Financial Services (Banking Reform) Bill
Lord McFall of Alcluith Excerpts(12 years, 3 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Turnbull (CB)
My Lords, I, too, am grateful to the noble Lord, Lord Sharkey, for giving us the opportunity to debate this issue, although, as I will make clear shortly, I have come to a slightly different conclusion. When we get to Amendment 103 next week, we will be talking about the RBS good bank/bad bank issue. The Parliamentary Commission on Banking Standards, which more or less in the same paragraph talked about that issue, also recommended that the Government should examine the scope for the disposal of any RBS good bank as a multiple entity. I think that these studies were called for by the end of September. We have now gone beyond that point and I hope that the Minister will be able to tell us when we can expect those reports. To some extent, the amendment in the name of the noble Lord, Lord Sharkey, seeks to pre-empt the conclusion. I should like to wait to see what the Government have to say on this and then take the matter on from there.
There are also other concerns. As well as trying to increase competition faster than would be achieved under RBS’s current plans, we should always be seeking to return RBS to its position as a fully effective lender, particularly to SMEs. We are asking it to reconstruct itself so that it gets back into the private sector and becomes a ring-fenced bank and a non-ring-fenced bank. My concern is that if we also ask it to start work on a regional agenda now, that will simply overload the system and not get it to the point of becoming an effective lender, which is the main priority in the short term.
It is not clear to me that the regional agenda will necessarily be an effective model, particularly when it is created by taking clones of existing bank networks—by simply breaking up the existing banks into smaller bits and trying to run them on the same lines, with much of the same culture and same technology. I wonder whether that will work and whether the future doe not lie in a more disruptive technology that will grow up from below. I wonder why, for example, we are keen on switching. Why will people want to switch from one kind of a bank to another kind of bank if it is just a smaller version of the same kind of bank? I am beginning to think that the real future lies not so much in the break-up of the existing model but in a disruptive technology, with someone doing to banking what Amazon has done to retailing.
It is inevitable that there will be a full market investigation reference to the Competition Commission. Again, I would not start that now, while so much else is going on, but begin somet ime after 2015. My preference would be to fold this regional debate into that, rather than pursue it now.
Lord McFall of Alcluith (Lab)
My Lords, the noble Lords, Lord Eatwell and Lord Sharkey, have done the Committee a service by raising this issue. Four years on from 2010, when the Government came into office, we have much less competition: banks are bigger; the cost of capital, as the noble Lord, Lord Higgins, said, is more expensive; and SMEs’ credit is still drying up. The problem is that British banking lacks a “spare tyre”, as Adam Posen of the Monetary Policy Committee said. I remember a conversation that I had with Stephen Hester when he was chief executive of the Royal Bank of Scotland. He said, “If you have new entrants into the banks, all they will do is replicate the business model that already exists. You need a Google, a Yahoo or a Facebook to have that disruptive technology”, as the noble Lord, Lord Turnbull, described.
I was of the opinion that, as a commission, we should have a referral to the Competition and Markets Authority straight away because this is an area in which, when talking about change, we are talking about years and possibly decades. If we do not get on to this straight away then we will see very little improvement at all in five or 10 years’ time. As the noble Lord, Lord Eatwell, said, if we are talking about establishing regional banks—an aspiration which the most reverend Primate the Archbishop of Canterbury articulated—we need a secure structure. We have to understand how small banks failed. People say, “Well, small banks are just the same as large banks”. I have a quote here from February 2006 in which an individual said,
“we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management ... These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries”.
So, the system is safer. The individual who said that was a certain Tim Geithner, whom the President of the United States then appointed as the United States Treasury Secretary. Mr Geithner had a great knowledge of individual institutions but Mr Geithner, like the IMF and others, was clueless about the interconnectedness of the banks, which is why the banks went down. Whether we are talking about large investment banks or small regional banks we must turn our attention to that area of risk if we want a better system.
My noble friend Lady Liddell mentioned the Airdrie Savings Bank. I was privileged to give the 150th anniversary address there. To re-emphasise what she said, the non-executive directors there were local and unpaid. The Airdrie Savings Bank was a fly on the back of the elephant that was the Royal Bank of Scotland. However, the Airdrie Savings Bank prospered and the Royal Bank of Scotland went under. The Chancellor at that time, Alistair Darling, said that he got a call in the morning from Tom McKillop, the chairman of the Royal Bank of Scotland, saying that it would be out of business in the afternoon if the Government did not step in. Surely there are lessons to be learnt there from the small banks.
I do not accept the proposition that small and regional banks are not on. A chief executive of a very large bank said to me in private that we should look at retail banking in the United Kingdom as utilities—as predictable and boring activities. That is the way we should be looking at our banks. I think a referral to the Competition and Markets Authority would be wise at the moment because we will be talking about this issue for 10 or 15 years to come. If we do not look at the structure of retail banking in the United Kingdom, we are simply going to replicate what we have at present. There is an opportunity for innovative thinking. These amendments offer the Government that opportunity and I hope that the Minister in replying will indicate that this is a fertile area and we can get on to looking at a new structure for our banking.
Lord Desai (Lab)
My Lords, I support the amendment in the name of my noble friend Lord Eatwell and want to comment a little on the amendment from the noble Lord, Lord Sharkey, and my noble friend Lord Glasman. The key is what the noble Lord, Lord Higgins, said. Where are the economies of scale in banking from? Why are large banks more successful in surviving and, as it were, swallowing up smaller banks here than they are elsewhere? We had smaller regional banks for a number of years in the 19th century and later. Then we had the concentration of only five large clearing banks left and then even fewer. One question that the competition authority ought to ask is, “Are the economies of scale technological, or is it just that larger banks can borrow money on the money market at a more favourable rate than small banks can? Or are we as authorities putting serious restrictions in the path of small banks to stop them starting and prospering? Are we imposing extra costs on the small banks so that the large banks get away with lower costs than small banks?”. Those are the questions that we ought to examine.
I do not particularly mind whether these are regional banks—what we need is more diversity in banking. Regional and local banks may have failed not because there is something wrong with being local or regional but because there was a storm of cheap credit available and people decided that even if you were a local bank you could still get into the American subprime mortgage market to make money. That is what ruined people; it was not being regional. In a globalised market you have access to buying and selling assets all over the world. German local banks got into subprime mortgage markets in America and lost out.
We really ought to nail down where the economies of scale are and encourage and increase diversity by removing the non-competitive restrictions that currently help large banks to dominate, rather than creating small banks that would have special competitive advantage—as it were, some kind of subsidy—which may be desirable in some larger sense but is not economically efficient. We have to ask whether large banks are surviving because of a competitive advantage and whether they will fail again, costing us a lot of money. Should we look for diversity and a level playing field among large and small banks?
Lord McFall of Alcluith
My Lords, the noble Lord, Lord Higgins, has a real point here. If we look at the timeline with PPI, consumer groups were complaining about it in the late 1990s. There was a supercomplaint in 2005. The Treasury Committee highlighted it in 2003. The OFT and the Competition Commission looked into it. It was 2012-13 before something was sorted out. That is a generation. We are making these points against the background of a sclerotic system and we really need a commitment from the Government that they are considering the matter. Otherwise, we will be back here in 10 or 15 years’ time and nothing whatever will have moved.
Lord Newby
My Lords, everybody would have a great deal of sympathy with the general point that the system has worked very slowly in the past. The FSA was extremely slow in many ways, but one of the features of the way the new system works is that a greater degree of urgency is injected. I give as an example the document on consumer credit published by the FCA last week. The FCA does not take responsibility for consumer credit until next April, but well in advance of that date it has produced a comprehensive plan of how it wants to proceed. This is much more rigorous than anything we have seen in that area in the past. To a considerable extent, the regulators have learnt lessons about the need to move with all due deliberation, yet also with due speed.
