Financial Services (Banking Reform) Bill

David Ruffley Excerpts

Monday 8th July 2013 Commons Chamber

[Chris Leslie]

I am delighted that the hon. Gentleman has taken the trouble to look at the new clause, because it is our second attempt to cajole or persuade the Government to look at this issue. In Committee, we took a different approach to the question of leverage, and tried to clarify that there was a clear power for the Government to act. I hope in the spirit of consensus and trying to move the arguments forward, the Minister and the House will accept that we have taken a new approach, thinking about leverage as it affects the UK economy as a whole. Leverage—and I shall come on to make this argument—is part and parcel of the way in which an economy works, and in the new clause we have looked at a particular design that would encompass other institutions. I do not want to be misinterpreted: we mention foreign banks, for example, but I do not intend any extra-territorial reference in the new clause. It simply makes it clear that the provision has to encompass effective leverage on the UK financial services sector as a whole.

I have referred to the Vickers commission, and it is important that we do not forget the work that it did, and that we pay tribute to it. It said that

“a leverage cap of thirty-three is too lax for systemically important banks, since it means that a loss of only 3% of such banks’ assets would wipe out their capital.”

The commission recommended a 25:1 ratio—a 4% ratio—but the Chancellor dismissed that concern. It is essential that the ring fence is supported by tougher capital requirements, as well as by a leverage ratio.

The parliamentary commission said that it was not convinced by the Government’s decision to reject the Vickers recommendation to limit leverage in this way. The parliamentary commission said that it

“considers it essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3 per cent minimum required under Basel III. Not to do so would reduce the effectiveness of the leverage ratio as a counter-weight to the weaknesses of risk weighting.”

Sir Mervyn King, the former Governor of the Bank of England, said that the leverage ratio turned out to be

“a far better predictor of the institutions that failed in the crisis”

than measures of risk-weighted assets. I could go on; a great deal of debate has taken place on this issue.

Our new clause seeks a way of ensuring clarity on the powers and what sort of process would take place. We suggest that the powers of the Financial Policy Committee in the Financial Services Act 2012 should be amended to make it clear that a target should be set by the Treasury for the overall leverage of the United Kingdom’s financial system to encompass all the activities of those institutions that are originators of credit.

[Mr David Ruffley (Bury St Edmunds) (Con)]

May I unpick what the hon. Gentleman is saying? Does he mean a minimum leverage ratio or a target? There is a difference. Perhaps he could clarify that.

[Chris Leslie]

That is a very good question and I am open to debate on that. I believe that looking at that minimum leverage ratio as a target to be set for the leverage of the system as a whole in the UK would be the point of public policy, which is why it needs to be dealt with in a policy-making context by the Treasury, with reference to Parliament if need be. The key point is that it should then be for the regulators to look at the detailed implementation of that on a firm-by-firm basis.

Essentially, there is a parallel to be drawn between the way that the Chancellor of the Exchequer sets an inflation target for the Bank of England and the Monetary Policy Committee is given operational independence to find ways of meeting that target. The purpose of the debate today is to look at the potential parallel to be drawn there, with a target being set and operational independence for the implementation of that target being given to the Financial Policy Committee and the Bank of England. Over every three-month period the FPC should respond by notifying any changes and any actions that it has taken in order to regulate leverage, so that there is a dialogue and a process that is fairly self-explanatory.

[Mr Ruffley]

The hon. Gentleman is being very generous in giving way, but I want to be clear about his proposition. A target would imply that a bank that was just 10 times leverage would have to raise its leverage ratio to 25 times if it was a 4% target, whereas if it was a 4% minimum leverage ratio, that would be totally different. The bank that leveraged 10 times would not be in breach of that.

