Financial Services (Banking Reform) Bill

Andrew Love Excerpts

Monday 8th July 2013 Commons Chamber

[Greg Clark]

This group deals with some of the recommendations of the first report of the Parliamentary Commission on Banking Standards, which was published on 21 December last year. The Government agreed to bring forward amendments on Report to implement those recommendations, and those amendments are amendments 1 to 4, 6 to 10 and 11 to 16. I will turn to them in a few moments, but the amendment proposed by my hon. Friend the Member for Chichester (Mr Tyrie) relates to his parliamentary commission’s final report on standards and culture, which was published on 19 June, and it therefore provides a perfect opportunity—as I suspect my hon. Friend intended—to say something about that further report and how the Government intend to implement its recommendations.

The Government warmly endorse the report. It is a landmark piece of work and I commend its unflinching, clear-sighted assessment of the damage done to the reputation of banking in this country and all around the world.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

The parliamentary commission requested the Government to consider giving their response—and tabling amendments —well in advance of this Report stage, yet that has been given only this afternoon. Why are we faced with having to absorb this document at very short notice?

[Greg Clark]

I pay tribute to the hon. Gentleman for the long hours he has devoted to the work of that commission. The Government did indeed make a commitment on Second Reading and before then to make use of the Bill before us to take forward the recommendations of the commission. It was always intended that that should be at the House of Lords stages of the Bill, but I will have more to say about that in a few moments. We will absolutely give the required time to consider those amendments and to make use of a Bill that is before the House, enabling us to respond rather than wait for a further piece of legislation.

The commission’s central judgment is absolutely right:

“High standards in banking should not be a substitute for global success. On the contrary, they can be a stimulus to it.”

When I visited Germany late last year, I picked up a copy of Handelsblatt and was struck by a double-page spread with a picture of the City of London and the headline, in English, “City of shame”. That shows the impact of the events of the financial crisis and subsequently on the reputation of this country’s banking system. Exactly as the commission says, if we are to restore the system’s global success, as we must, it is imperative that we improve its standards.

Therefore, in response to the commission’s report, I can confirm today that the Government will strengthen individual accountability by introducing a tough new regime that is recommended to cover the behaviour of senior bank staff; introducing new rules to promote higher standards for all bank staff; introducing a criminal offence for reckless misconduct by senior bankers—those found guilty could face a jail sentence; working with the regulators to implement the commission’s proposals on pay, specifically to allow bonuses to be deferred for up to 10 years and enable 100% clawback of bonuses where banks receive state aid; and reversing the burden of proof so that senior staff are held accountable for regulatory breaches within their areas of responsibility. We will also ask the regulators to implement the commission’s key recommendations on corporate governance. That will ensure that firms have to have the correct systems in place to identify risks and maintain standards on ethics and culture.

We will support competition in the banking sector by providing the Prudential Regulation Authority with what the commission asked for, which was a secondary competition objective to strengthen its role in ensuring that we have banking markets that benefit from the vigorous competition that delivers good outcomes for consumers. That will be in addition to the Financial Conduct Authority’s existing competition objective. In addition to introducing seven-day account switching later this year, the Government will ask the new payments regulator, once established, urgently to examine account portability and whether the big banks should give up ownership of the payment systems. The Government have also implemented the commission’s recommendation to conduct a review to look into the case for splitting RBS into a good bank and a bad bank containing its risky assets.

When the commission’s final report was published on 19 June, I undertook to provide an accelerated Government response by way of a Command Paper before the summer recess.

[Mr Love]

The press release that was—

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

On a point of order, Mr Speaker. I rise to seek your guidance, because the Minister is making, in effect, a statement on a series of Government policies related not to clause 1 or amendment 1 but to policy areas where amendments have not yet been tabled. Is that in order? Should this not have been done in the proper way—making a statement and allowing the House to ask questions in the normal way?

[Greg Clark]

I thought that I had explained the context at the beginning, which was that the amendment tabled by my hon. Friend the Member for Chichester deals specifically with the recommendations of the final report on the culture. As I said, I suspected that he had tabled the amendment in order to afford us the opportunity to debate these matters. I will move on to deal with the other amendments in the group if the House would prefer it.

[Mr Love]

May I seek some guidance from the Chair? I was about to ask a question pertinent to the discussion—

[Mr Speaker]

The hon. Gentleman is absolutely right; he has been a model of restraint, on which we congratulate him. He was in mid-intervention and we do not wish to have his aircraft come down prematurely, so let us hear it.