Lord McFall of Alcluith
My Lords, it is a pleasure to follow the noble Lord, Lord Brennan, and to have my name on these amendments. At Second Reading, I mentioned that the Parliamentary Commission on Banking Standards was charged with looking at culture and standards. We found a culture that was rotten and standards that were abysmally low. That applies particularly in the area of senior management and we need to ensure that the individuals, the organisations and the regulator do something about it.
My concern is that these amendments might not fully deal with the anti money-laundering failings that we have seen. I looked to the Economist, courtesy of the December 2012 issue, to recap on what we have seen in terms of egregious examples. The biggest money-laundering settlement with the US authorities was made by HSBC, which settled for $1,921,000,000—about $2 billion. Its money-laundering activities involved countries such as Cuba, Iran, Libya, Mexico, Myanmar and Sudan. Standard Chartered’s settlement was $667 million and the countries with which it was involved were Iran, Libya, Myanmar and Sudan. RBS had a $500 million settlement and it was involved with Iran and Libya. Lloyds Banking Group’s was $350 million and was involved with Iran and Sudan. The settlement for Barclays was $298 million and the countries were Cuba, Iran, Myanmar and Sudan. These were all UK-based companies, so our integrity as a financial centre in London is at risk as a result of the failings that we have seen.
The issue of HSBC is important because it took over a bank in Mexico. The group chief executive, Stuart Gulliver, and the group chairman, Douglas Flint, came before the Parliamentary Commission on Banking Standards. I asked Stuart Gulliver question 3777:
“Mr Gulliver, after acquiring the Mexican bank, it was known right up to board level that the bank had few, if any, money laundering controls, and that the affiliate did not meet group standards. So why was it allowed to continue correspondent banking, when it was known that it didn’t meet group standards? Was it wilful ignorance or were the systems not in place for that?”.
Stuart Gulliver said:
“I think the answer lies—I think the Commission has seen this in a number of instances—with culture. The culture failures were at two levels. We bought a bank in Mexico that we bought cheaply because it was in distress. That bank, as you can see from the documentation, clearly had inadequate anti-money laundering systems. We ourselves were too slow to put in place anti-money laundering systems that would be up to the standards we would all expect.”
I intervened and said:
“But you knew from day one of acquiring the bank that there were problems”.
Stuart Gulliver replied that, yes, he knew from day one; so a global bank with a reputation in London acquired a bank in Mexico, knowing from day one that it did not have adequate anti money-laundering facilities.
Then I quoted the head of group compliance, David Bagley, who had said that his,
“‘mandate was limited to advising, recommending, and reporting. My job was not—and I did not have the authority, resources, support or infrastructure—to ensure that all of these global affiliates followed the Group’s compliance standards. Rather, final authority and decision-making rested with local line management in each affiliate’”.
I continued my questioning:
“In October 2002, a month before HSBC acquired the bank in Mexico, David Bagley said in an e-mail: ‘There is no recognisable compliance or money laundering function’. Is that not amazing?”.
Was that not amazing for a global bank with the reputation it had? My point to the Minister is that he should not accept the words of the banks, because one of the things that the Parliamentary Commission on Banking Standards was tired of hearing was executives saying: “These were the problems that existed in the past. We have sorted them out. There are new people in place; ergo the problem will not exist”. However, at the Parliamentary Commission on Banking Standards, we were seeing examples every month of these egregious behaviours, so we have to ensure that both the regulator and the companies have the necessary authority and that the regulator enforces that.
On the issue of HSBC and the Mexican drugs, these are not victimless crimes. To put it into context, more than 35,000 people died at the hands of Mexican drug gangs at the time HSBC was involved in this money-laundering operation. The chair of the Senate Investigations Subcommittee, when referring to the widespread anti money-laundering failures of HSBC, described its culture as “perversely polluted”.
The Financial Conduct Authority itself confirmed how widespread the problem was. In 2011, it published a review into how banks deal with situations of high money risks. It found that 75% of banks were not taking adequate measures to ensure that they met their legal obligations and that more than a third were willing to accept business with a high degree of money-laundering risk if they thought they could get away with it. Based on that 2011 review and other findings, the FCA concluded that for UK banks,
“the level of anti-money laundering compliance is a serious concern … the weaknesses we see in firms’ dealings with high-risk customers is a serious and persistent problem”.
As the Parliamentary Commission on Banking Standards noted in its final report, by failing to prevent criminals from abusing our financial system, the banks are compromising the integrity of this sector and our economy as a whole. By failing to prevent money- laundering, banks are making the UK vulnerable to tax evaders, drug smugglers, arms traffickers and corrupt politicians laundering their ill gotten gains. The potential for a major British bank losing its licence in a major market would have huge ramifications for the UK economy. HSBC came perilously close to losing its licence. The Justice Department was of a mind to take its licence away and we all know that there was involvement from the Foreign Office and elsewhere to ensure that that licence was not indeed taken away. This issue is hugely serious for the integrity of our banks and for the economy.
The Parliamentary Commission on Banking Standards highlighted a number of general causes for the abysmal standards in the UK banking sector. Two of the most important ones were the lack of personal responsibility for senior bankers and poor enforcement of legal obligations by the regulators. I well remember that when Tracey McDermott, the director of enforcement, came before the commission we had another egregious example—one of the star traders of UBS losing billions of pounds. When we asked her what went wrong, she said, “We investigated the bank and the trail went cold”. The trail went cold because there was no list of individuals responsible for particular issues in the bank.
One of the things we would like to see is the responsibility flipped to individual bankers. Time and time again, as was mentioned earlier, we had senior bankers with PPI issues coming before us and saying, “We knew nothing about it”. It was a no-see, no-tell policy. They were evading the responsibility and they were evading being honest with the Parliamentary Commission on Banking Standards because if they had been honest with us, they would have been culpable.
Since we have had the Parliamentary Commission on Banking Standards, I have had a number of communications from one or two of the executives who came before us, asking whether I would meet them so they could explain how they went about their business and tell me about the restrictions placed on them within the organisations themselves. They wanted to demonstrate that they had personal integrity, notwithstanding the fact that everything—the whole ship—went down in terms of the organisation. I did see them.
This issue of a no-see, no-tell policy is really important. The noble Lord, Lord Turnbull, made the point about a handover note. It would seem to be a minor point, but this is hugely important. The Government must ensure that they get that right by allowing the regulator to lay down—“may lay down” are the words in the legislation—elements of the conduct of business. There has to be a real attempt here to ensure that full responsibility is taken by the senior executives.
It was clear that even when personal liability could be established the regulator rarely took up the case and when it did the punishment for individuals was non-existent or weak. I mentioned that the regulator was captured, cowed and conned by the industry. We need to ensure that the regulator has a spine in future to ensure that the organisations take individual responsibility and, if they do not, if it knows who is responsible, make its enforcement division very strict on the matter.
I suggest that, given the poor record of regulation, it is incumbent on us in Parliament to give the clearest steer possible, so that the commission’s recommendations are not diluted during the second, regulator-led stage of implementation. There needs to be firmness from both the regulator and Parliament. I hope that the amendments indicate to the Government that the anti money-laundering area is one that they should look at again and that they should come back before Report stage with something meaningful for us to address.
Lord Newby
My Lords, unless it was taking deposits it would be exempt under the amendments as they stand. It is fair to say that I have heard what the House has said and I will relay it with all force to my colleagues in the Treasury, who will not have had the privilege to hear it directly.
