Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Tuesday 26th November 2013 Lords Chamber

[The Deputy Speaker (Lord Faulkner of Worcester) (Lab)]

I must advise the House that if Amendment 84 is agreed to, I shall be unable to call Amendments 85 to 87 for reasons of pre-emption.

[Lord Phillips of Sudbury (LD)]

My Lords, my name is on the 18 amendments in this group and I am the sole signatory on eight of them. I endorse entirely what the noble Lord, Lord Brennan, said. He speaks from great experience, which is of great help to the House.

One of the scandals—I think one can fairly use that word—of the past five years in terms of financial failings has been the extreme paucity of prosecutions for some of the greatest criminal failings, to use a neutral word, in the history of our or any country. It is rather staggering to think that over the past five years you can count on the fingers of your two hands the number of City malefactors who have been prosecuted, when during that time probably 20,000 or 30,000 people have been prosecuted for shoplifting at an average of £25 a time.

I tabled these amendments not in any spirit of vindictiveness—one can also say that, I am sure, of the noble Lord, Lord Brennan, and the other signatories—but to try to give real teeth to a very important clause, Clause 27, which is designed and put forward on the basis that it will be a significant deterrent to conduct arising in the future which is comparable to the conduct that has occurred in the past five or six years. The wording of Clause 27(1) in particular seems to those of us who have tabled these amendments to be so narrow—to cite the word used by the noble Lord, Lord Brennan—that the prospects of getting a conviction before a jury, or, indeed, starting to prosecute at all, will be remote. To give a simple, direct example of that point, Clause 27(1)(b) makes plain that a conviction can be secured only if the implementation of a single decision—“the decision”—causes,

“the failure of the group bank”.

When, except in the rarest of circumstances, did a single decision cause the failure of a bank? Life is much more complicated. Very often a series of decisions is involved and even then you cannot say that the decision or decisions cause the failure but rather that they,

“contribute directly and significantly to”,

the failure of a group bank, as I have put it in my amendment.

We have tabled these amendments to give practical effect to Clause 27 and other clauses. They are important clauses and we must not shackle them with such a narrow set of requirements that they will not serve their purpose. We should never forget that British criminal law is rightly strictly construed, and construed against the prosecution. If you think of that and you think of the wording in the clause, you will realise that it is not fit for purpose. I hope that if my noble friend the Minister does not accept the wording of these amendments—they could be drafted differently—he will at least undertake to come back at Third Reading with wording that the Government find acceptable and which will serve the purpose that we seek to serve in putting these amendments forward.

[Lord Eatwell (Lab)]

My Lords, having listened to my noble friend Lord Brennan and the noble Lord, Lord Phillips, I found this discussion quite disturbing. The creation of a criminal offence is one aspect of the Bill that pushes forward the regulatory regime in the UK and creates an environment more suited to the somewhat cavalier nature of finance in a global marketplace—in particular by identifying those activities that have inflicted enormous harm upon our fellow citizens. What I heard was that, as drafted, the probability of securing a conviction or even a prosecution, as the noble Lord, Lord Phillips, put it, is vanishingly small. Unless the terminology is clarified in a way laid out so clearly by my noble friend, this part of the Bill will simply bring that aspect of regulation into disrepute because it will be worthless. That is why I regard the remarks that I have heard from the two distinguished lawyers who have just spoken to be very disturbing. It is incumbent upon the Government not simply to produce a pat answer here this evening but again to produce a carefully written assessment of the case for an appropriate criminal regime and its implementation in order that the whole House has an opportunity to assess this important aspect prior to Third Reading.

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[Lord Phillips of Sudbury]

My Lords, first, is my noble friend quite certain that the Interpretation Act 1978 does not itself operate subject to the context of the language which is being interpreted? If that is so, I believe that there will be real ambiguity about this clause because, as I say, the law is construed strictly in favour of the accused. Secondly, does he accept that in a clause like this, to rely on the Interpretation Act rather than put in some plain words that make it clear, is unhelpful to people who must refer to this piece of legislation in the future?

[Lord Newby]

I am not sure that I do, my Lords, but I wonder if I might write to the noble Lord to clarify our thinking and, it is hoped, persuade him that we have got it right.

Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Lea of Crondall (Lab)]

My Lords, there are a lot of very interesting propositions in this group. Am I right in thinking that what is in due course printed in Hansard will be one amendment which is moved, with other amendments not printed because they are part of a single group? If so, how can one proceed with that?

[Lord Phillips of Sudbury (LD)]

My Lords, surely there is no more important issue in relation to this banking situation than whether to go with ring-fencing or with separation—we have had that very clearly debated today. The noble Baroness, Lady Cohen of Pimlico, raised an issue in relation to that, which my noble friend the Minister placed some emphasis on in responding earlier, as he did at the last stage of this debate—namely, to state that the cost of total separation would be exorbitant. The noble Baroness rightly made the riposte that the cost of policing the ring-fence will not be a one-off, as the cost of a separation would be; the cost will be year after year. The task of the regulators in policing a ring-fencing arrangement will be intensely difficult. It is easy to jibe at the regulators, but we may underestimate the extreme difficulty of doing a thorough job in this field, where you have a single holding company and two companies under it. I take the point made vividly by the noble Lord, Lord Lawson of Blaby, about cultural contamination that can easily infect a group, such as the one that the ring-fenced company will be part of.

I hope that my noble friend will feel able to accept Amendment 5. We are all speculating madly. To have a review of how this has gone, and to look at it coolly, objectively and professionally in the period prescribed, must make absolute sense. Frankly, it is not worth taking the risk of not having such a review. The cost of getting this wrong will be insupportable. We are apt to underestimate, in what has happened over the past five years, the cost to this country in all sorts of non-financial ways. We must not let it happen again. The review that Amendment 5 proposes must be prudent, sensible and ultimately economical.

[Lord Hamilton of Epsom (Con)]

My Lords, I support my noble friend Lord Lawson’s amendment as well. Like him and the noble Baroness, Lady Cohen, I have always been a believer in Glass-Steagall, and in the complete separation of investment banks from clearing banks as the only way in which you can guarantee that there will be no contamination.

My noble friend the Minister described the ring-fencing as robust. I do not know how he can speak with such confidence about the robustness of the ring-fencing. I do know that many people in the City today are, as we speak, working on ways to get round the ring-fence and to make sure that money held in clearing banks can be used in investment banks. The problem is that there is an enormous financial incentive to get round this ring-fence. If that incentive remains when you do not have separation, it is only a matter of time before the clever people employed in the City will find a way round it.

I agree with my noble friend Lord Phillips. Much has been made of the cost of separation, but there is also the cost of ring-fencing. There are a one-off cost and a continuing cost. It would be regrettable if we did not support my noble friend Lord Lawson’s amendment and I intend to do so.

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[Lord Eatwell]

My Lords, Amendment 21, and Amendments 50 and 51 from the commissioners, refer to the professional standards to be required in the banking industry—particularly to licensing bankers who have attained the required professional standards and, of course, not licensing those who have not. With respect to the conduct and skills of members of the banking industry, the Bill currently refers to “rules of conduct”. Amendments from the commissioners use the words “licensing regime”, but continuously refer to the adherence to rules.

The notion of a licence surely refers to some level of professional competence or professional standards. The Co-operative Bank may have obeyed the rules, but we now know it would have failed even the simplest test for professional competence. Rules may require the attainment of professional qualifications, but we cannot be sure and, as the Government regularly argue, certainty is important in this legislation. The clause in the Bill as drafted refers to rules of conduct. The commissioners’ amendment refers to,

“training in the effect and application of the rules of conduct”.

However, neither of them seem to convey the true context of professional standards.

As an academic, I am perhaps rather overly keen on examinations and the attainment of professional standards. Doctors have professional standards because they are required to pass examinations, undergo rigorous professional training and be thoroughly trained in ethical standards. Lawyers have professional standards because they are required to pass examinations, undergo rigorous professional training and be thoroughly trained in ethical standards. Of course, doctors and lawyers may, on occasion, not maintain the standards we would expect.

[Lord Phillips of Sudbury]

I hate to interrupt the noble Lord but I cannot resist saying that, unfortunately, the training of solicitors at this time does not involve rigorous ethical training. In fact, it involves little ethical training at all.

[Lord Eatwell]

I am sure that the noble Lord, as a distinguished solicitor, would attest to that, as indeed he has done. It seems to me that if members of the professions are required to pass examinations to show professional competence and to undertake rigorous training, bankers should do the same. That is what Amendment 21 seeks to achieve. For example, proposed new Section 65A(2)(b) says that the licensing regime must,

“specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules”.

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[Lord Phillips of Sudbury]

My Lords, I support Amendments 21 and 51 as strongly as I can. We all know that the vast majority of people in the City of London and other financial centres are decent people who try to do good rather than bad, but the system of which they are part has been largely stripped of its ethical underpinning. Although you cannot inculcate morality by statute law, you can at least provide support for the forces of good and truth in dealing.

These two amendments are the very minimum required. I wonder whether the wording of Amendment 51, which refers to “rules of conduct”, is ideal. As a lawyer, whenever I see the word “rules”, I slightly draw back, because lawyers spend their time avoiding rules on behalf of their clients.

I would have hoped, and still hope, that if either or both these amendments were incorporated into the Bill, they would be construed in a wide way. There is no shadow of doubt but that too many people arrive in positions of responsibility without regard to these rules. As the most reverend Primate said, you can have a junior dealer who can cause devastating damage to a bank or other firm. So I hope that the Government accept these amendments or agree to come back at Third Reading with something comparable, bearing in mind the astonishing fact that the vast majority of our business schools have no ethical component in their curriculum at all. I do not think that 10% of them do anything in terms of ethics. If anyone says to me that it is a waste of time and a lot of hot air, they need only glance back at where we have come from. As other noble Lords have said, the degree of cynicism manifest in the policies and actions of so many financial institutions is stunning.

