Bank of England and Financial Services Bill [HL]

Baroness Kramer Excerpts

Wednesday 11th November 2015 Lords Chamber

I have one question for my noble friend the Minister. It is unclear in all the briefing documents whether the Bank of England—indeed, it ought to be the Treasury as well—will operate with this informal connection of the sharing of intelligence and the sharing of understanding of what is going on in the domestic and global financial markets, in order to enable the new PRC to be able to operate in a way which anticipates the future and does not just react to the past.

[Baroness Kramer (LD)]

My Lords, in response to the noble Lord, Lord Carrington, of course the FSA failed in its task as the problem developed over the several years leading up to the financial crisis of 2007-08. But I think it is very wrong to claim that the Bank of England did not also fail during this period, despite its access, as he reasonably said, to very extensive market intelligence. One of the frustrations of this House was that although the FSA recognised its failure, I am not sure that even up to this day the Bank of England has ever accepted that it played its role in an inadequate way during that period. Indeed, that has been part of the problem in putting remedies in place because, as many have said, a change in culture is an essential part of that process.

[Lord Carrington of Fulham]

The noble Baroness is failing to understand that there was a strict separation between the role of the Bank of England and the FSA, and there was no communication between them at the level which ought to have allowed that information to be passed. That was part of the problem. There was a great separation between the two. If the Bank of England understood what was going on, it did not see it as its job. If the FSA knew there was a problem but did not have the information, it could not communicate with the Bank of England. Bringing the two together—bringing the regulator together with the central bank and, I emphasise, with the Treasury as well—will find a solution.

[Baroness Kramer]

My Lords, I find it extraordinary that there is an argument that the Bank of England knew what was going wrong but sullenly kept its mouth shut because the constraints gave the key responsibilities to the FSA. We have to break away from that sort of cultural notion that one observes only the very narrowest interpretation of responsibility when we are talking about an organisation such as the Bank of England. I agree that that culture tends to continue. That is one of the frustrations and concerns that we have, particularly with the removal of the oversight committee, which is the one challenge to that ongoing attitude. Let us set that aside for the moment, although I find it a constant frustration not to recognise that the Bank of England did not act when it certainly had an opportunity to lay on the table the many problems it now says it saw with such clarity.

I go back to the underlying issue, which is that the PRA has been a success. The PRA has been absolutely key in establishing the kinds of regulations that have made the Bank safer for the future, setting standards for regulatory capital being an important part of that. In addition, in the period before we had the PRA, it was virtually impossible to get a new bank licensed in this country. We have had Metro Bank but essentially no new bank for 150 years. People had to find an existing banking licence, buy it and go for some sort of change of purpose. The PRA was a leader in changing that whole culture and recognising the importance of bringing in challengers and new players. Had it stayed tightly within the existing Bank family, which had resisted that approach over and over again, I very much doubt that we would have seen that kind of change. So the experience we have had since setting up a PRA which has some distance from the Bank—a small distance, I fully acknowledge, but separate responsibilities governed under company law—has been that it has brought forward change in a way that is not part of the history of the Bank. I am very concerned at the potential for losing that.

The noble Lord, Lord Carrington, also suggested that if we changed the existing structure it would not allow a proper flow of information from the Bank of England to the PRA. But look at the membership of the PRA: we have crossovers in deputy governors, and I believe that the Governor of the Bank of England is the formal chair of the PRA. If these individuals are unable to remember the meetings that they were exposed to and the memos that they read when they wore one hat, and bring that information into the meetings they have when they play their role within the PRA, I frankly find that extraordinary. As far as I understand it, there is no problem of information flow—and if there is, we would very much like to hear from the Minister what the instances are, where there has been that kind of breakdown, and why an individual involved in discussions in one particular part of his or her job has been unable to remember those discussions when participating in another part of it. Those are quite serious allegations. I would like to hear from the Minister where this communication has so badly broken down when it is quite frequently the same individuals who are involved.

[Lord Tunnicliffe]

My Lords, again, I support the noble Lord, Lord Sharkey, on his general thrust in this debate. I come at it from a slightly different direction, although I think that the fundamental proposition is, “If it’s not broken, why are we trying to fix it?”. In fact, the supporting paperwork says that it is working well. We need to go behind that—back to the 2012 Act, the FiSMA 2000, as amended, and all that sort of stuff—to look at how the Bank is now going to work.

