.
I was very surprised to hear my noble friend Lord Deighton say that we cannot go to full separation in any circumstances because the Vickers commission, the independent commission on banking, said that it wanted the ring-fence. There are two curiosities in that point. First, we are saying that we should go to full separation only if the ring-fence fails. I am quite sure that the Vickers commission does not want a failed ring-fence, it wants a successful one. I hope it is successful, but if it fails we will have to go to full separation.
Secondly, my noble friend implied that the Vickers commission was a holy writ and we must do as it says. However, when it said that 3% leverage is totally inadequate, the Government said that they did not agree and that they were going to stick with 3%. This is the despite the fact, as the noble Lord, Lord Eatwell, pointed out, that the United States has decided to go for 6%, although only for the larger banks. However, that is all that matters because it is only a failure of the larger banks that poses a systemic threat.
The Americans have quite rightly said that leverage set at 3%, to which we are apparently meant to stick, is totally inadequate and that it must be 6%. They have left it to the Fed to decide and impose. We said the same. We did not say that a particular number—whether it was four, five or six—was the right leverage ratio. You have to have a leverage ratio and we have said that that should be for the Financial Policy Committee of the Bank of England to decide. It should not be for politicians to decide. The Government have rejected that and have said that it should be for the politicians to decide. That is profoundly mistaken. The noble Lord, Lord Eatwell, was absolutely right that the risk-weighted assets are as long as a piece of string. Each bank has its own model and puts into it whatever will produce the risk-weighting that it wants. Studies have shown that to be true. It is not a matter of dispute. Although you should look at risk weighting—you should not throw it in the dustbin—because it tells you something, it is not a robust guide.
Another thing has changed from the medieval times when I had responsibility for some of these matters. We all know how much lobbying of the Prime Minister and the Chancellor of the Exchequer by the banks goes on at the present time. It is thoroughly unhealthy. In my day, this did not happen for a very good reason. The convention was not that the banks could not lobby—of course they could, they were bound to—but they had to lobby the Governor of the Bank of England, who would then represent to the Chancellor of the Exchequer of the day the concerns of the banks. That is a much healthier system and we would do well to get back to it.
Another recommendation the Government have not accepted is that we should look at proprietary training—that is, investment banks trading entirely on their own account, a form of hedge fund activity. I have nothing against hedge funds provided that they are hedge funds, but I am concerned when hedge fund-type activities are conducted within a bank. These issues interrelate. It would not be so bad with a pure investment bank but if you do not do complete separation it will threaten the retail and high street banks.
As noble Lords know, the United States, under the so-called Volcker rule, has decided to ban banks completely from undertaking proprietary trading. We said that within three years the Government and the regulator should watch carefully how the implementation of the Volcker rule is working in the United States—it is a practical example of banning proprietary trading—and, in the light of that, come forward with measures, if necessary, to ban proprietary trading. Not to ban it altogether—this is a free country—but it should be left to hedge funds and not be allowed in regulated banks, with all the great responsibilities that they have.
There is also a cultural dimension to this. What is the cultural dimension? As the right reverend Prelate the Bishop of Birmingham pointed out, it is to some extent the moral standards that we all like to think we apply in our daily lives. However, there are two things in particular that the banks need to have: a culture of caution and prudence, which is what we expect from our bankers, and a culture of service to clients. Proprietary trading is no service to clients because there are no longer any clients. It is a form of speculation. I have nothing against speculation in the right place but it does not sit well with the culture of caution and prudence that we need. You cannot do this by leverage ratios or by what you put on the statute book; it is a culture of the people involved. Those people used to be the high street bankers. They may have been rather boring but they were extremely cautious and prudent, and that is what is needed.
Finally, let me say a brief word about something that has not been mentioned—the question of remuneration packages. I am opposed to the cap on bonuses imposed by the European Union—as we said in our report, it will be counterproductive. However, the structure of remuneration is very important. We said that bonuses should be deferred for up to 10 years. That does not mean to say that it should always be for that length of time.
