Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Monday 9th December 2013 Lords Chamber

[Lord Brennan]

My Lords, I support this amendment. The debate on anti-money-laundering that we have undertaken during the course of this Bill has led the Treasury and government Ministers to send colleagues and me a number of letters and documents. This was extremely courteous and informative—but legislatively useless. The noble and learned Lord, Lord Steyn, once described this kind of material as an exercise in investigating “legislative archaeology”, principally because it had no real significance. Neither do these letters. You cannot legislate by epistle; you do it by the text of the Bill.

Everyone accepts that money-laundering is a major issue. Today is International Anti-Corruption Day. It is also the anniversary of HSBC’s enormous fine for money-laundering imposed last year in the United States. The concern reflects the fact that in the developing world in particular there is a constant, never-ending haemorrhage back into the developed world and our banking system of money that should be going to the poor. Something should be done about it.

The explanation given thus far by the Government is that the FCA has the responsibility for dealing with money-laundering and it is for it to do so. On our side, we do not think that that is strong enough. If in today’s Amendments 2 and 3 the Government feel robust enough to say that the Treasury must take steps to review proprietary trading, why should it not tell the FCA that it must take steps, always and actively, to counter money-laundering. Why the diffidence? Why not put a plain statement before Parliament, now or through the amendment, that anti-money-laundering counts, that we are against it and that the FCA must ensure that banks deal with it.

[Lord McFall of Alcluith (Lab)]

My Lords, I support the amendment. In evidence from business people to the Treasury Committee and the parliamentary commission it was said that good and firm regulation is a competition issue. Given that we aspire for London to be maintained as a global centre for financial products, it is important to recognise that dirty money comes in and out. The example was given of HSBC. It acquired a Mexican bank in 2001 in America. From day one the board was told by the compliance officer that no decent compliance functions were available. Notwithstanding that, the situation continued for six or seven years in which drug money was laundered, people died in Mexico as a result, and HSBC was fined almost $4 billion by the US authorities. If that can happen to a UK-based bank, it can be happening elsewhere. It is important that we ensure that regulation in this country is firm.

Mention was made of General Abacha. In 2006 there was an investigation by the FSA that did not go anywhere because the regulator did not have authority. It is therefore important that in this legislation we underline the regulator’s authority. The regulator did not have authority because there was a tension—and there will still be a tension, despite the new architecture—between the financial stability of companies and conduct of business. If we are to make London an attractive global centre, we have to understand the elephant in the room—money-laundering. I am afraid that, if we do not give the regulator an express duty and authority on money-laundering, we could find the problems that happened with Nigeria in 2006 and elsewhere being replicated. That case has still not been investigated authoritatively enough. Having this anti-money-laundering element in the Bill would be extremely important, and I support the amendment.

[Lord Flight]

My Lords, perhaps I may make the point that I made last time this matter came up for debate—a point that is staring at us. The problem is with parts of the world where corruption, drugs and political corruption are rife. Much more demanding anti-money-laundering requirements are needed when accounts are opened for individuals or organisations from such parts of the world.

We already have a factfile that grades different countries around the world according to the extent of their corruption—so there is, if you like, a textbook. If those standards were required, it would, apart from anything else, discourage banks from potentially getting involved. Also, rather than imposing greater demands on everybody—I do not think anyone is suggesting that the average Mr and Mrs Brown from Dorking is engaged in money-laundering—much more demanding standards would be applied when dealing with organisations and individuals from parts of the world where there are the real money-laundering problems.

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[Lord McFall of Alcluith]

My Lords, I will be very brief in supporting the comments of the noble Lord, Lord Lawson. I have been interested in the relationship between the auditors and the regulator ever since Northern Rock went down in 2007. The question that the regulator should be keeping in mind in discussions with auditors on a yearly basis is, what is the point of an audit? The auditors tell us that it is to have a backward look at what has happened in a company, but there is a need to have a forward look at the risks that are happening, to issues like low risk and low probability, low risk and high probability, high risk and low probability, or high risk and high probability. These scenarios need to be included, because the auditors came to all the committees, the Treasury Committee in the past and the Treasury Committee now, and said that it was their business to look at the audit at that particular time. That is insufficient and there needs to be a greater engagement between the regulator and the auditors.

I reminded the Minister that previously the regulator did not look at the business models of companies. They had nothing to do with them. Thankfully, the new chief executive, Martin Wheatley, has said that the business models are very appropriate for regulators to look at because the business models that were ignored let the PPI mis-selling scandal go for 18 years. There is a lot of work to do between the auditor and the regulator—and the question that I repeat again is for the regulator to say, what is the point of an audit? Auditors can come up to the mark and not just have a backward look or even a present look at the business model of a company but can ensure that there is also a forward look.

[Lord Deighton]

With respect to the question asked by my noble friend Lord Lawson about what constraints the EU law would put on the PRA getting the information in the form that it requests, this is merely tying it into what comes out of the capital requirement directive IV, just to make sure that it is consistent. I am not aware of a particular constraint, but I am aware that there will be additional disclosure responsibilities that come along with that. We really just want to integrate it, but I do not believe that it is a constraint; it should actually help with disclosure.

Autumn Statement

Lord McFall of Alcluith Excerpts

Thursday 5th December 2013 Lords Chamber

[Lord Deighton]

The cap is essentially a fiscal discipline to ensure that a very large part of our budget, which in the past has had no controls around it—and no opportunity to explain what is going on—is properly scrutinised. In the circumstances where there is justification for changing the cap, that will be done under the scrutiny of Parliament. The Chancellor has not introduced what the level of the cap should be but merely an operational measure to make sure that it is properly controlled, just as other parts of the budget are, and indeed so that all the questions and issues around the appropriate level of support for vulnerable members of society can be tackled independently. Those measures should be effectively targeted and that is also part of our welfare-reform programme.

[Lord McFall of Alcluith (Lab)]

My Lords, the Statement issued by the Treasury indicates that the free school meals commitment, costing £755 million in 2015-16, is there for only two years. Can the Minister confirm that that is not the case, and can he indicate why the OBR today sees public finances worsening in the future?

[Lord Deighton]

I thank the noble Lord for that question. I will have to write back to him. I am not sure what the long-term budgetary arrangement is. The usual thing is that it is not specifically in the book. It is expected to be absorbed when we come to do the specific budgets in those years. I am sure the expectation is that it will continue, and that the money will be found for it when we do the budget for that year.

Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Wednesday 27th November 2013 Lords Chamber

[Lord Lawson of Blaby]

I will try to be brief; I hope that the Government can readily accept this. This amendment concerns the need to have regular meetings between the bank’s supervisors and its auditors. I use the old-fashioned word “supervisors” rather than “regulators” because it gives a more accurate picture. I was very glad that the new Governor of the Bank of England, in his recent speech at some Financial Times junket or other—a very good speech indeed—referred throughout to “banking supervision”, which is a more accurate, old-fashioned term. It is important that there should be this regular dialogue. I will briefly go back a little into the history of this.

When I was Chancellor in the 1980s, I was very concerned to discover that there was no discussion between the auditors and the supervisors of banks—which was the Bank of England at that time, as it is now. I looked into it and discovered that it was because they were prevented from doing so. Under their duty of confidentiality to their client, the auditors were not able to speak to anybody about any concerns they might have had about what was going on in a particular bank. It applied to other clients, but the important thing was that it applied to the banks. Therefore, when I greatly strengthened banking supervision in what became the Banking Act 1987, I included legislation to remove that legal barrier. In introducing that I made it quite clear that I expected as a result that there would be a regular dialogue between the banking supervisors and the bank’s auditors so that each could compare notes about concerns they might have had about a particular bank.

I now regret that that was not in the Bill, but it was a clear expectation, stated from the Dispatch Box. These meetings took place for a number of years. Then, as time went on, fewer and fewer of them took place. In the run-up to the terrible crisis of 2008 it was significant—the Economic Affairs Committee of your Lordships’ House took evidence about this—that the meetings had virtually ceased. They did not happen at all, which was a huge mistake. Therefore the Economic Affairs Committee of your Lordships’ House recommended that there should be a mandatory requirement for those meetings to take place. That is all the more important with banks because with other businesses the auditor can qualify the bank’s accounts if it has a concern which the board of the client does not address. That is a signal that everybody can see. However, no auditor ever qualifies a bank’s accounts, and for a very good reason—because it would lead to a run on the bank. That is all the more reason for this dialogue to happen.

The Economic Affairs Committee of your Lordships’ House recommended this mandatory duty. When the parliamentary banking commission came to look at it again, we, too, recommended that there should be this mandatory duty. The Government have said that they entirely agree that there should be these meetings. They have announced that they have been moving gradually—I hope that they will move a little further—and have said, “Yes, these should take place, specifically at least twice a year”. However, they have so far resisted having that on the statute book. As noble Lords will know, once bitten, twice shy. We have been through this before: although we had all the good intentions, it was not on the statute book, and eventually it did not happen. Therefore, I say to the Minister, the Government have agreed that this should happen, and I cannot see any reason why it should not be in the Bill. Furthermore, from the history I have recounted, I can see a good reason why it would be folly, and dangerous, not to have it in the Bill. I beg to move.

[Lord McFall of Alcluith (Lab)]

My Lords, as a fellow member of the Parliamentary Commission on Banking Standards, I support the amendment moved by the noble Lord, Lord Lawson. The lack of a relationship with auditors is something that I have noticed since the beginning of the financial crisis. Indeed, at that time regulators told me that, when deciding what regulation banks should be subject to, they sent their less experienced regulators to the smaller banks and their more experienced regulators to the larger ones. By the way, when the regulators go to the larger banks they are sometimes taught by the people working in them because the quality is higher there. So the relationship between the regulators and the auditors is very important.

Martin Wheatley, who is now chairman of the FCA, is on record as saying that the FSA never looked at banks’ business models. In other words, it did not look at the profit and loss element of banks because it felt that it was none of its business. If the FCA is now to adopt the new policy of looking at business models, which tell you everything about a company, then the auditor is going to have a central role to play. I know that the audit profession has been rather taken aback by the criticism of the Treasury Committee and the Parliamentary Commission on Banking Standards, which posed the question, “What is an audit?”. The profession will have to do an awful lot of work on that because it has largely believed that audits cover something that has occurred in the past and not something that will happen in the future. It has not taken high-risk, low-probability strategies or low-risk, high-probability strategies into consideration. Auditors are in the unique position of looking at the business model and so can assist banks in having a forward look at that. They can also help regulators to understand what a business model is about. As the noble Lord, Lord Lawson, said, this measure was not put on the statute book previously and therefore lapsed by default. In the interests of being constructive on this issue and wanting to ensure that we have auditors who keep bank executives on their toes, I agree wholeheartedly with the noble Lord, Lord Lawson, that we need to see this measure written into the Bill.

[Lord Eatwell]

My Lords, I add the support of these Benches for the commissioners’ amendment. I was particularly struck, as I hope the Government were, by the account related by the noble Lord, Lord Lawson, of what happened when he made these meetings legal but overlooked the need to put them into statute law, with the result that they did not happen. We have an opportunity here to make these meetings take place and be effective. Both the Economic Affairs Committee of your Lordships’ House and the commission stand behind this amendment and the views that have been expressed, and I hope that the Government will as well.

Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Hope of Craighead (CB)]

I shall add just a bit, particularly to what the noble Lord, Lord Phillips, was saying. When I entered the legal profession about 40 years ago, the branch that I joined had no rules of conduct at all, and gradually we appreciated that the public would not stand for that. The position now is that the legal profession has rules of conduct, although they are sometimes called codes rather than rules for the reason that was mentioned. I support the amendment against that background. I also suspect that, if we do not take that step now, we will have to take it in five or 10 years’ time when some other crisis emerges. It is an important step and, I respectfully suggest, an inevitable one, in line with what all the professions have had to deal with over the past 10 or 20 years in modernising how they behave and making their behaviour acceptable to the public. There is a lot to be said for the amendment against that background.

[Lord McFall of Alcluith (Lab)]

I do not think that we should run away with the idea of codes of conduct because, if you look back over the past 10 or 20 years, you will have seen a proliferation of codes of conduct and ethics from banks. When they had rules, they circumvented them, so we must have something deeper here.

On the Parliamentary Commission on Banking Standards, if we heard the phrase, “This time it’s different”, once, we heard it 10,000 times. We were told that there was new management and a new executive, that the past was behind us and the future here, with new staff—and that everything would be better. Since we have taken evidence, tumbling out every month there has been another scandal. So we need to attest to something deeper here.

The lack of individual responsibility at the top is at the core of the problem. I say this with no understatement: many of the very senior individuals who came before the Parliamentary Commission on Banking Standards were economical with the truth. I give an example on PPI, where we now have a scandal of about £25 billion to £30 billion. There was a “no see, no tell” policy from those at the top. Why? Because they preferred to be seen as incompetent than to have any responsibility. There was a hiatus of responsibility from the top to lower down.

My own view was not accepted by the banking commission, which was fair enough. I thought that every year there should be an individual meeting between the chairman and chief executive of a bank and the regulator. That meeting would be recorded but it would not be made public—but they would have to attest to the regulator that they were responsible for their institution and what went on in their institution was their responsibility. If we implement a code, we will only repeat the mistakes of the past; there has to be a deeper cultural change.

Culture has been mentioned. Again, we had individuals coming before us saying, “Look, we have a new chief executive and a new culture—everything is okay”. You would ask how many employees were in that organisation and be told that it was 150,000. When we asked how long it would take to change the culture, they said, “Oh, three months”. That is for the birds. So the responsibility needs to start at the top.

The example I give of PPI is of a chief executive who came along to the commission and said, with a straight face, “As far as PPI is concerned, my organisation is on the side of the angels”. That organisation is the one with the highest PPI penalties in the United Kingdom. So do not let us kid ourselves that we can sort this problem with codes. We need to give the regulator authority—and we have seen a regulator that was captured, cowed and conned by the industry. There should be someone to go to in the organisation to whom we can say, “That was your responsibility”. If we are told, “Well, that person left”, we need to ask for the handover document that indicates that there was a transfer of responsibility that can be understood.