Lord McFall of Alcluith
It would be easy to put a note in the Library about which institutions will be affected and which will not, so that we can see for ourselves and there is no misinterpretation when we look at this further on Report.
Lord Newby
I am not sure that I can undertake to give a comprehensive list, but I am sure that I can undertake that we would explain which named organisations fall on both sides of that definition.
The next point made by the noble Lord, Lord Turnbull, was about the licensing regime. He made a common point about “may” as opposed to “must”, something that we debate at huge length. There is no doubt that there will be not a licensing regime in his terms, but there will be rules of conduct that will cover all employees for whom they are relevant. The intention is not for the cleaners to be covered by these rules. It is perfectly well understood with the PRA that it will not only produce the rules but set out the scope of which employees will be covered by them.
The noble Lord asked about the handover note. Our view is that we do not need primary legislation to require handover notes. The regulators can require that in their rules, and I am sure that they plan to. When senior managers take on a new job, new statements of responsibilities are required so that there is absolute clarity on what the senior manager is responsible for. We see these as fulfilling the purpose that he had in mind, and which other people might colloquially think of as a handover note.
The noble Viscount, Lord Trenchard, raised the question about whether British banks would be at a disadvantage. I cannot really add to the comments of my noble friend Lord Lawson and others, other than to say that the Government believe that it is in the long-term interest not only of bank customers but of the City of London that the highest possible standards are followed here. If individual bankers feel that they do not want to operate to the highest possible standards, they should go somewhere else.
The noble Viscount, Lord Trenchard, and the noble Lord, Lord Flight, asked whether the senior management regime undermines collective responsibility. We do not think that it does. It ensures that individuals are held to account when things go wrong. It will not change the way in which decisions are taken in a collective manner.
The noble Lord, Lord Flight, raised a point that has been made a number of times: why did the regulatory system get away with it, and why has no action been taken? The answer is that the restructuring of the system was undertaken to try to ensure that we did not have the same problems again. The Government believe that that is how you stop the laxity of the past, and that we begin to instil a new culture by having different organisations, objectives and rules. The regulatory regime has not gone through this process unamended.
Moving on to the amendments introduced by the noble Lord, Lord Brennan, I assure him that there is no difference of view between him and other noble Lords who supported this amendment about the significance of money-laundering and the need for it to be tackled effectively, nor of the scale of it. The scale of money-laundering is very large, and the Government and the regulators are determined to cut it down.
I would like to make some points against the amendments and in response to some of the things that have been said. The most important point was that raised by the noble Baroness, Lady Noakes. The requirements for senior managers to stay within the law on money-laundering are no different from those to keep to the law in every other area where there is law. The noble Lord has a laudable interest in money-laundering while the noble Baroness is interested in anti-terrorism legislation. There may be an overlap, but they are distinct. Other noble Lords are interested in other things, where bankers have a legal responsibility to keep within the law. Singling out money-laundering, at a point where it is not required in order to be covered by the legislation, serves no useful purpose and can be positively unhelpful. However, I am happy to take up the sensible suggestion from the noble Lord, Lord Eatwell, that we provide a letter of comfort, as it were, between now and Report to confirm that the regulator takes this extremely seriously, and that we begin to explain how the obligation under the law will be undertaken.
The noble Lord, Lord McFall, repeated that in the past the trail could go cold. The great thing about these provisions is that they deal explicitly with that. To say that the trail goes cold will no longer be a defence.
Lord McFall of Alcluith
The reason I said that is that Tracey McDermott, the present FCA director of enforcement, came before the committee and answered that question in all honesty. She said that what is needed is a chart of organisations to determine who is responsible for what and a handover document. That is at the start at the moment; it has not been fleshed out. That is the reason why I brought that point to the Minister.
Lord Newby
When this amendment is enacted, it will ensure that a senior manager will have his or her areas of responsibility explicitly set out on appointment and that he or she will be held responsible for everything that happens on their watch in that area. It will no longer be a defence to say, “The trail ran cold” or “Nobody told me about it”, as long as they might reasonably be expected to know about it. That is a killer point in respect of this amendment.
The noble Lord, Lord Watson, said that the Government are complacent, as HSBC has shown. It is in part because of the HSBC experience that this series of amendments has been introduced. We are confident that they will stop that happening again.
The noble Lord, Lord Eatwell, set out the arguments for a licensing regime. The Government believe that the code of conduct we are proposing, which will cover all those involved in banking activities, is a proportionate response to the need for the kind of principles followed by people on a day-to-day basis in the banking sector that the noble Lord wants covered by the licensing regime. We are confident that the Government will achieve that.
I hope that I have dealt with most of the points that were raised. I commend the amendment to the Committee.
Financial Services (Banking Reform) Bill
Lord McFall of Alcluith Excerpts(12 years, 4 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord McFall of Alcluith (Lab)
My Lords, it was, along with other Members, a privilege to be a member of the Parliamentary Commission on Banking Standards. I want to add a few words to what has been said. As a member of the commission whose view on this matter was for full separation, I signed up to the recommendation in order to have unanimity in the committee and because for the rest of us, with due deference to the most reverend Primate the Archbishop, it was an act of faith. That is what the recommendation from the committee was, because ring-fencing is at the moment theoretical. Without naming the person, I well remember someone on the Vickers commission saying to me, “John, we lost our nerve and advocated ring-fencing”. I do not want us to lose our nerve but I want us to be vigilant on this issue.
I well remember the evidence given to us by Paul Volcker who, noble Lords will remember, said, “I cannot really understand what the situation will be if you are the holding company which has authority over the ring-fence. If it comes to making a decision by that holding company’s executives about the future of the company, then the executives of the holding company will win over the decisions at the ring-fence”. At the end of the day, it is the holding company that matters. There is therefore something uneasy and illogical about this issue.
I also well remember another witness, not at the banking standards commission but elsewhere—Willem Buiter, when he was on the Monetary Policy Committee before he went to Citibank to be its chief economist—saying, “Remember that the half-life in the financial services industry is less than three years”. In other words, people will forget what has happened before. Having spent nine or 10 years as chairman of the Treasury Committee, all that I can say is that the banking industry is ever vigilant. If we sit back here for a four or five-year period and then return to the matter to see what has happened, the landscape will have changed completely. All that I would add to noble Lords’ comments is that if this House does not express that it has to be vigilant at all times, we are going to lose out and it could be to the disbenefit of ourselves as a Parliament and of society.
Lord Forsyth of Drumlean (Con)
My Lords, I did not speak at Second Reading because I could not stay for the wind-ups, but listened to most of that debate. I should like to press my noble friend on his logic. He says that we cannot have some body to police or check up on the regulator. I am very surprised that my noble friend Lord Blackwell, with whom I am normally absolutely on the same square on most issues, says that we must trust the regulator. There was a reason we got into this mess and, by the way, we still ought to have a proper inquiry into what the regulator was doing and how the crisis happened in the first place. The very last thing I feel like doing is trusting the regulator.
We have also seen the regulators going off to work for the banks at, no doubt very appropriately, very high salaries to help them with their compliance and operation of regulation. Let us face it, I am not sure where I stand on the notion that we should trust the regulator on this matter. Like the noble Lord, I was prepared to go along with ring-fencing but could not see how it could work. But it certainly is not going to work if you have very clever people in the banks and at the regulator, but no one is actually breathing down the regulator’s neck. That seems to be the lesson that we can learn with absolute clarity from the previous experience.
I have to say that my noble friend’s logic was, “We can’t possibly have the regulator being subject to second-guessing all the time. How are they going to be able to carry out the agreed policy?”. As has repeatedly been said in a number of speeches, this is an experiment because it is part of a compromise to try to get the banks reasonably on board and to proceed on the basis of consensus.
