Amendment of the Law
Andrew Love Excerpts(10 years, 8 months ago)
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Vince Cable
That is not actually true. All recoveries tend to start with consumer spending, but lack of investment is a deep-rooted problem in the United Kingdom, and it is a problem with which we are trying to deal. However, if the hon. Gentleman studies the figures from the Office for Budget Responsibility, he will see that business investment increased by 7% last year, and the CBI projections for this year are higher than that. Business investment is beginning to take serious shape.
I think that, when we speak of growth, recovery and productivity, it is worth our while reflecting on some of the 18 Budget statements to which I have listened and responded in the past. For more than a decade, Budgets were introduced by the present Opposition, and there was a very positive story every year until we reached 2008. We had 2% growth, and there was enormous triumphalist cheering about the wonders of the brilliant Government economic policy that had produced that achievement. Comparisons were made with the past which suggested that this was the greatest economic performance, if not since the Victorians, probably since the Georgians, the Tudors or even the Romans. However, we had to go back to the Greeks to find the word that captured the spirit of those early Budgets. It was the word “hubris”, which encapsulated the Opposition’s simple inability to understand that weaknesses were building up during that growth.
Our Government are confident that we now have recovery. We are positive about it, and proud of our contribution to it. However, we acknowledge that there are some deep-seated historical weaknesses that now need to be addressed, and the Chancellor did address them in a systematic way in the Budget yesterday. The first and most important way of dealing with those weaknesses—and the driver of productivity—is, of course, higher levels of investment. That is why the extension of investment allowances, which will substantially increase the incentives for small and medium-sized companies, particularly those in the manufacturing sector—over time and in terms of scale—is such a big step forward, and is so welcome.
Vince Cable
Yes, there has been a continuing decline in net lending to small business. We think it is bottoming out, but it has happened and it is damaging. It is a consequence of the near-collapse of the banking system and the fact that some banks are now responding to much tougher regulation by being much more conservative in their lending. That is not true in all cases: Lloyds and Santander are increasing their net lending to small businesses, but many are not.
In response, the Government are establishing institutions, particularly the business bank, which are developing new flows and types of finance—internet-based lending, asset-based finance, invoice finance—in areas that hitherto were deficient, as well as supporting the establishment of new banks. About 20 new banks have been licensed over the last year, and that deals with the issue of bank competition that should have been dealt with when the last Government were in power and we had the Cruickshank report. That is now happening, however, and I therefore think we will begin to see the net lending trend becoming much more positive, but there is no underestimating the enormous damage that was done to the British economy as a result of the collapse of the banks, over which the last Government had responsibility for many years yet did absolutely nothing.
Vince Cable
The hon. Gentleman is right: compared with other institutions, RBS is particularly remiss in its lending policies, and that relates to the seriousness of its balance-sheet position and its failed attempt to become a big global bank. I meet the chief executive from time to time and I think he is trying to change the culture of the bank in a positive way, and move it in the direction of some of the other banks, such as Lloyds, which have already achieved that transformation.
The first priority has been to develop business investment and the Chancellor’s initiatives help with that. The second, and extremely important, priority, which has already been hinted at in interventions by Government Members, is in relation to manufacturing industry. It is important to take stock of the context here. We have had a catastrophic decline in manufacturing industry over a long period of time. Some of that is driven by technology and some of it is driven by international trade over which we have relatively little control, but certainly in the period after 1997 we saw the share of the British economy accounted for by manufacturing shrink from 20% to 10%, a decline that was even more rapid than in the mid-1980s, when policies were considered to be unfriendly to manufacturing. We lost 1.6 million jobs in that period.
Budget Resolutions and Economic Situation
Andrew Love Excerpts(10 years, 8 months ago)
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Sammy Wilson
The percentage growth in exports was 0.8% last year, and in the next year it is forecast to be 2.6%. By any calculation, that is more than a three times increase in the rate of growth. The Government have talked about the reduction in the cost of finance for exporters, but measures that were introduced in previous years did not have the intended effect. Of course, that is against the background of a strengthening pound, so there will be a difficulty there. On what is the Government’s optimism based? If it is on export and investment-led growth, past patterns do not show that happening.
