Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I, too, am grateful to the noble Lord, Lord Sharkey, for giving us the opportunity to debate this issue, although, as I will make clear shortly, I have come to a slightly different conclusion. When we get to Amendment 103 next week, we will be talking about the RBS good bank/bad bank issue. The Parliamentary Commission on Banking Standards, which more or less in the same paragraph talked about that issue, also recommended that the Government should examine the scope for the disposal of any RBS good bank as a multiple entity. I think that these studies were called for by the end of September. We have now gone beyond that point and I hope that the Minister will be able to tell us when we can expect those reports. To some extent, the amendment in the name of the noble Lord, Lord Sharkey, seeks to pre-empt the conclusion. I should like to wait to see what the Government have to say on this and then take the matter on from there.

There are also other concerns. As well as trying to increase competition faster than would be achieved under RBS’s current plans, we should always be seeking to return RBS to its position as a fully effective lender, particularly to SMEs. We are asking it to reconstruct itself so that it gets back into the private sector and becomes a ring-fenced bank and a non-ring-fenced bank. My concern is that if we also ask it to start work on a regional agenda now, that will simply overload the system and not get it to the point of becoming an effective lender, which is the main priority in the short term.

It is not clear to me that the regional agenda will necessarily be an effective model, particularly when it is created by taking clones of existing bank networks—by simply breaking up the existing banks into smaller bits and trying to run them on the same lines, with much of the same culture and same technology. I wonder whether that will work and whether the future doe not lie in a more disruptive technology that will grow up from below. I wonder why, for example, we are keen on switching. Why will people want to switch from one kind of a bank to another kind of bank if it is just a smaller version of the same kind of bank? I am beginning to think that the real future lies not so much in the break-up of the existing model but in a disruptive technology, with someone doing to banking what Amazon has done to retailing.

It is inevitable that there will be a full market investigation reference to the Competition Commission. Again, I would not start that now, while so much else is going on, but begin somet ime after 2015. My preference would be to fold this regional debate into that, rather than pursue it now.

[Lord McFall of Alcluith (Lab)]

My Lords, the noble Lords, Lord Eatwell and Lord Sharkey, have done the Committee a service by raising this issue. Four years on from 2010, when the Government came into office, we have much less competition: banks are bigger; the cost of capital, as the noble Lord, Lord Higgins, said, is more expensive; and SMEs’ credit is still drying up. The problem is that British banking lacks a “spare tyre”, as Adam Posen of the Monetary Policy Committee said. I remember a conversation that I had with Stephen Hester when he was chief executive of the Royal Bank of Scotland. He said, “If you have new entrants into the banks, all they will do is replicate the business model that already exists. You need a Google, a Yahoo or a Facebook to have that disruptive technology”, as the noble Lord, Lord Turnbull, described.

I was of the opinion that, as a commission, we should have a referral to the Competition and Markets Authority straight away because this is an area in which, when talking about change, we are talking about years and possibly decades. If we do not get on to this straight away then we will see very little improvement at all in five or 10 years’ time. As the noble Lord, Lord Eatwell, said, if we are talking about establishing regional banks—an aspiration which the most reverend Primate the Archbishop of Canterbury articulated—we need a secure structure. We have to understand how small banks failed. People say, “Well, small banks are just the same as large banks”. I have a quote here from February 2006 in which an individual said,

“we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management ... These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries”.

So, the system is safer. The individual who said that was a certain Tim Geithner, whom the President of the United States then appointed as the United States Treasury Secretary. Mr Geithner had a great knowledge of individual institutions but Mr Geithner, like the IMF and others, was clueless about the interconnectedness of the banks, which is why the banks went down. Whether we are talking about large investment banks or small regional banks we must turn our attention to that area of risk if we want a better system.

