Bank of England and Financial Services Bill [HL]

Lord McFall of Alcluith Excerpts

Tuesday 15th December 2015 Lords Chamber

[Baroness Kramer]

My Lords, I will not detain the House very long. The National Audit Office and the Bank of England are crucial institutions. It is absolutely necessary that both are not only independent but perceived to be independent. In earlier stages of this Bill, we asked that those two organisations should be brought together to come to a common understanding and agreement of how we could go forward. That has been achieved and, with that, we are pleased that “peace has broken out”—to quote what has just been said. It was essential that that should be done and I congratulate the Minister on the role that he played in this.

[Lord McFall of Alcluith (Lab)]

My Lords, I add my thanks to the Minister and others on this issue. I have had a letter from the Comptroller and Auditor-General, who clearly says that the Government listened to many of the concerns at Second Reading and that the threat to his role as Parliament’s auditor has been reduced. That aspect is very important.

The power of veto was one of the first things on which people came to their senses. It was explained to me that the Bank would publish its view when it refused the NAO, to which I said, “Well, it means that it would go before the Treasury Committee, and the NAO would probably go before the Public Accounts Committee”. If the Treasury Committee and the Public Accounts Committee felt that that was not very good, they would probably have a Joint Committee. I think they thought that it was the best idea to drop the power of veto, which was a good outcome.

I accept that the Bank of England’s independence is essential, particularly in the former role I had as chair of the Treasury Committee. That was very important, particularly during the financial crisis. But the democratic accountability element is important. I see this memorandum of understanding not as something set in stone but as something that can adapt to time as we go along. The noble Lord, Lord Higgins, made a point about whether it would be public. I am sure that it has to be public if there is to be credibility. If there is no intention to have it be public, that would be a backwards step on that issue. If it is not going to be public, the Treasury Committee and the Public Accounts Committee need to have sight of this as it goes along. Let us hope that we do not have that second aspect and that the memorandum of understanding is a public document. As the noble Lord, Lord Young, said, it should be here before we finish the passage of the Bill.

[Lord Lester of Herne Hill (LD)]

My Lords, I have not taken any previous part in the debates on this Bill. I intervene only to explain why I fully support these amendments and the Minister’s statement. Many years ago I represented clients in the Crown Agents inquiry, which was concerned with how millions of pounds came to be lost in an unwise investment in Australia. The Bank of England’s role in that inquiry was important. It turned out that there was no legal adviser within the Bank at all. It seemed to me and many that the amateur system that then prevailed was quite bizarre. I very much welcome the fact that this Bill moves the Bank of England from the dark ages to an enlightened situation.

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[Lord McFall of Alcluith]

My Lords, I wish to speak up for the Parliamentary Commission on Banking Standards. Some of my colleagues seem to be disappearing like snow off a dike on a hot July day, but I want to be faithful to the strictures of the parliamentary commission. We took two years over the examination and we asked 10,000 questions. When the Financial Services (Banking Reform) Act was passed in 2013, all of us were satisfied with seeing our measures enshrined in legislation. But now, 18 months later and with no opportunity to test it, the legislation has been filleted, particularly in relation to the reverse burden of proof.

I have just returned from a conference in Washington attended by regulators from the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Office of Financial Research. They said that progress has been made, but the task ahead in terms of a global resolution for the financial regime is enormous: resolution plans, living wills, leverage ratios, counterparty clearing houses, cross-border co-operation, and not least public resolution mechanisms which do not fit in well with domestic insolvency regimes. Why am I mentioning these? It is because the message also given to me during those conversations was that there is not enough push-back. The momentum goes one way globally, in favour of Wall Street and the banks. In an environment with low interest rates and disappointing returns, it is inevitable that banks will take more risks in the future. So there is a need for vigilance to minimise regulatory arbitrage and change the culture in order to minimise misbehaviour, which was the essence of the parliamentary commission.

We have been talking about the reverse burden of proof, but is it that? Section 32 of the 2013 Act could be interpreted as not a reversal of the burden of proof, because it means that the defendant is considered to be automatically guilty, and she or he has to prove their innocence. That is not going to happen in this case. The present position is that a senior manager will be liable for misconduct if a variety of factors are present, including the absence of reasonableness in breaching a regulatory rule. That does not constitute a reversal of the burden of proof. It means that the regulator must still show that all the factors in Section 66 are present, and then the defendant will be required to demonstrate the defence of having acted reasonably. There is nothing unusual about the regulator having to prove the elements of an offence or misconduct and then the defendant having to prove a statutory defence to that liability. Indeed, the government amendment could have the odd effect of requiring the regulator to prove the defence. But that is for the senior manager to do, and he or she must prove that their work was reasonable.

Perhaps the test of reasonableness is too low because a senior manager need only point to a lack of diligence on the part of other senior managers to demonstrate that they appear to be reasonable as compared with their peers. I would prefer “reasonable diligence”; indeed, I would have preferred the duty of care, which I proposed to the Parliamentary Commission on Banking Standards, saying that it would be simpler and could not be misinterpreted, but it was not taken up, and that is why we find ourselves in this position today.

The real regulatory challenge is to make sure that senior managers manage their institutions properly from top to bottom so that none of their employees can misbehave. In the intervention made just previously to my own, mention was made of the regulator ensuring the best regulation and that companies undertake it. I can well remember Tracey McDermott, then the director of the FSA, coming before the commission to be questioned about UBS, where one of its clients had misappropriated $2 billion. When we asked the senior managers about it, they said that they did not know the client. When we asked them when they found out, they said, “It was on the Bloomberg news wires”. When we asked Tracey McDermott why she did not pursue it, she said, “The trail went cold”. The trail is going to be cold here, and we will still have to fix this problem.

Is it not ironic that Sports Direct knows when someone steals a pair of socks, but Barclays cannot spot millions of pounds being taken through misquoting LIBOR? That is the situation we are facing. The real issue is the quality of regulation. We have ducked it tonight, but perhaps my fellow commissioners will come back in two years’ time and say, “We have had another thought, and what we have passed tonight was not very good, so let us have another go”. There is a pregnant agenda here and we will have to attend to it.

Banking: Financial Crime

Lord McFall of Alcluith Excerpts

Wednesday 2nd December 2015 Lords Chamber

[Lord Bridges of Headley]

I entirely agree with the noble Lord. The new system will be robust and proportionate.

[Lord McFall of Alcluith (Lab)]

The £2 billion deal on behalf of Qatari clients saw Barclays deliberately breach its own rules on money laundering and financial terrorism, bringing the total fines that it has paid from 2010 to £500 million. The FCA judgment was very clear: it was done to generate revenue and new business. The FSA has neither named people nor taken action against them. Given that the Parliamentary Commission on Banking Standards, comprising individuals from this House and the House of Commons, said in its primary recommendation that individual executives have to be personally accountable, when will the Government implement this sensible recommendation from an all-party committee?

Bank of England and Financial Services Bill [HL]

Lord McFall of Alcluith Excerpts

Wednesday 11th November 2015 Lords Chamber

Moved by

[Lord McFall of Alcluith]

29A: After Clause 23, insert the following new Clause—
“Listings rules sustainability report
(1) Within one year of the coming into force of this Act, and annually thereafter, the Financial Conduct Authority shall prepare and publish an assessment of how listings rules contribute to the UK’s sustainable economic growth.
(2) In this section, “listings rules” means rules deriving from Part 6 of the Financial Services and Markets Act 2000, and rules governing markets designated as recognised growth markets by HMRC.”

[Lord McFall of Alcluith (Lab)]

My Lords, I rise to move the amendment in the name of my noble friend Lady Worthington who, unfortunately, cannot be with us today. Amendments 29A and 29B seek to introduce two new clauses, “Listing rules sustainability report” and “Power to require long-term sustainability reporting”.

In a Bill that deals with financial services, we would be remiss if we did not debate how we can best promote the long-term sustainability of an industry that contributed almost £127 billion of gross value added to the UK economy and supported 1.1 million jobs directly and indirectly in 2014.