I hope that, if these amendments are brought into the Bill, they are construed widely by those who have to implement them. I am particularly happy that Amendment 51 would require any breach of standards of conduct to be reported to the relevant authority, because that is a real deterrent. People would be anxious about that. This proposal must be the absolute rock-bottom minimum to provide some underpinning for the future of financial services.

[Lord Flight]

My Lords, I come down to a very practical issue. In the territory that we are discussing, pre-approval is absolutely necessary for dealing with staff and anti-money-laundering requirements.

Taxation: Tax Law Enforcement

Lord Phillips of Sudbury Excerpts

Wednesday 30th October 2013 Lords Chamber

Asked by

[Lord Phillips of Sudbury]

To ask Her Majesty’s Government how they will enable those who enforce the tax laws to accomplish their tasks better.

[Lord Newby (LD)]

My Lords, this Government are investing in HMRC, so that it will be collecting £10 billion a year more from its compliance activities by 2015-16 than it was at the start of this Parliament. The number of HMRC staff in compliance roles fell under the previous Government; under this Government there will be around 2,500 more staff tackling tax avoidance and evasion in 2014-15.

[Lord Phillips of Sudbury (LD)]

My Lords, at a time when decent Brits are struggling to pay their full taxes, is it not wholly counterproductive that many of our richest citizens and companies are evading and avoiding tens of billions of pounds in taxation? According to the HMRC calculation, every extra pound spent on enforcement resources yields £10 to £30. Although the statistics are encouraging, surely we should be doing yet more to avoid the citizen disenchantment that is currently brewing.

[Lord Newby]

My Lords, I absolutely agree with my noble friend. I would remind him that this Government reinvested an additional £917 million in compliance activities in the 2010 spending round. They added another £77 million in last year’s Autumn Statement. Therefore, we have a track record of providing HMRC with additional funding, should it come forward with proposals that result in additional tax yield. It is not inconceivable that HMRC might come forward with such proposals in respect of this year’s Autumn Statement.

Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Wednesday 23rd October 2013 Lords Chamber

Moved by

[Lord Phillips of Sudbury]

98A: Before Clause 16, line 16, at beginning insert “directly or indirectly”

[Lord Phillips of Sudbury (LD)]

My Lords, Amendments 98A and 98B stand in my name. They seek to tease out a little more detail in relation to the amendment just moved by the noble Lord, Lord McFall, on whistleblowing. I say at once that I am wholly in favour of that amendment. The position of whistleblowers in our country is not satisfactory. Amendment 98 would widen the portal to offer assistance and compensation for whistleblowers by giving the appropriate regulator the power of initiative with regard to getting appropriate compensation for whistleblowers.

My amendment is designed to widen the scope of that initiative as, at present, I feel that it is unnecessarily limited in that the whistleblower is defined by proposed new subsection (2) in Amendment 98 as a person who gives information directly to the appropriate regulator or gives it to a colleague. I notice that the amendment does not define “colleague”. Suffice it to say that many of the circumstances in which whistleblowers are sometimes encouraged—and feel morally compelled—to speak out are extraordinarily complex.

I have had the good fortune to do work for the charity Public Concern at Work. Indeed, I set it up 20 or so years ago. That charity continues to do extremely valuable work. I spoke to people at the charity a couple of days ago and, believe it or not, they had been approached by roughly 2,500 whistleblowers in the past year. Astonishingly, I think that scarcely any of the whistleblowers were from the City. There are particular issues around that and we can underestimate the extraordinary pressure that a whistleblower or would-be whistleblower feels under in the context of the City, particularly as it is a very tight community in many ways. At the moment, the only recompense that a whistleblower can get, if he or she is discriminated against and suffers loss, is by using the provisions of the Public Interest Disclosure Act 1998. However, the whistleblower has to take the initiative. This amendment, as I say, gives the initiative to the regulator, which can be of enormous help and assistance to the whistleblower.

The Public Interest Disclosure Act 1998 scores over this amendment by having a much wider entrée to the remedies than is provided by the amendment. In particular, my amendments put the words “directly or indirectly” into the beginning of the two subsections that define how a whistleblower gets into the circle of potential compensation when they talk about giving information to the appropriate regulator or to a colleague. This is because—and I have checked this with Public Concern at Work—a lot of those who want to speak out are really anxious, if not fearful. What very often happens is information gets to the regulator in a really indirect, round-the-houses way, sometimes anonymously. My simple amendment is designed to open up the door but it is also a probing amendment in the hope that between now and Report we can have discussions with the Government on the optimum way of finding the remedy which the amendment seeks to supply.

I finish by giving some idea of how much wider the Public Interest Disclosure Act is regarding “getting into the remedy”. Clause 1 of the Act inserts a four-page amendment into the Employment Rights Act 1996 and provides a multiplicity of definitions of who is a whistleblower for the purposes of the remedy. An example of its sensible provisions is that a “qualifying disclosure” is one that is made in good faith, is substantially true, is not made for personal gain and,

“in all the circumstances of the case, it is reasonable for him to make”,

and so on.

It may be possible, at the next stage of the Bill, to import some of the language of the 1998 Act or, indeed, insert this amendment as an amendment to the 1998 Act.

[Lord Eatwell (Lab)]

My Lords, I am sure that the Treasury has studied carefully the experience of a measure developed in the United States which is very similar to this and which has been remarkably successful over the past three or four years in bringing forward very important information to the regulatory authorities. When the noble Lord replies, perhaps he would reflect on the American experience and say how valuable it might be to replicate it here.

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[Lord Phillips of Sudbury]

I am sorry to interrupt my noble friend again but it is important for the House to know a little more about this public consultation. I suspect that not one single person here tonight is aware that there is a consultation out there and that it is closing in a matter of a few days. Can the Minister tell us how widely this has been advertised, because it is news to me?

[Lord Newby]

My Lords, I am very happy to write to the noble Lord about the process that has been followed up until now. The whole process of this Bill has demonstrated, as the noble Lord has said, that there is tremendous activity—whether in terms of the regulators producing documents or of other regulatory initiatives, which are very hard to keep up with. I will ensure that we write as a matter of urgency to all noble Lords about this exercise.

Before coming on to what the regulators are already doing in this area, I want to stress the basic point about this review. First, it is wide ranging. Secondly, it aims to beef up the current system. Thirdly, it will apply across the board because the Government do not believe that the financial services sector has a different status in terms of whistleblowing to, say, the oil and gas sector or the pharmaceutical sector. What we need is a common approach across all sectors.

The FCA is already extremely active in supporting and encouraging whistleblowing. The number of whistleblowing contacts received is growing rapidly. There was a 370% increase between 2007 and 2012. The SEC has done very well. It received 3,001 reports in 2012. In the same year, the FSA received 3,929 reports. The impression has been given that the Americans have this system which is generating huge quantities of people coming forward and that the City is absolutely in fear to the extent that no one is coming forward. The figures totally contradict that view. I am not saying for a minute that the system is perfect, cannot be improved or will not be improved, but that the numbers of people coming through in the City are higher than is the case in the States. The FCA’s whistleblowing procedures have been revised to actively track whistleblowing outcomes across the FCA while cases are actively monitored to provide feedback, wherever legally possible, to whistleblowers.

On the point that the noble Lord, Lord Brennan, raised, the regulators have a role in enforcement and protection. The Dodd-Frank Act brought in protections for whistleblowers which, to a considerable extent, already existed in the United Kingdom. The American scheme is of course not what is proposed in the UK, as the noble Lord said. Under that scheme, whistleblowers can receive a proportion of any penalty received from successful enforcement action arising from tips that they provide. That is different from what this amendment proposes. Although the PCBS said that it would like research to be undertaken in this area, it did not suggest an incentive scheme. The regulators are undertaking research, as requested by the parliamentary commission.

The regulators are therefore already doing a lot, including undertaking research, while the Government are undertaking a review of the whole issue across all the sectors. In the light of that, I hope that the noble Lord will withdraw his amendment.

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[Lord McFall of Alcluith]

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

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

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

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

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

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

[Lord Phillips of Sudbury]

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

Amendment 98A (to Amendment 98) withdrawn.

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[Lord Eatwell]

Surely the point is that by establishing a fiduciary duty a regulated entity would be expected to pursue exactly those duties. Therefore a regulated entity or other authorised person would be deemed by the regulator to be required to follow exactly those duties. If the noble Baroness thinks that this is too weak, I will be very happy to bring a stronger duty of care back on Report.

[Lord Phillips of Sudbury]

My Lords, the noble Lord, Lord Eatwell, asked an extraordinary question because there is no more onerous duty than the fiduciary duty. It is a novel and maybe a highly effective way of dealing with a great many of the concerns that have occupied this House over the last few days in Committee. An important part of the amendment is that the core activities and services are subject to a fiduciary duty, and other services to a duty of care. Given the big difference in responsibility, is it sufficiently clear what is and what is not a core duty?

[Lord Eatwell]

Core duties are defined in the Bill.

[Lord Phillips of Sudbury]

I thank the noble Lord.

[Lord McFall of Alcluith]

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

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

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

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

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

[Lord Deighton]

My Lords, this amendment is an opportunity to revisit the imposition of fiduciary duties or duties of care on financial services firms. The other place debated the same amendment at the Committee and Report stages of this Bill. Of course, no one in this House is going to disagree with the proposition that customers need a better deal from their banks, whether we call it treating customers fairly, having better standards or putting customers first. The Government have been keen, for example, to see more competition between banks as another way of addressing this concern. We all want to see better standards in the banking industry and a return to the days when the customer relationship mattered and the customer came first. We want the leadership of banks to appreciate that it is also in their long-term interests in building successful banking businesses. The Government’s amendments so far, which implement the recommendations of the PCBS, will be an important step in the round in that respect.