My noble friend Lady Liddell mentioned the Airdrie Savings Bank. I was privileged to give the 150th anniversary address there. To re-emphasise what she said, the non-executive directors there were local and unpaid. The Airdrie Savings Bank was a fly on the back of the elephant that was the Royal Bank of Scotland. However, the Airdrie Savings Bank prospered and the Royal Bank of Scotland went under. The Chancellor at that time, Alistair Darling, said that he got a call in the morning from Tom McKillop, the chairman of the Royal Bank of Scotland, saying that it would be out of business in the afternoon if the Government did not step in. Surely there are lessons to be learnt there from the small banks.

I do not accept the proposition that small and regional banks are not on. A chief executive of a very large bank said to me in private that we should look at retail banking in the United Kingdom as utilities—as predictable and boring activities. That is the way we should be looking at our banks. I think a referral to the Competition and Markets Authority would be wise at the moment because we will be talking about this issue for 10 or 15 years to come. If we do not look at the structure of retail banking in the United Kingdom, we are simply going to replicate what we have at present. There is an opportunity for innovative thinking. These amendments offer the Government that opportunity and I hope that the Minister in replying will indicate that this is a fertile area and we can get on to looking at a new structure for our banking.

[Lord Desai (Lab)]

My Lords, I support the amendment in the name of my noble friend Lord Eatwell and want to comment a little on the amendment from the noble Lord, Lord Sharkey, and my noble friend Lord Glasman. The key is what the noble Lord, Lord Higgins, said. Where are the economies of scale in banking from? Why are large banks more successful in surviving and, as it were, swallowing up smaller banks here than they are elsewhere? We had smaller regional banks for a number of years in the 19th century and later. Then we had the concentration of only five large clearing banks left and then even fewer. One question that the competition authority ought to ask is, “Are the economies of scale technological, or is it just that larger banks can borrow money on the money market at a more favourable rate than small banks can? Or are we as authorities putting serious restrictions in the path of small banks to stop them starting and prospering? Are we imposing extra costs on the small banks so that the large banks get away with lower costs than small banks?”. Those are the questions that we ought to examine.

I do not particularly mind whether these are regional banks—what we need is more diversity in banking. Regional and local banks may have failed not because there is something wrong with being local or regional but because there was a storm of cheap credit available and people decided that even if you were a local bank you could still get into the American subprime mortgage market to make money. That is what ruined people; it was not being regional. In a globalised market you have access to buying and selling assets all over the world. German local banks got into subprime mortgage markets in America and lost out.

We really ought to nail down where the economies of scale are and encourage and increase diversity by removing the non-competitive restrictions that currently help large banks to dominate, rather than creating small banks that would have special competitive advantage—as it were, some kind of subsidy—which may be desirable in some larger sense but is not economically efficient. We have to ask whether large banks are surviving because of a competitive advantage and whether they will fail again, costing us a lot of money. Should we look for diversity and a level playing field among large and small banks?

--- Later in debate ---

[Lord McFall of Alcluith]

My Lords, the noble Lord, Lord Higgins, has a real point here. If we look at the timeline with PPI, consumer groups were complaining about it in the late 1990s. There was a supercomplaint in 2005. The Treasury Committee highlighted it in 2003. The OFT and the Competition Commission looked into it. It was 2012-13 before something was sorted out. That is a generation. We are making these points against the background of a sclerotic system and we really need a commitment from the Government that they are considering the matter. Otherwise, we will be back here in 10 or 15 years’ time and nothing whatever will have moved.

[Lord Newby]

My Lords, everybody would have a great deal of sympathy with the general point that the system has worked very slowly in the past. The FSA was extremely slow in many ways, but one of the features of the way the new system works is that a greater degree of urgency is injected. I give as an example the document on consumer credit published by the FCA last week. The FCA does not take responsibility for consumer credit until next April, but well in advance of that date it has produced a comprehensive plan of how it wants to proceed. This is much more rigorous than anything we have seen in that area in the past. To a considerable extent, the regulators have learnt lessons about the need to move with all due deliberation, yet also with due speed.

--- Later in debate ---

I have taken some time on this because out there, despite all the technical stuff we talk about in certain debates, the one thing the public will expect out of the Bill is that it will contain provisions designed to restore trust, domestically and internationally, in our banking system. To suggest that these amendments are unnecessary is naivety. They are necessary. There is no loss to their intent by inclusion but there is much to be gained. I ask the Committee to look at these amendments with favour.