My second point is about the Chancellor’s throwaway lines saying, “I am not in the job of easing up just because things are getting better”, and “We don’t want to spend more.” I am not asking the Government to spend more; I am asking them to spend differently and better. Of course we have to get the deficit under control, but what is the increase in that deficit at the moment? Of the percentage of our GDP that is debt, what is most of it made up of? It is made up of paying people to sit on their backsides doing nothing, instead of spending on investment in infrastructure projects, which would have a return. It would put people back to work, increase tax revenues and stimulate growth. We can examine the infrastructure projects in Northern Ireland, such as in tourism. For modest amounts of money, the Titanic signature project is now bringing in millions of pounds and half a million visitors a year, mostly from outside the state. There has also been the extension of the gas pipeline. Many Members have talked today about the cost of living, and one way of bringing fuel prices down is to give people alternatives. For modest public investment, we have been able to increase the coverage of gas pipelines in Northern Ireland, bringing people cheaper fuel and helping to bring down their cost of living.
Sammy Wilson
I do not have much time; otherwise I would be happy to give way.
Help has been given to industry in Northern Ireland for research and development, machinery and so on. I welcome the increase in capital allowances. In fact, one thing that we suggested was that if corporation tax could not be devolved to Northern Ireland, capital allowances should be increased so that companies were more able to invest using that mechanism. Such measures could stimulate growth and add to the productive potential of the economy. That is not about spending more; it is about spending differently. If we are finding it difficult to get private investment in the economy, it can be pump-primed with public investment, which can have an important impact.
I welcome some of the specific spending proposals in the Budget, such as the extra spending on infrastructure, filling in potholes and so on, all of which has Barnett consequences. I hope that in spending money to fill in potholes, the Government will not find themselves having to look for money to fill the financial holes in this Budget in a couple of years.
I also welcome the changes to pensioners’ savings. They will not have an impact on all pensioners, because many pensioners in my constituency have never earned enough to accumulate huge savings. Nevertheless, those who have saved should be able to experience the rewards.
The Chancellor has made a lot of helping industries with their energy costs. It is one thing to make temporary changes and give big energy users temporary help, but it is another thing to continue the mad policy of increasing reliance on renewables, which have pushed up energy bills. Once the temporary measures are over, firms will still have to face that problem. This country will have to reconsider its energy policy. I welcome the fact that the Chancellor wants to improve the extraction of oil from the North sea, despite what the hon. Member for Brighton, Pavilion (Caroline Lucas) said, and frack gas, which is a natural resource that will give us cheap energy. If we stick to a policy of dear energy, we will pay the consequences.
Oral Answers to Questions
Andrew Love Excerpts(10 years, 9 months ago)
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Mr Osborne
The employment allowance will help many small firms that want to invest or take on a new member of staff. I saw that for myself when I visited a small business in Enfield that, as a result of the employment allowance, will take on an extra member of staff. That is the support we can give. It is up to those in this House who promote anti-business rhetoric to get up and explain how that could possibly help our economy. The truth is that by being anti-business, they are anti-recovery, anti-jobs, anti-investment and anti-the British people.
Mr Andrew Love (Edmonton) (Lab/Co-op)
The latest figures show that net lending by banks to businesses has dropped by nearly £56 billion since 2010. The Chancellor is on record as supporting lending to small businesses, so what action is he taking to address the problem?
Mr Osborne
Credit conditions for small businesses have been one of the huge challenges since the banking crash. The better news is that conditions are starting to ease, as the most recent surveys show, but I am the first to say that the job is not done. That is why we are shifting the focus of the funding for lending scheme with the Bank of England onto small business lending and why we have introduced the British business bank, which did not exist before. We are doing all those things to support credit, including for small businesses.
Payday Loan Companies
Andrew Love Excerpts(10 years, 10 months ago)
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Ann McKechin
I absolutely concur with what the hon. Lady, a Committee colleague, says. The advertising is very clear and insidious, and it is targeted at younger people and children in particular. There is no debate about that; it has happened and continues to occur.
