Financial Services (Banking Reform) Bill

Debate between Lord McFall of Alcluith and Lord Lawson of Blaby

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.

Transparency of Lobbying, Non-Party Campaigning and Trade Union Administration Bill

Debate between Lord McFall of Alcluith and Lord Lawson of Blaby

Wednesday 6th November 2013 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, by mismanaging the lobbying Bill, the Government are wrecking the work of the Parliamentary Commission on Banking Standards, which was set up to reform the culture in the banking industry, by bringing forward this Bill early—on 18 November. That is the unanimous view of all members of the banking commission, who have said that they need until the new year to study these government amendments for the simple reason that this is an entirely new Bill. This is a Bill that left the House of Commons 35 pages long. It is now more than 160 pages and the government amendments are four times the size of their original Bill. This morning I spoke to Andrew Tyrie MP, the chairman of the commission, who said that if the Government go ahead before due consideration to this increasingly complex and dense legislation, the Parliamentary Commission on Banking Standards will not be able to carry out the mandate that the Government gave it to reform the banking industry. The collective efforts over one year—almost 200 hours of public evidence and 10,000 questions —will be wasted. The Government will not only be betraying their promise when they established the commission, but will be seen and disowned by members of the commission for indulging in cynical, low, political-level, sharp practice. I ask the Government to think again and give due time to the Parliamentary Commission on Banking Standards by bringing this Bill back in the New Year when it is appropriate.

[Lord Lawson of Blaby (Con)]

My Lords, as a fellow member of the banking standards commission, I agree with the conclusion reached by the noble Lord, Lord McFall, that the Leader of the House should think again about this important matter. I have great sympathy with him. I understand that the parliamentary timetable has been complicated by the late change of plan on the lobbying Bill and that presents him with a difficulty, but it would be wholly wrong to put Report of the banking Bill in as a stopgap. This is a massively important Bill. It is a completely different one from the Bill that emerged from the other place. It is hugely larger—about five times—and extremely complex. In Committee, a number of noble Lords asked for a particularly long gap between Committee and Report, and I was under the impression that the Government were extremely sympathetic to that. Now they are suddenly putting it forward as a stopgap.

That is the main reason for making this objection, but there is another one. The most reverend Primate the Archbishop of Canterbury cannot be in his place today because he is abroad, but he was an active member of the banking commission. I spoke to him by telephone this morning. He is most anxious to take part in Report and, as a member of the banking commission, he has strong and informed views on a number of the issues. The week that the Government have now chosen is the week of the annual Synod of the Church of England, over which he has to preside, which means that he cannot be present. I urge my noble friend to think again.

Financial Services (Banking Reform) Bill

Debate between Lord McFall of Alcluith and Lord Lawson of Blaby

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.

--- 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.