[Mr Love]

My question relates to the issues covered by my right hon. Friend the Member for Wolverhampton South East (Mr McFadden) and the list of policy positions recommended by the parliamentary commission. The press release that accompanied the Government’s document today states that they endorse “the principal findings”. Would the Minister care to tell us which findings they do not endorse?

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[Greg Clark]

It is certainly true that the hon. Member for Nottingham East is seated, and it is also true that he was chuntering. My hon. Friend the Member for Hexham (Guy Opperman) has done the House a service in reminding it of the voting record of the hon. Member for Nottingham East, seated or otherwise.

The amendments clarify that the PRA must seek to minimise damage to the continuity of core services caused by the failure of a ring-fenced bank or any other member of its corporate group; an investment bank could, for example, suffer losses that threatened the whole group with bankruptcy. Amendment 1 requires the PRA to minimise the harm to the continuous provision of core services caused by the failure of other group members, as well as of the ring-fenced bank itself.

Amendment 2 clarifies that the failure of a group company includes its insolvency. Amendments 3 and 4 reflect those same changes in the remit of the FCA, in the unlikely event that the FCA ever became the prudential regulator of any ring-fenced bank. I hope that the House will welcome those amendments, which the Committee that scrutinised the Bill and the Parliamentary Commission on Banking Standards suggested.

[Mr Love]

I thank the right hon. Gentleman for being so generous in giving way. I want to take him back to the discussion about regional banking, because one of the parliamentary commission’s recommendations was that the Government should consider measures to break up RBS into regional banking. I seek his reassurance that the Government have not forgotten that recommendation.

[Greg Clark]

It delights me to hear the hon. Gentleman refer to today’s publication; it confirms what I thought and hoped, which was that the publication would inform the debate. I think that tomorrow we will come on to clauses that deal with precisely those matters.

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The proposal for a further power is a much diminished version of the process that has been undertaken to produce this policy. It would bypass the process of meticulous consultation, consultation of experts and parliamentary scrutiny that ring-fencing will have had, certainly by the time the Bill reaches the end of its parliamentary passage.

[Mr Love]

The parliamentary commission consulted widely and there was considerable concern about the weaknesses and the ring-fencing that had been suggested by Vickers. That resulted in a proposal for electrification. Is the right hon. Gentleman secure in the view that we have electrified the fence enough on the basis of the amendments he is proposing today?

[Greg Clark]

I will be even more secure when I have persuaded the hon. Gentleman, as I hope to do. He, being a fair man, will reflect on the fact that his distinguished commission undertook pre-legislative scrutiny of the proposals made by Sir John Vickers and his commissioners. Sir John did not recommend that there should be the power to separate. In fact, he has been persuaded by the institution-specific power of separation that his commission proposed, but has reflected in evidence to his commission that to go further and introduce a system-wide power is a separate matter and should come before Parliament in an explicit way rather than, as would be the case here, through a statutory instrument following an independent review.

The proposals before us, most fair-minded colleagues would concede, fall very far short of the degree of scrutiny and rigorous assessment, including by the hon. Gentleman’s commission, that the current proposals have gone through. Parliament would not have the ability to present amendments to proposals and at that stage to take account of the recommendations even of the independent review. So the procedures proposed are less than adequate to the scale of the policy change that would be embodied in them. If we are to be serious about the need to respect the views and the role of Parliament—as I have made clear, these are important matters—we must accept that the only right and proper and democratic way of legislating for full separation is by coming back to Parliament with full primary legislation, including the rigorous process that we have undertaken.

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[Greg Clark]

My hon. Friend has some experience of these matters. I think that the debates about structure are important and that structural reform will make an essential contribution to making the system safe for the purposes of taxpayers. However, having looked into it, I think that to have hanging over the system the sword of Damocles—the origins of the metaphor were the subject of an erudite debate in the Commission—would introduce an uncertainty into proceedings that might distract from the important work of implementing the existing provisions.

[Mr Love]

The reality is that we are seeking to balance conflicting issues. One respects the Government’s view that Parliament should be supreme in this regard, but the alternative argument, of course, is the one that the Minister has just put to us, about the sword of Damocles keeping the feet of the banking industry to the fire. We know that the industry has not been entirely with us in relation to setting up the ring-fencing arrangements and that it needs some encouragement to make it work effectively.

