Financial Services (Banking Reform) Bill

Emily Thornberry Excerpts

Wednesday 11th December 2013 Commons Chamber

[Emily Thornberry (Islington South and Finsbury) (Lab)]

With hindsight, will the hon. Gentleman help the House and say whether Fred Goodwin would have been prosecuted under that provision?

[Sajid Javid]

It is possible, although it is difficult to answer that question specifically as it would depend on the legal process, as anticipated in the Bill. As I progress with my remarks, the hon. Lady will see the kind of actions that can lead to prosecution.

[Sajid Javid]

My hon. Friend has explained well the reasoning behind the recommendation from the PCBS—which, of course, he was part of—and the deterrent effect this change could have should not be underestimated.

[Emily Thornberry]

I thank the Minister for giving way again; he is helpful in giving me the time because I am genuinely confused about this. If the proposed legislation is to have a deterrent effect and deter the sort of behaviour that was seen before the banking crash, had it been in place at the time, presumably people would have been prosecuted. All I want to know is: which people, and can the Minister give the House some examples?

[Sajid Javid]

As I discuss the issue I will provide more information on how the measure could work, and perhaps the hon. Lady will judge for herself, given the situation she has in mind, whether the measure would have acted as a deterrent, and whether a prosecution could have taken place.

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[Sajid Javid]

I completely agree with the hon. Gentleman and I think we all hope that the new criminal sanction will not actually have to be used because the offence will act as a genuine deterrent against such recklessness.

[Emily Thornberry]

If I were a senior banker to whom this law applied, what would affect my decision on whether to behave recklessly? Would it be the thought, “If I do this, there’s a risk my bank and the whole financial system will crash around my ears and I will be seen as personally responsible”, or would it be the possibility of being prosecuted under this new legislation?

[Sajid Javid]

Both cases would be a deterrent. A key point of the change to criminal sanctions is that they would apply if a senior manager took part in any reckless action—there is a very strong test, as we have just heard—that led to the failure of a bank. It would not be appropriate to perform a legal analysis of what has happened in the past because we do not have the full facts before us, but if a board full of senior managers makes a decision on, let us say, a potential acquisition and they fail to carry out proper due diligence or they deliberately ignore certain risk factors, and that eventually leads to a failure and collapse of that bank, that will be an example of the situation that the new offence tries to capture. It is reasonable to say that, as those senior managers will be aware of the new criminal sanction, which did not exist before, it will bear on their minds when they make those important decisions. The Government amendments in this group will improve standards and the culture in banking.

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[Cathy Jamieson]

My hon. Friend makes a valuable point. It would have stood us in good stead had we had such an opportunity. I have only been a Member of Parliament for a relatively short time, and others will have much more experience, but it seems to me unusual to have so many amendments at this stage of a Bill. External bodies have made significant representations at this stage, which is also unusual and shows the strength of feeling about the issue of banking and its culture. It also shows that people have been thinking about how to future-proof the Bill, not simply to repair damage done in the past, but to ensure that we do all we can for the future. Some people may feel that this has been a tick-box exercise and a part of the process that does not matter as much, and it is rather sad if that has been the case.

We know that we have a huge amount more to do. Only today we have seen the latest news about Lloyds bank being fined again. It is also fair to say that as the weeks and months have unfolded during the Bill’s passage, we have seen various situations emerge. I have written to the Minister on the recent issues on forex, and we have also had the sad events at the Co-operative bank and the outcome of investigations into the LIBOR rigging. Those all show that more issues may arise that will have to be dealt with properly, and we want to ensure that the legislation we put in place is able to do that.

[Emily Thornberry]

Is my hon. Friend satisfied with the definition of senior bankers as those who would be liable to be prosecuted? Is it sufficiently clear and is it felt that it covers those people who really would be directing proceedings?

[Cathy Jamieson]

My hon. Friend makes another interesting point. She has already raised the likelihood of criminal proceedings, and in that context the Minister made comparisons with other legislation. I was concerned about the comparison with legislation on corporate manslaughter, which my hon. Friend obviously knows a considerable amount about. We have to ensure that definitions are as tight as possible, so that things do not slip through the net at a later stage. I hope the Minister will be able to provide clarity on those concerns.