Both these amendments are probing amendments. Amendment 29B would require the specification of accounting standards for the disclosure of exposure to the financial risks associated with climate change—an issue that Governor Carney has spoken about very recently. Amendment 29A sets out a requirement for the listings authorities to report on how the rules arrangements governing our financial markets relate to sustainable growth.

The need for the effective disclosure of the carbon intensity of assets is widely supported, and according to the Bank of England there are already 400 such schemes internationally. The problem is that each initiative varies in status, scope and ambition, and as Governor Carney has said recently,

“The existing surfeit of schemes and fragmented disclosures means a risk of getting ‘lost in the right direction’”.

Amendment 29B calls for uniformity and clarity of reporting standards so that our financial services industry has the right information to make the right decisions when investing clients’ money.

The UK is uniquely placed to lead on this issue, given the size and importance of our financial services industry. That is why it is important that we look at all means to ensure its long-term sustainability. Amendment 29A does this by asking the FCA to prepare a report into the effect of listings rules on sustainable growth. In particular, it would shine a light on to our “recognised growth markets”, such as the Alternative Investment Market.

The AIM is designed to support new, high-growth and innovative enterprises which would otherwise struggle to meet the requirements to list on the main market, and it encourages investment with income tax, capital gains tax, stamp duty and inheritance tax reliefs. However, this market also allows well-established extractives to list their shares here, avoiding tougher regulation and allowing companies such as Coal of Africa—an Australian mining firm with a history of sacking striking workers—to list its securities on that market. In a time of austerity, we should be looking at the regulation of our financial services industry and markets to ensure that they are encouraging the sustainable growth that we need. I ask the Minister to consider these amendments.

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[Lord Bridges of Headley]

As always, my noble friend makes a perceptive point. As I said, I do not want to prejudice the outcome of the discussions that will likely take place. Obviously, my noble friend makes a good point. I simply make the point in return that, in the case of disclosure, we want to try to make sure that this is as internationally recognised as possible. I heed what he said and will no doubt make that point to those who will be present at that discussion.

On primary issuances, the relevant regime is the prospectus directive—which is currently under review. We are working closely with the European Commission and other European partners to achieve a positive outcome on that. We look forward to hearing any suggestions on how to improve this regime. I thank the noble Lord—and the noble Baroness who sadly is not with us—for this amendment. I hope what I said gives some reassurance that the Government take this issue seriously, but I ask the noble Lord to withdraw the amendment.

[Lord McFall of Alcluith]

My Lords, I beg leave to withdraw the amendment.

Amendment 29A withdrawn.

Bank of England and Financial Services Bill [HL]

Lord McFall of Alcluith Excerpts

Wednesday 11th November 2015 Lords Chamber

[Lord Garel-Jones (Con)]

My Lords, I draw the House’s attention to my declaration of interests. Before coming to the reasons why I believe that the removal of the reverse burden of proof is a wise move in both practical and administrative terms, I want to say that its removal restores the principle of natural fairness—a fundamental principle of British law to which the right reverend Prelate has just referred, and, if I may be so bold, one to which even bankers are entitled. Also, as again the right reverend Prelate has said, the creation of a two-tier system would not be a very helpful situation to move towards.

The importance of the City of London to the British economy will be a given among your Lordships. If that position is to be retained, bearing in mind some of the abuses we have seen in recent years, it needs to be underpinned by a strict and proper regulatory framework. Under these proposals for senior management conduct, which are supported by the PRA, senior managers remain responsible for taking reasonable steps to oversee the areas for which they are responsible.

The revised disciplinary provisions in the Bill provide that regulators will be able to take action against senior managers on three grounds: first, a breach by the senior manager of the conduct rules; secondly, the senior manager being knowingly concerned in a breach by the firm of its regulatory obligations; thirdly, where there is a breach by the firm of its regulatory obligations in relation to the area for which the senior manager is responsible, a failure by that senior manager to take such steps as a person in his or her position could reasonably be expected to take to avoid a breach occurring or continuing.

The first of those two grounds would also be grounds for action against any other employee or director of the firm, while the third ground in effect replaces the reverse burden of proof. In all three cases the burden of proof now rests with the regulators. Importantly, the FCA’s reaction to these changes makes it clear that the regulators,

“remain committed to holding individuals to account where they fail to meet our standards”.

I therefore believe that the Government are right in claiming that senior managers will remain subject to the same tough underlying conditions. The statutory duty, together with the statement of responsibility, means that senior managers will no longer be able to plead ignorance in these matters.

I make one final point, which to many noble Lords may seem a mere footnote to the bigger issues we are discussing. One of the great attractions of London is that it is truly the most international city in the world. Not surprisingly, therefore, many of the most senior positions in the City are held by non-British citizens. If you are running a global business, in many instances you can just as easily manage that with your team from New York or some other financial centre. I am advised that, had the reverse burden of proof remained on the statute book, many senior managers may well have declined to be posted to London, and that some now here would have moved as soon as a suitable opportunity arose. I believe that we have here a rigorous regulatory framework of the type we need, which no longer carries within it what might well have proved to be a strong disincentive to senior non-British bankers to base themselves in London.

[Lord McFall of Alcluith (Lab)]

My Lords, I support the amendment of the noble Lord, Lord Sharkey. I bring to the attention of the Committee my position as deputy chairman of the Banking Standards Board, but I speak here in a personal capacity.

This measure abandons a key element of the recommendation of the Parliamentary Commission on Banking Standards—a decision that was unanimous among its members, including the most reverend Primate the Archbishop of Canterbury. We all signed up to the recommendation to hold senior bankers to account. The essence of the recommendation is that, if misconduct or prudential failings take place, in order to avoid sanction senior managers have to demonstrate that they did all they could to prevent them happening.

I remind the Committee why we came to that decision. We sat for two years and asked 10,000 questions. We questioned senior executives of banks, whose response when anything went wrong was, “No see, no tell. Nothing to do with me”. In fact, senior executives were content to come across as incompetent rather than culpable, no doubt advised to do so by their lawyers. We covered examples such as PPI, which went on for 20 years. I questioned the former chief executive of Lloyds. I asked him, “What about PPI? It’s cost you about £12 billion”. He replied, “Oh, we were on the side of the angels as far as PPI was concerned”. This is a group of people divorced from the reality of the situation in society, and that is why the parliamentary commission unanimously made this recommendation.

I shall give your Lordships another example. We had four UBS executives lined up before us. We were told informally that their salary was probably £100 million a year. One of their star traders had lost more than $2 billion in Hong Kong, so naturally we asked, “Did you know?”, to which the answer was “No”. We said, “You didn’t know what your star trader was doing? Fine. So when did you find out?”. The answer was, “Oh, we found out on the Bloomberg wires”. In other words, it took someone outwith the company to tell the most senior managers that one of their star traders had lost $2 billion.

The director of corporate affairs, Tracey McDermott, came before one of the sub-committees in relation to this issue. She is a very competent and professional person. We asked her, “What happened with the UBS situation?”. She said, “We examined it but the trail went cold. In other words, we couldn’t pinpoint anyone in the organisation who was culpable because there wasn’t a sufficient organisational chart”. Her evidence indicated that at that time—this was mentioned by the noble Lord, Lord Sharkey—the FCA was unable to impose sanctions on senior executives, first and foremost due to the evidential standard required to prove their liability. She added:

“The test for taking enforcement action is that we have to be able to establish personal culpability on the part of the individual, which means falling below the standard of reasonableness for someone in their position”.

That entails showing that senior executives failed to reach a reasonable conclusion and, as the Bill stands, that will remain the evidential standard for proving culpability. So we are back to the future here—a future that has failed time and again. That is why the Parliamentary Commission on Banking Standards was very frustrated at the situation and said that something had to be done in civil law. However, the new standard in the Bill will not effect the change that it is supposed to bring about because the evidential standards remains the same and, as a result, we are going back to an old regime.

