Financial Services (Banking Reform) Bill

Andrew Love Excerpts

Wednesday 11th December 2013 Commons Chamber

[Sajid Javid]

I thank my hon. Friend for his comments. As Chair of the Parliamentary Commission on Banking Standards, he helps to explain the commission’s reasoning, which the Government share.

The introduction of this offence means that, as we have heard, in future those who bring down their bank by making thoroughly unreasonable decisions can be held accountable for their actions, which, as we saw in the recent financial crisis, can lead to severe economic disruption and considerable loss for taxpayers. In line with the commission’s recommendations, the new offence will be applicable only to individuals who are covered by the senior managers regime I mentioned earlier. Senior managers could be liable if they take a decision that leads to the failure of the bank, or if they fail to take steps available to them to prevent such a decision from being taken.

The offence will apply to behaviour that falls far below the standard that could reasonably be expected of a person in their position—that is similar, for example, to the test applied in corporate manslaughter. Importantly, the offence will apply to senior managers in banks, building societies and investment firms, and be subject to PRA supervision. That reflects concerns expressed by their lordships that the failure of systemic investment firms could lead to similar adverse consequences for financial stability, and that the taxpayer may have to bail out a collapsed retail bank. The maximum sentence for the new offence will be seven years in prison, and/or an unlimited fine. That reflects the seriousness that the Government, and society more broadly, place on ensuring that our financial institutions are managed in a way that does not recklessly endanger the economy or the public purse.

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

The Minister struck the correct note when he mentioned the seriousness of such situations. Much concern has been expressed that this provision applies only to financial institutions, but the conditions that would have to apply for it to be used—in other words, a serious threat to the systemic nature of our financial system—are such that it is likely the measure will not be used often.

[Sajid Javid]

I completely agree with the hon. Gentleman and I think we all hope that the new criminal sanction will not actually have to be used because the offence will act as a genuine deterrent against such recklessness.

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[Cathy Jamieson]

My hon. Friend makes an important point. It is vital that the public has confidence in the process. The public need to know that the culture of banking will change; that we have given the Bill thorough scrutiny; and that we have considered and put in place every possible method to limit bad judgments and errors in the future. In the end, however, it will be down to individuals, and from my experience of various pieces of legislation I would always guard against the notion that any individual piece of legislation will guarantee that nothing will go wrong in the future. That always depends on individuals making judgments. It is important that we get the culture right so that individuals within it make judgments not just because they fear that they will be prosecuted and go to jail, but because they believe they are doing the right thing by their customers and by the wider economy.

[Mr Love]

Before my hon. Friend moves on, does she agree that while we should congratulate Members in the other place on the role that they played in amending the Bill, it would have been correct to delay the Bill so that the House of Commons had proper time to scrutinise the changes recommended by the commission, rather than leaving that to the other place?

[Cathy Jamieson]

My hon. Friend makes a valuable point. It would have stood us in good stead had we had such an opportunity. I have only been a Member of Parliament for a relatively short time, and others will have much more experience, but it seems to me unusual to have so many amendments at this stage of a Bill. External bodies have made significant representations at this stage, which is also unusual and shows the strength of feeling about the issue of banking and its culture. It also shows that people have been thinking about how to future-proof the Bill, not simply to repair damage done in the past, but to ensure that we do all we can for the future. Some people may feel that this has been a tick-box exercise and a part of the process that does not matter as much, and it is rather sad if that has been the case.

We know that we have a huge amount more to do. Only today we have seen the latest news about Lloyds bank being fined again. It is also fair to say that as the weeks and months have unfolded during the Bill’s passage, we have seen various situations emerge. I have written to the Minister on the recent issues on forex, and we have also had the sad events at the Co-operative bank and the outcome of investigations into the LIBOR rigging. Those all show that more issues may arise that will have to be dealt with properly, and we want to ensure that the legislation we put in place is able to do that.

