Financial Services and Markets Bill

Lord Turnbull Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Viscount Trenchard (Con)]

My Lords, I declare my interest as a director of two investment companies, as stated in the register.

I too congratulate my noble friend Lord Bridges and his supporters on their most interesting proposal to set up an independent office for financial regulatory accountability. The Bill as drafted does not secure sufficient change in the way the regulators carry out their duties and the speed with which they will work to simplify and improve the rulebook. In particular, I welcome the provision in Amendment 162’s proposed new subsection (2): that the office “must prioritise” analysis of regulations that reduce competition, negatively affect competitiveness and add compliance costs. In other words, the office will be bound to identify regulations such as the myriad anti-competitive and cumbersome regulations adopted by the ESAs in recent years.

I support my noble friend’s amendment and believe it would augment but not replace the work of an FSRC, such as my noble friend Lady Noakes and I proposed in Amendment 86. As such, it would mitigate further the regulators’ lack of accountability to government following the transfer of significant rule-making powers. This is most likely to be a good thing, although alone it does not do enough to improve the deficit in accountability to Parliament.

I would like my noble friend Lord Bridges to tell the Committee whether he envisages the office working alongside a Joint Committee such as the FSRC and whether he would consider amending his Amendment 165 to replace the Treasury Committee of another place with a suitable Joint Committee. I agree entirely with what the noble Lords, Lord Hunt and Lord Vaux, said about the need for a new Joint Committee.

Along with my noble friends Lord Sandhurst and Lord Roborough, I have put my name to Amendments 169 to 174, so eloquently proposed by my noble friend Lord Lilley. In common with my noble friend, I am not a lawyer; I am a banker. I was proud to work in the City of London when I joined Kleinwort Benson as a management trainee in 1973 because, by and large, the City was an honest place and its leading firms were well regarded. We knew the importance of the old maxim, “My word is my bond.” The banks did not maintain vast compliance and legal departments. During my banking career, I have seen the relative size of these departments increase massively as a proportion of total staff. This itself has had a negative effect on the culture of our leading firms, reducing the emphasis on innovation and business development and increasing the number and influence of those employed in compliance and legal, and of the interlocutors with the regulators.

We believed that Brexit would enable us to return to our simpler, less cumbersome, common law-based regulatory system. These proposals will enable this and encourage agility and precision in the drafting of rules. The regulators operated in this way after the Financial Services and Markets Act 1986, and this is how the FSA was empowered to act under FSMA 2000. But by then, the EU acquis on financial services was beginning its period of rapid expansion, so most of the rules since then have actually been made at statutory level by the EU. FSMA 2000 already accepts that judicial review is an inadequate safeguard against unduly harsh decisions by the regulators, and it gives the final say on enforcement decisions to the Upper Tribunal. These proposals would ensure that the regulators act predictably and consistently. They would ensure that they are no longer above the law—now even more important, as a result of their greater rule-making powers.

I believe that the opportunity costs of the current regulatory system are too high. Legitimate financial business, such as providing new products for consumers, is not being done because of regulatory uncertainty. These amendments would ensure that the wording of the rules is more thoughtfully drafted than it was under EU regulation and would reduce compliance costs. The rules would be based on common law methodology. The wording would be applied to facts on the basis of their natural and ordinary meaning. The renamed financial adjudication service would reach decisions not only on its own subjective opinion but on the basis of the growing body of case law deriving from decisions of the new first-tier tribunal.

Does my noble friend the Minister understand just how important it is that the Bill be made a lot more radical in changing the way our regulators operate? As drafted, nothing much will change. There was no point in Brexit if we continue to apply a bureaucratic, overly cautious and cumbersome regulatory system. These proposals would take us down the right road as a significant step to ensuring the City’s future and reversing the recent decline of some of our most important institutions, such as the London Stock Exchange.

[Lord Turnbull (CB)]

My Lords, I have not spoken before in this Committee, but as one of the surviving members of the Parliamentary Commission on Banking Standards, I want to address an instance where an amendment directly challenges one of the proposals that was incorporated following the commission’s report. Earlier in proceedings—on day three, I think—the noble Lord, Lord Tyrie, addressed Amendment 46, which introduced the concepts of predictability and consistency. He asked, “Who could possibly object?”, and went so far as to describe them as “motherhood and apple pie”. On examination, these principles, particularly predictability, can be seen to be simply duplicating the existing provisions of administrative law, but also as introducing provisions that could limit the scope of the regulator to address new and previously unforeseen problems.

A similar problem arises with Amendment 174 in this group. How could one possibly object to acting

“reasonably and in good faith”

as a defence against sanction under the senior manager conduct regime, the SMCR—the principal sanction being disqualification from practising? By way of a bit of background, the PCBS spent a great deal of time on structural issues—bank break-up, ring-fencing, capital adequacy, liquidity adequacy and so on—but it also attached a great deal of importance to conduct issues, hence the creation of what was then called the senior person conduct regime and is now the senior manager conduct regime.

Is there evidence that this regime has proved oppressive and needs to be relaxed? Quite the contrary, in my view. There have been very few cases, although it has only been fully in force since 2018. Following the 2008-10 financial crisis, Mr Peter Cummings of HBOS is the only senior person to have been seriously sanctioned. One can debate whether that verdict was fair or unfair, but it is undeniable that it is unfair that he should be the only person sanctioned of the big players in those events. I do not think the case for further easing has been made out; more effective application is needed.

The introduction of a defence of acting

“reasonably and in good faith”

would, in my view, be a serious weakening of the regime. Very few people who made serious errors—which were costly to their customers, their own companies or the economy at large—set out intentionally to do harm. The thinking behind this amendment is that it is unfair to sanction people who claim that they did not intend to do harm, even if their actions were genuinely harmful. The protection of consumers is not achieved if those who mis-sell financial products or take what prove to be excessive risks are immune from regulatory action if they can show that they did not intend to do so.

Once again, these amendments look superficially desirable, but they would weaken the SMCR and could cause a lot of damage. The normal pattern in Committee is that an amendment is proposed and others stand up to support it. I want to do the opposite: I urge the Minister to stand firm in rejecting Amendment 174. In any case, I wonder whether the right way to change the underlying philosophy of regulation and the balance between the regulator, the common law and the courts should be to set out a comprehensive proposal, rather than through the accumulation of a disparate set of amendments in this Bill.

[Lord Sandhurst (Con)]

My Lords, I speak in support of Amendments 169 to 174 and 200. These have been proposed forcefully by my noble friend Lord Lilley and are, I suggest, worthy of acceptance.

I speak from the perspective of a lawyer. First, I suggest that three adjustments are needed to the decision-making and supervision of regulators to drive predictability and consistency in rule-making. Amendment 200 would make the regulators’ enforcement committees more independent in their decision-making. This should reduce the number of firms that bring unnecessary challenges to regulatory decisions in the Upper Tribunal.

Secondly, Amendment 173 gives the existing Financial Regulators Complaints Commissioner power to order the correction of regulators’ errors. Currently, the FRCC can find that regulators have acted unlawfully, but the regulators are free to ignore that finding. In fact, the FCA has ignored the FRCC’s only such finding. So, the overarching oversight of the FRCC is toothless; it will, if our amendment is accepted, have some teeth.

Thirdly, we propose a set of adjustments to the supervision of regulators by our judiciary in the Upper Tribunal and courts. Currently, challenges by financial institutions to supervisory decisions in the Upper Tribunal are rare, and rarely successful. That is because the tribunal is reluctant to interfere with regulatory decision-making and lacks a framework within which to consider regulators’ decisions. Judicial review is even rarer. To succeed, firms have to prove that the decision was not just wrong, but unreasonable.

The problem is that because it is so difficult to overturn a decision, firms rarely go to the Upper Tribunal or seek judicial review, so there is no body of jurisprudence by which financial companies can set their practices consistently. The lack of predictability therefore means that firms have to build compliance programmes based in part on guesswork as to how the regulator may react when applying its rulebook in the future. This is particularly so when considering the vaguely drafted rules known as principles.

Finance Bill

Lord Turnbull Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Turnbull (CB)]

My Lords, let me return to the report on the Finance Bill by the Economic Affairs Sub-Committee, of which I was a member. That highlighted a number of general concerns about the way in which the tax system is developing that go beyond the specific measures on the taxation of savings. I will focus on the following themes: complexity; destination; compliance; and communication.

I first started working on tax in the Treasury in 1971. In theory, the system worked by adding up all the sources of income, deducting an allowance and then applying a series of rate bands. This rather simple system reached its apotheosis in the late 1980s, when the noble Lord, Lord Lawson, was Chancellor of the Exchequer. Since then, the system has grown progressively more complicated, with a proliferation of separate regimes for different sources of income, each with their own allowances and rate bands.

I start with dividends. We must first acknowledge and welcome an important area of simplification. For the last 44 years, since the Labour Government’s classic corporation tax system was abandoned, part of the tax imposed at the company level has served as a credit or offset for tax at the personal level. I must confess that, despite working on this system and being a taxpayer myself, I never succeeded in mastering this. We should welcome the end of the tax credit and welcome the payment of dividends gross, with the personal tax collected as part of personal tax returns. But instead of just adding dividend income into other sources of income, it will now have its own £5,000 allowance, with a separate set of rate bands: 7.5%, 32.5% and 38.1%. I have not the faintest idea why those numbers were chosen or how they relate to the other numbers in the system.

The same process of fragmentation can be seen in the new regime for the taxation of interest. Again, there are benefits, particularly for the majority of people who earn small amounts of interest—these days, you certainly do earn a small amount of interest—but for the minority who pay the majority of tax things are rather different. Again, there is a separate regime—a £1,000 allowance, which is reduced to £500 for higher-rate taxpayers and abolished altogether for top-rate taxpayers—but this system, as the noble Lord, Lord Hollick, pointed out, does not currently apply to a number of important interest sources, such as bond and collective investments, but only to banks and building societies.

Then there is the growing use of another device by restricting the allowance as income rises—for example, to limit the benefit to higher-rate taxpayers of child benefit or to confine the benefit to basic rate taxpayers. The downside of this device is that cliff edges are created, as well as exceptionally high marginal rates. A further complication is that, having introduced the principle of separate taxation—albeit with some transferability of allowances between spouses—the Revenue has introduced a household basis of assessment for operating child benefit and clawing it back. How HMRC distinguishes between the household that created a child and the household that might now be looking after it, I have no idea. There are also separate regimes for capital gains, with their own allowances and rates.

While this proliferation of treatments is growing, HMRC is pursuing a different agenda: giving individuals their own digital tax accounts. Much of the information in such accounts is to be provided by third parties, such as employers, companies or banks. The aim is for the taxpayer to be able to manage their own accounts. But the bottom line is that the individual still has to sign off the account as complete and accurate and be accountable for any errors. This gets more difficult the more complex the system is. The result is that HMRC will save itself a great deal of money, but anyone in the higher-rate bands or with a range of income sources is forced to incur the cost of professional advisers to get the figures right.

Therefore, it is essential that, as well as pursuing greater simplification, HMRC consults fully with taxpayers and communicates the details of the various schemes. In the two proposals that we looked at for the taxation of savings, the level of communication was inadequate. HMRC was lazy, in my view, and relied heavily on companies and banks to explain the changes in dividends and interest. In my view, this is not good enough. It has a responsibility to ensure that people can actually comply.

Finally, there is the question of where all this is going. Twice a year now, the Chancellor of the Exchequer makes a Statement to Parliament. These have become occasions on which to add a few more piecemeal measures. What is missing is any sense of an underlying philosophy, of a destination and a route map to it. Nowhere is this more apparent than in the taxation of pensions, where a decade ago a regime of caps was introduced. That had a logic to it—to limit tax relief for the higher paid—but it has been progressively whittled down to the point where it now barely exists.

For many years the dominant model was known to the cognoscenti as EET: contributions were exempt from tax; the accrual was exempt; but you paid the tax when you withdrew. We seem to be moving progressively towards what might be called TEE: you pay pension contributions out of taxed income; it accrues without tax; and when you withdraw it, you do not pay tax. At present we are stuck in a no man’s land, with features of both systems, such as ISAs and the lifetime ISA. We wondered whether LISAs were a Trojan horse for a full-scale move towards the TEE system. That would be jolly nice for the Chancellor, who would get his tax receipts up front, but precarious for the rest of us, who will have to assume that when we make the withdrawals one or two decades hence he will keep his side of the bargain.

Over the years, a number of studies have been made into the optimal shape of the tax system, by eminent people such as Professor James Meade and Professor James Mirrlees. The noble Baroness, Lady Altmann, has championed a much simpler pensions regime with payment by government to match the contributions made by a taxpayer. This has the merit of being simple, providing the right incentives and being fair to all taxpayers.

It would be a bit much to expect the Chancellor of the Exchequer to come up with the answer to all this by the time of his Autumn Statement on 23 November, but by the time of the Budget we can reasonably expect not further complication but further clarification.

On simplification, I, too, welcome putting the Office of Tax Simplification on a statutory basis but the benefit would be limited if it was there only to clear up the mess. It is important that it gets drawn into the policy formulation phase. I am confident that all these issues about budget secrecy and so on can be properly handled.

Finally, I will make a brief comment on fiscal policy in general. I welcome the abandonment of the idea of a surplus by 2020, but we are told by the Prime Minister that this is simply a matter of timing. The objective of achieving a surplus is retained; we are just to do it at a later date. I do not see the logic of this when such a huge range of infrastructure requirements are unmet in this country. I do not see that it is necessarily wrong to have a deficit, provided that it is small enough that the debt to GDP ratio continues to decline.

Queen’s Speech

Lord Turnbull Excerpts

Thursday 4th June 2015 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I am delighted to welcome the noble Lord, Lord King of Lothbury, to the House and to congratulate him on his excellent maiden speech. It was well worth waiting for. The noble Lord’s career divides neatly into two parts of roughly 20 years as a distinguished academic economist and 20 years at the heart of the Bank of England. As its governor for 10 years, he became a key figure not just in the UK but globally as part of a small group of world policymakers who, by developing innovative monetary policy techniques, prevented a recession from spiralling into a depression, for which we must be grateful. Since he left the Bank two years ago and was made a life Peer, he has wisely followed one of the teachings of the Lords spiritual: when a bishop retires, he leaves the diocese, at least for a time. He has wisely judged that now is the right time to re-engage in the public debate, and we welcome that.

Some people may have found writing a maiden speech daunting, but in the case of the noble Lord, Lord King, it must have come as a relief as two of the passions of his life, English cricket and Aston Villa, bombed out so badly over the weekend, but at least he can remember the name of the football club he supports. With the simultaneous arrival of the noble Lord, Lord O’Neill, the collective experience of the House in finance, economics and taxation has been enormously enhanced, and I look forward to their respective, possibly contrasting, contributions.