[Greg Clark]

The hon. Gentleman gets to the nub of the matter, because of course any attempt to evade the ring fence or to nibble the electric fence, as dangerous to health as that would be, could be undertaken only on the part of a particular institution, not the system. That is why we agreed with the commission’s report—it was not part of the Vickers report—that it was necessary, for exactly the reasons the hon. Gentleman mentions, to have a sanction against that type of behaviour, and that is what we have done.

A further power to separate the whole system could not be triggered by an individual and could not punish the actions of an individual institution. That is why I think that is a very different policy. It commands the support of some very distinguished and influential people. The Glass–Steagall approach, which of course the policy is modelled on, has its place in history, but I think that history also reveals that the Glass–Steagall arrangements were not immune to the very dangers my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) pointed to. It is a good job my hon. Friend the Member for Chichester secured his amendment to the programme motion, because we are having a very interesting debate, but I would like to conclude, because there are other amendments that hon. Members would like to speak to. On that point, however, I urge the House not to allow at this stage the introduction of a very different policy into the Bill.

Let me turn to the amendments tabled by my hon. Friend the Member for Chichester, who I dare say will speak for himself in a few moments. I know that some of them were tabled to afford us the opportunity to discuss his commission’s report, and I think that this is now established as a very relevant opportunity. I will of course listen carefully to what he says. I am confident that the amendment the Government have tabled in response to the commission’s report can be improved during the Bill’s passage to take into account whatever concerns are embodied in his amendments.

Amendment (a) to Government amendment 6 would add a new condition under which the separation powers could be used: namely, when the regulator

“judges that there are serious failings in the culture and standards of the ring-fenced body or another member of its group.”

Of course, under the Government’s amendment the regulator would have the ability to separate the group if its conduct threatened to undermine the regulator’s ability to meet its continuity objective, but I think that, as the commission’s extensive deliberations showed, cultural failings might be present in banks that can result, for example, in significant harm to individual consumers or groups of consumers but nevertheless do not have systemic consequences. I think that the relevance of the proposed new power to take into account the culture is adequately covered under the provisions already in the Bill.

Amendments (b) to (p) concern the procedures for exercising the separation power. They would remove from the process: the second and third preliminary notice stages that extend to six weeks the time for banks to make representations; the requirement that the group be given a minimum of five years to effect separation; and the requirement for Treasury consent before a group can be required to separate. It is, of course, essential that a clear process be established for the exercise of the separation power. As I have said, I will listen carefully to what my hon. Friend says about reducing the number of warnings, which I think is the essence of what he is recommending, and about departing from the standard practice in financial services of allowing 14 days, rather than the six weeks that he proposes, for representations.

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[Chris Leslie]

It probably will, particularly if there is a change of Administration, but we will come to that in a couple of years’ time.

[Mr Love]

Some very eminent members of the commission are in the House of Lords, and I have absolutely no doubt that they will do a magnificent job of scrutinising the Bill. However, this is the democratically elected Chamber where most of the debate should take place, and it is incumbent on the Government to make time available for those at this end of Parliament to scrutinise it.

[Chris Leslie]

My hon. Friend is 100% correct, and we have made our point; I now want to move on to issues of substance. There is a lack of time and we have to finish debating this group of amendments by 7 o’clock. It is ridiculous that the commission spent hours on these matters but only a tiny amount of time has been allocated to debating them today.

Government amendments 1 to 4 seem to be generally welcome with regard to the extension of the regulatory perimeter and the definitions of the Financial Conduct Authority and the Prudential Regulation Authority. It is intriguing that amendment 4 centres on clarifying the definition of “failure”. It is very tempting to ask if they know what failure is, especially given their weak response to the parliamentary commission today, but I will move swiftly on.

Government amendments 7 to 10 also seem to be fairly unobjectionable, although there appears to be a drafting error in amendment 8. Why has the Minister decided that the proposed subsection (3) should be inserted ahead of subsection (2) of FSMA? Something seems to be amiss, but that is only a minor point.

More importantly, will the Minister talk about the tribunal to which a lot of the issues will be referred? What sort of tribunal will it be and where will it be situated? Will its work add to the functions of an existing tribunal? That is a small point, but I would be grateful if the Minister would address it.

Government amendments 11 to 13 seem to focus on drafting issues. I cannot really see what will be achieved by changing “subsidiary” to “body”, but I do not have anything to say about those smaller, drafting amendments.

The first main issue of substance relates to our amendment 17 on the need for a thorough review process of the ring-fencing of retail banks, such that it augments what ought to be the electrification of the ring fence. We suggested this in Committee and it was a clear recommendation of the commission. It would be better to have a proper and independent review of the adequacy of ring-fencing every two years. We think that a more robust review process would be better than the Government’s PRA-led approach. It would be inadequate for the regulators to lead the process. We need a broader and more substantial review process to ensure successive ring-fencing.

