Financial Services (Banking Reform) Bill

Cathy Jamieson Excerpts

Monday 8th July 2013 Commons Chamber

We need not more laws but to address the culture within banks and financial services. We pay senior executives in those institutions to assess risk. If the highest fine associated with the 2008 banking collapse is less than the bonuses of those executives in the preceding year, as is currently the case, it is logical that executives will assess the risk of being caught and of a paltry fine as being a risk worth taking. If the penalty is against the firm and not against them as individuals, that will further embolden them to take risks from which they personally benefit. That is why I seek to draw the Financial Secretary’s attention to the opportunity offered by new clause 2 to reverse the burden of proof without condition, so that we can hit those responsible for future failure personally and where it hurts most—in their pocket.

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

It is a pleasure to speak to this group of new clauses, and I thank members of the banking commission—a number of whom are with us today—for their thoughtful work, and for the time and energy they put into ensuring that we had a series of recommendations, which have given us the opportunity to table a number of amendments in Committee and on Report.

The Opposition tabled amendments in Committee to reflect the commission’s recommendations, but for various reasons—some of which I could understand and some of which I could not—the Government did not see fit to accept them. There was some disappointment when we got the opportunity to scrutinise the original Bill that it was so thin—to be fair, the Government recognised that in their response published today, but we must get to annex B2 to find that acknowledgment. At times it would have been good to have a clearer indication of the Government’s direction of travel, and perhaps some of the details to discuss in Committee. As is often said, however, we are where we are, and we are now discussing the Bill in the context of the report published today.

No doubt all Members have had the opportunity to read the Government’s report, which provides a slightly more detailed response to the report by the Parliamentary Commission on Banking Standards. There are, however, some areas where clarification or further information from the Minister would be helpful. The new clauses were tabled before we were aware of which provisions the Government intended to accept, and we may have tabled a number of them differently—or not at all—had we known their intentions. Nevertheless, there are a couple of issues that we believe are not covered by the report and the Government’s response.

To put my remarks in context, the areas where quick implementation can be taken forward have been highlighted and the issues that require more detailed work have been identified. Where the Government do not agree with the commission has also identified. I will come to some specific issues in the new clauses, but it is worth noting that the Government now accept the need for change and action in a number of areas in which the Opposition have consistently made the case on Second Reading, in Committee and today.

The Government have announced plans to implement measures to improve individual accountability, and some of our new clauses relate to that in the overall context of conduct and remuneration. The Government have mentioned the tough new senior persons regime governing the behaviour of senior bank staff, outlined a willingness to take forward work on new banking standards rules to promote higher standards for bank staff, and—this was controversial in some quarters—we are pleased that they have at last decided to introduce a new criminal offence for reckless misconduct for senior bankers. We have heard from the hon. Member for North East Cambridgeshire (Stephen Barclay) about reversing the burden of proof so that bank bosses are held accountable for breaches within their areas of responsibility. The Government have made further commitments to work with regulators to implement the commission’s proposals on pay, allowing bonuses to be deferred for up to 10 years, and enabling 100% clawback of bonuses where banks receive state aid. All those areas are relevant to our discussion.

Some of the proposed reforms are either already enshrined in EU legislation or are part of forthcoming EU legislation, in some cases specifically relating to bonuses capped to salaries and bonus limits on bailed-out banks. Therefore, the Government would have had to consider the issue anyway, notwithstanding the fact that the Opposition have been pressing them to do so.

On new clause 2, the hon. Member for North East Cambridgeshire spoke eloquently about the culture involved. We can debate legislation and change as many regulations as we like, but if we do not get into the heads of those who make decisions and create that culture, we will not change enough to ensure that past scenarios do not happen in the future. The hon. Gentleman said that he did not intend to push the new clause to the vote. I had assumed that perhaps the Government would have agreed to it and that he would have been acclaimed as the favoured son who had tabled a new clause that the Government accepted—and therefore his record would have been better than mine; throughout the Bill’s time in Committee, I managed to get only one word changed, much to the chagrin of my hon. Friend the Member for Nottingham East (Chris Leslie).

New clause 3 was inspired by the commission, and builds on an amendment that was tabled in Committee and recommendations in the commission’s final report. It would introduce a licensing regime for

“all approved persons exercising controlled functions,”

to ensure that such persons have adequate standards of competence and integrity. Again, that was a feature of the discussion in Committee, and we were keen for reforms to be brought forward to ensure that future banking misconduct is prevented, whether that is fixing LIBOR rates or mis-selling financial products. In Committee we argued that similar regimes have applied to other professionals, and there is no reason in principle why that should not be the case in the banking and financial services sector. Just as with lawyers, doctors or other professionals, misconduct in banking and financial services causes potential injury, injustice or financial loss. In the financial sector, the consequences and costs of bad behaviour cost billions and harm the whole of society, so we believe it right to introduce safeguards similar to those in other professions.