The director of enforcement at the FSA came before the commission at the time of the UBS scandal, which cost the bank billions of pounds. We had four from the top management of the bank before us and, when we asked them if they knew who the individual was, they said that they did not know at all. Then we asked them how they found out, and they said, “Bloomberg wires”. That is how corrupt the institutions are in terms of accountability.

We need to change. I am happy for the Government to accept this amendment, but I am certainly not happy for warm words or for anyone to say, “This time is different”. This time ain’t different. The scandal has kept going and will continue, and we need to do something severe to ensure individual accountability by those at the very top of those organisations.

[Lord Spicer]

I have enormous respect for the noble Lord, Lord McFall, but I think the idea of legislating to be more responsible—in fact, legislating for human character—is a very dangerous path. It is why I intervened on the question of minimum standards of integrity: you are either honest, or you are not honest. It is quite dangerous to keep loading the statute book with matters which attempt to affect human characteristics. I think that there should be some caution about some of these amendments.

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Moved by

[Lord McFall of Alcluith]

70: After Clause 23, insert the following new Clause—
“Independent review
After section 66B of FSMA 2000 (inserted by section 23 above) insert—“66C Independent review
(1) The Treasury shall commission an independent report in relation to the effectiveness of—
(a) any rules implemented under section 64A; and(b) any action taken by the FCA or PRA by virtue of section 66.(2) The Treasury shall ensure that the report prepared under subsection (1) shall—
(a) include such recommendations as considered appropriate for legislative and other action;(b) be laid before Parliament by the end of 2018; and(c) be published in such manner as it sees fit.””

[Lord McFall of Alcluith]

This amendment is in response to government amendments to the Bill which amend the Financial Services and Marketing Act 2000. The amendment would require the Treasury to commission a review to provide an opportunity to evaluate the effectiveness of the regulators, particularly the FCA, in implementing and effectively enforcing new powers in relation to individual standards rules and the licensing regime.

The amendment should allow for recommendations that may include the removal of powers from the current regulators or further separation within the current body. That would potentially allow for aspects covering licensing and individual standards rules to be considered for moving across to an independent professional body, should that be appropriate. That echoes the amendment that we on the Labour Front Bench successfully moved a short time ago.

Given the competing priorities for resources—which have the potential to be compounded with the inclusion of consumer credit regulation in 2014 and the payments system regulation, if approved—there is the concern that the FCA may struggle to carry out this challenging role it faces. Therefore, an independent review can assess the effectiveness of the FCA and PRA in being able to implement the recommendations made by the Parliamentary Commission on Banking Standards and, in doing so, provide feedback on how this can be improved, and whether it is more effective for the oversight and enforcement of the professional standards to be undertaken by a genuinely independent professional body.

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[Lord Newby]

My Lords, I start by saying that we strongly agree with the last point made by the noble Lord; people who fall below the standards of conduct required of them should be held effectively to account. We have been discussing a number of ways in which the Bill will help to bring this about. I also appreciate the concerns of the noble Lord that we should take stock at some point and review whether the new system of rules of conduct has delivered an improvement in behaviour among bank staff—the kind of improvement that we are all agreed we want to see. I am not sure, however, that we need legislation to provide for that.

In the first place, the regulators themselves will keep their rules under review in the normal way. There will be no difference in that respect between rules of conduct for bank staff and any other rules that they make. They will similarly review their policy statements about taking action for misconduct under Section 66, and keep their policies and practices under review too. I expect also that the Treasury Committee in the other place, and possibly also the Economic Affairs Committee in your Lordships’ House, will want to keep such matters under review. Nothing, of course, stops the Treasury from commissioning reviews of these and other matters, if it thinks it appropriate. All these reviews can range as widely or as narrowly as is appropriate. They can cover the full range of matters in FiSMA or other relevant legislation—and any other matter as well.

I comment briefly on the point that the noble Lord made about the work of Sir Richard Lambert. We are putting great faith in Sir Richard Lambert to produce worthwhile movement. Having worked with him on other things in the past, I have considerable confidence in him to do that. However, we will have to see how that unfolds. It requires the banking industry to accept the need to take measures that it has not in the past. Sometimes that has been difficult for it. On the amendment, we do not need a mandate for such a specific review in the Bill itself.

[Lord McFall of Alcluith]

My Lords, given the form of the regulators in the past, the Minister’s words that the regulators will keep the review under review in the normal way are not inspiring. However, I beg leave to withdraw the amendment.

Amendment 70 withdrawn.

Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Eatwell]

My Lords, we of course look forward with interest to the amendments that the Government will put down at Third Reading. However, I was somewhat disturbed by newspaper reports suggesting that the Government are going to ask the FCA to formulate a policy on the level of the cap. That would be entirely inappropriate. It is for the Government to formulate and to define the objectives of the policy and for the FCA to then implement it. The FCA may, on the basis of research, be charged with setting the level of the cap in relation to principles defined by the Government, but it is up to the Government to specify those principles, specify the objectives and, indeed, design the policy. We do not want to hear a cop-out, where the Government declare, to general acclaim, that they are going to cap payday loans and then hand the whole design of the policy over to an organisation which is a regulator and not designed, in and of itself, for the formulation of policy.

I hope that the Minister can give us some reassurance that when these amendments are brought forward at Third Reading, they will contain clear objectives, principles and processes that will define the approach and policy that the Government are prepared to implement with respect to payday loans and that the responsibility that is then handed to the FCA will be one of implementation, not of policy design.

[Lord McFall of Alcluith (Lab)]

My Lords, Amendment 178 concerns continuous payment authorities. This is an issue that I raised during the passage of the Financial Services Act 2012. Continuous payment authorities are a recurring payment mechanism involving a debit or credit card where the debtor gives his or her card to the company and they contact the bank. Unlike direct debits or standing orders, this allows a firm to take regular payments from a customer’s bank account without having to seek express authority for each payment. When I made this point to the Minister, the noble Lord Lord Newby said that,

“abuse of the CPA is one of the most concerning practices of payday lenders”.—[Official Report, 28/11/12, col. 235.]

Consumer groups, the Law Society and the OFT have expressed ongoing concerns about this issue. The real issue is that the debtor—the customer—is not in full charge of their affairs. The continuous payment authorities do not offer the same guarantee as direct debits or standing orders. In effect, they give the company authority about how much is taken from an individual’s account and when. This is hugely important to those who take out payday loans, whose financial position is tenuous. Unlike direct debits and standing orders, there is no written communication between the individual and the bank. This situation has led to the banks reviewing up to 30,000 complaints from customers since 2009. According to the Financial Conduct Authority, quite a number of those will be eligible for compensation. That authority has said that many of the banks or providers are not cancelling recurring payments to payday loan firms.

Last December, the OFT warned that businesses should not lock customers into CPA traps because people did not know what they were signing up to. The OFT opened formal investigations last November into several payday lenders over aggressive debt collection practices. Their progress report focused on concerns regarding unfair or improper practices:

“Using the CPA in a manner which is unreasonable or disproportionate or excessive in failing to have proper regard to the possibility that a debtor is in financial difficulties”.

This includes,

“seeking payment before income or other funds may reasonably be expected to reach the account”.

The Financial Ombudsman Service was seeing 50 new cases a month at the end of last year. My information is that that number has increased since.

Such blatantly unfair treatment of consumers should not be restricted to a matter of guidance. The new clause that I am proposing ensures that debtors are informed about their rights and that only the debtor may cancel or vary a CPA in communication with the bank. Furthermore, the debtor’s bank is obliged to comply with the debtor’s instructions, as they do with direct debits and standing orders. I suggest to the Minister that in these austere times we ought to legislate to protect such debtors and to ensure a level playing field between the lender and the debtor.

[Lord Newby]

My Lords, I am grateful to the noble Lords, Lord Sharkey and Lord McFall, for raising this very important issue again. The Government wholeheartedly agree that consumers must be protected when they borrow from payday lenders and use other high-cost forms of credit. Payday lenders are causing unacceptable consumer harm and the Government are committed to putting that right.

As noble Lords will know, the Government have taken decisive action to protect borrowers by fundamentally reforming the regulatory system governing these lenders. This House strongly supported the Government’s proposals to transfer the regulation of consumer credit to the FCA during the passage of the Financial Services Bill last year.

The Government have ensured that the FCA has robust powers to protect customers of high-cost lenders. It will thoroughly assess every lender’s fitness to continue to trade. It will put in place much higher standards that firms will have to meet, and those requirements will, for the first time, be binding on firms. It will proactively monitor the market, focusing on the areas most likely to cause consumer harm. The FCA has a broad enforcement toolkit to punish breaches of the rules: there is no limit on the fines it can levy and, crucially, it can force lenders to provide redress to consumers.

The FCA takes up its new regulatory responsibilities in this area on 1 April next year. But it has already demonstrated that it is serious about cracking down on high-cost lenders. Its draft rules, published on 3 October, restrict some of the practices that cause most consumer detriment, and have won widespread support. But we are convinced that further action will be needed to ensure that this market functions in a way that is in consumers’ interests. As noble Lords will be aware, the Government have announced that they will bring forward an amendment to this Bill at Third Reading to require the FCA to use its powers to cap the cost of payday loans.

I will not pre-empt our discussion at Third Reading but I would just like to make a few key points on the need for a cap on the costs of credit. The Government have always kept the case for a cap under review as the market has evolved. With growing evidence, including from other countries, in support of a cap, we believe that now is the right time to give the FCA a clear parliamentary mandate to take action under the powers we have given it to implement a cap on total costs.

The FCA has an important job to do: it must ensure that it designs a cap that works in UK consumers’ best interests and fits the UK market. To do that, it needs to consider the evidence thoroughly, including drawing on the valuable work being undertaken by the Competition Commission to investigate the fundamental problems in the payday market. As the noble Lord, Lord Sharkey, has already pointed out, we do not intend to wait until the Competition Commission has finished its work and have committed to implementing the cap in January 2015.

The Government’s commitment this week sends a strong message to lenders: “Do not wait for the authorities to act, raise your game and start charging and treating your customers fairly now”. We will have a full debate on the government amendments at Third Reading—

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[Lord Newby]

I was going to come on to this point but I will do so now. I did not see “Newsnight” but I read about the report in today’s papers. It seems demonstrably unfair. I have two sons in their 20s. I have no idea whether they take out payday loans but I know that at some point in the next six years one or both of them might think of getting a mortgage—if they keep working hard. It does seem demonstrably unfair that someone taking out 50 quid for a payday loan today could be automatically denied a mortgage in six years’ time. If the noble Lord will permit me, I propose to draw that to the attention of the FCA.

There are two elements to this. First, there is the point that the noble Lord made about what might be on the website to point this out. There is also another issue, which is whether it is reasonable for people offering mortgages automatically to deny them to someone who may have taken out a small payday loan and paid it off rapidly. I do not know, for example, whether that rule applies to somebody who has taken out a loan under the traditional method of door-to-door payday-type loans that we had in this country for many decades. I shall draw that to the attention of the FCA.

I was just beginning to say that we will have a full debate on Third Reading, and I can commit to operating, as the noble Lord, Lord Sharkey suggested, on Committee stage rules. Having sat through many debates in your Lordships’ House, I do not think that, even if I said that we were resistant to noble Lords’ proposals, that would make a huge difference to the behaviour of noble Lords. In any event, I am happy to give that assurance now.

Turning to the amendments before us, starting with that tabled by the noble Lord, Lord McFall, the Government share his deep concern about the potential for consumers to be misled by lenders. It is essential that consumers are well informed of the risks before entering into an agreement. However, I believe the noble Lord’s concerns will largely be addressed by the FCA’s proposed rules, or already exist in legislation.

Regulations made under the Consumer Credit Act 1974 in accordance with the consumer credit directive currently require that creditors provide adequate information to enable the consumer to assess whether a proposed credit agreement is suitable to their needs and financial situation. Requirements on lenders to be clear to consumers are also set out in the OFT’s Irresponsible Lending guidance. These requirements will be transposed into binding FCA rules. The noble Lord was worried about guidance; this is being transposed from guidance into rules.

The FCA has also proposed a tough package of measures to restrict how payday lenders can access money from their customers’ bank accounts via the continuous payment authority mechanism on their debit and credit cards. These include limiting the use of CPAs to two attempts, and banning part payment. The FCA is also proposing to turn the guidance around the use of CPAs from the outgoing regulator, the OFT, into binding FCA rules. Several of the provisions set out in the noble Lord’s amendment are therefore directly covered by these proposed rules, including a requirement for lenders to give the debtor a statement of their rights in relation to the CPA, and the ability of a borrower to cancel a CPA at any time.

The Government believe that the provisions set out by the noble Lord and not reflected in FCA rules will not, in practice, serve to improve consumer protections. Requiring lenders to provide additional information to consumers on their legal rights presents a real risk of information overload and confusion for consumers. As the noble Lord said in Committee, no one wants to be swamped by hundreds of pages of dense legal text. It is also important to balance awareness of legal rights with promoting awareness of the Financial Ombudsman Service, the free service to help consumers resolve disputes. Taking a case to court can be too expensive for consumers.

[Lord McFall of Alcluith]

The issue here is a level playing field for continuous payment authorities, and direct debits and standing orders. There has to be a loud and clear message from the Financial Conduct Authority to banks, which have 30,000 complaints against them at the moment, and to companies, that we cannot tolerate an imbalance between the power and authority of a lender and the debtor, who can be in ignorance about what is happening to their account. If the Minister can assure me that he will send that message to the FCA, which in turn will send out the message that it needs a level playing field, at least that would be a step forward.

[Lord Newby]

Absolutely, I am very happy to do that. I hope that the rules would send that message very clearly, but I am very happy to reinforce it.

I go back to the terms of the amendments. I am concerned that some of the provisions could make it more difficult for a consumer to cancel an agreement—for example, requiring borrowers to sign for cancellation of a CPA. I am confident that the FCA’s proposals will give consumers control with respect to CPAs and in managing their repayments. I strongly support the noble Lord in seeking to protect consumers using the high-cost credit market and ensuring that they know their rights. However, I believe the objectives of transparency and protections for consumers are already provided for by the new regulatory regime; the FCA has already set out the action that it proposes to take in this area.