I want to deal now with the real-time recording of credit information. If credit information is to work, it needs to be both accurate and comprehensive; otherwise, there is little point to it. Unsurprisingly, the industry was quick to downplay the significance of this potential regulatory step, and again it is regrettable that the authorities have not been faster to respond, preferring instead an approach of wait and see. I commend the sustained pressure from agencies like as Citizens Advice and StepChange, but the cloud lifted when BBC’s “Newsnight” programme and others reported at the end of last year on the potential impact on mortgage lending. If there is no real-time recording in the payday lending sector, the existing credit recording systems become increasingly unreliable and inaccurate, particularly in respect of younger borrowers, who form the bulk of this sector’s customers. Lenders in the mainstream sector have now decided, in their world of lower risk, to dismiss payday borrowers entirely from their eligibility test—and hey presto, this month we have the announcement from Wonga and some others that a real-time recording system is going to be put in place later this year. Call me a cynic, but I suspect that the potential hit on their client base, who were increasingly worried about future access to mainstream lending and to mortgages, acted as a greater incentive than the dialogue with the FCA.
Mr Andrew Love (Edmonton) (Lab/Co-op)
My hon. Friend will be aware that only four payday lenders have entered into this real-time conglomerate. The FCA has indicated that it will take action if the sector does not get its act under way. Do we not need to get action from the FCA to make sure this happens?
Ann McKechin
My hon. Friend has taken the next sentence from my speech, because that is what the FCA absolutely needs to do and it is what we have recommended. Unless we have a recording system that is properly comprehensive, we will not have a solution and we will not stop lenders making non-compliant loans. The current proposal contains no requirement to report to the FCA; it still relies on voluntary reporting, and we know that many of the same lenders were found wanting in last year’s OFT investigation. As colleagues have done, I urge the FCA not to rely on the industry to provide the solutions, but to ensure that the public’s protection is paramount. Given that no one trade organisation represents the sector and that new entrants are likely, albeit in smaller numbers than before, we need a regulated and transparent system of recording which will have the trust of borrowers and lenders alike, and which will do the work it needs to do to allow our constituents to obtain legitimate credit. The FCA should quickly impose such a system, rather than allowing a not very satisfactory alternative to emerge in fits and starts.
Our Committee has further requested that in the light of the disturbing evidence we received of continued abuses of the present regulatory system, all companies should resubmit their affordability tests to the FCA for approval. Like some other hon. Members here today, I received whistleblowing evidence this weekend from a former senior employee of a major payday lender. It portrays an endemic culture of avoidance, from the senior managers down to shop-floor staff, and I trust it will receive the urgent and serious attention it deserves from the regulators. This is not just about a company bending the rules to suit its own profit line; it is about full-scale lending to people the company knows will be unable to repay in full or part, with the misery that goes along with it. I do not believe this is an isolated example, and as the Chair of our Committee has stated, the evidence before us challenges regulators to make sure that their enforcement systems are going to work. As this evidence suggests, there may be a move by some lenders to have long-term lending simply to bypass regulatory attempts. To be fair to the FCA, I know it appreciates that the challenge on effectiveness will be in trying to cope with changes in the market and how it shifts over months and years. I believe it is important for the Government to have a strong response to our Committee’s report, to accept our recommendations and to make sure that public protection is always paramount in our considerations.
Yvonne Fovargue (Makerfield) (Lab)
I welcome the report from the Business, Innovation and Skills Committee. It is right to focus on payday lending, but there are other practices that we need to look at. The logbook loans, the rent-to-own model of BrightHouse and brokers such as Cash Lady all bear closer inspection, but at the moment we are looking at the payday loan industry. The industry has said that it recognises the need to clean up its business, and it introduced the good practice customer charter a year ago. However, were those just fine words, or has it cleaned up its business? Over the past year, Citizens Advice surveyed more than 4,000 people who had taken out a loan with payday lenders, and I am afraid that the results do not make encouraging reading. Like my hon. Friends, I do not trust the payday industry when it says that it is going for the database.
The real-time database must be mandatory to have any effect. If it is not, lenders can pop up all over the place without putting in the data. It is no good for lenders to say that they will give the FCA information on their products and services on a six-monthly basis, as has been said by the lenders who have promised to join the real-time database. That promise is simply not worth having. This is a fast-moving and—shall we say—innovative market, and the FCA must have the tools to work with the companies, examine their products and see how they are lending to people in as quick a time as they are changing their practices.
Let me give an example from Florida of how a real-time database can help. Loans are capped at $500. The regulator thought that a company had given two loans that breached the cap. It went in and the manager of the shop said, “Hands up, yes. It was a rogue employee. I am terribly sorry.” The regulator had the real-time data in enough detail to be able to say, “Actually, it was you, the manager of the shop, who approved this loan on two occasions.” That is the sort of data we need.