I remind the Committee of the long list of recent failures, not least IPOs, LIBOR and forex. Those are what are called the three lodestars of the market, and they were all rigged. It was a corrupt market, and the Parliamentary Commission on Banking Standards was very clear, from the evidence it received, that it was a corrupt market. We had evidence from HBOS, UBS and RBS. PPI mis-selling went on for 20 years and cost £40 billion. What does £40 billion mean? It is about 2% of the country’s GDP, so, paradoxically, the PPI fines helped economic growth. I do not want to live in a country with standards like that.

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[The Lord Bishop of Southwark]

My Lords, I do not wish to interrupt the noble Lord in full flight but I should like to put on the record that the most reverend Primate the Archbishop of Canterbury signed up to the reverse burden of proof, having lost the argument in the PCBS that the reverse burden of proof was unjustifiable. I think that slightly puts in context the phraseology he used.

[Lord McFall of Alcluith]

The commission valued enormously the contribution of the most reverend Primate the Archbishop of Canterbury. However, if we feel strongly about something, it can be a matter of record. I take the point about the unanimity of the commission, and will come to an area where I disagreed with it. I did not get my way, but signed up to it. So it is a case of tit for tat and one for one with the most reverend Primate.

This measure sends out the wrong signal—that Parliament is unfairly on the side of the banks rather than on the side of the public. The Parliamentary Commission on Banking Standards was very clear on enforcement action. We described it as being,

“as rare as hens’ teeth”.

The public want effective reforms. They want senior managers to be personally culpable. They want fines on individuals, not companies, because when the fines are on companies it is the shareholders—ordinary members of the public—who pay them. So the public are being denied and punished twice. The public—I include the noble Lord, Lord Sharkey, and others—want a fair market where risk is rewarded but where failure is punished. That has not happened.

The point was made about the most reverend Primate the Archbishop of Canterbury. I pushed the concept of duty of care in the Parliamentary Commission on Banking Standards. It did not accept it as a recommendation, although it was in the report. If the Government were serious about this, they would adopt a duty of care, which would transform the financial services industry. My good friend John Kay, who has just written a book on that, Other People’s Money, agrees with me on this issue.

In the absence of the Government doing anything, when we come back to this on Report they will really have to think about how they can make senior executives personally responsible. Otherwise, the value of the Bill and the reforms, the expenditure and the time we have spent on the Parliamentary Commission on Banking Standards will count for naught. It is time for a reassessment by the Government between now and Report. I hope the Minister takes that seriously.

[Lord Gold (Con)]

My Lords, I oppose this amendment. I have listened to the noble Lord, Lord McFall, and I fully agree—I suspect we all agree—that the examples he has mentioned of culpable things that have gone wrong cannot be acceptable. However, hearing his comments on the demands of public opinion makes me even more certain that we should oppose this amendment, because the rule of law must be upheld and we must allow the innocent to remain innocent until proved guilty.

Regulation is terribly important and we must give appropriate powers to the regulators to enable them to undertake their work effectively, including the ability to search out evidence in order to ascertain what went wrong and who was responsible. They must be able to break down any firewall that the institutions might have erected. Employees in financial institutions must fear the consequences of acting badly and know that if they break the rules the consequences could be very severe, including heavy fines and maybe a prison sentence.

If we have failed to achieve these things, however, the answer is not to shift the burden of proof so that the defendant has to prove his innocence. That would be tantamount to giving up the challenge. Instead, we must tighten up the regulator’s powers and create an appropriate and effective regulatory regime, one that can achieve what all of us want, which is to protect those dealing with the financial institutions and punish those who fail in their duties.

In this Bill, the Government are aiming to do just that by extending the regulatory regime to all financial services firms and giving power to the regulator to make and enforce rules of conduct. This materially strengthens the regulator’s position. In so doing, it rightly reverses the burden of proof so as no longer to presume guilt, requiring the defendant to prove innocence, and we should not now allow that to continue.

I welcome the Government’s proposals for several reasons. First, I believe it is right to extend the regulatory regime across the whole financial services industry and thereby strengthen regulation. It is also right that we should not change a fundamental tenet of English law, which is that a person is innocent until proved guilty. As I have indicated, to reverse the burden of proof in this way is an excuse for failing to create an effective regulatory regime. Indeed, it is a lazy way of dealing with a problem and should not be countenanced. The provision that it is now proposed should be reversed, frankly, should never have been enacted. I am pleased that the Government have now recognised this.

In proposing this change, the Government seek to treat all financial institutions in the same way. Surely that must be right and fair. Why should there be one rule for large institutions and another for smaller ones? If a financial institution or someone working there breaks the rules then there should be a consequence, and everyone should be treated equally. Any suggestion that there should be a two-tier system so that the present law presuming guilt applies only to certain institutions, but the burden of proof shifts for those institutions that now come within this regulatory regime, is unfair. We should not discriminate between institutions. This could lead to unfair competition and could prejudice the very people we wish to protect—the consumers and customers.

The effectiveness of these new rules, once in force, should be carefully monitored and scrutinised. If, despite the extension of the regulatory regime now proposed, more is required, the Government must not shy away from a further extension of regulatory powers. However, in so doing, they should not then restore the short cut of shifting the burden of proof.

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[Lord Hunt of Wirral (Con)]

My Lords, I declare my interests as set out in the register but particularly as a practising solicitor for nearly 50 years.

I heard the noble Baroness talk about fundamental principles. For me, no principle is more fundamental than the presumption of innocence, as one sees in the way that that has been set so deeply within justice systems, particularly in this country. In contributing to this debate, I come at it in a different way: I do not like the reverse burden of proof in any event. However, I have to recognise the extent of the problems that people have set out so clearly, so that would accompany my welcome of the Government’s decision to have what in effect will be the same statutory duty of responsibility right across the financial services industry. I hope there will be a clear message to the industry that, although we recognise that regulation has to be proportionate, there is no way that we can allow to continue the lapses in conduct and responsibility that have taken place.

I think it was the noble Lord, Lord Sharkey, who quoted Tracey McDermott. I too refer to what she said, because I strongly agree with her. She said this at the Mansion House:

“My firm belief is that if the financial services industry is to restore the trust and confidence of those it is here to serve firms should not just aspire to meet our rules. They should aspire to be better than that”.

I have always strongly believed in self-regulation. As a solicitor, what I call super rule No. 1 guides us so that, all right, the rule of law has to be observed, but our code of ethics and professional standards should govern everything we do. I just hope that the message will go from this House to the financial services industry that it should follow the example of the professions that set the highest possible professional standards.

[Lord McFall of Alcluith]

I welcome the noble Lord’s comments, in particular that senior managers have to perform way beyond the call of duty. Will he therefore support my call for a duty of care on the industry, thereby avoiding the reverse burden of proof?

[Lord Hunt of Wirral]

There is a duty of care. It depends on how much you enact to support the duty of care. As far as I am concerned, the customer, the consumer and the client matter most of all. With that there is an associated duty of care; there has to be.

I hate to quote Socrates to the noble Lord, but I seem to recall that it was he who said that good men do not need laws while bad men will always find a way around them. So the more you set out rules and regulations and duties, the more you enable people to find ways around them. My argument to the noble Lord is this: can we get away from trying to set down in legislation, rules and regulations everything you can do and everything you cannot do? Can we not return to that essence of your own principles, namely your duty of care and responsibility?

[Lord McFall of Alcluith]

The noble Lord has mentioned Socrates. I well remember that Socrates consulted the wise men and came away appalled by the level of their ignorance.

[Lord Hunt of Wirral]

I hope that the noble Lord will not mind if I try to avoid following him down that route. I hope that noble Lords will understand that my objection is that I dislike in any event the reverse burden of proof. I welcome the fact that it is to be abolished, but I want to send a message that the financial services industry should be composed of people who put the customer, the consumer and the client first and observe the highest possible principles both professionally and in the standards they seek to maintain.

