Bank of England and Financial Services Bill [HL]

Lord Tunnicliffe Excerpts

Tuesday 15th December 2015 Lords Chamber

Moved by

[Lord Tunnicliffe]

20: Clause 22, leave out Clause 22

[Lord Tunnicliffe (Lab)]

My Lords, I rise with some trepidation to bring this period of peace to a close. I, too, have been involved in this Bill from the beginning and have worked with my noble friend Lord Davies and the Minister, and I, too, thank him for the enormous amount of time and effort he has put into trying to achieve a consensus on so much of the Bill. The amendments we have already agreed tonight are the product of that work. I also commend the Minister, his team and the members of the Bank, the PRA and so on who put so much effort into trying to persuade us not to move this amendment. It is somewhat sad that they failed, and therefore I rise now to speak to Amendment 20, which is tabled in my name and that of my noble friends Lord Davies and Lord McFall and the noble Baroness, Lady Kramer.

The effect of the amendment is simple. It would ensure that the so-called reverse burden of proof on senior managers comes into force as planned from March 2016. The Government have argued that the Financial Services (Banking Reform) Act 2013 and the senior managers and certification regime—the SMCR—represent a significant improvement to the regulatory system and the regulatory standards that existed before the financial crash. On this, we are in full agreement. Along with the structural reforms that have already been set in motion by the Financial Services Act 2012, the 2013 regulation also had a very important message for senior managers in the financial service sector. From March 2016, the burden of responsibility for failure to prevent regulatory breaches would live solely with them, and whether they were aware of failings or not would be irrelevant. They would have to show that they had taken all reasonable steps necessary to prevent a breach taking place. Quite simply, the buck would stop with them.

Two years on, before the regime has even come into effect, the Government want to back-track on the promises they made to the British public and replace the reverse burden of proof with a duty of responsibility. That means that the burden will be on the regulators, rather than the bankers themselves. According to the Government, the introduction of the duty of responsibility in place of the presumption makes little difference to the substance of the new regime. They even suggest that the change is one of process, not substance. We disagree.

We believe that the retention of the reverse burden of proof is crucial. So too does the Parliamentary Committee on Banking Standards and, following intense debate in your Lordships’ House and the other place, so did both Houses of the previous Parliament. Despite a lack of any case history to back up their claims or any examples to draw on, the Government have suggested that the original proposals will create a checklist and tick-box mentality that ultimately will be unhelpful, and that merely presenting evidence that this template had been followed would enable senior managers to meet the burden of proof for defence but leave the regulator to prove that the steps taken were not reasonable.

As I stand here, Major Tim Peake, the first British man in space—whether he is the first British person is somewhat debatable—is safely up there, speeding over us at 175,000 miles an hour. Actually I do not really know where he is; he could be thousands of miles away, but the fact is that he is safely in space. How did he get there? Did a bunch of people wake up this morning in Russia, join together and, to somewhat paraphrase the Minister’s letter, form a responsible management team taking considered and reasoned decisions? No, they did not; they woke up this morning with checklists that they went through and ticked off, and, because those checklists contained hours of thought and lots of experience all moulded together into a process, the take-off was successful and he is safely in space.

In deriding the value of checklists, the Government could not have picked a less appropriate person than myself. I have lived with checklists for over 50 years. Ever since the man said, “If you don’t learn the checks, lad, you can’t fly the aeroplane”, I have been involved in checklists. I was involved with checklists in aviation and in the railway industry, of which I ran a small but important part and we ran a whole series of operations using checklists. We did not call them checklists; we called them manuals and procedures. We would spend millions of pounds on a whole variety of projects because at board level we considered what rules to make, and at executive level we said, “Meet these rules if you want your projects to run”, and that worked well. Then I moved into the nuclear industry, where if you wish to run a nuclear site you will approach a checklist of 36 chapters that forces you to set out how it will be run and be safe and viable. For a period I was chairman of the Rail Safety and Standards Board, which did nothing but create rules that people had to obey to make things safe.