I am still uncomfortable with the idea of two roll-overs. The survey says that for 18% of such borrowers, the risks were never explained at all. In only 18% of cases were the risks of extending the loan explained to people. In 37% of cases were the costs clearly explained. Only 17% of people were treated sympathetically when they got into difficulties. In only 16% of cases were the charges and interest frozen. I have even more concerns now after receiving the same e-mail as my hon. Friend the Member for West Bromwich West (Mr Bailey) in which the company talked about repaying the loan in full, and then making another loan, which means they would get out of any cap. They would not be capped because it would be a new loan. The market is extremely fast-moving and slippery, and we must ensure that the regulations are worded in such a way that we can regulate on the basis of intention.
Default fees are a major problem for many people. Someone who borrowed £200 was charged £50 for a letter telling them that they had not paid. That is a completely ridiculous amount to charge for a letter. I have always said that payday loans are a perfectly sensible way to borrow in certain situations, but if someone cannot pay the loan, they can expect to be treated with some sympathy. I am more concerned that the cap on the total cost of credit will not include default fees. I have heard some companies say that it is the cost not of credit but of not paying, and that is how they will get around the cap, which is why there should be a cap on the default fee, and it should be an amount that the regulator says is reasonable. I am sure that a company can justify £50 for a letter, with time, office costs and so on, but it is not justifiable on a £200 loan. It means that vulnerable people who take out a loan, like 48% of the population, and are slightly over-optimistic about whether they can pay it back will continue to be exploited.
I am pleased that limiting continuous payment authority is under consideration. People need to have a letter before money goes out of their account, because I am not convinced that they understand that they are giving a supply of blank cheques to such lenders.
Yvonne Fovargue
I totally agree with my hon. Friend. As my hon. Friend the Member for West Bromwich West said, the affordability check should be sanctioned by the FCA. It should be approved, but, as we know, at the moment speed trumps affordability in most cases.
Let me return to the report by a group of northern housing associations and social landlords, which regularly surveys 100 tenants—this is the second time that it has surveyed the same people. It found that 55% of those surveyed said that they had “never” felt optimistic about their future in the past six months, and 21% said that they were “rarely” optimistic about the future. Those are horrifying statistics, and when we consider that 89% of those surveyed said that they were concerned about the level of debt they were in, it is not surprising. According to a survey by Citizens Advice, only 9% of those who are in hock to payday lenders have been referred to free debt advice. That means that 91% of those who should have been referred have not been.
This is probably a once-in-a-generation opportunity to influence and control these lenders and we need to make the most of it. We must also ensure that we cannot sit back after taking some action and say, “That’ll be the end of it.” As I have said, these people are extremely innovative. They will look at the rules and how they can get around them, so we need a regulator with the tools to act and the will to move with lenders to ensure that vulnerable people do not continue to be exploited.
Financial Services (Banking Reform) Bill
Andrew Love Excerpts(10 years, 11 months ago)
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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.
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.
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.
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.
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.
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 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.
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.
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.
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.
Oral Answers to Questions
Andrew Love Excerpts(10 years, 11 months ago)
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Danny Alexander
The right to buy is an important part of the coalition Government’s housing programme. It has been substantially improved by the commitment to one-for-one replacement for social housing when each house is sold. If that policy had been in place under the previous Government, we would not have seen a net loss of 421,000 social homes throughout their time in office.
Mr Andrew Love (Edmonton) (Lab/Co-op)
Why is it that, over the last 18 months, 11,000 homes have been sold under right to buy, but fewer than 2,000 replacements have been started? That does not seem to me to be one-for-one replacement. How does the Minister explain it?
Autumn Statement
Andrew Love Excerpts(10 years, 11 months ago)
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Mr Osborne
My hon. Friend is assiduous in his observation of these matters, and he will have spotted the first step in a quiet revolution. The Treasury has produced a dynamic model for tax reduction—in this case, for corporation tax. At the moment that sits alongside the static, more orthodox, model that the Treasury has always used. That dynamic model—which we have made available and will, of course, be subject to scrutiny—shows that reductions in corporation tax not only increase investment in this country, but as a result cost less than the scorecard method we normally suggest. We certainly intend to roll out that approach, as they say, to other taxes.
