Financial Services (Banking Reform) Bill

Baroness Noakes Excerpts

Tuesday 15th October 2013 Lords Chamber

[Baroness Noakes (Con)]

My Lords, for various reasons I have not yet had an opportunity to speak to the Bill. As this is my first appearance, I declare an interest as recorded in the register as a non-executive director of the Royal Bank of Scotland Group plc. I emphasise that what I am about to say represents my personal views, and in no way represents anything that I have been asked or encouraged to say by the Royal Bank of Scotland.

I want to comment on the group of amendments that the noble Lord, Lord Brennan, introduced when he raised the extremely important issue of anti money-laundering and the legislative provisions that he referred to, and on my noble friend Lord Newby’s comments about seeking to import specific references into this group of amendments. I should say that I support the intention of the amendments which the Government have brought forward to have a much enhanced set of standards and supervision for those taking management responsibilities within banks.

My concern about the amendments introduced by the noble Lord, Lord Brennan, is that by singling out one group of activities, however important, we might give the impression that a lot of other things are not as important. The schema at the moment is drafted quite generically. It will eventually leave a lot to the discretion of the regulators—which I think is right—so that they can operate it in an effective manner. However, by singling out the particular legislation that the noble Lord, Lord Watson of Invergowrie, referred to—the Fraud Act, the Proceeds of Crime Act and the Money Laundering Regulations—it seems to me that a lot of things are not said.

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[Lord Eatwell]

I would like to reinforce the position of the official Opposition on this. We are totally behind what the noble Lords, Lord Lawson and Lord Turnbull, have said. It is disgraceful to suggest that investment banks that are not deposit-taking but offer a wide range of financial services should not come under this senior persons regime.

[Baroness Noakes]

Was the Minister talking about retail deposits, as I believe my noble friend Lord Lawson has interpreted him saying, or, as the legislation seems to me to say, about deposit-taking more widely? Deposit-taking is not confined to retail banking on ring-fenced operations. Deposit-taking occurs across the whole range of banking activities, as far as I am aware. Will he clarify to what kinds of activity he intend this to apply?

[Lord Newby]

The definition relates to deposit-taking, retail and wholesale.

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[Lord Phillips of Sudbury]

My Lords, I commend the Government on bringing forward Amendment 58. It has been a source of great public disaffection that over the past few years the number of people in the City responsible for some really gross acts of criminality who have been brought to book could be measured on the fingers of two hands; indeed, the noble Lord, Lord Turnbull, referred earlier to the pathetic enforcement statistics. This provision is therefore vital. However, I have two thoughts regarding the way in which this is framed: first, that it is too severe, and secondly, that it is too light, or slight.

The title of the clause is:

“Offences relating to decision”—

I suppose they mean “a decision”—

“that results in bank failure”.

I note that in two places in the clause itself it talks about a decision that “causes” a bank failure. There is a difference in the meaning of the words, “resulting” in a bank failure and “causing” it. The word “causing” is absolutely direct in a way that “resulting” is not. Perhaps the Minister might like to look at that.

The other point that strikes me about the wording of this clause is in Amendment 58(1)(c) and (d). Paragraph (c) says,

“in all the circumstances, S’s conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person in S’s position”.

The noble Lord, Lord Brennan, has already made points on this. That is unsatisfactory in another sense. However, if we are—as we are—making criminal offences out of the conduct defined in this new clause, there should be a clear indication that no one can be convicted unless there is a want of integrity or honesty on the part of the person convicted. That is a fundamental principle of British criminal law. However concerned we are, and I certainly am, to bring to book the many malefactors who have ruined the reputation of the City in recent years, one cannot do it at the cost of changing or undermining that fundamental test of criminality, intent, bad faith, dishonesty or want of integrity—call it what you like. The language here does not clearly require that intent and want of integrity. There are cases that would fall within Amendment 58 that would not satisfy the normal test of mens rea in criminal offences.

I will refer briefly to Amendment 60 in this group, which is about the institution of proceedings. Subsection (4) says:

“In exercising its power to institute proceedings for an offence, the FCA or the PRA must comply with any conditions or restrictions imposed in writing by the Treasury”.

Those are the words. I cannot see anywhere, in this amendment or elsewhere, a requirement for the conditions or restrictions imposed in writing by the Treasury to be made public. Surely it is a fundamental requirement of restrictions or conditions that will potentially lead firms and individuals into the criminal courts that those conditions or restrictions be made public.

[Baroness Noakes]

My Lords, my first thought on seeing this new offence relating to bank failure was to be mildly appalled at something that might possibly impinge on one’s personal life, but I have tried to put that to one side and to look at this clause dispassionately. What concerns me is a point raised by the noble Lord, Lord Phillips of Sudbury, which relates to causation. That is mentioned several times in this clause, but one of the conditions in subsection (1)(d) of the new clause proposed by Amendment 58 is that,

“the implementation of the decision causes the failure of the group”.

Is it clear that single decisions cause failures of the nature that we are talking about? I ask him to think, in the context of the failures that existed in the wake of the 2008 financial crisis, whether any one of those, had they occurred today and been dealt with under existing legislation, could have technically satisfied the wording in this offence. Even in the simplest case of failure, which was probably Northern Rock, it was not as simple as one decision or even one group of decisions. There were multiple points of decision which contributed. Certainly, when one gets to something as complicated as the failure of Lehman Brothers, I would be absolutely astonished if anybody could have pointed to one decision causing one failure.