So I am afraid that I believe in checklists. If the present legislation means that banks are spending their time carefully setting out what procedures should be followed in order for them to operate safely and legally, then that is a good thing. Good checklists, good tick-box procedures and good checks on those procedures are a good thing. Bad checklists are a bad thing, bad law is bad, bad procedures are bad and bad regulation is bad, but we are not talking about them; we are talking about banks using their resources to ensure that they obey the rules of the future.

I turn to what I believe is the heart of the issue, something that the Government have dismissed over and again: the question of culture—more specifically, what will bring about the much-needed cultural change in the banking sector. There was a time when banks were trusted and respected, part of the local community. The noble Baroness, Lady Kramer, referred to Captain Mainwaring. He was a cartoon figure, but that was how my generation looked at banks. We expected banks to give a service for our interests; we had the sense that we could trust them and did not have to question them. We were probably naïve and maybe we were being ripped off rotten, I do not know, but we trusted them. We are not there any longer. Ask the British public today what they think of banks, and bankers in particular, and they will use words like “greed” and “exploitation”. You certainly cannot blame them for thinking that way; events like the PIP scandal, rate swaps or HBOS give people the impression that these are not the exception but the norm. A change of culture is desperately needed if banks are to regain their reputation as public service institutions. I am certainly not saying that this will be an easy or quick task. It will require sustained effort from all involved, but in the view of the Opposition there is no better starting point for this repair than the implementation of the reverse proof of burden.

[Noble Lords]

Burden of proof.

[Lord Tunnicliffe]

Thank you very much—the implementation of the reverse burden of proof. If I go back to my script, I will get it right.

It is important not to underestimate, as the Government seem to be doing, just how significant a departure this would be from the previous regime, not only symbolically but practically too. There could be no denying the intent and commitment to bring about the most rigorous and thorough regulatory regime if the reverse burden of proof were introduced. We believe that knowing that there is nowhere to hide from failure, and that the burden is on you as a senior manager to prove that you took all reasonable and necessary steps, is a more powerful tool to bring about such change. That is why Labour has tabled this amendment to ensure that it comes into force next March, along with the rest of the SMCR.

We have been prepared to listen to the Government’s defence, and accept that they have put forward a very convincing point about why the reverse burden of proof might not be wholly acceptable in its current form. I speak specifically on the issue of proportionality. Given that the Bank of England and Financial Services Bill extends the scope of the SMCR to the entire financial services sector, we fully acknowledge that exemptions from the burden of proof for those not covered by the original proposals would be entirely sensible and necessary, but we do not regard a differentiation in regime as an insurmountable hurdle to overcome.

Therefore, by way of consensus, if the Government would be willing to indicate their intention to bring forward amendments at Third Reading preserving the reverse burden of proof but making exceptions for smaller firms, we would be open to further discussions. However, if the Government fail to do that, it is our responsibility to stand up for the change that people desperately want to see in the banking sector. It is the difference between reform and the status quo—the difference between the path back to public trust and continued disbelief. It is the difference that we need and deserve.

[Baroness Kramer]

My Lords, I am going to speak only briefly on this issue. My noble friend Lord Sharkey, who is sitting beside me, is perhaps the greater master, with particular expertise of the detail, and I do not think that the House needs to hear the same speech twice. Still, I want to make a few remarks because this is such a crucial issue.

To pick up the point made by the noble Lord, Lord Tunnicliffe, I say that the importance of the reversal of the burden of proof is, above all, its cultural impact—the impact that it has on every chief executive and every head of department to understand that if things go wrong, if there is misconduct and bad conduct within their own department, they are essentially on the line. Historically they have not been, and they know that. This reversal of the burden of proof changes that impact. We can tell that from the many conversations that I keep hearing from the Government that, if there is a reversal of the burden of proof, it might be harder to recruit new people to these posts because of the burden that now sits there.