I think the Bank will move its emphasis from the Monetary Policy Committee towards the FPC. Regarding the control of interest rates and the Government’s injections of cash, depending on which textbook you read, it was the actions of banks in creating credit that formed the bubbles that caused the crisis of 2008-09. I believe that is the technical reason and that we are seeing many bubbles emerging again. As to the process of the FPC, by reading through the consolidated Act we see that its many powers—to make recommendations about new tools, for example—and all the things it is able to do to control the creation of credit, among other things, are absolutely fundamental to how efficiently the money system supports the economy, and hence are fundamental to the economy.

Now, what is the thing that keeps this clean? The thing that keeps it clean is the fact that the PRA is a subsidiary—an independent company, as mentioned, governed by company law—and, therefore, there has to be an arm’s-length relationship between it and the FPC. Under the various terms of the Act, the FPC can create various macroeconomic tools, which it then hands down to the PRA. It hands those down not through some side-channels or influence but, because of that independent legal status, in a very formal way to its subsidiary, and I think that is healthy. I do not believe that in effect moving the PRA closer to the Bank—and, by definition, closer to the FPC—is a good thing. The present separation is working, and I think we should continue it.

The reform included in the Bill ends this subsidiary status. The PRA board will be replaced by the Prudential Regulation Committee and, as I said, that must have the right balance. The Government so far, frankly, have not come up with a good reason for this change. The noble Baroness, Lady Kramer, made the point that mechanisms for information transfer are there, and therefore that is not at risk. The whole purpose of being in a subsidiary company—I headed a subsidiary company of a large organisation—is to get focus on its business, so that there are very clear responsibilities. I think that the move in the Bill away from its being a subsidiary is a bad thing, and I hope that the Government will reconsider the inclusion of this clause.

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Moved by

[Baroness Kramer]

20: After Clause 15, insert the following new Clause—
“PRA: Green Investment Bank
(1) The PRA must carry out its functions in a way that it considers will secure the provision of a “Green Investment Bank” service in the United Kingdom.
(2) The PRA shall by rules specify the purposes that it considers should be supported in the United Kingdom by the provision of a “Green Investment Bank” service.
(3) Rules under subsection (2) shall include the following purposes—
(a) the reduction of greenhouse gas emissions;(b) the advancement of efficiency in the use of natural resources;(c) the protection or enhancement of the natural environment;(d) the protection or enhancement of biodiversity; and(e) the promotion of environmental sustainability.(4) In subsection (3)(a), “greenhouse gas” has the meaning given by section 92(l) of the Climate Change Act 2008.”

[Baroness Kramer]

My Lords, I realise that some of your Lordships will be surprised that we have introduced an amendment with a clause referring to the Green Investment Bank into a discussion of a Bank of England Bill. Your Lordships will be aware that the Green Investment Bank has been one of the great successes of the coalition era. It filled a gap left by a market failure which had resulted in any green project requiring long-term, patient investment having great difficulty in accessing that kind of financing. The Government put something in the range of £3 billion into the Green Investment Bank, which has been so successful that it has since leveraged an additional £6 billion from the private sector. It is universally regarded as one of the most successful creations for enhancing our long-term investment in green infrastructure.

This Government have made the decision that they wish to privatise the Green Investment Bank. Discussions around that should and must take place in the context of the Enterprise Bill, but it is clear from the discussion so far that privatisation presents a problem. In order to completely remove the Green Investment Bank from their books, as the Government intend, they cannot continue to exercise any control over the bank after it has been privatised. They cannot require that the mission of the bank continues to be green investment; new owners could convert the bank to any other purpose at will after privatisation. Indeed, the Government cannot even require that the bank continue as a going concern. It would be quite possible for a new owner to absorb the existing assets into other parts of its business and make the decision that, as those assets were paid down, it would invest in a whole variety of other activities; it need not continue to provide a green investment bank at all. The Government, as I understand it, believe that they are helpless to provide for that requirement post privatisation. I do not think that is the wish either of the Government or, frankly, of Parliament.

As I say, this has been a successful bank. There are real concerns that private investors might turn the bank to another purpose—not because it is not successful but because there will be other ways to make money once the assets begin to return cash. Indeed, as I said, the reason why the bank was created in the first place was that the market showed very little interest in providing financing for these kinds of projects. Hopefully, attitudes have changed because the Green Investment Bank has established a very positive track record, but there is absolutely no guarantee. The future of the Green Investment Bank once it is in private hands is in question.

We faced a very similar problem when the system was set up to enable Royal Mail to be privatised. That privatisation is now going ahead. The Royal Mail, as your Lordships will be aware, was and is the vehicle through which a universal postal service is provided, under which every area of the country is covered by a postal service at a single, identical rate, which applies no matter where in the country anyone is. So my question became: if the Government could find a mechanism through which Royal Mail continued to have that set of obligations, could a similar mechanism provide for the Green Investment Bank to continue to have its existing obligations? The mechanism used for Royal Mail was that of the regulator, Ofcom.