In my seven years—perhaps it was nine years—working in an investment bank, I learnt that investment bankers are extremely adept at getting between the wallpaper and the wall. If they can find a way to get around something, they will. That is their job and how they make money and resources. The notion that if we have ring-fencing there will not be lots of clever people finding very good schemes to get around the intention of it and that the regulator will stand up to them, especially if we are in a period of prosperity, flies in the face of the experience that we have had.
It is essential to have someone independent of the regulator looking at this relationship and seeing if it is working. They should report to Parliament, with Parliament ready to enforce separation if it is required. It is by putting their feet to the fire in this way that we can be sure that they realise that it is in their interests to make this ring-fence procedure work. Without that, it will not work and we will be back to where we were before you can say “renewed prosperity”.
My noble friend uncharacteristically showed a lack of logic in what he was saying. If he wants the House to commit itself to this policy, he needs to address this basic question of who will guard the guardians.
Economy: GDP Forecast
Lord McFall of Alcluith Excerpts(12 years, 6 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Newby
My Lords, the increased growth figures will of course have a materially positive impact on the debt forecast going forward. With regard to lending to SMEs, the Funding for Lending scheme was strengthened at the Budget and I am pleased to say that the figures published this morning show that there has been for many months a slight uptick in lending to SMEs.
Lord McFall of Alcluith
My Lords, the Minister has recognised that the public debt that this Government inherited in 2010 will be greater when they leave office in 2015. No less a figure than the editor of the Spectator has said that the amount of debt that this coalition Government will borrow will be greater than the total amount of debt of the Labour Government in their 13 years from 1997. Is it not the case that there is not a deficit reduction strategy but a growth reduction strategy, which has been the most successful in history? This Government need to acknowledge that and do something about it.
Lord Newby
My Lords, I disagree with virtually all of that. As I pointed out earlier, during the five years of this Government we will have borrowed very significantly more to shore up the economy. That is why debt is higher. I am not sure whether the noble Lord is suggesting that we should have borrowed even more.
Taxation: VAT on Retrofitting Buildings
Lord McFall of Alcluith Excerpts(12 years, 6 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Newby
Shale gas is a significant potential new source of energy. As the noble Lord will be aware, we announced a series of measures in the spending review that will facilitate the development of shale gas. We think that it can play an important part in our future energy mix. Of course, the development of it will generate a number of jobs.
Lord McFall of Alcluith
In the discussion the other day with representatives of the KfW Bank in Germany, at which the Minister was present, he will have heard them say that one of the most successful schemes the bank has been involved in is a scheme for energy saving and job creation in Germany. Does he not think that there is a lesson here for this country, at a time when the divide between north and south is getting greater, so that we can help rebalance the economy and provide jobs at a local level, thereby having the twin objectives of ensuring economic prosperity and providing insulation for homes for the future?
Lord Newby
I completely agree with the noble Lord. Of course, that is why we set up the Green Investment Bank, which is already proving its worth, not only in putting money into green projects on its own behalf but getting a significant multiple of private sector investment coming in to support that government pump-priming.
Financial Services (Banking Reform) Bill
Lord McFall of Alcluith Excerpts(12 years, 6 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord McFall of Alcluith
My Lords, it is a pleasure to follow my fellow member of the Parliamentary Commission on Banking Standards, the noble Lord, Lord Lawson, who played an invaluable and steadfast role. I also congratulate the noble Baroness, Lady Kramer, the noble Lord, Lord Turnbull, and the most reverend Primate the Archbishop of Canterbury on the work that they have undertaken. As the noble Lord, Lord Lawson, has said, special thanks go to the chairman for keeping it all together and producing a unanimous report for us.
It is exactly a year ago this month that the Parliamentary Commission on Banking Standards was established. With more than170 hours in 80 evidence sessions in public, 74 hours in private, and more than 9,000 questions later, what have we found? Mindful that the remit was to look at culture and standards in the banking industry, we have found an industry where standards are abysmally low and the culture is rotten. Even in the seven months in which we took oral evidence, we saw two more major LIBOR scandals; an interest-rate swap scandal; the PPI mis-selling scandal, the bill for which has risen £15 billion to £17 billion; a major bank guilty of money-laundering in Latin America; and another fined $700 million for sanction-busting in Iran.
The question is: how do we fix such a system where the public trust in these institutions is at rock bottom? Despite the worthy attempts of the Parliamentary Commission on Banking Standards, we have no magic solution. Yes, we provided a profound analysis that illustrated both the structural and organisational fault lines, but I would suggest that we have produced a signpost report which points the way for the Government, the regulator, the industry and also civic society to take things forward. This will not be done overnight; it will take a generation. If we are to change culture, we need that change to be a behavioural change and, for that, individuals need to buy into it. It starts at the top and permeates the organisation, which will take a considerable period of time. We have seen boards, chairmen and chief executives deficient in this regard. The report laid bare the lack of individual responsibility at the top—I would suggest that we witnessed a “no see, no tell” approach, where the collective decision-making was a defused responsibility. The concept that “the buck stops here” was non-existent in the banking system. I have two brief examples of that. From UBS top management, four senior executives came before the commission; a star trader had lost thousands of billions of dollars in the Far East and, when we asked if they knew the star trader, they replied no. We asked when they found out and they said, “When we read it on the Bloomberg wires”. Collectively, they were probably getting about £100 million a year, but they knew neither who the people were within their organisation nor what those people were doing on their behalf.
The payment protection insurance scandal has, as I mentioned, cost £17 billion and is likely to go up to £30 billion. Mindful that the cost of the Olympics was £8.9 billion, we are talking about the cost of four Olympics being put on, with a mis-selling scandal taking place over 18 years. Yes, the standards were abysmally low, because of a lack of ethical principles at the top of the organisation. Why, we may ask, did that situation prevail for so long without adequate challenge from outside? Here we come to the regulator; it is full of worthy people but it was, I would suggest, captured, conned and cowed by the industry. Captured, because there was an incestuous relationship where the views of wider society were rarely heard and never heeded. When I was chairman of the Treasury Select Committee, it took me five or six years to get at least one consumer representative into the Financial Services Authority. With the procession from the Financial Services Authority to the private industry—and with the former chief executive going to Barclays as a compliance officer for 10 times his salary at the FSA—I suggest that we could be seeing a postgraduate institute of the FSA for people to get better jobs in the private sector. If we want to have an even system, where the balance of power is maintained, we are going about it the wrong way, because the regulator will always be weak.
The regulator was cowed, because this is a powerful industry that is used to getting its own way and is impervious to challenge. The PPI scandal illustrated that very well. I also said that the regulator was conned. Why conned? It is because the FSA executives said to me for years that the business model of institutions and organisations was not their responsibility. They did not know, or seemed to care little for, how much risk there was on the balance sheets of banks as a result of complex models. That complexity provided an illusion of control; people felt satisfied but they did not know what was going on. That very much applied to the regulator. They did not wake up to the importance of the selling of PPI, because they did not look at the profit and loss of the balance sheets. One cursory look would have shown that there was a big problem.
I am not advocating for more regulation, we do not need more regulation. What we do need is tougher regulation and change to the commercial law of the land regarding the responsibilities of directors, so that the heads of the banks are answerable for the actions of rogue subordinates. We need to give the regulator both authority and autonomy. I turn to the ring-fence and leverage, because the Parliamentary Commission on Banking Standards did its job adequately in those areas. What have the Government done? To date, I would suggest, they have pulled the rug from under the feet of the regulators. Let us look at ring-fence and what the Government are proposing. In fact, some of us, as the noble Lord, Lord Lawson, said, were advocates of full separation and anyone who listened to the testimony of Paul Volcker when he said to the commission that an executive or director of an holding company is responsible for the ring-fence as well, would know, as the noble Lord said, that it is very hard to have a ring-fence situation. In the name of compromise, however, we sat down and said that if the Government established the Vickers commission and Vickers came out with ring-fencing, we were mindful that the Government would be unsympathetic to anything else. That is why we called for the electrification of the ring-fence. If anyone gamed the system, the regulator could bring them into line quickly and threaten or impose separation.