[Chris Leslie]

I understand the hon. Gentleman’s point. Let me be clear. The target that should be set would be for the financial system as a whole. It would be for the regulators to make judgments about firm-by-firm leverage arrangements, so it would be on a more sophisticated basis. There is a case to be made for a regulator to look at each individual institution. Some institutions are significantly different from one another. Some of the building societies, for example, have recently been making the point that they have different asset structures and so on, and that exactly the same leverage arrangement across the board for all firms simultaneously would not necessarily be appropriate. In an effort to work towards some way of dealing with the issue, this design is one that I have suggested.

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[Mr Redwood]

I remind the House that I provide investment advice on world markets and world economies, but I am pleased to say that it has nothing to do with banking credit or banking leverage, so I feel quite entitled to comment in this important debate.

I welcome what I hope is a probing new clause from the Opposition. It allows us to discuss something that is at the heart of what regulators need to do to have a strong banking sector and economy and to have the comfort at night of knowing that we will not live through another dreadful crisis like the credit crunch of the previous decade. The new clause goes to the heart of the issue: what action should the Government and regulators take to try to ensure that large banks and other institutions advancing credit that can be a risk to the whole system are kept under sensible control, so that we can be pretty confident that, if something goes wrong or the world economy dips, they have the necessary money to pay the bills and deal with any losses that might arise?

If we look at the tragic history of the previous decade, we can see that the then banking regulator in the United Kingdom—I think that it has now admitted this—got it wrong both ways. It wanted the banks to have too little capital, cash and protection, and in the run-up to the credit crisis in 2008 it allowed the most enormous expansion of leverage, which previous generations of regulators had not permitted. Then, in the ensuing panic, when interest rates had to rise to tackle the problem of inflation, it lurched to wanting very high amounts of capital, but at the time the banks could not generate profit and so found that very difficult. That resulted in the previous Government’s decision, in two of the worst cases, that capital should be forthcoming from the state and taxpayers themselves. I think that we all agree that we do not want to go back around that course or to get to the position again where some Members of this House feel that the only option is for the state to provide taxpayer support for organisations that have been too leveraged.

New clause 9 suggests that it is possible to set a leverage ratio for the system as a whole, and it might be, and that might be desirable, and I look forward to the Minister’s response. Of course, the regulator already does that in a way because it sets individual target ratios or capital requirements for all the major banks in the system, so if we aggregate those we get to its view of the aggregate amount of leverage. As the hon. Member for Nottingham East (Chris Leslie) has rightly said, if that overall leverage were to be set for the system as a whole, the regulator would still need to interpret that bank by bank. Some banks would be super-prudent and some would be straining at the other end of the spectrum and might be under special measures with the regulator to try to get their balance sheets into shape.

My particular worry at the moment is that it is never easy managing the transition. We would all be delighted to wake up tomorrow and discover that all the banks are super-safe, but if the price of getting to that stage too quickly is no growth in the economy or, worse still, the onset of another recession because the banks cannot finance the recovery, that would be a bad idea. Many of us would like to see the banks get to better ratios by writing more profitable business and generating more legitimate and sensible levels of profit, rather than having the regulator run the risk of moving too quickly to demand that they have much better ratios. The banks would then have to achieve those better ratios by not writing any new business and by trying to get old loans back ever more quickly from businesses that might find it difficult to repay them. Some of those banks, not being very profitable, could not trade themselves out of the difficulties that they found themselves in.

We also need to be conscious of what is happening globally, because although we should not chase the rest of the world if it has a group of regulators that are being far too generous and wish to re-enact the boom-type crisis of the previous decade—I do not think that we are in that position any more; I think that the regulators of the world are all generally trying to be more cautious—we need to ensure that we do not do anything in Britain that is particularly penal. What we need in order to have a prosperous economy is banks with sufficient profit, reserves and capital to be able to finance a normal recovery. It is very unpopular in this country to speak up for banks making profits at the moment, or indeed at any time, but it is important that they generate reasonable working profits, because that is the best way to make them more solvent.