We wish to ensure that Lords amendment 41, on professional standards, stays in the Bill. Earlier this year, the Government committed to implementing the main recommendations of the Parliamentary Commission on Banking Standards. Those recommendations included the creation of the new criminal offence of reckless misconduct by senior bankers. We want to ensure that that is as tight as possible. As the Minister outlined, the Government also agreed to introduce a new two-tier authorisation process for bank staff.

Our concern is that the Government have consistently failed to go far enough on the professional standards required of bankers. When the Bill was first introduced, Ministers resisted, on three separate occasions, Opposition attempts to put tougher professional standards in the Bill. Introducing the proposal at an early stage would have allowed us the opportunity to debate and finesse it, if required. At that stage, we included proposals for an annual health check on senior bankers. Indeed, Labour first pushed for a licensing regime with an annual validation of competence during the Committee stage of the Financial Services Bill in March 2012, so we have been pressing this case for a lengthy period of time.

Lords amendment 41 states that there needs to be

“minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct.”

The recognised code of conduct is important. The then Minister, the hon. Member for Fareham (Mr Hoban), opposed the amendment, saying:

“I…argue very strongly that the amendment is not necessary. In fact, it could have unintended consequences.”––[Official Report, Financial Services Public Bill Committee, 1 March 2012; c. 235.]

I cannot recall what those unintended consequences he feared were. Given that the Government have now seen fit to change their view, I am sure they no longer have those concerns.

A similar amendment was tabled again in April 2013 to this Bill and once again it was voted down by the Government. We on this side of the House never give up: if we think something is the right thing to do, we will come back and come back again. We tabled the same amendment again in July 2013, and again the Government failed to support it. We tabled the amendments because we believe that the persons we are talking about must have adequate standards of competence and integrity. The debate on managing the process and legislating for it may seem technical, but it is important for people in the real world to know that we are trying to introduce reforms. There has been a degree of discussion across the House, and I accept that, but people need to know that we are trying to introduce reforms that complement the attempts to change the culture of the banking sector.

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[Mr Tyrie]

I have pressed the Bank of England on that issue with my Treasury Select Committee hat on. A subsequent exchange of letters between the Governor and the Chancellor makes it pretty clear that by the end of next year the issue will be resolved and responsibility will lie with the Bank. Indeed, I think that for anything else to happen, given that exchange of letters, would be considered extraordinary, unless the review came up with some major obstacle that no one had previously spotted.

Another important assurance has been given in respect of so-called special measures. We proposed the establishment of an intermediate tool between enforcement at one end of the spectrum and day-to-day supervision at the other, which regulators could use to keep an eye on banks and help to improve standards. The Americans have something of the kind, which is known as a memorandum of understanding. The Government said that the statutory underpinning that we proposed would not be necessary, but the regulators have now announced that they will produce a full and detailed guidance note after consultation, which will set out how the new tool will be created and administered.

[Emily Thornberry]

I am listening with great interest to the hon. Gentleman. As he may know, the United States operates a regime called the deferred prosecution agreement, under which an institution accepts that it has committed an offence and agrees to pay a large fine on the understanding that it will not be prosecuted. Part of the deal is that the institution must allow auditors in, and must change its behaviour. Is there a similarity between the DPA structure and the structure the hon. Gentleman is describing?

[Mr Tyrie]

In some cases, the “deal”, as the hon. Lady called it, is accompanied by a memorandum of understanding, in order to achieve exactly the result that we intend by means of special measures. However, the primary purpose of special measures is to provide a tool that need not lead to escalation and full enforcement. That is a step back from the example given by the hon. Lady.

We were also assured that there would be a review of the system of enforcement decision making, which is currently very unsatisfactory. We had proposed that the regulatory decisions committee should be separated further from the enforcement division of the Financial Conduct Authority and given statutory autonomy in relation to its decisions. The Government did not accept that proposal, but they did accept the need for the issue to be re-examined and the need for a fresh and independent pair of eyes to look at each enforcement action before it proceeds, and a review is now to be carried out.