[Lord McFall of Alcluith]

My Lords, it is a pleasure to follow the noble Lord, Lord Brennan, and to have my name on these amendments. At Second Reading, I mentioned that the Parliamentary Commission on Banking Standards was charged with looking at culture and standards. We found a culture that was rotten and standards that were abysmally low. That applies particularly in the area of senior management and we need to ensure that the individuals, the organisations and the regulator do something about it.

My concern is that these amendments might not fully deal with the anti money-laundering failings that we have seen. I looked to the Economist, courtesy of the December 2012 issue, to recap on what we have seen in terms of egregious examples. The biggest money-laundering settlement with the US authorities was made by HSBC, which settled for $1,921,000,000—about $2 billion. Its money-laundering activities involved countries such as Cuba, Iran, Libya, Mexico, Myanmar and Sudan. Standard Chartered’s settlement was $667 million and the countries with which it was involved were Iran, Libya, Myanmar and Sudan. RBS had a $500 million settlement and it was involved with Iran and Libya. Lloyds Banking Group’s was $350 million and was involved with Iran and Sudan. The settlement for Barclays was $298 million and the countries were Cuba, Iran, Myanmar and Sudan. These were all UK-based companies, so our integrity as a financial centre in London is at risk as a result of the failings that we have seen.

The issue of HSBC is important because it took over a bank in Mexico. The group chief executive, Stuart Gulliver, and the group chairman, Douglas Flint, came before the Parliamentary Commission on Banking Standards. I asked Stuart Gulliver question 3777:

“Mr Gulliver, after acquiring the Mexican bank, it was known right up to board level that the bank had few, if any, money laundering controls, and that the affiliate did not meet group standards. So why was it allowed to continue correspondent banking, when it was known that it didn’t meet group standards? Was it wilful ignorance or were the systems not in place for that?”.

Stuart Gulliver said:

“I think the answer lies—I think the Commission has seen this in a number of instances—with culture. The culture failures were at two levels. We bought a bank in Mexico that we bought cheaply because it was in distress. That bank, as you can see from the documentation, clearly had inadequate anti-money laundering systems. We ourselves were too slow to put in place anti-money laundering systems that would be up to the standards we would all expect.”

I intervened and said:

“But you knew from day one of acquiring the bank that there were problems”.

Stuart Gulliver replied that, yes, he knew from day one; so a global bank with a reputation in London acquired a bank in Mexico, knowing from day one that it did not have adequate anti money-laundering facilities.

Then I quoted the head of group compliance, David Bagley, who had said that his,

“‘mandate was limited to advising, recommending, and reporting. My job was not—and I did not have the authority, resources, support or infrastructure—to ensure that all of these global affiliates followed the Group’s compliance standards. Rather, final authority and decision-making rested with local line management in each affiliate’”.

I continued my questioning:

“In October 2002, a month before HSBC acquired the bank in Mexico, David Bagley said in an e-mail: ‘There is no recognisable compliance or money laundering function’. Is that not amazing?”.

Was that not amazing for a global bank with the reputation it had? My point to the Minister is that he should not accept the words of the banks, because one of the things that the Parliamentary Commission on Banking Standards was tired of hearing was executives saying: “These were the problems that existed in the past. We have sorted them out. There are new people in place; ergo the problem will not exist”. However, at the Parliamentary Commission on Banking Standards, we were seeing examples every month of these egregious behaviours, so we have to ensure that both the regulator and the companies have the necessary authority and that the regulator enforces that.

On the issue of HSBC and the Mexican drugs, these are not victimless crimes. To put it into context, more than 35,000 people died at the hands of Mexican drug gangs at the time HSBC was involved in this money-laundering operation. The chair of the Senate Investigations Subcommittee, when referring to the widespread anti money-laundering failures of HSBC, described its culture as “perversely polluted”.