The electorate clearly thought that the Conservatives’ record in office was more credible than Labour’s. The latter party was punished heavily, I believe, for its refusal to acknowledge the flaws in its economic management in the middle of the last decade. The electorate clearly also thought that the Conservatives’ policy programme was the more attractive. Nevertheless, the Conservatives do not, in my view, have a monopoly of superior wisdom. There are elements of their programme that are objectionable, and there are elements of Labour’s programme that are more attractive.

Let us start with fiscal policy. A position in which the stock of debt was increasing far faster than money GDP was clearly unsustainable, and the priority was, rightly in my view, to get to a point where the debt/GDP ratio was no longer rising, and as now is beginning to fall. I do not agree, however, that it is an urgent priority to eliminate the overall deficit, both current and capital, in four years and then to go on running a surplus. The Labour proposal that only the current deficit should be eliminated is more logical.

Why do I take this more dovish attitude to public-sector debt? First, one cannot make a sensible judgment without looking at the asset side of the Government’s balance sheet as well as the liabilities. The UK Government debt ratio is around the median of the G7, but the UK also has serious gaps in its infrastructure, including in power generation, roads, and above all in social housing. There is a serious illogicality in the Government’s position. It is promoting HS2 and the northern powerhouse on the grounds that these are investments that will make the economy more productive. If that is so, they will create the means to service the debt to pay for them.

Secondly, I dislike intensely the language of reducing the debt so that we do not impoverish later generations. In an economy where 70% of government debt is owned by UK citizens, we are witnessing a transfer process. Tax is being collected from and interest is being paid to many of the same people or their pension funds. It is true that if that is carried to an extreme, the weight of this extra tax burden can reduce the effectiveness of the economy, but that is far short of the alarmist impoverishment claim. I believe that the narrative of debt reduction is being used to provide a smoke-screen for another objective: to reduce the size of the public sector. There is a case for that, but it should be made explicitly and not be hidden behind a bogus argument.

My second area of concern is housing, where I believe that neither party has it right. Fortunately, I do not need to deal with the objections to the Government’s right-to-buy scheme, as they were dealt with very effectively by the noble Lord, Lord Kerslake, and other noble Lords earlier this week. The proposals coming from Labour on rent control and letting control were a ghastly throwback to the failed policies of the last century. Nevertheless, there was one area in which Labour rather than the Conservatives correctly diagnosed the problem: the relative weight of taxation on higher-value housing. It cannot be fair that a £3 million house, which is 100 times more valuable than a £30,000 house, pays only three times the tax. Council tax is based on relative values as they were a quarter of a century ago.

In that time, relative house prices across the country have shifted substantially. This not just a Kensington issue but a national one; it is as just as much about the relative contributions of Beckenham and Birkenhead. However, having identified a valid issue, Labour produced a deeply objectionable response. Its mansion tax was based on class rather than economics, grafting a tax on absolute values on to a system of relative values. The correct answer, which neither party has shown the courage to adopt, is to start by undertaking a national revaluation and then to redesign the bands, adding two or three more at the top end.

The other flaw is the position of housing in the overall system of taxation. Housing is a capital asset that pays no capital gains tax on people’s first residence, nor any tax on imputed income. The same money invested in businesses or financial assets pays both. It is not surprising that people have been incentivised to pile into residential property. We get this wrong, because we fail to understand the difference between the cost of a house as bought on the market and the cost of building a house. Many people can afford to pay the cost of building a house, but the problem is with land, and until we tackle that all those schemes and subsidies, tax reliefs and rights to buy will simply make things worse.

As a former Permanent Secretary to the Treasury, I cannot be expected to applaud the legislation to freeze our main tax rates. Why do legislators need legislation to force them to implement what they have legislated? This is now the fourth of these legal duties, after the reduction in child poverty, the decarbonisation target and the commitment on international aid. What has happened to good old-fashioned accountability? Far from increasing trust in politicians, these arrangements merely serve to advertise their untrustworthiness. The tax proposal has many dangers in it. If it is to be strictly enforced, it will create extortion opportunities for predatory parties such as the SNP and DUP and could bring to the UK the farcical shut-downs of the US Congress. If there are sensible safety valves and waivers, what is the point?

Finally, one parting shot: we should scrap the Smith commission and start again. Grafting tax powers on top of an already overgenerous grants system will make the outcome even more unfair. The sine qua non of any new system if it is to generate fiscal responsibility is that £1 of extra spending in Scotland must be funded at the margin by £1 of extra tax in Scotland.

Financial Services (Banking Reform) Bill

Lord Turnbull Excerpts

Monday 16th December 2013 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I speak on behalf of my noble friend Lord Eatwell. We are in but, we hope, moving towards the end of the worst financial crisis in most of our lifetimes. We will not agree on the reasons for this crisis, as we have proved when we have touched on it over the past several months. However, I think all noble Lords agree that some part of it related to the regulation and structure of the banking sector. We have had several White Papers on this subject and the Vickers report. We have had two financial Bills, of which this is the second. Half way through this process, there was a discontinuity when the LIBOR scandal changed the mood and grounds of the debate. We all hoped it was a one-off, just as we hoped RBS and Northern Rock were one-offs, but from that scandal onwards unease about the sector has continued to grow. Other banks—HSBC and the Co-op—were involved in mis-selling, but what really hit me was the latest report on the Lloyds Bank issue, which brought out how deep mis-selling has gone in these organisations. The FCA press release states:

“For a Lloyds TSB adviser on a mid-level salary, not hitting 90% of their target over a period of 9 months could see their base annual salary drop from £33,706 to £25,927; and if they were demoted by two levels their base pay would drop to £18,189—almost a 50% salary cut. In the worst example that the FCA saw, an adviser sold protection products to himself, his wife and a colleague in order to hit his target and prevent himself from being demoted”.

This final debate is about the whole issue of standards and culture. As a result of the LIBOR scandal, Parliament decided to set up the Parliamentary Commission on Banking Standards. As Mr Tyrie said in the other place today, its role was to,

“consider and report on professional standards and culture of the UK banking sector”.

We hope to tease out this issue by insisting on this amendment.

We are not happy—nobody can be happy—with the way this Bill has progressed. It started in your Lordships’ House 35 pages long and it was more than 200 pages long when it left. In the other place, it had a two-hour debate. The Minister had barely got to Amendment 41 in his winding-up before the debate was terminated by the guillotine. This is unsatisfactory. Other elements of the Bill have, in many ways, been a model of good practice which I hope will be taken up in future. My parliamentary experience is not long enough to be sure, but I think the Parliamentary Commission on Banking Standards is an innovation. It has been a good one, roundly approved by all sides of the House and I thank its members, two of whom are in their place tonight.

I also commend the Government for the graceful way they have bowed to the wisdom of the commission and the size of our voting power. The combination of the two has been, in most places, most satisfactory. What is now left between the Official Opposition and the Government? One thing that is not left is the duty of care. We wish we had carried that amendment, which could have made a big impact on standards and culture in the future. Unfortunately, we were unable to persuade the House. We are left with professional standards and it is on these that we want to emphasise our differences. I wish the process had not ended up with 150-plus pages of the Bill being discussed in two hours in the other place. More extensive and thoughtful work on this area might have achieved the level of consensus that the Minister hopes for.

I wish to make four points about the amendment which are subtly, but importantly, different. The first relates to the term “licensing”: the amendment calls for a licensing regime. For 10 years, I carried in my pocket—actually it was a little too bulky for that, so I carried it in my briefcase—a licence to fly an aircraft and carry passengers. At one point in my career I was privileged to carry up to 400 passengers, so society imposed on me the requirement to have a licence. We were very serious about that licence, the validity of which cost three days a year to maintain. You had a simple, clear concept of what a licence was. It is therefore important that the word “licence” should be used. In the rest of industry, such as the railway industry, from which I come, the concept of licensing is growing in strength. It is a good idea and we should call this a licensing regime.

Secondly, the amendment requires that we,

“specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development”.

The Government’s amendment does not set out that these areas must be specified in the regime. This is a modest, but important, difference.

Thirdly, our amendment sets out that there should be a set of “Banking Standards Rules”. These were referred to by the commission, in paragraph 107 of its summary of conclusions and recommendations, paragraph 634 of the total document. Paragraph 2.18 of the Government’s response states:

“The Government will also take forward the Commission’s recommendation to replace the existing statements of principle (and codes of practice) for Approved Persons with banking standards rules”.

We believe it is important that banking standards rules should be set out, with the implication that this is a universal document for all parts of the industry to know of and take account of.

Finally, our amendment calls for,

“an annual validation of competence”.

I am happy to be corrected on this, but the tone of the government amendment suggests that in the previous 12 months the individual has not been found out—been found to be incompetent—because it talks about issues, errors or problems being recorded and being passed on to other employers. We want this to be a positive thing. Just as it was in my day, when I had to prove my right to hold a licence, we want bankers to go through a similar process, which looks positively over the previous 12 months at the continuing professional development and professionalism of the individual, and validates that annually. For those reasons, I beg to move.

[Lord Turnbull (CB)]

My Lords, perhaps I might go back over the history a little. The banking commission found that the approved persons regime had proved pretty toothless and that virtually no senior figures had suffered any serious sanction, and recommended a two-tier system: the most senior tier would require prior registration, and the second tier would require the banks to attest that the people working for them were fit and proper.

Both the Opposition and the PCBS found that the original government proposals were unsatisfactory, and each put down their own amendments. The one put forward by the Government, which was supported by the PCBS, was passed—but so, too, was the Opposition’s Amendment 41. They are different in some significant ways, but they do not differ in their attempt to define the standards that this generality of employees in trading or serving the public should be asked to reach.

The Opposition’s amendment refers to,

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

The Government’s Amendment 53 contains something that is more or less identical. It refers to a “fit and proper” person who has,

“obtained a qualification … undergone, or is undergoing, training … possesses a level of competence, or … has the personal characteristics”.

On that there really is no difference at all between us. The difference is the mechanism by which this is achieved.

The noble Lord, Lord Tunnicliffe, prefers the word “licensing”. I cannot really tell the difference between that and “certification”. On the question of defining minimum standards, I have just explained that those are true of both these proposals. On the question of annual approval, in the Government’s case all these characteristics are,

“required by general rules made by the appropriate regulator in relation to employees performing functions of that kind”,

and the certificate issued is valid for 12 months—so, again, we do not really have any difference between us; or at least the differences are tiny.

As has been pointed out by the Minister, the one important difference is that in one case the enforcement goes directly from the regulator to the regulated person, and in the government amendment, which follows the PCBS’s approach, it is the bank—paradoxically called an approved person—that has to identify those people who are capable of causing harm to the bank, its customers or its regulation, and to ensure that they meet the right standards. You have to make a choice about which you think is the better system.

The Opposition’s amendment would involve the direct regulation of tens of thousands of people, and in the alternative system it would be the bank that is, in a sense, the first line of regulation, but according to standards that the regulator has set. I think that that is a superior approach, and therefore I will certainly support the retention of Amendment 53 rather than voting to allow Amendment 41 to prevail.

Financial Services (Banking Reform) Bill

Lord Turnbull Excerpts

Monday 9th December 2013 Lords Chamber

[Lord Lawson of Blaby (Con)]

My Lords, I thank my noble friend Lord Deighton for putting forward this amendment. As he said, it is something which the banking commission, of which I had the honour to be a member, has been calling for. It is extremely welcome and it is very good that he has acceded to it. As the noble Lord, Lord Eatwell, said, the whole idea of ring-fencing is something of an experiment. We do not know whether it is going to work and therefore it is necessary that after an appropriate time it should be thoroughly investigated to see whether it is working satisfactorily and, if it is not, to have a move to full separation.

We know for certain that full separation works; indeed, separation was the norm in this country for most of our lifetimes. It is only during the past 25 years that there has not been separation. In the old days, there were the so-called joint stock banks, which were to do with the commercial banks and did retail lending and lending to small businesses, which are now known as SMEs, and there was a completely different group called the merchant banks, which were different people and institutions. For a long time, most of them were partnerships and had a different set-up altogether. They did what is now known as investment banking and it worked extremely well. We know that separation can work but we do not know whether this idea can work, so it is right that there should be a review.

While commending the Government, and in particular my noble friend, for introducing this, I hope that it will not be necessary. That is not because the ring-fence will, as it were, be found to work. I have grave doubts about that if it persists. However, there must be considerable doubt as to whether it will persist. Some noble Lords may have seen the interesting report in today’s Financial Times that the HSBC is thinking seriously of spinning off its UK retail and commercial banking enterprise as a separate company, with outside shareholders taking up to 30% in it. That is according to the Financial Times; we do not know, but there is a good reason for that. If the requirements of the ring-fence are really to be enforced toughly, they will make it so difficult, complicated, burdensome and onerous that many banks should, if they are rational, ask, “Is it actually worth staying together? Might it not be better for us”—the management—“and for our shareholders to separate and release increased shareholder value for that purpose?”. I hope that the institutional shareholders will also keep the banks up to the mark. That would be the happiest conclusion—that we will not even need the review because separation will happen of its own accord. However, just in case it does not we will need the review and I am grateful to my noble friend.

[Lord Turnbull (CB)]

My Lords, we should welcome this shortening of the period, particularly when one remembers that the clock for the new period does not start ticking until the transition to ring-fencing is complete—and that is a date in 2019. If we are adding four years to that, it will be 2023 before this review takes place; so even bringing it back to 2021 is to be welcomed.

Amendment 1 agreed.

--- Later in debate ---

[Lord Turnbull (CB)]

My Lords, the PCBS always envisaged a two-tier system, one for senior persons where prior registration would be required, and the other for staff below that who are not senior persons but who are nevertheless capable of inflicting damage to the bank, its customers or its shareholders. We felt that the original provisions made for the upper tier were broadly okay, although there were one or two refinements about what a bank is. However, we thought that the provision made for the second tier was too vague. I therefore welcome these amendments, which bring much greater focus to who is covered and what the obligations are.

There are two loose ends in this, which do not need to be concluded this evening. The first is that there are a number of functions in banks for which the APP—the approved persons regime—will be retained, namely the submitters of LIBOR numbers and those who have responsibility for money-laundering. It might be worth considering at some point whether instead of having three schemes for banks—the two new ones and the old one—they can all be consolidated. Finally, there is also the question of whether, in the fullness of time, a decision needs to be made on whether to continue with the old approved persons regime, with all the faults that we identified, in the rest of the financial services sector.