I turn to the amendment proposed by the noble Lord, Lord Sharkey. His proposal would require the FCA to implement a number of rules from the Florida model of payday regulation, including a requirement for a cap on credit. I can give the noble Lord at least some of the assurances that he seeks in terms of the FCA considering the Florida approach to regulating payday lenders very closely, as it decides how to design a cap on the total cost of payday loans for the UK market and make sure that it works effectively here. It will consider rollovers and look, for example, at the experience of Florida with a real-time database.

While I completely support the noble Lord’s desire to learn lessons from other countries’ experience, I have some doubts as to whether it is as straightforward as he thinks to simply import almost an entire regulatory framework from another jurisdiction. The UK has a very different market from other countries, and it is right that the rules governing regulation of payday loans in the UK reflect our own unique national characteristics. The FCA will be charged with doing that, building on the international evidence and examination of the UK market, and drawing on the Competition Commission’s analysis among other things. Therefore, while I share the noble Lord’s commitment to ensuring the UK consumers are protected when they borrow from high-cost lenders, I hope that he will agree that the best way to achieve that is through development of evidence-based rules that are tailored to protect UK consumers. We have a clear action plan to deliver this objective.

The noble Lord, Lord Eatwell, raised the question of the content of the amendments and the relationship between the Government, in setting policy in this area, and the FCA—where the Government stop and the FCA begins. I heard very clearly what he said. The exact nature of the amendment that we will debate at Third Reading is currently being formulated, and I shall make sure that his point is very much in the minds not only of Ministers but of officials as they set about that task.

With those assurances about the amendment that we will introduce, I hope that the noble Lord will feel able to withdraw his amendment.

Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Monday 11th November 2013 Lords Chamber

Moved by

[Lord McFall of Alcluith]

To move that this House takes note of the number and complexity of amendments tabled by Her Majesty’s Government at Committee Stage of the Financial Services (Banking Reform) Bill, and of the case for measured consideration of the Bill.

[Lord McFall of Alcluith (Lab)]

My Lords, why does my Motion state, “measured consideration”? If we go back to Second Reading on 21 July, the noble Lord, Lord Deighton, the Commercial Secretary, stated that,

“the Bill is a central part of the Government’s response to the financial crisis of 2007-09”.

In responding for the Opposition, the noble Lord, Lord Eatwell, said that this is the most significant reform of the finance ever, but he added:

“This Second Reading is being conducted largely in the dark”.—[Official Report, 27/7/13; col. 1343.]

The President of the Supreme Court, the noble and learned Lord, Lord Neuberger, in a speech last month entitled Justice in an Age of Austerity said:

“Partly because there are so many perceived problems in society, there is a welter of ill-conceived legislation—poor in quality and voluminous in quantity. The result is little more than the illusion of action without much in the way of the reality of achievement, coupled with uncertainty and confusion about the law … it brings the legislature, even the rule of law, into disrepute”.

He could have been talking about this financial services Bill. I have news for the House; indeed he was.

When introduced to the House of Commons in February 2013, the Bill was 20 pages and 25 clauses long. When introduced to the House of Lords in July 2013, it was 35 pages and 21 clauses long. Now, before us, we have 170 pages and 127 clauses.

The noble and learned Lord, Lord Neuberger, continues:

“I mean no criticism of parliamentary drafters or of MPs or Peers. The pressure on them is such that they cannot do their jobs properly, as they themselves have made clear. Let me take a very recent example. Exactly a week ago, the House of Lords considered the Financial Services (Banking Reform) Bill, in what was optimistically described on the Parliamentary website as ‘the first chance for line by line scrutiny, in the Lords’. Lord Turnbull, a cross-bencher, pointed out that the ‘total amendments [run to] 116 pages and government amendments accounting for 95 pages of that: more than three times the length of the original Bill. That tells us something about the process of legislation. We are dealing with amendments to amendments to amendments which are in turn amending statutes that have already been amended more than once’.

‘Lord Higgins, a Conservative, said that ‘the way that the Bill is drafted … makes it extremely difficult for the House to work out what is happening from moment to moment on an unbelievably complex matter’. Lord Phillips of Sudbury, a Liberal Democrat, described ‘the complexity of both the Bill and the amendments’ as ‘quite barbaric’, and Lord Barnett, for Labour, said that he had ‘enormous sympathy’ with the view of Lord Turnbull ‘that he has never seen such a shambles presented to any House’. He immediately went on to say:

‘As Chief Secretary to the Treasury, I had the misfortune for five years … to take two Finance Bills a year through, mainly because the first Bill had to be amended because it had not been properly scrutinised; it had been guillotined by all successive Governments. Yet I have never seen anything remotely like this Bill’”.

As the noble and learned Lord, who is the President of the Supreme Court, said:

“So here we have a Parliamentary debate on a Bill whose importance could scarcely be greater, a debate and a Bill which are condemned from all sides of the political divide as plainly unsatisfactory, and where a former Minister indicates that the problem is not new. Examples abound”.

He adds:

“I appreciate that life gets ever-more complex, but that reinforces, rather than undermines, the need for simplicity in legislation”.

The Government may say that they have put these amendments down in order to respond to the recommendations of the Parliamentary Commission on Banking Standards. However, there is universal dismay among the members of that commission at the haste with which the Government are pushing the Report stage to 18 November. I quote from the Times last Thursday, in which the chairman of the commission said,

“a government move this week to ram the Bill through the House of Lords would not leave peers necessary time to consider amendments”.

He continued:

“This legislation is being rushed. It’s hugely complex: amendments piled on amendments piled on amendments. We must get this bill right, and the Lords need more time to do it”.

He adds:

“The bill would be a botched job, were we not to take the time to get it right”.

We have a number of substantial differences with the Government regarding the direction in which they are going. For example, we want a statutory basis for the remuneration code, to better align risk and reward. Leverage ratios have been at the core of all financial crises since the time of the Ark. Mervyn King, the former Governor of the Bank of England, was very clear when he said:

“Leverage is the one issue that matters above all others”.

It is not for politicians to decide, and that is what the Government are doing at this very moment. There are also the issues of electrification of the ring-fence, and of general powers. The chairman of the commission, Andrew Tyrie, said,

“the Government’s amendments would render the specific power of electrification virtually useless”.—[Official Report, Commons, 8/7/13; col. 75.]

The noble Lord, Lord Lawson, and I have been interested in the issue of the auditors’ code. We need a basis of communication between auditors and the regulator if we are to ensure that we can make sense of banks’ business models, now and in the future. The noble Lord has been very keen on the issue of prop trading, which the Government have dismissed.

The commissioners accept in principle much which needs to be in secondary legislation. If that could be provided—even in draft—so that we know exactly what the Government have in mind, and we can form our opinion accordingly, it would be a step forward. However, that needs time so that everyone can understand it.

The commission was established in June 2012 to examine both culture and standards in the financial services industry, particularly the banking industry. What did we find? We found a culture which was rotten, and we found standards which were abysmally low. Financial services will not change overnight as a result of even the finest legislation passed here, because fostering a culture of caution, prudence and service to clients is a generational task. That has not been done. However, if we pass legislation without adequate scrutiny, it will be imbued with complexity and will therefore lack both clarity and coherence. The noble Lord, Lord Brennan, a seasoned commercial lawyer, was very clear in Committee when he said:

“Everybody will look at what they are required to do and what the consequences are if they do not do it… The Bill should say what it means and mean what it says”. — [Official Report, 24/7/13; col. 1375.]

If the Bill does not do that with sufficient clarity then there will be no individual accountability of bankers, which was at the core of the rottenness of the system. They did not see, they did not tell and they did not hear, so that clarity is really important.

--- Later in debate ---

[Lord Newby (LD)]

My Lords, on the substance of the Motion of the noble Lord, Lord McFall, as the House knows I am one of the Government’s spokespeople on the Bill, as well as being Deputy Chief Whip.

The Government tabled 155 amendments at Committee stage. By my reckoning, 116 of them were to respond to the report of the Parliamentary Commission on Banking Standards and were welcomed by members of the commission. The remainder set up the payments systems regulator, and were equally welcomed across the House. All but one of the amendments were tabled more than a week ahead of the Committee stage debate, and with an open letter of explanation addressed to the participants. I believe that this was a classic example of good practice.

Off the Floor, my noble friend Lord Deighton and I and other Treasury Ministers have had highly constructive and productive discussions with those interested in the Bill, and we continue to do so. Committee stage finished on 23 October. Usual practice would have been to have Report stage start a fortnight later on 6 November; instead, it will be on 18 November. That is a degree of measured consideration.

That is the substance of the matter. I will address two further issues. The first is that of the Chief Whip adjusting our future business in response to events. The Chief Whip had to rearrange our provisional forward business but, as she made clear last week at the Dispatch Box, she did so only because of the pressure in the House to delay Part 2 of the lobbying Bill—a position not initiated by the Government. In order to have a proper pipeline of parliamentary debate and proper progress of government business, it is necessary to have legislative business next week. The Financial Services (Banking Reform) Bill was waiting for Report. It was well beyond the necessary minimum interval between stages, and the Opposition Chief Whip made no alternative proposal. I think the Chief Whip not only did the best she could in the circumstances but acted entirely properly and reasonably.

I cannot but regret that the Motion we find ourselves debating was tabled by the noble Lord, Lord McFall, not only minutes before House up on Friday afternoon, but without first agreeing a slot for the debate with the Chief Whip, or even consulting her. I realise that in theory every Lord has equal access to the Order Paper. Of course they do in theory, but that is not how we work in practice.

[Lord McFall of Alcluith]

Let me correct the Deputy Chief Whip. As a member of the Parliamentary Commission on Banking Standards, I was left in the dark regarding the Chief Whip’s negotiations with the usual channels. I was informed on Friday of the situation. I got on to the Table Office at about 1.30 pm and one of the first things I said was, “Contact the Government Whips so that they know this is going on on Monday”. I would have not needed to have done that if there had been proper channels of procedure between the Whips’ department and our department, and also the Parliamentary Commission on Banking Standards under the chairmanship of Andrew Tyrie, who has expressed deep regret at this situation. This Bill is different from all other Bills. The Government set up the Parliamentary Commission on Banking Standards. This is not government legislation; this is legislation that the Government are implementing as a result of a year-long inquiry that they set up. It is unique and different from all other aspects.

[Lord Newby]

My Lords, my understanding—and I have not been a Whip as long as a number of noble Lords in their places at the moment—is that if a noble Lord wishes to bring a Motion of this sort, the normal practice is to discuss it with the usual channels before laying it. That did not happen in this case, and I greatly regret it. It is for the good order of the House that that is how we do our business. That is not the substance of our debate this evening, although we have to look to at how we do our procedure.

There are a number of outstanding issues between the Government and the Parliamentary Commission on Banking Standards. It is proposed that the relevant Treasury Ministers should meet representatives of the commission within the next 24 hours. That offer has been made. Having looked at the outstanding issues, I believe that it will be possible to make progress on most of them, but not necessarily on every last one. That can be done within the next 48 hours. The number of issues between the Government and the Parliamentary Commission on Banking Standards is relatively small because we have dealt with so many of them already. I strongly urge members of the commission to go ahead with that process in the confident expectation that we will be able to reach an agreement on many of the outstanding issues in the very near future.

--- Later in debate ---

[Lord Newby]

My Lords, the usual channels are always open.

[Lord McFall of Alcluith]

My Lords, the Parliamentary Commission on Banking Standards has been very open with the Government in everything we have done, and courteous in all our exchanges with them. In light of the heavyweight presence on that commission, in light of the reception it has received in the country and in the knowledge that if anything will change cultural standards in the UK’s financial services, it will be the recommendations of this commission, I should like the Government to reflect on the situation. The Minister should take it back to the Chief Whip and come back and say, “This commission has the best interests of Parliament and the country at heart. It wants time to look at it in a measured way and it is as simple a request as that”. It would be done courteously, and if it needs me to go to the Chief Whip and supplicate, I will be quite happy.

Motion agreed.

Tackling Corporate Tax Avoidance: EAC Report

Lord McFall of Alcluith Excerpts

Wednesday 30th October 2013 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, it is a pleasure to participate in this debate and to have been a member of the Economic Affairs Committee under the wise chairmanship of the noble Lord, Lord MacGregor. As he said, this is a short report which will advance matters a small amount, but it contains the opportunity for the Government and others to act on issues and to take them forward.

Our report asks whether a new approach is needed. The answer is an unequivocal yes. At the heart of the report is the statement that the UK has serious problems with the avoidance of corporation tax. As the noble Lord mentioned, that is partly due to the complexity of our domestic tax regime, but principally it is because of an international tax system which gives multinational companies the ability to shift profits between countries in ways which minimise their tax liabilities in the UK. The effect of that is to damage the economy and undermine trust in the taxation system. It has both social and economic consequences. We are witnessing democratic failure here and the electorate have caught on. They are unconvinced that the political class will solve these big issues, and there are no issues as big as this to solve. The electorate are of that opinion because they see the social contract as broken—the social contract which was founded on the premise that everyone got a slice of the pie. Over the years, some got a bigger slice, but now we find that, while some are still getting a big slice, others are getting nothing.

The noble Lord, Lord King, the former Governor of the Bank of England, made the point recently that wages and standards of living in 2017 will be the same as they were in 2007. Professor Joseph Stiglitz, who is a professor at Columbia University and a former chief economist at the World Bank, stated, in his book, The Price of Inequality, that the global economy is sick, has been sick for a long time, and that that is infecting our politics. He cited figures to show that, in the US since 1979, output per hour has gone up by 40%, but pay has barely increased. Meanwhile, the top 1% in the US takes home more than 20% of national income. He asked whether the great recession has made things worse. It has made things worse for 99% of people, but 95% of the gains between 2009 and 2012 went to the top 1% of society.