Mr Andrew Love (Edmonton) (Lab/Co-op)
Does the Chancellor accept that the recovery is too dependent on consumer expenditure? With net exports not increasing at all, the EU stagnating in coming years—as the Chancellor indicated—and business investment on the floor, what positive steps is he taking to secure a more balanced recovery?
Mr Osborne
We want a balanced recovery, as the hon. Gentleman says, and if we look at recent GDP data, the good news is that we have growth in manufacturing, construction and services. The forecast is for business investment and exports to increase, but I agree that those remain challenges, particularly because of what has happened to the source of 50% of our exports—the European continent. That is why the Prime Minister’s trade mission and the expansion I announced today of the export finance guarantee scheme will help Britain’s companies go out to emerging markets and ensure that we are connected to some of the fastest-growing parts of the world.
Oral Answers to Questions
Andrew Love Excerpts(11 years, 2 months ago)
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Greg Clark
Yes it will. The scheme is available to purchasers who already own their own home but want to move to a bigger one, perhaps because, like my hon. Friend’s constituents, they have had children. They are currently trapped in the home they have bought, and that is why the scheme we are introducing is important. It will allow people who can afford to pay the mortgage to achieve their dream of home ownership.
Mr Andrew Love (Edmonton) (Lab/Co-op)
The mortgage guarantee scheme does nothing to help housing supply. In those circumstances, many organisations suggest that the scheme will be inflationary. What is the Minister doing to reassure those who are concerned that the scheme will increase house price inflation?
Greg Clark
The hon. Gentleman is wrong to say that the scheme has done nothing to encourage supply; 10,000 homes have been started under the current scheme. The Home Builders Federation itself has said that a lack of affordable mortgage availability remains the biggest constraint on housing supply. That is a problem; we are solving it.
Financial Services (Banking Reform) Bill
Andrew Love Excerpts(11 years, 4 months ago)
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Chris Leslie
Funnily enough, divorce has already come up a couple of times in our proceedings, and I am sure that Mrs Leslie will be watching them.
Mr Andrew Love (Edmonton) (Lab/Co-op)
The reality is that the seven-day switching service must be matched against increases in the level of switching of current accounts if we are to increase competition. All the evidence from countries like the Netherlands, where such a service has been introduced, shows that it has the trust of customers but does not increase switching levels, although that is the rationale for account portability.
Chris Leslie
Absolutely. Sir John Vickers pointed out in his report that a typical customer is likely to move current accounts every 26 years, on average, and it is estimated that about 6% of personal current accounts will be switched this year. All sorts of statistics prove that this is not a particularly active area, although there is a growing consensus among members of the commission, and even some of the banks, that portability might be an idea whose time has come.
Andrea Leadsom
Yes. The hon. Gentleman is absolutely right, and he has certainly been a keen supporter of bank number portability, as have many hon. Members in the Chamber today. The payments regulator that the Government are consulting on is the first step to achieving transparency. The next step is empowering that regulator to do something to enforce bank number portability when it finds, as I am sure that it will, that to date there has been a completely deliberate attempt to restrict competition in the banking system.
The big banks have said that bank account number portability would cost an absolute fortune, yet the technology already exists. Some people have asked whether it would not be an enormous risk to data integrity if the consumer’s bank account number, sort code and payments instructions were held by VocaLink, but in reality, all the consumer’s details are held by the bank, which passes them all on to VocaLink, so there are double risks to data integrity at the moment. Holding those account details in VocaLink would reduce, rather than increase, the risk.
People also say that other banks cannot access VocaLink’s payments infrastructure directly, because all the banks that clear direct have mutually to underwrite each other’s payments. The smaller challenger banks cannot possibly afford to underwrite the payments of the bigger banks. However, we could easily solve that; already, in various exchanges, banks pre-fund payments. If a bank’s balance were too low, and it was running short of cash with which to meet its outgoing payments, it would be called, intra-day, for more cash. That problem is easily solvable, and the reason why it has not been solved is that that is simply not in the big banks’ interests.