The Financial Conduct Authority itself confirmed how widespread the problem was. In 2011, it published a review into how banks deal with situations of high money risks. It found that 75% of banks were not taking adequate measures to ensure that they met their legal obligations and that more than a third were willing to accept business with a high degree of money-laundering risk if they thought they could get away with it. Based on that 2011 review and other findings, the FCA concluded that for UK banks,

“the level of anti-money laundering compliance is a serious concern … the weaknesses we see in firms’ dealings with high-risk customers is a serious and persistent problem”.

As the Parliamentary Commission on Banking Standards noted in its final report, by failing to prevent criminals from abusing our financial system, the banks are compromising the integrity of this sector and our economy as a whole. By failing to prevent money- laundering, banks are making the UK vulnerable to tax evaders, drug smugglers, arms traffickers and corrupt politicians laundering their ill gotten gains. The potential for a major British bank losing its licence in a major market would have huge ramifications for the UK economy. HSBC came perilously close to losing its licence. The Justice Department was of a mind to take its licence away and we all know that there was involvement from the Foreign Office and elsewhere to ensure that that licence was not indeed taken away. This issue is hugely serious for the integrity of our banks and for the economy.

The Parliamentary Commission on Banking Standards highlighted a number of general causes for the abysmal standards in the UK banking sector. Two of the most important ones were the lack of personal responsibility for senior bankers and poor enforcement of legal obligations by the regulators. I well remember that when Tracey McDermott, the director of enforcement, came before the commission we had another egregious example—one of the star traders of UBS losing billions of pounds. When we asked her what went wrong, she said, “We investigated the bank and the trail went cold”. The trail went cold because there was no list of individuals responsible for particular issues in the bank.

One of the things we would like to see is the responsibility flipped to individual bankers. Time and time again, as was mentioned earlier, we had senior bankers with PPI issues coming before us and saying, “We knew nothing about it”. It was a no-see, no-tell policy. They were evading the responsibility and they were evading being honest with the Parliamentary Commission on Banking Standards because if they had been honest with us, they would have been culpable.

Since we have had the Parliamentary Commission on Banking Standards, I have had a number of communications from one or two of the executives who came before us, asking whether I would meet them so they could explain how they went about their business and tell me about the restrictions placed on them within the organisations themselves. They wanted to demonstrate that they had personal integrity, notwithstanding the fact that everything—the whole ship—went down in terms of the organisation. I did see them.

This issue of a no-see, no-tell policy is really important. The noble Lord, Lord Turnbull, made the point about a handover note. It would seem to be a minor point, but this is hugely important. The Government must ensure that they get that right by allowing the regulator to lay down—“may lay down” are the words in the legislation—elements of the conduct of business. There has to be a real attempt here to ensure that full responsibility is taken by the senior executives.

It was clear that even when personal liability could be established the regulator rarely took up the case and when it did the punishment for individuals was non-existent or weak. I mentioned that the regulator was captured, cowed and conned by the industry. We need to ensure that the regulator has a spine in future to ensure that the organisations take individual responsibility and, if they do not, if it knows who is responsible, make its enforcement division very strict on the matter.

I suggest that, given the poor record of regulation, it is incumbent on us in Parliament to give the clearest steer possible, so that the commission’s recommendations are not diluted during the second, regulator-led stage of implementation. There needs to be firmness from both the regulator and Parliament. I hope that the amendments indicate to the Government that the anti money-laundering area is one that they should look at again and that they should come back before Report stage with something meaningful for us to address.

--- Later in debate ---

[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 McFall of Alcluith]

It would be easy to put a note in the Library about which institutions will be affected and which will not, so that we can see for ourselves and there is no misinterpretation when we look at this further on Report.

[Lord Newby]

I am not sure that I can undertake to give a comprehensive list, but I am sure that I can undertake that we would explain which named organisations fall on both sides of that definition.

The next point made by the noble Lord, Lord Turnbull, was about the licensing regime. He made a common point about “may” as opposed to “must”, something that we debate at huge length. There is no doubt that there will be not a licensing regime in his terms, but there will be rules of conduct that will cover all employees for whom they are relevant. The intention is not for the cleaners to be covered by these rules. It is perfectly well understood with the PRA that it will not only produce the rules but set out the scope of which employees will be covered by them.