We can see the same trends in our own country. The electorate feel that their views are less important than those of the banks and financial institutions, the energy companies and the multinationals like Google and Starbucks. Our report backs that up when it says that multinational companies are unique in that their corporation tax payments are largely a voluntary activity. That is endorsed by Sir Martin Sorrell of WPP, among others. However, it is not a voluntary activity for the rest of society. The message from HMRC at the end of the year will be that people better get their self-assessment tax returns in by 31 January otherwise they are liable to a £100 fine per day. Rightly so, we should say. But, if we are to have a level playing field, and the chance to restore both economics and politics to health, then we must urgently look at this situation.

Earlier this month, HMRC estimated that there was a £35 billion tax gap which it was failing to collect. The noble Lord, Lord MacGregor, made the point that our proposal for HMRC to have extra resources had been rejected. If it had those resources, as it has done in the past with positive results, then some of that £35 billion could be clawed back. If the Chancellor had that £35 billion in his hands, he could reduce the basic rate of tax from 20p in the pound to 12p. There is a big pot to get hold of, but we need the resources to do so, and it is disappointing that the Government have rejected that proposal. Tax evasion is relevant to the everyday lives and struggles of us all, particularly at this present time of austerity.

Is the UK a soft touch here? It does seem so. The recent examples of Starbucks and others who shifted their profits elsewhere illustrate that point. Since their naming and shaming, the voluntary payment of £20 million by Starbucks is welcome, but it is not the answer. We need to change the structure. The use of outlandish gimmicks to shelter profits in other countries must cease. Google is claiming, absurd though it is, that its intellectual capital resides in Bermuda. That would be okay if it was not for the fact that it was approved by the US Internal Revenue Service. That illustrates just how difficult the situation is and how we need to tackle it globally. In my capacity as a member of the Parliamentary Commission on Banking Standards, we saw how our own domestic banks—HSBC, UBS, Standard Chartered, Barclays and others—were fined almost $4 billion by the American authorities for engaging in money laundering activities. The HSBC evidence to the Parliamentary Commission on Banking Standards was very clear. It admitted that, on day one of assuming control of a Mexican bank in 2002, there was an e-mail from the head of compliance which made it clear that there was no recognised compliance or money laundering function in the company. Yet it allowed that to fester for years.

Why do I mention that in the context of a global financial situation? It is not a victimless crime. During the period of HSBC’s ownership of that Mexican bank, 35,000 individuals in Mexico died at the hands of local drug gangs. So there is a moral as well as an economic case to be looked at. We need international co-operation. We cannot do this alone. The G8 took place in Lough Erne, where warm words and a forced solidarity of leaders gave some reassurance. However, the mild language in our report where we say that we are not yet clear how effective the proposed solutions can be or whether they are achievable within the timescale puts a question mark against the purpose of the G8 in ensuring that this issue is tackled.

I want to put forward a few proposals for what we need to do. First, we need to tackle the opacity of the international structures. They are giving companies an easy advantage in using differences in tax rates between jurisdictions to avoid paying tax legally. The International Financial Reporting Standards, which are overseen by the International Accounting Standards Board, need to be urgently reviewed. Presently the International Accounting Standards Board is an independent, non-governmental body comprised of representatives from the accountancy and tax professions, but it is not overseen or regulated by government. Given the state we are in, there has to be a role for government oversight of this issue. We have to look at how tax structuring is based in the IFRS and elsewhere. The Government need oversight of these accounting standards.

Secondly, we need also to ensure that we remove the lack of transparency of, lack of control over and lack of accountability in the basic tax system that we are now witnessing. Thirdly, in promoting transparency and more democratic accountability, we need a stronger culture. A public beneficial ownership registry is an important aspect of that. Both the Government and the EU have carried out cost-benefit analyses on it. The Government’s cost-benefit analysis produced a figure showing a saving of £30 million in police time alone, while the European Commission has said that the United Kingdom could save €420 million if this register was created. It would be the correct thing to do to have such a register so that we know who owns the companies and what benefits they bring. Apart from revealing savings and costs and being able to tackle money laundering and fraud, one of the key aspects of such a register would be transparency.

For example, in the recent horsemeat scandal, the key companies were set up by the same Cypriot professionals who helped the infamous arms dealer, Viktor Bout, to create his web of secretive companies. If such a register was established, it would provide business with important information about partners, suppliers, investors and customers, and it would ensure that the law enforcement and tax authorities, including those outwith the UK, would have quick and guaranteed access to information. That would be helpful to us all. At the G8 summit the Prime Minister promised,

“to push for more transparency on who owns companies”.

We need this public register. I know that this Thursday and Friday the Open Governance Partnership will hold its summit meeting, and I would like to think that the Government will take up this recommendation and ensure the establishment of a register.

I turn now to transfer pricing and the many ways companies find to shift profits between countries. As the noble Lord, Lord MacGregor, said, the Government’s response on this issue is inadequate. Stepping up the fight, as they say, misses the point. Our report shows that currently there are legal ways to avoid paying UK taxes that are owed because of the very many existing loopholes. We need to identify and close those loopholes. If I was asked to choose between name and shame or ensure transparency, I would ensure transparency on the basis that if we name and shame the “bad” acts, we will see that many of those acts are perfectly legal at this time. Transparency is the key here.

In the end, Starbucks did us a favour because the public finally became aware of an international financial structure that has substantially reduced government tax receipts in a way that directly affects the daily lives of many lower and middle income families in the UK and around the world. The question should not be “How much is Starbucks paying in tax and is that fair?” but “What are all UK companies paying in tax?”. Paragraph 86 of our report makes this point clearly by stating that,

“large companies operating in the UK should make public disclosure of their UK corporation tax returns”.

If the amounts are low when we see the figures in the public domain, the Government can review the applicable tax structuring and identify what legal arrangements are needed to allow these companies to continue operating in the United Kingdom.

In addition, it is essential to make country by country financial reporting publicly available in order to identify problematic tax arrangements. The charity Christian Aid has identified the fact that $160 billion are lost from poor countries every year due to tax dodging. That is more than all the developing countries together receive in aid. This haemorrhaging of the much-needed resources that are required to combat poverty and hunger and to fund vital public services is a continuing scandal. The situation is being allowed to continue to fester.

As the noble Lord, Lord MacGregor, said, the OECD has been charged with some responsibilities, but it has stated that the information from country to country reporting should be made available only to tax authorities, not to the public. I suggest that if that practice continues, we are not going to advance this issue by one whit. The Government urgently need to take this on as part of an international agenda and ensure that country by country financial reporting is secured. Professor Paul Collier of Oxford University has done much to highlight the social and economic injustices of global tax structures. He has noted that the G8 countries are now beset by the corporate opacity that Africa has faced for decades. He identifies the G8 as being far more important now, in times of austerity, than it was in the easy years of the rising economic tide.

I suggest that this short but sharp report can help us to think about the bigger picture, one that we should use to put our own house in order so that at last we can do something beneficial not only for our own citizens, both rich and poor, but for the poor in developing countries around the world.

Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, I support the noble Lord’s amendment enthusiastically because the auditors were the weak link in the financial crisis. In terms of profits, the banks booked expected profits and then found out they were not there. So the question is: where were the auditors in that situation?

I was chair in 2007 when the Treasury Committee looked at Northern Rock. There were no meetings between the regulators and the auditors. The auditors of Northern Rock received more income from consultancy for Northern Rock than they did from audits. If I remember correctly, the auditors wrote 10 letters on behalf of Northern Rock, from which they gained £800,000. That is £80,000 a letter: not bad for a day’s work. Again, if I remember correctly, there were about seven meetings between the regulators and Northern Rock. At the time the mentality in the Financial Services Authority was the bigger the bank, the bigger the risk; the smaller the bank, the smaller the risk. Of these seven meetings, four were conducted by phone. Three were face-to-face, with no minutes taken. If you were the secretary of your local community council or your golf club and came up with such practice, you probably would not be the secretary at the end of the year. The regulator, however, kept on swanning along. That practice was a terrible practice—the voice of the auditor was missing.

The Treasury Committee report was clear. We said that within the limits of what they are required to do, perhaps the auditors did an adequate job. However, if they did an adequate job in terms of what they were required to do, the question remains: what is the point of an audit? That question continues to haunt the audit profession and it has not started to answer it.

The Government say there is talk about a code of practice, but in 2011 in a letter to the Economic Affairs Committee, Andrew Bailey of the Bank of England was very clear that,

“the working relationship between external auditor and the prudential supervisors had broken down in the period prior to the financial crises”.

So the code of practice does not work. The aim of this amendment is to ensure that there is a statutory basis so that no one can come along in future and say “That aspect was overlooked”. There has to be a serious duty on individuals to look at that.

From an accounting and disclosure perspective, RBS, Halifax and Northern Rock went down because of factors such as huge wholesale funding and property exposures. It was clear from the accounts two to three years previously exactly what the risks were, but nobody took heed. That is why the voice of the auditors has to be that much stronger. At the time, RBS shareholders approved the ABN AMRO deal by 95% to 5%, but that was just months before it collapsed.

When he was on the Economic Affairs Committee the noble Lord, Lord Lawson, asked John Connolly of Deloitte a pertinent question about auditing. The answer was that perhaps Deloitte would have had a different interpretation of “going concern” if it had realised that the Government were not standing behind the banks at the time. How flexible and flimsy is this focus on auditing from the auditors themselves?

There is a long way to go on audit, not just with regard to a statutory basis. There has to be a look at what auditing uncovers and what information it gives. I suggest that the Government look at three key features of an early warning system, having said that the auditors knew what the risks were before. First, there has to be a duty on auditors to raise these issues early with the supervisor. They knew what lay ahead if the reckless approach continued. Secondly, and very importantly, the auditors need to become more professional and sift large numbers of high-impact, low-probability events so that the regulator can understand what the risks are. Remember that the regulator was operating on the basis of business models—the profit and loss accounts of companies—which had nothing to do with the regulator, so they never looked at that. That is why we ended up with such huge scandals as PPI, interest rate swaps and whatever else. Business models are crucial to the regulator, as they should be to the auditors, so it is crucial to sift that large number of high-impact, low-probability events.

Given the point I made earlier about nobody taking heed, there needs to be an increase in credibility to ensure that all stakeholders pay attention to what auditors are saying. In terms of auditors and auditing and the link between auditors and the regulator, there has to be a less compliance-driven and more comprehensive approach. There has to be an enhanced role for the auditor as an independent expert to check and challenge all the trivial and complex issues that banks present. There has to be clear and unequivocal communication from the auditor to the company, and it is important that the regulator is aware of that information. From the auditors there has to be an insight into the company’s risk management system. More than anything, there has to be a universally consistent interpretation and application of standards. Given that we have to increase the confidence of the stakeholders by auditors, financial reporting needs to ensure that investors understand what is happening in a company.

The Government’s response to the commission’s report is totally inadequate. They said that they are,

“not convinced of the need to define the frequency of this dialogue in statute”.

The Bank of England has also said:

“The PRA has published a code of practice on the relationship between an external auditor and the supervisor”.

That code of practice, by the way, was ignored and jettisoned in the past. The FSA, given its culpability in Northern Rock, Halifax and the Royal Bank of Scotland, has the cheek to say that it supports an open dialogue with external auditors.

Andrew Bailey’s letter states quite clearly that the code of practice does not work. The empirical evidence states quite clearly that the auditors and regulators did not do their job in the past. If all we have is an exhortation to the financial community, auditors and regulators, to do things better, we will be back here in a few years. I therefore ask the Minister and the Government to look at this issue very seriously, and if they cannot give us a full answer today, to ensure that when we come back on Report and have had adequate time to look and present our amendments on that, at least we can have a positive way forward.

[Lord Flight (Con)]

My Lords, I strongly support these two amendments and the points made by the noble Lords, Lord Lawson and Lord McFall. I will add only the point that IFRS renders accounts virtually impenetrable, and fund managers have to convert them into a more understandable form of accounting to understand what on earth is going on within the organisation. I have been critical of IFRS for more than 10 years. The point was made to me initially that this was not a matter for Parliament but for the profession. It is of crucial importance to Parliament, because if it leads to things such as the banking mess, the nation at large is responsible. Secondly, as the noble Lord, Lord Lawson, pointed out, not only did it exaggerate profits in good times and create fictitious profits on the back of which excessive bonuses were paid, but it also exaggerates the other way in bad times, and therefore arguably can lead to an underappreciation of a bank’s strength. I had thought that France and Germany had some sympathy with this view and, notwithstanding other criticisms, I had been hopeful that the EU was looking to address this issue. I am disappointed that, to date, nothing seems to have happened.

I also make the point that, going back 20 years, Switzerland actually put a legal obligation on the auditors to do the compliance regulatory checking. The auditors were then liable if they had not done their job properly. I think it is a pity that Switzerland changed from that practice because I thought that it worked extremely well. I am not necessarily recommending it for this country but it was a novel idea, and the auditors ought to know what is going on within a bank if they have done their duty in auditing that bank properly. Switzerland has since changed its approach. Indeed, it was after it did so that Switzerland, too, encountered problems.

When the crisis broke in 2007-08, I asked myself: where were the auditors? Since then, candidly, there has been justified criticism of the regulators, but the issue of what the auditors were doing and why, and why bank accounts were so unsatisfactory, has not been adequately examined. I believe that the Treasury Select Committee has looked at this, but I am not sure whether it has done so in any detail. It is still quite an important issue and I believe that this Government should exercise pressure to effect reform of IFRS. In addition to the havoc it caused in the banking industry, it has also been significantly responsible for massive damage to our pension systems by overestimating the liabilities, especially when bond interest rates are artificially low. That has led to massive closure of justifiable defined benefit schemes. It really is a problem and it needs addressing.

--- Later in debate ---

[Baroness Noakes (Con)]

My Lords, I agree with much of what my noble friend Lord Blackwell said—in fact, I probably agree with all that my noble friend Lord Blackwell said—but I would like to pick up something that my noble friend Lord Lawson said when he intervened on my noble friend Lord Blackwell, that the issue was who was to decide on the leverage ratio.