It has also been said that the proposal would surely be incredibly complicated from an IT point of view, but VocaLink has already set up bank accounts for the Department for Work and Pensions, because a lot of the Department’s benefits customers do not have bank accounts. VocaLink is already able to manage customer account details for DWP customers, so the technology already exists. I simply do not accept the idea that there would be eye-watering costs. Chief executives of big banks have literally said it would cost trillions—absolutely vast sums—but I challenge them to provide any scrap of evidence that shows that is the case, and that their refusal is not down to their desire to restrict access to new players.
The advantages of bank account number portability are, of course, the elimination of barriers to entry, and increased competition as a result. One of the big problems for new entrants is that it is so difficult to gain customer share, because people will not move bank accounts. With bank account number portability, if I, as a customer, was sick and tired of my bank, I could move tomorrow, the day after, and the day after that, if I was not getting good service, and it would not be any skin off my nose; it would be perfectly easy to do, and it would be the banks’ problem. That would be an enormous change in the competitive environment.
Likewise, there would be far greater consumer choice. Bank account number portability would encourage the likes of Tesco Bank and Marks & Spencer Financial Services—any big, multinational conglomerate—to go into the money business; it would become yet another product line. That in itself would eliminate some of the problems of “too big to fail”, because there would be many more smaller players, which would have many product lines, and therefore would not have all their eggs in one basket.
For small businesses the change would be revolutionary. At present one of the biggest problems for small businesses is that the big banks require that as well as their company accounts, small business people have their personal accounts and mortgage with the same big bank and do all their foreign exchange, overdraft, loans and other transactions through that bank. It is incredibly difficult for a small business to move accounts because of the complexity of all their suppliers and all the people they are trying to trade with. The barriers to entry for them are perhaps even greater than they are for us as individuals. Again, being able to take their bank account number with them would change the position dramatically.
Another huge advantage that is not often talked about is that since the 1990s, when I was running Barclays bank’s team, an enormous consolidation has taken place. There used to be 44 big banks in the UK; there are now about 22 banks of any size. The consolidation meant that during the 1990s many banks took over other banks, broker- dealers, small fund managers and so on, so they have an enormous number of legacy systems. They have managed to string them together over the years, but bank fraud in this country alone is huge. Changing the payment system would dramatically reduce the incidence of bank fraud. Intellect, the IT trade body, has said that the change could reduce the incidence of bank fraud by up to £30 billion a year.
Finally, another key advantage of bank account number portability is resolution. Andy Haldane, the Deputy Governor of the Bank of England, has gone on record as saying that it would be the solution when the day comes that a big bank fails again. We have, of course, put in as many steps as we can. Basel III will make great strides towards ensuring that banks cannot fail again. We have created our new regulators. We have ensured that banks have proper leverage and proper capital. All those measures are designed to ensure that banks cannot fail again, but we know that banks will always fail. That is the reality in a western developed market economy such as ours. We saw only too recently the problems with Northern Rock, when people were desperate to take their money out. The answer to resolution is for the Bank of England to be able to say, “You have failed. We are now taking all your accounts and putting them with survivor banks.”
There is a huge amount going for bank account number portability, above and beyond the seven-day switching process. My new clause calls for the Government to ensure, within 12 months of Royal Assent, a full cost-benefit analysis of bank account number portability. Should the findings be that this is a good idea, and should it produce the kind of benefits that I have just described, the regulator should be empowered to implement bank account number portability. I welcome the Government’s assurances that they will move in that direction. On that basis I will not press my new clause to a Division, but I urge the Government to keep up the momentum and ensure that before too long we have full account number portability.
Mr Love
Given that the new payments regulator will take some time to set up, I hope that the Minister will keep a watching brief on seven-day portability, because there is still some controversy over the proportion of fees for the receiving bank as opposed to the bank losing the customer. This was brought to the commission’s attention; we commented on it, and I hope that he will keep it under review.
Greg Clark
I certainly will keep a close eye on that, as too, I am absolutely certain, will my hon. Friend the Member for South Northamptonshire. The arrangement is that the fees should be shared between the bank of departure and the bank of arrival, which I dare say reflects the different costs. However, we need to keep an eye on its effect on competition.
In response to the parliamentary commission’s report, the Office of Fair Trading has announced that it will bring forward its investigation into small and medium-sized enterprise banking as part of an ongoing programme of work to investigate concerns about competition in banking. The hon. Member for Nottingham East rightly wants this to go further. The OFT is engaged in a programme of work looking at all sections of the banking sector. As I think Members know, it has recently completed an investigation into the personal current account market, and on that narrow point has argued that there should not be an immediate referral pending some of the changes taking place or in the pipeline.