[Lord Flight (Con)]

My Lords, first, I declare an interest as a commissioner of the Guernsey Financial Services Commission. I will raise an issue which relates, as far as possible, to the territory being addressed right now: what will be the position of the banks in Crown dependencies of the UK under the new arrangements for ring-fenced banks? I have made inquiries of the Financial Secretary and got an answer. However, I have some reservations that the answer will not work very well. An issue analogous to the comment about foreign banks in London is that most of the banks in the Crown dependencies are not branches but subsidiaries. The proposal is for branches to be within the ring-fence and not subsidiaries. However, there is little incentive for banks to convert from subsidiaries to branches to come within the ring-fence. At the heart of this is an issue of UK interest in that those banks mostly effectively gather deposits that are lent to London, and are in some senses merely a legal fiction. Therefore if they will be within the ring-fence and will all have to convert to being branches, there is a strong practical case for including them within the UK deposit insurance scheme. If not, the banks in the Crown dependencies will stay as subsidiaries in the main, they will be outside the ring-fence, and there will be a decline in the deposits they upstream to the UK partly for regulatory reasons and partly because they will not be a subsidiary of the ring-fenced entity. I ask the Minister to think again about the precise arrangements regarding ring-fencing for the Crown dependencies.

Banking: Parliamentary Commission on Banking Standards

Lord Turnbull Excerpts

Thursday 5th December 2013 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I join noble Lords in welcoming the noble Lord, Lord Carrington, to this House. I suspect that the smaller, innovative banks like Gatehouse are going to make a disproportionate contribution to the improvement of banking services in this country, so his knowledge and wisdom in that area will be valuable to us.

The final report of the PCBS opened with the following summary:

“Banks in the UK have failed in many respects. They have failed taxpayers, who have had to bail out a number of banks including some major institutions with a cash outlay peaking at £133 billion. They have failed many retail customers with widespread product mis-selling … They have failed their own shareholders, by delivering poor long-term returns and destroying shareholder value. They have failed in their basic function to finance economic growth, with businesses unable to obtain the loans that they need at an acceptable price”.

That is a harsh verdict that poses a number of questions. Is it a fair verdict or is it just banker-bashing, providing politicians with a smokescreen for their own failures? Were other players also to blame? Are the remedies appropriate? Has something gone wrong with bank culture and can something be done about it? Lastly, will we kill the golden goose and drive away banks and/or bankers?

On the first question, it is certainly the case that the banks were not uniquely to blame for the financial crash. Top of my list of contributors is a major intellectual failure. The model of the financial world that was taught in our universities and business schools, and championed by Alan Greenspan among others, presumed that capital markets functioned efficiently. In fact, almost all of those assumptions proved to be wrong. Financial markets were riddled with serious flaws, such as major externalities, misaligned incentives, irrational herd instincts and asymmetry of information.

Secondly, there was the connivance of western Governments, particularly in the US and the UK, who actively promoted access to credit for their citizens as a way of promoting the appearance of rising living standards. Thirdly, there was the widespread use of inflation targeting of price indices based on a narrow basket of consumer goods while ignoring asset prices and underlying credit conditions. The list goes on—there were all the players that should have provided checks and balances but did not, such as regulators, auditors and rating agencies—but it is clear that the banks played a powerful role as an accelerator and transmitter of these forces, taking greater and greater risks.

Initially, the response to the financial crisis was largely a structural one. The first phase was to restructure the regulators. A twin-peak structure was put in place in the first Financial Services Act 2012. In my view this is not necessarily the only, or perhaps not even the best, model, but it has been done and we should get on with it and make it work, rather than continuing to debate the alternatives.

The other part of the structural response was through the Independent Commission on Banking led by Sir John Vickers, set up in June 2010, which reported its conclusions in September 2011. The ICB set itself four objectives. The first was to make banks more resilient and better able to absorb losses, through higher capital and lower leverage. The second was to make it easier and less costly to sort out banks that get into trouble by dividing them into ring-fenced entities carrying out the core functions of taking deposits, supplying overdrafts and operating the payments system, with other, riskier investment banking activities being kept in a different entity, though still within a banking group.

The third objective was to curtail incentives for excessive risk-taking. In particular, the ICB wanted to cut back the implicit guarantee that arises if banks, and those investing in them, come to believe that banks are too big to fail or too complex to be allowed to fail. Finally, it wanted to strengthen competition and consumer choice by creating a more diverse, less concentrated banking market and by making switching easier.

By mid-2012 the debate was still dominated by these structural issues. Some people argued that if incentives and structures were improved, if the implicit guarantee was curtailed and if the banks were properly capitalised, behaviours would improve. If that view was ever true, though, it was blown away by a series of revelations about conduct in the summer of 2012. The straw that broke the camel’s back was LIBOR fixing. At this point the patience of politicians snapped and we moved on to a different agenda, one concerned not just with structure but with behaviour, standards and culture. The PCBS was created to investigate this.

I should at this point record my thanks to my colleagues on the commission and to the clerks and advisers who supported us. Not only did we pioneer some new approaches to committee evidence-gathering, such as the use of counsel, but we demonstrated how much can be achieved within the discipline of unanimity. Even as the commission began its work, reports of misconduct multiplied. They came more or less weekly.

There was widespread mis-selling to consumers and SMEs of retail products such as PPI and interest rate swaps, there was mis-selling of complex mortgage securities in the wholesale market and there were poorly supervised rogue trading, aggressive tax planning, money laundering and sanctions busting. This time even the survivors of the crash, such as JP Morgan, HSBC and Standard Chartered, were implicated. The list of abuses grows even to this day, with rumours that there may have been fixing in foreign exchange markets and claims that RBS has exploited some of its SME customers.

The PCBS has produced five reports but its findings on conduct can be summarized briefly. First, there was a lack of personal accountability. The approved persons regime was found wanting, as it served only to control entry into senior posts—although, as the Reverend Flowers’s case indicates, at times it did not even achieve that. It was ineffective in influencing conduct and in enforcing standards. In this crisis only one senior banker has been fined, and no action has been taken against any CEO.

Secondly, there was remuneration that was widely perceived as excessive and incentivising poor behaviour. Thirdly, there was an erosion of professional standards and a decline in the status of chartered bankers. Fourthly, there was a loss of customer focus.

Anthony Salz, once of Freshfields and then of Rothschild, was asked by Barclays to review its business practices. He found a,

“culture that tended to favour transactions over relationships, the short term over sustainability, and financial over other business purposes … remuneration systems that tended to reward revenue generation rather than serving the interests of customers and clients”,

and a bank acting,

“within the letter of the law but not within its spirit”.

In a few words, he pretty much captures it, and the same could be said of most other banks.

The commission’s recommendations provide an extensive agenda to rectify this, including a senior managers regime to replace the APR, which will define responsibilities and hence create a chain of accountability. That will make it easier to identify who is responsible and therefore to sanction or disqualify poorly performing executives. It seeks to eliminate the Macavity defence of “I didn’t know” or “I wasn’t there”. Below senior management, banks will be required to identify all staff whose actions are capable of damaging the bank, its shareholders or customers and to attest that they will operate to proper standards.

A new body has been created by the banks, led by Sir Richard Lambert, to promote codes of professional standards. A new criminal offence of reckless conduct is to be applied where a bank has failed and required state assistance. There would be a tougher remuneration code requiring a larger proportion of pay to be deferred and for longer, plus a power for the regulator to claw back remuneration that has already vested where a bank fails and requires state support.

I return to some of the questions I posed at the start. Is this unfair targeting of banks and bankers? I would argue that it is not. Even now, banks accept that their conduct was not acceptable and that they have forfeited the trust of their customers. Banks are also exceptional in a number of other ways. They provide a public service through the payments system, which cannot be allowed to be interrupted. They are highly interconnected: a failure of one bank can damage other banks either directly or by undermining the trust on which the whole system is based. They can fail with astonishing speed. Even after the structural changes have been made, they will still enjoy some degree of implicit guarantee. In addition, their funding structure is different. Compared with most industrial and commercial companies, equity forms a tiny part of their balance sheet. Almost of necessity, they are highly geared organisations.

Will banks, and hence London as a financial centre, be forced by tighter regulation and higher capital requirements to contract or divest themselves of certain lines of business? To a degree, yes they will, and we should accept that. Our largest banks became too big to manage. Cutting RBS down to size so that it concentrates on serving UK firms and households is to be welcomed. It is essential that leverage is brought down. The UK is a middle-sized economy with a global-sized banking sector. In 1990 the combined balance sheet of UK clearing banks was 75% of GDP. In 2010 that had risen to 450%. Even by 2012, it was still at 350%. That exposes us as a nation to certain risks that we have to be prepared to face.

A lot of proprietary trading is better conducted in the hedge fund sector where the proprietors have more at stake and the implicit guarantee does not operate. Will banks or bankers move out of London, as many around the dining tables of the City tell us? Where would they go—into the hands of the US Department of Justice, the land of the orange jumpsuit and the perp walk, or into the bureaucratic clutches of the European Commission and the European Parliament? We should have the confidence to see a better regulated London as a source of strength, not weakness.

Finally, we must ask whether it is all going to work. In our debates, some noble Lords have described the ring-fence structure, even as strengthened by the commission, as an experiment. To a degree, it is, but so, too, would be fuller structural separation. The option of staying with the status quo simply is not available. Will the report achieve the objective of its title, Changing Banking for Good? We need a regime that works not just now, when banks have been chastened, but when animal spirits have revived and memories of the crash have dimmed. If it is to succeed we need to address both parts of the agenda, structure and culture, as they are closely linked.

The Government said they strongly endorsed,

“the principal findings of the report”—

and intended—

“to implement its main recommendations”.

The initial proposals in the Financial Services (Banking Reform) Bill fell short of that claim. Some recommendations were accepted but only weakly implemented, while others were ignored altogether. However, I can report that through the process of Committee and Report, a number of important amendments have been agreed, and significant assurances have been secured on the nature of reviews and on how the regulators will operate the new regimes. I hope that by Third Reading next week we can resolve the remaining issues.

Ultimately, however, the question of behaviour is for the banks themselves. Will they get back to a greater emphasis on relationships rather than transactions, and to serving their customers rather than seeing customers as the people from whom they make money? Opinion is clearly shifting for the good, but will this be temporary or will it be a change that lasts? Only they can answer this.

Financial Services (Banking Reform) Bill

Lord Turnbull Excerpts

Wednesday 27th November 2013 Lords Chamber

Moved by

[Lord Turnbull]

176: After Clause 119, insert the following new Clause—
“Other provisions about the FCA and the PRAAbolition of strategic objective of the FCA
In FSMA 2000—(a) In section 1B, omit—(i) in subsection (1), paragraph (a) (and the “and” following it)and, in paragraph (b), “operational”,(ii) subsection (2),(iii) in subsection (3), “operational”,(b) omit section 1F,(c) in subsection (1K), omit “operational”,(d) omit section 3B(3),(e) omit section 3D(4),(f) in section 55B(4), for the words after “advance” substitute “any of its objectives”,(g) in section 55H(4), omit “operational”,(h) in section 55I(5), omit “operational”,(i) in section 55J(1)(c), for the words after “advance” substitute “any of its objectives”,(j) in section 55L(6), omit “operational”,(k) in section 55T, omit “operational”,(l) in section 88E, in subsection (1) and in the heading, omit “operational”,(m) in section 89U, in subsection (1) and in the heading, omit “operational”,(n) in section 137A(1), omit “operational”,(o) in section 138A(5), omit “operational”,(p) in section 192C(2), for the words after “advance” substitute “any of its objectives”,(q) in section 194(1)(c), for the words after “advance” substitute “any of its objectives”,(r) in section 232A, omit “operational”,(s) in section 314(1), omit “operational”,(t) in section 316(1A)(a), omit “operational”,(u) in section 318(3A)(a), omit “operational”,(v) in section 340(8), for the words after “expedient” substitute “for the purpose of advancing any of its objectives”, (w) in section 395(3), for the words after “procedure and” substitute “the regulator considers that, in the particular case, it is necessary in order to advance any of its objectives.”,(x) in paragraph 11(1)(b) of Schedule 1ZA, omit “operational”,(y) in paragraphs 6 and 6B of Schedule 1A, omit “operational”, and (z) in paragraphs 3C(1) and 3D(1) of Schedule 6, omit “operational”.”

[Lord Turnbull (CB)]

My Lords, this amendment repeats an amendment tabled in Committee, the aim of which was to delete what the commission thought was an otiose strategic objective for the FCA and thereby increase the prominence and importance of what were previously called its three operational objectives, one of which was the promotion of competition. I thought that the reply from the noble Lord, Lord Newby, was unsatisfactory and I wanted to pursue it a bit further. The noble Lord concluded with the following remarks:

“After taking legal advice, the FCA has subsequently written and confirmed that it is happy with the strategic objective. On that basis, we are happy that the FCA is happy and wish to retain it”.—[Official Report, 15/10/13; col. 508.]

Perhaps I might respectfully comment that the object here is not to make the FCA happy but to make it pursue diligently the competition objective, about which a number of people have reservations. I would like to give the Minister the opportunity to give us some further assurance that the competition objective of the FCA will be pursued with the vigour that I think the Treasury and this House want.

[Lord Deighton]

My Lords, I confirm the observation of the noble Lord, Lord Turnbull, that it is of course not our objective simply to make the FCA happy. I will give a slightly longer explanation of why we think that the current situation will work just fine but, to get straight to the point, it is absolutely because we believe that the overriding mission statement is entirely consistent with the vigorous pursuit of the competition objective.

In looking at this from a personal point of view, I am very comfortable with the notion of an overriding mission statement which works in harmony with the operational objectives, can be used to support and enforce them and is very useful when it comes to shades of difference between them. I am very comfortable in this case because the overriding objective of making markets work well is entirely consistent with our mutual objective of ensuring that the FCA is pursing its competition objective with the utmost vigour.

I hope noble Lords have been able to witness that where we have been able to compromise, I have been very keen to compromise, but I am afraid here it is either yes or no, and in this case I ask the noble Lord to withdraw the amendment on the basis of my suggestion that I think it is going to be okay.

[Lord Deighton]

I shall look into that for my noble friend.

[Lord Turnbull]

In tabling amendments, there are a number of objectives. The first is to get an amendment accepted, the second is to make a point and the third is to receive an assurance. I think I have achieved the second and third objectives. On that basis, I beg leave to withdraw the amendment.

Amendment 176 withdrawn.