We tabled new clause 3 because we wanted to introduce our senior persons regime and revised set of banking standards rules, as recommended by the Parliamentary Commission on Banking Standards, and it is good that the Government intend to take that forward. In his response, will the Minister provide a further flavour of how he intends to do that and give some detail, particularly on the scope of the legislation he proposes to introduce?

Why did the Government not feel able to introduce such a measure at an earlier stage in Committee? We would have welcomed the opportunity to scrutinise, discuss and probe the Bill in slightly more detail then. Will everything now be done in the other place, and will there be time for consideration in this Chamber? In his opening remarks I think the Minister gave an assurance that there would be ample opportunity to discuss those issues in the Chamber, but it is worth noting that when the Bill passes into statute as a result of all the work done to it, it will be very different to the one initially introduced, and it is right and proper that we have the opportunity to scrutinise it at every stage.

The Minister will be familiar with the amendment that we tabled in Committee on the duty of care, and we have now tabled new clause 4, which would introduce duties of care for ring-fenced bodies—first, a fiduciary duty in relation to the carrying out of core services, and secondly a more general duty of care across the financial services sector. As I outlined in Committee, we bring this forward because we feel that it would send an important signal to the general public, who still have some way to go before trust is restored in the banking and financial services sector.

--- Later in debate ---

[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.

[Mr Ruffley]

On a point of information, what fiduciary duties, other than a duty of care, does the hon. Lady envisage?

[Cathy Jamieson]

I could go back through some of the issues that were raised in Committee. As I outlined, some of the duties that would be expected are those defined and accepted in common law already. What we want to do is try to put them in legislation to give a clear signal to consumers that things have changed and to try to rebuild trust in the banking system. I do not think that the customers of the banks think that it is unreasonable to have something that says that the banks should act in consumers’ interests when looking after their money.

New clause 5 reflects another amendment that we tabled in Committee. It is important to have assurances from the Government in the absence of knowing their intentions about remuneration reform. We tabled new clause 5 because we want the banks to take account of performance and stability over a five to 10-year period. That would reduce unnecessary risk-taking, force bankers to take a longer-term view, and end rewards for short-term profit. We tabled an amendment on this in Committee, and the parliamentary commission took a similar view in its report, which states:

“The Commission recommends that the new Remuneration Code include a new power for the regulators to require that a substantial part of remuneration be deferred for up to 10 years, where it is necessary for effective long-term risk management.”

That was raised by the Treasury Committee in January, when the Bank of England director Andy Haldane called for various reforms.

[Stephen Barclay]

Does the hon. Lady not recognise that the difficulty with catch-all provisions, such as that for a 10-year period, is that they capture the good as much as the bad? New clause 2 would create targeted regulation to focus on those who have done wrong, instead of a catch-all provision that captures everyone.

[Cathy Jamieson]

I might have been tempted to support new clause 2 had the hon. Gentleman decided to put it to the vote, and I look forward with interest to hearing what the Minister has to say. I understand the issues relating to length of time and the dangers of a catch-all provision but, in the aftermath of the banking crisis, the legal and regulatory structures, and the further changes that the Government promise to introduce, we need to ensure that the banking culture really changes. New clause 5 attempts to ensure that banks think for themselves about how to ensure that their performance is sustainable. Now that the Government have moved to an acceptance of the broad principle, the devil will be in the detail of what they do next. Perhaps the Minister will have more to say on that.

[Mark Garnier]

The shadow Minister raises the 10-year deferral of bonuses recommended by the Parliamentary Commission on Banking Standards. We made that recommendation so that we could at least see the business of a bank through a business cycle, as it can take 10 years to expose irregularities. One problem occurs that when people in receipt of such bonuses—there are already some deferred bonuses, in particular in UBS—want to move to another institution, they are bought out of their held-back bonus. Does the hon. Lady have any proposals to deal with that?

[Cathy Jamieson]

The hon. Gentleman makes an extremely good point. It is perhaps worth remembering that not only did the Parliamentary Commission on Banking Standards make that recommendation, but Andy Haldane supported it when he came before the Treasury Committee. I am sure that the Minister will have something to say on that when he sets out his next set of actions.

New clause 7 relates to protection for whistleblowers. It is important to ensure that workers are protected if they make a disclosure in the “reasonable belief” that misconduct has occurred, is occurring or could occur. The new clause would amend the Employment Rights Act 1996 and impose a duty on managers to inform the bank chairman—or chairwoman, if that is the case—of any report of wrongdoing that qualifies as a “protected disclosure”. This is an updated version of a clause tabled in Committee, and reflects the final report of the parliamentary commission, which in paragraph 788 states:

“A non-executive board member—preferably the Chairman—should be given specific responsibility under the Senior Persons Regime for the effective operation of the firm’s whistleblowing regime. That Board member must be satisfied that there are robust and effective whistleblowing procedures in place and that complaints are dealt with and escalated appropriately. It should be his or her personal responsibility to see that they are.”