What have the Government done on paper? They have accepted that, but I suggest that to date they have neutered it. The noble Baroness has already mentioned the remarks of the chairman in the other place. How have they neutered it? They have done so by expecting the regulator to issue three preliminary notices to the offending bank, seeking permission from the Treasury on each occasion. What price the independence of the regulator in a situation such as that? The three permissions from the Treasury are followed by a five-year gap before there is any decision whatever on separation. I say to the Minister that that is an affront to the genuine efforts of the Parliamentary Commission on Banking Standards to seek a unanimous way forward. What we have now is not a ring-fence; I suggest that it is a hammock in which the executives can swing easily above the ground, while all the hassle takes place on the ground with the politicians and the regulators, and the executives look down from above, easy and relaxed. Therefore, the Government have to fundamentally change their opinion on that. I am going to be in the trenches with the noble Lord, Lord Lawson, in ensuring that the Government do the right thing on this issue.
The other area that we looked at was leverage. The noble Lord, Lord Lawson, said that the Bill as it stands remains defective in many key areas. There is no doubt that it is defective in the area of leverage. As the noble Lord said, we were of the opinion that the regulator should be in sole charge. However, the Government have rejected that out of hand. The noble Lord, Lord King, newly ennobled, was unequivocal when he said:
“Leverage is the one issue that matters above all others ... it’s precisely for that reason that the banks will resist most strongly the regulation of leverage and the politicians will compromise on precisely that”.
In the Financial Times today, the Business Secretary talks about those in the Bank of England as the “capital Taliban” because they are not listening. I agree with the leader in the Financial Times headed:
“Let the regulators show their teeth”.
The regulators have not shown their teeth so far, and if we allow the present situation to continue, we will undermine confidence in the entire system.
We all know that excessive leverage has been the trigger in every banking crisis in history. That is why Vickers recommended 4%, limiting gearing to 25:1. That is why we echoed Vickers, and it is why the interim Financial Policy Committee of the Bank of England asked for the power to vary leverage. However, the Government declared “no, no, no” three times, saying that they were wedded to Basel, despite the wise advice to the contrary. Robert Jenkins, a former member of the interim Financial Policy Committee, was very clear on the issue. He is no longer on the FPC because, I suggest, he challenged the Government too much, and he has now been dumped off it. However, he looked at Barclays, which we saw—and still see—as a poster child for excessive leverage.
The balance sheet of Barclays is roughly the size of the UK’s annual GDP. It funds £1.5 trillion of risk-taking, with 97.5% of debt and 2.5% of loss-absorbing equity. The noble Lord, Lord Lawson, mentioned hedge funds. The average hedge fund trades with three times leverage, but Barclays is operating with 45 times leverage—a gearing 15 times the average of any hedge fund. If Barclays’ assets eroded in value by a mere 1.5%, it would be leveraged 100 times over. I ask noble Lords: does that inspire confidence in building a sound, stable and sustainable system for a post-crisis environment? I think that the Government have to look again at that.
One last issue, which I advocated in the report, is the concept of the duty of care. It could be said that, despite all the scandals that there have been in banking, there has been only one big scandal, and that is that customers’ interests have been at the bottom of the pile. I suggest to the Government that if they implement this measure, it will be transformative for the industry because it will ensure that the buck does indeed stop with individuals at the top, and it will permeate the organisation. Therefore, my plea to the Government is that a duty of care needs to be a key element in the new banking standards rules.
During the many hours of questioning, I regularly asked senior bankers whether banks could change on their own. In response, they all said no. That is why the Government cannot stand aside and give the industry a free pass. To transform this industry, which is at such a low, the Government have to be an active participant. The parliamentary commission was the first of its kind for a century. The previous one, exactly 100 years ago, collapsed in a heap of partisan acrimony. This commission did not; it stayed together and was unanimous. At the end of the day, we do not want the Government letting the side down after a cross-party group has sat for a year and come out with a unanimous approach.
We resisted the temptation to be partisan and produced the report, so we have been faithful to the task that the Government gave us. However, if they ride roughshod over our efforts and recommendations, not only will that traduce the role of such a unique commission but it will fail to best serve the interests not only of the financial services sector but of the wider economy and of societal well-being in the long term.
Queen’s Speech
Lord McFall of Alcluith Excerpts(12 years, 9 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord McFall of Alcluith
My Lords, today UK businesses have about £700 billion in cash on their balance sheets—money that is looking for places to invest but companies are lacking the confidence to do so. In addressing the growth strategy—which currently seems to be absent—the biggest task facing the Government is to instil confidence in people and companies. We have to recognise that there is a demand problem facing the country. That is why the austerity approach taken by the Government in the past few years has been wrong.
However, we need to ensure that confidence is based on reality. As a member of the Parliamentary Commission on Banking Standards, I am very much aware of the reality that in banking and finance the architecture has crumbled. We need not just to reform but to rebuild that from the floor up. We cannot afford to apply a sticking plaster to a system. Just how much the system has disintegrated was admitted by Adair Turner, the former chairman of the Financial Services Authority, in a remarkable interview a few weeks ago in the Sunday Telegraph. He said:
“I think we—as the authorities, central banks, regulators, those involved today—are the inheritors of a 50-year-long, large intellectual and policy mistake. 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 and in the real economy. And not only did we ignore it but we had a pretty overt intellectual philosophy that we could ignore it, because we knew the financial system was just a market like any other and whatever it did was bound to be for the good because that’s what markets are … I was surprised at the supervisory approach. I’d been on the board of a bank, I’d been involved in banks, I’d dealt with banks back in the 1980s and 1990s, and I, throughout that, had accepted the existing capital regime as a given, right? I had never gone back to basics and said, ‘Why do we allow banks to run with 30, 40, 50 times leverage?’. And neither had anybody else, funnily”.
That includes Larry Summers, former Treasury Secretary of the United States, adviser to President Clinton and president of Harvard University—he is presently the Charles Eliot professor of economics at Harvard—who has said that everything that he has taught in economics has been called into question by the crisis. When the respected John Kay and Professor Charles Goodhart came to the Treasury Select Committee a few years ago, I asked them whether they understood risk, to which Charles Goodhart succinctly answered no. John Kay said, “I’ve been teaching risk for the past 25 years at Oxford University and what I did was throw my notes away, because nobody understands risk at the present time”.
Therefore, the situation in which we find ourselves is fragile. I suggest that if we do not go back to basics we will not solve the long-term problems that affect the financial services industry. The Prime Minister last week admitted in response to a question from the chief executive of Santander that the Government were confused and had mixed messages for the sector. As for briefings from the Treasury and the Chancellor, I have been taken aback to read in newspapers over the past few weeks that the Treasury is paving the way to sell the Government’s bailed-out bank stakes at a loss. The Times commentators, Sam Coates and Patrick Hosking, both of whom I know and are very respected, wrote recently that the Treasury wants to,
“lower public expectations over the amount that will be recovered from the sale”.
It hopes that the Parliamentary Commission on Banking Standards will conclude that the Labour Government paid too much for Royal Bank of Scotland and Lloyds in 2008.