Bank of England and Financial Services Bill [HL]

Lord McFall of Alcluith Excerpts

Monday 9th November 2015 Lords Chamber

[Lord Higgins (Con)]

My Lords, the noble Lord, Lord Davies of Oldham, is always modest, but on this occasion he is excessively so. I agree with my noble friend because the implication of putting the words “reasonable” and “reasonably” in these clauses is that somehow the National Audit Office would act unreasonably, and I do not believe that that is the case. Perhaps the Minister will tell us where else in the legislation governing the National Audit Office such clauses are applied. These are quite unnecessary words. It may well be that, given the more formal auditing functions of the National Audit Office, as against the value-for-money provisions, there might be some occasion when it is necessary to get hold of documents at an unreasonable time. I hope the Minister will respond to this and agree to delete the words which appear in the amendments.

[Lord McFall of Alcluith]

My Lords, I support the noble Lord, Lord Higgins, and the noble Baroness, Lady Noakes. I was a member of the Parliamentary Commission on Banking Standards which looked at the word “reasonable” and concluded that it is a lawyer’s word. If it is a lawyer’s word, it costs a lot of money, and if it costs a lot of money, it can obscure the truth. Let us get rid of it and invest the authority in the Comptroller and Auditor-General which will save everyone time and money.

[Lord Bridges of Headley]

My Lords, as my noble friend Lady Noakes said, the noble Lord, Lord Davies, is once again being incredibly modest and reasonable about his reasonableness amendment. I think the amendments merit a full response, so I hope he will forgive me. I will try my best, and I will pick up on the point made by the noble Lord, Lord McFall. I heed what he said about this in the past.

I shall set out the Government’s position. Clause 9 gives the Comptroller and Auditor-General a new role in the financial audit process of the Bank. The Comptroller and Auditor-General will be consulted on the appointment of the financial auditor and on the work programme that that auditor sets out to deliver. The Comptroller and Auditor-General will have the right to attend the relevant parts of the meetings of the Bank’s audit and risk committee. This is intended to assist the NAO in conducting value-for-money examinations of the Bank under Clause 11.

Clause 10 provides for increased public scrutiny in circumstances where a Treasury indemnity has been granted to the Bank, or to a company of the Bank. Fortunately, times when a Treasury indemnity is deemed necessary are rare, but it is right that where there is a direct risk to public funds the Treasury can require the Bank to prepare a financial report on any activities that have been indemnified, so that the extent of the risk to public funds can be assessed, and that this report is subject to review by the Comptroller and Auditor-General. I agree that in both of these contexts the question of access to information is critical. It is central to the ability of the Comptroller and Auditor-General, assisted by the National Audit Office, to carry out effectively the roles defined for him in the Bill. So I am pleased that the noble Lord, Lord Davies, has tabled the amendments and that the issue has been raised, but I am unable to accept them.

To address my noble friend Lord Higgins’s point, the language used in the Bill regarding the Comptroller and Auditor-General’s access to information mirrors the relevant wording from the National Audit Act 1983, which provides in Section 8 that,

“the Comptroller and Auditor General shall have a right of access at all reasonable times to all such documents as he may reasonably require, for carrying out any examination under section 6 or 7”,

in the National Audit Act,

“and shall be entitled to require from any person holding or accountable for any such document such information and explanation as are reasonably necessary for that purpose”.

As far as I am aware, the inclusion of requirements of “reasonableness” in this section has not created difficulties for the Comptroller and Auditor-General in the context of value-for-money examinations carried out in relation to other public bodies, and I see no reason why it should cause a problem now.

Some may argue that the Bank would be able to use this reasonableness requirement to delay examinations, but if the Bank did not comply with its obligations under this clause then the Comptroller and Auditor-General would be able to seek an injunction from the courts to enforce his rights. As such, it seems to me that the amendment is unnecessary, and I ask the noble Lord to withdraw it.

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[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I take that as a kind of personal statement.

[Lord McFall of Alcluith]

My Lords, I shall move Amendment 14, which is in the group Amendments 14 to 18, concerning Clause 11 and the proposed audit arrangements for the Bank of England. As it stands, the Bill provides for the NAO to carry out value-for-money studies at the Bank, but it also imposes a number of constraints on this. First, before carrying out a study, the Comptroller and Auditor-General would have to consult the Court of Directors at the Bank. Secondly, if the court is of the opinion that an examination is concerned with the merits of the Bank’s general policy in pursuing the Bank’s objectives, then it can ultimately prevent the Comptroller from proceeding with an examination.

These provisions contrast sharply with the terms under which the NAO undertakes value-for-money studies in every other public body under the National Audit Act. That legislation gives the Comptroller and Auditor-General,

“complete discretion in the discharge of his functions … in determining whether to carry out any examination … and as to the manner in which any such examination is carried out”.

The National Audit Act prohibits the NAO from questioning the merits of policy objectives. As I will mention later, the NAO has never sought to cross that line. However, the Bill extends this prohibition to cover the Bank’s general policy in pursuing the Bank’s objectives, as well as giving the Bank an effective veto over which studies are undertaken.

That presents the NAO with several major problems. First, as the Comptroller and Auditor-General has said, it therefore gives an impression of greater accountability on the part of the Bank that is at odds with reality. Secondly, it undermines the independence of the NAO to decide what should be examined, and that independence is key to holding public bodies to account. Thirdly, if these provisions are agreed for the Bank, it will encourage others to challenge the independence of the office; perhaps every new body and many existing ones wish for the same ability to veto or limit the NAO’s work—to the great disadvantage of Parliament and the taxpayer, for both of which the NAO has long performed an invaluable function. This is not an issue, therefore, that can be limited to the particular circumstances of the Bank of England.

Why would anyone wish to impose these kinds of constraints on the NAO? Perhaps there is a concern that the Bank should not have its policy decisions examined. That would be entirely understandable, but the fact is that the NAO has had decades of experience of operating without questioning the merits of policy objectives. It has done so without any difficulty in the Ministry of Defence, including the security services, or indeed the Foreign Office, where it has recently been looking at how crises in Tunisia, Libya and Yemen have been handled. It is difficult to argue that if the NAO is capable of dealing satisfactorily with this level of sensitivity, it could not be trusted to steer clear of questioning policy objectives at the Bank.

I know it has been argued that there are no precedents for the equivalent of the NAO being involved with a national bank, but the Government Accountability Office in the US audits the Federal Reserve Board and the Federal Reserve Banks, with exceptions to the scope of their audits being made explicit, and including transactions for and with a foreign central bank; deliberations, decisions or actions on monetary policy matters; and transactions made under the direction of the Federal Markets Committee. The Comptroller and Auditor-General has made clear from the outset that he would be content it agree similar such exceptions in this country. These amendments seek in the case of Amendments 14 and 16 to bring the definition of “policy” into line with that used in the National Audit Act, Amendment 15 would delete the need for the Comptroller to consult the court before undertaking an examination, and Amendment 17 would remove the veto of the Bank’s Court of Directors over examinations.

[Lord Higgins]

I am having a slight problem with Amendment 14. It seems, effectively, simply to put back again the lines which the noble Lord seeks to leave out. That is to say, in each case it seems to say that the Comptroller will not question the merits of the policy objectives of the Bank.

[Lord McFall of Alcluith]

I did not quite pick up on the noble Lord’s point.

[Lord Higgins]

I will try again. Amendment 14 says,

“leave out from ‘section’ to end of line 28”,

which is concerned with the question of whether the Comptroller can question the merits of the policy objectives of the Bank, and which effectively says, “No; the NAO can’t”. However, Amendment 14, which I may have totally misunderstood, seems effectively to put it back in the same way, except with the addition of the words,

“including in relation to monetary policy”.

[Lord McFall of Alcluith]

In fact, the Comptroller and Auditor-General made it clear to me that he does not want to question the merits of the policy of the Bank, so if there is a misunderstanding there, we should sort it out, particularly when it comes to Report. However, that is certainly not the case, and he would not want to do that.

