Financial Services (Banking Reform) Bill

Debate between Lord Watson of Invergowrie and Lord Newby

Tuesday 26th November 2013 Lords Chamber

[Lord Newby]

My Lords, I am grateful to the noble Lords, Lord Sharkey and Lord McFall, for raising this very important issue again. The Government wholeheartedly agree that consumers must be protected when they borrow from payday lenders and use other high-cost forms of credit. Payday lenders are causing unacceptable consumer harm and the Government are committed to putting that right.

As noble Lords will know, the Government have taken decisive action to protect borrowers by fundamentally reforming the regulatory system governing these lenders. This House strongly supported the Government’s proposals to transfer the regulation of consumer credit to the FCA during the passage of the Financial Services Bill last year.

The Government have ensured that the FCA has robust powers to protect customers of high-cost lenders. It will thoroughly assess every lender’s fitness to continue to trade. It will put in place much higher standards that firms will have to meet, and those requirements will, for the first time, be binding on firms. It will proactively monitor the market, focusing on the areas most likely to cause consumer harm. The FCA has a broad enforcement toolkit to punish breaches of the rules: there is no limit on the fines it can levy and, crucially, it can force lenders to provide redress to consumers.

The FCA takes up its new regulatory responsibilities in this area on 1 April next year. But it has already demonstrated that it is serious about cracking down on high-cost lenders. Its draft rules, published on 3 October, restrict some of the practices that cause most consumer detriment, and have won widespread support. But we are convinced that further action will be needed to ensure that this market functions in a way that is in consumers’ interests. As noble Lords will be aware, the Government have announced that they will bring forward an amendment to this Bill at Third Reading to require the FCA to use its powers to cap the cost of payday loans.

I will not pre-empt our discussion at Third Reading but I would just like to make a few key points on the need for a cap on the costs of credit. The Government have always kept the case for a cap under review as the market has evolved. With growing evidence, including from other countries, in support of a cap, we believe that now is the right time to give the FCA a clear parliamentary mandate to take action under the powers we have given it to implement a cap on total costs.

The FCA has an important job to do: it must ensure that it designs a cap that works in UK consumers’ best interests and fits the UK market. To do that, it needs to consider the evidence thoroughly, including drawing on the valuable work being undertaken by the Competition Commission to investigate the fundamental problems in the payday market. As the noble Lord, Lord Sharkey, has already pointed out, we do not intend to wait until the Competition Commission has finished its work and have committed to implementing the cap in January 2015.

The Government’s commitment this week sends a strong message to lenders: “Do not wait for the authorities to act, raise your game and start charging and treating your customers fairly now”. We will have a full debate on the government amendments at Third Reading—

[Lord Watson of Invergowrie]

I thank the Minister for giving way. He made the point about treating customers fairly. I understand that he is making a broader point but I noticed that he was nodding a few minutes ago when I spoke about the potential damage to somebody trying to get a mortgage, having taken out a payday loan. Does he agree that some way should be found of ensuring that specific information is given to those taking out a payday loan so that they do not affect their ability to handle other aspects of their financial affairs?

Financial Services (Banking Reform) Bill

Debate between Lord Watson of Invergowrie and Lord Newby

Tuesday 26th November 2013 Lords Chamber

[Lord Watson of Invergowrie (Lab)]

My Lords, I am pleased to associate my name with all five amendments in this group, but I also want to speak to some extent about the FCA note which appeared at about 9 o’clock yesterday evening—typically late in the day, not just literally, as regards the progress of this Bill. I reiterate the point made by my noble friend Lord Brennan that the Government have provided no grounds for reassurance that their amendments adequately deal with the serious issue of anti-money laundering. The fact that the Minister’s promised letter of comfort has not materialised demonstrates that the House should be concerned by the absence of any coalition assurances on this crucial issue. I am not sure whether the FCA note is intended to be in place of such a letter, and I will come on to that later. However, I said in Committee that not only were the Government naive to assume that the amendments we tabled then were unnecessary, they were also complacent. I very much regret to say that the failure to produce the letter setting out the Government’s position which my noble friend Lord Brennan was promised clearly suggests that that complacency remains intact.

We also heard in more general terms in Committee about the devastating human cost caused by the banks’ failure to comply with anti-money-laundering laws. That has not been mentioned this evening but it bears repeating: it is not just a question of what happens in relation to the financial sector in this country but also of money laundering that often amounts to the state looting of developing countries’ aid and haemorrhages billions of pounds from their national budgets, trapping millions of the world’s poorest people in extreme poverty. However, as mentioned in the previous debate, it also threatens the economy of the UK. The integrity of our financial system is hugely compromised by banks failing to prevent access by the worst types of criminals from around the world, whether they be corrupt dictators, drug smugglers, arms dealers or terrorists, as other noble Lords have said. This shows that the stakes could not be higher. I wish that that were reflected in action taken by the Government to counter this problem. It makes their lack of willingness to deal meaningfully with the issue quite unfathomable. Their continuing naivety is potentially dangerous. I apologise for using the word “naivety” again but I feel that I have to do so.