Moved by

[Lord Turnbull]

177: After Clause 119, insert the following new Clause—
“Independent Banking Regulatory Decisions Committee of the FCA
(1) After section 1L of FSMA 2000 insert—
“1LA Independent Banking Regulatory Decisions Committee
(1) There is to be a Banking Regulatory Decisions Committee of the FCA (“the Committee”).
(2) The members of the Committee are to be appointed jointly by the FCA and the PRA and hold office in accordance with the terms of their appointment.
(3) The person appointed to chair the Committee must have experience of acting in a senior judicial capacity.
(4) A majority of the members of the Committee must be persons appearing to the FCA and the PRA to have (and to have had) no professional connection with the provision of financial services.
(5) The remaining members of the Committee must include persons appearing to the FCA and the PRA to have extensive experience in senior roles in banking.
(6) The function of the Committee is to exercise the banking regulatory decisions function of the FCA and the PRA.
(7) “Banking regulatory decisions function” means the function of taking decisions for enforcing compliance with relevant requirements, within the meaning of Part 14, in cases where the authorised person is a relevant authorised person within the meaning of section 71A of this Act.
(8) The banking regulatory decisions function of the FCA and the PRA is delegated to the Committee; and references in this Act to the FCA and the PRA in relation to that function are to be construed accordingly.
(9) The FCA shall meet the reasonable costs of the Committee in discharging its function but the Committee—
(a) is not subject to direction by the FCA or the PRA as to the exercise of its function,(b) is not accountable to the FCA or the PRA for the exercise of its function, and(c) may appoint its own officers and staff.(10) At least once a year the Committee must make a report to the Treasury on the discharge of its function.
(11) The Treasury must lay before Parliament a copy of each report received by them under subsection (10).”
(2) The FCA and the PRA must carry out a review of the operation of the Banking Regulatory Decisions Committee of the FCA.
(3) The review must be completed before the end of 2018.
(4) The FCA and the PRA must give the Treasury a report of the review.
(5) The report must include an assessment of whether the function of the Banking Regulatory Decisions Committee would be better discharged by a body that was entirely independent of the FCA and the PRA.
(6) The Treasury must lay a copy of the report before Parliament and publish it in such manner as they think fit.”

[Lord Turnbull]

This amendment is about the future structure of the Regulatory Decisions Committee. This is avowedly a placeholder amendment to allow further discussion. The commission originally proposed that the RDC should be given statutory autonomy within the FCA and that that new regulatory structure should be reviewed by 2018. On further reflection, my commission colleagues and I put forward a rather different proposition, which is that there should be a wider review but there is no reason why it should not start as soon as maybe.

There are a number of reasons why a wider review is justified. The first is obvious. Although we now have two regulators rather than one—the PRA and the FCA—events where enforcement is justified can arise from either of these domains and enforcement action taken by one could help or hinder the work of the other. The enforcement division and the RDC are embedded in the FCA, and it raises the question of whether the RDC should be placed, in a sense, more equidistant between the two.

The second reason for raising this question is that, in banking at least, enforcement decisions could be taking on a greater significance than in the past. Indeed, the past has been characterised by a surprising absence of enforcement, at least in relation to the events of the financial crisis. There have been some major enforcement decisions and some colossal fines around conduct, but virtually none in relation to events leading up to the financial crash. This therefore raises the question as to whether the RDC needs to be upgraded in terms of its chairmanship and membership so that it is capable of handling bigger and more important cases.

The third reason is that, in response to a regulatory infraction or lapse, there is a balance to be struck between using enforcement as an instrument and the supervisory instrument. We should not get into the mode of thinking that enforcement is always the first and best recourse. Supervisors may take the view that a case is better handled by what elsewhere might be called “special measures”, such as seeing that the people who are responsible for the poor behaviour and decisions are moved on, and possibly even sacked; or by getting new people in; or by securing undertakings from management about future conduct. Often, this can produce a quicker and more effective result, whereas recourse to enforcement can cut across this so that instead of a bank immediately getting into a constructive dialogue about what to do next, it begins to dig in and wait for a long, drawn-out litigation.

We therefore need to ensure that, in any particular case, the full range of options has been considered and that the interests of other regulators have been taken into account. In other words, the RDC should only receive a case after that balancing process has taken place. It would be helpful if the RDC was able to question whether all the options and possible responses have been explored.

The fourth reason is that, in many walks of life, there has been a trend which continues to this day of greater separation between those investigating a case, those who decide whether a prosecution should be undertaken and those who reach a verdict. You could go back to the creation of the Crown Prosecution Service more than two decades ago, and you can see this in a number of professional bodies covering medicine, solicitors and accounting. The hot topic of the moment is the Independent Police Complaints Commission. There is a perception that the RDC is not as independent of enforcement as it could be. It is co-located. It is part of the FCA. Would we be able to achieve both actual enhancement of its independence and, certainly, the perception of that independence if it stood in a more independent position?

Finally, the RDC has to ensure that before any accusation is made in a decision notice that enforcement has been properly researched, the accused has been given a proper chance to put their case, and the case has been gone into thoroughly. This is of particular relevance to smaller practitioners who can be severely damaged by accusations and are not able to clear their name until maybe years later. Unlike big firms, such businesses, such as IFAs, can find that they clear their name but there is no business left to go back to.

All this indicates to me that there is more than enough material on which to base a review and no reason to delay that until 2018, which was included in the earlier amendment. Rather than attempt to legislate now in a process that does not allow proper consultation with practitioners, and which would be confined only to banks, I argue that we should have a wider review. I hope that between now and Third Reading we can have further discussions on this idea. I beg to move.

--- Later in debate ---

[Lord Deighton]

In the spirit of the noble Lord’s approach, which was to move on from the specific amendment, I will not read out my speaking note, as entertaining and well structured as it is. I thank the noble Lord, Lord Eatwell, for his valuable experience here. I feel as the noble Lord does—something in here needs to be sorted out, but at the moment we are not exactly sure quite what the right thing is. However, it is certainly likely to involve a review, as is recommended as part of the amendment. Therefore I am more than happy, in preparation for Report—I am sorry, I mean Third Reading—to see what we can come up with together on a review.

[Lord Turnbull]

On the basis of that quite generous assurance, I am very happy to withdraw the amendment.

Amendment 177 withdrawn.

--- Later in debate ---

Moved by

[Lord Turnbull]

182: After Clause 120, insert the following new Clause—
“Remuneration code
(1) The FCA and the PRA must prepare (and may from time to time revise) a remuneration code.
(2) The remuneration code is to apply to all persons who have approval under section 59 of FSMA 2000 to perform a function in relation to the carrying on by a relevant authorised person of a regulated activity which is designated under subsection (6B) or (6C) of that section as a senior management function.
(3) The remuneration code must—
(a) require that persons to whom the remuneration code applies are, except in specified circumstances, to receive a proportion of their remuneration in the form of variable remuneration,(b) require that a specified measure of profits is to be used in calculating any variable remuneration which is calculated by reference to profits,(c) require that the nature and amount of variable remuneration is to strike an appropriate balance between risk to the relevant authorised person providing it and fair reward for the recipient of it,(d) require a proportion of variable remuneration to be deferred for such period, not exceeding 10 years, as is appropriate to strike a balance between risk to the relevant authorised person providing it and fair reward for the recipient of it,(e) require that no, or only a limited amount of, variable remuneration of a person to whom the remuneration code applies is to be calculated by reference to sales made by the person or by any group of persons employed by the relevant authorised person providing it, and (f) require that non-executive directors of a relevant authorised person are not to receive variable remuneration.(4) A requirement imposed by the remuneration code is a relevant requirement for the purposes of Part 14 of FSMA 2000.
(5) In this section—
(a) “relevant authorised person” has the meaning given by section 71A of FSMA 2000,(b) “variable remuneration” means remuneration (whether in money or in securities or any other form of money’s worth) the amount or value of which varies in accordance with profits, sales or other matters.”

[Lord Turnbull]

I shall speak also to Amendment 183. This is about whether there should be a statutory basis for the existing remuneration code. One can analyse this at three levels. First, does the current code permit the kind of actions that the parliamentary commission recommended, such as longer deferrals where the nature of the risk justifies it, and more extensive clawback? Secondly, will those powers be used more rigorously than they have been in the past, particularly for banks? Thirdly, is giving statutory backing through the Bill necessary in order to ensure the correct answer to the second question?

Since tabling this amendment, we received a letter from the noble Lord, Lord Newby, on Monday, which in my view gives a satisfactory answer to the first question. All that the parliamentary commission sought, with the possible exception of forfeiture of some pension rights, can be imposed under existing powers. With regard to the second question—will those powers be used more rigorously?—the letter from the noble Lord, Lord Newby, says that the regulators,

“have stated that they will revise the … Code following consultation in 2014. The Government will work with regulators to ensure that …the Code [takes] full account of the views of the PCBS and the debates”,

on this Bill. Therefore, it is a matter of judgment for the House. Does it want to accept those assurances or does it feel that further amendments are needed to embed this presumption more fully? I think that the correct way forward is for there to be some further discussion about precisely what the review and the outcome might be. I look forward to hearing what the noble Lord has to say.

[Lord Newby]

My Lords, I am extremely pleased that my letter has at least partially satisfied the noble Lord. He has left me with a remaining question, which is: are we happy to continue to engage with him and his colleagues as we work towards, and consider, the review? I can give him the absolute assurance that we will be very happy to do so. On that basis, I hope that he will feel content to withdraw his amendment.

[Lord Turnbull]

On the basis of that assurance, I am indeed content to beg leave to withdraw the amendment.

Amendment 182 withdrawn.

--- Later in debate ---

Moved by

[Lord Turnbull]

184: After Clause 120, insert the following new Clause—
“Special measures
(1) This section applies where the FCA or the PRA—
(a) has reason to believe that a relevant authorised person’s systems or professional standards or culture do not provide sufficient safeguards against the commission of actions in respect of which the FCA or the PRA has power to take action, but(b) do not have reason to believe that any such action has been committed (ignoring any action which is already being investigated or in respect of which action has been or is being taken).(2) The FCA or the PRA may give notice to the relevant authorised person of the belief mentioned in subsection (1)(a).
(3) If the FCA or the PRA gives notice under subsection (2), it must invite the relevant authorised person to make representations showing that sufficient safeguards are in place.
(4) Following the giving of a notice under subsection (2) and the receipt of representations under subsection (3) (if any are made), the FCA or the PRA may commission an independent investigation into the relevant authorised person’s systems and professional standards and culture with a view to establishing whether sufficient safeguards are in place; and for that purpose—
(a) “independent” means independent of the FCA, the PRA and the relevant authorised person, and(b) an investigation may not be commissioned from a person involved in the auditing of companies.(5) The relevant authorised person must cooperate with the investigation.
(6) Following receipt of the report of the investigation under subsection (4), the FCA or the PRA may by notice require the relevant authorised person to take measures to provide sufficient safeguards and to monitor their effectiveness.
(7) The relevant authorised person must—
(a) comply with the notice, and(b) appoint an appropriately senior member of the relevant authorised person’s staff to oversee compliance.(8) Compliance by a relevant authorised person with a duty under this section may be considered for the purposes of the exercise by the FCA or the PRA of functions under FSMA 2000.
(9) In this section, “relevant authorised person” has the meaning given by section 71A of FSMA 2000.”

[Lord Turnbull]

This amendment concerns the concept of special measures. We were again told, as we often have been, that all the powers necessary are there and that, indeed, they are being used. That may well be the case. However, the Minister did not respond to my suggestion that, if this is part of the armoury of the regulators, it would be helpful if they set that out so that there was wider understanding of the special measures regime. I do not think that the regime has an identity in the way that it has in the US, where they talk about memorandums of understanding. Subject to that, I would be happy to put this matter into the box labelled “For further discussions”. I beg to move.

[Lord Newby]

My Lords, I think that this is now having the appearance of a Christmas box, in that the noble Lord is asking the Government to agree to things and we are tending to agree to agree to things.

Given all the powers that the regulators already have, we have been slightly sceptical about whether they need to have, as it were, an Ofsted power of special measures. We do not think that they need more powers but, in order to address the noble Lord’s concern that failings in professional standards and cultures should not be overlooked, we shall be happy to discuss this with him further and to involve the PRA in discussions about how we move towards a firm policy in this area.

--- Later in debate ---

[Lord Newby]

My Lords, I understand the point being made by the noble Lord. I am not sure at this point, without further discussion, whether we need an amendment at Third Reading. We think that the way forward might be a PRA policy statement, but we can have urgent discussions with the noble Lord on that.

[Lord Turnbull]

It is indeed a PRA policy statement that I am after. I am trying to establish a regime in which the regulator sees things that are going wrong and gets into dialogue with the company about remedial measures to head off the long-drawn-out agony of enforcement. If it is already doing it, it would be helpful to codify it but I am very happy to work with the Minister on that basis. I beg leave to withdraw the amendment.

Amendment 184 withdrawn.

Financial Services (Banking Reform) Bill

Lord Turnbull Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I will comment briefly on this amendment and will not comment, of course, from the perspective of the Royal Bank of Scotland. I will take your Lordships back to when I first worked at the Treasury, many years ago, when I was on secondment from my firm at the time. That was when there were lots of nationalised industries in the public sector. Worthy civil servants—and worthy Treasury civil servants, too—thought they knew how to manage the relationships between these large, complex, commercial organisations. They did not do it well. It was the right decision, therefore, when the previous Labour Government started to accrete new, substantial holdings in commercial organisations, to set up an arm’s length relationship to professionalise the handling of those organisations and their ultimate disposal, and to recognise, as that Government did at the time, that those holdings were not to be long-term holdings. I criticised the previous Government because it was not set up by statute, but in a shroud of secrecy without proper accountability arrangements in place. I believe, however, that the principle that civil servants are not the right people to manage these complex relationships with sophisticated organisations is the right one.

[Lord Turnbull (CB)]

My Lords, there was a similar organisation set up in my time, the Shareholder Executive. The Shareholder Executive is a body attached to BIS, as it is now called, and it creates a centre of expertise for the management of shareholders. What it does not do is claim to be the decision-maker. It is all very well to have the expertise—we need the expertise—but there is a pretence that decisions relating to RBS and LBG are being taken by UKFI as opposed to being taken by the Treasury on the advice of UKFI. It is a pretence that when it suits you, you can decide, and when it suits you, you can hand it on to someone else.

At the moment, with the change of leadership in RBS—the noble Baroness, Lady Noakes, may not want to comment on this—we do not know whether that was a decision of the RBS board, UKFI or the Treasury. It ought to be clear who took that decision. You can have an advisory body—in this case, almost an executive body—but not one that claims to be the decision-maker, which is the pretence of the UKFI situation.

[The Commercial Secretary to the Treasury (Lord Deighton) (Con)]

My Lords, the intention of the amendment is to transfer into HM Treasury the function of managing the Government’s shareholdings, in particular in RBS and Lloyds. As my noble friend Lord Lawson has pointed out, the Chancellor of the Exchequer, in his Mansion House speech in June, has already made it clear that he rejects this particular PCBS recommendation.

As has been pointed out in a number comments already, UKFI was not a creature set up by this Government; it was set up by the previous Government when they made the initial capital injections into RBS, Lloyds, Northern Rock and Bradford and Bingley, with the idea of being able to manage these investments on an arm’s-length commercial basis. So that was the genesis.