From my point of view, there is not a chance of that happening, and it is simply not true. Alistair Darling made it clear in an article in the Financial Times last week that, on the eve the general election in 2010, the economy was growing and the Royal Bank of Scotland’s share price was 504p, which meant that the taxpayer was up £500 million on the deal. Three years later, with no growth, the taxpayer is down almost £20 billion. It is vital that we do not turn a paper loss into a real one with a hasty sell-off. The Business Secretary, Vince Cable, agrees with us on that very point. He said:
“I don’t see the need for any haste”,
as he called for the break-up of the Royal Bank of Scotland to boost competition. That is perhaps as a result of his membership of the Future of Banking Commission—on which he sat along with me and David Davis MP, who chaired it excellently—when we called for increased competition, maximum transparency and a new culture and ethos in the system where customers’ interests come first.
Three years into the life of this coalition, meaningful competition is a more distant prospect than it was in 2010. The events at Lloyds with Project Verde and the RBS sell-off to Santander, which has hit the dust, illustrate that the Government have neither leadership nor control of this situation despite being the dominant shareholder in these entities. We cannot leave the structure of the banking system to the vagaries of the market. Perhaps the time has come for us to abandon the pretence that UKFI is in control of events, in a situation where Lloyds has already spent more than £1 billion on Project Verde and Santander has withdrawn from the agreement with Royal Bank of Scotland after years of negotiation. We have seen everything turn to dust.
The Government need to demonstrate leadership by producing a blueprint of their own for a changed financial service. Perhaps, as the noble Baroness, Lady Kramer, who is an excellent member of the Parliamentary Commission on Banking Standards, mentioned earlier, that could be in conjunction with the regional partnership initiative of the noble Lord, Lord Heseltine. We have heard calls today for decentralisation from Westminster, for a rebalancing of the economy and for other parts of the country to share in prosperity.
However, if we do it in a hurry, it will be messed up. I suggest that the date of the next general election should not be the deciding factor in reforming the architecture of the banking system. This is a one-off opportunity. Mention has been made of the situation in Germany, where the privately owned Mittlestand companies are thriving because of their close regional relationship with the 3,000-plus independent banks, whose managers understand their businesses. Handelsbanken in the UK had a favourable press because of the same style of engagement at local level.
If we are serious about rebalancing the economy, developing SMEs and revitalising manufacture, this is the time. There has never been a better opportunity to use the leverage that we have. The politically myopic reactions to the situation from the spinners at the Treasury do no service whatever. Although the Parliamentary Commission on Banking Standards is doing excellent work, it is not the forum to produce a blueprint for the Royal Bank of Scotland and Lloyds. It can point the way forward, but the blueprint is for the Government. That is not our main focus. Our focus when we were established was clearly to look at culture and standards in the banking and financial services industry. RBS should not be a big element of our report, but we should recognise that there is an opportunity to do something there for the manufacturing and regional banking sector.
Also, we do not at present know what is on the banks’ balance sheets. Less than two weeks ago, the Financial Policy Committee said that British banks have a £25 billion shortfall in capital overall. The other day, the Local Authority Pension Fund Forum, representing 55 public pension funds, stated that the Royal Bank of Scotland has £10 billion of undisclosed loan losses on its balance sheet because it is using accounting standards that allow loss to be booked only after it is incurred, however likely a default may be, thereby underplaying the likely losses. We have been here before with accounting standards, when the banks, in their heyday, booked options and their own bonuses and expenses based on expected profits. A year of two later, however, the profits did not materialise. It is a sensitive and shaky situation.
Only the other week, I had discussions with HMRC after the noble Lord, Lord Lawson, and I, in a sub-committee of the Parliamentary Commission on Banking Standards, examined Barclays and the structured capital management vehicle, which the noble Lord accurately referred to as tax avoidance on an industrial scale. It is a black box. Following my discussions with HMRC, the head of the business unit wrote to me to say that HMRC has 92 issues with the big banks at the moment and £3.2 billion is under consideration in relation to tax avoidance schemes. Those matters have still to be determined. They will not be determined tomorrow or next month; it could take between seven and 10 years. The sum of £3.2 billion could have considerable impact on the prudential stability and health of banks. The banks have set aside £16 billion already for PPI mis-selling—perhaps that is a euphemism for fraud—and that figure is not final. The situation is fragile and illustrates the folly of making definitive judgment calls before a general election. We are presently clawing our way in the dark. Incentives are at the heart of the matter in banking.
At the end of the day, we need that leadership from the Government. A quick disposal of shares on political grounds will negate the golden opportunity for the Government to effect real change. I submit that the customers’ interest, both personal and economic, requires a responsible, mature approach to the disposal. When I was chairman, the Treasury Select Committee was clear that we wanted the taxpayers’ interest to be paramount. The Public Accounts Committee has followed that up and said in its report of 2012:
“The taxpayer has invested £66 billion in RBS and Lloyds shares and it seems that their ‘temporary public ownership’ will last for some time if getting value for our investment remains the most important objective for Government … We are concerned that a short-term decision to sell might undermine long-term realisation of value for the taxpayer. The Treasury, with UK Financial Investments Ltd, should set out a strategy for its share sales, and how it will prioritise the government’s various objectives so that the taxpayer’s interests are protected in any eventual sale”.
Hope and confidence are at the centre of that. If we expect to take taxpayers along with us, we need to have that mature and fundamental look at the system.
EU: Budget Report
Lord McFall of Alcluith Excerpts(12 years, 9 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord McFall of Alcluith
My Lords, in his manifesto defining the Mais lecture of February 2010, the Chancellor, just before he assumed office, announced a new macroeconomic and financial policy. He asserted that economic theory and, indeed, evidence suggested that tight fiscal policy would lead to recovery. He embraced the notion of austerity politics, and the imprimatur of both the Chancellor and the Prime Minister was very firmly on that phrase, “austerity politics”.
Three years later, what do we find? We find unemployment increasing, with youth unemployment of 1 million, which is unacceptably high, child poverty levels ballooning, and almost zero growth. Notwithstanding today’s announcement, even if we include that and accept that in the past 18 months we have seen growth of 0.4%, that works out at a miserable 0.066% growth per quarter—in other words, a percentage of growth equivalent to 66 out of 10,000, or virtually none at all.
When the Chancellor came into office, as others have said, he inherited an economy that was growing by 2.6%, from the third quarter of 2009 to the third quarter of 2010. Since that date, total growth has been 0.8%, solely down to the effect of the Olympics. As my noble friend has said, the markets have now turned against the Chancellor. The comments of Bill Gross of PIMCO, which has the biggest bond fund of $300 trillion, made it very clear that the austerity policy does not lead to growth in the short term. As he asserted, the Government need to spend money. He also said that it was a mistake to assume that the bond markets want severe fiscal belt-tightening.
Given that the Chancellor and the Prime Minister have sacrificed growth on the altar of despair for the past three years, we now need an urgent injection of confidence. Austerity was never going to work because when you are in politics, if you assert austerity and are devoid of hope, the people rightly assert that you are not on their side. Today, there needs to be a case for optimism.
Along with other Peers, the other evening I saw Ken Loach’s film, “The Spirit of ’45” about the period after the Second World War. At that time there were appalling economic and human circumstances. Debt as a percentage of GDP was 250%, compared to the 70% it is today as a result of the financial crisis, yet with that debt dreams were turned into reality for many millions of impoverished individuals. Can the Government today not embrace a modicum of the hope and spirit of 1945 and ensure that we offer people something in the future?
On the eve of the financial crisis in 2007, national public debt was 36%, the lowest ratio to GDP in the past 300 years, as was asserted by Martin Wolf in the Financial Times this week. When we look at the public spending figures under the Labour Government from 1997 to 2010, we find that it was 39.7% of GDP. Let us go back to 1979 to 1997 under the Conservative Government, when public spending was on average 43.3% of GDP. So it was 39.7% for the Labour Government and 43.3% for the Conservative Government. Those are powerful statistics that destroy the myth that spending by the Labour Government was out of control.