However, I note that the commission did not itself recommend the introduction of either a fiduciary duty or a duty of care. To cut to the chase, the Government do not consider that the introduction of either a fiduciary duty or a duty of care in legislation would help to drive up these standards within ring-fenced banks. First, banks are already subject to a wide range of legal duties. Most obviously, they are subject to contractual obligations to their customers. Any banking relationship or transaction is subject to a contract between the bank and the customer. Of course, a bank is subject to obligations under FiSMA and the regulator’s rules. Further, the Government’s amendment on banking standards rules means that in future senior managers and ordinary employees will also be subject to conduct rules. Therefore, it is not clear that imposing a fiduciary obligation on a bank would add any value. The fiduciary obligation is the kind of obligation that a director owes to a company, or a trustee owes to a beneficiary under a trust. It is an appropriate obligation when one person is acting on behalf of another or dealing with another’s property on their behalf. However, deposits with a bank are not property held on trust, so a fiduciary obligation would have no place in the contractual relationship between a bank and its customer.

Similarly, it is not clear what a duty of care—

[Lord Phillips of Sudbury]

I hesitate to interrupt my noble friend at this time of night, but there is an important issue in relation to what he said that needs clarification. He said a couple of times that the relationship between a bank and its customer is a contractual one, and therefore that that was sort of QED. The problem is that until not long ago all banks, in the small print of their contracts, which they knew full well that customers would not read, put material which, had the customers read it, would have led them to not agree the contract. In that situation, the contract said such and such, but the purport was wholly antithetical to the real interests of the customer. How does my noble friend deal with that situation, if he is rejecting the fiduciary concept?

[Lord Deighton]

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

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

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

Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Lord Hollick (Lab)]

My Lords, I support the two amendments in this group. They address real flaws in the current arrangements. The comments of the noble Baroness, Lady Noakes, were interesting on whether the flaws are now covered by the codes of practice. The concern in the committee report to which the noble Lord, Lord Lawson, referred—I was part of that committee—was that there was no active and effective dialogue between the auditors and the regulators. Regulation requires as much light as possible to be shone on what is going on in the organisation being regulated. In part, that is to do with the provision of information and data—of which there are tonnes in banks. At another level, it is very important to give a perspective and a judgment. This goes to the heart of some of the problems.

First, and bluntly put, the auditors—as has been pointed out—are appointed, paid and retained because they work with the management of the bank. Their duty is to shareholders, of course. However, the reality is exemplified by Barclays, which had the same auditor for, I think, 240 years. It is very important that we underwrite the independence of the auditor. The statutory requirement to talk to regulators helps auditors have the necessary degree of independence so that they can inform the regulators of what they are concerned about.

The second issue is that of the accounts. As the noble Lord, Lord Flight, made clear, investors have a completely different set of accounts. They put IFRS to one side because it is incomprehensible and meaningless. It is completely pro-cyclical in banking, which is the most dangerous thing to be. The fund managers look at their own accounts, but of course if you sit on the board of a bank—as a number of Members of this House do—you see a different set of accounts as well. You see the management accounts about how the bank is trading. You look at the bankbook and try to assess the risks. Before IFRS came along, when times were good it was a practice for prudent bankers to say that some of the loans might turn bad and that it was necessary to put some provisions to one side. IFRS has stopped that practice, although we were told in our committee that IFRS is reconsidering the rules; its rules committee has recognised the shortcomings of IFRS. A Member of this House has also written a very good report which tries to get accounting back from being totally rules-based to being principles-based and asking: “Is this a going concern? Is it a true and fair view of accounts?”.

The audit firm that signed off Northern Rock to say that it was a going concern—when it was funded entirely by overnight money—made a clear misjudgment, shall we say. The bank’s own management accounts—and indeed the auditor’s own judgment—would have helped the regulator to look at that much more closely. It is therefore important that the Government think again on this. The argument about cost is not a real one; that is a bit of nonsense, to be blunt, because these sorts of accounts are published and provided to board members to review the performance of the organisation.

As for relying on expectation, we owe it to the taxpayers in this country to have rather clearer rules. Expectations and codes of conduct are all very well, and one would wish to have them clearly set out and published. However, in a matter as serious as this, it is very important that there is a legal requirement to do this. The noble Lord, Lord Lawson, wishes that he had put one into the 1987 Act. The Government owe it to the taxpayers to think again on these issues.

[Lord Phillips of Sudbury (LD)]

My Lords, I am going to build on what has been said by the noble Lords, Lord McFall, Lord Barnett and Lord Hollick. Then I will make one suggestion in respect of Amendment 92, which I support. Comment has been made about the fact that the accountancy profession has got too concentrated for public benefit. It is altogether too cosily placed vis-à-vis the very largest banks and companies. The noble Lord, Lord Hollick, referred to Barclays using the same auditors for more than 100 years; it that is not a recipe for slack auditing, I do not know what is.

The noble Lord, Lord McFall, noted that many accountancy firms provide both auditing and consultancy services. Sometimes, the non-auditing services are more valuable than the auditing services, which is a crazy situation. It is a pity that the Bill does not address that because if, as auditor, you ought to be saying some things with “rigour”—the word quoted by the noble Lord, Lord Lawson, from an article by Mr Woolf—how can you avoid a deep conflict of interest? I suggest, and experience bears me out, that you cannot bring to the very difficult task of auditing the rigour that is on occasions necessary to bring a bank or a large company to heel and to ensure, as far as any audit can, that some of the disasters we have seen are thereby avoided.

As I say, I am sorry that we are not addressing that issue in this Bill. Perhaps it is not too late to table such a provision on Report. However, I fear that a great deal is lacking. I think I am right in saying that all the big four accountancy firms have been penalised or fined many millions of pounds in the past few years. I remember that in America, KPMG was fined more than $450 million for running fraudulent tax schemes for years on end. What happens to these firms’ reputation and business? Very little does, as far as I can see. I suggest to my noble friend Lord Lawson and his co-proposers of Amendment 92 that it is not clear beyond peradventure that the bank under consideration should not be present at these statutory meetings. It may seem an obvious common-sense point that you cannot have such a statutory meeting with somebody from the relevant bank being present. However, given the cynicism of our world, we should make that clear. Given that we are at a flexible stage of our consideration of the Bill, if Amendment 92 goes forward, I recommend that that provision be included in it.

[Lord Blackwell (Con)]

My Lords, I do not think anyone can disagree with the arguments put forward by my noble friend Lord Lawson that the regulators should have access to the best available information from the auditors and should be able to request the information relating to the accounts that they want. What I am less clear about from this discussion is whether there is a need for that to be built into this legislation. I should be very grateful to my noble friend the Minister if he would clarify whether there is anything in the current law that prevents regulators doing exactly what these amendments suggest.

Like my noble friend Lady Noakes, I sit on the board of a bank and on its audit committee. Things have moved on considerably since 2008. It is clear to me that as regards the major banks, the PRA has frequent confidential discussions with the auditors; and those are perfectly proper. It is also clear to me that the PRA can, and does, request information from the relevant bank in any form that it feels it needs to have to perform its duties. Therefore, the question is whether there is anything in the current legislation that would allow an auditor to refuse to meet the PRA or to refuse to provide information on the grounds of commercial confidentiality or conflict. Are those powers extant in existing legislation? Is there anything that allows a bank to withhold financial information if it is requested by the PRA? If those powers are already available, I am less clear what these amendments would add.

--- Later in debate ---

[Lord Eatwell]

My Lords, I support the noble Lord, Lord Lawson, in this amendment. It seems a modest amendment, calling for a review in three years’ time when the appropriate information from the United States will be available. It will be valuable to have this clause in the legislation to ensure that that review takes place, because it is so easy—given the exigencies of the moment—for major issues, which were recognised as major in the past, to be neglected because of day-to-day pressures. Therefore, having done all our work on banking in the Bill, if we set this process in motion so that the review happens, we will be performing a valuable service.

[Lord Phillips of Sudbury]

My Lords, I, too, support the amendment. I moved Amendment 91B at the close of our second day in Committee, which overlapped to a considerable extent with this amendment. In my amendment, I also talked about looking at the cultural as well as economic effects of this mass of gambling, as it is, within the financial markets. I hope that the Government will smile upon this; it may be that if it comes back on Report I will try to amalgamate my amendment and this one.

[Lord Higgins (Con)]

My Lords, I also support my noble friend’s amendment, but with some qualifications and a request for some clarification. The amendment simply refers to “proprietary trading by banks”; that does not distinguish between one part of a ring-fenced bank and another. The arguments on this issue are so clear that we should take a perfectly clear view that there ought to be no proprietary trading whatever by any ring-fenced bank.

There is also no real need to wait three years for such an inquiry. My noble friend referred to the Volcker rule in America; not all of us in this Chamber have Paul Volcker as a personal friend, but I have great respect for him. He is absolutely right that this should not be carrying on in the United States. Although it may be that there has been a decrease for the moment, over a period of three years the situation might change somewhat. Therefore, we could take a clearer view on this between now and Report than is set out in the amendment. As my noble friend has pointed out, this is effectively the banks’ carrying out risky trading on their own behalf—in the past, not infrequently, it was risky trading on their own behalf with clients’ money—and this, again, is a crucial point. Perhaps we should clarify that aspect of the matter, but I have not the slightest doubt that this is a move in the right direction and I hope that we can make rapid progress on it.