Ultimately, as the commission itself has said, the jury is out on whether ring-fencing will work. It is fine in theory, but in order to keep a close eye on things—especially as these issues fall out of the media spotlight, as they inevitably will in the years to come—we must have a process in place that makes sure that we test, watch and scrutinise what happens.

The commission was right to be disappointed with the Government’s response. It noted that

“the Government did not accept our recommendation on potential ‘electrification’ with respect to the sector as a whole. As our First Report noted, crucial doubts remain about whether all the intended reforms can be put in place and, even if they are, whether this will be enough to prevent the Government from having to step in next time a crisis hits. In particular, we identified the possibility that the partial separation of a ring-fence may prove insufficient.”

That is why we feel that a more rigorous and thorough review process that involves the commissioning of independent members to produce, together with the Chair of the Treasury Committee, a report for Parliament would be far more effective. I do not want to take words out of the mouth of the hon. Member for Chichester, but he is right to say that if we leave it to the PRA to do this job and do not have a proper and more thorough process, there is a danger that the regulators will simply end up marking their own exam paper.

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[Mr Andrew Tyrie (Chichester) (Con)]

I shall say a little more than I usually say in the House because these arrangements are quite central to the work of the banking commission and give me an opportunity— my first—to explain some of the reasoning behind that work. The two key amendments that I have tabled would empower the regulator to split up a banking group if there were serious failures in the culture and standards of the ring-fenced body or another member of its group. In deciding whether these serious failures have occurred, the regulator would be required to take account of the recommendations contained in the reports of the Parliamentary Commission on Banking Standards, which I chaired.

We produced five reports about a vitally important industry, one that has become embroiled in very serious scandals that have cost the consumer, taxpayers and the whole country a fortune. The parliamentary commission was the first of its kind for a century. The last, exactly a hundred years ago, collapsed in a heap of partisan acrimony.

We have produced five reports in under a year, all of which were agreed unanimously. We also put in an unprecedented amount of detailed work, taking evidence for 171 hours in no fewer than 76 evidence sessions, in addition to deliberating in private for a further 74 hours. I would like to thank my colleagues on the commission in both Houses for their huge contributions, injections of energy and endurance. I would also like to express my thanks for the equally impressive commitment of the commission staff and specialist advisers, led by Colin Lee and his two deputies, Adam Mellows-Facer and Lydia Menzies. Only the very limited time available prevents me from listing many more of the staff who put in so much work. I would also particularly like to thank the Front Benchers of all parties, who have offered a great deal of support.

The task now is to get the report implemented, primarily by regulators and banks, and, where necessary, supported by statute. The Government have today responded to the commission’s most recent report—our fifth. I have had a chance to flip through the response, but there has been no time to digest it fully—it is about 80 pages—and, of course, no time for anyone to table amendments as a result. In view of the extent to which it looks as if the Bill has been changed, I would be grateful if the usual channels could consider recommitting this Bill to Committee. Failing that, at the very least—as the my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) has said—an extra day should be provided for consideration of what will inevitably be a mass of Lords amendments. Bearing in mind the struggle that we had to get the half-day tomorrow, I hope that the Government will show more flexibility about this extra time.

Having said that, I warmly welcome the supportive tone of the pre-briefing given to the Financial Times about the publication that we have had today. Still, I would rather have heard about it here first. I am also very pleased that so many of the proposals and also the argumentation for them appear to have been accepted in full. But I am not fully reassured. The Government appeared to have accepted the commission’s proposal on a specific power to force the separation of an individual bank, but here we are, at the eleventh hour, trying to prevent the proposal from being severely weakened by the Government. In fact, as I will explain, the Government’s amendments would render the specific power of electrification virtually useless.

Some of the commission’s important proposals have not been accepted at all, for example on leverage, on which we support the recommendations of the Vickers commission, and on reform of the Bank of England’s antiquated governance structure, on which the commission supports the recommendations of the Treasury Committee.

Other ideas that the Government have rejected include the need to wind up United Kingdom Financial Investments Ltd and the regulatory reforms to provide statutory autonomy for the regulatory decisions committee. I find that especially regrettable. The Government have also rejected the proposal to remove the FCA’s strategic objective. No one can see much purpose to this except the Government. It can be used to trump the operational objectives of the FCA, including that of competition, and can thus serve only to weaken those operational objectives. On all those issues, I hope that their lordships will repair some of the damage that we have been left with no time to attend to here.