This group works closely with the management of RBS and Lloyds to assure itself of their approach to the strategy and to hold management to account for their performance. RBS and Lloyds are led by their management and board in the interests of all shareholders, including the taxpayer. So, while it may be possible to imagine different arrangements to fulfil these objectives—you can make the arguments and the pros and cons of the different ways of doing it—the current ones work well, as my noble friend Lord Garel-Jones has said, and it would not make sense to change them at this stage. So, just as my noble friend Lord Lawson said it is a simple amendment, there is a simple reason to reject it—it does not make any practical sense. UKFI is working fine and the time and effort it would take to pull it back into the Treasury and to reorient all that work there would distract our efforts on the important work that is currently going on.

My noble friend Lord Lawson referred to the review at RBS in particular, which we are two-thirds of the way through, and the bad bank/good bank option. I am afraid I am going to disappoint my noble friend. I am not going to tell him what the result is but it will be ready this autumn and we will announce the outcome and the rationale behind it. The matter is being pursued with great urgency and the last thing we want to do at the moment is to destabilise the arrangements for conducting that important analysis, which is really the most important thing.

I reiterate that UKFI is staffed by some very good top people. I have worked with them and I have seen the work that they do. Frankly, we have been able to recruit top-class people to do this work on our behalf. I can assure the Committee that the Government continue to value the role that they play. It was demonstrated again, as my noble friend pointed out, by the role they played in advising the Chancellor on the successful divestment of 15.5% of the Government’s shareholding in Lloyds at 75p per share. They will carry on looking at the full range of options for RBS and managing the timing of the subsequent tranches of the sale of Lloyds back into private ownership.

I am grateful to the PCBS and the noble Lord for raising these issues, but the Government consider that UKFI has a vital role to play which it is performing well. I therefore cannot support the amendment and I urge the noble Lord to withdraw it.

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[Lord Deighton]

Noble Lords will know that the Chancellor has already set out at the Mansion House the next stage of the Government’s plan to take the banking system from rescue to recovery. For Lloyds, the Chancellor has taken the first steps to return Lloyds to the private sector and will continue to consider options for further share sales. Value for money for the taxpayer will be the overriding consideration for disposals. There is no pre-fixed timescale for share sales and, given the size of the taxpayer’s stake in Lloyds, the disposal process is likely to involve further multiple stages over time.

For RBS, however, share sales are still some way off. We discussed this earlier when we debated my noble friend Lord Lawson’s amendment. The Treasury is currently examining the case for creating a bad bank for RBS risky assets. As discussed, this review is still ongoing and will be published later in the autumn. Setting out public options for structural change may be advisable in some cases, as the Chancellor’s announcement of the RBS bad bank review makes clear. However, the Government will need to judge in each case whether to do so, given the risk of generating uncertainty and speculation about likely outcomes.

Similarly, selling large numbers of shares in the market is a very commercially sensitive matter: for example, in the case of Lloyds. Any communications from government in advance of placing shares could be destabilising and affect the price that the Government get for the shares. Publication of a report as outlined in the proposed amendment could undermine the Government’s ability to sell shares quickly in favourable market conditions. This could significantly reduce value for money for the taxpayer in that case.

The Government firmly agree that all the topics set out in the amendment need to be carefully considered by any Government in making their decisions relating to the sale of banking assets. UKFI, which we talked about earlier, was established with a very clear emphasis on value for money in executing its core mandate of devising means of exiting the Government’s shareholdings in the banks. In doing so, it is required to pay due regard to the maintenance of financial stability and act in a way that promotes competition.

The amendment seeks to improve accountability. Many mechanisms already provide accountability. On value for money, the Government are scrutinised against the general principles set out in the Green Book. UKFI is also accountable to Parliament through the Chancellor of the Exchequer, and has a mandate to secure value for money for the taxpayer. Moreover, the Treasury and UKFI are accountable directly, through the accounting officer mechanism, to the National Audit Office and to the Public Accounts Committee. Indeed, UKFI published a report, following the sale of Northern Rock, setting out the rationale for returning the bank to the private sector at that time. The National Audit Office completed a review of the sales process and published a lengthy report on it, which was considered at a session of the Public Accounts Committee.

The sale of Northern Rock demonstrated the Government’s commitment to transparency on the sale of their banking assets and the ability for bodies such as the National Audit Office and Parliament to scrutinise the decisions of government on these matters. Finally, the Government are accountable for their decision to Parliament, including through the Treasury Select Committee and in public debate. Overall, it is not clear what value would be added by this mandatory reporting requirement and it might well be detrimental to the objectives it aims to deliver, particularly to value for money. I hope that the noble Lord will therefore agree to withdraw the amendment.

[Lord Turnbull (CB)]

The first half of a paragraph in the PCBS report asked for a report on the good bank/bad bank option by September: it is going to be a bit late but we are told it is coming soon. The next two or three sentences were on the same subject as the amendment: looking at a wider range of options. Is the Minister telling the House that the Government will fulfil the first half of this PCBS recommendation but not the second half?

[Lord Deighton]

The Government will announce the conclusions of the good bank/bad bank review and the rationale for why that is the option being pursued. We will be addressing the second half of the undertaking in describing the rationale.

[Lord Turnbull]

The Government have got to good bank status with RBS. Are they not proposing to do any further analysis on what might happen to the good bank bit that remains?

[Lord Deighton]

The first thing we have to determine is what we are proposing to do with the good bank/bad bank. Does the split make sense and on what basis does it work? We will subsequently look at what we do with the separate parts.

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Moved by

[Lord Turnbull]

104E: Before Clause 16, insert the following new Clause—
“Definition of “bank”
(1) In sections (Meetings between regulators and bank auditors, Leverage ratio, Proprietary trading, Remuneration code, Powers of regulator where Bank receiving State support, Special measures, and Regulatory accounts) “bank” means a UK institution which—
(a) has permission under Part 4A of FSMA 2000 (permission to carry on regulated activities) to carry on the regulated activity of accepting deposits; or(b) is an investment firm within the meaning of that Act (see section 424A of that Act).(2) But “bank” does not include an insurer.
(3) In this section—
(a) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom;(b) “insurer” means an institution which is authorised under this Act to carry on the regulated activity of effecting or carrying out contracts of insurance as principal. (4) Subsections (1)(a) and (3)(b) are to be read in accordance with section 22, taken with Schedule 2 and any order under section 22.”

[Lord Turnbull]

My Lords, this is an amendment to which we have returned on a number of occasions and which is quite fundamental to the Bill. It raises the question of what is a bank and defines who comes within the scope of the various regimes, sanctions, penalties, or whatever. There was a feeling when we last discussed this that defining a bank around whether it took deposits was too narrow and that there could be people who could conduct, for example, trading activities without taking deposits and who ought to be subject to the senior managers’ regime, the criminal sanction or the remuneration regime.

The amendment is an attempt to widen that scope. It was tabled before the letter dated 22 October from the noble Lord, Lord Newby, to the noble Lord, Lord Eatwell, with its offer to set out a note. I think that that will probably deal with the question. I do not think that there is any real difference between us about what we want to cover. We want to make sure that we are covering not only ring-fenced banks but people running major investment bank trading operations, whether they be domestic, such as BarCap, or UBS or whatever.

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[Earl Attlee (Con)]

My Lords, we are slightly out of order because the noble Lord has not moved his amendment and started the debate. Perhaps the noble Lord would like to finish moving his amendment.

[Lord Turnbull]

I thought that I had started by begging to move Amendment 104E, but if I have not I shall do so now, and if that allows the noble Lord, Lord Eatwell, to offer his clarification I should be very grateful. I beg to move.

[Lord Eatwell]

I usually try to be difficult. When I try to be helpful I am stopped. I was referring to the Bank of England response, published today, in which it says that,

“the Government’s legislative proposals in this area”—

this is referring to the senior persons regime which we talked about last time—

“will apply only to deposit takers but not to investment banks and insurance companies”.

So the Bank of England is clear that both the senior persons regime and, I presume, also the offences issue—for which I remember the same issue arose as to the definition of a bank—do not apply to investment banks.

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[Lord Turnbull]

My response to that is that it is completely unsatisfactory. We shall need to come back to it. I hope that there can be some discussion, maybe with officials in the Bill team. I am not satisfied that applying these various provisions simply to deposit takers covers all the areas of conduct that really need to be covered.

One other issue came to light in the course of this evening’s discussions about the remuneration regime. The noble Lord, Lord Newby, read out a list of people who are covered. Those are the people who are covered by the current remuneration regime. What was being proposed in my amendment was in effect a senior tier particularly for banking. Once you do that, you have to find a definition of a bank. I thought that we were a bit nearer to getting an answer until I heard from the noble Lord, Lord Eatwell. It is something we need to sort out, otherwise we shall find a serious area of misconduct in an investment banking area only to be told that when we legislated we forgot to cover these kinds of people. That would be completely unacceptable.

[Lord Newby]

My Lords, I thought that I read out virtually verbatim last week what the noble Lord has read out from the Bank of England. We are going to confirm that in a letter. However the most important point is the one that the noble Lord, Lord Turnbull, raised about the scope of the senior managers regime and the criminal offence that goes with it. I can confirm now what I attempted to say last time, that my Treasury colleagues are considering the scope of the new regime and of the new criminal offence of reckless misconduct in the management of a bank in the light of the previous debate. I can assure the House that they take your Lordships’ views extremely seriously.

[Lord Turnbull]

I infer that I should pay more attention to the letter of the noble Lord, Lord Newby, of 22 October than I should pay to the Bank of England’s response, because I think the former is a more constructive response than that of the Bank of England. On that basis, I beg leave to withdraw Amendment 104E.

Amendment 104E withdrawn.

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[Lord Turnbull]

Because of the piecemeal way in which the Bill has been constructed, we now have a piecemeal presentation of the secondary legislation procedure as it applies to each bit—and I have completely lost track of it. The first thing that needs to be done is to set out, for the whole Bill—the bits that were there originally and the bits that have been added—what the secondary legislation provisions are. Then we can make a judgment on whether they are appropriate: whether the right things have been assigned to the negative procedure and the right things assigned to the positive procedure. However, it is virtually impossible to do this on the basis of this piecemeal presentation.

Amendment 114 raises enormous issues. The Minister is shaking his head and may try to reassure us, but there are important provisions here that need to go to various committees which we have set up in this House to examine such things.

[Lord Newby]

My Lords, three issues have been raised. The first is whether we have responded to the Delegated Powers Committee. I explained at some length last week what the Government’s response was. Subsequently, I wrote to the chair of the committee, reiterating what I had said. I am sorry if noble Lords have not seen the letter; I will make sure that it gets to them. I will repeat what I said and what the letter said.

The Government’s view, bearing in mind that the committee said it was for the House to decide and did not make a recommendation on the procedure to be followed, is that, given the technical nature of these statutory instruments, the best way forward, in the light of the Government’s response to the consultation process that they have just completed, is to invite noble Lords who are interested in the secondary legislation to the Treasury to have an informal discussion on the issues, and to see what they feel might be done, and whether any amendments are required. The Treasury does not have a fixed view on the detailed provision of that secondary legislation, and would welcome the further views of Members of your Lordships’ House.

Secondly, I find literally incredible the suggestion of the noble Lord, Lord Eatwell, that the Government took no account of the recommendations of the PCBS.

Financial Services (Banking Reform) Bill

Lord Turnbull Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Lord Eatwell]

My Lords, this amendment, which I hope will become a new clause in the Bill, is probably the most important in the Bill. It defines whether we are really serious. If we are not serious, we will reject the idea of having a leverage ratio as one of the armaments of the FPC. If we are serious, the Financial Policy Committee must have this tool.

As the noble Lord, Lord Lawson, has argued, risk-weighted assets have been discredited as a measure of risk within the banking system. It is regrettable that so much legislation both here and in some of the discussions in Basel and in the European Union still use this discredited measure as a means of devising appropriate regulatory measures.

The leverage ratio is simple, it is clear and it provides a protection to the overall stability of the financial system; it provides protection for a resolution regime; and it provides protection for depositors because, with the regulatory determination of the amount of capital relative to the asset base of the bank, that regulatory determination pursuing those goals will have the effect of reducing an important component of systemic risk. It is not me who makes that argument; the Government did so in the Financial Services Act 2012. In defining systemic risk, that Act defines one of the characteristics of systemic risk as “unsustainable levels of leverage”.

If the Financial Policy Committee is supposed to be managing systemic risk and a component of systemic risk is unsustainable levels of leverage, why cannot the Financial Policy Committee have the tools to do anything about it? At the moment the Government are telling us that they will review whether the FPC should be given this particular tool in 2017. They will review it: we are not even sure that the Financial Policy Committee will receive the ability to manage the leverage ratio in 2017-18.

By the way, even if it does appear in 2018, the Financial Policy Committee and the Governor of the Bank of England will be given this tool just as Mr Carney gets on the plane back to Canada. We have managed to secure someone who the Government tell us—and I think is generally acknowledged—is a highly skilled central banker and we are not giving him the tools to do the job which he is asked to do in the 2015 legislation. I notice that it was said in the Commons Public Bill Committee that:

“The Financial Policy Committee cannot be expected to work with one hand tied behind its back”.—[Official Report, Commons, Financial Services (Banking Reform) Bill, 26/3/13; col. 207.]

Not giving the Financial Policy Committee this particular power ties both its hands behind its back because it is, as I have already said, required to take account of unacceptable levels of leverage and yet it has no tool to do anything about it. The amendment of the noble Lords, Lord Lawson and Lord Turnbull, and of my noble friend Lord McFall, achieves that goal. Surely this is what is necessary if we are serious and are not overwhelmed by the lobbying of the banks.

[Lord Turnbull (CB)]

My Lords, I support the amendment and the account given by the noble Lord, Lord Lawson. I shall add a bit of background to this matter. For probably two decades, up to about 2004, the leverage ratio of the British banking system fluctuated between 20 and 25. It then rose, reaching a peak in 2008 of somewhere over 40. The Government’s wish that the number of the leverage ratio should not be greater than three implies that the limit of their ambitions is to get this leverage ratio back to 33, which is still, by historical standards, a very high ratio.

A very interesting chart in the Vickers commission report shows how risky people thought assets were. It shows that they fell—this is the assessment that banks put into their own models—between 2004 and 2008. How can anyone believe that 2008 was a year of greater financial stability? I believe the way this came about was as follows. You said in 2004, “I have a portfolio of commercial property and have not lost a penny on it in the past 10 years, so I will give it a weight of X”. You come to 2008, four or five years later, and say, “I have still not lost any money on this, which tells me that this portfolio is not as risky as I thought it was in 2004, so I will give it a lower risk rating”. What is happening all the time when you have an upswing is that, as the upswing gets riper and riper, the risk weights go down and down, until there is a crash. The whole purpose of having a leverage ratio is to provide a backstop to that. One or two people argue that we should run on basic leverage ratios alone but, in my view, both the leverage ratios—unweighted and risk-weighted—should run in tandem. Each provides a check on the other. Relying solely on risk-weighted assets leads you into the farce of banks marking their own homework and doing the opposite of what they should be doing by marking things as less likely at precisely the moment in the cycle where they become more likely.