The important issue of remuneration was raised, later in her remarks, by the hon. Member for Kilmarnock and Loudoun. The PRA has committed itself to aligning the maturity of the rewards for bankers with the maturity of the risks that they have incurred. That is crucial. It is the collecting and taking of bonuses in return for the creation and selling of a new financial instrument or tool when, although the full risks will not mature for many years, the individuals concerned have had the money in advance that has created so many misaligned incentives and so much poor behaviour. Those individuals need to know, even several years later, that there may be a clawback, or, better still in most cases, that their bonuses are deferred. They need to know that the product had better be robust enough to survive the test of time before they start selling it.

Let me now mention a few measures that the commission did not succeed in inserting in the Bill. I shall not describe any of them in detail—although I note that when I have tried to deal briefly with the measures that I have described so far, Members have intervened to ask me about a number of them.

Both the Select Committee and the commission concluded that the governance of the Bank of England was still in a mess, and would have to be sorted out. The Bank of England still has no board worthy of the name, and the cross-cutting lines of responsibility and accountability between various new institutions are, to put it mildly, very confused. One of the most senior people in the Bank told me recently that he thought the situation was like the Schleswig-Holstein question: the former Governor probably understood it, and one other guy had forgotten it—and the third was this person himself, whose name I had better not reveal on the Floor of the House.

We also failed to achieve change with our proposal to abolish United Kingdom Financial Investments Ltd. UKFI has been exposed as a fig leaf: it seems to be of very little practical use. The Labour Government’s intention in introducing it was good, but when the Government want to intervene directly in the activities of institutions they simply do so, and UKFI does not seem to be performing the “buffer” function that was intended for it.

We argued that the regulator should have a duty to compensate whistleblowers who had been disadvantaged by their firms. There are still risks, at least perceived risks, for whistleblowers, which will tend to deter them. It is a remarkable feature of the current crisis that there has been so little whistleblowing, and I am not yet convinced that we have managed to sort the matter out.

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[Mr Tyrie]

I think the banks have discovered that the scale of the damage done by the revelations and the scale of the fines that are now being imposed are systemic in implication for their institutions and that has shaken them up a lot. But I do think the culture at the top of our banks is changing. The task of our legislation is to entrench that change for a generation. We have had this crisis. The horse has bolted. What we have got to do now is devise a stable door that can keep the next horse in.

[Emily Thornberry]

Will the hon. Gentleman give way?

[Mr Tyrie]

I will this one last time, but I get a sense that Members might want me to draw to a close in a minute.

[Emily Thornberry]

The hon. Gentleman mentions LIBOR. In respect in particular of fraud, does he agree that if an individual working within an institution is behaving dishonestly for the benefit of that institution, the institution itself should be liable? If the law were to be changed to allow that, there really would be institutional change.

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[Ian Swales]

I will keep my remarks relatively brief. Neither of the two major parties has too much to crow about in this area, because the regulatory system is a product of both their Governments over time. However, at least this is one area where the Leader of the Opposition and the shadow Chancellor have said sorry for something they have left behind.

I am pleased with the work done by the Banking Commission, and I pay tribute to my hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso) and my colleague Baroness Kramer for the work they have done on it. I am delighted that the Government have, perhaps kicking and screaming, at last agreed to adopt the vast majority of the proposals. I am particularly delighted that the Bill puts in place powerful measures on ring-fencing, as the Liberal Democrats have been arguing for that for years. Not only was it in our 2010 manifesto, but it was on the front page, so I am pleased to see it happening.

The background to this is clear: taxpayers should not be held to ransom by these giant organisations, particularly for high-risk activities—casino banking, as it is sometimes called. We must also remember that a lot of these institutions are highly international, so the UK taxpayer is having to stand behind organisations that have a lot of activities overseas—that, too, does not seem right. So it is good that all these measures are being introduced.