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[Cathy Jamieson]

I understand the hon. Gentleman’s point. Our approach has been to suggest that that responsibility lies, rightly, with the Financial Conduct Authority. It would not be for me, as a shadow Minister, to list those roles. In relation to the definition of a professional, it is important for people to have professional development, with qualifications, on a continuous basis. One fundamental issue for professions is an adherence to a code of conduct. We tabled amendments on that consistently because we believe strongly that that is important. The wider world wants to know that the banking industry culture has changed and that malpractice, which unfortunately is still coming to light, is being dealt with.

[Mr Love]

As a member of the parliamentary commission, I note that despite our many recommendations, which my hon. Friend has illustrated, six years on from the credit crunch there are continuing difficulties with the culture of the banking system. Is it not the case that we need to do more to change that culture, and that we need to do it now?

[Cathy Jamieson]

My hon. Friend is absolutely right. If we believe the Bill to be the end of the story, we will do a disservice not only to the hard work done already, but to the industry and to the wider public. I hope the Minister and the Government will take that on board. We must always be vigilant and look to the future.

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[Cathy Jamieson]

I thank the hon. Gentleman for that comment. I know that he has done considerable work in his role on the commission, but it is important that these issues be put on the record. It would have been useful to consider them in Committee, and I mention them now to show that significant pressure has been applied to move things forward and bring about change. The Government appeared to resist that and some of the commission’s recommendations until, of course, their recent change of heart following their defeat in the other place on the amendment for the licensing regime. At that point, they felt they had to bring forward their own plans.

The Opposition might have expected the Government to be reasonably gracious and accept the decision of the other place, but today they have tabled an amendment to disagree with and remove Lords amendment 41 from the Bill. To be fair, what they have tabled, under pressure to replace that amendment, is better than nothing, but it does not go anywhere near as far as the amendment they wish to strike out. The main difference essentially concerns the code of conduct. Lords amendment 41 states specifically that the

“licensing regime must…apply to all approved persons exercising controlled functions, regardless of financial sector;…specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules”.

That is important, given that the Government’s position does not call specifically for a code of conduct. In some ways, their regime legislates for the commission’s recommendations, but by failing specifically to legislate for an open and transparent code of conduct, they risk failing to address some of the ethical issues surrounding so-called casino banking. Their more permissive amendment does not focus specifically on a code of conduct.

Several other hon. Members wish to speak, so I shall conclude with some brief comments about remuneration. As hon. Members might be aware, the Opposition have given considerable thought to the regulation of bankers’ remuneration, and there remain certain issues that the Government must consider before the general public can have confidence in the industry. The public find it difficult to understand, and have concerns about, the culture of high risk, high reward that was evident in the previous system and which contributed to the crisis.

[Mr Love]

Does the banking industry not make it more difficult for the public to understand, given that, even in these difficult times, it has gone back to the massive bonus culture we have all been complaining about?

[Cathy Jamieson]

Once again, my hon. Friend is absolutely correct. The general public expected the industry to show some humility and make every effort not only to repay the taxpayer, where appropriate, but to reflect on its actions, perhaps take the view that this culture was now outdated and move on and operate differently.

The general public’s concern will not be alleviated by the latest list of scandals. We have had LIBOR, EURIBOR, PPI—payment protection insurance—forex, yen LIBOR—the list seems to go on and on. Almost every day, every week, every month, something else is being put into the public domain. We have recently heard concerns about lending from RBS, with businesses having gone into administration. It is right and proper, of course, that these issues are investigated. We continue to talk about these issues, but however much we will things to change, people are concerned that if the bankers do not accept that their culture has to change, we will just continue to talk and put legislation in place, but without the messages having got through. I believe that the general public are particularly concerned about that.

As I said, we believe that the amendment unsuccessfully launched in the other place should remain in the Bill. I am disappointed that the Government have chosen to disagree with it and want to strike it out. I do not expect the Minister to change his view at this stage. I am sure he will revert to the position held in Committee, which was to disagree with us on this matter.