In the old days the merchant banks performed very well. Moreover, during this crisis it was the so-called reputable banks which went belly up but very few hedge funds did. Both the merchant banks and the hedge funds today normally have a partnership structure. The top management and directors have their own wealth invested in the company. They have their own skin in the game. That does not make them any less innovative, but it does make them less reckless, because their own wealth is at stake. It is too easy for bankers to construct a deal that is crazy and will turn lousy a few years hence. They collect the bonuses in year one and year two and then it is the poor shareholders and taxpayers who suffer later on when the whole thing goes south. The idea of deferring the payment of bonuses is to get something that approximates more to the partnership structure, which is much healthier.
I am sorry to have gone on for so long. We have a historic role to play in this House. I am very glad to hear the assurance from the Bishops’ Bench that the most reverend Primate the Archbishop of Canterbury will play a full part in Committee in this place. That is extremely helpful. I know that the noble Lord, Lord Turnbull, from the Cross Benches, will be doing the same. We have a very important part to play and I hope that we will discharge our duty.
Lord Newby
My Lords, I thank all noble Lords who have spoken in the debate this evening, particularly members of the Parliamentary Commission on Banking Standards—not so much for their contributions tonight, excellent though they were, but for the phenomenal amount of work they did on the commission. For months on end it was impossible to discuss anything with my noble friend Lady Kramer because she was either in a meeting, just going to one or in the middle of reading great piles of stuff. I know they did a huge amount of work. I share the views expressed by my noble friend Lord Lawson and others about the extraordinary leadership that Andrew Tyrie gave in driving that process forward.
I believe the Bill has been marked by a readiness on the Government’s part to listen and respond to a wide range of views. The Government have already made a series of amendments to the Bill in response to the recommendations of the PCBS and have shown willing to keep listening and to fine-tune their provisions as the debate on these issues continued to unfold. We will make further changes to the Bill in this House in response to the constructive debates in another place and here, in particular on the firm-specific electrification power. We will also introduce amendments to implement the recommendations of the PCBS’s final report on culture and standards.
The debate today has confirmed the broad consensus and strength of feeling across the House about the great significance of the measures contained in this Bill and those shortly to be added to it. In the time available now, I cannot deal with every issue that noble Lords raised. Indeed, some issues went significantly further than the Bill itself. Of course, we will return to all these issues in Committee. Many of the principal issues mentioned by a number of noble Lords were first raised by the noble Lord, Lord Eatwell. I will deal with them in the same order that he did.
There has been a lot of discussion about whether this is a watering-down as opposed to an enabling Bill in terms of what it contains. There are many further, detailed provisions to be made to implement the changes and we have taken the view that these are not all most suitably dealt with in primary legislation. That is why there is a lot of material to be done in secondary legislation. A lot of the detailed rules will be made by the PRA. I hope that we are able during the course of debates to explain how we see some of those being implemented in detail but the principle of having much of the regulation done by secondary legislation was agreed by the parliamentary commission.
The noble Lord, Lord Barnett, asked where we disagreed with the commission. I recommend that he looks at our response to its first report, which we issued on 4 February, and our response to its other four reports, which we issued earlier this month. In the second of those, a table at the back lists each of the recommendations and the text earlier on explains our response to it. Both those responses are available on the Treasury website.
Lord Lawson of Blaby
I accept in principle that there is a lot which will need to be in secondary legislation. Nevertheless, it would be helpful if the proposed secondary legislation could be provided in draft so that we know exactly what the Government have in mind and can form a view accordingly.
Lord Newby
Of course, my Lords. Much of the secondary legislation was published earlier this month. I would like to suggest—both in terms of the secondary legislation and the amendments and how we reconcile the text in the Bill with earlier legislation—that we contact noble Lords between now and the end of the Session explaining our timetable for producing material, if we have not already done so. If we have produced material, we will let noble Lords have it at that point. Specifically, the noble Lords, Lord Higgins and Lord Tunnicliffe, referred to reconciling the Bill with the existing FiSMA. We will make a Keeling schedule available before the end of the Session showing the effects of the amendments in the Bill.