The amendment before us says that the direction, which is the Treasury’s direction,

“may specify the leverage ratio to be used”.

The key issue with this amendment is not who potentially decides on the amount of the leverage ratio but the timing of the leverage ratio. People have been clear, and it is going to be a requirement of CRD IV, that there will be a leverage ratio, and the current international timing is to be 1 January 2018. As I understood it, that timing was going to drive the Government’s decision on what leverage ratio to introduce, given that they have the power to include it within the macroprudential toolkit under the legislation that has already been passed. We should not rush into a leverage ratio because there is still much work to be done on understanding how these leverage ratios, which have not been used much recently, actually work in practice.

My noble friend Lord Lawson also pooh-poohed the idea that the difference in practice between the US and the UK was significant. Some analysis done by the British Bankers’ Association has identified that on any given balance sheet the difference can be 3% under CRD IV and 5.3% under the current US rules. So we potentially have quite a significant difference, and the BBA talks about different leverage ratios as well. We also need to understand the impact of any given level of leverage ratio once the definitions are sorted out.

Mark Carney, who is chairman of the Financial Stability Board as well as Governor of our own Bank of England, has been clear that this is to be a backstop measure and that it is important to calibrate it so that the risk-weighted asset calculation of capital bites before the backstop method. Unless we are very clear when we introduce the leverage ratio about what the impacts will be, we potentially lay ourselves open to the unintended consequences of positively driving the capital requirements of the banks or, more likely, their lending capacity.

It is important that we let the current timetable for the development of the leverage ratio proceed and let the calculations be done properly. Banks are already disclosing leverage ratios to the regulators and will be disclosing considerably more information as time goes on, so there can be much more of a public debate about the impact of different leverage ratios on banks and other financial institutions.

[Lord McFall of Alcluith]

I support the amendment moved by the noble Lord, Lawson, which stands in my name as well. As the noble Lord said, the amendment is, quite simply, about who is doing it. Whatever they do at some future stage, we will let them get on with it, because it is about authority. There are two issues here: learning the lesson, and the authority.

On learning the lesson, I noted the comments of Adair Turner, former chairman of the FSA, when he said:

“We allowed the banking system to run with much too high levels of leverage, inadequate levels of capital, and we ignored the development of leverage in the financial system … That was a huge mistake”.

I had never gone back to basics and asked, “Why do we allow banks to run with 30, 40, 50 times leverage?” Neither had anyone else, funnily enough; so it is about time that somebody asks that question and keeps it in their mind on a daily basis. My point is that politicians—Chancellors, Prime Ministers or whoever—will not keep that in their mind on a daily basis. We learnt that from the financial crisis before. If we set up a new organisation we should give it the authority. I noted the comments made by Lawrence Tomlinson, who was brought in to BIS recently as an “entrepreneur in residence”. He questioned why the British Bankers’ Association needed,

“60 people working full-time lobbying”,

when the Government owned majority stakes in two of the banks, Lloyds and the Royal Bank of Scotland. As he said:

“We already own the banks. Why are Lloyds and RBS paying the BBA to lobby us? They can just get lost! … It’s amazing we let RBS spend tens of millions advertising its services with 80% of our money”.

I mention that because the banking sector is the best sector in the country for lobbying. The banking sector, unlike any others, gets direct access to No. 10 and No. 11 Downing Street. That happened with the previous Government and it is happening with this one. If you do not allow the proper authority—the FPC—to have this leverage ratio, you are weakening its authority in an instant. I suggest that the institutional memory of a Chancellor or a Prime Minister is much less than the institutional memory of the Financial Policy Committee.

In terms of the leverage requirements, we have had the Vickers commission, the Parliamentary Commission on Banking Standards, and the interim Financial Policy Committee asking for that leverage to be handed over. The Government have refused. If the Government do not want to be accused of playing politics, it is important that that is put to the Financial Policy Committee.

Let us look at leverage even today. I looked at Barclays, which has been,

“the poster child for excess leverage. Its balance sheet is roughly the size of the UK’s GDP. It funds 1.5 trillion pounds of risk-taking with 97.5 per cent debt and 2.5 per cent loss-absorbing equity … The average hedge fund trades with less than 3 times leverage … Barclays has chosen to operate with 45 times leverage … So Barclays deploys gearing 15 times that of most hedge funds. If the bank’s assets eroded in value by a mere 1.5 per cent, it would be 100 times leveraged. How confidence inspiring is that?”.

If we do not allow the FPC to look at these issues on a daily basis, when No. 10 and No. 11 Downing Street will not be looking at them, we will find ourselves in trouble in the future. As mentioned by the noble Baroness, Lady Noakes, Dr Carney said that it is,

“essential to have a leverage ratio as a backstop to a risk-based capital regime”.

We are saying that, if we have appointed Dr Carney with all the thrills and frills of a Chancellor’s appointment, we should give him that authority so that he can get on with the job straightaway and we can keep it away from the hands of the politicians.

--- Later in debate ---

[Lord Phillips of Sudbury]

My Lords, I commend the mover of the amendment, the noble Lord, Lord Turnbull. If, as I assume, this matter is brought back at Report, I should like to raise two questions. The first concerns the fact that the code is to be solely the responsibility of the FCA and the PRA. I wonder whether it should have a broader base than that. The City is a real bubble. The two authorities are part of that bubble, as are most of the people working in them. Everybody—particularly the noble Lord, Lord Turnbull, in moving the amendment—has said that we have to break out of this small enclave to understand the wider national, social and cultural impact of what is going on in the square mile. I just throw that idea out.

My second question concerns proposed new subsection (3)(a) in the amendment, which requires that those subject to the code shall,

“receive a proportion of their remuneration in the form of variable remuneration”,

although it does allow specific exceptions. For the life of me, I do not see why that is being insisted upon. Twenty-five years ago, most of the senior bank executives and those on the boards of banks did not receive a variable element in their remuneration at all. The problem that the amendment seeks to address was not present then, or at least not remotely to the degree that it now is. Therefore, again, if this matter is to be brought back at Report, I should be grateful if more thought could be given to the need for subsection (3)(a).

[Lord McFall of Alcluith]

My Lords, I support the amendment. The most important and admired banker of the 20th century—the late Sir Brian Pitman, the former chairman and CEO of Lloyds—came to the Future of Banking Commission, which I established, and on which David Davis MP, Vince Cable, Roger Bootle and others served. He gave us a lesson that day: he said very clearly that he understood that banks should be run for the long-term benefit of shareholders, and that that was what customers wanted most.

Sir Brian’s synopsis of what mattered to him as a banker was very clear, when he said in evidence to us:

“Nobody is a greater believer in shareholder value than me ... It’s long term shareholder value and everything has to be structured around the long term, particularly the remuneration structure … The minute you move to a huge emphasis on short term big bonuses you're going to change the behaviour. It is perfectly possible, in our case for 17 years when I was there”—

at Lloyds, that is—

“we were doubling the value of the company every three years for 17 years. Nearly everybody had shares in the company; messengers were worth a quarter of a million pounds when I left because we’d been successful as an organisation. But we believed it all had to start with the customer”.

He was very clear that if you had the customer in mind in terms of remuneration, you had to measure it on a 10-year basis. Only that way do you find out about the business cycle, and about whether the money paid in bonuses is money that has really been earned at all. As was said earlier, that money was not really earned in the past, because remuneration was based on expected profits, which did not materialise.

For the senior executives in banks it was upwards all the way: whether the bank went down or up, they had their bonuses. Sir Brian distinguished banks from other organisations as follows: “Banks and insurance companies have the unique ability to engineer increases in profits by pulling a lever that forces their banks to take more risks to lend and invest more relative to their capital resources, unlike other institutions”. That is why, in our report, we wanted a statutory basis, and we wanted the regulator to look at this issue.

When the noble Lord, Lord Lawson, and I were on the Parliamentary Commission on Banking Standards we considered the same issue on our sub-committee. We examined Barclays and its culture, and looked in particular at the structured capital management division —which, incidentally, the noble Lord, Lord Lawson, referred to as tax avoidance on an industrial scale.

We wanted to find out about the business model for that, and we spoke to insiders. When Sir David Walker and Antony Jenkins came to the committee, we had prepared questions, and my question for Sir David was along these lines:

“I would like copies of all management reporting and management performance information provided to Roger Jenkins”—

who established BarCap, along with Bob Diamond—

“and Iain Abrahams to support the bonus pool”—

in other words, to provide the numbers for us. I continued:

“The second one is the information used for the purposes of calculating the bonus pool of the structured capital management division, and the information used for determining the bonuses in particular for”,

three senior executives for the past decade.

The reason why we asked for that information is that the noble Lord, Lord Lawson, said in the evidence session that Roger Jenkins, who established the division, had had more than £40 million in one year. Bob Diamond had £100 million over a 10-year period. We wanted to find out exactly how they had earned that. The insiders told us that in 2008 BarCap was responsible for 110% of the profits of the whole entity. Here we had a tax avoidance unit on a massive scale masquerading as a bank, and responsible for 110% of the profits—and we did not have a clue how they made their money. I said that we wanted the information,

“in sufficient detail in order to identify each of the subcategories of the structured capital management business. In that respect, it will be the year-end management accounts information and quarterly reports information”,

which we received. We went on to ask for more—and we received absolutely zilch information. So, as we take this banking reform Bill through the House, we still do not know exactly what BarCap was up to.

What I—and the noble Lord, Lord Lawson, and others—want to know is that the regulator has the authority, so that it can see exactly how a business is performing and getting its money, and what business model and culture it has, so that the remuneration structure does indeed have a long-term basis and serves the long-term interests of society and of customers. That is not happening to date. That is why the amendment is before the House.

Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Wednesday 23rd October 2013 Lords Chamber

Moved by

[Lord McFall of Alcluith]

98: Before Clause 16, insert the following new Clause—
“Whistleblowers’ compensation
(1) After section 206A of FSMA 2000 (suspending permission to carry on regulated activities) insert—
“206B Whistleblowers’ compensation
(1) If as a result of an investigation carried out in accordance with this Act the appropriate regulator is satisfied that an authorised person has mistreated a whistleblower, the appropriate regulator may require the authorised person to pay to the whistleblower compensation of an amount determined by the appropriate regulator to be appropriate having regard to the financial implications of the mistreatment for the whistleblower.
(2) In this section “whistleblower” means an individual who works or worked for the authorised person (whether or not as an employee) and who—
(a) gave information to the appropriate regulator for the purpose of initiating or facilitating the carrying out of an investigation in accordance with this Act, or(b) gave to a colleague information relating to any matter which might be relevant if the appropriate regulator were deciding whether to initiate the carrying out of such an investigation or were carrying out such an investigation.(3) In this section a reference to mistreatment includes a reference to any form of discriminatory or unfavourable treatment.
(4) A payment under subsection (1) is to be made only if the whistleblower chooses to accept it; and a whistleblower who accepts compensation under this section may not bring civil proceedings (including, but not limited to, proceedings before an employment tribunal) in respect of, or in reliance on, the mistreatment in respect of which the compensation is offered.
(5) The procedural provisions of this Act in relation to the imposition of a penalty under section 206 apply to an award of compensation under this section.””

[Lord McFall of Alcluith (Lab)]

My Lords, it is my pleasure to move Amendment 98 on behalf of my parliamentary banking standards colleagues, the noble Lords, Lord Lawson and Lord Turnbull. Essentially, the Parliamentary Commission on Banking Standards is saying that banks must put in place mechanisms for employees to raise concerns when they feel discomfort about products or practices, even where they are not making a specific allegation of wrongdoing. It is instructive to note that during the whole financial crisis, not one whistle was blown. Why was that? The issue of fear of damage to one’s career is central. Therefore, we must ensure that we have a system that rectifies those deficiencies.

One recommendation from the parliamentary commission is that a non-executive board member, preferably the chairman, should be given specific responsibility under the senior persons regime for the effective operation of the firm’s whistleblowing regime. We would like the Government to consider that. I am sure that the noble Lord, Lord Lawson, and I feel that that recommendation does not go far enough, particularly when one considers the situation in America. My noble friend Lord Brennan informed me earlier that under the Dodd-Frank Act, the SEC has an Office of the Whistleblower within individual companies. The United States is far ahead of us on that, and, if we do not allow the chairman to undertake this, we are ducking one of the main responsibilities that we want to give to the chairman, which is to accept individual accountability.

We were littered with examples of chairmen putting their hands up and saying, “Nothing to do with us. We didn’t know about the mis-selling scandals. We didn't know about the LIBOR scandal. We didn't know about the interest-rate scandals”, et cetera. If the system is to work properly, the chairman must be responsible. We consider that it is important that the chairman should be held personally accountable for protecting whistleblowers against detrimental treatment if we are to have a system that is worthy of the name in this area.

We recognise that whistleblowing reports should be subjected to an internal filter by the bank to identify those that should be treated as grievances. Banks should be given the opportunity to conduct and resolve their own investigations of substantial whistleblowing allegations.

The regulator should also have a part to play here. It should periodically examine a firm’s whistleblowing records in order both to inform itself about possible matters of concern and to ensure that firms are treating whistleblowers’ concerns appropriately.

The FSA’s evidence to the committee appeared to show little appreciation of the personal dilemma that whistleblowers face. It should regard it as its responsibility to support whistleblowers.

We also noted the regulator’s disquiet about the prospect of financially incentivising whistleblowing. As a commission, we call on the regulator to undertake research into the impact in the US of financial incentives in encouraging whistleblowing, exposing wrongdoing and promoting integrity and transparency. Two representatives of the SEC gave evidence at one of our hearings on how incentivising whistleblowing was going in the United States.

It is the financial sector that must undergo a significant shift in cultural attitudes towards whistleblowing, and change its view from one of distrust and hostility to a recognition that whistleblowing is an essential element of an effective compliance and audit regime.

We note that the Government did not reject our proposals, but do not propose to address them in the current legislation, instead placing the issue of whistleblowers in the context of a wider piece of work led by the Department for Business, Innovation and Skills. We feel that the FSA should be right at the centre of the issue. As a commission, we concluded that not only did internal compliance and formal control structures fail to uphold proper banking standards, but a culture of fear prevented employees from speaking out about serious wrongdoing.