Now, when interest rates and the cost of government borrowing is at rock bottom, is the time to invest in infrastructure so that we get a 21st century that is fit for purpose. For the past four or so years, along with others, I have been advocating the establishment of a business investment bank. It would fill the current equity gap with longer repayment periods for viable businesses and help SMEs, which are starved of lending because of the private sector money famine. Wherever we go, SMEs tell us that they have this huge problem.
We have to look to the future. We should be looking at replicating the fantastic initiative of the Labour Government in 1969 when they set up the Open University, of which I am a proud graduate. We should be looking at a successor to that with a 21st-century UK digital university underpinned by superfast broadband and smart grids. It would cost one-third of the money that will be spent on HS2. Wiring everyone up would in the long term help social inclusion and income equality. We have to think big on that. Why do we not have an objective of ensuring that all university learning is put on the net? What would that mean? It would mean that every individual could walk through the digital gates of the finest universities from the privacy of their own home and hearth.
The future never has a big enough constituency. Those fighting for present gain almost always win out. At a time when the social contract in society is broken and when millions of people will have no gain for the foreseeable future and have considerable pain, there is a need to restart and rebuild that confidence by ensuring that we do not miss out in the future. As Heraclitus said, change is the only reality, and we know that in politics change is the law of life. The late US President John F Kennedy said that those who look only to the past or present are certain to miss the future. I suggest that by ditching the cruel hoax of austerity politics—austerity is a hoax because it has been proved that it does not work, and cruel because it hurts those who are already hurt most— we can make a start to ensure that we as a country and as individuals do not miss out in the future.
Lord Davies of Oldham
My Lords, this has been a most interesting debate and the Minister has a major task in replying to it. He has to address himself to the minutiae of parliamentary procedure and to the most philosophical aspects of the current policies of the Government.
On the question of procedure, I cannot understand why we did not have a speakers list for this debate. I agree with the noble Baroness, Lady Noakes, on this matter. I also understand why she does not see why these Motions are necessary anyway as far as Europe is concerned. My noble friend Lord Barnett did not doubt that the Motions might be necessary but on the whole found them so offensive that he would not vote for them if there was any question of a Division, which there is not going to be. This indicates that there are anxieties on all sides about the framework for this debate.
What is fundamental is the concern about where the economy is at the present time and what we are reporting to Europe about the state of the British economy. It is quite clear that every target that the Chancellor set himself in 2010 has been missed and that the timetable for recovery has already been elongated by several years. As my noble friend Lord Barnett indicated, it is now expected that it will be at least 2018 before the deficit will have been reduced.
At the very beginning, the Minister stated that one of his items would bring confidence. As in all economic debates about the position of the economy and the balance of payments, confidence is of great importance. The Chancellor chose one measurement of it, Britain’s AAA credit rating. We saw Moody’s going first and now Fitch has stripped away the AAA credit rating. What is reflected in that is a degree—if the Chancellor was right to put so much importance on them—of erosion of confidence. My noble friend Lord Barnett said that the reason for that is pessimism about growth. That issue was reflected, particularly on this side of the House, in every aspect of the debate.
My noble friend Lord Hollick identified another area in which confidence is being eroded. The intellectual support for the Chancellor’s policy put forward by Reinhart and Rogoff has been destroyed by the indications of the research and the propositions are inherently faulty. That intellectual prop having gone, what is in its place? My noble friend Lord Layard identified these issues with the greatest clarity. What there is is a commitment to a right-wing ideology that does not need too much in the way of intellectual support. After all, we have been through these issues before under Conservative Governments. It is about the creation of the virtues of the smaller state. In the Government’s drive towards creating the smaller state, which my noble friend Lord Layard identified has little to do with whether economic growth can be produced or whether we can tackle the fundamental issues of the economy, the price is being paid not by millionaires who are being cushioned by taxation relief but in increasing unemployment and low wages for those who are in employment. It is already recognised that wages will have dropped by 2.4% this last year. That is the cost to the people in work. Meanwhile, the Government have some figure of the number of jobs being created by the private sector. We know what a lot of these jobs are: they are concealed unemployment. They are part-time jobs that give no opportunity for people to work longer hours; part-time jobs on low pay in which people are still struggling—although in work—to make ends meet. Those people are paying the price for this Government’s policies.
Banking: Regulation
Lord McFall of Alcluith Excerpts(13 years, 2 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Newby
My Lords, I absolutely agree. That is why we have been in the forefront of bringing forward plans under which banking problems can be resolved and why, under the Banking Reform Bill, we are looking at having a ring-fence around retail banks so that we do not have the problems that we have had in the past. This will go ahead, whatever happens internationally. I hope very much that there will be international action, but action that is based very much on the British model and with British leadership.
Lord McFall of Alcluith
My Lords, Glass-Steagall, which governed the global prudential system, was more than 30 pages, Basel II increased that tenfold to 350 pages and Basel III is now 600 pages. Does this not tell us that the system is governed by complexity and opacity and that the desire to game it increases? Is there not a case for simplifying the system and having leverage play a greater role in the regulatory framework? The need for structural change, irrespective of what is happening elsewhere in the world, is urgent in the UK and we should get on with it.
Lord Newby
Yes, my Lords, I agree. Basel is indeed that number of pages, while I think that the Dodd-Frank Act in the States is more than 2,000 pages and is so complicated that there are real questions about whether the institutions will ever be able to implement it. Getting back to what I was saying about banking reform here, one of the key reasons for having a ring-fence is to have a simpler structure under which the retail bank is segregated from the more complicated and casino elements of the system. We think that that will bring benefits for consumers as well as bringing greater stability to the system as a whole.
Financial Services Bill
Lord McFall of Alcluith Excerpts(13 years, 2 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Barnett
In Florida, they have to register this. If it was in Canada, the new Governor of the Bank of England would have a still better idea. It may be that he still does because he seems a very bright fellow and he will know what happens in Florida. Perhaps, some time in the not too distant future, we will have something like what my noble friend Lord Mitchell quoted because that seems to me, as a non-lawyer, to be a sensible way forward. I hope that we can move that way in future. For now, it only remains for me, too, to congratulate all concerned in this matter and wish the new amendment well in the future.
Lord McFall of Alcluith
My Lords, I congratulate the noble Lord, Lord Mitchell, the Government and others in the House on passing this Act because in terms of consumer protection in Acts, the wheels turn very slowly. The Consumer Credit Act 1974 was only superseded because of a lot of effort by quite a number of us in the other place in getting another Consumer Credit Act in 2006, 32 years later. At a time when we have the internet and technology has increased enormously, that means that the imbalance between the consumer and the industry gets even steeper, so I welcome this amendment today and the efforts that have been put into it.
In particular, I congratulate the Minister, the noble Lord, Lord Sassoon, as he departs the Front Bench. He deserves our hearty congratulations because for years we have listened to the plea, “Let the market work”. What happens when we let the market work, to be euphemistic, is that innovation takes over and innovation, as the Minister says, equates to sharp practices. Once we pass this in the House today, it will be going out into the cold light of day and I can tell everyone in the House that innovation will take place and we therefore have to be on our guard.
This is but a first step but it is a huge first step. In line with the comments made by other Peers, I ask the Minister for clarification on these points. First, will the new clause cover all costs and charges levied by payday lenders or borrowers? Secondly, when will it come into force? A number of us are worried that we could be waiting for a long time before it is brought in and that, in the interim, the sharp practices will continue. Lastly, how do the Government envisage the cap being set and does the Minister have in mind at what level he expects that cap to be set? It is important to give some direction to the FCA in today’s debate. My last word to the Minister is to offer my congratulations as a new life beckons in front of him, which I hope is just as prosperous.