Amendment 18 deletes a provision which would apply Section 353A of the Financial Services and Markets Act 2000, which would restrict the ability of the Comptroller and Auditor-General fully and openly. As the Government have said on many other occasions, transparency is an essential ingredient of accountability. These amendments seek to ensure that the Bank is subject to a level of transparency necessary to ensure its proper management of its resources. Parliament and the taxpayers have the right to expect nothing less.

An article in the Financial Times at the weekend said that, globally today, central banks exercise unparalleled power and independence. Willem Buiter used to come before the Select Committee quite regularly and was a former member of the policy committee. He is now the chief economist at Citi and stated that presently, central banks,

“are punching well above their weight … This could lead to a backlash and to central banks losing their operational independence, even where this independence makes sense—in the design and conduct of monetary policy”.

When the former Governor King came before the Treasury Select Committee, which I chaired, he was very clear both in formal and informal settings that the integrity and credibility of the bank is essential if society is to have confidence in its monetary policy decisions. That being the case, the Bank should not be marking its own exam paper. It should be honest in its intentions and transparent in its actions, and it cannot tie the hands of the Comptroller and Auditor-General with the court holding a power of veto. In the short and even the long term, that does not serve the best intentions of the Bank or society. In that spirit, I beg to move.

--- Later in debate ---

[Lord McFall of Alcluith]

My Lords, I thank the Minister for his reply. He made a point about the Federal Reserve, in respect of which there is a huge amount of engagement in the United States at the moment. Congressional members are knocking it about like mad. The status of the Federal Reserve is more in question than that of the Bank of England—that is accepted here. The point of these amendments is to ensure that the status of the Bank is maintained and that its independence is not questioned. The analogy with the Federal Reserve is a bit off the mark on that issue.

As my noble friend Lord Davies said, the Government are in a pickle. There has to be a lot of consideration before Report. The noble Lord, Lord Young, made a point about facilitating engagement between the Comptroller and Auditor-General and the Bank of England. According to my information, they have met but there is still a gap. To give an example from my own experience, when I was chairman of the Treasury Committee I was approached by the Treasury to ensure that the Bank of England was audited. I said to them, “Do your own business: I am not doing it for you. Engage in it”. I notice that three distinguished former Permanent Secretaries are sat on the Benches. I do not know what you call a trio of Permanent Secretaries, but the noble Lords should not worry: it would have to be something complimentary. My question to the Minister is: are the Treasury the fly in the ointment at this stage?

The noble Baroness, Lady Noakes, said that the Bank of England should be audited and that it can be effective only if it is. We are here to ensure that that effectiveness is maintained. The noble Lord, Lord Higgins, talked about value for money and the NAO being independent. This arrangement could end up in a public squabble between the Bank and the NAO, and that is not going to serve anyone’s interest, particularly when it comes to parliamentary scrutiny. That does not serve the Bill. A lot of thinking needs to be done on this issue. The noble Lord also made a quite radical point about the value for money of forward guidance. The Comptroller and Auditor-General does not want to go near that. He has been very reasonable—I have used that word before—in his ambitions and it is important to see where he comes from on this issue.

The Minister talked about increasing transparency, but where will it increase?

[Lord Higgins]

The Minister has suggested that there was a compromise. It would not appear to be a compromise as far as the release of information is concerned. The Comptroller and Auditor-General appears to take the view that the Government’s position on that issue is unacceptable. Can we be sure that that is not taken as settled? We also need to consider the question of releasing information.

[Lord McFall of Alcluith]

There cannot be a compromise when the court has the veto at the end of the day and this has been public. We do not know where this is going to lead. I do not think there is a compromise at this stage.

Thinking off the top of my head—and I am in good company, because the Government are doing the same—given the need to bring people even further together, why can the Comptroller and Auditor-General not engage with the Governor of the Bank of England? Perhaps there could also be some third parties: wise heads such as the noble Lord, Lord Higgins, who has tremendous experience, and the former Permanent Secretaries. Why can they not sit down and say which areas the Comptroller and Auditor-General should have an opportunity to go over? Can we get that wise counsel before Report, so that we do not end up with a squabble? At the moment, there is a big gap between the governor and the Comptroller and Auditor-General that should be narrowed before Report. There is an opportunity to introduce a bit of common sense so that, on Report, we can all agree that the independence of the NAO and the Bank of England are important. Both institutions have a job to do in the best interests of the country, and the authority and integrity of both would thereby be increased. I seek the co-operation of the Minister in achieving a compromise before Report. I beg leave to withdraw the amendment.

Amendment 14 withdrawn.

Bank of England and Financial Services Bill [HL]

Lord McFall of Alcluith Excerpts

Monday 9th November 2015 Lords Chamber

[Lord Eatwell]

My Lords, the Bill reeks of the feeling that non-executive directors are a nuisance. Everywhere, we find the role of the non-executive directors in the Bank being reduced. This simple numerical reduction is something like arguing about the number of angels who can dance on a pin. None the less, let us remember why legislation was brought to this House and argued for so forcibly by the noble Lord, Lord Deighton. It was because the Bank of England was seen to have significantly failed during the financial crisis: in particular, that the Bank of England had not had sufficient alternative voices or challenge within its decision-making process. That is what underlay the Financial Services Act of, let me remind the Committee, 2012—just three years ago. From its vesting date to today, that Act has been in force for about two and a half years. How, after that period, can it be decided that the experience of the Act and the structures put in place by it were misconceived? This seems to be simply an attempt for the Bank to return to business as usual, ex ante—before the financial crisis. If the size of the court is too large then that should be the subject of a careful review and the evidence should be presented to this House. That has not been done. Where is the evidence?

The noble Baroness, Lady Noakes, said that what the court does is of course not very much. I wonder whether she was listening to the noble Lord, Lord Bridges, just now when he said that the court is responsible for deciding delegation of powers within the Bank. That seems to me to be quite a lot. With respect, perhaps in the day of the noble Baroness the court did not do very much, but the 2012 Act was specifically designed to empower the court and to produce on it a variety of views and the potential for challenge. There is not much of an issue between seven and nine. The issue is: why is this being changed now? What was wrong in 2012 that is now to be righted and what evidence is there that the decisions which this House made in 2012 were misconceived?

[Lord McFall of Alcluith (Lab)]

My Lords, I would like to make a couple of points in support of the views of the noble Lord, Lord Sharkey. The noble Baroness, Lady Noakes, made the case that the court did not do very much; that was precisely the problem. It had the job of oversight and it is a matter of record that it did not do that job well. The feeling was therefore that the Bank was engaged in groupthink. It did not allow the doors of the Bank to be opened and for the outside world to understand what the Bank was doing. That closed community failed. Evidence to the Treasury Committee acknowledged that it had failed; the current governor acknowledged that it had failed in a speech at Mansion House a number of months ago, when he made three detailed points about the areas in which it failed.

This body has failed. It therefore needs to ensure that that groupthink and closed mentality is disposed of, but that cannot be disposed of by shrinking. It has to ensure that there is a wider community looking over the Bank. After all, society depends on the decisions that the Bank makes, and it is extremely important that society has confidence in the Bank. This is not just a matter for the Bank, the directors and the governor or how he feels; this is a matter of democratic accountability to Parliament and societal involvement. As the noble Lord said, two years after a change with no examination is an unacceptable way to go about business. Let us get the doors of the Bank open and ensure that we have a wider engagement and a wider debate. That will do both the Bank and society good.

[Lord Ashton of Hyde (Con)]

My Lords, I thank noble Lords who have participated in this short debate. The general theme has been that the Government have not put forward a sufficient case for reducing the number of non-executives. I hope that by the end of the debate, we will have been able to elaborate on that. The noble Lord, Lord Eatwell, said that there seemed to be a pervasive feeling through the Bill that non-execs are a nuisance. That could not be further from the truth—good ones are essential, but too many non-execs are not effective. It is crucial to have very high-quality non-execs. I will come on to that as far as the court is concerned.

I agree with the noble Lord, Lord Sharkey, that we have got the figures right in terms of what we have at the moment and what we are going to have, but I come to completely the opposite conclusions as a result of that. I will try my best to outline the Government’s feeling and will also refer, to a certain extent, to some of the points my noble friend made about the academic evidence and the experience of commercial firms, which show that sometimes reduced numbers are more effective.