There are a number of examples to which we could refer, but the FSA did its own investigation into Barclays at the time of LIBOR. In June 2012, it came out with its final notice in which it imposed a financial penalty of £59.5 million on that bank. Because,

“Barclays agreed to settle at an early stage … [it] … qualified for a 30% … discount under the FSA’s executive settlement procedures. Were it not for this discount, the FSA would have imposed a financial penalty of £85 million on Barclays”.

When we looked at the evidence that was presented to us on Barclays, we found that there were dozens of people in open trading desks for several years while this practice was going on. At UBS we found that there were up to 100 people who were there for a decade and that there was a clear e-mail trail on the issue. We could only conclude that if one is asked to do something wrong, there has to be whistleblowing so that the company can develop a better culture and better process to enable it to deal with it. We do not wish people to feel that their career will be threatened if they do whistleblow or, indeed, if they do not.

When we looked at the LIBOR situation at Barclays, we asked witnesses what this behaviour meant about the culture of Barclays and of the banking industry. As I mentioned, the final notice from the FSA painted a picture of a close-knit group of people who were colluding to try to manipulate LIBOR. For example, the following conversations were noted:

“Trader C requested low one month and three month US dollar LIBOR submissions”.

That was on 7 April 2006. Trader C was quoted as saying to his colleague:

“If it’s not too late, low 1m and 3m would be nice, but please feel free to say ‘no’ … Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”.

Then the submitter replied:

“Done … for you big boy”.

In October 2006, an external trader stated in an e-mail to Trader G:

“If it comes in unchanged I’m a dead man”.

Trader G responded he would “have a chat”. Barclays’ submission on that day for three-month US dollar LIBOR was half a basis point lower than the day before, just as requested. The external trader thanked Trader G for Barclays’ LIBOR submission by saying:

“Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

Those are clear, open e-mails and no one can tell any of us, particularly the banking commission, that others in Barclays did not know what was going on with that situation. The noble Lord, Lord Turner, in one of the most understated comments, said that the actions over this period indicated a cultural weakness with Barclays. One might say: “You can say that again”. We read many submissions covering the direct exchanges. I will repeat just one more. Trader C said:

“The big day [has] arrived…My [New York desk] are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”.

The submitter said:

“I am going 90 altho 91 is what I should be posting”.

Trader C came back and said,

“when I retire and write a book about this business your name will be written in golden letters”.

The submitter, maybe with a little bit of common sense, replied:

“I would prefer this not be in any book!”.

Those comments are in e-mails—that is the trail. That is why we need whistleblowing. People were scared to give their point of view to those further up the management trail. Barclays is just a case study of all that has gone wrong with the culture. We on the commission are asking for disclosure of significant supervisory correspondence and matters considered. It would be helpful to know how many of these went to enforcement.

When I was investigating this in the last Parliament, I spoke to senior individuals in the FSA. They were very clear with me. They said that Barclays’ legal and compliance team were intimidated by Bob Diamond and others. They said that the senior legal and compliance team should be sacked because they knew about LIBOR and the capital raising for a long time. Not one legal or compliance officer at Barclays ever graced the door of the FSA to complain about that situation.

It happened down the line as well, particularly at the front-line, retail-desk level with PPI, with individuals being pressured in that regard. At a breakfast conference this morning, Martin Wheatley was very clear. He said that these individuals at the front-line level were trying to eke out a salary of £16,000 to £18,000 a year. They had been asked to sell PPI alongside loans and other products and would receive an extra couple of thousand pounds a year for doing so. At the top level, however, huge sums were involved. Distorted incentives led to a situation where, as a result of PPI mis-selling—deliberate mis-selling by companies—the banking industry could face a bill of £30 billion. Financial stability could be threatened as a result of these perverse incentives. The PPI scheme went on for 18 years. I suggest that if a rigorous, appropriate whistleblowing regime had been in place whereby individuals did not feel that whistleblowing would end their career, the PPI scandal could have been stopped well before that length of time had passed. As has been mentioned, a culture shift at the top in terms of accountability would help to increase confidence in this regard down the line. The chairman must be accountable and take responsibility in this area and must ensure that the whistleblowing regime works well.

Martin Wheatley said this morning that the Financial Services Authority had lost its focus on the moral compass and on being honest. Perhaps if we have an appropriate whistleblowing scheme we will start to reinject honesty into the system, to ensure a better culture and better ethics whereby individuals in a company feel free to serve the interests of the company and the customer and thereby help society.

--- Later in debate ---

[Lord McFall of Alcluith]

My Lords, the Government’s response to every amendment is, “Manana, manana”. There is nothing in the response but, “Tomorrow, tomorrow”. There is, for example, a public consultation that we know nothing about. As noble Lords have said tonight, this is a very modest proposal. The Minister really has the wrong end of the stick here when he asks why we should protect whistleblowers in the financial services industry and what is different here from in the oil and gas industry. The Government themselves think that it is different. Why? Because they appointed the noble Lords, Lord Lawson and Lord Turnbull, and me to a Parliamentary Commission on Banking Standards, along with Members of the House of Commons. We spent a year of our lives—10,000 questions and 180 hours in committee—before presenting a report to the Government. That is why the financial services industry is different from others.

[Lord Newby]

My Lords, is the noble Lord seriously suggesting that whistleblowing in the financial services sector—we are talking about whistleblowing here—is of a different order of public interest from whistleblowing in, say, the pharmaceutical or oil industry?

[Lord McFall of Alcluith]

We have had the biggest financial crisis ever but not one whistleblower. That is the magnitude of the problem which the Minister does not grasp and that is why we looked at this issue. Goodness gracious, look at the fines: £85 million for Barclays and £13 billion for JP Morgan today. There is a litany we could go through, so what is the problem?

The Government set up a commission to look at culture and standards. What did the Parliamentary Commission on Banking Standards find? It found that the culture was rotten and the standards were abysmally low. This whistleblowing amendment—a modest amendment—is being put forward to ensure that we have a better culture, and that we have legal and compliance teams in companies that might have the nerve and confidence to go the FCA and say, “Look, there is wrongdoing in this company and we do not feel that we can assuage our conscience on this. We need to report it to the FCA to ensure that we have a better organisation here”. This has failed totally. That is the magnitude of the problem facing us and that is why we have this modest amendment.

The USA was mentioned. We had two witnesses before us from the USA who were very clear that we did not scrape the ground with the FSA. My noble friend Lord Brennan has given his wisdom on the situation in the USA tonight. We are asking the Government and the FCA to look at the experience in the USA to see if that aspect can be adapted. As the noble Lord, Lord Phillips, said, his charity did not have one person from the City. That backs up the evidence that we heard and gives the initiative to the FCA. That is the purpose of this amendment.

We received representations from trade unions in a sub-committee evidence session. The trade unions were very clear to us that their members at the grass-roots level felt pressurised but were scared stiff to do anything about it. I have a number of examples but will give the Minister one in particular. An individual I have known in my own town of Dumbarton for years, who worked in one of the banks for 25 years, left to become a care worker at less than half the salary. I asked her why she left. She said, “John, I was being forced every week to sell products that were not only unsuitable for people but were making their lives miserable. I could not partake in that, so I left”. There was someone who had been committed for 25 years being pressured on issues like that. Surely we should have a system to say “That person has given loyal service. That’s a person who wants to serve their bank and their community. Let’s establish an appropriate structure so that we protect that person, and also make the company better”.

I suggest to the Minister that there is a link between the almost £30 billion that we will be paying out in fines for PPI and the conduct of a company. If the proper procedure was in place and that information came up from the bottom, we probably would not have the abysmal situation we have with the £30 billion.

This amendment is about not just changing the culture and standards but helping the safety and soundness of companies. It was a responsibility given to us, the Parliamentary Commission on Banking Standards, by the Government to give recommendations to change the culture. This is a sound way of doing that and I would have expected a more sympathetic and engaging response from the Minister than we received tonight.

[Lord Phillips of Sudbury]

My Lords, I should quickly make clear that the whistleblowing charity, Public Concern at Work, is not mine; I was merely the lawyer who set it up. However, it does wonderful work. I am delighted to hear that there is a public consultation. I am very anxious indeed that it may not have reached the parts that it should have reached. I ask the Minister if it possible for him to look into that and, if necessary, extend the consultation period for, say, a month.

--- Later in debate ---

[Lord Phillips of Sudbury]

I thank the noble Lord.

[Lord McFall of Alcluith]

My Lords, I will briefly speak in support of this amendment. My noble friend Lord Eatwell spoke of treating customers fairly. I remember, going back to 2002, when the FSA, bless its heart, introduced this to the industry. The FSA told me that it was a hugely uphill struggle. I well remember having a conversation with the chairman of one of the banks, who said to me, “Treating customers fairly? I don’t know what that FSA is up to, because I’ve always treated my customers fairly”. The gap between what the FSA was trying to do and the mentality of some people in the industry was huge. I remember being at a seminar with John Kay, who has written a great article in today’s Financial Times that I have already referred to. He said that a duty of care, if it was imposed on the banks, would be “transformational”. I think he said that for the following reason. There is today an imbalance between the customer and the bank—the term for that is symmetry of knowledge—which has led to many of the scandals.

Time after time on the parliamentary banking standards commission, when we ask chairmen and chief executives exactly why mis-selling occurred or why the grievous omissions took place in their organisation, they say that they did not know anything about it. There is, therefore, a hiatus between the top and below. One of the amusing aspects of my time as chair of the Treasury Committee was speaking informally to senior executives in the banks who came along to the Treasury Committee and said, “What you did to the chairman today was good because it allows us to educate him”—or her, although it is largely him—“about what is happening in the organisation”. A lot of them do not know what is happening. If we had this duty of care, that responsibility would lie at the very top.

During the deliberations of the parliamentary banking standards commission, I suggested that there should be an annual meeting between the chairmen and chief executives of these institutions, and the regulatory authorities, so that there was a sign-off on how they do their duty and how they serve the interests of their institution and their employees in the wider society. That information is not made public, but at least there is that accountability at the top between the regulator and the chief executive. At present, we do not have that. Having the duty of care would make those at the top much more alive to what is going on in their organisation. I have received evidence in the banking commission, particularly from the lawyers who were advising us, that the term “duty of care” has a specific legal meaning in the law of torts, and tests to establish whether a duty of care exists and whether it has been breached are a fundamental tenet of common law. In the context of banks and their customers, it is not clear what a duty of care would look like in practice. I know that there are huge legal hurdles to overcoming that, but there is a basic, common-sense and moral purpose to the concept of duty of care, and I think it is one that we will refer to again on Report.

I would like the Minister seriously to consider this amendment and ensure in some way or other that, as the Parliamentary Commission on Banking Standards stated in paragraph 416:

“Banks need to demonstrate that they are fulfilling a duty of care to their customers, embedded in their approach to designing products, providing understandable information to consumers and dealing with complaints”.

[Lord Brennan]

My Lords, perhaps I may take up the points raised by the noble Baroness, Lady Noakes. Paragraph (a) of the proposed new clause refers to a “fiduciary duty” by the ring-fenced body. In practical terms that means a duty exercised by, ultimately, the board of directors. The body acts through it. The practical consequences of such a duty, which does not involve enforceability by the regulators, are twofold. First, if the board of a bank breaches its fiduciary duty to customers in this way, it is perfectly reasonable for the shareholders to refuse to indemnify it in respect of any claims made by customers on the basis that it has breached a statutory duty, which could not conceivably be said to have been acting in the shareholders’ interests. That is the first practical consequence. It is a deterrent. Secondly, although I have not checked this yet, I suspect that in the field of commercial insurance you would not be able to get D&O insurance for protection in respect of a fiduciary duty until you have satisfied the insurability test of having acted reasonably and in accordance with commonly accepted standards of probity and good behaviour in the commercial sector. Therefore, the point is answered, I suspect, by practical consequences.

--- Later in debate ---

[Lord Deighton]

It is clear that the essential contractual relationship still exists, regardless of the fine print. It is not clear what a duty of care would add to the existing contractual obligations or regulatory requirements to which the ring-fenced body is subject. The primary duty of a ring-fenced bank is to repay its borrowings, such as deposits, when they fall due, in accordance with the terms of its contracts. If a ring-fenced bank does that and complies with its regulatory obligations, such as those relating to ring-fencing or leverage, it is hard to see what a duty of care would do to make it care more for its customers, inside or outside the financial services industry.

Therefore, the Government firmly believe that it would be better to impose specific and focused requirements, and standards of business, on banks, than to rely on high-level, generic concepts such as a duty of care. Banks can comply more easily with specific requirements. Customers and regulators can more effectively hold to account the banks, and, if appropriate, their senior managers, when they do not comply. Moreover, if our ultimate objective is to improve the deal that customers get from their banks, one of the most effective and direct ways to achieve this is surely by enhancing competition. Banks must be spurred to treat their customers better by the threat of the customers voting with their feet. Through the introduction of the measures in this Bill, including the changes to the regulator’s objectives and powers, and the new payments regulator, we believe that a better deal can be achieved.

Imposing a duty of care or a fiduciary duty would not give banks or their senior managers a clear understanding of what conduct is expected of them. It would not provide a viable and effective means of holding banks to account, and it would not benefit consumers. Therefore, I hope that the noble Lord will agree to withdraw the amendment.

[Lord McFall of Alcluith]

On the duty of care, at the present moment if an individual opens a bank account, they get 170 pages of dense text to look through. No one is going to look through that. If a duty of care were imposed, does the Minister not think that banks would look at that again and perhaps fillet a lot of the information, so that the information that went to the customer would be readily understood?

[Lord Deighton]

I certainly agree with the noble Lord’s observation that sometimes the way in which business is done clearly is not in the interests of the customer. However, the Government do not believe that the duty of care is the right way to address those kinds of problems.