Another argument that has come up in relation to 3% and 4% is that we must not get out of step with regulation abroad. However, when it comes to risk-weighted assets, the Government have accepted that they want to impose a higher figure—partly because we have more systemically important banks and it is important for a medium-sized economy running a very large banking sector for that sector to be safe. When you say, “Does that not mean that what we thought was a 3% figure should move pari passu”, the answer is, “Oh no, we can’t do that because we will get out of line with what everyone else is doing”. But if you can do it for one of these measures, why can you not do it for the other? I find that argument completely unconvincing.

There was a view in the commission that higher leverage ratios were a good thing. However, that is not what this amendment is about. Although we thought that, the amendment says that it should be the FPC that makes the judgment. As my noble friend Lord Eatwell has pointed out, the absurdity of hiring this super-duper, global-standard central banker and then not giving him this essential tool until the very point at which his contract ends is beyond belief. It seems an absolutely simple point that the FPC should start this. Elsewhere in the world, other people will be thinking about this and it seems very strange indeed to leave the Bank and the FPC unable to start deploying this measure.

There is an argument that certain kinds of banks, particularly those with low-risk assets, will find that this 4%, or the leverage ratio, becomes the binding ratio. People making that argument cite, principally, various former building societies. You have to look around and ask where the biggest failure in Britain was. It was former building societies thinking that they had a portfolio that was a good deal safer than it really was. Some of them also got into quite a lot of commercial real estate. Northern Rock, for example, would have been well advised to have followed a leverage ratio of this kind. If it turns out that the supply of mortgages is not adequate—although we are doing lots of other things to promote it—you might want to differentiate between one kind of organisation and another. That should be done by the regulator as a derogation from a world in which we are working with higher leverage ratios than the Government currently envisage.

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[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.

[Lord Turnbull]

I reassure the noble Lord, Lord Higgins, that it is certainly not intended, while this activity might remain within a banking group, that it should be done, under the plan, by a ring-fenced bank. One of the reasons why we took the view that we should wait and see is that the dividing line between a proprietary trade and a trade on behalf of a customer is not straightforward, which is why it is very difficult in the US. For example, if I lend the noble Lord money he may seek some kind of hedge which I would provide. That might mean that my position as the bank is no longer what I really want it to be. As a bank, I would look around to see what my colleagues have done during the course of the day, and we would then add up all the positions that we have taken. We may well find that that position is not where we really want to be, so on the following day the bank goes out and undertakes a trade which gets it back to the degree of hedged position that it wants. Was that a proprietary trade or was it a trade that was a consequence of serving a customer? That is why this is actually very difficult and why we are wise to wait and see whether workable definitions could be found of what constitutes real proprietary trading and of what constitutes trading in response to a customer. This measured amendment enables us to do precisely that.

[Lord Deighton]

My Lords, the ICB considered in detail the case for a ban on proprietary trading in the UK, but decided in favour of ring-fencing. The PCBS heard evidence from a wide range of sources that prop trading does not appear to play a large role in the UK at the moment—as my noble friend Lord Lawson pointed out—nor did it play a significant role in the financial crisis. The noble Lord, Lord Turnbull, has already addressed the question of my noble friend Lord Higgins, but it should of course be noted that the ring-fenced banks will be banned from proprietary trading as well as from market-making and other forms of trading activity that would expose them to risks from global financial markets. Therefore, from a prudential perspective, much of the risk posed by prop trading can be addressed by a suitably robust ring-fence which is, of course, the thrust of our legislation. This was the point made by the PRA in response to questions from the PCBS.

It is also worth noting that the evidence heard by the PCBS also suggests that prop trading is not necessarily the sole avenue for the cultural contamination of banks. For example, the PCBS highlighted in its excellent report the serious failings in culture and standards at HBOS, a bank which did not engage in any prop trading at all. Indeed, it is perfectly possible to run an integrated securities business with full integrity in a way that manages any potential conflicts of interest quite satisfactorily, so they do not necessarily follow. It is far from clear, therefore, that prop trading is the real problem facing the UK financial system, or that structural solutions address cultural problems. In light of that, and of observations about the practical difficulties of a ban on prop trading, as it is being attempted in the US through the Volcker rule, the PCBS did not recommend a ban on prop trading.

It is not wholly clear what further evidence would support a different conclusion to that reached by the PCBS in its own assessment, so it is unclear what a further review into proprietary trading within such a short period of the PCBS’s own report would add. Still less is there a need for such a review to be followed immediately by an independent review of the same question. Of course, we have no issue with reviews as a matter of principle: we are just not sure that, in this case, legislating for one in advance really does much for us.

As the findings of the PCBS do not suggest that prop trading presents a serious prudential risk at this time, I do not think we need to legislate for the regulator to carry out a further review. The absolutely valid point made by my noble friend Lord Lawson was that this could change in the future. That is what we are trying to address. Should that happen, the PRA has made it clear that it already has the powers it needs to bear down on prop trading where it endangers the safety and soundness of a firm or where the risk incurred is not consistent with the publicly stated risk appetite of a bank.

Moreover, monitoring and reviewing all risks to a bank constitutes an essential part of the PRA’s work. The PRA’s approach is to insist that firms adopt and follow a risk appetite that is consistent with the PRA’s statutory objective to promote the safety and soundness of firms that it regulates. This will include regular monitoring and review of all risks, not limited just to those associated with prop trading. Therefore, to require the PRA by legislation to undertake such a review seems unnecessary. Should we legislate for a review of how reference rates are set, for example? Should we legislate for a review of mis-selling practices? Why, therefore, should we do it for prop trading? It is not apparent to me what problem a review would solve. While I think that reviews can play a useful role, in this case we are not sure that it is justified in advance.

We need to give the regulator the space to allocate its resources in a way that is appropriate and proportionate when considering all the different risks to the UK financial system, not only focusing on one particular risk. Our more widely framed reporting requirements allow for this. For all of these reasons, I do not think that a review on the particular issue of prop trading is necessary. The regulators are already subject to extensive reporting requirements. I expect the PRA to make the Treasury, and Parliament, aware of any emerging risks it identifies, whether through prop trading or anything else. The deputy governor for financial stability has already written to the chair of the Treasury Committee, offering to discuss arrangements for reporting. I therefore ask the noble Lord to withdraw his amendment.

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Moved by

[Lord Turnbull]

95: Before Clause 16, insert the following new Clause—
“Remuneration code
(1) The FCA and the PRA must prepare (and may from time to time revise) a remuneration code.
(2) The remuneration code is to apply to all persons who have approval under section 59 of FSMA 2000 to perform a function in relation to the carrying on by a bank of a regulated activity which is designated under subsection (6B) or (6C) of that section as a senior management function.
(3) The remuneration code must—
(a) require that persons to whom the remuneration code applies are, except in specified circumstances, to receive a proportion of their remuneration in the form of variable remuneration,(b) require that a specified measure of profits is to be used in calculating any variable remuneration which is calculated by reference to profits,(c) require that the nature and amount of variable remuneration is to strike an appropriate balance between risk to the bank providing it and fair reward for the receipient of it,(d) require a proportion of variable remuneration to be deferred for such period, not exceeding 10 years, as is appropriate to strike a balance between risk to the bank providing it and fair reward for the recipient of it, (e) require that no, or only a limited amount of, variable remuneration of a person to whom the remuneration code applies is to be calculated by reference to sales made by the person or by any group of persons employed by the bank providing it, and(f) require that non-executive directors of a bank are not to receive variable remuneration.(4) A requirement imposed by the remuneration code is a relevant requirement for the purposes of Part 14 of FSMA 2000.
(5) In this section “variable remuneration” means remuneration (whether in money or in securities or any other form of money’s worth) the amount or value of which varies in accordance with profits, sales or other matters.”

[Lord Turnbull]

This amendment stands in my name and in the names of the noble Lords, Lord Lawson and Lord McFall. It seeks to legislate for a remuneration code for banks administered by the PRA and the FCA and to provide some headings on its content. I shall speak also to Amendment 96 which seeks to establish a more stringent regime for clawback.

We can analyse this remuneration issue at several levels. Is a special regime needed for banks? We already have a regime for remuneration in UK corporates, partly determined by BIS regulations and partly enforced by the guidance issued by investors and investor groups such as the ABI and the NAPF. This remuneration structure has recently been reinforced by increasing the amount of disclosure and by increasing the voting power of shareholders. We also have—or have had—a remuneration code for financial institutions—going wider than banks—administered by the old FSA. Why should we go to something more stringent for banks?

The Parliamentary Commission on Banking Standards took the view that a special regime for banks beyond that required for other financial institutions and listed companies generally was justified. Why was that? We identified a number of characteristics that make banks special. They are responsible for an essential service which has to be operated continuously and has, hitherto at least, created a presumption of being too big or too complex to fail, thereby creating an implicit guarantee which can be exploited. Banks are highly interconnected and can fail very quickly, damaging not just themselves but affecting people’s confidence in other parts of the banking industry and the wider economy. Banks are also very highly geared, as has been mentioned today. Their capital structure is not at all like that of the general run of FTSE companies. Equity counts for low single figures. Like the noble Lord, Lord Flight, I read Essays in Money and Banking in Honour of R S Sayers, and the ratios were vastly higher in those days. As a result, those running banks are incentivised to take risks and their shareholders are incentivised to support them. Therefore, I think you can rely less on countervailing pressure from shareholders to achieve restraint in bank remuneration.

Banks are also special in the way they behave. Total remuneration has increased hugely and takes a very high share of the total surplus compared with dividends, taxation, retentions, building up capital and so on. As has also been said today, cash bonuses have been paid on the basis of mark-to-market profits which, in the end, proved ephemeral. There is unlimited upside when remuneration takes the form of equity but, unlike the old partnerships which have gradually been superseded, there is limited downside.

If you accept the premise that there should be something special for banks, what should be the content of this regime? The first thing that should not be there is what the EU and the European Parliament are trying to put in: a limit on the ratio of variable pay to base pay. That is likely to be counterproductive, pushing up base pay and reducing the quantum which is provisional and, therefore, at risk of clawback. What should be there is something about the proportion of variable pay that is deferred and the time period over which it is deferred. The commission recommended that some, not necessarily all, could be deferred for up to 10 years, in recognition of the cyclical nature of banking.

Amendment 96 seeks to strengthen clawback. The terms “clawback” and “malus” sometimes get muddled up. Most of what people have said is strengthening clawback is better described as malus. It is where remuneration has been conditionally offered but not yet vested and there is still the option of cancelling the vesting. This clause suggests that, in the really serious case of a bank being run so badly that it fails and ends up being taken into public ownership or requiring the commitment of public money, even sums that have been vested should be at risk. Some of this could be pension money. If someone has paid for a pension regularly, through contributions, I would, by and large, say it was their money. However, we have seen instances where very large, discretionary amounts are paid into people’s pension funds precisely in order to put them somewhere where, hitherto, they have had immunity.

Those are the principal components of the amendments. You could go further. For example, Charles Goodhart has argued that it is a mistake, in the case of banks, to make variable pay take the form of shares because the shares are highly geared and it would be better if a significant amount was not in shares but in bailable bonds. This would limit the upside but that value would not be transferred if the bank failed.

What is the scope of these arrangements? How far down the bank should they go? They should certainly cover the senior managers’ regime. What is offered below that is not the licensing regime that we suggested which should apply to people who had the ability to damage the bank in some way. As it is set up at the moment, it could be any employee, which is a much less focused scope in terms of who is covered.

The other issue is about which parts of banking should be covered. We came across this argument and are still uncertain about whether it is those people who work in entities which take deposits or whether it should also cover people engaged in investment banking, which is the common sense view. Another amendment in my name attempts—probably unsuccessfully—to produce a definition which is wider than simply those who are in banking entities which take deposits. However, the noble Lord, Lord Newby, has written to a number of noble Lords recognising this problem and undertaking—I hope he will confirm this—to work with us to find a definition which covers the kind of people and activities that we want it to.

The final question is whether this all needs legislation. I can confidently predict the noble Lord’s response as we have had it at least three times today. I think he will say, “We agree there is a need for a special regime for banks and we agree on lots of the components that should be in it. We will work with you to agree the coverage, but we do not agree that it needs to be in legislation as the PRA has all the powers that it needs”. I think that is pretty much what is in his folder. Why is the commission pressing for legislation? In the whole of the financial crisis, two issues have infuriated the general public. The first, which we dealt with last week, is the absence or extreme weakness of personal accountability. The second is the sense that the bankers made the money but did not lose it in the bad times. They were incentivised to excessive risk-taking: too much upside, not enough downside. The public find the existing regime incomprehensible and they want something done about it. In particular, they want assurance that it cannot happen again. The way to ensure that there is no backsliding is to provide the powers proposed in my amendment. We should also set some of the parameters of what that covers.

[Lord Eatwell]

My Lords, we have already, on some previous amendments, begun to discuss the issue of the culture within banks and the culture which contributed significantly to the disaster in the banking system of the past four or five years. Nowhere does that bite become more evident than in the issue of remuneration. There has been considerable disquiet about the sheer scale of remuneration but this amendment, particularly in terms of the elements listed under subsection (3), goes to the heart of the matter which is the relationship between remuneration and risk-taking and the way in which remuneration systems incentivised, to an extraordinary degree, risk-taking which went way beyond the ability of the financial institution to manage it effectively.

If we are to persist with the banking structure we now have in this country, with very, very large banks—which are extremely difficult to manage—dominating the banking scene, then it is necessary to de-incentivise the risk-taking which did so much damage. That is the most valuable element in this amendment. The elements to which the noble Lord, Lord Turnbull, referred are also important, but we need to provide a clear statement that a remuneration code will be developed which does not incentivise selling insurance or financial instruments that individuals or firms do not need. This has been a characteristic of banking in this country over the past four or five years and has been directly incentivised by remuneration structures. We have to remove that sort of structure by giving the FCA and the PRA the responsibility to develop a code, expressed here in quite flexible terms, without the excessive rigidity in current European Union proposals. This is a very flexible structure but it focuses on the exact issue of incentives and risk-taking. In that sense, I think that it could achieve an enormous amount in changing the culture in British banking and in ensuring that banking is more stable and significantly safer than it has been in the past.

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[Lord Turnbull]

My Lords, I agree that this has been an interesting debate. I start by thanking the right reverend Prelate the Bishop of Birmingham for his supportive remarks. He referred to the way in which companies print mission statements, values et cetera—what the most reverend Primate the Archbishop of Canterbury referred to as doing the three Ps, or, “Print, pin up and pray”. We have to move beyond that and make these things a reality.