As noble Lords are aware, the Bank of England Act 1998 states that the court can contain,

“not more than 9 non-executive directors”.

This Bill does not make any alteration to this provision. Before I dive into the detail, it may be helpful to remind the Committee what we are seeking to achieve: a court that is effective in scrutinising the actions of the Bank, holding executives to account, challenging their thinking and exercising its statutory functions. A number of noble Lords have cast this debate in terms of avoiding groupthink, which I agree is very important.

Given that, there are two important factors to bear in mind about the issue we are discussing here, both of which mitigate the risk of groupthink. The first is the number of non-executive directors on the court, which the noble Lord’s amendment focuses on. The second, but no less important, factor is the quality of non-execs on the court. Let me first address the issue of numbers. Within the terms of the current legislation as written, the Government plan to reduce the number of non-execs to two. This will not weaken the court; instead, it will strengthen it.

Bank of England and Financial Services Bill [HL]

Lord McFall of Alcluith Excerpts

Monday 26th October 2015 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, I welcome the opportunity to participate in this debate. I welcome the Minister to his place and my fellow members of the Parliamentary Commission on Banking Standards, the noble Lord, Lord Lawson, and the noble Baroness, Lady Kramer. We started off on a three- or four-month project, which ended up taking over two years, with 10,000 questions. We presented the Government with recommendations and I am pretty disappointed in the Bill tonight, as are the noble Lords, Lord Eatwell, Lord Lawson and Lord Sharkey. I will focus on the ring-fence, the senior managers’ regime, Bank of England governance and, lastly, transparency and disclosure.

The noble Lord, Lord Lawson, and I were at one from the very beginning in that we wanted separation in banking. But we went along with the concept of ring-fencing to give it a chance. We actually spent almost a disproportionate amount of time on it, so it was a big issue in our deliberations. I well remember Paul Volcker coming to give us evidence on that. He was very clear. He said, “You are going to have two boards. It is naive to expect the holding company directors to have anything other than an unremitting interest in responsibility for the retail”. So you cannot separate those issues. He was very clear—as we were—that the culture is different. If it boils down to one thing, it is that the retail bank has to be customer focused, whereas the investment bank is trading and it is anonymous. It devalues and eliminates the personal relationships. That is the difference between the two of them. I do not think that this will ever change. We had individuals who came to the committee who were very supportive of the ring-fence—for example, Sir David Walker, who was chairman of Barclays. But hey presto, five or six months later, he has an article in the Daily Telegraph saying that ring-fencing has had its day—even before it has come in. The issue of lobbying is right at the heart of this very Bill.



Let us not forget that, post-crisis, banks are both bigger and more complex. The big issue now is “too big to manage”. I well remember the chairman of HSBC, Douglas Flint, coming before us. I asked him the question, “Is HSBC too big to manage?”. He said, “That is a good question”. There was no other answer on that issue.

Look at the size of the 28 global banks: in 2006 their combined total was $38 trillion—an average size of $1.4 trillion per bank. In 2013, seven years later, it has gone up from $38 trillion to $50 trillion, with an average $1.8 trillion for each bank. We speak here in trillions. Can we understand what trillions are? If we ask the question “What is a trillion seconds?”, the answer will come back: “32,000 years”. Trillions are a hell of a lot of money—and lots of people in the banking sector do not understand what the issues are in their individual institutions.

When Lehman’s went down, there were hundreds of legal entities connected globally. The issue was that it could not connect the individual pieces, hence it went down. Is it any different today? I do not think it is. So the concept of separation, as the noble Lord, Lord Lawson, said, needs to be kept alive by this Government. It cannot be dismissed.

On the senior manager regime, the main recommendation of the Parliamentary Commission on Banking Standards concerned the lack of individual accountability at the top. There was a no-see, no-tell policy, with no one responsible. We were very clear in our recommendation when we said that the problem is that:

“Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making. They then faced little realistic prospect of financial penalties, or more serious sanctions”.

Now the Government are dropping the plans to reverse the burden of proof, which would have forced senior managers to demonstrate that they have done the right thing if there was wrongdoing on their watch. That is a concern. Why the change? We are changing the burden of proof from the senior manager to the regulator. It will be necessary for the regulator to prove that the senior manager had not taken steps before bringing disciplinary proceedings. The previous FCA chief executive, Martin Wheatley, was very clear when he said that there is an accountability firewall within institutions. Here we see the Government watering down that very proposal.

There is a history to the attempt by the regulator to hold banks to account. We should look at that history when we are filing this legislation. The mis-selling and misconduct of PPI, which went on for 15 years or more—we still have the remnants of it—has cost UK banks £40 billion in fines and redress. That £40 billion is three and a half times the cost of the London Olympics. Who has been fined or brought to account on this? If we look at Land of Leather, we find that the chief executive was disciplined by the FCA for mis-selling, but he is the only senior manager to have been disciplined. What is the moral in that? It is that if you mis-sell in a sofa shop, they are coming after you, but if you mis-sell in a financial system that is systemically important, then you are safe. What a condemnation.

I recall one regulator saying in a speech made in 1998 that senior managers were not held to account. He was very clear. He said that:

“One of the least appealing features of a number of the scandals I referred to at the outset was that while junior and operational managers have lost their jobs and been disciplined”,

the senior managers get away without that responsibility. He followed that up in a speech made in April 2001 when he said that, when things go wrong, we should look directly to the senior manager, whom we should hold accountable. In the case of the failure of Barings Bank or the pensions mis-selling debacle, senior management has not been held directly accountable. He asserted that:

“Now we have a system of personal registration, where specified individuals at the top of the firm have clearly set out responsibilities for risk management and compliance, for which we hold them accountable”.

Who was this individual who spoke in 1998 and 2001? Why, it was none other than the chairman and chief executive of the FSA at that time, Sir Howard Davies, who is now the chairman of the Royal Bank of Scotland. He said, in 2001, that they had a system in place. So, what price believing the Government when they say they have a system in place, given that the man whom they ensured was appointed chairman of the Royal Bank of Scotland made a statement 15 years ago that is full of holes, if ever anything was? We have a real problem in that, 15 years later, we have no decent remedy. The Government are jettisoning any chance of achieving that in this Bill, which is a matter of sorrow for us all, including the Parliamentary Commission on Banking Standards and others here tonight.

On the issue of Bank of England governance, much of the Bill does seem to be technical, but perhaps that is largely to do with the Governor wanting to reorganise the Bank. But the real problem is a lack of constitutional accountability. Mention has been made of Clause 12, entitled “Bank to act as Prudential Regulation Authority.” The Prudential Regulation Authority has responsibility for the microprudential regulation of the solvency of banks. As Chairman of the Treasury Select Committee at the time, I can tell noble Lords that the PRA did not work. That is why the Chancellor, George Osborne, changed it. But now, through his own architecture he is downgrading the PRA to a mere committee, not a subsidiary of the Bank that works as a separate authority. Given the experience of the past seven years or more, there is a need for a free-standing PRA with its own rule book. The recent failures of the Co-operative Bank and the Britannia Building Society should warn us that microprudential regulation is still vital. More answers need to be given as to why it is to be downgraded.

My noble friend Lord Eatwell made the very important point that the structure of the Bank is becoming opaque and not fit for purpose. Given the experience of the past seven years, there are many questions regarding the Bank and monetary policy. For example, what changes to the remit might have improved its performance before, during and after the recession? What has the true effect of QE been? Has it enriched the rich at the expense of the poor? Has it increased inequality? One thing we do know is that it has added £15,000 more debt to every person in the United Kingdom. Who pays that? Is it the banks or the investment companies? No, it is the ordinary citizen. These are relevant questions to ask of the Bank of England, which has not been probing enough.