--- Later in debate ---

[The Lord Bishop of Birmingham]

My Lords, I rise to speak on behalf of the most reverend Primate the Archbishop of Canterbury. He regrets very much that he cannot be in his seat today, but it is seldom that one has the opportunity to offer Christian baptism to a young couple, particularly when their child is a future heir to the throne of this country. None the less, I know that he, like me, would want to echo the support for these amendments, which have been spoken to by the noble Lords, Lord Turnbull and Lord Eatwell. In a sense, I now regret that I am here doing my duty, because I could not have put it better myself.

In the wake of the economic debacles following 2008, one of the greatest areas of concern among the public was the apparent lack of change in the financial fortunes of those whom they viewed as being most responsible for the banking crisis. As we have heard, the salaries of senior bankers seem to remain high and bonus levels have quickly regained their old levels, while for many ordinary people and ordinary businesses across the country, it has been a matter of tightening the belt and looking very seriously at difficult household and commercial budget decisions. The submission of the Church of England’s Mission and Public Affairs Council to the banking commission said of this disparity between what I am going to talk about as two cultures that it,

“has gravely harmed the public perception of banking”.

Recognition of the disjunction between these disconnected groups—the wider public, who need the services of good banks, and those who lead those banks—is, I believe, at the heart of what these amendments seek to achieve. It is about implementing sensible measures, and we have been very sensible this afternoon, one with another, about what needs to be done: striking an appropriate balance between risk and reward; looking to the long-term benefits of decisions made by key figures in the banks; and giving incentives for a trustworthy and productive culture, rather than one that promotes excessive risks, ending in disaster. Deferred remuneration, which we have in this proposal, and clawback provisions —central components of the proposed remuneration code—are technical terms, but at the heart of these principles is a simple question: what sort of culture, as has been mentioned by several noble Lords, do we want to establish in these organisations? As the most reverend Primate the Archbishop of Canterbury has already pointed out to the Committee, one rather well known former banking executive said that there had been a culture in the banks focused on what happened when people were not looking.

There is now an increasing interest, including in your Lordships’ House, in culture, and we heard from the noble Lord, Lord Lawson, about the two principles of prudence and customer-centred or customer-focused culture. I hope that both the Government and the banks will give a high priority to insisting on these profound changes in culture. Indeed, at a regional level—and this may seem a little parochial for the high level of discussion that we are engaged in this afternoon—in Birmingham and the Midlands, well resourced bank employees from well resourced organisations, their banks, are already looking way beyond their computer screens and boardrooms to wider and deeper responsibilities in the community. They are looking at simple things such as finding and supporting young entrepreneurs, and giving basic financial skills to local citizens—I have said before in your Lordships’ House that there are 100,000 citizens in Birmingham who do not have a bank account—and they are even getting involved in making sure that future employees of the bank in our local primary schools have enough food at breakfast so that they can learn the basic skills of their education.

These tentative cross-cultural relationships and initiatives give me hope not only that executives in banks will run sound businesses but that, as they experience and affect for good the lives of ordinary citizens, including those who are much less protected than themselves in ordinary life, the worthy values printed in the foyers of the headquarters of many of our large banks may at last begin to enter not just the policies of the banks and their structures and cultures but the policies, structures and cultures of the leading executives in those banks. I shall mention just one of those banks where these values appear; in fact, I may not mention which bank it is because I think that noble Lords should try to work out which one I am talking about. Those values read: “Serving Customers”; “Working Together”; “Doing the Right Thing”—a new one that has been inserted; and, fourthly, “Thinking Long Term”. It is in the policies, structures and cultures of the leading executives in those banks that I believe culture change will really happen. We have high expectations of that change but, as many noble Lords have said, it needs to be undergirded by legislation. It cannot be left simply to hope or chance or to the individual motivation of altruistic colleagues.

Therefore, I welcome that in both amendments we find provisions to limit sales-based incentives at both the individual and business unit level. In the PPI scandal, we saw what happens when banks come to value the sale of financial products as the objective of the whole exercise, with little or no thought for customers’ needs. Banks are now having to take responsibility for this culture of “selling at any cost” and the new remuneration code before us seeks to make explicit the realisation that an excessively sales-based culture can be very damaging both to the financial well-being of customers and to the reputation of the banks.

I hope that my noble friend the Minister will recognise that this amendment is not seeking to overly restrict remuneration, devalue the work that our senior bankers undertake or unduly affect the competitiveness of our world-beating banking sector. What it does is to set out some of the values and virtues that should underlie the banking system: long-term risk management; a fair balance between risk and rewards; valuing customer needs above the sale; and, above all, valuing collective interest beyond the individual or the unit, or even the bank itself. This will be good for both business and society.

[Lord Phillips of Sudbury]

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

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

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

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

[Lord McFall of Alcluith]

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

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

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

at Lloyds, that is—

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

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

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

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

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

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

who established BarCap, along with Bob Diamond—

“and Iain Abrahams to support the bonus pool”—

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

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

three senior executives for the past decade.

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

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

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

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

Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the Minister for introducing these amendments. However, can we reflect a little on the rush towards competition? A competitive system, if it is working effectively, is likely to result in the elimination of institutions from time to time, a process that was famously described as “creative destruction”. That sort of process can be seen quite clearly in countries that have large numbers of relatively small banks. Banks fail regularly in the United States—it is quite a common process. The process is, of course, managed effectively because these banks are relatively small. Has some thought been given to the relationship between the size of banking institutions in Britain and the effectiveness of competition? If competition were truly enhanced, one bank managed to eliminate another and both were relatively large, that could be extremely disruptive. This is not to argue against a competitive process but simply to say that it should not be regarded as an exclusive guideline with respect to what are desirable policies. Has the FPC been consulted on these clauses, and what is its view?

[Lord Phillips of Sudbury (LD)]

My Lords, there is an assumption that competition is essentially and necessarily good and that more competition is better. We have had manifest evidence in the past six years in the City—and indeed much longer than that— that there is a point at which competition turns in on itself. Indeed, the values of out-and-out aggressive competition are inimical to the values of integrity and honesty. I want to strike a note of caution, because this word is overdone in terms of its necessary public benefit.

[Lord Newby]

My Lords, we spent the first part of the afternoon talking about how we get more diversity and competition into the sector. Obviously there is a danger that this can go too far. It is important, however, to realise what these powers do. There are two principal powers. First, Competition Act enforcement powers deal with restrictive practices. Most people would agree that, almost by definition, restrictive practices are not a good thing. The second power is the ability to carry out market studies and make references to the Competition and Markets Authority for a decision on whether action should be taken. Earlier we were discussing the need for the Competition and Markets Authority potentially to do just that. These are not powers that are going to force the FCA to put competition at all costs, at any price, ahead of everything else. They are relatively limited and I think we will find that they are beneficial.

--- Later in debate ---

Moved by

[Lord Phillips of Sudbury]

91B: After Clause 15, insert the following new Clause—
“Review of the exemption of certain business gaming contracts from the Gaming Acts
(1) The Treasury must institute a review of the effects of certain business gaming contracts having been made enforceable by the repeal of certain provisions of the Gaming Acts pursuant to the Financial Services Act 1986 (as amended).
(2) “Effect” shall include the social, cultural and ethical effects.
(3) The Treasury may appoint one or more persons to undertake the review after consultation with the Bank of England, the PRA, the FCA and such others as it decides on such terms as it shall think fit.
(4) The review shall culminate in a report to the Treasury within two years of the coming into force of this Act.
(5) The Treasury must lay the report before Parliament and thereafter publish the same.”

[Lord Phillips of Sudbury]

My Lords, after 10.20 pm and with less than a dozen of us still hanging on, I shall be remarkably brief in moving this amendment, which I hope has the advantage of self-clarity.

My starting point is the Financial Services Act 1986, which, as noble Lords will remember, ushered in big bang. Section 63 of and Schedule 1 to the 1986 Act exempted certain City dealing contracts from the effects of the Gaming Acts 1845 and 1892. Up until that time those contracts—which were purely gaming contracts—were unenforceable. Since then, the exemptions have been extended, first by the Financial Services and Markets Act 2000 and further by the Gambling Act 2005.

It is a matter of considerable debate, within the City in particular, about just what the impact of this extremely fast-growing market has been over the years, because fast-growing it has been. I suppose that among all the types of City dealing that have benefited most from exemption from the Gaming Acts there would be much hedge fund activity, which now runs into trades worth trillions of pounds.

It would be beneficial for all concerned to have a review, simply set up and in the hands of the Treasury. The disadvantages of this type of market may be few; they may be beneficial. Many consider that they are a dangerous element in our economic life, because they exaggerate swings and drive markets to extremes. I am afraid that they are susceptible to corruption, in particular, and the most famous or notorious summation of these markets, depending on your point of view, was when Adair Turner—the noble Lord, Lord Turner of Ecchinswell—described them as “socially useless”. I seem to remember from when I was at Cambridge reading economics, ploughing through John Maynard Keynes’s General Theory, that there was one very striking comment in there. I have not quite got it word for word, but the gist is that when the operation of the markets becomes akin to that of a casino, the job is likely to be ill done.

This amendment carries no pre-judgment, but will allow us a cool and collected—and, some would say, overdue—look at the impact of this particular market, the gambling market as you might call it, and see just how it stands. Noble Lords will note in particular that when saying that the Treasury must institute a review of the effects of these gaming contracts, in proposed new subsection (2) of Amendment 91B “effect” is defined as including the,

“social, cultural and ethical effects”,

of this type of gaming business.