As the noble Lord, Lord Phillips, rightly noted in Committee, should there be any doubt, following the Minister’s letter, about whether the Government’s amendments adequately dealt with money laundering or not, the House should err on the side of caution and choose the alternative amendments. We now know that no such letter has materialised. My noble friends and I have taken great care to move new and refined amendments which reflect the extensive and helpful debate in Committee. In stark contrast the Government have not even offered the explanation they promised. This should leave the House in no doubt as to which set of amendments should be favoured.

I turn to the note from the Financial Conduct Authority that appeared yesterday evening. My noble friend Lord Eatwell said in his opening remarks on Amendment 3, I think, that everything seemed to be done at the last minute as far as the Bill is concerned, and that has been very much the pattern since it first appeared. It is unhelpful in terms of enabling noble Lords to respond meaningfully to new information or, indeed, to draft amendments. It is not clear whether the FCA note on its anti-money-laundering supervision and the new senior managers regime proposed in the Bill is in lieu of the Minister’s letter to my noble friend Lord Brennan, as I said earlier. That letter was intended to outline why the latter’s amendments seeking the explicit inclusion of anti-money laundering in the new senior persons regime and other personal liability mechanisms were unnecessary because the government amendments implicitly did this. However, I submit that the note does not achieve what is required; namely, a guarantee that the FCA will include anti-money-laundering compliance as a key risk and make every bank name a senior banker with personal responsibility for it.

The FCA’s note is largely about what it does and has done, and even refers to what the FSA did. There are just two paragraphs at the end which focus on the proposed new senior managers regime. As the Bill stands, this could give the FCA the power to hold named, individual senior bankers accountable for failures to uphold key standards and risks. However, it seems to me there is a loophole in the Bill which means that it will be left open to the FCA’s interpretation as to whether it uses this power and insists that anti-money-laundering compliance should be one of the issues covered. The note does not indicate that the FCA will include this. It uses terminology such as, “We will consult”, “This will allow firms”, and it, “will help regulators”. These are key phrases in any document but I suggest that they are weak, possibly ambiguous and certainly open to interpretation. I believe that the word “consult” simply means that the outcome is by definition not certain. We should require firms to do something, which is a stronger word than “allowing” them to do something.

My next example is fundamental to the way we deal with anti-money laundering. Instead of the phrase, “for example, anti-money laundering systems”, we should state unequivocally, “including anti-money-laundering systems”. The language that is used is permissive and uncertain rather than being mandatory, which is what I and the noble Lord, Lord Brennan, seek to achieve with these amendments. The content of the note is disappointing and it would be helpful to have clarification of whether it is provided in lieu of the Minister’s letter.

I believe that anti-money laundering compliance should be included as one of the areas of responsibility that is allocated to a named senior banker under the new senior persons regime, is written into the banking standards rules to which staff at banks will have to adhere, and should be one of the conditions of the new remuneration code which makes deferred pay and bonuses contingent on upholding standards. Will the Minister, on behalf of the coalition, ensure that these important requirements are included?

[Lord Newby]

My Lords, we are dealing here with an issue that everybody realises is an extremely important one in terms of the way banks behave and the way that they are seen to behave. As the noble Lord, Lord Eatwell, pointed out, the importance of money-laundering in financing terrorism has given it an added twist.

These amendments are an expanded version of an amendment tabled by the noble Lord, Lord Brennan, in Committee. Since then, my colleagues in the Treasury have met the noble Lord and explained their view of his original amendment. I hope I can convince the House that the Government’s approach meets the requirements which the noble Lord, Lord Brennan, seeks to impose. These amendments would expand the scope of the senior managers regime to include all persons who are responsible for ensuring that a firm complies with specific obligations under the criminal law, irrespective of the level in the organisation at which they work.

No one doubts the importance of robust action to tackle financial crime such as money-laundering, but I can assure your Lordships that these amendments are not necessary to ensure that financial crime is adequately addressed under the reforms that the Government are bringing forward.