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[Mr Tyrie]

Broadly, yes. Given that I am already stretching things a little in my opening remarks, I will try to deal with prop trading at the most appropriate parts of my speech—but the short answer is, as I say, broadly yes.

The commissioners met yesterday to discuss progress. We believe that the Government have converted the lion’s share of the Banking Commission’s recommendations into statutory action, where required. It is worth listing what has changed. The following amendments have been made to the Bill in order to implement our recommendations: electrification of the ring fence has been considerably improved since Commons Report stage; an independent review of the ring fence, which can consider the full separation of the banking industry, has been introduced; the Banking Commission’s recommendations on prop trading, which we just discussed, have, for the most part, been implemented; the proposals for the senior managers regime have been improved; a certification or licensing regime has been added to the Bill; a proper definition of a bank—the Bill’s definition was defective when it left this place, and it was a major lacuna—has been added to the Bill; the PRA has acquired a competition objective to complement that of the FCA; and audit requirements have been tightened for systemically important firms.

Furthermore, a good number of undertakings and assurances have been given in response to specific recommendations. Most importantly perhaps, the bank will almost certainly be given the Financial Policy Committee responsibility for the leverage ratio, and the Government have said that they will legislate to that effect after a review. We would otherwise have had to wait until 2017-18 to have that considered.

[Mr Love]

Will the hon. Gentleman give way?

[Mr Tyrie]

I give way to my fellow commissioner.

[Mr Love]

How long does the hon. Gentleman think the handing of control over the leverage ratio to the Bank of England will take? Time is moving on, and we need to get there sooner rather than later.

[Mr Tyrie]

I have pressed the Bank of England on that issue with my Treasury Select Committee hat on. A subsequent exchange of letters between the Governor and the Chancellor makes it pretty clear that by the end of next year the issue will be resolved and responsibility will lie with the Bank. Indeed, I think that for anything else to happen, given that exchange of letters, would be considered extraordinary, unless the review came up with some major obstacle that no one had previously spotted.

Another important assurance has been given in respect of so-called special measures. We proposed the establishment of an intermediate tool between enforcement at one end of the spectrum and day-to-day supervision at the other, which regulators could use to keep an eye on banks and help to improve standards. The Americans have something of the kind, which is known as a memorandum of understanding. The Government said that the statutory underpinning that we proposed would not be necessary, but the regulators have now announced that they will produce a full and detailed guidance note after consultation, which will set out how the new tool will be created and administered.

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[Mark Garnier]

I intend to talk principally about Lords amendment 41, but before I do so let me echo the comments made by the Chairman of the Parliamentary Commission on Banking Standards, my hon. Friend the Member for Chichester (Mr Tyrie), at the beginning of the debate. He said that he was grateful to the Government for moving such a long way along the road towards the commission’s recommendations. That is a tribute to the organisation that he chaired extraordinarily well for about 18 months and that came up with such sound proposals. It was a great honour for me to be part of that process. It also says a huge amount for the Government that they have taken great heed of what the commission said and have moved a great deal further towards implementing the proposals.

On Lords amendment 41, I suspect that there is not too much of a difference of opinion in the House about what we are trying to achieve through the Bill—that is, a change in the culture of banks. I take slight issue with the hon. Member for Islington South and Finsbury (Emily Thornberry), because it is not just about preventing banks from collapsing. It is about getting better standards and better service for consumers. Many constituents will complain about their treatment by banks and that has nothing to do with criminal matters; it is simply about the culture and how certain people address other people in their everyday lives. We want to drive that out and to ensure that the banking culture is one of which we can be proud and which consumers can trust enormously.

[Mr Love]

Is the hon. Gentleman not disappointed that, since 2007, when there has been such a focus on the problems and difficulties of banking, no greater progress has been made in creating the type of culture we all want to see?