As I say, the framework I have provided is a light one. The Treasury will appoint the members of the review committee and describe its terms of reference within the constraints I have put down. In deciding who is going to be part of the review, the Treasury has to consult the Bank of England, the PRA and the FCA. Then there is simply an obligation for the review committee to report within two years of the Act coming into force, and for the Treasury to lay the report before Parliament and then publish more widely. I hope that this will commend itself to the House. I beg to move.

[Lord Newby]

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

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

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

--- Later in debate ---

[The Archbishop of Canterbury]

My Lords, I am slightly surprised that the Minister should be resistant to what seems to me a very reasonable amendment. One of the dangers that we have faced in the markets over many years is that of parallel markets. The derivatives markets are, as we know, opaque, as has already been remarked on, and we examined them in some detail in the banking standards commission. The computer-driven markets are also very opaque. We examined those markets and remarked that they would constitute the next great crash. When you have these gambling markets on the side that no one quite understands or knows who is participating in them, and which often take place offshore, it seems to me that at the very least there are grounds to hold an inquiry into the effect they are having on market prices through their impact on the shadow market—we should also examine the psychology of the dealers—and on those involved directly in the more regulated market.

One of the great lessons learnt from the events of 2008 was the ineffectiveness of the clearing system for over-the-counter derivatives, which there was no means of settling. That has been one of the major problems for the liquidators of Lehmans. The gambling markets have much the same problem. We are setting up mechanisms—they are being set up internationally—to deal with the settlement of derivatives contracts, but nothing is being done in this parallel market. The noble Lord, Lord Phillips, has made a very useful point, albeit that the hour is late and it is almost 10.40 pm, which may enable this issue to become slightly clearer in terms of understanding what can be done.

[Lord Phillips of Sudbury]

My Lords, I am grateful to the most reverend Primate and to the noble Lord, Lord McFall. However, I am not so grateful to my noble friend the Minister, as I thought that he rather missed the point. The fact that Tom, Dick and Harry can go down to the betting shop or the local casino, run up a debt and be sued for it has nothing whatever to do with the amendment that I propose tonight. As noble Lords have commented, and as is obvious, we are dealing here with huge sums of our money which are gambled, often to the excessive benefit of the gamblers. We do not know how they function and have not looked carefully and closely, as we should, at the impact of this. I refer not so much to the economic impact, although it may be found that the destabilising effects of this market are greater than we realise, but to the ethical, cultural and social effects. For the life of me, I cannot see why a liberal-minded Government should want to staunch such an investigation. I see no downside to it; it would not be expensive and would be simple to operate. It would all be within the purview of the Treasury and it might yield some surprising and valuable results. I therefore hope that the Minister will give this a little further thought, as I am very inclined to bring this back on Report.

[Lord Newby]

My Lords, I am extremely grateful to my noble friend for clarifying exactly what lies behind his amendment. I am sorry if I in any way misconstrued it. The issues that he raises about the social and broader consequences of some aspects of the “socially useless” parts of the financial services world are obviously important. I am somewhat less certain about whether the kind of inquiry that he is seeking would produce any decisive results.

I wonder whether he may wish to consider between now and Report whether there is another means of achieving the same result because these issues are very much in the public domain. A dry inquiry might not get us to the answer that he wanted. I wonder whether there might be some broader inquiry, bringing together groups of people with expertise and concern, possibly moderated by a think tank or charity, to look at some these issues. The membership of such an inquiry would be important in determining the result. Too narrow a membership would tend to produce a series of dry, probably useless, recommendations, whereas a broader group operating in a relaxed and unconstrained manner might produce more wide-ranging and socially useful conclusions.

[Lord Phillips of Sudbury]

I am not sure whether I am supposed to say any more to the Minister except, “Thank you”. I thought that at the end he was arguing my case rather better than I was. I will certainly think between now and next time, and talk with him. I beg leave to withdraw the amendment.

Amendment 91B withdrawn.

Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Higgins (Con)]

My Lords, both these amendments have much to commend them. The point that I would like to pick up regarding Amendment 43 is the position of the banks in which the taxpayer has a large holding. Having bailed out a number of banks, it is extraordinary that the Government have stood back completely from any involvement at all in what those banks are doing. In the context of competition, which we are now discussing, there is a strong case for them to set an example. This would enable at least a degree of competition to be introduced at this stage without much delay.

Amendment 102 also has much to commend it. It suggests that the inquiry should look into a series of aspects with regard to banks such as the level of competition, the obstacles to it, other actions and so on. One should add to that a careful study of what the economies of scale in banking actually are, because I suspect the reality is that they do not exist to anywhere near the extent that the size of the banks at present would suggest. On the other hand, we would find that there were major diseconomies of scale, not least the enormous risks to which we have been exposed as a result of banks being the size that they are. We frequently say that they are not only too big to fail but too big to manage. It is clear that they are too big to manage, and that is a major diseconomy of scale.

If we are going to set up the kind of inquiry that the Opposition are advocating, which I would support, it needs to look at economies of scale in this context and consider whether—given that the banks seem to have been motivated as much by megalomania as by anything else—they are of an appropriate size or whether some consideration ought to be given to whether competition would be increased if they were broken up. It is curious that competition in this area has been, as far as I can see, in no way affected by this or any previous Government’s overall competition policy, which has simply not been applied here. If, as the noble Lord said just now, the major banks have probably 80% of the market—given that normally anything over 30% would be appropriate for an investigation—we need to look at that carefully.

The lack of competition is affecting two things: the supply of loans to consumers and small businesses in particular, and the price. It is clear that there is a serious lack of supply for businesses that are trying to get finance for expansion. Despite all the Government’s efforts, of which there have been a number, to increase the supply of loans to small businesses and others, the loans do not seem to be getting through to the people whom the Government would like to help.

As for the price, one has only to look at the cost of capital to banks and then at the amount that they are charging consumers to realise that the situation is lunatic. I wish my noble friend Lord Flight well because there must surely be scope for something to be done on that issue. The difference between the cost and the amount being charged is totally disproportionate. This came up earlier in Question Time, when my noble friend on the Front Bench replied that there is concern about the amount being charged by banks when compared with what is charged on payday loans and so on. A helpful and illuminating article in the press in the past few days brought out this point. I hope that one can get something done about that.

We have some way to go and noble Lords will no doubt wish to return to this matter on Report. I hope that we will then take a definite decision or, even more, that the Government will respond to the proposal for a study. However, this is only a study, and a number of other measures to which I have referred go wider than this. These measures could be taken now and have some effect on the appalling oligopolistic situation in the market at the moment.

[Lord Phillips of Sudbury (LD)]

My Lords, I, too, broadly support these two amendments. It is encouraging that every speaker so far has taken that broad point of view. As my noble friend Lord Sharkey said in opening this debate, the amendment in his name and that of the noble Lord, Lord Glasman, is a probing amendment. I hope that the noble Lord, Lord Eatwell, was advancing Amendment 102 in the same spirit. I very much hope that the Minister will say that he will take away the contributions made, so that we can come back together on Report with an amendment that answers some of these concerns.

Perhaps the most striking statistic that we have had was that given by the noble Lord, Lord Eatwell, who said that in Germany 80% of banking is provided by local regional banks whereas here the figure is only 3%. I think that was said by the noble Lord, Lord Eatwell, or perhaps it was the noble Lord, Lord Glasman.

[Lord Sharkey]

It was me.

[Lord Phillips of Sudbury]

I am sorry, it was my noble friend. That is a stunning statistic. The fact that some of the small German banks failed in the great crisis seems to reflect a strength and virtue as compared with the situation in this country where, but for the injection of in excess of £80 billion of taxpayers’ funds, as far as I can see the whole banking system would have failed. The big clearers would have gone to the wall—that is the truth. We do not even have a market banking system that complies with the supposed basic virtues of a capitalist system: when they were tested, they could be held up only by immense government input.

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[Lord Higgins]

My Lords, my noble friend says that people have been very slow in the past, but he is now telling us that the OFT will decide whether to make a referral—not actually do anything, just make a referral—by 2015. Does it really take from now to 2015 to decide whether the banks need to be referred?

[Lord Phillips of Sudbury]

My Lords, if I may, I would add that my noble friend talked of being too slow, but in this debate several noble Lords have made the point that it is not slowness which has afflicted the large clearing banks but immorality. Whether you are talking about trying to manipulate the LIBOR rate or PPI or identity insurance—you can go on and on—there is the sheer scale, impersonality and lack of relationship or any sort of customer allegiance. I fear that these have rotted the foundations of so many of these colossal banks. Does he not therefore understand that the gist of these amendments is to try to replace that state of affairs?

[Lord Newby]

My Lords, as far as immorality is concerned, later we will deal with amendments on the reversal of the burden of proof and on the new criminal offence which will be available should banks behave in a grossly immoral way. That is the way to deal with the narrow point my noble friend makes. The whole question of the culture of the banks is addressed only partially in the legislation because it is by definition a cultural issue. We are taking very significant steps to regulate individual senior managers and hold them to account for what they do in a way that has never been the case in the past. Again, that is quite a revolutionary change. Regarding the specific point raised by the noble Lord, Lord Flight, I believe that local authorities at least can bank wherever they choose, but I will look into the point and write to him. I simply do not know what the position is.

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[Lord Desai]

My Lords, I support what my noble friend Lord Eatwell said and speak in relation to what the noble Lord, Lord Lawson, said. People who are supposed to be responsible for the conduct of, as it were, their inferiors in the bank sometimes do not understand what is happening below them. Certainly, in the case of Baring Brothers the management did not understand what Nick Leeson was doing. This is a matter of competence. I very strongly support this amendment because we ought to have periodic examinations of people in charge of banks, and see whether they pass those examinations, because the profession is changing and they are way behind a changing business.