These amendments would bring subordinate staff with relevant responsibilities within the scope of the senior managers regime. That could lead to confusion at least and is contrary to the PCBS recommendation to narrow the senior persons regime to very senior people, and parts of the regime, such as the reversal of the burden of proof, make sense only when applied at the senior level. It is not necessary to bring subordinate staff with specific responsibilities for financial crime within the senior managers regime in order to ensure that these staff are subject to enhanced regulatory scrutiny. It will still be possible for the FCA to ensure that appointments of persons to be money-laundering reporting officers, for example, will be subject to prior regulatory scrutiny and approval under the approved persons regime, if that is considered appropriate, and then subject to rules and standards applicable to their role. This is because the approved persons regime is being retained for financial services firms that are not banks. It is also being retained within the banking sector for appointments below senior management level. The Government have always considered this necessary as there may be critical roles below senior management level with important responsibilities for consumer protection, market integrity or preventing financial crime where prior regulatory scrutiny of appointments remains necessary.

In addition, of course, the regulators will have the ability to make rules of conduct for bank employees who are not approved persons. This will mean that rules of conduct can be applied to staff with more limited roles in preventing financial crime in banks, as well as to approved persons and senior managers.

There is also no need to refer explicitly to breaches of the criminal law to bring senior managers with relevant responsibilities within the scope of the senior managers regime. Under the Government’s proposals, a function can be designated as a senior manager function if a person holding it would be responsible for aspects of the bank’s business that could involve serious consequences for the bank, or for business or other interests in the United Kingdom. There is no doubt that a serious breach of criminal law could have serious consequences for the firm as well as for other people. So senior managers in this area would be covered by this new regime.

The noble Lord, Lord Brennan, asked me three specific questions and for assurances on those points. First, he asked me to confirm that there was no reason to doubt the reliability of the conclusions of the FCA paper. There is no reason to doubt them. Secondly, he asked whether the FCA was properly financed to undertake the level of activity required for it effectively to fulfil its responsibilities under the rules on money-laundering. The FCA budget, as he will know, is funded by the sector as a whole. The FCA is therefore unconstrained, in practical terms, regarding its budget. It is for the authority to determine the resources that it thinks it requires and it can then get them. So no budgetary constraint is imposed on the FCA which reduces its ability to employ as many staff as it feels it wants in this area. Thirdly, he asked whether the FCA represented government policy. The FCA does represent government policy. I am sorry that the note was transmitted later than would ideally have been the case but that in no way undermines its significance as a definitive statement of government policy in this area.

I recognise the concern that noble Lords had in Committee, and still have, in this area. It may be of some minor comfort to know that since Committee I have had a meeting with one of the senior relevant staff at one of the largest UK banks to discuss whether, in its opinion, the FCA was pursuing money-laundering with greater rigour than had been the case in the past. The bank said that the FCA was doing so. It also said that the bank itself had recognised that it simply had to give greater priority to this area.

Two things must happen if we are to achieve the level of compliance that the noble Lord would like. The first, which the noble Lord has concentrated on now, is that the FCA has to do its job properly. As I say, it is putting more resources in and is being, as it states in its list of objectives, more intensive and intrusive. Secondly, as we have discussed in relation to a number of other areas, the banks have to accept that they must adopt a zero tolerance approach to money-laundering. It is clear from the evidence which the parliamentary commission received, and from much other evidence, that this has not always been the case. I believe that the banks are giving a priority to this that they have not done in the past. Is it adequate? It is a great improvement, but it will take some time to be fully clear about whether it is adequate. However there has been a sea change which has been effected in part by the regulatory regime and in part by the pressure put on the banks by a whole range of external stakeholders, not least your Lordships’ House.

The noble Lord, Lord Eatwell, suggested that a further letter might be of help between now and Third Reading to confirm the exact position. I am happy to agree to provide a letter in the terms that the noble Lord suggested. With that assurance, I hope that the noble Lord, Lord Brennan, will feel able not to press his amendments.

[Lord Watson of Invergowrie]

Perhaps the noble Lord could clarify something. He made it absolutely clear that the FCA note represents government policy. It therefore seems strange that that policy is allowed to be as—shall I say?—ambiguously worded as the FCA note is. It is of concern that it is left that way. Will he commit to write to the FCA before Third Reading to ask it to make anti-money-laundering explicit in the personal responsibility requirements of senior bankers?

[Lord Newby]

My Lords, I will cover that issue in my letter. I am sorry that the noble Lord thinks that the FCA note is ambiguous, because the fact that it is giving greater priority to this issue and being more intrusive and energetic should give him some comfort. However, as I say, I will write to him.