I do not pretend that there is any quality in the drafting, but I have pulled together provisions from the Postal Services Act 2011 and the Enterprise and Regulatory Reform Act to try to establish a similar framework for the Green Investment Bank. The regulator in this case would appear to be the PRA, because that is the role it plays in relation to the banking industry.

I understand that the Government are willing to listen if we can find ways to keep the purpose for which the Green Investment Bank was created. I very much hope that moving the new clause creates an opportunity for the Government—for the Treasury—to become engaged. One problem that we often suffer from within government is that actions get siloed to one particular area. Frankly, the Green Investment Bank has ended up getting siloed over to BIS. But it is an issue that could impact equally well on the Treasury, because the Treasury has the relationship with the banking regulator which I propose to use in this case. It is on that basis that I move the amendment, and I hope that the Government will seriously look to see whether this route offers everyone a mechanism to get to the solution that most wish for.

[Lord Teverson (LD)]

My Lords, the Green Investment Bank has been one of the great successes of the coalition Government. To quote the words— which I fully endorse—of the Conservative manifesto of 2010,

“we will create Britain’s first Green Investment Bank—which will draw together money currently divided across existing government initiatives, leveraging private sector capital to finance new green technology start-ups”.

Absolutely. It was also in the Liberal Democrat manifesto and, I think, the Labour manifesto. After the Wigley commission, set up by the Conservatives, we all felt that this was an excellent way forward and one that would be successful. The management team at the Green Investment Bank has delivered that well over its first three years.

We on these Benches would prefer that privatisation did not take place quite so quickly. We do not feel that the Government will get its full value at the moment, but we accept that that is the Government’s policy. If the bank does not have proper access to additional private funding, in reality, it will be starved of sufficient future investment by the Treasury. Hence, we want to co-operate strongly with the Government to find a way to ensure that we do not just remove the legislative requirements in the Act, but keep those principles of the bank’s operation not just in its constitution but in the way that it can operate.

We are not happy about the fact that the five principles currently in statute will be put into the mem and arts of the company, because clearly those can be changed by a special resolution of 75% of the shareholders. As my noble friend Lady Kramer said so well, we have no guarantee that the bank will not be purchased just to run it down, make the most of its income stream and use it as an investment for future cash flow. That would be a tragedy for everybody. I am sure that that is not the Government’s intent but at the moment we have no guarantee through legislation that it would not be the case.

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[Lord Bridges of Headley]

The noble Lord makes an extremely good point, and one that the CEO, Shaun Kingsbury, was asked directly. I am not going to prejudice what my noble friend the Minister in BIS is working on, but that is clearly something that we need to look at. I note that Mr Kingsbury himself said that he believed that the purchasers of or investors in the Green Investment Bank would look expressly to ensure that the specialisms that the bank currently has would continue, and we would want to make sure that that specialism and focus are the core of their investment. That said, I heed entirely what the noble Lord says and will draw it to my noble friend’s attention.

[Baroness Kramer]

My Lords, I was actually quite heartened by the Minister’s reply, although I suspect not in the way that he intended. He suggested that there were very few obstacles to using the PRA as an appropriate regulator in this case—so perhaps there is an avenue there to be explored. Can the Government look seriously at this issue? I know from having been in government very briefly that to direct the lawyers to look at a way to achieve rather than stop something is a very significant challenge. I hope that now the energies of the Treasury will be focused on this, as well as the energies of BIS. Frankly, if we lose the Green Investment Bank in the role that it plays, we will all be losers. It would be very frustrating to think that that was unnecessary and had only required some significant legal effort to avoid it. I beg leave to withdraw the amendment.

Amendment 20 withdrawn.

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[Lord Gold (Con)]

My Lords, I oppose this amendment. I have listened to the noble Lord, Lord McFall, and I fully agree—I suspect we all agree—that the examples he has mentioned of culpable things that have gone wrong cannot be acceptable. However, hearing his comments on the demands of public opinion makes me even more certain that we should oppose this amendment, because the rule of law must be upheld and we must allow the innocent to remain innocent until proved guilty.

Regulation is terribly important and we must give appropriate powers to the regulators to enable them to undertake their work effectively, including the ability to search out evidence in order to ascertain what went wrong and who was responsible. They must be able to break down any firewall that the institutions might have erected. Employees in financial institutions must fear the consequences of acting badly and know that if they break the rules the consequences could be very severe, including heavy fines and maybe a prison sentence.