[Mr Love]

I agree with the hon. Gentleman that it is an offence to Parliament to read about the Government’s response first in the Financial Times. Give the mixed reception from the Government to our fifth report, we should have adequate time to discuss all the very important issues about which we deliberated for many days and which appeared in our recommendations.

[Mr Tyrie]

I strongly agree with the hon. Gentleman and I have already made both those points, which he just reinforced. All the amendments that I have tabled on behalf of the commission are about standards. Banking continues to suffer from the effects of poor standards. Even in the seven months that we took oral evidence, we had two more major LIBOR scandals, the interest rate swap scandal, a major bank found to be involved in money laundering in Latin America, and another fined $670 million for sanctions busting in Iran.

It is sometimes suggested that trying to do much about this will drive banks overseas. But all of the evidence we took pointed to exactly the opposite conclusion. Far from imperilling the UK’s global competitiveness, high standards will make the UK a more attractive place to locate. Many good things can flow from higher standards in banking, among them a restoration of trust. Trust is an essential buttress to the UK’s reputation as a global financial centre. It is also vital for the British economy. While banks are not trusted by their clients and particularly by SMEs, there will be less lending and less economic activity.

The crisis of standards and trust in banking—and it is a crisis—is multi-faceted, and so are the necessary remedies. None the less, the nub of the problem can be characterised as twofold. First, there has been a lack of individual responsibility at the top of banks. Collective decision making has diffused responsibility and a sense of duty to be vigilant. Secondly, there has been colossal failure of judgment by regulators, with an approach based on pointless data collection on a huge scale and needless box ticking.

In a nutshell, boards were negligent and the system of regulation was found seriously wanting the first time it was tested. Both boards and regulators were motivated by an understandable desire to cover their backs, but their lapses were inexcusable. The lack of personal responsibility in banks has been aggravated by misaligned incentives. By that I mean bonus and remuneration structures. They encouraged bankers to make short-term gains while the full risks and costs became evident only later. The taxpayer ended up picking up much of the tab.

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[Mr Redwood]

I think that we have wonderful agreement across the Chamber on this, which might hearten the Minister. We would be happier with 4% than with 3% in general terms, but we do not want to get there too quickly if that means a further jolt to expectations and confidence and further actions by banks to pull back loans, rather than financing the recovery that we clearly need from them.

[Mr Love]

One of the banking commission’s recommendations was that that should be devolved to the regulator to decide and that we should not set a target or a figure. The Government seem to be resisting that, and for the reasons that have been outlined in relation to growth and living standards. What does the right hon. Gentleman think about the proposal to give that to the regulator earlier than the Government suggest?

[Mr Redwood]

I think that a Government have to take responsibility for the big calls on economic policy. They can take very good advice from independent regulators and the Bank of England, and sensible Chancellors take good advice, but ultimately it is the Chancellor of the Exchequer and the Prime Minister of the day who have their names on all that, and the electorate will expect them to be responsible. I think that people believe in independent central banks and independent regulators up to the point where they get it wrong, and then they look to politicians to take the blame. We have just been through a period when the banking regulator, by its own admission, got it very visibly wrong.

[Mr Love]

The Government are suggesting that the regulators will get it wrong in 2018, and the commissions say that they will get it wrong a little sooner. Is this not an argument about timing and when the economy will be out of its current difficulties?

[Mr Redwood]

It is important that we should have proper discussion and informed debate, taking the best advice, so that we can try to get things right for a change. We owe it to all our electors and the economy generally to try to get the matter right.

Time is not generous, so I will be brief. My worry is that, under the previous Labour Government and in the early days of the coalition, we were running a strange policy in which, on the one hand, the Bank of England was trying to depress the vehicle’s accelerator by creating a lot of extra money and saying, “We really need to get some of this money out there to do some good in the economy.” On the other hand, the banking regulator was depressing the vehicle’s brake, saying, “No, you can’t possibly spend that money to create more credit and do more things. The priority is for the banks to sit on the money to have better cash and capital ratios. They probably need to wind down their loan books, which we think are too big.” My observation is that if we try to drive a vehicle with one foot on the accelerator and one on the brake, the brake normally wins.

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New clause 4 would enter on the statute book a concept that would add a great deal to ensuring that consumers could have that full confidence that their best interests were being served, and that those selling financial services products were doing so in a prudent and ethical manner. In terms of a stronger duty of care, the industry would have to take customers’ interests into account not only when designing the products, but when providing advice throughout their life cycle.