Should the Bank of England have a broader, dual mandate similar to the Fed’s? In the light of devolution, should we have broader regional representation, as the Fed has with its 12 regional banks? How will an independent Bank of England be more accountable to Parliament, and what will the role of the court be with the Treasury Select Committee? This issue of the court is not finished. It proved itself not to be up to standard during the financial crisis, and this just seems to be shifting different responsibilities about with seemingly no coherent strategy from the Government.

We need a wider engagement and a review looking at the future of the MPC. A number of years ago, when I was Chairman of the Treasury Committee, I established the Future Banking Commission to take the matter up with Parliament. I asked David Davis to chair it and he did an excellent job; the Liberal Democrat Vince Cable was also on it. We came out with our proposal, reported in June 2010 and the Conservatives accepted it—David Cameron said he would take it forward. As a result, we had the Vickers commission, which also reported in due course. We then had a Parliamentary Commission for Banking Standards, and now we have the Banking Standards Board, of which I have been asked to be deputy chairman. A focus outwith Parliament—a social dimension—has led to politicians and regulators looking at this issue again.

That is why, when Professor David Blanchflower phoned me earlier this week to ask me to join a committee—along with Adam Posen, the former MPC member, and Simon Wren-Lewis, professor of economics at Oxford University—I accepted. He told me that John McDonnell, the Shadow Chancellor, had asked him to form the committee. I replied that I would be delighted to be on it, on two conditions. The first is that it has to be independent, having nothing to do with any political party; the second is that it should have no resources from any political party. We need a cross-party, wider social engagement and we will report to any and every party. It is very important that we undertake this work. I hope that over the next two years, we will be able to engage with different people who can point the way forward to the future for an independent Bank of England, because there is a big democratic and constitutional issue still to be resolved. If our recommendations are taken up after 18 months or two years, we will be delighted.

I would like to finish on a note of transparency, with the disclosure of a contemporary issue. A few weeks ago, the Investment Association sacked its chief executive, Daniel Godfrey. He had tried to establish a set of principles, following the recommendations of the Kay review, for the industry as a whole to abide by. Two of the principles are that,

“we … always put our clients’ interests first and ahead of our own”,

and that:

“Costs and charges should never be so high as to compromise the likelihood of achieving agreed objectives”—

that is, the objectives agreed with clients. It all seems quite reasonable, but Schroders, Fidelity and M&G adamantly refused to sign up—though others did, such as Hermes Investments, which has put the principles on its website. Consequently the Investment Association chief executive was booted out the door. I thought that seemed a little superficial and needed to be examined a little more, to see why it happened.

Further examination indicated to me that at the heart of the matter was the issue of dealing commissions. For every trade, as noble Lords know, a broker is paid—usually an investment bank. However, part of that sum is put into another account to buy research from the investment bank. In the United Kingdom, £3 billion per annum is spent on dealing commissions, with half that figure passed back to the fund managers who then pay investment banks and others for their research. That £1.5 billion—which does not appear on profit and loss accounts—is paid out of clients’ money. It is the ordinary person in the street, striving for a pension, who pays—and let us keep in mind that the average pension in this country is £15,000. Some £1.5 billion is being siphoned off these dealing commissions, which are paid by ordinary people. Should we not see this as a kickback—as bribery? Meanwhile people on small pensions are struggling to make their way to ensure a decent reward for themselves. That is a contemporary scandal: £1.5 billion of customers’ money being used not to satisfy customers’ own ambitions but those of fund managers. It is one of many scandals in the global banking sector—I think the total is getting near $300 million of fines or redress. Again, that money is not paid by institutions; it comes from the ordinary saver.

All these scandals could be reduced to one, core scandal: that the customers’ interests are secondary to the interests of the industry. I suggest to the Government that they are compounding the problem with the change to the senior management regime. Until they address the issue of personal responsibility properly, as the noble Lord, Lord Lawson, and others said, society will continue to be cheated and the Bill will do nothing to address that.

--- Later in debate ---

[Lord Bridges of Headley]

Indeed I can. These issues were raised and I am more than happy to meet the noble Baroness to discuss them in due course. This issue was raised by the Governor, Mark Carney, in a recent speech, and it is one that the Bank is always looking at. I am happy to discuss that in due course.

To conclude, the reforms in the Bill will strengthen the governance and accountability of the Bank of England, update resolution planning and crisis management arrangements between the Bank and the Treasury, and extend the principle of personal responsibility to all sectors of the financial services industry.

Finally, I return to a point raised by the noble Lord, Lord Sharkey, about the balance on the PRC and the role of the FCA CEO. First, it is right to consider the FCA CEO as external to the Bank: he or she is not a Bank appointee. The legislation therefore ensures that there is a majority of externals on the PRC, since the legislation provides for at least six externals plus the FCA CEO, compared to five Bank committee members. It is also worth noting that, for the PRA board, the legislation requires a majority of externals on the board and includes the FCA CEO as an external for these purposes. The legislation, therefore, will reinforce the independence of the PRC compared with the PRA board.

[Lord McFall of Alcluith]

In the debate I raised the issue of transparency and disclosure regarding the Investment Association. This is a current issue and I would like an assurance from the Minister that they will take this issue up with the regulators—both the Bank of England and the FCA—to see if we can do something to assist transparency and disclosure in this industry.

[Lord Bridges of Headley]

My Lords, I am all in favour of transparency and am happy to meet the noble Lord to discuss those issues. I hope the noble Lord will forgive me for not giving a blanket commitment here and now, but I am more than happy to meet him. Transparency must be in the interests of everyone, as long as it is applied proportionately. I am acutely aware that the noble Lord has a lot of experience in this field, so he will forgive me for not agreeing to that request here and now.

I thank your Lordships for all your contributions today.

Algorithmic Trading

Lord McFall of Alcluith Excerpts

Monday 6th July 2015 Lords Chamber

[Lord Bridges of Headley]

I reiterate that the PRA, and Andrew Bailey in a speech last month, drew attention to a lot of these issues. I hope the noble Baroness takes some consolation from that and from what I said about the FCA. On smaller investors, as I said, the Government are looking at this issue. I draw attention to the Foresight report which said,

“transaction costs have fallen for both retail and institutional traders”.

We therefore need to look at this in a balanced and proportionate way.

[Lord McFall of Alcluith (Lab)]

My Lords, this House received compelling evidence from the Economic Affairs Committee that through HFT, billions of pounds of shares were being traded every day with little or no public exposure. Technology is being used not to ensure that we introduce fairness and neutrality into the market, but to receive information ahead of the rest of the market. This was described as the battle of microseconds, whereby ordinary investors and others are screwed because they do not understand the concept. The Government and the regulators are on the outside looking in; full transparency of the market is essential. Government have a public duty, and there has been laxity so far; they really should put their skates on. Then, the next time there is a “flash crash” or a liquidity value, they cannot put their hands up and say that it is nothing to do with them. Full transparency and disclosure are essential and it is time that the Government acted.

[Lord Bridges of Headley]

My Lords, that was a high-frequency question as far as I can see. The noble Lord raised a number of points. Investment firms that operate what are often termed dark pools are subject to code of business rules that require them to treat their customers fairly. As I mentioned in my opening answer, MiFID II will further introduce strict volume caps on the amount of equities trading that can take place under waivers from transparency. That will significantly reduce such dark trading.

Economic Leadership for Cities

Lord McFall of Alcluith Excerpts

Thursday 11th December 2014 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, I welcome the introduction by the noble Lord, Lord Shipley, of this important debate, and the maiden speech of the noble Lord, Lord Goddard of Stockport, which was very thoughtful and amusing. I am sure that he will make a great contribution to the House.

My reflections will be on the issue of the Scottish referendum and from my experience as a Member of Parliament in the other place for 23 years. In Scotland, the most important question was that of the currency. The SNP proposals were described by Jim Sillars of that party as “stupidity on stilts”, and Paul Krugman commented:

“If Scottish voters really believe that it’s safe to become a country without a currency, they have been badly misled”.

We can see that today, with oil at $65 a barrel—the White Paper had Scotland breaking even at $115 a barrel.