If we have failed to achieve these things, however, the answer is not to shift the burden of proof so that the defendant has to prove his innocence. That would be tantamount to giving up the challenge. Instead, we must tighten up the regulator’s powers and create an appropriate and effective regulatory regime, one that can achieve what all of us want, which is to protect those dealing with the financial institutions and punish those who fail in their duties.

In this Bill, the Government are aiming to do just that by extending the regulatory regime to all financial services firms and giving power to the regulator to make and enforce rules of conduct. This materially strengthens the regulator’s position. In so doing, it rightly reverses the burden of proof so as no longer to presume guilt, requiring the defendant to prove innocence, and we should not now allow that to continue.

I welcome the Government’s proposals for several reasons. First, I believe it is right to extend the regulatory regime across the whole financial services industry and thereby strengthen regulation. It is also right that we should not change a fundamental tenet of English law, which is that a person is innocent until proved guilty. As I have indicated, to reverse the burden of proof in this way is an excuse for failing to create an effective regulatory regime. Indeed, it is a lazy way of dealing with a problem and should not be countenanced. The provision that it is now proposed should be reversed, frankly, should never have been enacted. I am pleased that the Government have now recognised this.

In proposing this change, the Government seek to treat all financial institutions in the same way. Surely that must be right and fair. Why should there be one rule for large institutions and another for smaller ones? If a financial institution or someone working there breaks the rules then there should be a consequence, and everyone should be treated equally. Any suggestion that there should be a two-tier system so that the present law presuming guilt applies only to certain institutions, but the burden of proof shifts for those institutions that now come within this regulatory regime, is unfair. We should not discriminate between institutions. This could lead to unfair competition and could prejudice the very people we wish to protect—the consumers and customers.

The effectiveness of these new rules, once in force, should be carefully monitored and scrutinised. If, despite the extension of the regulatory regime now proposed, more is required, the Government must not shy away from a further extension of regulatory powers. However, in so doing, they should not then restore the short cut of shifting the burden of proof.

[Baroness Kramer]

My Lords, I cannot in any way better the speeches of my noble friend Lord Sharkey and the noble Lord, Lord McFall, but maybe I could make a few additional comments.

First, there is the argument in favour of a two-tier system. The regulator is already managing the banks and the financial services industry as a two-tier system. There are different rules for systemically important institutions and for the much smaller institutions whose behaviour cannot disturb the financial stability of the country. If the principle is that the banking industry and the financial services industry should be regulated only under a single tier, the Government are, in a sense, demanding that a great deal of regulation be rolled back, which, they are currently arguing, makes us more secure. We have a two-tier system; we are arguing that that two-tier system should encompass this kind of liability.

I want to also talk about the difficulties in pursuing senior managers when their institutions have been involved in outrageous and illegal behaviour. These are not victimless crimes, although they are often treated as though they are. The collapse of the banking system had a huge impact on people up and down the country: people lost their jobs, had to live through a period of suppressed wages and have seen public services cut. The experiences of ordinary people over the last five years have been wretched, and the trigger for that crisis was a financial crisis created by systemic financial institutions—so many people suffered as a consequence of that.

If I look at the misbehaviour inside the banks, I see that those were not victimless crimes. The families that paid for PPI that they did not need and could not use were often families without large resources—the cost mattered. Small businesses were persuaded to enter into interest rate swaps that were completely inappropriate for them, and some went under as a consequence of the problems generated by those swaps. Money laundering, which was on an industrial scale across many of our institutions, supported the drugs trade, prostitution and people trafficking, all of which did extensive damage to our communities. LIBOR mis-selling and mispriced mortgages and loans for individuals over a long period of time came at a significant cost to them, as well as, frankly, bringing the City of London into disrepute and, for a time, putting it at risk as a financial centre. We know that the United States seriously considered whether or not London could continue to be a major player if it could so poorly regulate its financial institutions as to allow manipulation of a core measure such as LIBOR.

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[Lord Hunt of Wirral]

I hope that the noble Lord will not mind if I try to avoid following him down that route. I hope that noble Lords will understand that my objection is that I dislike in any event the reverse burden of proof. I welcome the fact that it is to be abolished, but I want to send a message that the financial services industry should be composed of people who put the customer, the consumer and the client first and observe the highest possible principles both professionally and in the standards they seek to maintain.