Banking: Regulation
Lord Lawson of Blaby Excerpts(11 years ago)
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Lord Newby
My Lords, I think that I can give that assurance as far as the Liikanen proposals are concerned. As the noble Lord probably knows, the Government believe that there is no incompatibility between what he is proposing and what the Government are doing in respect of banking and the banking reform Bill. I am confident that the Government are acting with all due speed on these measures, and indeed in some areas we have moved more quickly than the EU as a whole has been able to do.
Lord Lawson of Blaby
My Lords, as a member of the Parliamentary Commission on Banking Standards, I remind my noble friend the Minister that in our unanimous report we were in fact highly critical of the emerging European Union banking regulation, and indeed not greatly enamoured of the approach of Basel III either. We made it clear that, given that London is the only world-class financial centre within the European time zones, it is incumbent upon this country to put in place whatever system of bank regulation we feel is necessary to address the problems that have emerged.
Lord Newby
Yes, my Lords, and of course that is exactly what we are doing with the banking reform Bill.
Bank of England: National Debt
Lord Lawson of Blaby Excerpts(11 years ago)
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Lord Newby
My Lords, the Treasury has always accepted that it might find itself paying back money to the Bank of England. The noble Lord will be aware that the original situation was that the Bank was buying Treasury bills and collecting interest on them. The Treasury was paying the interest to the Bank, which was then sitting on the interest. What we have done, in line with America and Japan, which have broadly the same scheme, is ensure that that money, which amounts to some £19 billion to date, has been transferred back to the Treasury. We have always accepted that there could be a reverse flow as bills are sold back into the market or expire, but that will take place over a significant period. We believe that it is sensible to operate in that way.
Lord Lawson of Blaby
My Lords, following the supplementary question from my noble friend from the Liberal Democrat Benches, can my noble friend the Minister confirm that the requirement on banks to raise more capital will in no way reduce the amount of lending to SMEs? That is just special pleading by the banks. In fact, more capital will be enabled to be lent to SMEs. While he is on his feet, can he also confirm that a good bank/bad bank split of the Royal Bank of Scotland Group as soon as possible would also greatly assist more lending to SMEs?
Lord Newby
My Lords, the noble Lord’s views on the good bank/bad bank split are well known. As he knows, the Treasury is now looking at that. We are hopeful that as economic conditions improve, lending to SMEs will increase in any event, but I have been surprised over the past three years by the extent to which the views of the banks about the demand from SMEs for lending have not been matched by the self-professed requirements of SMEs. I think that at every stage the banks could and should have done more.
Banking: Quantitative Easing
Lord Lawson of Blaby Excerpts(11 years, 3 months ago)
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Lord Newby
My Lords, to deal with that last point I will say that we do not need a change in the Bank of England Act because its basic provisions—namely, of inflation-targeting, and this year, as in previous years, we have a 2% inflation target—remain in place. The Chancellor has suggested, in changing the remit, that it would be appropriate for the MPC to deploy new explicit forward guidance, including intermediate thresholds, in order to influence expectations and meet its objectives more effectively.
Lord Lawson of Blaby
My Lords, on the subject of the Bank of England’s remit, I warmly welcome the fact that the Government have firmly decided not to move away from the inflation target to a nominal GDP target, and have given very good reasons why that would be a disastrous course. Will the Minister take this opportunity to make it clear that neither the Government nor the Bank of England are pursuing a policy of exchange rate depreciation?
Monetary Policy Committee: Inflation
Lord Lawson of Blaby Excerpts(11 years, 5 months ago)
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Lord Deighton
I do not really want to get into a semantic argument about the definition of flexibility, and I do not know whether it appears in the original Act. However, to my simple understanding, the remit and the MPC’s behaviour clearly demonstrate significant flexibility, which is what you would expect in a policy tool to cope with our difficult and challenging economic circumstances.
