Financial Services Bill

Baroness Kramer Excerpts

Wednesday 18th July 2012 Lords Chamber

Amendment 110ZB attempts to make amends for this oversight. Professional standards need to be embedded in a firm’s ethos and this must be supervised by the regulator. Left to themselves, too many firms simply do not pass muster. We need to enhance the integrity of our financial services sector in order to ensure good consumer outcomes and drive up standards. The FCA must send clear signals to the firms it regulates about the behaviours it expects and the professionalism that must be evidenced. These amendments are part of enabling that to happen. I beg to move.

[Baroness Kramer]

My Lords, I shall speak to Amendment 110ZC, which stands in this group in my name and that of my noble friend Lord Sharkey. I thank the noble Baroness, Lady Hayter, for her kind words. This amendment illustrates why I and, I suspect, this House and the other place had a preference for a parliamentary committee, which will report by the end of the year, over a judicial committee which will report in a couple of years, because the issue addressed in it would certainly have been resolved one way or the other by that point and, I suspect, with damaging effect. I hope that the Government will respond to the amendment by telling me that it is completely unnecessary, but it arises out of deep concern following various newspaper reports that have discussed the size of the liability that may fall on the banks involved in LIBOR manipulation. We are talking not just about the fines that come from the regulators—they are significant but small in the way of things for banks—but about the liabilities that may arise from the various actions that are now under way and others which I am sure will join them.

As the Committee will know, two cases are already under way in the United States. One is in the Southern District of New York, which is a class action lawsuit titled “In re LIBOR-Based Financial Instruments Antitrust Litigation”—the use of “antitrust” obviously has significant consequences—and the second is in the northern California district court, filed by Charles Schwab against a series of banks, including a number of UK banks. Charles Schwab claims in its complaint that “significant harm” has resulted from the mispricing of,

“tens of billions of dollars in LIBOR-based instruments”.

Its complaint outlines the methodology of comparing the banks’ LIBOR quotes with some market-based yields and CDS spreads. Some excellent work done by the securities analyst Cenkos estimates that the LIBOR quotes were understated by 30 to 40 basis points in some cases. Cenkos does a simple calculation to show that if LIBOR had been mis-stated by even five basis points over four years, on £1 trillion-worth of notional contracts, the damages would be £2 billion. We are therefore looking at multiples of billions of potential charges.

It struck us as we were looking at this and reading some of the stories about Barclays considering separating the bank into an investment bank and a retail bank—that is the direction in which we are going in this country through ring-fencing, and I am very much in favour of it—that there might be scope for organisations to decide that those liabilities generated by LIBOR manipulation could happily be sited in the retail part of banks rather than the investment part. I am afraid that that view comes with some cynicism, as many of us now would not put anything beyond the decision-making powers of some bank boards and directors.

We are seeking from the Government some stern comments to the effect that we have got this entirely wrong and that safeguards are in place. If it is not the case, we hope that someone will quickly pay attention, because the decisions that could set this process in train could happen fairly quickly. I think that every one of us here and the public at large would be shattered if that was the conclusion to this aspect of the scandal. This is in no way meant to be a comprehensive response to the amendments; it is one particular issue that struck us as being in need of immediate comment.

[Lord Peston]

My Lords, I listened with enormous interest to the noble Baroness, Lady Kramer, and am sympathetic to what she said, but I cannot see how the amendment fits into this section of the Bill. If I have read it correctly, new Section 1D(2)(b) states that the integrity of the financial system includes,

“its not being used for a purpose connected with financial crime”.

As I understand it, these people have engaged in financial crime and been fined for it already. If the noble Lord, Lord Carlile, is to be believed, they will be brought before the courts to be examined some more. What unfair allocation does the noble Baroness have in mind? If some American investors have lost a great deal of money as a result of criminal activities by people connected with British banks, it would not be unfair if those banks had to meet the cost of those criminal claims. Is she saying that that would be unfair, or have I totally misunderstood the purpose of the amendment? It is most likely to be the latter.

--- Later in debate ---

[Baroness Kramer]

I would hesitate ever to say that the noble Lord, Lord Peston, had misunderstood any issue. Perhaps I can clarify. This is a probing amendment, and I cannot pretend that it is drafted with skill or placed in the Bill where, ultimately, a sophisticated legal mind— or, perhaps, the noble Lord—would put it. We felt that it was an issue that needed to be raised promptly. I fully accept that if courts decide that there is liability, that liability will be met, but if the institutions are dividing themselves into separate pieces and there is flexibility on where the liability is then allocated—into a retail entity or the investment banking entity—that is of acute interest.

[Lord Peston]

This sounds a bit like tax avoidance in a new version. If they separate the institution into two parts, they will then claim that there is a part that is not guilty. Is that the point of the amendment?

[Baroness Kramer]

I think that this is an issue that I will hand off to the Minister.

[Lord Davies of Stamford]

My Lords, I want to intervene briefly on two amendments. One is that moved by my noble friend, Amendment 104ZB. I congratulate her on it and draw particular attention to paragraph (c), which is enormously important. Paragraphs (a) and (b) stand by themselves and no one will want to argue with them, but I particularly congratulate my noble friend on paragraph (c), which deals with the need to ensure that all those involved in managing money or advising retail investors should keep abreast with changes in financial markets, which, as we all know, have been great in the past 10 or 20 years, and in financial products.

The range of financial products available is enormously confusing. Inevitably, it totally confused retail investors. It is enormously important that IFAs are kept abreast of developments so that they can give good advice to their clients. Among the complex and dangerous instruments that have emerged have been all sorts of derivatives used both for hedging purposes—thereby reducing risk if they are used intelligently and properly—and speculatively and extremely dangerously. That can be an acceptable product for a very sophisticated investor to use as a way to leverage his or her risk if he or she is determined to do that.

Just as it is so important to ensure that doctors are kept abreast of changes in medical science, which in a career of, say, 40 years, can revolutionise the subject, it is enormously important that that should happen in financial services. An “annual validation of competence” would be an excellent discipline that will itself create a market. Professional organisations, business schools and others will arrange regular courses for people in the financial services industry who are affected by the clause and need to keep up to speed. I hope that those courses will involve some test or examination at the end, so that it will be possible to use that as validation. That will greatly reassure the public. I congratulate my noble friend on proposing this extremely intelligent contribution to the Bill.

I also congratulate the noble Baroness, Lady Kramer, first, on being selected for the very important committee. Even those of us who thought—and still think—that a judicial inquiry is the right approach give our very best wishes to those who have taken on the important task of carrying out the parliamentary inquiry. The credibility of Parliament is at stake here, as is that of our financial services industry, so it is enormously important that people of the highest intellectual calibre and integrity have been selected. I know that the noble Baroness falls under both those categories, as does my noble friend Lord McFall, who is sitting behind me, and I also delighted that he has been nominated for the committee. That is very reassuring to us all.