[Lord Phillips of Sudbury]

My Lords, I support very much what the noble Lord, Lord Eatwell, has just said. We need a clear and authoritative report from my noble friend the Minister as to who is right between the noble Lord, Lord Brennan, who is a highly distinguished lawyer, and those who are advising my noble friend. If there is any doubt about the matter, I see virtue in the amendments put down in the names of the noble Lords, Lord Brennan, Lord McFall and Lord Watson of Invergowrie. I commend the organisations that have helped to craft those important amendments. There again, the noble Baroness, Lady Noakes, seems to make a strong point. If on second thoughts the Minister cannot assure us that the amendment of the noble Lord, Lord Brennan, is superfluous, one would want him to assure the House that the noble Baroness’s concern is superfluous.

[Lord Newby]

My Lords, perhaps I may start by dealing with the three points on which the noble Lord, Lord Turnbull, sought clarification. The first was on the definition of “bank” for the purposes of these amendments. The regime will apply to all UK institutions that have permission to take deposits. That covers ring-fenced banks, other banks, building societies, credit unions and some wholesale deposit takers, but it does not cover things which in popular parlance are called banks but which do not take deposits.

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[Lord Eatwell]

My Lords, my noble friend Lord Brennan has made some powerful points. I draw the attention of the House to the fact that, as in the previous group of amendments we were discussing, these offences will apply only to institutions that accept deposits. It therefore leaves out a whole series of institutions that I believe the noble Lords, Lord Turnbull and Lord Lawson, would also feel should be included under these offences.

[Lord Phillips of Sudbury]

My Lords, I commend the Government on bringing forward Amendment 58. It has been a source of great public disaffection that over the past few years the number of people in the City responsible for some really gross acts of criminality who have been brought to book could be measured on the fingers of two hands; indeed, the noble Lord, Lord Turnbull, referred earlier to the pathetic enforcement statistics. This provision is therefore vital. However, I have two thoughts regarding the way in which this is framed: first, that it is too severe, and secondly, that it is too light, or slight.

The title of the clause is:

“Offences relating to decision”—

I suppose they mean “a decision”—

“that results in bank failure”.

I note that in two places in the clause itself it talks about a decision that “causes” a bank failure. There is a difference in the meaning of the words, “resulting” in a bank failure and “causing” it. The word “causing” is absolutely direct in a way that “resulting” is not. Perhaps the Minister might like to look at that.

The other point that strikes me about the wording of this clause is in Amendment 58(1)(c) and (d). Paragraph (c) says,

“in all the circumstances, S’s conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person in S’s position”.

The noble Lord, Lord Brennan, has already made points on this. That is unsatisfactory in another sense. However, if we are—as we are—making criminal offences out of the conduct defined in this new clause, there should be a clear indication that no one can be convicted unless there is a want of integrity or honesty on the part of the person convicted. That is a fundamental principle of British criminal law. However concerned we are, and I certainly am, to bring to book the many malefactors who have ruined the reputation of the City in recent years, one cannot do it at the cost of changing or undermining that fundamental test of criminality, intent, bad faith, dishonesty or want of integrity—call it what you like. The language here does not clearly require that intent and want of integrity. There are cases that would fall within Amendment 58 that would not satisfy the normal test of mens rea in criminal offences.

I will refer briefly to Amendment 60 in this group, which is about the institution of proceedings. Subsection (4) says:

“In exercising its power to institute proceedings for an offence, the FCA or the PRA must comply with any conditions or restrictions imposed in writing by the Treasury”.

Those are the words. I cannot see anywhere, in this amendment or elsewhere, a requirement for the conditions or restrictions imposed in writing by the Treasury to be made public. Surely it is a fundamental requirement of restrictions or conditions that will potentially lead firms and individuals into the criminal courts that those conditions or restrictions be made public.

[Baroness Noakes]

My Lords, my first thought on seeing this new offence relating to bank failure was to be mildly appalled at something that might possibly impinge on one’s personal life, but I have tried to put that to one side and to look at this clause dispassionately. What concerns me is a point raised by the noble Lord, Lord Phillips of Sudbury, which relates to causation. That is mentioned several times in this clause, but one of the conditions in subsection (1)(d) of the new clause proposed by Amendment 58 is that,

“the implementation of the decision causes the failure of the group”.

Is it clear that single decisions cause failures of the nature that we are talking about? I ask him to think, in the context of the failures that existed in the wake of the 2008 financial crisis, whether any one of those, had they occurred today and been dealt with under existing legislation, could have technically satisfied the wording in this offence. Even in the simplest case of failure, which was probably Northern Rock, it was not as simple as one decision or even one group of decisions. There were multiple points of decision which contributed. Certainly, when one gets to something as complicated as the failure of Lehman Brothers, I would be absolutely astonished if anybody could have pointed to one decision causing one failure.

--- Later in debate ---

[Lord Newby]

Yes, I hope I can. As I was just saying, we had to put in the Bill a form of words that would create a credible offence that could be successfully prosecuted. The two requirements that an individual’s conduct had to fall far below what could reasonably be expected of them and that they were aware of the risk they were taking, would, in the view of the lawyers, capture recklessness. It is a definition of recklessness without the use of the word. The wording gives a greater chance of having a credible offence than using the word “reckless”. It is an attempt to make sure that we have got something that we could use, while capturing the concept.

The noble Lord, Lord Phillips, asked about the difference between the heading and the text. My understanding is that headings of sections of the Bill do not constitute part of the Bill for legal reasons. It may be possible to improve the heading, but the noble Lord should not worry about it. The noble Lord asked whether any restrictions on conditions which were imposed might be made public. At first sight, I cannot see any reason why that should not be the case, but I will write to him to confirm the position.

We have had a good debate on these amendments. I commend the government amendments to the House.

[Lord Phillips of Sudbury]

I do not think the Minister has adequately dealt with the point made by my noble friend Lady Noakes and partly by myself. Surely it is an inescapable point that if you say that someone has to cause the failure of a bank, that is a direct and hugely demanding test. If it had said instead that the decision significantly contributed to the failure of a bank then I think my noble friend and I would be content because it satisfies justice as well as practicality. Is he not concerned that this will undermine the whole purpose of this amendment?

[Lord Newby]

I do not think it undermines the whole purpose of the amendment. It obviously reduces the scope of cases which can be brought under this amendment, but the challenge that the lawyers have had is to make sure, as far as possible, that there is the certainty of what constitutes an offence, which is required under human rights legislation. That has been one of the principle drivers for the particular form of words that we have got. I accept the noble Baroness’s point that in some cases there will be a whole raft of contributory decisions which over a period lead to a bank failing. It will be, I accept, more difficult to bring a prosecution in those cases. It is not inconceivable, however, to argue, without having any particular case in mind, that if a senior executive of a bank persuaded the board to make an acquisition knowing that it was a very risky acquisition which if it went wrong could bring the bank down, that decision would fall squarely, as I understand it, within the scope of the Government’s proposals. I do not think it is outside the realms of possibility that a senior manager in the bank might take such a decision.

--- Later in debate ---

[Baroness Noakes]

My Lords, my initial reaction to these new clauses was that they constituted a sledgehammer to crack a nut. It seems to me that creating another regulator in a territory which is well occupied by regulators is unnecessary in this case. To that extent I support the noble Lord, Lord Eatwell. One has only to look at government Amendment 60YYH to see that the new regulator will have to co-ordinate with the Bank of England, the FCA and the PRA. These bodies already have to co-ordinate among themselves for different purposes in any event. I think that the world is slightly going mad on this. My noble friend Lord Higgins asks who will pay for the regulator. Obviously, the people who will operate the payment systems will pay for the regulator. I suspect that this arrangement will be more expensive than the existing Payments Council system. I do not know how much more expensive it will be. I believe that we should be told what the costs are because they will inevitably end up being paid for by the businesses and individuals who use payments systems. There is no one else.

I have one question with two parts for my noble friend which relates to the powers in government Amendments 60S and 60T. One part relates to the power to require access to payment systems. I completely understand that. If you are to promote competition, you need powers to require access. The other relates to the variation of agreements relating to payment systems to take out anti-competitive elements in arrangements that have already been made. Both those measures could have financial consequences for those who operate payment systems. I do not object to the principle involved, but where in these 40 pages of amendments can I find the principles that the payments regulator has to use in deciding how he approaches those decisions? I assume that he cannot have unlimited discretion to decide who will pay for what and on what terms. However, there appear to be no basic financial principles underpinning this arrangement in the 40 pages of amendments, which seems to me a lacuna.

[Lord Phillips of Sudbury]

My Lords, for the record, these amendments cover exactly 52 pages. The only other point I wish to make—I agree with the noble Lord, Lord Eatwell, here—is that, despite the payment system having its own regulator, new subsection (3) of government Amendment 60B states:

“The FCA must take such steps as are necessary to ensure that the Payment Systems Regulator is, at all times, capable of exercising”,

its functions. It has the job of overseeing the regulator, so why on earth does it not do the job itself?

[Lord Sharkey]

My Lords, I have two simple questions. One is to do with the innovation objective. Government Amendment 60M states:

“The innovation objective is to promote the development of, and innovation in, payment systems”.

It just occurred to me to ask whether there is any example of a regulator successfully promoting innovation. I would be interested to hear the Minister’s reply to that.

Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Tuesday 8th October 2013 Lords Chamber

[Lord Phillips of Sudbury (LD)]

My Lords, this must be the first time in parliamentary history for the amendments to a Bill to be more than three times the length of the Bill itself. Moreover, as others have said, the complexity of both the Bill and the amendments is quite barbaric. I must admit that when I put all the papers on my dining room table to try to make head or tail of them, they occupied 10 feet of space, including all the so-called explanatory documents. Having said that, I thank my noble friend Lord Deighton, who has at least listened to what was said at Second Reading. He has an open mind, which has undoubtedly led to the introduction of a lot of the measures in the amendments that we are now debating in Committee.