In a world where we are sure that regulation alone cannot ensure that the banking industry behaves properly, and where enforcement is exceedingly difficult, it is very hard to follow a paper trail when lawyers have been very careful to ensure that one does not exist. There might be no electronic trail either; in fact we have just seen an example of such behaviour by Barclays, which explicitly set up a scheme, for which it has since apologised, which was designed to have no electronic trail whatever. Where the trail is so extremely difficult to follow, what matters is that chief executives and heads of department and other key players lead that cultural change; that they appoint people who will challenge them; that they put people in positions where they will blow the whistle when things go wrong; and that they drive through their whole organisation an understanding of the importance of ethical behaviour and proper conduct. That is the best defence that we can have.

Frankly, government arguments for cancelling the reversal of the burden of proof—the sort of argument for a key reason—have constantly shifted over the past few weeks when we have been discussing this issue. To gather from the last set of conversations around this issue, the argument is now primarily that the senior managers regime, which identifies who is responsible for different activities and different tasks, is both much tougher than the existing regime and much tougher without the reverse burden of proof rather than with it.

--- Later in debate ---

[Lord Bridges of Headley]

My Lords, this amendment has led to a very interesting debate. I would like to pick up on what the noble Lord, Lord McFall, said, and remind the House of the context. As he so well knows, and everyone here will remember, seven years ago, the world was engulfed by a financial crisis, triggering a deep recession. It was a crisis caused, in part, by the reckless actions of some bankers and it was a crisis which our regulatory system failed to prevent. Today, we are all still paying the price for it and we are still hearing cases of crimes and misdemeanours in our financial services, as my noble friend Lord Lawson mentioned.

Although a number of banks have paid eye-watering fines for their misdemeanours, it is wholly unacceptable that so few bankers have themselves been held to account for their wrongdoings. The current regime, the approved persons regime,

“has created a largely illusory impression of regulatory control over individuals, while meaningful responsibilities were not in practice attributed to anyone. As a result, there was little realistic prospect of effective enforcement action, even in … the most flagrant cases of failure”.

These are not my words but those of the Parliamentary Commission on Banking Standards. The Government are absolutely clear that this has to change.

Our regulatory system needs to be able to hold individuals—I repeat, individuals—and not just banks to account for misconduct or recklessness, a point that the noble Lord, Lord McFall, rightly made in Committee and my noble friend Lord Lawson echoed. More than that, regulation needs to deter misconduct and recklessness in the first place. Good regulation is a spur for good behaviour and, as such, is crucial to driving the cultural change in the industry which we all want.

What are the characteristics of such a regulatory regime? It is one in which individuals’ responsibilities are crystal clear. It is one where individuals cannot shirk responsibility for their actions or those of their employees. Tasks may be delegated, but never accountability. A good regime is a regime where ignorance is no excuse. It is a regime where there are strong, simple principles that guide people’s conduct. Above all, it is a regime in which all senior managers understand that if something goes wrong in their team—be it a team of 20 or 20,000 —or on their watch, they will be held individually accountable. That is a good regulatory regime. Are these the features of the current approved persons regime? They are not but they are the hallmarks of the new senior managers regime that we will implement. As the noble Lord, Lord Grabiner, eloquently argued, the new regime will be tough and it will help to change the culture across the financial services industry for the better, which is what the noble Lord, Lord Tunnicliffe, desperately wants.

I am aware that there are concerns that the replacement of the reverse burden of proof with a statutory duty of responsibility will leave us in the same position as under the approved persons regime, where it can be very difficult, as I have said, for the regulators to hold senior management to account. I can reassure your Lordships that this is simply not the case. Let me set out exactly how the new regime will deliver a step change in senior manager accountability. First, the clarity of responsibility which has been so desperately lacking under the approved persons regime will be embedded in the system. This will be achieved in a number of ways.