We have seen banks that used to be on the side of customers, both individuals and businesses, increasingly behave very much on the side only of themselves. We have seen scandals involving payment protection insurance, LIBOR, foreign exchange and interest rate swaps, which is the one I particularly wish to highlight. I made a speech on that a few weeks ago in this House. I said that the banks appeared to be moving at a tortoise-like pace when we were not having debates and suddenly acted like hares for a few days when we did have them. I can report that they have become tortoises again since that debate a few weeks ago. Constituents of mine who were expecting repayments in very quick time are still waiting, so I hope the Minister will keep the pressure on, although that is not strictly relevant to today’s debate. We have also seen the Co-op bank scandal and predatory activity by banks in the corporate restructuring area—that is the current scandal and I am sure we have a lot more to hear about it.

The Government have been acting on matters such as transaction levies, and making sure that fines for institutions leave the industry and do not just go around in a magic circle. The current round of fines is being used to help pay for the military covenant, which has to be a great idea. The Secretary of State for Business, Innovation and Skills, my right hon. Friend the Member for Twickenham (Vince Cable) is trying, although it is sometimes a lonely furrow, to do something about high pay: shareholders are being given binding votes on their company’s pay policy; companies are being forced to publish single figures for executive deals; and companies are being encouraged to inject more diversity by hiring non-executives from a broader pool of academics, public servants and lawyers. So, to a limited extent, the Government are trying to do something about that.

I particularly wish to discuss Lords amendment 41, which deals with professional standards. A joke doing the rounds when the banking crash happened named the four chairs of the big banks and asked which of them and Terry Wogan had a banking qualification. Of course, the answer is Terry Wogan and none of the others. That illustrates that for too long we have had under-qualified people in important positions. The hon. Member for Bolton South East (Yasmin Qureshi), who is not in her place, was talking about the legal, medical, pharmaceutical and accountancy professions, which have professional standards of the type she would like to see. However, it is important to note that those standards are not set and regulated in this place; they are set by the professions themselves, which have a huge vested interest in ensuring their own high reputation. Those professions also carry out much more specific and autonomous work in terms of knowing whether an individual has transgressed or not. It is much more difficult in large organisations with long decisions chains to say who is actually responsible for each individual activity. However, I urge the banking profession to think a lot more about how it can enhance its reputation, which, let us face it, is pretty much at rock bottom at the moment. It should think, “How can we have professional standards which are enforced? How can we ensure that people are kept up to date with continuing professional development and that people will be struck off?” However, that is increasingly a role for professional bodies such as the Chartered Banker Institute to be thinking about; it is not something for legislation in this place.

I welcome the work of the Banking Commission and the Government’s response to it. I welcome the extra powers that regulators are going to have as a result of this legislation, but the onus is on them to use those powers. I would like the Minister to say, at some point during today’s debate, how we are going to scrutinise the regulators to make sure that they use their new powers to their full extent.

[Emily Thornberry]

It has been said that one of the great innovations of this Bill is the introduction of the offence of reckless banking. It is not beyond our imagination to think that in 2015 the measure will be promoted on many a doorstep by people who perhaps do not fully understand what it is that is being introduced. It is one of those proposed offences that promises a great deal, but delivers very little indeed. There is nothing like it in existence in English law, and I will go on to explain why that is in a moment.

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[Mr Tyrie]

The question the hon. Lady should ask herself is that if she were a banker, would she be prepared to take the risk?

[Emily Thornberry]

There are other things that can be done, and I shall briefly touch on some of them. May I begin with the difficulties that exist in relation to this offence? Under the Bill, it would be an offence for a senior manager recklessly to take a decision. I appreciate that some of the additional 175 pages that have been added to the 35-page Bill have been to backfill exactly what a senior manager is and how they will be defined. That is clearly an improvement, and it is unfortunate that it was even suggested that the Bill would be sufficient in its original form. One must remember that even if a definition of senior manager is now one with which we can all be happy, there have been banks that have been brought down by people other than senior managers. Nick Leeson from Barings bank comes to mind, as does the £2 billion that was lost to UBS by Kweku Adoboli.

[Mark Garnier]

I am fascinated that the hon. Lady chooses to use Nick Leeson as an example, because he went to jail, in Singapore, for four years.