I thoroughly support Amendment 3, largely for the same reasons given by the noble Lord, Lord Higgins. We are groping around in an extraordinarily complex area of life and it is abundantly sensible to have these reviews—not just of ring-fencing but a series of reviews—to see how we are coming along and whether the suppositions we are making in the course of this legislation prove to be correct. I disagree with the noble Lords, Lord Eatwell and Lord Tunnicliffe. We need to give time for these new arrangements to bed down and show their paces. Frankly, in each case, four and five years are likely to be better than two years.

I will make a few quick points on the way in which Amendment 3 is put together. We will have an opportunity at the next stage to make changes to what is currently before us. A review panel formed of five persons is unnecessarily large. You might well get by better with three or even two people, so more thought is needed on that. I also note that there is a requirement that the PRA and the FCA carry out their independent reviews but that they publish a joint outcome. Proposed new Section 142J(4) says that they,

“must publish a joint assessment of the impact of the operation of their ring-fencing rules”.

However, they may not agree. You have at least to allow, in this terminology, that that may be the case. You cannot force consensus upon these two august bodies.

The other point is in relation to the appointment of the chair and the endorsement of the Treasury Committee of the House of Commons. It requires that the person appointed,

“is likely to act independently of the Treasury, the PRA and the FCA”.

We should provide that the person is likely to act independently, full stop. It is not only required that they are independent of those three bodies; general independence is required, and so I suggest that those words be excluded.

Finally, proposed new Section 142JA(3) states:

“The persons appointed to conduct a review must include at least one person with substantial experience”.

That is one person out of five. If we are to stick with five people—and I suggest fewer, or at least the prospect of fewer—it is not enough to have only one with experience of all this. This is an extremely complex area of life—there is no area more complex—and experience on the part of more than one person on this panel of reviewers is essential.

That was not quite my final point; I have another quick comment. Proposed new Section 142JB(4) states:

“The report must include … recommendations to the Treasury as to the provision that should be included in orders and regulations”.

It is not inconceivable that there may be no recommendations. Indeed, it is very conceivable that there may be more than one. Therefore the language of proposed new subsection (4) needs amending. I will leave it at that, but I commend the noble Lords who tabled the amendment in this group.

[Lord Desai (Lab)]

My Lords, I apologise for not speaking at Second Reading; I was out of the country. I support the amendment tabled by my noble friend Lord Eatwell. As many noble Lords said, ring-fencing will be a new experience. However, given what happened in the banking industry, and the damage it caused, we have to start the process with extreme care and great suspicion. Given time, I know that the banks will innovate ways of avoiding ring-fencing; that is the nature of the market in innovation. Therefore, before anything further happens, we ought to have early scrutiny of ring-fencing arrangements, as proposed by my noble friend. Later, if we wish, we may do the next review after four or five years, but the initial reviews must be done as early as possible and as toughly as possible, because if we are kind to the banking sector and it does the same thing again, the public will never forgive us.

--- Later in debate ---

[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.

[Lord Phillips of Sudbury]

I have a lot of sympathy with what my noble friend has said. However, on my noble friend’s thesis, there is the problem that if you have a regulator of the regulator, you should have a regulator of the regulator of the regulator. At some point you have to put some trust in someone. As he has said, bankers are adept at getting around any set of regulations. Is there not a point at which you have to have trust?

[Lord Forsyth of Drumlean]

I agree, but all questions can be reduced in that way—reductio ad absurdum. On that basis, we would get rid of Parliament, which ultimately is the regulator of the regulator. The regulator is accountable to Parliament. We are dealing here with day-to-day very complex circumstances. In this great House we have many experienced people. In my view, the banking commission has done a brilliant job, as has the Treasury Select Committee in many respects. I think all of us would agree that that was appropriate and that that job has been done. However, as I understand it, in the particular instance of deciding whether this ring-fencing experiment will work, here we are talking about the need for some kind of process which will scrutinise that and will report on an informed and an in-depth basis. That is why I support the amendment in the name of the noble Lord, Lord Turnbull, which seems a sensible course of action.

In the case of the Bank of England, why did it allow interest rates to remain so low when it could see a housing bubble and an asset bubble being formed? Even the former governor, who is now a Member of this House, has acknowledged that and has said publicly that it is very difficult when everyone is making lots of money and the whole consensus is that we have abolished boom and bust. It is very difficult for a regulator to stand up to that, especially if Ministers are egging them on and in their speeches are saying the same thing.

If the purpose of this exercise is to say, as we always say, “What went wrong? What are lessons that we need to learn?”, this amendment points to one of the clear lessons that we need to learn. I am disappointed that my noble friend does not see that.

--- Later in debate ---

[The Archbishop of Canterbury]

My Lords, I apologise that I, too, was not here for Second Reading as I was at the funeral of a close friend. I speak as a member of the PCBS, having had the privilege of a year of lessons from the other members, especially noble Lords here today, and the great pleasure of being rung up by the noble Lord, Lord Lawson, quite frequently at weekends, to explain how I should think about a particular subject, which he has done with great eloquence as well today.

I agree entirely with the speeches made by the noble Lord, Lord Turnbull, twice, and both speeches by the noble Lord, Lord Lawson, which have put the position very clearly. It must be a very long time—and my experience of this House is very limited—since a solution to a major problem was put forward with such a noticeable lack of enthusiasm. Almost everyone who has spoken about the ring-fence has damned it with faint praise, to put it at its most polite. The noble Baroness, Lady Cohen, simply eliminated it quite quickly and very clearly. We are in danger of getting lost in looking at the regulation and forgetting what the regulation is trying to do. This is about a question of a culture and ethics, not detailed rules. We all remember Bob Diamond, the chief executive of Barclays, saying that culture is what happens when no one is looking.

We know what happened when no one was looking in the culture of some parts of the banking industry—they fixed LIBOR, overgeared and gamed any system of regulation going. All of that was dealt with under regulatory processes that did not work. They still fixed LIBOR, gamed the system and did all kinds of other things. The force of culture in those institutions made it hard to challenge and it is very noticeable that over 10 years when this was going on at its worst the number of people who blew whistles on this was almost zero. The culture made it very hard to discern that what you were doing was not right.

The noble Lord, Lord Lawson, referred to the dreadful effect of the meltdown we experienced in 2008—as was said earlier, five years almost to the day. The terrible cost of that catastrophe must not happen again. That is what we are trying to do. It has affected the City of London for a while but the far-flung areas of deprivation and poverty in our country suffered grievous blows of further damage from which they are still in the process not even of looking for recovery. The damage when the culture goes wrong is not localised. It is not just about the City; it is about people far away who know very little about what is going on there but find that they cannot raise money, that they cannot do their business and that their banking disappears locally. The vast structures of reform that have been and are being passed through Parliament, including this Bill, and that are passing through the regulators and the industry, show that there is a great failure of trust—and trust will be re-established not by regulation but by culture.

We have already heard the problems expressed very clearly about the ring-fence. The noble Baroness expressed herself very pointedly and precisely. But one thing that we found in discussing this issue in the Parliamentary Commission on Banking Standards is that separation is almost as hard to work out as a ring-fence, because you have to decide which bits get separated into which bits. The next thing that happens is that the brilliant merchant bankers, as it was put a few minutes ago, get between the wall and the wallpaper—that, I think, was the memorable phrase—and start putting other bits into the wrong bit. They game the system just as much with separation as with a ring-fence, so I do not think that that is a simple solution.

We have had the prodigal son and elements of faith from the noble Lord, Lord McFall, but we have the Trappist solution here. You live in the same community, but you do not talk; that is how the ring-fence is meant to work. The amendment—and this is why the element of culture is so important—increases vastly the voltage of the ring-fence. If it has to be used, like much of these forms of regulation, it will have failed to some degree. But it says that, if the industry loses its way in ethics and culture, as it did in the early years of this century, there is catastrophe in regulatory terms. Banks will be split up; people will come in and take them apart. The Government have argued that such a drastic step should require further primary legislation, but that argument seems to carry very little weight. The amendment is merely a rational extension to existing provisions and ensures that the banking industry realises that poor culture leads to fatal shocks, not to a little buzz in the fingers, or to lengthy debates in future on primary legislation. It will concentrate minds.

There is no doubt that we are seeing good things happen in the culture of a number of banking institutions. The new leadership in a number of banks is changing the culture very effectively. A professional standards body is being set up. I believe that this is not merely temporary self-interest but, in many cases, a deep sense that there needs to be a change of culture and values. But that is what is happening in this generation, now; it must be reinforced with firm boundaries to the ring fence, with very serious consequences if you walk into it to see what will happen. The amendment will reinforce that change of culture and act as a permanent reminder to the banking industry of the danger of slipping back into the bad old ways. Not to have that reality signalling the boundaries of acceptable ethics and culture is to encourage behaviour that looks first to what is legal, as has happened for a number of years, and never to ask the question, “What is right?”. To have banks ask what is right rather than what is merely legal would be good not only for the bank but for the whole society that it exists to serve, as the noble Lord, Lord Lawson, said.

[Lord Phillips of Sudbury (LD)]

My Lords, I entirely agree with what the most reverend Primate has just said. As a lawyer of far more years than I am willing to admit, I wonder whether sometimes the legislation that we pass in this place, with the very best of intentions, has in some strange and horrific way an almost contrary effect, for the reason given by the most reverend Primate—namely, that people look at the law rather than what is behind the law and look at the small print instead of the large issues. In my professional life, I have seen this get worse and worse.