An application by the firm for approval of a senior manager must be accompanied by a statement of responsibilities setting out what the senior manager will be responsible for managing in the firm. This must be updated if the responsibilities of a senior manager change. That ensures that both regulators and the firm will have the necessary clarity about who is responsible for what, and senior managers will take full ownership of their respective areas of responsibility.

This requirement is bolstered by the regulators’ rules, which require each firm to have, and to submit to the regulators, a “responsibilities map” setting out how responsibility for the business of the firm as a whole is allocated amongst its senior managers. This minimises the risk of any responsibilities falling through the cracks between different senior managers. On top of that, under rules of conduct made by the regulators, it is made clear that a senior manager must take all reasonable steps to ensure that any delegation of their responsibility is to an appropriate person, and they must oversee the discharge of any delegated responsibilities effectively.

Secondly, tough rules will apply to the senior managers. A senior manager can now be found guilty of misconduct if a breach of regulations occurs in the area of the firm’s business for which they are responsible and if they did not take such steps as a person in their position could reasonably be expected to take to prevent it. Crucially, it does not matter whether or not the senior manager is aware of the regulatory breach. Ignorance is no defence. What matters is whether they have taken reasonable steps to prevent the breach. If they have not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold. The regulator will not—I repeat, not—be completely stymied if all conversations and exchanges take place in an environment where there are no minutes, no emails, no memos and no existing trail.

Indeed, as the noble Lord, Lord Pannick, said, the very fact that there is an absence of such an email trail, and that a senior manager is totally unaware of what is going on in an area of the firm for which they are responsible, may very well suggest that they have been guilty of failing to take reasonable steps to prevent a breach of regulations. This is the new system we are introducing and the Bill before Parliament does not change any of what I have just said. The measures in this Bill do not take us back to the days before the financial crisis.

Noble Lords need not take my word for it. According to Andrew Bailey, deputy governor for Prudential Regulation and chief executive officer of the Prudential Regulation Authority, the introduction of the statutory duty of responsibility, instead of the reverse burden of proof,

“makes little difference to the substance of the new regime. Once introduced, it will be for the regulators (rather than the senior manager) to prove that reasonable steps to prevent regulatory breaches were not taken. This change is one of process, not substance”.

Furthermore, the removal of the reverse burden of proof does not change the penalties which can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager could face an unlimited fine and/or prohibition from working in the industry. All this means that situations where things go wrong because of irresponsible, reckless or negligent management by a senior manager will be less likely to occur in future, because of the strong deterrent effect of the statutory duty of responsibility. If they do occur, the regulators will be much better equipped to take action against senior managers who have mismanaged the firm.

To those who would still like to keep the reverse burden of proof, I would say this. First, Andrew Bailey has highlighted to the Treasury Select Committee in the other place that the way banks are starting to prepare for the introduction of the reverse burden of proof next March is unhelpful. We understand that some of their legal advisers are being asked to prepare checklists, as the noble Lord, Lord Tunnicliffe, said, of “reasonable steps” which their senior managers should follow. I would say to the noble Lord that the point about checklists is this: presenting evidence that a template or checklist had been followed could enable the senior manager to meet the burden of proof for the defence, but would leave the regulator to prove that the steps taken were not reasonable.

In practice, the reverse burden of proof would not give the regulator a significant advantage but could sow the seeds of a new tick-box culture. The reverse burden of proof will add no significant weight to the regulators’ powers of enforcement, but instead risks creating a great deal of lucrative work for City lawyers. Secondly, the Government are expanding, as has been said, the senior managers and certification regime so it covers all authorised financial services firms, the majority of which are small. The tick-box culture I have described risks leading to the perverse outcome whereby senior managers in the largest firms are less exposed to legal risk under the reverse burden of proof, thanks to being able to employ the best lawyers and compliance officers.