[Mr Love]

The current regime for the regulator is “treating customers fairly”, which is exactly what the banks did not do in the PPI scandal. Does my hon. Friend agree that we need something stronger, and that a duty of care is a step in the right direction, signalling that we need to do something about the scandals that have happened in the past?

[Cathy Jamieson]

My hon. Friend is right and he speaks with great experience, both because of the work he has done in this House and on the banking commission. He is right to say that the scandal of the PPI is exactly why today’s consumers want further assurances that the banking industry and the financial services sector are not simply about using consumers’ possible lack of knowledge or understanding of the system to turn a quick profit with no thought to the longer term, either for the individuals or for the wider financial sector. That is why we have tabled the new clause.

I suspect that the Minister may say much the same to me this evening as he said in Committee, as he felt that the amendment was unnecessary. Nor was it drafted in the most technically perfect way. However, it would be helpful if he were able to confirm that at the least the idea of a fiduciary duty—a duty of care—will be significant. I feel minded to test the will of the House on this new clause.

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[Cathy Jamieson]

As I am sure the hon. Gentleman is aware, I was not in this place or, indeed, a member of the previous Government. [Interruption.] I hear someone saying “Shame”. I do, however, think it would be appropriate to look at the circumstances in which we are operating at present. In the same way as the hon. Gentleman did not wish to be partisan, I will resist the temptation to make an incredibly partisan response. Instead, I simply say it is important that the Government look at this. I welcome the fact that they seem to be willing to move on this, and the parliamentary commission was very clear that:

“It is inappropriate that those found guilty of criminal recklessness should continue to benefit from remuneration obtained as a consequence of the reckless behaviour.”

That statement sits in the context of the issue of being able to claw back.

[Mr Love]

This recommendation emerged from an all-party commission, with all parties supporting it. It is important to remember that it has the effect of signalling that we treat so seriously the misdemeanours that have occurred in the banking sector that we deem that those found guilty should face a criminal sanction.

[Cathy Jamieson]

Again, my hon. Friend makes an important point that this is an all-party stance and that everyone on the banking commission took this issue seriously.

It is worth remembering that in response to a question from the Leader of the Opposition last month, the Prime Minister told the House that he would use this Bill to implement the report of the parliamentary commission. The Leader of the Opposition asked:

“Following the Parliamentary Commission on Banking, can the Prime Minister confirm that he supports its important recommendations on bonuses and criminal penalties, and that he will use the banking Bill to implement them?”

The Prime Minister responded:

“Yes, I do support both those measures...Penalising, including with criminal penalties against bankers who behave irresponsibly— I say yes. Also, making sure that for banks in receipt of taxpayers’ money we can claw back and have a ban on bonuses—I say yes too.”

The Leader of the Opposition then asked a further question, to which the Prime Minister replied:

“We will be using that Bill to take these important steps.” —[Official Report, 19 June 2013; Vol. 564, c. 883.]

I hoped the Minister would have been able to bring forward appropriate amendments or new clauses—or whatever is needed—at this stage, rather than leaving that to elsewhere. I hope he will be able to give us some further information on how the work will be progressed and when he now expects to give us more detail.

New clause 13 relates to the financial services crime unit in the Serious Fraud Office. We raised this issue in Committee, and my hon. Friend the Member for Nottingham East gave an eloquent description of some of the areas that an FSCU would be able to address. This new clause would require the Treasury to report on the establishment of the FSCU and to do so within six months of the Act coming into force.

I fear the Minister might sigh and think, “Here go the Opposition once again, asking for another report to be produced.” Before he says that or any Member seeks to intervene to make that point, I will say that the reason we are asking for these reports to be produced is to ensure that progress is made and that things do not just gather dust on a shelf somewhere.

We know we have to look at the resources available to tackle white collar crime. Financial products are becoming ever more complex, and they are being traded faster, and increased resources could enable specialist police officers to develop their expertise. There are huge financial incentives in looking at developing this, too. It is worth remembering that fraud costs Britain about £73 billion a year, according to the Home Office’s National Fraud Authority. As my hon. Friend the Member for Nottingham East recalled in Committee, Andrew Bailey, the PRA chief executive, said it was “more than odd” that bank directors had not faced formal charges over the events leading up to the crisis. The Serious Fraud Office has a bit of a mixed record on tackling the high-profile cases. The Home Secretary was forced to perform a bit of a U-turn on her plans to abolish the SFO. It is clear that the SFO needs to be improved. The LIBOR scandal again shows that misconduct in financial services can have ramifications for traders, for industry, for shareholders, for the reputation of the City and, indeed, for criminal law.