Financial Services (Banking Reform) Bill

Debate between Lord Watson of Invergowrie and Lord Newby

Wednesday 23rd October 2013 Lords Chamber

[Lord Watson of Invergowrie (Lab)]

My Lords, I support my noble friend Lord McFall and his colleagues on Amendment 98. I am also in favour of the two amendments tabled by the noble Lord, Lord Phillips of Sudbury. My noble friend drew on his experience as a member of the banking commission when he talked eloquently about the serious matters behind LIBOR and the other issues that contribute to the need for serious whistleblowing legislation to protect those who are, in effect, doing the country a great service.

In reading out those e-mails, my noble friend Lord McFall described the situation very graphically. At one stage I thought that he was going to break into the voice of Robert de Niro or Al Pacino, but his dulcet Dunbartonshire tones were sufficiently menacing to get across the message that the people involved in this crime were playing no games at all, and that it was very serious.

The seriousness of the whole question of LIBOR was brought home to many of us yesterday when we opened our newspapers and saw photographs of people who had been appearing in court charged with offences related to the LIBOR scandal. The first thing that struck me was that the people were relatively young. The “ringleader”, if that is the appropriate term, is barely in his thirties now and was in his twenties in 2008 when the offences were committed, and the other two are not much older. Surely there were older, more experienced people further up the chain who must have known what was going on. If they did not know, they certainly should have done. That is the heart of the matter with regard to whistleblowing. Those responsible have to be held to account.

Amendment 98 works by adding excluded activities under FiSMA or the Financial Services Act 2012 to the list of justifications for making what is known as a qualified disclosure. As noble Lords may know already, the list includes reporting that someone’s health and safety is in danger, damage to the environment, and a criminal offence that a company is not obeying the law or that someone has covered up wrongdoing. Those are generic terms, but many of them would apply to the finance sector. For the new banking system to work well and be policed effectively, protections have to be in place for staff who believe that wrongdoing exists in their organisation and they are not prepared simply to sit on their hands or, as happens in many cases, simply leave the job in the hope of finding employment somewhere else because they fear the consequences of raising the issue.

This amendment is a further attempt to trigger a cultural change in financial services, which I think noble Lords on all sides have acknowledged is necessary. A bank employee may well wrestle with their conscience before deciding to break ranks; it is inevitable that they would. If an honest trader suspects that wrongdoing is under way and is considering informing the authorities, surely protections have to be in place for him or her to guard against a situation where they are held to be at fault. They are the victim because they perhaps lose their job, which in banking, of course, could be a very well paid job indeed. Once the word goes round that someone has left a bank or financial institution for this reason, how difficult will it be for him or her to find other employment?

The LIBOR scandal illustrates the importance of making it easier to report wrongdoing. At the time that we now know the LIBOR rate was being manipulated, certain newspapers did speculate about the accuracy of those claims, and indeed about the accuracy of the LIBOR rate itself. But as we know, no one came forward because no one had the confidence, even if they had the evidence, to break the surface and bring the scandal out into the open. It would have been much easier had it been brought into the open then rather than when it eventually emerged. Surely it is essential that people feel confident about being able to do that in the future.

Amendment 98 simply seeks to bolster the maintenance of law and order, something that I suggest we are entitled to expect that the Minister and his colleagues would agree with. The amendment would make it easier for the regulator and banks’ own compliance teams to do their job. We have heard from my noble friend Lord Brennan that this is being done very effectively in the USA. How could the coalition oppose it being introduced in this country as well?

[Lord Newby (LD)]

My Lords, the amendment would introduce a system under which the regulators would be able to award compensation against a firm that mistreated a whistleblower. Whistleblowing is an important issue and the Government agree that we need to have a proper system for protecting whistleblowers in the financial services industry as elsewhere. However, I do not think that the noble Lord’s amendment would be a helpful addition to the legislative framework, particularly at this point. Let me explain why.

In the summer, the Government launched a call for evidence on the whistleblowing framework to see whether there was a case for reforming the law protecting whistleblowers. This will be able to take account of submissions from the financial services regulators as well as from other interested parties. The call for evidence closes on 1 November and, once the evidence has been assessed, the Government will consider what if any action needs to be taken. It would not be sensible to prejudge the outcome of the call for evidence and implement changes without first looking at all the evidence available to support any changes. Moreover, the Government do not think that it would be appropriate to have different laws or protections for whistleblowers in different sectors. It would not be right to suggest that whistleblowers were more deserving of protection in some sectors than in others. I am sure that this is not what the noble Lord intended, but there is a risk that giving the regulators a special role in protecting whistleblowers in the financial services sector will be seen as special treatment for that sector.

Finally, this power does not seem consistent with the role and competence of the financial services regulators. There is a comprehensive system of protection for employees in employment law, which applies across the board, protecting workers in every sector. It provides a route of redress using employment tribunals for individuals who have suffered a detriment or dismissal as a result of blowing the whistle.