[Baroness Kramer]

My Lords, I do not mean to be in any way offensive to the noble Lord, but we cannot afford to be naive. We were naive for decades and in that period significant abuse took place. I am not talking just about a failure to make proper credit decisions. If we look at RBS, we can see that it lost money the old-fashioned way. It made very foolish loans and abandoned appropriate credit standards. You could call that incompetence rather than venality. But what of money laundering, LIBOR mis-selling and PPI mis-selling? These were not failures of competence; they were quite deliberate abuses of the customer on an industrial scale, year after year after year. The assumption that all the people engaged in those activities have either changed who they are or have left the industry is, may I suggest to him, naive?

Part of the underlying problem is that so much money is at stake here. For senior people who turn their eyes away from abuse, there are very substantial financial rewards. As we have seen, even when there are some penalties such as clawback, they are only a small proportion of extraordinary rewards. We are in a situation where the risk is high if abuse continues. I understand the noble Lord’s concerns over the reverse burden of proof, and I do not support it lightly, but as my noble friend Lord Sharkey said, we have on the statute book at least 10 or 11 other Acts, frequently supported by Members of this House, which have decided that the reverse burden of proof is necessary because it is the only way for the law to be effective.

[Lord Hunt of Wirral]

I am not sure that I am supposed to try to answer the noble Baroness. Perhaps I may just say that if she examines her basic beliefs, she will agree with me that the presumption of innocence is a fundamental human right. I suppose we disagree because the noble Baroness would like to see a two-tier system. I find that very difficult to justify.

I revert back to my view that complementary self-regulation is the way forward. If the trust and confidence that the public had in the financial services industry is to be restored, the message has to go out to the industry that, rather than be subjected to even tougher statutory rules and regulations, the time has come for it to take the lead and determine how its businesses are to be run in the interests of the customer. I hope that that will be the message that goes out from this debate.

[Lord Carrington of Fulham]

My Lords, I had not intended to intervene on this amendment, and before I speak, perhaps I had better remind the Committee of my interests as set out in the register. I think that everything has been said about the natural justice and injustice of the reverse burden of proof, particularly on this side by the right reverend Prelate the Bishop of Southwark. I do not want to take that line because the argument is clear; rather, I want to add two practical thoughts. The first is that if there has been wrongdoing in a financial institution, I do not think that anyone in this House would support the guilty parties getting away with it, however senior they are in the organisation. The question is not whether they should get away with it but whether the powers exist to enable the regulators, and then the proper prosecuting authorities, to take appropriate action. I remind the Committee that the PRA has very extensive powers. If the authority considers that there has been malfeasance in a financial institution, it is able to go in and trawl through the records of that institution in great detail, to the extent of looking at email trails.

[Baroness Kramer]

I believe that the noble Lord, Lord Carrington, is referring to the FCA, but regardless of that, he has mentioned email trails. Is he aware that the absence of email trails was a fundamental part of the regulator’s decision that it was not able to pursue a single case to senior management level? There was an absence not only of email trails but of any other record which would enable pursuit of a trail from the bottom upwards. The evidence for that is very clear in the transcripts of the Parliamentary Commission on Banking Standards.

[Lord Carrington of Fulham]

I have not read those transcripts, but I have some experience of both the PRA and the FCA, and I can tell the noble Baroness that those powers exist for both bodies. If they do not, or if they need enhancing, I would be the first to say that that should happen

[Baroness Kramer]

I am sorry to keep bobbing up and down, but the point that was made was that those in charge are very careful that there is no email trail and no written trail. That is one of the points about the reverse burden of proof: in effect it requires senior managers to allow an email trail to exist, or indeed some sort of audit trail, because they would be in a position where they would be required to demonstrate that they had taken reasonable steps. When the burden shifts back to the regulator, the regulator is completely stymied at the point where all conversations and exchanges take place in an environment where there are no minutes, no emails, no memos and no existing trail.

[Lord Carrington of Fulham]

I will come on to that in a moment; that is the second point I wish to make. The first point is that the power does exist for the PRA—and, indeed, the FCA—to be able to go and investigate what has happened inside a financial institution in very great depth and in very great detail.

The consequence of the reverse burden of proof would be to make the situation to which the noble Baroness referred even worse. An organisation which knows that there is individual liability where they have to prove that they did no wrong will have lawyers crawling all over them to make certain that at every move, nothing is recorded, nothing is said and nothing is minuted which would put them in a position where they could do anything other than deny all culpability. That is what would happen—and to some extent does happen. But I can reassure the House that destroying email trails is extraordinarily difficult. In most institutions, email trails survive through even the greatest attempts to wipe the hard drives clean. I can assure the noble Baroness that if the PRA wishes to find evidence and has the resources, the determination and the suspicion, it will find the evidence to bring the prosecutions it needs.