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[Richard Fuller]

I am very grateful for the opportunity to catch your eye, Madam Deputy Speaker. I wish to discuss the proposals in this group, particularly new clauses 11 and 2. I am not a member of the Treasury Committee, I was not a member of the Parliamentary Commission on Banking Standards and I was not even on the Public Bill Committee, so I hope that other hon. Members will permit me to make a few perhaps less-informed commentaries about these proposals on conduct and remuneration, and the issues they raise, and perhaps come at this from a different perspective.

May I start by thanking the commission for its work on this issue and, in particular, my hon. Friend the Member for Wyre Forest (Mark Garnier), who made an extraordinarily strong contribution? Collectively, they have a much greater claim than Goldman Sachs to have been doing God’s work on financial services. I thank the Government and congratulate them on their speedy response to the recommendations. I also thank the Minister for allowing us to see the document ahead of today’s debate.

I remember the evening when the membership of the commission was established. It was a late evening, and quite warm. It might have been 10.30 pm, 11 pm or even later and hon. Members were keen to get back to their duties in responding to their constituents. I got up to speak with some trepidation, as hon. Members were hoping that the membership would go through on the nod, to make the point that for my constituents in Bedford and Kempston the commission would fail in its duty if, as a result of its actions, nobody went to jail. It is in that spirit that I want to comment on the new clauses today.

[Mr Love]

I was present on that occasion and the commission took very seriously the point that the hon. Gentleman made.

[Richard Fuller]

I am grateful for that intervention. A lot in the commission’s recommendations reflects the seriousness with which it considered that point, and rightly so. In the intervening 12 months, I have dealt with constituents whose businesses have been put at risk because of the fraud of interest rate swap mis-selling and whose lives have been rent asunder by payment protection insurance mis-selling, and the Government have also taken action on the fiddling and fixing of LIBOR. Beyond that, some of us have been dealing with regulatory failures on Equitable Life. My view is that jail for such bankers and for those responsible is the only fair outcome for the victims of those scams. Despite the intervention from the hon. Member for Edmonton (Mr Love), I must still ask where justice is to be found for the victims of those crimes in the recommendations and in the amendments tabled today.

Banking is full of honest and decent men and women. As my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) said, one of the attractions of new clause 2 is that it focuses like a laser beam on the individuals who are responsible and culpable. If we fail to do that and those people do not go to jail, where is the justice for all the other people who work in financial services honestly on behalf of their clients every day?

It is not a habit of this House to consider retrospective legislation, but I want to mention that in a minute. First, let me ask the Minister a couple of questions. In the senior persons regime and the actions that would be covered by new clause 11, the focus is on named individuals at the top. As we saw in the interest rate swaps, a lot of the decisions made by the senior ranks at the banks were translated into budgets and business plans and transferred down through the hierarchy of the banks. Perhaps the Minister, when he considers the issue of conduct, could answer the question of how those extensions beyond the senior persons regime will be handled.

--- Later in debate ---

[Richard Fuller]

I must admit that I am not particularly familiar with Iceland—certainly not as familiar as the hon. Gentleman is—but he makes an important contribution. Other regimes look at things differently, and are far stricter than we are. Normally, we would look at how United States regulations dealt with some of these things. In the past, they have been more successful than they have been recently as regards criminal prosecutions in financial services. Many people in the United States were held criminally responsible for their actions in the savings and loans scandal; the same has not happened in this financial crisis.

I respect the work of the commission, and I am nowhere near as smart as it is on these issues, but I have to say that no one has gone to jail, and that is not good enough.

[Mr Love]

I will comment on the commission’s thought processes on some of the issues that the hon. Gentleman mentioned. He will remember, as we all do, the evening on which we set up a special parliamentary vehicle in the wake of the LIBOR rate-rigging scandal. Since 2008, there have been a variety of critical events, including the credit crunch and the recession. All that led to a catastrophic decline in the reputation of the financial services sector. Trust in bankers sank to an all-time low, and frankly LIBOR was the last straw. This was truly shocking behaviour on an unprecedented scale. Something had to be done, and the focus was very much on our terms of reference on standards and culture.

As a result, the commission had to answer some tough questions, and the hon. Member for Bedford (Richard Fuller) has posed some of them: why had so few bankers been held to account for their failings? Why had it appeared that bankers pocketed the gains, but passed on the losses to the taxpayer? Why were customers who should have been treated fairly treated in the exact opposite way—a point that my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson) raised? We tried to answer those questions through three themes that came out in our report. The first theme is individual responsibility.