The noble Lord asked about the handover note. Our view is that we do not need primary legislation to require handover notes. The regulators can require that in their rules, and I am sure that they plan to. When senior managers take on a new job, new statements of responsibilities are required so that there is absolute clarity on what the senior manager is responsible for. We see these as fulfilling the purpose that he had in mind, and which other people might colloquially think of as a handover note.

The noble Viscount, Lord Trenchard, raised the question about whether British banks would be at a disadvantage. I cannot really add to the comments of my noble friend Lord Lawson and others, other than to say that the Government believe that it is in the long-term interest not only of bank customers but of the City of London that the highest possible standards are followed here. If individual bankers feel that they do not want to operate to the highest possible standards, they should go somewhere else.

The noble Viscount, Lord Trenchard, and the noble Lord, Lord Flight, asked whether the senior management regime undermines collective responsibility. We do not think that it does. It ensures that individuals are held to account when things go wrong. It will not change the way in which decisions are taken in a collective manner.

The noble Lord, Lord Flight, raised a point that has been made a number of times: why did the regulatory system get away with it, and why has no action been taken? The answer is that the restructuring of the system was undertaken to try to ensure that we did not have the same problems again. The Government believe that that is how you stop the laxity of the past, and that we begin to instil a new culture by having different organisations, objectives and rules. The regulatory regime has not gone through this process unamended.

Moving on to the amendments introduced by the noble Lord, Lord Brennan, I assure him that there is no difference of view between him and other noble Lords who supported this amendment about the significance of money-laundering and the need for it to be tackled effectively, nor of the scale of it. The scale of money-laundering is very large, and the Government and the regulators are determined to cut it down.

I would like to make some points against the amendments and in response to some of the things that have been said. The most important point was that raised by the noble Baroness, Lady Noakes. The requirements for senior managers to stay within the law on money-laundering are no different from those to keep to the law in every other area where there is law. The noble Lord has a laudable interest in money-laundering while the noble Baroness is interested in anti-terrorism legislation. There may be an overlap, but they are distinct. Other noble Lords are interested in other things, where bankers have a legal responsibility to keep within the law. Singling out money-laundering, at a point where it is not required in order to be covered by the legislation, serves no useful purpose and can be positively unhelpful. However, I am happy to take up the sensible suggestion from the noble Lord, Lord Eatwell, that we provide a letter of comfort, as it were, between now and Report to confirm that the regulator takes this extremely seriously, and that we begin to explain how the obligation under the law will be undertaken.

The noble Lord, Lord McFall, repeated that in the past the trail could go cold. The great thing about these provisions is that they deal explicitly with that. To say that the trail goes cold will no longer be a defence.

[Lord McFall of Alcluith]

The reason I said that is that Tracey McDermott, the present FCA director of enforcement, came before the committee and answered that question in all honesty. She said that what is needed is a chart of organisations to determine who is responsible for what and a handover document. That is at the start at the moment; it has not been fleshed out. That is the reason why I brought that point to the Minister.

[Lord Newby]

When this amendment is enacted, it will ensure that a senior manager will have his or her areas of responsibility explicitly set out on appointment and that he or she will be held responsible for everything that happens on their watch in that area. It will no longer be a defence to say, “The trail ran cold” or “Nobody told me about it”, as long as they might reasonably be expected to know about it. That is a killer point in respect of this amendment.

The noble Lord, Lord Watson, said that the Government are complacent, as HSBC has shown. It is in part because of the HSBC experience that this series of amendments has been introduced. We are confident that they will stop that happening again.

The noble Lord, Lord Eatwell, set out the arguments for a licensing regime. The Government believe that the code of conduct we are proposing, which will cover all those involved in banking activities, is a proportionate response to the need for the kind of principles followed by people on a day-to-day basis in the banking sector that the noble Lord wants covered by the licensing regime. We are confident that the Government will achieve that.

I hope that I have dealt with most of the points that were raised. I commend the amendment to the Committee.