[Lord Newby]

My Lords, I will try to sum up some of those points. One of the big challenges that we faced in producing the exact terms of this amendment was to produce a sanction which is a credible offence and could be successfully prosecuted. Setting the conditions to include that in all the circumstances the individual’s conduct fell far below what could reasonably be expected of them and that they were aware of the risk that a decision could cause the bank to fail gives us the clarity that we need. This will capture behaviour which in normal parlance or in normal view would be considered reckless.

The noble Lord, Lord Brennan, said that he was keen that this new offence should make people think. It will make people think, but equally it must have within it a degree of certainty that means that an offence could be prosecutable. This necessarily circumscribes the way in which we define it.

I can confirm to the noble Lord, Lord Eatwell, that his interpretation of the provisions in the Bill is correct.

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[Lord Higgins]

Those of us who have been through many legislative processes may be a little appalled to find that it takes 40 pages of amendments to establish a payments regulator. I wish to ask one or two simple questions. On whom will the cost of this regulation fall? Have we an estimate of what it is likely to be? The Minister referred to what I believe was the lamentable attempt to get rid of the cheque system. Will this proposal stand up if the cheque system is changed? As far as international transactions are concerned, will the regulator be concerned with payments which are made internationally?

[Baroness Noakes]

My Lords, my initial reaction to these new clauses was that they constituted a sledgehammer to crack a nut. It seems to me that creating another regulator in a territory which is well occupied by regulators is unnecessary in this case. To that extent I support the noble Lord, Lord Eatwell. One has only to look at government Amendment 60YYH to see that the new regulator will have to co-ordinate with the Bank of England, the FCA and the PRA. These bodies already have to co-ordinate among themselves for different purposes in any event. I think that the world is slightly going mad on this. My noble friend Lord Higgins asks who will pay for the regulator. Obviously, the people who will operate the payment systems will pay for the regulator. I suspect that this arrangement will be more expensive than the existing Payments Council system. I do not know how much more expensive it will be. I believe that we should be told what the costs are because they will inevitably end up being paid for by the businesses and individuals who use payments systems. There is no one else.

I have one question with two parts for my noble friend which relates to the powers in government Amendments 60S and 60T. One part relates to the power to require access to payment systems. I completely understand that. If you are to promote competition, you need powers to require access. The other relates to the variation of agreements relating to payment systems to take out anti-competitive elements in arrangements that have already been made. Both those measures could have financial consequences for those who operate payment systems. I do not object to the principle involved, but where in these 40 pages of amendments can I find the principles that the payments regulator has to use in deciding how he approaches those decisions? I assume that he cannot have unlimited discretion to decide who will pay for what and on what terms. However, there appear to be no basic financial principles underpinning this arrangement in the 40 pages of amendments, which seems to me a lacuna.

[Lord Phillips of Sudbury]

My Lords, for the record, these amendments cover exactly 52 pages. The only other point I wish to make—I agree with the noble Lord, Lord Eatwell, here—is that, despite the payment system having its own regulator, new subsection (3) of government Amendment 60B states:

“The FCA must take such steps as are necessary to ensure that the Payment Systems Regulator is, at all times, capable of exercising”,

its functions. It has the job of overseeing the regulator, so why on earth does it not do the job itself?

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[Lord Newby]

My Lords, I am extremely sorry that the noble Lord does not understand. We just have a difference of view about that. The noble Baroness, Lady Noakes, asked about the kind of action that the regulator could take and whether it could, in effect, behave unreasonably. The answer is—

[Baroness Noakes]

I did not question whether or not it could behave reasonably because all regulators are supposed to behave reasonably, and can be challenged if they do not. I asked the Minister to address specific points. There are amendments here about granting access and varying the terms of existing agreements. I asked where in the 40, which I am told is now 52, pages of amendments that we are asked to consider in this group are the financial principles that will guide this new regulator in imposing terms for this new access or in varying existing access rights. I was trying to tease out, for example, whether the regulator will have the power to impose subsidies on existing payments regulators or whether he will be required to ensure that the payment system operators can cover their costs. Therefore, I asked: where are the financial principles which the regulator has to use in exercising the powers that are granted by two of the amendments in this group?

[Lord Newby]

I am extremely sorry; I misunderstood the noble Baroness. I think that I shall have to write to her on that point.

My noble friend Lord Sharkey asked whether this was the only case in which a regulator had innovation as part of his remit. I simply do not know but I think that the noble Lord, Lord Lawson, pointed out that, if it were, that might indeed be an innovation. If it is an innovation, we think that it is a good one.

In terms of divestment and who picks up the shares, we are saying that this is something that the regulator should have the power to look at as one possibility. There is no blueprint in Treasury minds as to how he will do it or whether he will do it and, if so, who the beneficiaries will be. It is something that we want to have as an option for the regulator to look at. We want to give the regulator the greatest possible scope to come up with alternative ways of developing the system and possibly of generating new sources of funding for the innovation, which we are also keen on.

I am sure that I have omitted a number of points. My noble friend Lord Phillips raised a question concerning subsection (3) of the proposed new clause in Amendment 60B and I have now forgotten what he asked. Perhaps he would like to ask it again. He is indicating that he would not—that is good.