[Mr Ruffley]

Is my right hon. Friend as unconvinced as I am by the relatively arbitrary figure of 4% being preferable to 3% for the leverage ratio? Like him, I believe that, if there is going to be any tightening on capital adequacy or leverage, it should be done when the recovery is more surely under way, and 3% is preferable to the 4% recommended by the Vickers commission and the parliamentary commission.

[Mr Redwood]

I think that I agree with my hon. Friend. What I am suggesting is that I would like to get closer to 4% and further away from 3% by growth, and I think that that could be inferred in Labour’s new clause, because I noticed that the hon. Member for Nottingham East wisely did not pledge himself firmly to 4%. Although he might secretly want 4%, like the rest of us he is probably wise enough to know that, although it might be nice to have 4% in due course, to lurch straight to a target that some big banks could not meet might be very damaging to the economy.

--- Later in debate ---

[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 Ruffley]

As has been mentioned already, some in the Bank, including Sir Mervyn King, argued that insufficient lending is a consequence of insufficient capital. I put that to Mr Bailey a few days ago in the Treasury Committee. I asked him about the net new lending level now compared with when funding for lending began last August, and he said that it was flat. Is that not evidence for his proposition that we cannot have tighter adequacy requirements on capital and lots more new lending? The figures show that lending is flat.

[Mr Redwood]

Indeed. That point also shows that we need banks to be profitable—particularly RBS, which is still largely state owned. Until the bank is making profits, its capital ratios will not improve quickly enough and it will then not be in a position to lend the money that the Government would like it to. The taxpayer would be grateful if it could be more profitable, because our shares would be worth more, which would be in the general interest.

I conclude by making the same point to the Minister. Yes, I want us to get to stronger banks with tighter ratios, but I want us to get there through growth and growth in bank profits—particularly for HBOS and RBS, in which we have a large state stake and whose results have been disappointing for a number of years. If we can get to that happy position, we can have a bit of growth and some more profitability and then the regulator will have to have a sensible conversation with the banks; it will say that some of the money has to be put into cash and capital so that they are stronger. We will be the better for that.

--- Later in debate ---

[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.

--- Later in debate ---

[Mr Ruffley]

I shall make two brief points. First, I congratulate my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) on drawing attention to something very important to the House—that it is this Government who have got behind the idea that there should be, in certain limited circumstances, a custodial sentence for breach of a new criminal offence. It is worth reminding ourselves that although the crash occurred in autumn 2008, the then Labour Government had 2009 and the first five months of 2010 to do something about it, but it is this Government who have made their intentions clear regarding custodial sentences. For that, Ministers should be congratulated.

The second and final point is that we cannot let this debate pass without reminding ourselves of the fact that existing criminal law was not being enforced in relation to the allegations of LIBOR rigging. The Parliamentary Commission on Banking Standards came into existence as a direct result of the allegations about rigging the LIBOR market. The custodial sentences available for those activities were not seriously taken on board by the Serious Fraud Office, for in 2011, it is said, the SFO inquired into whether existing criminal offences had been committed by those manipulating the LIBOR market, and concluded that they had not.

This time last year the Chancellor of the Exchequer told the House that he would ask the Serious Fraud Office to take another look to see whether criminal offences had been committed under existing criminal law. Leading counsel advised me and I said in the Chamber that there were, on the face of it, breaches of section 2 of the Theft Act 1968 through false accounting, the common law offence of conspiracy to defraud, breach of the Proceeds of Crime Act 2002, and possibly even breaches under the Fraud Act 2006.

Although the Minister clearly cannot intervene in investigations by the Serious Fraud Office because prosecutorial authorities are quite separate from the Executive, which has always been the case and will, I am sure, continue to be the case for centuries to come, it would be useful for him to indicate what the state of play is in relation to breaches of existing criminal law that might give rise to custodial sentences in the case of those engaged in LIBOR rigging.