--- Later in debate ---

[Lord Newby]

My Lords, it goes without saying that the Government are fully behind the objective of increasing competition in banking and making sure that customers who wish to switch banks can do so without impediment. The notion of portable account numbers was considered by the Independent Commission on Banking and in its final report the ICB chose to recommend a new account switching service over portable account numbers. It considered that such a service, if designed correctly, would provide the majority of the same benefits as portability, but with significantly reduced risk and cost.

The Government acted quickly on this recommendation to secure a commitment from the banking industry to deliver current account switching in two years. This was an ambitious timetable for such a big project, but the banks have met the challenge. The new current account switching service was launched on schedule in September and covers almost 100% of the current account market. It has been designed to meet all the ICB’s criteria for tackling customer concerns over switching and to give customers the confidence they need to make the banks improve their services by ensuring that their customers can vote with their feet.

However, it is important that the new system delivers on its promises. That is why the Government continue to engage closely with the Payments Council, which has delivered the service on behalf of the industry, on the progress of switching.

[Lord McFall of Alcluith]

The noble Lord mentioned the Parliamentary Commission on Banking Standards and talked about account portability. But that was not as firm a recommendation as he has suggested, because one of the questions we asked was: why can the banks not allocate an account number that works in the way that mobile telephone numbers do, so that people can swap them around in the same way? The banks replied that the IT costs would be too high, but a cursory examination—that is all we did—of the IT aspect indicated that there were legacy problems with the IT. As we have seen with the horrendous examples involving RBS and others, the IT system is in a very poor state. So now is the ideal time to raise our ambitions and ensure that we get for bank customers the portability that telephone customers have.

[Lord Newby]

My Lords, I did not mention the parliamentary commission; I was referring to the Independent Commission on Banking. None the less, I shall come to the substantive point that the noble Lord has just made.

As I was saying, to aid transparency we have asked the Payments Council to publish statistics regularly, including switching volumes on a monthly basis and more detailed statistics every quarter, which include data on awareness and confidence in the new service. The Government consider that making this information public is the best way to hold the current account switching service to account. As has been mentioned, the Payments Council has just published the first set of data, covering the four-week period following the switching service becoming fully operational. The numbers show that 89,000 switches were completed—an 11% increase on the 80,000 completed during the same period last year. I am a great fan of the Financial Times, but to describe a scheme that has been running for a month as a failure, when it has already got 9,000 extra people to switch, is clearly complete rubbish.

Account portability is a more complicated issue. I am not necessarily disagreeing with the noble Lord, Lord McFall, but the only way to make a properly informed assessment as to whether, or how, steps towards portable account numbers should be taken is to conduct a comprehensive analysis. I must say, almost in parenthesis, that I do not believe that the analogy with telephone numbers takes us as far as might appear at first sight. For a start, as an individual I am quite happy if lots of people know my telephone number —but I am very unhappy if anybody knows my bank account details. This means that I have a completely different view about how I want to deal with that account. That is one of a number of different reasons why this is a complicated issue. It is not, however, an issue that the Government have just pushed to one side. We have made a commitment to ask the new payment systems regulator to undertake the comprehensive analysis that is required.

There has not yet been a proper study of account portability in the UK, but it is clear that operating the payments systems alongside account portability would be one of the significant challenges. That is why we think that the payment systems regulator is the right body to carry out this work. It will have the appropriate expertise and will be able to give an independent view. To be clear, the payment systems regulator will have the powers described in subsection (2) of the proposed new clause. There would be no need to confer new powers on the regulator in order to implement the recommendations of a review. In order to get a complete picture of what benefits account portability could bring, the experience of the current account switching service will need to be fully considered. Therefore, the Government expect the success of the switching service to be firmly within the scope of the payment systems regulator’s view of portability. The switching service is new and the regulator is not yet established. In our view, the logical step is to let them both become properly established and bedded in and then have a proper and comprehensive analysis. On the basis of that, a decision can be taken.

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Moved by

[Lord McFall of Alcluith]

104B: Before Clause 16, insert the following new Clause—
“Restriction on disclosure of confidential information by FCA, PRA etc
In section 348 of FSMA 2000 (restriction on disclosure of confidential information by (FCA, PRA) etc), after subsection (4)(b) insert—“(c) it is made available, without imposing any requirement of confidentiality, to a consumer (as defined in section 425A), or to a person imitating a consumer, or to persons who include consumers;”.”

[Lord McFall of Alcluith]

My Lords, while many aspects of competition, culture and behaviour in the industry are addressed by the Financial Services (Banking Reform) Bill, these amendments focus on the lack of transparency and public disclosure of poor products, practices, individuals and institutions, which remains unaddressed. The focus of these amendments is to open up this aspect of transparency. The amendments would enable the FCA to publish the instructions it gives to firms when it finds that consumers have been unfairly treated. It would improve the accountability of the regulator and of the regulated firms.

Most people are agreed that the FSA was not a transparent regulator. Indeed, in 2009, when the Treasury Select Committee investigated the treatment of customers in mortgage arrears, it concluded that,

“the balance between disclosure to the public and the need to protect firms before they have been found guilty of wrongdoing may have tilted too far towards the interests of the industry”.

More importantly, Section 348 of FiSMA placed a blanket prohibition on the FSA publishing information received from firms without the firms’ permission. The question has to be asked: are any banks going to voluntarily agree to the publication of their poor practice? I would suggest that is highly unlikely.

I will give one example. In the case of PPI, HFC Bank was fined by the FSA in 2007 for mis-selling of PPI. It issued instructions about the steps the bank needed to take to contact customers and review its previous conduct. However, when consumer groups asked for full details of the instructions, the answer given was that the instructions issued by the FSA contained information from HFC and the FSA was therefore prohibited from disclosing them by Section 348 of FiSMA.

This amendment empowers the FCA to release the instructions given to firms. Genuinely confidential information still will be protected, but the regulator will no longer be able to use Section 348 as an excuse for not disclosing the instructions it gives to firms. There are safeguards for firms, requiring the regulator to consult firms on the notice it will issue and to take account of their representations. Indeed, when the managing director of supervision at that time, Jon Pain of the FSA, appeared before the Commons Treasury Committee in March 2010, he was asked if he would like to have the ability to publish names of firms to which the FSA has sent a warning notice on disciplinary process. He said that that process struck the right balance between transparency and process.

The FSA itself would like that facility to be looked at. Indeed, when the Parliamentary Commission on Banking Standards looked into it, we stated that:

“Amendment of Section 348 … is likely to be required to facilitate the publication of appropriate information about the quality of service and price transparency.”

The amendment argues that the definition of “confidential information” should be modified to exclude firm-specific results of mystery-shopping exercises and thematic work. That would prevent consumers being kept in the dark and ensure that firms are not able to get away with not treating their customers fairly without suffering any practical penalty.

The definition should also be modified to exclude price data for certain markets, such as annuities—a very hot topic at the moment—which would make it easier for consumers to shop around to get the best rate and spot when they are getting a bad deal. It would also assist consumer organisations in warning consumers about products to avoid.

Complaints data for individual firms should also be excluded, which would allow the FCA to react swiftly to emerging problems by disclosing specific information about individual product areas to consumers. The legacy of mis-selling which exists happened because of a lack of speed in telling consumers and ensuring that individual companies undertook the remedies which the then FSA asked them to undertake.

If the definition also excluded enforcement activity against firms, that would allow for greater regulatory transparency. That must include the FCA publishing information on the number of cases referred to enforcement, broken down by subject—including product and practice involved—and industry sector; the outcome of cases, including how many resulted in a fine, public censure or were dealt with informally; and the names of firms and individuals involved in cases.

As I said on an earlier amendment, the balance is tilted too much towards the industry. The asymmetry of knowledge is in the industry’s favour. This amendment would help redress that by improving transparency. I ask the Minister to consider the long-standing commitment that I have had to that.

[Lord Eatwell]

My Lords, my noble friend has made a very strong case. He needed to add one other element to persuade the Government, which is that this would enhance competition. If one improved information in this way, then, given the enhancement of consumer choice, the competitive objective of the Government would be better served. This would be a diminution of some of the severe problems of asymmetric information that distort competition in financial services, especially retail financial services. If it was developed with care it would be a considerable boost to the overall efficiency of retail financial services in this country.

It is very easy to say, “The time is not ripe; it is not really quite the time; there are unintended consequences”. All that is required is a consistent bias towards transparency. The Government should approach this issue by saying, “In principle, we are in favour of transparency”. The argument should be made for not being transparent. In other words, the strong case has to be made for not revealing something. The fundamental prejudice should be that this information should be transparent. Effective transmission of information is a key element in creating an efficient market and enhancing the competitive goal that the Government claim to be their own.

[Lord Newby]

My Lords, as the noble Lord, Lord McFall, pointed out, we debated this issue at great length during proceedings on the previous Financial Services Bill. Sections 348 and 349 of FiSMA govern the treatment of confidential information obtained by the regulators and the ability of the regulators to disclose such confidential information. The noble Lord argued at the time, and repeated today, that there was inadequate transparency and insufficient disclosure of information in the financial services regulatory regime. This led to the argument that Section 348 should be amended to make it as unrestricted as possible.

In response, the Treasury undertook a careful review of Section 348 and its associated provisions. The review concluded, first, that it would be difficult to amend Section 348 without negative consequences. Scaling back Section 348 would increase the risk that firms would become less willing to share information with the regulators, undermining those important relationships and the regulators’ ability to protect consumers. Secondly, even with Section 348 in place, the FCA could and should do more to increase transparency.

With that in mind, the Government decided at the time not to amend or delete Section 348 but agreed with the FSA, as it then was, for it to carry out a fundamental review of how transparency would be embedded in the new FCA regime. This was published as a consultation in April of this year and received positive feedback from consumer groups—that is, the very people the new or changed approach was intended to benefit. The review covered use of disclosure as a regulatory tool by the regulator, disclosure of information by firms, both voluntarily and as a result of FCA rules, and transparency on the part of the regulator.

In terms of publishing details of enforcement action, the FCA is already required to publish details and information about decisions and final notices that it considers appropriate. It can also publish the fact that a warning notice has been issued in respect of disciplinary action. In response to the recent PCBS recommendation that it should require firms to publish more information, the FCA has outlined its plans to issue a call for evidence next year on data that it should require firms to publish to help consumers better understand the firm and product quality.

I hope the noble Lord will agree that this is exactly what the PCBS was seeking to achieve and that it can be done without further amendment to Section 348.

[Lord McFall of Alcluith]

My Lords, again the Government’s response is a little timid. However, the hour is late. It is an appropriate time to say, “Mañana” and we will fight it another day.

Amendment 104B withdrawn.

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[Lord Newby]

The noble Lord may or may not remember that at the start of today’s discussions the noble Lord, Lord Lawson, pointed out that the size of the Bill had expanded multiple times. I admit that part of this relates to the Government’s amendments on bail-in. However, every other amendment is in order to implement a recommendation of the PCBS. That is what we spent nearly all of last week discussing.

[Lord McFall of Alcluith]

There is a real communication problem here. I was at a meeting with the noble Lords, Lord Turnbull and Lord Lawson, and with Andrew Tyrie, and they all complained about the expansion of the Bill from 35 pages to 199. If the Minister, incredibly, is saying that this is to help the Parliamentary Commission on Banking Standards, perhaps the Government should start communicating with us on this, because we are dismayed by the number of pages in the Bill, not accepting of it.

[Lord Newby]

My Lords, I am sorry; with the exception of the bail-in provisions, the expansion of the size of the Bill is specifically in order to implement recommendations of the parliamentary commission, such as the senior managers regime, the criminal sanctions and the enhanced electrification power. The reason that the Government have not today accepted everything that the PCBS has recommended is that we have already accepted the majority of the commission’s recommendations and put them in the Bill. It is simply not the case that we have accepted no recommendations of the parliamentary commission—quite the opposite.

The final issue is specifically about the powers in this amendment. The powers can only be used to make consequential amendments—that is, those which are needed to deal with the provisions passed in the Bill. The example I gave was in relation to the senior persons regime, and I can reassure the noble Lord, Lord Brennan, that there is nothing sinister or unusual in what is being proposed. These powers are commonly taken in Bills which make significant changes to existing law. I am very happy for Treasury lawyers to set out in a letter the precedents that these powers exactly replicate. The hour is late, but I can assure the House that we are not doing anything here that is in the slightest way unusual.

Financial Services (Banking Reform) Bill

Lord McFall of Alcluith Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Lawson of Blaby]

My Lords, my noble friend the Minister has just pathetically addressed Amendment 87. None of his arguments stack up. We are saying here that it would be desirable—I cannot understand why the Government are opposing this—that there should be an additional external member who would have great knowledge and he might even be an academic, which would enormously please the noble Lord, Lord Eatwell. However, he need not be an academic; he could be someone who had a great knowledge of past financial and banking crises.

I think it was the philosopher Immanuel Kant who first observed that the only lesson of history is that no one ever learns the lessons of history. Financial crises are not unique; there have been a series of them over the years, both in this country and in the western world more generally. We commissioned a study of past financial crises. It was conducted by an excellent man, Mr John Sutherland of the Bank of England. It is remarkable how the same mistakes were made time and again. Everyone knows now about the crisis of 2008, but the time will come when that generation will have learnt the lessons of their own lifetime but not of the past, and it would be extremely useful to have someone on the Financial Policy Committee with such knowledge and expertise. It may not prevent a further substantial crisis but it will, at trivial cost, reduce the risk significantly. I cannot understand why the Government object to this.

My noble friend the Minister said that there should not be this guidance; that the Government should be able to appoint the best people. In other words, they should be able to appoint people who have no knowledge of past financial crises. Why do they want to do that? Why on earth is the reason they should want to do that when they have been given this opportunity to buttress all the other excellent measures in the Bill with someone on the FPC who has some knowledge and understanding of previous financial crises? Such knowledge is not widespread among the great majority of people. I have known this neck of the woods for a long time and there is very little knowledge of previous financial crises, yet there is a lot to be learned from them. It seems to me that the Government could easily accept having someone on the FPC who has this knowledge and I cannot understand why they do not do so.