First, I will respond to various speakers. The noble Lord, Lord Phillips, made two comments. One was to ask about all the other people in the City. The remuneration code which exists—I declare an interest as a director of an insurance company—still applies and will apply. The issue here is whether a kind of upper tier is to be created that relates specifically to banks. I believe there is a case for that. He also asked why anybody needs variable remuneration. A number of noble Lords have given the answer to that. One is that base pay builds in fixed costs. In the case of banks, why do you defer? One reason is because, particularly given the way that they are accounted for, profits which look okay today vanish tomorrow—they are ephemeral. You suddenly find that a series of trades that you had valued at a certain level just disappears. You should wait and see until the profits are actually made and then you can pay it out. The argument has also been made that this would tend to raise base pay. A degree of variable pay is actually a beneficial part of the system, although it needs to be controlled.

The noble Viscount, Lord Trenchard, asked about leaving the responsibility to shareholders. If shareholders own only 3% of the business, are they really going to be a sufficiently powerful force, particularly when their investment is highly geared? They share the same incentive as the managers. The managers are, in a sense, overincentivised and the shareholders are the same. The other thing that has come out is that there are strong externalities working in this world. The failure of a bank, and particularly the banking system, has the ability to create havoc over a wide area. The impetus and responsibility on the state to see that the banks provide a continuous service means that other people have a locus in this. You cannot simply allow banks to be run with the entire remuneration system being put into the hand of one set of stakeholders, such as the shareholders.

As for inflation over the past two or three years, my reading is that bank pay has probably plateaued in that period. Most inflation came in the decade before that, when there was precious little intervention from either the state or investors. The noble Lord, Lord Higgins, said that my support for variable pay was based on giving it to them so that you can then claw it back, but the deferral is really there because you want to make sure that these profits have actually been delivered and the benefits then shared with the bank, in terms of its capital, and through dividends. I absolutely agree that many banks are too big to manage. At the moment, a lot of them are shedding activity, although we will have to wait to see whether they are going fast or far enough.

The Minister’s response was pretty much as I expected but there was also quite a lot of “wait and see”. There will be new proposals but what is not clear is how far the Government have really taken onboard that there is a case for going further with banks than with other financial institutions. This crisis owed nothing to the rest of the City; if anything, the rest of the City were victims of it. We were arguing that provisions for longer deferral were more appropriate for banks than generally.

It is partly a question of knowledge; I do not know that people really understand what the remuneration code is. Between now and Report it would be quite good if the PRA or the Treasury could circulate to us what this code now looks like, which propositions are currently being consulted on and which decisions, if any, have not yet been put into effect. We will then be better able to judge whether we think this is going to be adequate, otherwise it really is a case of “Trust us, we’ll get round to it”. But this crisis is six years on. Time is moving on, so simply saying “We will get some further proposals next year” is not enough. A better job needs to be done in informing people of what is currently being considered. They will then be in a better position to make a judgment on whether that is good enough or whether we need to go further. Preferably, to pick up the point that the noble Lord, Lord Lawson, made, if there was quite a lot more time between now and Report we would be able to look at that to get a better understanding of what is in the pipeline.

The final question was about pensions. If you say, “What is in someone’s pension fund is inviolable”, you create an absolute incentive for people to stack money in there. This is about not their contributions but the discretionary payments that the company has decided to put in. Perhaps it has put another £1 million into someone’s pension fund. If that is done on a contractual basis, by saying, “Here is the regular contribution we make to your pension fund and here is the addition that we are making. You should be aware that that bit could be clawed back”, then I do not really accept the argument that says, “It’s your money now—it’s absolutely yours forever and we can never touch it”. You need to set up the basis on which deferred pay is offered in a way that makes it possible to claw it back.

We have seen in two cases, RBS and HBOS, that pensions were a crucial issue. In both cases, by a kind of popular pressure, concessions were made but it should not really need to depend on that. We should not simply accept the story that nothing more can be done. However, there is work needed to understand what the PRA and the Treasury have in mind. That would put us in a better place to take the discussion further between now and Report. On that basis, I beg leave to withdraw the amendment.

Amendment 95 withdrawn.

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Moved by

[Lord Turnbull]

97: Before Clause 16, insert the following new Clause—
“Special measures
(1) This section applies where the FCA or the PRA—
(a) has reason to believe that a bank’s systems or professional standards or culture do not provide sufficient safeguards against the commission of actions in respect of which the FCA or the PRA has power to take action, but(b) do not have reason to believe that any such action has been committed (ignoring any action which is already being investigated or in respect of which action has been or is being taken).(2) The FCA or the PRA may give notice to the bank of the belief mentioned in subsection (1)(a).
(3) If the FCA or the PRA gives a notice under subsection (2), it must invite the bank to make representations showing that sufficient safeguards are in place.
(4) Following the giving of a notice under subsection (2) and the receipt of representations under subsection (3) (if any are made), the FCA or the PRA may commission an independent investigation into the bank’s systems and professional standards and culture with a view to establishing whether sufficient safeguards are in place; and for that purpose—
(a) “independent” means independent of the FCA, the PRA and the bank, and(b) an investigation may not be commissioned from a person involved in the auditing of companies.(5) The bank must cooperate with the investigation.
(6) Following receipt of the report of the investigation under subsection (4), the FCA or the PRA may by notice require the bank to take measures to provide sufficient safeguards and to monitor their effectiveness.
(7) The bank must—
(a) comply with the notice, and(b) appoint an appropriately senior member of the bank’s staff to oversee compliance.(8) Compliance by a bank with a duty under this section may be considered for the purposes of the exercise by the FCA or the PRA of functions under FSMA 2000.”

[Lord Turnbull]

Amendment 97 would create a regime of special measures. In the report of the Parliamentary Commission on Banking Standards, from paragraph 966 onwards, we argued that regulators should have a power to give notice to a bank where they believe that the bank’s systems, professional standards and culture do not provide sufficient safeguards. First, they could require an independent investigation, and then require a remedial programme of corrective action. This would be seen as a precursor to enforcement. It is basically a way of trying to avoid getting into the morass of enforcement. A similar regime is operated in the US by the office of the controller of the currency. It is called the safety and soundness plan.

Although the amendment refers to the PRA or the FCA, I believe that it would work best if the special measures plan was jointly owned. The twin peaks system of regulation has its advantages but there was always a danger that with each regulator focusing on its specific areas of concern, between them they would fail to capture the bigger picture. There could be a more generic problem of standards and culture and this would be an opportunity to work collectively and engage with the bank.

It may well be that yet again the response is that regulators have these powers already. Indeed, if they believe that the way that a bank is being run is a risk factor, they can impose a capital add-on. However, the argument against all these cases where we have these powers already comes back to if that is case, how did we get into this problem in the first place? What we are trying to establish is whether things will be different in the future. It would help us judge that better if the PRA/FCA could produce a working document on how they envisage using powers of this kind—a special measures regime—where they are looking for generalised improvements in the culture and the way that a bank is being managed. I beg to move.

[Lord Newby]

My Lords, we agree with the spirit behind the special measures proposal, as the noble Lord expected, but we do not believe it is necessary to give the regulators new powers in this area. They already have the powers to do everything the PCBS has asked. We have therefore been working with them on how they could respond to the recommendation using their existing powers.

The regulators published their responses earlier this month. These responses explain that both the FCA and PRA can, and in fact do, use the powers that they already have to do many of the things that the PCBS recommended and that are included in the amendment. The regulators have a significant range of powers to identify and tackle serious failings, either to rectify existing problems or prevent further consumer loss or reputational damage to markets. In fact, the regulators are able to replicate all the steps outlined in the amendment using their existing powers.

For example, the regulators already have the ability to give notice to a firm through an appropriate mechanism, be it a letter or an e-mail, as a matter of course if they have any concerns or think there may be a problem. The regulators will look to engage with the firm to address the concerns they raise. Whenever it is appropriate, the regulators may request information from the firm under Section 165 of FiSMA. If, following an investigation, the regulators believe further action is needed, the PRA and FCA can use their powers under Sections 55M and 55L of FiSMA to impose requirements on firms to undertake or cease a particular action. These powers can certainly be used to require a bank to adopt additional safeguards or to strengthen its existing safeguards.

Similarly, the regulators can appoint an independent person to undertake investigations using their power under Section 166 of FiSMA to commission a skilled persons report, or under Section 167 to conduct an investigation into the business of an authorised person. Both the PRA and FCA are committed to doing so in instances that they believe add substantially to their understanding of an issue. However, we do not think it is appropriate that the use of an independent person should be a requirement in all cases. There are some instances where the necessary information will be available from other supervisory sources making any such requirement unnecessarily costly and counterproductive.

Finally, there are already duties in regulations made by the regulators that require firms to deal with their regulator in an open and co-operative way. It may be that the noble Lord has not had a chance to look at the responses from the regulators and that, having done so, he will be satisfied, or, equally, that he would like further clarification. I suggest to him and any other noble Lords who have a particular interest in this matter that, if they have any further concerns having looked at those documents, we would willingly arrange a meeting with the Treasury to discuss any further elaboration that the noble Lord feels would help clarify how the system is going to work. Given that the powers exist, we really believe that the special measures powers envisaged in the amendment are unnecessary, and I therefore ask the noble Lord to withdraw it.

[Lord Turnbull]

I am grateful to the Minister. I think I received a link to the document but never got round to reading it. I will go and find it again and if I cannot find it I will come back and ask for assistance. I welcome the fact that this is recognised as a tool by the regulators. It may be that when I have read the remarks the Minister has just made, I will find that satisfactory.

One other point that I agree with concerns the use of Section 166. At various conferences I go to around the City, people think that Section 166 is probably being overused. Very often you could say, “We want you, the company, to investigate this. You could get it done by your chairman of audit or your chairman of risk or someone else”, but inevitably one of the four accounting companies ends up being a rather expensive and laborious way of doing it. I share the noble Lord’s sentiments on that.

I will go and do a bit more homework. In the mean time, I beg leave to withdraw the amendment.

Amendment 97 withdrawn.

Financial Services (Banking Reform) Bill

Lord Turnbull Excerpts

Tuesday 15th October 2013 Lords Chamber

A return to relationship banking is not something that one can conjure out of thin air, least of all through legislation. Indeed, the restoration of trust in the banking system is a bedrock of and essential for a revival of banking that we can be proud of. As I said, I hope that the Minister, in consultation with those who have tabled these amendments, will be able to come back on Report with something that we can all get our teeth into.

[Lord Turnbull (CB)]

My Lords, I, too, am grateful to the noble Lord, Lord Sharkey, for giving us the opportunity to debate this issue, although, as I will make clear shortly, I have come to a slightly different conclusion. When we get to Amendment 103 next week, we will be talking about the RBS good bank/bad bank issue. The Parliamentary Commission on Banking Standards, which more or less in the same paragraph talked about that issue, also recommended that the Government should examine the scope for the disposal of any RBS good bank as a multiple entity. I think that these studies were called for by the end of September. We have now gone beyond that point and I hope that the Minister will be able to tell us when we can expect those reports. To some extent, the amendment in the name of the noble Lord, Lord Sharkey, seeks to pre-empt the conclusion. I should like to wait to see what the Government have to say on this and then take the matter on from there.

There are also other concerns. As well as trying to increase competition faster than would be achieved under RBS’s current plans, we should always be seeking to return RBS to its position as a fully effective lender, particularly to SMEs. We are asking it to reconstruct itself so that it gets back into the private sector and becomes a ring-fenced bank and a non-ring-fenced bank. My concern is that if we also ask it to start work on a regional agenda now, that will simply overload the system and not get it to the point of becoming an effective lender, which is the main priority in the short term.

It is not clear to me that the regional agenda will necessarily be an effective model, particularly when it is created by taking clones of existing bank networks—by simply breaking up the existing banks into smaller bits and trying to run them on the same lines, with much of the same culture and same technology. I wonder whether that will work and whether the future doe not lie in a more disruptive technology that will grow up from below. I wonder why, for example, we are keen on switching. Why will people want to switch from one kind of a bank to another kind of bank if it is just a smaller version of the same kind of bank? I am beginning to think that the real future lies not so much in the break-up of the existing model but in a disruptive technology, with someone doing to banking what Amazon has done to retailing.

It is inevitable that there will be a full market investigation reference to the Competition Commission. Again, I would not start that now, while so much else is going on, but begin somet ime after 2015. My preference would be to fold this regional debate into that, rather than pursue it now.

[Lord McFall of Alcluith (Lab)]

My Lords, the noble Lords, Lord Eatwell and Lord Sharkey, have done the Committee a service by raising this issue. Four years on from 2010, when the Government came into office, we have much less competition: banks are bigger; the cost of capital, as the noble Lord, Lord Higgins, said, is more expensive; and SMEs’ credit is still drying up. The problem is that British banking lacks a “spare tyre”, as Adam Posen of the Monetary Policy Committee said. I remember a conversation that I had with Stephen Hester when he was chief executive of the Royal Bank of Scotland. He said, “If you have new entrants into the banks, all they will do is replicate the business model that already exists. You need a Google, a Yahoo or a Facebook to have that disruptive technology”, as the noble Lord, Lord Turnbull, described.

I was of the opinion that, as a commission, we should have a referral to the Competition and Markets Authority straight away because this is an area in which, when talking about change, we are talking about years and possibly decades. If we do not get on to this straight away then we will see very little improvement at all in five or 10 years’ time. As the noble Lord, Lord Eatwell, said, if we are talking about establishing regional banks—an aspiration which the most reverend Primate the Archbishop of Canterbury articulated—we need a secure structure. We have to understand how small banks failed. People say, “Well, small banks are just the same as large banks”. I have a quote here from February 2006 in which an individual said,

“we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management ... These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries”.

So, the system is safer. The individual who said that was a certain Tim Geithner, whom the President of the United States then appointed as the United States Treasury Secretary. Mr Geithner had a great knowledge of individual institutions but Mr Geithner, like the IMF and others, was clueless about the interconnectedness of the banks, which is why the banks went down. Whether we are talking about large investment banks or small regional banks we must turn our attention to that area of risk if we want a better system.

My noble friend Lady Liddell mentioned the Airdrie Savings Bank. I was privileged to give the 150th anniversary address there. To re-emphasise what she said, the non-executive directors there were local and unpaid. The Airdrie Savings Bank was a fly on the back of the elephant that was the Royal Bank of Scotland. However, the Airdrie Savings Bank prospered and the Royal Bank of Scotland went under. The Chancellor at that time, Alistair Darling, said that he got a call in the morning from Tom McKillop, the chairman of the Royal Bank of Scotland, saying that it would be out of business in the afternoon if the Government did not step in. Surely there are lessons to be learnt there from the small banks.

I do not accept the proposition that small and regional banks are not on. A chief executive of a very large bank said to me in private that we should look at retail banking in the United Kingdom as utilities—as predictable and boring activities. That is the way we should be looking at our banks. I think a referral to the Competition and Markets Authority would be wise at the moment because we will be talking about this issue for 10 or 15 years to come. If we do not look at the structure of retail banking in the United Kingdom, we are simply going to replicate what we have at present. There is an opportunity for innovative thinking. These amendments offer the Government that opportunity and I hope that the Minister in replying will indicate that this is a fertile area and we can get on to looking at a new structure for our banking.