When all the head bankers came before us, we were genuinely shocked to hear that they denied any responsibility for what happened in their banks. Whether it was ignorance of the serious failings happening under their noses, or because there was collective decision making, the result was the same: no one could be held to account. That, we discovered, was the result of the failure of the approved persons regime, which did not attribute responsibilities to senior staff, who, as a result, could not be held to account.

Two steps are proposed to try to address that problem. First, we have already mentioned the new senior persons regime, designed to ensure that the most important responsibilities are assigned to specific individuals, who will more easily be held to account for them. Secondly, for a much wider group—not every employee, but those who could do serious harm to the bank, or its customers, due to their customer-facing position—we propose a new licensing regime, with a set of banking standard rules that enable them to be held to account.

However, for people to be held to account, we need more effective sanctions, and that is the second theme of the commission’s report. Identification of those responsible under the new regime will provide a stronger basis for the regulator to enforce existing civil penalties, such as fines, restrictions and bans. One of the great difficulties was assigning responsibility; we hope that individual responsibility will address that.

Given the seriousness of the wrongdoings—an issue mentioned in earlier contributions—the commission is recommending two new, far-reaching powers. New clause 2 does not address this point, but under certain conditions, the regulator should be able to impose a full range of civil sanctions, unless the person can demonstrate that reasonable steps were taken to prevent or mitigate the failing. In effect, that does what new clause 2 suggests: it reverses the burden of proof, but only under certain conditions.

[Stephen Barclay]

In essence, the hon. Gentleman is describing the purpose of new clause 2. Earlier, I alluded to the fact that there is a condition that militates against the effectiveness of the new clause: the tool can be used only if there is a successful prosecution, which gets in the way. As much as I agree with my hon. Friend the Member for Bedford (Richard Fuller), does the hon. Member for Edmonton (Mr Love) agree that we need to be careful about changing the law retrospectively, particularly on custodial sentences? One of the issues that we are addressing today is how we get it right for the future, and what the sanctions should be.

[Mr Love]

Personally, I oppose retrospective legislation. It was not considered by the commission, which does not make any recommendations on it. I suspect, however, that none of its members would be in favour of addressing these issues in that way.

The other change is the much publicised criminal offence of reckless misconduct in the management of a bank, which normally carries, as has been suggested, a custodial sentence. Importantly, we have laid down preconditions before a charge of that nature can be brought. There must be a cost to the taxpayer—the bank has turned to the taxpayer to bail it out; or there are consequences for the financial system—stability is critical, and anything that destabilises the system should be subject to a criminal sanction; or there is serious harm to customers. We think that we have framed a big change in the law. Bankers continually ask why they are singled out as the only commercial group that can be charged in that way. It is a delicate balance, and I hope that the Government will look seriously at what we are trying to do.

The third area I want to touch on is remuneration and incentives. The reality is that rewards have been huge, and still are huge for a more limited supply of senior bankers. That incentivises excessive risk taking and, occasionally, misconduct. The commission concluded that risk and reward are still misaligned, particularly when making pay awards over a short period. It therefore sees advantages in making a significant portion of remuneration variable, rather than fixed. We do not have much sympathy for the European solution in relation to that, but we think that reform is necessary in this area. More variable pay should be deferred to take into account changing circumstances at the bank at which the banker works, with power for the regulator to extend the period for up to 10 years. To those who say that that is a long time, many banks have a good year, but then some less good years, and the commission wanted to recognise that that can go on for an extended period.

Regulators should be able to limit or prohibit sales-based incentives. We were shocked at the way in which sales-based incentives were used to create the mis-selling scandals of PPI and interest rate swaps. There was a cascading group of incentives from senior management through to the customer-facing end of the bank, and we think that that made a major contribution to the problems that arose. We want to give the regulator much stronger powers. Where a bank requires taxpayer support, the regulator should have discretionary power to cancel all deferred compensation. It is shocking that, as happened in some banks, they were still paying remuneration to employees after the bank had taken on taxpayer funds.

The issues of conduct and remuneration that I have raised lie at the heart of what the commission thinks needs to be done in respect of culture and standards. These recommendations have been much debated and discussed. We have done everything we can to make them practical and realisable, and I hope that, when there is an opportunity to debate them in the other House, or when they come back to this place, the Government will give serious consideration to those recommendations.