Yet almost 45% of people in Scotland voted yes, and there were many reasons for that. In my campaigning, I found a few: first, people wanted a fairer, more socially just Scotland; they thought, “We couldn’t do any worse, so why shouldn’t we vote yes?”; and they had lost faith in the ability to bring change through the ballot box. The fundamental issue is that there is an increasing distance between the political process and the people, but the referendum demonstrated that people are interested in politics—we saw tremendous turnouts of 85% to 90%. So there is a clear desire for increased devolution and a recognition of the special characteristics of other nations and regions in the UK.

However, there is a remoteness to our politics, whether in Westminster, Holyrood, Cardiff or Stormont. What I have witnessed, with Holyrood, is devolution to Scotland but not devolution within Scotland. Let me give my own experience of how difficult devolution within Scotland is. As MP for West Dunbartonshire, I witnessed the closure of the J&B bottling plant in 1997. Instead of letting Diageo depart simply with warm words of regret and a cheque for the local community, I held its feet to the fire and established a task force, which I chaired, comprising local enterprise companies, local authorities, trade unions, local companies and the community, as well as Diageo.

Tying down that local public/private partnership was not without its difficulties, but in 2011 I departed, after 14 years as chair, of what has become known in the local area as Lomondgate. What is the audit of that? Four hundred and thirty jobs were lost by the J&B closure; at the end of 2013, the audited accounts showed that we now have 702 full-time equivalent jobs on that 40-acre site—that is 2% of West Dunbartonshire’s resident workforce. We have contributed £182 million gross value added regionally and £65 million nationally. The major achievements include: attracting the BBC to us as a production location for “River City”, which is Scotland’s equivalent of “EastEnders”; attracting Aggreko, a company that started almost in a back room in Dumbarton in the 1980s but is now a FTSE 100 company, with 400 jobs; and bringing in housing and leisure investment of more than £40 million, accompanied by capital investment of £62 million.

Independent economic forecasts estimate that, by 2019, there will be 1,971 gross full-time equivalent jobs accommodated on that site. That is a net cumulative regional gross value added of £510 million, plus £192 million contributed nationally. What does that mean in terms of public funding? Public funding for that project was less than £500,000, so the net return on investment is more than £1,000 for every £1 of public money. That is a tremendous outcome.

And what are the lessons? This would never have been achieved if it had been left at national level. The public/private partnership had to be locally devised and driven, and Diageo had to fulfil its community responsibility. If Westminster or Holyrood—or even the local authority—had been running it, they would have been too remote and that would not have happened. To end up with this successful outcome, day-to-day project management was needed to drive it. This is not just about satisfying local needs; it is about powering those with the ambition for their areas, and the skill sets to realise their potential. I conclude by saying that if we take the concept of subsidiarity to its natural conclusion, we will not end just with devolution to cities alone.

Social Mobility

Lord McFall of Alcluith Excerpts

Thursday 6th February 2014 Grand Committee

Asked by

[Lord McFall of Alcluith]

To ask Her Majesty’s Government what assessment they have made of the impact of inequality on social mobility in the United Kingdom.

[Lord McFall of Alcluith (Lab)]

My Lords, it is a privilege to have secured this debate today on inequality and social mobility.

The American and British dream, that if you work hard and do the right thing, you prosper and do better economically than your parents, no longer applies. Indeed, the funeral rites for that were announced this week by President Obama in his State of the Union address when he said:

“Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by—let alone get ahead. And too many still aren't working at all”.

That picture is almost identical to the situation that exists in the United Kingdom, where we have seen a rapid increase in inequality in the past few decades and we are now at a lowly 28th out of 34 in the OECD equality league table. The IMF, the World Economic Forum at Davos and the Economist put inequality as one of the top global risks. In our country, Alan Milburn, the social mobility czar, and ex-Prime Minister John Major have expressed similar sentiments. They say that one of the causes of deepening inequality and static social mobility is the entrenched elitism in the United Kingdom.

That trend is most marked at the top of the pay scale. The income share of the top 1% doubled from 7.1% in 1970 to 14.3% in 2005. In 1997, the income of the top 0.1% of earners was 61 times the average of those in the bottom 90% of earners; by 2007, that multiple had climbed to 95 times and is still rising.

Why should we be concerned by that inequality? Frankly, because the disparity between rich and poor is leading to more alienation that, allied with high youth unemployment and growing inequality, harbours serious economic, social and political divisions. If not tackled, it will worsen.

Is growth the answer? We have seen growth without gain. The social contract in society is broken. It went along the lines that everyone got a share of the pie—some got a bigger share, some got a smaller share—but now some are getting no share of the pie at all.

The conventional political response has been framed simply as securing a steady recovery. In the past, we could assume that living standards always increased when the economy grew, but that was contingent on social and economic characteristics of the economy which no longer prevail. Change has taken place imperceptibly under our very feet and we can therefore no longer assume that a return to growth will mean gain for everyone. One of the most depressing statistics on social mobility came out of the OECD in a document about what was termed inter-generational social mobility. It demonstrated in the UK the extent to which a son's earnings are likely to reflect those of the father. Britain was top of the poll in that. So the message is that, in Britain, if you have rich parents your prosperity is more guaranteed; if you have poor parents, your future prosperity is stunted. That is why we need to look at that problem again.

The high levels of income inequality definitely generate political and social problems. In the book, What Money Can't Buy, by Michael Sandel, which I recommend to everyone, he states that,

“at a time of rising inequality, the marketisation of everything means that people of affluence and people of modest means lead increasingly separate lives. We live and work and shop and play in different places. Our children go to different schools”.

The big question for society is: how do we learn to negotiate, abide by our differences and come to care for the common good? At a recent talk given by the most reverend Primate the Archbishop of Canterbury, he said that when he and his wife first came to London after spending many years in the north, it was a tale of two of cities, as Charles Dickens would have said. These are issues to which we must attend. As Parliamentarians the question is: do the present policies aid or detract from the common good? In this Palace, 35% of our MPs were privately educated in a country where 7% of the population have been privately educated. Ten per cent of our MPs were educated at just 13 schools, 12 of which were private. So, 60 of the nation’s Parliamentarians come from a microcosm of the educational establishment in our country. If we have 4,500 schools and 10% come from 13 schools, it shows the problem that has been built up.

I do not want to enter into class issues, although Warren Buffett got it right when he said amusingly class warfare had been going on for 20 years and that his class had won. It certainly won in the economic stakes. Given the shocking lack of social mobility, how do we, in the words of Alan Milburn, the social mobility tsar, break the glass ceiling? More and more people are coming out against that, whether in the law, medicine, politics or journalism. Alan Milburn said that it had all the hallmarks of social engineering.

Change can come only from the highest level of government, and only if the Prime Minister takes personal charge of the inequality and social mobility agenda. No. 10 has to be the driver in this to break the conventional approach to such problems. Departments should have to report to the Prime Minister’s Office on what new mindset and initiatives they are adopting to ensure that policies achieve a fairer society with equal opportunities for all, irrespective of class, income or gender. We need a new long-term agenda. We should abandon the political horizon of four or five years, equivalent to a Parliament.

I chaired for the Fabian Society a very dense document, which I recommend for bed-time reading as I am sure that noble Lords would get there quickly. The 2030 Vision report recognised that not all public money was spent well. As a result, we recommended that all spending decisions should include a 10-year test on what they would achieve, and a 10-year cost. By doing so, the long-term impacts would be considered, including the effects on society and on the public agencies. The problems are not confined to the United Kingdom; they are mirrored elsewhere and started decades ago. International co-operation is a must if we have to tackle this properly.

Talking of Davos, Klaus Schwab, who established it said that,

“systems that propagate inequality, or that seem unable to stem its rise, contain the seeds of their own destruction”.

To avoid such scenarios and create pathways to increase social mobility will require not only new policies but a new mindset.

Economic prosperity and social stability are two sides of the same coin. Only if they move forward in concert can we achieve a better, fairer and more prosperous society. As the ex-American President said, “It’s the economy, stupid”. I suggest that it is also the social, stupid.