[Lord McFall of Alcluith (Lab)]

My Lords, I support the noble Lord, Lord Lawson, on that point. The historical issue is extremely important. If all MPC members had a copy of Adam Smith’s The Wealth of Nations—Adam Smith was a professor of moral philosophy in Glasgow University 250 years ago—we would not be in this crisis. If we could give them something from the 20th century, it would be John Kenneth Galbraith’s treatise. As he said, all financial crises have leverage at their core. In many ways, as the City historian David Kynaston said, the banking community has to come into the rest of society; it has been an island apart from it.

I remember when I was chairman of the Treasury Select Committee and Sir Richard Lambert was appointed to the Monetary Policy Committee. All flutters were let loose because he was not an economist and therefore could not know about or have an intelligent opinion on the MPC. He proved that he was efficient and in fact the banking community is now calling on him to chair a committee so that it can re-engage with the rest of society.

I remember when Professor Danny Blanchflower was appointed to the Monetary Policy Committee. He was resident professor of economics at Dartmouth College but those with the closed-shop mentality did not want such an individual because he was in America. However, we were in the jet age and he came across every couple of months for the MPC. He gave us an insight into the US labour market and US housing.

My plea to the Minister is to get rid of the mentality that it is only economists and those who are in the system who understand it. This crisis has had a hugely detrimental effect on society. If the economists again do not engage with society, then that is where problems will arise.

Professor Larry Summers, who was a contender for the Treasury Secretary’s job and is the Charles W Eliot Professor at Harvard, said:

“The financial crisis has made me rethink everything about economics”.

That is what he has done. The link between economics and society is so important. Let us get rid of the elitism; let us get rid of the closed shop; let us let in people with experience who understand society and can impart to people who have the great gift of economics the knowledge that they are part of society and that the consequences to society will be dire if they do not have a wide perspective on the implications of their actions.

[Lord Higgins (Con)]

My Lords, we are clearly getting a proliferation of Bank of England committees. We have both the Monetary Policy Committee and the Financial Policy Committee. Can the Minister say briefly precisely what the responsibilities will be of the Financial Policy Committee?

--- Later in debate ---

[Lord Lawson of Blaby]

Before the noble Lord withdraws the amendment, I would like to correct the Minister on what he said before about the noble Lord, Lord King—the former Sir Mervyn King. He is a very old friend of mine, and I can assure the House that in advance of this crisis, he had no knowledge whatever: it was not his interest. He was interested in two things: monetary policy and microeconomics. He was very good at microeconomics, but he had no knowledge or interest in past financial crises at all. He mugged it up later, of course, after the crisis broke. Of course he mugged it up: he is a clever man and able to do so, but I am afraid that the Minister was briefed by his officials to say something totally false and misleading.

[Lord McFall of Alcluith]

The noble Lord, Lord King, whom I know as well and for whom I have tremendous respect, told me on many occasions that he attended MIT for his PhD. He shared an office with Ben Bernanke, who was an historian of financial crises in the 1930s. He assured me that he learned quite a lot in those three years.

--- Later in debate ---

Moved by

[Lord McFall of Alcluith]

91: After Clause 15, insert the following new Clause—
“Independent Banking Regulatory Decisions Committee of the FCA
(1) After section 1L of FSMA 2000 insert—
“1LA Independent Banking Regulatory Decisions Committee
(1) There is to be a Banking Regulatory Decisions Committee of the FCA (“the Committee”).
(2) The members of the Committee are to be appointed jointly by the FCA and the PRA and hold office in accordance with the terms of their appointment.
(3) The person appointed to chair the Committee must have experience of acting in a senior judicial capacity.
(4) A majority of the members of the Committee must be persons appearing to the FCA and the PRA to have (and to have had) no professional connection with the provision of financial services.
(5) The remaining members of the Committee must include persons appearing to the FCA and the PRA to have extensive experience in senior roles in banking.
(6) The function of the Committee is to exercise the banking regulatory decisions function of the FCA and the PRA.
(7) “Banking regulatory decisions function” means the function of taking decisions for enforcing compliance with relevant requirements, within the meaning of Part 14, in cases where the authorised person is a bank.
(8) The banking regulatory decisions function of the FCA and the PRA is delegated to the Committee; and references in this Act to the FCA and the PRA in relation to that function are to be construed accordingly.
(9) The FCA shall meet the reasonable costs of the Committee in discharging its function but the Committee—
(a) is not subject to direction by the FCA or the PRA as to the exercise of its function, (b) is not accountable to the FCA or the PRA for the exercise of its function, and(c) may appoint its own officers and staff.(10) At least once a year the Committee must make a report to the Treasury on the discharge of its function.
(11) The Treasury must lay before Parliament a copy of each report received by them under subsection (10).
(12) In this section “bank” has the meaning given by section 2 of the Banking Act 2009.”
(2) The FCA and the PRA must carry out a review of the operation of the Banking Regulatory Decisions Committee of the FCA.
(3) The review must be completed before the end of 2018.
(4) The FCA and the PRA must give the Treasury a report of the review.
(5) The report must include an assessment of whether the function of the Banking Regulatory Decisions Committee would be better discharged by a body that was entirely independent of the FCA and the PRA.
(6) The Treasury must lay a copy of the report before Parliament and publish it in such manner as they think fit.”

[Lord McFall of Alcluith]

My Lords, this amendment is about the regulatory decisions committee that the Parliamentary Commission on Banking Standards proposed, giving responsibility for banking enforcement decisions taken by the FCA and the PRA to a new, statutory autonomous body within the FCA. Unfortunately, to date the Government have rejected that proposal.

In our evidence sessions we took evidence from a number of bodies, such as the medical and legal professions. In these established professions, a number of steps are taken to separate disciplinary functions from the supervision of professional development. In the legal profession, for example, the Solicitors Disciplinary Tribunal is totally separate from the Solicitors Regulation Authority and has a mixture of lay and professional members. The SRA has no say in its composition. It is in effect a prosecutor before a tribunal.

We took evidence from Sir Peter Rubin, who chairs the General Medical Council, who described similar recent developments in the medical profession. He told us that following the Shipman inquiry, it was pointed out to the GMC that its previous arrangements, whereby it was the police, the Crown Prosecution Service, the judge, jury and everything else, in his words, were incompatible with Section 6 of the Human Rights Act. Essentially, no one should adjudge their own cause so last year, as he told us, they hived off the adjudication process under which cases against doctors are heard to a separate body in a separate building. It is still funded by the GMC but, crucially, a judge now runs the adjudication process. It is now petitioning Parliament to give the GMC the power to appeal when it does not agree with one of its findings. In his opinion, that would really get the complete separation going.

In our deliberations the commission noted that an entirely separate statutory body for enforcement could be a solution but we recognised that there were a number of obstacles to that, not least because it would generate a new regulatory body that could be a source of confusion and conflict. An independent enforcement body would still be reliant on supervisors for many referrals that could in effect result in fewer cases if there were any problems co-operating with the FCA and the PRA. The body that we mentioned should be chaired by someone with senior judicial experience.

We also recommended a joint review by the regulators of their enforcement arrangements in 2018 but to date the Government have been silent on that issue. In the debate in the House of Commons, our chairman Andrew Tyrie made the point that the Government have rejected the need to wind up United Kingdom Financial Investments, and that the regulatory reforms to provide statutory autonomy for the decisions committee are especially regrettable. I would like the Government to give us their views on that joint approach by 2018.

We are seeking a body to be appointed by agreement between the boards of the PRA and the FCA with a majority of members with a non-banking or financial services background, containing several members with extensive and senior banking experience. It should be chaired by a person with senior judicial experience. In that way, it could publish a separate annual report of its activities and of the lessons for banks that emerged from its decisions.

When the FCA representatives were giving us evidence, Tracey McDermott, the director of enforcement, told us that the FSA had still not solved the problem of ensuring that senior figures were properly subject to the enforcement process. She said:

“The focus on senior management is something that we have talked about a lot in the FSA but we have found it very difficult to bring home the responsibility, particularly in larger firms, to those who are further up because of confused lines of accountability and because of confused responsibility”.

I would ask the Minister to keep in mind that there is an inherent tension between the role of real-time regulators and the enforcement function that can involve reaching judgments on which matters supervisors were involved in at the time, and that regulators are focused on the big picture, such as maintaining financial stability. Again, from experience I have witnessed the enforcement process being devalued in that area. There were a number of areas where the FSA at the time should have been on to enforcement procedures, particularly in the 2004-06 period of the financial crisis. It avoided those areas.

The proposal that we are making here is quite a modest one. It is for a statutory autonomous body within the FCA, and in 2018 there should be a review. I hope that Government will take those propositions seriously, reflect on them and come back to us. I beg to move.

[Lord Eatwell]

My Lords, I was a member of the first regulatory decisions committee established under the Financial Services Authority. It was established at that time because it was felt that the FSA’s procedures would run counter to the Human Rights Act, in the sense that those procedures were both judge and jury. The role of the committee was to act as an independent assessor of the regulatory and enforcement proposals put forward by the FSA.

It worked reasonably well, at least from the perspective of a member of the committee, but not from the perspective of the FSA; we tended to give it a rather difficult time when we felt that its cases were ill prepared and ill focused. It played a particular role for a short period. Then, after a particular dramatic case was lost by the FSA in the tribunal, the FSA decided that it did not like the RDC being foisted upon it, and the role of the RDC was slowly downgraded. I think that was unfortunate—obviously I do, because I participated in the early days when I thought it was working rather well, but be that as it may.

The role here is slightly different from the challenge role that the RDC played. Will the Minister address the question of whether any effective enforcement role for a regulator is compatible with the Human Rights Act?

[Lord Newby]

My Lords, we have considered extremely carefully all the recommendations from the PCBS. They contain a number of observations about the importance of banking expertise, accountability, clarity of responsibility and consistency of decision-making, which we certainly agree with.

I shall explain how the current arrangements already deliver all those things in a way that is tailored to the regulators’ individual approaches. First, on expertise, the call to create a separate decisions committee solely for the banking sector partly reflects concerns about the level of banking expertise on the RDC. At the FCA, the regulatory decisions committee is responsible for taking enforcement decisions. Its remit extends beyond banking, but that does not mean that it does not contain banking expertise. Indeed, the FCA has recently addressed the balance of expertise on the RDC through the appointment of two new members with banking expertise. At the PRA, of course there is no lack of banking expertise on its decision-making committees.

Secondly, on clarity of roles and responsibility, Section 395 of FiSMA provides for the separation of supervision from disciplinary decision-making. Under the current arrangements, there is also a clear separation of the function of making enforcement decisions from that of judicial consideration of the issue.

I do not accept the argument that the fact that the PRA does not have an RDC gives rise to human rights concerns. We do not believe that there is a problem on that front. The prospect of decisions being appealed to the Upper Tribunal means that the system already provides an independent judicial challenge function to the decision-making process for all financial services cases. The proposed requirement for regulatory decisions to be made by a committee chaired by a person with senior judicial experience, on the other hand, would appear to give this new committee a quasi-judicial role more suitable for an external review tribunal than an internal decision-making body.

On consistency of decision-making, I understand that a key part of the recommendation was to encourage a greater consistency of decision-making across the PRA and the FCA. Unfortunately, I believe that the creation of an additional statutory committee for banks would create only new inconsistency. The new committee relates only to banking, so any enforcement decisions relating to a building society, insurer or investment firm would be made under the existing framework and the FCA would have to maintain the existing RDC. This would mean one body dealing with the breach of a rule by a bank and a different body dealing with the same breach of the same rule by a building society, with potentially different outcomes, which seems undesirable. While I think that the PCBS report contains some useful observations in this area, I believe that the current, flexible arrangements are the right ones. On that basis, I would be grateful if the noble Lord withdrew his amendment.

[Lord McFall of Alcluith]

I beg leave to withdraw the amendment.

Amendment 91 withdrawn.

--- Later in debate ---

[Lord Newby]

My Lords, this amendment proposes that the Treasury should be required to undertake a review into the effects, including the social, cultural and ethical effects, of exempting certain gaming contracts from the rule which used to provide that no gaming contract or wager can be enforced in a court of law. That exemption applied to certain categories of financial contracts, such as derivative contracts like contracts for differences, which could be regarded as gaming contracts within the meaning of the Gaming Acts because of their characteristics. Only those transactions which were subject to regulation under Financial Services legislation, such as the Financial Services Act 1986, and more recently the Financial Services and Markets Act 2000, ever benefited from the exemption.

However, the law has changed significantly in this area. Since the Gambling Act 2005 came into force, gaming contracts and wagers are now enforceable through the courts, except in Northern Ireland, and the effect of the exemption is therefore limited to Northern Ireland. In the rest of the United Kingdom, there is no difference in the enforceability of derivative investments and other gaming contracts and wagers. Much of the purpose of the review proposed has therefore, in the Government’s view, gone.

It is also unclear what action could be taken following such a review. Trading in financial instruments is subject to European law, and in particular the markets in financial instruments directive. This limits the extent of the action this country could take in relation to financial instruments falling within the scope of the directive. It is unclear what benefits such a review could bring and we suggest that the noble Lord withdraws his amendment on the basis that it is not proportionate or objectively justified.

[Lord McFall of Alcluith]

My Lords, I am surprised that the Minister is saying that we do not know what benefit this could bring. After all this is a derivatives market. We are talking about a derivatives market globally with $66 trillion or more. Not only is there a complexity in that market but there is a total opaqueness. Warren Buffett called derivatives weapons of mass financial destruction. So there is benefit in looking at this issue. Given that the parliamentary banking standards commission’s remit was to look at culture and standards, I would like the Minister to reflect on that issue with culture. In my opinion, culture is about behaviour and ethics is about conflicts of interest. In an opaque market, there are many conflicts of interest, and therefore it would do the Government good to open up this market and see what benefits could result.

The noble Lord, Lord Phillips, has done the Committee a service in this matter. We know that the market will not change overnight, but we must understand what is in the market, particularly the derivatives market. I would like the Government to take this a bit more seriously than the Minister has taken it in saying that we cannot learn anything at all from this.