Baroness Howe of Idlicote
My Lords, I had not intended to say anything today, because I was pleased with the amendment. The more I listened to the explanation, however, the more enthusiastic I became about it. So I wanted to add my thanks to the noble Lord, Lord Mitchell, for all that he has done here, as well as to the noble Lord, Lord Sassoon, and everybody else who has been involved in the redrafting. I am sure it will not solve all the problems. I would also like to ask when it will come into force; I imagine that it will not be all that far ahead. Nevertheless, as has been said, it is an extremely important and valuable step in the right direction.
Lord McFall of Alcluith
My Lords, I do not want to push my luck too much with the Minister, but he says that the rules will come in as and when the FCA decides, and that is 2014. We have a bit of time before then. Given that there is urgency regarding the adoption of this clause and all-party agreement about it, it would be good if he could elaborate on those comments so that he sends a message from here today to the industry and the regulators that this is a matter of urgency and that Parliament wishes to see early action on this matter. We do not want to wait until mid-2014. Just to add icing to the cake, will he please elaborate?
Lord Sassoon
My Lords, I am sure that the industry has got the message loud and clear from this House that more needs to be done. Of course, it need not wait until April 2014; there are plenty of other things that can be done in the mean time if appropriate.
Financial Services Bill
Lord McFall of Alcluith Excerpts(13 years, 2 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
“Continuous Payment Authorities: debtor’s rights
(1) This section applies where a debtor has granted to a creditor a continuous payment authority for payment of any debt arising under a regulated agreement.
(2) Prior to the debtor granting the continuous payment authority, a creditor must give the debtor a statement of the debtor’s rights in relation to the continuous payment authority.
(3) A debtor may at any time cancel or vary a continuous payment authority.
(4) A cancellation or variation of a continuous payment authority must be signed by the debtor and bear the date of the signature.
(5) A bank is obliged to comply with immediate effect to a cancellation or variation of a continuous payment authority signed by the debtor.
(6) A debtor must inform the creditor within 24 hours of signing the cancellation or variation that the continuous payment authority has been cancelled or varied.
(7) In this section “continuous payment authority” means an instruction or mandate given by a debtor to a bank to pay a fixed or variable sum to a creditor.”
Lord McFall of Alcluith
This proposed new clause seeks to make the law on continuous payment authorities, sometimes referred to as CPAs, clearer and more weighted in favour of the debtor. As noble Lords know, these are harsh times for many working families under pressure from rising food and fuel costs and living in fear at the prospect of job loss and insecurity. They know only too well how difficult it is to stretch a wage from month to month, week to week, and even day to day. It is no wonder, then, that frequently these hard-pressed families and wage earners find that their money is simply not enough to stretch to all their needs from payday to payday, and that many of them have recourse to what are euphemistically called short-term lenders, more popularly known as payday lenders.
Consumer Focus research published in May this year showed that many banks’ customer service advisers were unclear about the rules concerning continuous payment authorities and could be giving customers incorrect advice as a result. A continuous payment authority is a type of regular, automatic payment arrangement set up by using a debit or credit card. It is like a direct debit. Under a CPA, consumers give a supplier or retailer permission to take payments on their cards. However, unlike direct debit, there is no written communication between the individual and the bank. Although CPAs are used by many businesses, including insurance companies, magazine companies and gyms, my concern is about how they are used by payday lenders. CPAs are sometimes known as recurring payments and are often used in the short term or payday loan market. Many payday loan companies use CPAs to retrieve loan payments from customers. This involves the debtor giving the company his or her card details and authorising the lender to take regular payments from the account.
Various reports suggest that customers are generally not aware of the right to withdraw from CPA schemes. For example, a report in the Guardian of 2 May this year stated:
“Consumer Focus raised particular concerns about continuous payments to payday lenders set up on the accounts of people with debt problems … cash-strapped consumers are having an even tougher time paying priority bills such as their rent, mortgage or heating costs due to some payday lenders ‘dipping’ into their account”.
The Consumer Focus research raised particular concerns about continuous payments to payday lenders set up on accounts of people who already have debt problems and recommended that clear and accurate information be provided to these customers from banks and loan companies, particularly regarding the right to cancel.
All that is fair enough and I know that the Department for Business, Innovation and Skills and the OFT have been doing work on this. Indeed, the Office of Fair Trading issued a warning to payday lenders on 20 November by opening formal investigations into several payday lenders over aggressive debt collection practices. It published a progress report last week as part of its compliance review of the payday lending sector and highlighted concerns about the adequacy of checks made by some lenders as to whether loans will be affordable for borrowers, the proportion of loans which are not repaid in time, the frequency with which some lenders roll over or refinance loans, the lack of forbearance shown by some lenders when borrowers get into financial difficulty, and debt collection practices. It also published revised debt collection guidance last week, focusing on continuous payment authorities. Under the heading “Deceptive and/or unfair methods”, paragraph 3.7 of the guidance states:
“Dealings with debtors and others are not to be deceitful and/or unfair”.
The OFT then gives examples of unfair or improper practices. I realised that the concept of misusing a continuous payment authority covers no fewer than five pages in the OFT report. Some of the examples made me fearful for the people who enter into these loans and give a CPA authority to their lender.
I shall give the House a number of examples of bad practice to be avoided, as mentioned in the OFT report. The report states:
“Using the CPA other than as set out in the credit agreement or without the informed consent of the debtor”.
It also refers to debiting a higher or lesser amount than agreed and debiting an account before or after the due date. The report also states:
“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”.
The last example includes seeking payment before income or other funds may be reasonably expected to have reached an account, seeking payment where there is reason to believe that there are insufficient funds, or using the CPA after the debtor has informed the creditor that he or she is in financial difficulties and cannot afford to repay.
Further, the OFT identifies as a problem:
“Failing to document the CPA appropriately or to explain it adequately before entering into the credit agreement”.
Sometimes a credit agreement is not complete because relevant terms are missing; or it is written in unclear, unintelligible language; or it is confusing, unfair and misleading. The OFT guidance expects the agreement to identify that the CPA can be cancelled by the debtor or that alternative repayment options may be available.
It is all very well to issue guidance and I sincerely hope that guidance will be followed. However, my reading of this report convinces me that much more than guidance is required in this case. Such blatantly unfair treatment of consumers should not be restricted to a matter of guidance. This proposed new clause ensures that debtors are informed about their rights and that only the debtor may cancel or vary a CPA. Furthermore, the debtor’s bank is obliged to comply with the debtor’s instructions. We ought to legislate to protect debtors in straitened times.
We abolished imprisonment for debt in the Debtors Act 1860. However, debt itself can create a prison and the misuse of power by creditors can be as hard a punishment as being jailed for debt. I hope the Government will accept this amendment, realising that the balance of power between debtor and creditor must be redressed in favour of the customer. I beg to move.
Lord Newby
My Lords, I do not believe that there is a guarantee. I think that the vast bulk of people who use this system will fall into the category that the noble and learned Lord asked about. However, I will check and will write to him if there is any further information that I can give him to explain those points more fully.
Lord McFall of Alcluith
My Lords, CPAs are different from direct debits, as I made clear. Given the legislative complacency in the consumer credit field, I am very unhappy with the notion of guidance. I think that we sent out a message from the Lords today on an earlier amendment, and it was good to have cross-party consensus on that. There are glaring injustices and it is very important that we reinforce that message in the House today. I should therefore like to test the opinion of the House.