We have asked that that work considers the impact on the new challenger banks created by the divestments from Lloyds and RBS. The hon. Gentleman asked where they stand. My understanding is that in both cases the parent banks are looking to move forward with initial public offerings of the challenger banks and that they intend them to form part of the competitive environment. The OFT aims to conclude its programme of work next year. It will then decide whether a market referral to the Competition Commission is needed. I can tell my hon. Friend the Member for Caithness, Sutherland and Easter Ross that such a referral would not require legislation; the OFT could make one under its existing powers.
Given that commitment, which is more or less of the same time frame as that envisaged in new clause 8, and given the significant measures being implemented to enhance competition, I hope that hon. Members will agree that the new clause, which calls for such a referral in 2014, following Royal Assent, should not be adopted. It is important that the OFT completes its review in 2014, so that it can build up a file of evidence to be submitted to the Competition Commission. That would be consistent with what both the independent commission and the parliamentary commission called for: that the OFT be in a position to make a referral in 2015. The OFT’s work is absolutely in line with that.
Greg Clark
That is happening. The review that the OFT is carrying out is comprehensive—it will keep us informed in that process—and is about building up the evidence to make that judgment in accordance with exactly the time frame that my hon. Friend has set out.
New clause 15, standing in the name of the hon. Member for Brighton, Pavilion (Caroline Lucas), would require the Government to consult formally on the creation of a network of regional banks. I strongly agree that a revival of regional banking in this country is a very good thing. Yesterday in the Chamber my hon. Friend the Member for Hexham (Guy Opperman) reported on a meeting that he organised in Gateshead. I am pleased to tell the hon. Lady that a senior director of the Sparkassen, Dr Thomas Keidel, was at that meeting. He very much commended the Sparkassen model in Germany as something that could be emulated in this country. In fact, when one of the delegates objected that it was very much part of the German system and culture, which might be difficult to transplant to this country, Dr Keidel immediately pointed out that the German system was explicitly modelled on the UK system before it was abandoned in this country. I am therefore optimistic that what is proposed should be possible.
There was certainly great enthusiasm on Tyneside—indeed, momentum was being established—for launching a regional bank for the north-east. The hon. Lady might also be aware that the Cambridge and Counties bank—a joint venture between Cambridge county council and Trinity Hall, the Cambridge college—is already active and is providing lending to local small and medium-sized enterprises. The steps that the Prudential Regulation Authority has taken to license new entrants—
Mr Love
I apologise to the right hon. Gentleman for jumping in rather late, but before he leaves the issue of regional banks I want to mention one of the most promising areas, which is community development institutions. They are working at the regional and local level; however, their sources of funding could be enhanced immeasurably if community interest tax relief was set at a proper rate. I recognise that the Treasury has carried out a consultation. I am not asking the Minister to respond now, but perhaps he will at some stage inform Members of where the Treasury has got with that consultation and whether it will review the incidence of community interest tax relief.
Greg Clark
I do not know whether the hon. Gentleman will be reassured or alarmed to learn that I had not left the subject of regional banking just yet. Indeed, I want to come to the precise subject he has just raised.
The Prudential Regulation Authority’s changed procedures were referred to—by, I think, my hon. Friend the Member for Wyre Forest. It is now possible to license new entrants, who could require up to 80% less capital up front than previously. That means that the time is now ripe for new banks in the regions to be established. The hon. Member for Brighton, Pavilion, in her new clause 15, and the hon. Member for Edmonton (Mr Love) refer to CDFIs—community development finance institutions. Some £60 million of wholesale funding for CDFIs is available through the regional growth fund. Tax relief up to 25% is already available on investments made by individuals and companies into CDFIs. Of course I will talk to my hon. Friend the Exchequer Secretary and carry forward the hon. Gentleman’s representation for further changes, but a significant set of advantages is available. Similarly, the more flexible rules for credit unions that have been introduced and the £38 million of funding for this movement have also created greater opportunities.
Financial Services (Banking Reform) Bill
Andrew Love Excerpts(11 years, 4 months ago)
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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 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 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?
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.