Lord Lawson of Blaby
I support my noble friend the Minister in everything that he said and I greatly look forward to the court case which the noble Lord, Lord Peston, is about to bring against the Bank of England. I am sure that that will give us great entertainment value. Is my noble friend aware that to jettison the inflation target at this time or at any other time would mean a loss of financial market credibility and a loss of political credibility for no gain whatever?
Lord Deighton
I thank my noble friend for his expert endorsement. He is absolutely right: our inflation target has served this economy extremely well. The Chancellor and the incoming governor as well as the existing governor have been clear that it would take a very high hurdle to climb over to find a better structure than the one that we currently have.
Banking: Regulation
Lord Lawson of Blaby Excerpts(11 years, 7 months ago)
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Lord Newby
Yes, my Lords, I completely agree. One of the things that the banking crisis has demonstrated is that the banks understand the international situation better than Governments understand it. One of the things that we have been trying to do, both through the EU and internationally, is to close that gap. No doubt the noble Lord has seen the article in the FT today by Paul Tucker from the Bank of England and Martin Gruenberg, the chair of the Federal Deposit Insurance Corporation in the States, which looks specifically at how you deal with resolving problems concerning the largest systemically important banks in the world.
Lord Lawson of Blaby
My Lords, while the noble Lord, Lord Peston, is undoubtedly correct that international co-operation is desirable, will the Minister give an undertaking that we shall not hold back on what needs to be done simply because international co-operation may not be forthcoming or, even if it is, it may not be adequate?
Lord Newby
My Lords, I absolutely agree. That is why we have been in the forefront of bringing forward plans under which banking problems can be resolved and why, under the Banking Reform Bill, we are looking at having a ring-fence around retail banks so that we do not have the problems that we have had in the past. This will go ahead, whatever happens internationally. I hope very much that there will be international action, but action that is based very much on the British model and with British leadership.
Financial Services Bill
Lord Lawson of Blaby Excerpts(11 years, 9 months ago)
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Lord Lawson of Blaby
What my noble friend has said is most helpful. Can he give us an indication of when the banking reform Bill is likely to reach this House? I am sure that noble Lords on all sides will be greatly interested in this.
Lord Sassoon
I shall probably get into trouble if I say anything that is terribly helpful. However, the Government want to get on with it as quickly as we reasonably can. I would like to think that it will not be very many months before the Bill gets here. But, whenever it arrives, it is no excuse for not getting on with these clauses.
Financial Services Bill
Lord Lawson of Blaby Excerpts(11 years, 9 months ago)
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Baroness Wheatcroft
This is a simple amendment which I believe could have significant effect. Your Lordships will recall that just before our major banks admitted catastrophic losses resulting in multibillion-pound bailouts and the Government becoming a major shareholder in Lloyds and Royal Bank of Scotland those banks were each given clean audit reports. The annual reports which the auditors signed off were packed full of numbers and told us nothing. The auditors received huge rewards for their efforts, yet within months of them signing off those accounts without any qualification the taxpayer was having to fork out £65 billion—that is £1,000 for every citizen in the country.
In February 2007 Northern Rock, which had a hugely risky business model, was given a clean audit report for its 2006 accounts. Within months it was clamouring at the door of the Bank of England for support as the queues mounted outside its branches. In February 2008 Lloyds and RBS each produced accounts for the preceding year. To judge from the unqualified audit reports each received, these were businesses which would happily carry on trading, yet just months later the Government were having to orchestrate a massive rescue package. Audit fees for those accounts were more than £13 million at Lloyds and £17 million at RBS. For what?
Audit is a profession in which the UK has played a dominant role but the profession’s role in the financial crisis does it no credit. The Economic Affairs Committee of this House has done some admirable work looking at the role of auditors but now we need action.