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[Lord Turnbull]

My Lords, these clauses exemplify the maxim, “be careful what you wish for”. The commission recommended that the UK Government should prepare a UK version of the bail-in scheme being negotiated in the EU as a precaution against the possibility that the EU scheme could be delayed. One only has to look at the Solvency II directive to know how long these things can take. We have a slightly different explanation today, which is that we are sufficiently close to finalising the EU scheme that it is safe to proceed to legislate for it. In other words, that implies that this is a substantive scheme, not an interim scheme that might in due course be replaced by an EU scheme. I wonder if the Minister could clarify this.

My only other remark is to say that I very much support the remarks that the noble Lord, Lord Eatwell, has made about people who, once or twice in a lifetime, have a very large sum in their accounts. The other example that could have been quoted is people who sell a business before they retire.

[Lord Flight]

My Lords, I can see something like a bail-in scheme working satisfactorily with regard to a bank the size of the Co-op Bank, for example, and indeed the proposals to bondholders are effectively a do-it-yourself bail-in scheme. However, in the unlikely event that it was necessary, if a bank as large as Lloyds Bank were in trouble, I find it difficult to believe that the situation could be resolved by a bail-in scheme. This is in part for the reasons that others have given, that the knock-on effects to the rest of the banking system are too large. So while the bail-in system makes great sense, I do not think it can be a sort of universal solvent to the possible need for taxpayer money to be used when huge banks are in trouble, or for so long as we have huge banks.

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[Lord Newby]

My Lords, we now turn to the government amendments which implement another important part of the recommendations of the Parliamentary Commission on Banking Standards on senior persons and banking standards rules. This group also contains a number of amendments to the amendments the Government have tabled. I begin by explaining how the government amendments will deliver the goal of improving standards of conduct in banking.

The Parliamentary Commission on Banking Standards concluded that the current system for approving those in senior positions in banks—the approved persons regime—had failed. It saw it as overly complex and unable to ensure that individual responsibilities were adequately defined or that clear expectations were set for those holding key roles. The commission’s central recommendation in this area is for the creation of a senior persons regime applying to senior bankers. The regime for senior managers in banks will have the following features. It will reverse the burden of proof so that senior bankers will have to show that they did what was reasonable when a bank fails to comply with regulatory requirements in their area of responsibility, or face regulatory action for misconduct. It will have mandatory statements of responsibility, so that whenever someone is a candidate to be a senior manager in a bank, the bank will have to set out clearly what aspects of the bank’s business they will be responsible for. There will be powers for the regulators to make conduct rules for senior managers in banks instead of the old system of statements of principles supported by codes of practice. There will be a requirement that the register kept by the FCA must state who is a senior manager in a bank and give details of regulatory action taken against them.

The new regime for senior managers will also retain the tools which the regulators have under the existing approved persons regime. The regulators will also retain their tough powers under FSMA to impose unlimited fines on, or publish notices of censure about, senior managers in banks. It may sometimes still be appropriate for the regulators to approve people to perform functions that are not senior management functions but which still involve important responsibilities. The Government have therefore chosen to retain the power for the regulator to pre-approve individuals to perform functions outside the senior managers regime. It is for the regulators to determine what functions, if any, should be subject to pre-approval outside the senior managers regime. I am confident that noble Lords will agree that retaining this power is a sensible safeguard at a time when concerns about individual standards in financial services remain acute.

In addition to the regime for bank senior managers, the commission also recommended the introduction of a standards regime that would apply to a wider class of individuals who work in banks. The Government have therefore provided the regulators with a new power to make conduct rules for anyone who is employed by a bank, even if they are not a senior manager or other approved person. This is an extension of regulatory power in relation to individuals, and gives the regulators the power to impose a single set of banking standards rules for all who work in banks. Employees of banks could face disciplinary action if they breach these standards rules or if they are knowingly concerned in regulatory breaches by the bank. The regulators will not be compelled to make conduct rules. They will be able, quite properly, to exercise their supervisory judgment to determine who in a bank should be subject to rules, and what standards to impose.

Finally, the commission also recommended including provision for time-limited and conditional approvals of senior bankers, and longer time limits for the regulators to take disciplinary action against individuals. The Government also accepted these recommendations. Accordingly, the Bill will allow the regulator to grant approval to perform senior management functions in banks subject to conditions, as well as to take steps to vary an approval it has already given, for example by imposing new conditions.

Perhaps I may respond to the amendments tabled by the noble Lords, Lord Brennan, Lord McFall and Lord Watson. Amendments 46A, 46B and 47A seek to ensure that responsibility for preventing money laundering and other financial crime is also a senior management function. The Government agree with concerns that underpin these amendments. UK banks should uphold the highest standards in preventing criminal activity, and not facilitate it. Where there is evidence that banks have not lived up to those standards, the people at the top should be held to account. I reassure noble Lords that the new regime for senior managers will deliver precisely that accountability in relation to financial crime. Therefore, while we can all support the result that the noble Lords want to achieve, I can assure them that these amendments are unnecessary and there are no loopholes when it comes to such matters.

I shall try to explain why. The definition of “senior” is quite comprehensive. It encompasses all aspects of the bank’s operations and would therefore include responsibility for aspects of a bank’s operations that are concerned with the prevention of financial crime, where those aspects could involve serious consequences for the bank, for business or other interests in the United Kingdom. The amendments could in fact have the unintended effect of requiring junior staff with specific duties in relation to financial crime to be treated as senior managers. That would run in the opposite direction to what the parliamentary commission intended, which was to focus on senior persons in charge of all aspects of the bank’s activities.

Amendment 53A has two limbs. The first seeks to ensure the operational objectives that the FCA must consider when making rules of conduct for approved persons or bank employees. I can assure your Lordships that this part of that amendment is unnecessary. The reference to the operational objectives in new Section 64A(1) attracts all aspects of these objectives as defined in Sections 1B, 1C, 1D and 1E of FiSMA, without any additional words.

The second limb of Amendment 53A, and Amendment 53B, would require both regulators to use their new powers to make rules of conduct specifically about the conduct of individuals responsible for preventing money laundering or other financial crime. I am not sure what these changes would add. The Fraud Act 2006, the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007 already bite on bank senior managers. Adding regulatory rules mandating compliance with statutory requirements would add little. Further, the regulators already have a power to make conduct rules applying to persons in banks who have responsibility for compliance with money laundering regulations and other laws creating financial crimes. We certainly expect the regulators to use this power to make rules about aspects of conduct that include ensuring that firms comply with their obligations relating to money laundering and preventing financial crime. However, to single these areas out in primary legislation adds little bite to the existing regime and is, we believe, unnecessary. I hope, therefore, that noble Lords will agree not to press those amendments.

I also assure the noble Lords, Lord Brennan, Lord McFall and Lord Watson, that Amendment 54A is unnecessary. The reference to an application for approval in a context which refers to a person approved under Section 59 of FiSMA already always means an application under Section 60. There is no other section under which such an application can be made. I hope, therefore, that the noble Lords will agree not to press their amendment.

Finally, I turn to Amendment 100, tabled by the noble Lords, Lord Eatwell and Lord Tunnicliffe. This amendment is the same as an amendment brought forward on Report in another place. The government amendments, which implement the commission’s key recommendations, go much further than the noble Lords’ amendment, which would really just rename the existing approved persons regime as a “licensed persons regime”, and that is all. It would not deliver the real improvements sought by the parliamentary commission. I hope therefore that the noble Lords will agree not to press this amendment. I beg to move Amendment 45.

[Lord Turnbull]

My Lords, an important finding of the commission was that the existing approved persons regime was flawed. After a debacle wiping billions of pounds off the value of shareholdings, requiring the state to inject billions of pounds into the industry and take huge financial exposures, and after several serious lapses of conduct, according to my researches one person has been fined and another person has negotiated an agreement not to practise.

Our conclusion was that the APR operates mostly as an initial gateway to taking up a post, rather than serving as a system through which regulators can ensure the continuing exercise of responsibility at the most senior levels within banks. A major cause of this flaw was that responsibilities were ill defined and were not joined up, so that those at the top could claim they “didn’t know” or, “It wasn’t me”.

We proposed a two-tier system: a senior persons regime, now called a senior managers regime, covering a meaningful chain of accountabilities, which we wanted to apply to all banks and holding companies operating in the UK; and, below that, a licensing regime, where no prior approval from the regulator would be required to employ anyone but banks would have to take responsibility for ensuring that those they did employ were properly qualified and trained and that they observed a code of conduct. This would apply to those who could seriously damage the bank or the bank’s reputation or harm a customer’s reputation.

The commission welcomes many of the Government’s proposals: defining the functions of senior management; requiring senior managers to have a statement of responsibilities; extending the limitation period for regulators to take enforcement action from three years to six; recording information on a person’s regulatory history so that a new employer can find out important details about whom they are recruiting; and the reversal of the burden of proof on whether a person is fit and proper.

However, serious issues are left unresolved. Amendment 55 provides a definition of a bank to which the regime applies. I found it impossible to discover what the definition means. Does it meet the commission’s objective of covering all banks and holding companies operating in the UK? Would the Minister clarify what he means by “bank”? Could it be a ring-fenced bank, a non-ring-fenced entity conducting investment activities within a group, a whole group or a freestanding investment bank? In our view, the new senior managers regime should apply to all such entities. It would make a mockery of the scheme if, as I suspect may be the case, it applied only to banks taking deposits from the general public—that is, ring-fenced banks. It would be completely unacceptable if the regime did not apply, for example, to the senior managers overseeing the LIBOR traders, to those overseeing rogue traders such as the “London Whale”, to those overseeing the marketing of highly dubious packages of sliced and diced mortgages or to those engaged in the mis-selling of interest rate swaps. I very much hope that the Minister will be able to give us an answer today or address this between now and Report.

There is no mention of the licensing regime, which the commission recommended. The Government said that they would ensure that regulators had the ability to take regulatory action against persons who were not senior persons—senior managers—or who were not subject to prior regulatory approval. There is no mention of the licensing regime in the government amendment. They have come up with something rather different in Amendment 53 on the rules of conduct. It states:

“If it appears … necessary or expedient for … advancing one or more of its operational objectives, the FCA may make rules about the conduct of the following persons”,

and those persons could be any employee of the bank.

I question whether that is the right answer. It is “may” rather than “must”, but I should have thought it essential that the FCA made rules. Is it right that it should apply to all employees from purely backroom or administrative staff? In some ways, the government scheme goes wider but it is possibly too permissive.

The final omission to highlight is that we propose that as well as an initial statement of responsibilities for each manager, there should be a handover note when people change jobs. We think that that is crucial because without it the chain of accountability breaks down, and when someone changes jobs we are back to, “I didn’t know”, or, “It wasn’t me”.

[Viscount Trenchard (Con)]

I intervene to ask the Minister to comment on some concerns that I have about this new “approved persons” or senior managers’ regime. First, I am worried that it will place British banks at a considerable disadvantage when they try to recruit the most talented managers available, not just from the United Kingdom but from around the world. Everybody agrees that bank management failed, so it is clear that the supervision of senior mangers needs to be enhanced and improved. For example, someone may be offered a job to work in Hong Kong, where he would probably pay less tax anyway, and he is unlikely to run the risk of being individually liable or culpable in that jurisdiction. I am not sure which other jurisdictions intend to introduce some kind of senior managers’ regime such as this.

My second concern is that it seems to me that it is up to the manager to prove that he was not negligent in the exercise of his responsibilities. It is wrong that a senior manager should be deemed to be guilty unless he can prove his innocence. My third concern is that to increase the individual responsibilities of senior managers will have the unintended consequence of diminishing the responsibility of the board of directors as a whole, or the executive committee, risk committee, or whichever committee it may be. I have sat on an executive committee of a bank and often the business being discussed was not my responsibility, but I felt that I should understand what was going on and what the discussion was about because I was collectively responsible as a member of that committee. What worries me is that if it is very clear that the individual manager is going to be responsible, that effectively diminishes the responsibilities of the other members of the committee. It also diminishes the ability of the chief executive to change the responsibilities of his senior team based on his judgment, because it would be too complicated as each department or division would effectively be under the supervision of people outside the chief executive’s control. Can the Minister comment on these points as well?

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[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.

[Lord Turnbull]

If a bank divides itself under the new regime into a ring-fenced bank which takes deposits and puts its investment activities—derivatives, underwriting and proprietary trading—into a non-ring-fenced bank which does not take deposits, does it mean that that mass of activity will not be covered by the regime? Much of the malefaction took place in that area.

[Lord Newby]

My Lords, I repeat: it is limited to banks that take deposits, because the view is that they are of a different order of significance in the system. I think that we have a difference of view.

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[Lord Turnbull]

The question then becomes, “Should it be those areas?”, and a question of whether the Minister will take this back to the Treasury and come up with a scheme that includes them. I do not think it will be understood that the people supervising some of the activities that I mentioned are not covered by it. We are actually weakening the regime.

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[Lord Turnbull]

My Lords, this is another example of where we should be careful what we wish for. The Treasury committee and the parliamentary commission both welcomed the Government’s damascene conversion —that was what it was called in our report—announced in the Budget last year to create a payments regulator. However, this has been done in a quite extraordinary way with some 40 pages of amendments having been produced only two or three days before we were due to examine them. Although the new clauses were published following a process of consultation, there does not seem to be time for anyone in Parliament or anyone affected by them to scrutinise them. How can we tell whether what has been drafted is workable, reflects the views expressed in the consultation or will deliver what the Government want? From a procedure point of view, the usual channels might consider whether the gap between Committee and Report might be rather longer than normal so that we get a chance to look at not just this but also at the bail-in provisions as we have only had a small amount of time to consider them.

Through much of the consideration in Committee my view has been pretty close to that of the noble Lord, Lord Eatwell. However, as regards whether this body should be independent or part of the FCA, I am in the other camp. One of the key features here is that there is doubt about whether competition comes high enough up the FCA’s priorities. We shall come to later amendments whereby the parliamentary commission wanted to push competition higher up the FCA’s priorities. The proposal before us serves the interests of competition better than by making the body under discussion another department within the FCA, so there is another side to the case.

[Lord Flight]

I support these amendments. The biggest part of the Bill is concerned with creating competition in the banking industry. The thought had crossed my mind that we are proliferating yet another regulator but I am persuaded by the argument advanced by the noble Lord, Lord Turnbull, that it might get lost within the FCA which has many other things to focus than competition. However, I make the small point that in the past year the Payments Council has done a good job in bringing in the ability to transfer a bank account within seven days. Although the new body will be more representative, the Payments Council should not be overcriticised for what it has achieved while it has existed.