[Mark Garnier]

I do not necessarily agree. I speak not only as a Member of Parliament, a member of the Parliamentary Commission on Banking Standards and a member of the Treasury Committee but as a former investment banker and investment manager. My hon. Friend the Financial Secretary is also a former banker, so to a certain extent we have a private interest in ensuring that banking standards are greater than they have been. There has, however, been an enormous amount of progress. We have a new regulatory regime, there have been a number of changes in the banks and we have seen a complete change of culture at the top of many of the banks. Things are moving in the right direction but it will take a long time and this Bill is part of that process.

Although we are all trying to achieve the same thing, the important question is how we will achieve it and who, ultimately, we should ask to ensure that the licensing regime is upheld and looked after. The Parliamentary Commission on Banking Standards was perfectly clear that we felt that the approved person regime was complete and utter nonsense. One of the Bank of England’s greatest thinkers, Andy Haldane, highlighted why that was the case: if regulation is devolved to a regulator, all that happens is that the individuals at the head of the banks think that they have nothing to worry about. It becomes the regulator’s problem to worry about such things, and not that of those individuals.

When we met a number of the banks—particularly UBS, the Union Bank of Switzerland, the senior directors of which appeared in front of us just after it had been fingered for its share in the LIBOR scandal—we discovered that there was an incentive to be ignorant of what was going on within them. The senior managers of UBS who were running the bank when the LIBOR scandal happened within their organisation knew nothing about it until they read about it in the Financial Times three or four weeks before our hearing. That gave rise to the accusation that there was an accountability firewall between the management of the banks and the individuals working on the front line—that is, those at the coal face on the dealing room floors and servicing our consumers.

We were trying to work out how on earth we could reach a system in which those at the top of the bank took accountability for the work and standards of the individuals in the lower part of the bank. That is crucial in leading me to support the Government in rejecting amendment 41: it does not deal with that accountability but rather gets around the problem. That is why it fails to hit the nail on the head.

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[Sajid Javid]

If my hon. Friend will allow me, I will, as I move on, provide more information on that particular point.

[Mr Love]

I thank the Minister for giving way so liberally on this issue. He mentioned the FCA’s role not just in setting the cap, but in other critical arrangements, such as roll-over, continuous payment authorities and proper administration of the high-cost credit sector. Does he think that that goes far enough? If we are going to get this sector right, many organisations think that the consumer needs more protection.

[Sajid Javid]

The measures that the FCA has already suggested, and on which it is currently consulting, go a long way to protect consumers in this sector. Of course, the FCA has broad powers in this area and there is nothing to prevent it from considering future measures as it learns more about aspects of the market. For example, the hon. Gentleman may know that the Competition Commission is currently looking into this sector. It is due to report back with its preliminary findings next May and a final report around November. It will look at the sector for about 18 months in total. I am sure that the FCA will take that into account and see what further measures it could take, if necessary, with the broad set of powers it already has. I hope that is of some reassurance to the hon. Gentleman.

Designing the cap on the cost of credit is a job not for the Government but for the independent and expert regulator. Nor is it right that the detail of a cap should be enshrined in primary legislation, given that the industry it is intended to bind is so fast-moving and innovative.

Lords amendment 155 makes clear the FCA’s overarching objective in this endeavour: it must make rules to impose a cap to protect consumers from excessive charges imposed by high-cost, short-term lenders. This language echoes the FCA’s consumer protection objective. The FCA must make rules to advance one or more of its operational objectives, namely consumer protection, market integrity and competition. That applies to the rules to implement the cap, just as it does to all FCA rule-making. The FCA’s competition duty also applies. It must consider how the rules affect the ability of the market to serve consumers’ interests.

As we have heard, introducing a cap is not without risks or potential adverse consequences, including reducing access to credit for some individuals who find themselves in financial difficulty. The FCA will not be able to eliminate those risks, but it will seek to manage them. It will be important that the FCA strikes the right balance in designing and setting the cap.