I do not believe that the auditors who signed off those bank accounts could have been entirely sanguine about what they were doing. They must have been aware of the perilous exposures that were building up, not just in derivatives but in loan books which were loaded with extraordinarily generous loans made against a ragbag of properties and businesses. Some of those still sit on the books at valuations which might be deemed “optimistic” at the very least. Yet such is the narrow interpretation placed on the duty of auditors that they were able to give those banks what is seen as a clean bill of health just as disaster was about to fall. Shareholders took comfort from those audit reports, only to see their investments shattered. The Economic Affairs Committee concluded that while the auditors may have carried out their duties properly in the strict legal sense, they had not in the wider sense, and that wider sense is surely crucial.
This amendment would change the requirement of an audit report for banks. It may be that other sectors would benefit from such a change but this is the Financial Services Bill and, as we have learnt, banks are not as other businesses. The amendment would require auditors to provide a narrative report on the risks they perceive in the bank they have audited. How different might those Lloyds and RBS reports have looked had this been the case then?
The Minister may feel that the content of annual reports is a matter for the Financial Reporting Council but this need not always be the case. This month the FRC has launched a consultation on guidance for the audit of financial instruments. I commend it to your Lordships as an exercise in overdosing on acronyms. Whether or not it would improve the audit of financial instruments, I do not feel qualified to judge, but it will certainly take a long time to wend its way through the FRC process. The Government can and regularly have intervened through the Companies Act to determine the shape of annual reports. Only recently the Business Secretary has decided to change the way in which remuneration is reported in annual reports. If there is a belief that the demands made on auditors and banks need to be strengthened, then the Government can use this legislation and provide the change that is required.
I have no illusions that asking auditors to report on perceived risks will go down well with everyone in the profession but some would welcome the wider remit. They would have to exercise judgment over what constituted genuine risks and they would be doing a service to shareholders as well as the wider community. Those familiar with company prospectuses will know that the list of risk factors can be comprehensive, bordering on the ludicrous, but it is not beyond the auditing profession, perhaps working with the Financial Reporting Council, to come up with ground rules that would make this a useful exercise. If all banks had to have such a narrative report, it would give auditors the opportunity to do their job properly. It would stop them being prone to any bullying tactics from executives. It would give shareholders and the community a better picture of what is truly going on in their financial institutions. I beg to move.
Lord Lawson of Blaby
My Lords, I would like to support very strongly the amendment moved by my noble friend Lady Wheatcroft. I shall speak briefly but my brevity does not indicate that this is not an important issue. It is a very important issue indeed. We are debating in the shadow of the worst banking crisis of our lifetimes and possibly the worst banking crisis there has ever been. As my noble friend pointed out, the Economic Affairs Committee of this House produced a report called Auditors: Market Concentration and Their Role which was published in March 2011. It was extremely critical and rightly critical of auditors in the context of the banking collapse that we have seen. This was, as is common with reports of Select Committees of this House, a unanimous report, but unanimity can be got in various different ways. This was unanimity where everybody of all parties who sat on that committee and heard the evidence was totally committed to what the report said. My noble friend Lady Wheatcroft mentioned one thing from the report. Let me quote one other thing from paragraph 204. It states:
“There was no single cause of the banking meltdown of 2008-09. First and foremost, the banks have themselves to blame. … But we conclude that the complacency of bank auditors was a significant contributory factor”.
This has to be addressed. How will we prevent—as far as we can—this sort of thing happening again?
In discussion of an earlier amendment, the noble Lord, Lord McFall, referred to the banking commission of which I, too, am a member. It is quite possible, such is the importance of this, that the banking commission will decide to look into the question of bank audits and auditors, and indeed auditing standards and IFRS, which leave a lot to be desired and are probably a step in the wrong direction. However, we must do what we can in the Bill to rectify the position.