[Greg Clark]

It is a pleasure to respond to this well-informed debate. I start by welcoming the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) to the Opposition Dispatch Box. She proved rather more persuasive in Committee than her hon. Friend the Member for Nottingham East (Chris Leslie), as I was able to accept at least one of her amendments. I think that it was a single word, but I am sure that it was an excellent one, historically so.

We are considering a large group of amendments, as has been evident in the range of the debate, and it has given us the opportunity to have an initial discussion of the parliamentary commission’s recommendations on questions of individual accountability and corporate governance. We agree with the recommendations that have been made. The commission’s report has at its heart the essential point that the UK banking system depends totally on the trust it commands. If it cannot count on the trust of its customers, it cannot truly serve businesses and people, which is the only purpose of banking. If it cannot count on the trust of businesses and people in this country, it cannot possibly sustain a reputation for international pre-eminence, which is what we all want to see.

The commission’s conclusions are comprehensive. Never again must directors of banks be able to preside expensively over failure or misconduct and then claim that they simply did not know what was going on. Never again must banks simply, as the commission sees it, contract out ethical judgments to the regulator. Never again must senior bankers be able to make one-way bets with the money of ordinary working people and walk away financially unscathed, leaving taxpayers with a crippling bill.

Specifically, we will enact the new senior persons regime that the commission proposes and introduce new banking standards rules to require high standards among all staff. We will introduce the new criminal offence of reckless misconduct that has been suggested for senior bankers. We will reverse the burden of proof so that the bosses are held accountable for breaches within their areas of responsibility. We will work with the regulators to implement the commission’s proposals to defer bonuses for up to 10 years and to enable 100% clawback of bonuses where banks receive state aid. We will ask the regulators to implement the commission’s recommendations on corporate governance to ensure that firms have the correct systems in place to identify risks and maintain standards of ethics. As I have said in earlier debates, where legislation is required, we will propose amendments in the autumn in the other place.

Let me deal specifically with today’s amendments and new clauses. New clause 2 was ably moved by my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay). In a powerful speech delivered without notes, he explained that the new clause seeks to reverse the burden of proof when taking action against a senior person where there are regulatory failings by a firm in that person’s area of responsibility. As the hon. Member for Edmonton (Mr Love) pointed out, that is one of the parliamentary commission’s recommendations, but I think that my hon. Friend campaigned for that even before the commission reported, drawing on his own experience as a regulator. I say to the hon. Member for Kilmarnock and Loudoun that my hon. Friend needs no tawdry trinket of the Government accepting his amendment to be lionised in this House for the contribution he has made. We very much accept the thrust of his recommendation and that of the parliamentary commission.

The PCBS put it this way:

“Senior managers of banks will no longer be able to hide behind an accountability firewall, where they are too distant from the consequences of their responsibilities to be held directly accountable when things go wrong.”

At present, the regulator has to be able to show that the person knew what was going on. That cannot be right. It means that while regulators can take action against the firm’s junior employees who might be implicated, they are unable to pin responsibility on someone higher up the chain just because, as the Commission put it, the e-mail trail goes cold when it reaches their level of management. I will take on board the case my hon. Friend made on whether it is necessary to require the corporate offence to be committed, and we will reflect on that before the Bill goes to the Lords.

New clause 3 reproduces a new clause that was considered in Committee, when I predicted that the parliamentary commission would have something to say about the approved persons regime and a code of conduct. My predictions proved uncannily accurate. The commission’s recommendation that the approved persons regime should be replaced is, of course, a major feature of its report, which we accept. We will bring forward amendments to introduce the new senior persons regime to replace FSMA’s approved persons regime. As the commission recommends, the new regime will ensure that key responsibilities within banks are assigned to specific individuals who are aware of those responsibilities and have formally accepted them. As part of the regime, we will implement the commission’s more detailed recommendations, including reversing the burden of proof, which I have just mentioned, and allowing regulators to make the approval of senior persons subject to conditions and time limits.