I have been pressed on why the Government cannot introduce a two-tier system, with the reverse burden of proof applying to deposit takers but not to other firms. First, I have described the potential for detrimental effects on small firms. These issues are also relevant for small deposit-takers—for example, small building societies and credit unions, the latter often relying on volunteers for their staff. This approach would also raise serious issues of cross-sectoral competition. Noble Lords on all sides want a vibrant, innovative financial services industry that offers high-quality, good-value products to consumers. To achieve that, the regulatory system must, as far as possible, deliver a level playing field to support competition.

A reverse burden of proof that applied only to the banking sector would undermine this. For example, both deposit-takers and non-deposit-takers can engage in mortgage advice. A small building society or bank, for which the reverse burden of proof would apply, engaged in direct competition with firms, for which it would not apply, could find it more difficult to attract key members of staff. There could be a particular issue for challenger banks, especially those seeking authorisation for the first time.

Legitimate questions of fairness would also be asked about why senior managers in deposit-takers, particularly small ones, should be subject to the reverse burden of proof while those in firms such as large insurers or investment firms, which may pose greater risks to positive consumer outcomes and market integrity, are not. This approach would also create a great deal of complexity in large groups that contain firms which have deposit-taking permissions and firms that do not.

So, introducing a two-tier regime would introduce unnecessary complexity, when we have a tough, fair and practical alternative—the statutory duty of responsibility —that can be applied consistently to all firms. This is why the Government do not believe it appropriate to retain the reverse burden of proof. Is it needed to prove a senior manager culpable for a misdemeanour? No. Is it needed to clarify responsibilities of individuals in firms? No. Is it needed for the regulator to prosecute a senior manager if the email trail goes cold? No. Is it the silver bullet that will make the individuals who manage our banks responsible for their actions? No.

Instead, as I have explained, the new regime, with its statutory duty of responsibility, is a formidable tool for holding senior managers to account and for changing behaviour and culture in banks and across the entire financial services industry—a change we and the British public so very much want. I therefore ask the noble Lord to withdraw his amendment.

[Lord Tunnicliffe]

My Lords, I am conscious that there are two possible tests for deciding when to bring a debate to a conclusion. One is when all arguments have been exhausted, the other when there are no minds left to change. I suspect that the second test is the more acute one, therefore I will be brief.

Many noble Lords have taken part in the debate. In many ways I do not need to answer the points, in that it has been a balanced debate and points have been contested across the House. I am particularly grateful to those noble Lords who agreed with me; I am less enthusiastic about those who disagreed with me. A particular point raised was the matter of human rights. I counter that with the point that the noble Lord, Lord Deighton, affirmed that this part of the Bill is compatible with the regime.

I thank the noble Lord, Lord Sharkey, for speaking in support of my position and, in particular, for bringing out in how many areas the reverse burden of proof is in our law. It is not common, but it is there in particular cases.

I note the point made by the noble Lord, Lord Hunt, on credit unions. In my speech I made the point that we were willing to enter conversations with the Government so that they could come forward at Third Reading with a sensible carve-out from the overall effect. I plead with the noble Lord—he may remember way back when he was in opposition—that we have modest resources. Putting together a series of sensible additions to do the carve-out would not be sensible. We are very happy to agree carve-outs with the Government.

I thank my noble friend Lord Brennan for once again reminding us of the Health and Safety at Work etc. Act 1974. That is one of the most outstanding pieces of legislation in the British system. Its impact on safety in this country has been phenomenal. I and many managers in this country have laboured under the reverse burden of proof that that Act brings. The reverse burden of proof can be the right thing to do and has proved so in safety. We believe that it would prove so here.

The noble Lord, Lord Pannick, said that we have not brought out sufficient justification. He says that it is difficult to prove. No: it has so far proved impossible. I thank my noble friend Lord McFall for reminding him, us and fellow commissioners of how forcefully they supported the reverse burden of proof in their report—I have pulled out extracts but I will not take up the time of the House and read them.