I say en passant that what concerned me a great deal when the big four auditors gave evidence to us was the extent to which they seemed to think that they had simply to satisfy the management of the banks at the time, when under law their duty was to the shareholders. Furthermore, the putting in place of a proper system of audit for business and industry as a whole, but particularly for the banks, is a public duty; auditors had a duty to the wider public to do a good job, quite apart from their duty to shareholders of the banks—and they failed lamentably.
What can we do about this? I do not think that my noble friend Lady Wheatcroft would say that her amendment is the complete answer. Of course it is not: a lot more has to be done. However, it is very important that the Bill addresses this question, and I believe very firmly that the amendment before the House tonight is an important part of the answer, even though it is not the whole answer. I strongly support my noble friend’s amendment.
Lord Oakeshott of Seagrove Bay
My Lords, I, too, am delighted to support the amendment moved by my noble friend Lady Wheatcroft. With her characteristic delicacy and discretion, she did not mention the name of the auditors in question—but I will. I believe that Deloitte has very serious questions still to answer about its audit of RBS, particularly towards the end. There were some unhealthily close relationships between Deloitte’s auditors and the senior management of RBS. I also believe that PWC has very serious questions to answer about its final audit of Northern Rock before it went bust. I am sure that the Minister will remember that in this House, I moved an amendment calling for a special audit of Northern Rock, organised by the Bank of England. The amendment was agreed, but not approved in the other place. My noble friend has put her finger on a very important question and I very much hope that the Government will take it seriously.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the question of the audit of banks is indeed an important one, and one which has recurred in policy debates over the past 20 years. I looked back to see what the Banking Act 1987 had to say on the topic and what Lord Justice Bingham had to say when he looked into the BCCI collapse. Various changes were made at that time and since in FiSMA but it is important that we learn lessons from the recent banking disasters, and I address the particularities of this amendment from a position of agreeing with the considerable concern around this issue. However, I do not believe that the amendment before us completely achieves what we are trying to do.
Clearly auditors are uniquely placed to identify and flag to the PRA current and potential risks in a firm. We would also expect the PRA to share relevant information with auditors, for example where it views a firm’s approach to asset valuation or provisioning to be significantly out of line with its peers. It is worth pointing out that there are areas in which the present regulator, the FSA, believes that auditors should be looking at particular issues and reporting on them and it can require that to be done in rules under Part 22 of FiSMA. So, for example, under the client asset rules, auditors are required to report on whether investment firms have properly segregated their client assets.
I do however have some difficulty with this particular amendment. My noble friend Lady Wheatcroft says that if only provision like this had been in place before or at the time of the crisis the auditors might have given a lot more help which might have prevented some of the disasters. On the other hand my noble friend Lord Lawson of Blaby quotes from your Lordships’ committee’s report which talks of the complacency of bank auditors at the time. Taking as read for the moment that the complacency thesis is the right one, I wonder if that complacency would have run through what was required to be done under a particular provision like this one in the amendment. I think that we are on to something important here but I am not convinced that this quite hits the sweet spot that the Committee is aiming for and that requiring auditors to provide this general narrative report will achieve what we want. Risk assessment is a highly-specialised process and it goes to the heart of the job of the prudential regulator. What I think we want of auditors is to see if there is something more that they can do which supports the prudential judgment rather than cuts across it.
Lord Lawson of Blaby
I am most grateful to my noble friend. Of course this is not the whole answer; I made that clear in my remarks. However, does he not think that this amendment would have been helpful and that it is therefore worthy of support from the Government?
Lord Sassoon
For the reasons that I have given, I am not absolutely convinced that it would have been helpful against the background of complacency of the bank auditors at the time of the crisis. Having said that, I agree with the Committee that there is something here that we need to look at further, so I want to see whether the Bill can and should go further to require the regulator to make the most of the expertise that auditors can undoubtedly offer. I am happy to take this issue away and consider whether there is an amendment that I can bring back at Report that recognises the important role of auditors without cutting across the role of the regulator in the way that I believe this particular amendment may do. I will look at it and come back to the House with something that addresses this area. On that basis I hope—