In new clause 7 we are attempting to trigger a cultural change in the financial services sector. There is no doubt that a bank employee would wrestle with their conscience before deciding to break ranks. If an honest trader suspects wrongdoing and is considering informing the authorities, there must be protections to mitigate his or her fear of losing their job.

The LIBOR scandal illustrates the importance of making it easier to report wrongdoing. At that time there was a quite a lot of speculation in the press and elsewhere about the accuracy of LIBOR, yet nobody came forward with the evidence. New clause 7 seeks to bolster the maintenance of law and order—I think everyone would generally agree with that—and would make it easier for the regulators and the banks’ compliance teams to do their jobs.

I looked closely at the Government’s response to the commission today, which says:

“The Government recognises the important role that whistleblowing can play in exposing wrongdoing”.

It continues:

“BIS is publishing a ‘call for evidence’ to establish a strong evidence base to help Government better understand the operation of the whistleblowing framework in today’s employment environment”.

It seems that the Government are now linking whistleblowing in the financial services sector with the wider review. We need to be careful about how a code of conduct, support for regulators and the role of regulators—including their interaction with employment tribunals, which is how the report couches this issue in context—are dealt with. Will the Minister say in his response when he anticipates the review being completed and what legislative vehicle would be proposed to implement any recommendations? It was not immediately apparent to me on reading the report that that had been established or thought through. Does he agree that any delay in dealing with the issue would risk putting that change out of sync with some of the other important changes that will be made to banking and the banking culture?

[David Rutley (Macclesfield) (Con)]

I am following the hon. Lady’s argument with interest. Proposed new section 43B(g) of the Employment Rights Act 1996 refers to where

“a breach of regulated activities under FSMA 2000…has been committed…or is likely to be committed.”

So that we can understand the new clause better, how would she determine whether something was “likely” to be committed?

[Cathy Jamieson]

The hon. Gentleman makes a useful and probing point—I wish I had had the opportunity to probe the Government’s proposals in the same way. The point is to look at patterns of behaviour and conduct. The important thing is that this change or anything that the Government introduce should be robust and should stack up. That is why I was particularly keen to know how the Minister sees this issue being taken forward. However, I recognise that there is a wider context, so if he could respond by giving me some assurances on this issue, I would probably be tempted not to press new clause 7 to a vote.

Let me briefly mention new clause 11, which deals with criminal sanctions. New clause 11 was also inspired by the work of the Banking Commission. It would require the Government to bring forward proposals for the new offence of reckless misconduct in the management of a bank covering the people licensed under the senior persons regime and would seek civil recovery of money from people found guilty of the offence. Although that might be controversial in some areas, it is important. I welcome the fact that the Government now seem to be moving on this, and I await the detail with interest. It is vital that bankers are held to account for their actions. That is important not just for any action after a future crisis, but as a deterrent, should any bank executives be tempted to take unnecessary or reckless risks.

[Richard Fuller]

I do not wish at this moment to be unduly partisan, but could the hon. Lady advise us on the evolution of the Opposition’s thinking? Was the imposition of criminal sanctions for the reckless management of banks discussed in the previous Government?

[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.

[Stephen Barclay]

I seek to understand the scope of new clause 13 and the financial crime unit. Would it have taken criminal sanctions against the auditors of RBS, who so failed that they required the then permanent secretary of the Treasury to seek a letter of direction?

[Cathy Jamieson]

I am sure the hon. Gentleman will not be surprised to learn that I am not going to go into the detail of that case. He has had a career in the banking sector dealing with such issues, and he will be as aware as I am that looking at one case in isolation is sometimes not the best way to appreciate the overall picture. The overall picture is what I am interested in, and why I specifically mentioned LIBOR, because it is already a criminal offence to attempt to fix that rate. We need to seek to ensure that the SFO has the resources necessary to tackle this and to prevent any further scandals.

We have tabled new clause 13 to give Parliament a chance, once again, further down the line to discuss the creation of a new agency, and we hope it would send a firm message to those tempted to engage in criminal conduct. I hope that the Minister may be able to say something more on that in his response. He did not seem to be persuaded in Committee of the need for a new unit or even a subdivision. My recollection is that he took that view, “Its all fraud and there is no need to have a specific unit or part of an organisation dealing with it.”

I think I have covered a number of issues relating to these proposals. Once again, it is important to put on the record the fact that although we have had the opportunity to raise some of these issues in Committee and this evening, it is unfortunate that on Report we are not going to be able to scrutinise the detail of some of the new clauses—it is fair for us to assume that they might have been tabled at this stage. I seek the Minister’s further reassurance that we are going to get the important detail of how he intends to proceed, that we will see as much as is possible of the draft new clauses and legislation as things are taken forward, and that we will have an appropriate opportunity to discuss all that further in this place.

[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.