One argument above all others persuades me that this amendment is a good one. By and large, I am persuaded that it will leave us with a simpler, more workable outcome than the ring-fence arrangements, which seem to me, even in my most legalistic frame of mind, to be of barbaric complexity. These will be bad enough, but they are significantly more straightforward, more comprehensible and, in a way, more down to earth than the ring-fencing. So I support the amendment.

Queen’s Speech

Lord Phillips of Sudbury Excerpts

Monday 13th May 2013 Lords Chamber

[Lord Whitty]

My Lords, some have said that this Queen’s Speech is too thin. I do not have a problem with that. Frankly, it is an issue of quality rather than width. If the legislation proposed was going to do something about the economy and improve our economic and societal prospects, I would welcome it, however thin it was and however many Bills were involved. As it is, I welcome some of what is there, and welcome the opportunity to debate the rest. I am very glad that we are about to debate the Energy Bill and the water Bill; both will probably be discussed more tomorrow, but both are vital for issues of living standards and cost of living, and for our investment programme. The Energy Bill seems deeply flawed, and I am sure that we will have some serious debates on that. I agree with what is in the water Bill, broadly speaking, but there are great gaps in it—in particular any reform of the abstraction sector, which will be vital for the economic and environmental future of that sector.

I am glad, although it was not mentioned in the gracious Speech, that we will also get banking reform back before the House. However, I am pretty dubious about the present proposal’s ability to reform a sector which both caused the financial crisis by its recklessness and which is failing and holding back the recovery by its caution. It is a sector in this country which, despite the dramatic changes since 2007, has somehow retained, broadly speaking, the same structure. Some institutions are under different ownership, including state ownership but, basically, we have not tackled the problem of the structure of the banking sector in particular. I was hoping that we would see a more decentralised and more segregated banking system, both horizontally and vertically, and an absence of organisations which, for the future, would be “too big to fail”. I regret that we are not yet in that position, and I cannot see that this proposition on banking reform will get us to it.

On other legislation in the gracious Speech, I think I welcome the Mesothilioma Bill, which should—although it requires some detailed scrutiny—right a serious, long-standing and distressing situation. On the deregulation Bill, I hope that it will raise burdens on small and medium-sized firms, but I suspect that it is largely another rehearsal of saloon bar prejudices, and so I cannot give it an unequivocal welcome.

I hope I will be able to welcome the proposed consideration of the draft consumer protection Bill. As my noble friend Lady Hayter has said, the Government’s record on consumer issues in legislation has not been particularly good. They not only abolished my own organisation, Consumer Focus, but resisted proposals from noble Lords on all sides of the House during the previous Session to improve the protection of consumers in Acts that were passed in that Session. I hope that we will see some real proposals for improvements for consumers this time round.

In particular, I hope the Government will return to the issue that was mentioned by my noble friend Lady Hayter: that of collective redress, which I have been banging on about on every possible occasion over the past few years. It was to be included in one of the last pieces of legislation of the last Government, but unfortunately it was lost during the wash-up when it was objected to by the then Opposition. Collective redress would have avoided a lot of the hassle which consumers face, for example with PPI, where they are exploited first by financial institutions and then by claims companies. To have a proper system of collective redress for consumers would be a major step forward, and I hope that the Government have that in their sights in the production of the draft consumer protection Bill.

Excluded from the gracious Speech are some serious proposals on how to get out of the current economic recession. I follow the noble Lord, Lord Patten, in this, although I have seen the same bad example in Wincanton to which he refers. We need a massive housebuilding programme. The Government, after cutting back even on the rather inadequate programme they inherited from the previous Government, have finally realised this, and they are providing some significant support for the purchase of housing. However, as the noble Lord, Lord Shipley, said, that is not enough. In default of increasing the supply of housing—in other words, acting on the provision and capital side as well as supporting potential buyers and landlords—the net effect of underwriting and providing mortgages under Help to Buy and other schemes will be to raise house prices and increase housing costs, aggravating rather than resolving the problems of dysfunctional housing markets. Help on the capital side for building houses, by raising the limit on borrowing for local authorities and housing associations, by joint ventures and by supporting the private sector in housebuilding, is one way out.

Investment in housing ought to be accompanied by investment in infrastructure. The only serious mention of infrastructure in the gracious Speech was the reference to HS2. I broadly support it, but I will not enter into that controversy now. HS2 will bring jobs and serious investment only in several years’ time. We need investment in ready-to-roll projects now. There is an absence of that both in the Queen’s Speech and in the Government’s thinking.

Of course, behind all this is the problem of the economy, which manifests itself in a number of ways. The political obsessions at the moment with the EU and with immigration are a reflection of the failure of the economy. It is probably too late at night and I have too small an audience—actually, the audience is distinguished enough for me to go into a bit of a rant about the economy. Brussels, Frankfurt and Great George Street are all in thrall to a dangerous economic ideology, and they must get out of it if we are to see any economic progress in this country and in Europe.

The effect of the eurozone and the ECB’s view on how they should impose austerity on the rest of Europe is pretty clear. A single currency requires the transfer of resources and credit from the richer part of the EU to the poorer part. The fact that the Deutsche Bundesbank, German politicians and the ECB do not see that sufficiently clearly will, if they are not careful, ruin the eurozone. I speak as a passionate pro-European. I was even broadly in favour of the single currency at some point. However, they are failing to manage it properly because they are in thrall to an ideology that says that the only way out of economic recession and a public finance crisis is to impose austerity in a way that impacts most detrimentally on the poorest part of the eurozone.

Having been critical of the eurozone, I say in a less dramatic way that we are pursuing the same policy here. The Chancellor likewise is locked in the same ideology. The one great success of the Treasury in the past three years has been to convince the bulk of the press and a large proportion of the British public that the current difficulties in the economy and the public finances are entirely the fault of the previous Labour Government. The noble Lord, Lord Hodgson, who is no longer in its place, said that the Labour Party was in denial about this. My assertion tonight is that it is the Government who are in danger of believing their own propaganda. The financial crisis was started by private debt in America and in Europe. It was compounded by the failure of the banks, and compounded further by the fact that Governments throughout Europe and North America decided that they were going to bail out the banks. That is what caused the crisis in public finances.

The UK was more impacted than others because we are more dependent than other countries on the financial sector. The long-run record of the Labour Government was that before 2007-08 we had a debt-to-GDP ratio that was roughly the average of the OECD countries. It got worse because of our dependence on the financial sector. That is something that this Government have to pick up. However, they should not try to do so by imposing a form of austerity on the whole of the country in a way that minimises our chances of getting out of the recession. In particular, they should not focus on the social security budget and misrepresent the way in which it has increased over recent years. The vast majority of that, of course, has been because of the increase in the part of the population of pensionable age. The other two elements include the increase in housing benefit, which has got seriously out of control. But that is due to a failure of the housing market, not of social security policies, and housing benefit should not be included within the universal credit system until we have resolved the problems of the housing market in a way that does not lead to huge increases in housing benefit for those dependent on ever-decreasing opportunities within the housing sector.

If you look at the Government’s credibility in international markets and their inability to stimulate investment within this country, despite the fact, as somebody said, that significant money is available in corporate accounts and pension funds, you can see that people are not investing in the UK because they do not have confidence in this Government’s ability to get growth going in the UK.

[Lord Phillips of Sudbury]

I am grateful to the noble Lord for giving way. I cannot resist asking him, on his second reference to our position in the international markets—he talked about our credibility—whether the most vivid example of where we stand in the eyes of would-be speculators against sterling is not the fact that the rate at which we have to pay on our admittedly massive international debt is little if any more than the Germans pay. Had we not adopted a programme of some austerity, the cost of our borrowing would have been enormously greater.

[Lord Whitty]

No, my Lords, I do not accept that. I accept the first part of what the noble Lord, Lord Phillips, says, but not the second. The ability to borrow in international markets, as with borrowing in almost any context, depends on a number of things. It depends on your ability to have a low rate of interest and low cost of borrowing; a reasonable term of borrowing; and an ability to service that borrowing and to repay the borrowing. On all those counts, throughout the desperate period of 2007 to 2011, the UK retained credibility and could borrow at relatively low rates over relatively long periods. The final qualification is that the markets have to be confident that the Government can raise enough money to repay those debts over the medium to long term. What has lost credibility in this Government is the slow growth and flat-lining of the economy, as well as the downturn of financial income for the Government as a direct result of that economic failure, which has reduced the markets’ confidence in the ability of the UK to repay loans. That is why the credit rating has gone. It was not Gordon Brown who lost the credit rating—it is actually George Osborne and his failure to get economic growth within this country. Unless the Government recognise that and start changing course by investing in infrastructure and housing and getting us out of this economic recession, they will be going down the wrong road. I think that they have already gone too far down that road, but there is still time even for this Government to change their direction.

Taxation: Avoidance

Lord Phillips of Sudbury Excerpts

Thursday 14th March 2013 Lords Chamber

[Lord Newby]

My Lords, I think there is a willingness on the part of HMRC and the Government more generally to work with any country that seeks to do that. As I say, we are already working with 20 countries. In recent months, DfID and HMRC have been looking together at how to put together a business case to allocate more resources to this area. The interesting thing about it is that this is a relatively new area. We have realised that we have expertise that can make a big difference to a whole raft of developing countries, and we are very keen now to capitalise on it.

[Lord Phillips of Sudbury]

Will my noble friend accept that when British companies are involved in tax avoidance schemes abroad, it invariably has a British dimension, and that, sadly, some tax avoidance schemes are plain fraudulent? Is it not therefore essential that HMRC should have much more and better quality staff? Frankly, at the moment, there is a gross inequality of arms.