The regulators will also be able to make rules about the conduct of senior persons, replacing the current system of statements of principle and codes of practice. The new clauses will put in place new arrangements for regulating the conduct of individuals who are not covered by the senior persons regime. The arrangements will include provisions to allow the regulators to make rules covering financial services employees whose appointments are not subject to regulatory pre-approval.

My hon. Friend the Member for Bedford (Richard Fuller) is absolutely right: it is plausible that the deficiencies in the approved persons regime may affect not just the banking sector but other parts of the financial services industry. The relevant FSMA provisions apply to all parts of the sector, so it might be operationally simpler to apply the regime to the industry as a whole. The Government will consider, with the regulators, whether the relevant provisions should allow for the wider application that my hon. Friend has in mind.

As the hon. Member for Kilmarnock and Loudoun said, new clause 3 would not deliver the extent of the reforms that the Parliamentary Commission on Banking Standards is seeking. On that basis, I hope that the hon. Lady will withdraw the new clause.

New clause 4 also reflects a debate that we had in Committee. The commission did not recommend the introduction of a fiduciary duty or duty of care, but it did recommend an alternative route. It said that the Department for Business, Innovation and Skills should consult on changing the duties of the directors of ring-fenced banks, to prioritise the safety and soundness of the firm first, over the interests of shareholders.

The Government strongly believe that bank directors must maintain an awareness of their responsibility to safeguard the security and stability of the firm. Changes that will support a focus on stability and soundness—for example, giving directors specific duties under the proposed senior persons regime—will help. We will indeed consult on whether changing directors’ duties will help further to accomplish those intentions. I hope that that will reassure the hon. Lady.

A duty of care specifically towards customers across the financial sector is difficult to make sense of, as we have previously discussed. Would it mean, for example, that a bank had a duty of care not just to its own customers and those of its competitors but, as the proposed duty is to customers across the financial sector, the customers of an insurance company with no relevance to the firm itself? The new clause has been tabled to confirm the Government’s intentions on the wider duties of banks and their directors, and I hope that the hon. Lady is satisfied.

New clause 5 refers to remuneration. Of course, the Government have already taken significant steps in that regard; under the remuneration code, large parts of bonuses must be deferred and paid in shares, and cash bonuses must be limited. However, it is a question of not just the quantum of bonuses, but how they are decided in the first place. Next year, shareholders will have a binding vote on executive pay.

We strongly support the proposals made by the parliamentary commission. In particular, the commission has recommended that the regulator should have the power to require a substantial part of remuneration to be deferred for up to 10 years when that is necessary for effective long-term risk management. There is a subtle but critical distinction between the commission’s recommendation and the new clause. The power should be with the regulator to determine whether and in what circumstances to require extended deferral; my hon. Friend the Member for North East Cambridgeshire made that point.

The commission has commented that no single deferral period is appropriate but that it should be determined in accordance with the nature of each business and the risks and activities of the employee in question. The Government agree and will ask the PRA to consider the powers that it has to extend deferral periods as part of its consultation on implementing the commission’s proposals. I hope that that commitment will reassure the hon. Member for Kilmarnock and Loudoun and that she will not feel the need to press the matter further.

New clause 7 deals with protections for whistleblowers. As the hon. Lady said, we debated this in Committee, so I do no want to detain the House further today other than to reassure her that, as I explained on that occasion, these provisions already exist in legislation. Disclosures about criminal offences are already covered by the Employment Rights Act 1996. Disclosures about regulatory breaches are covered by FSMA. This proposal would cover, for example, disclosures about the breaches of the regulatory requirements in relation to the ring-fence. I assume that the second requirement is designed to give effect to the commission’s proposal that a non-executive board member, preferably the chairman, should be given specific responsibility under the senior persons regime. Again, the powers to enact this are already available to the regulator under FSMA, and we have indicated that we support the thrust of these recommendations.