[Emily Thornberry]

The point is that he was not a senior manager and he brought down a bank. This measure will not solve the problem of banks being brought down. An offence of reckless banking that will apply only to senior managers is not by itself sufficient, which is why I want to go on to say what I think should be done instead.

[Mr Tyrie]

I think the hon. Lady is misunderstanding the intentions of each bit of legislative change. The primary purpose of this measure is to change bankers’ behaviour. It is not primarily to protect banks from being brought down. That task lies with ring-fencing and a range of other proposals, particularly with all the structures being constructed around bail-in and resolution. It does not lie with the criminal offence.

[Emily Thornberry]

With respect, I am even more confused than before. What is the point of bringing in an offence that will change the behaviour of bankers, but will not, by itself, defend the banks? As I understand it, if the behaviour that we seek to stop is reckless banking, the reason that it should be criminalised is in order to stop banks failing and the financial system crashing.

There are other difficulties with this offence, which include recklessly to take a decision or to fail to prevent the taking of a decision that results in the failure of a bank. That sets a high threshold and, as has already been pointed out, it is not clear who, of those who may have behaved in a reckless way in our banks and who may have brought down the banking system before, would have been prosecuted. The Minister has not been able to assist us as to who might have been prosecuted under the offence. [Interruption.] It is unfortunate that the Minister is distracted at the moment, but the point I am making is important, and I hope that he will be in a position to address it.

It is difficult to prove that aspect of the offence, and prosecuting it would be a risky undertaking for the prosecuting authorities who will be expected to invest public money in prosecuting such matters. There is no point in putting something in legislation that can be discussed on doorsteps but will never be used to prosecute. We have seen the Serious Fraud Office struggle with high-profile, high-risk prosecutions. Too often such prosecutions end in shambles because of the behaviour of the Government, which have cut the SFO’s funding from £53 million in 2008 to £30 million by the end of this Parliament. Differences can be made to the behaviour not only of banks but of businesses generally. May I just add that of course I support Labour’s position on a stringent licensing regime for bankers, the imposition of a fiduciary duty of care on financial-sector staff for clients and customers and its call for a dedicated financial crime unit. In a moment, I will move on to what will work better, but before I do that, I give way.

[Guy Opperman (Hexham) (Con)]

Let me take the hon. Lady back to her last point on prosecutions. I speak as a former prosecutor of serious fraud work, although not for the SFO. Either there is the 51% test of prima facie evidence at the start of the case, or there is not. How the case then ends up, once the matter has been examined by a jury, is a matter for a jury and occasionally a judge. She is being a little harsh on the SFO, which is doing a fantastic job under very difficult circumstances.

[Emily Thornberry]

I am more than happy to put it on the record that I am a critical friend of the Serious Fraud Office. Sometimes the emphasis is more on the word critical, especially after what we have seen in the newspapers today, with the crash of yet another serious fraud case because the SFO asked an agent, which clearly had a conflict of duty, to do its investigation. That is yet another mistake that the SFO has made. If we want the SFO to turn a corner, we need to do more than show good will. This Bill provided us with an opportunity to change things. It is unfortunate that more attention was not paid to changing corporate liability.

I listened carefully to what the hon. Member for Chichester (Mr Tyrie) said in his contribution, and I undertake to send him, as a Christmas present, Labour’s policy paper in relation to fraud. If we can change corporate liability to ensure that if an individual within an organisation behaves in a way that is dishonest and to the advantage of the larger organisation, we can prosecute the organisation, unless it can show, in the same way that it can under the Bribery Act 2010, that it has in place controls over its staff, it would have an impact on our banking system. If I may say so respectfully, introducing such legislation will have a greater impact than the measures proposed in this Bill. If we were to introduce a different form of corporate liability, we could increase the fines hugely, and that money could be ploughed back into the Serious Fraud Office. Then we would have an organisation of which people in the City of London would be afraid. They would be prepared in most circumstances to come to an agreement with the SFO to have a deferred prosecution agreement.

DPAs will not ever exist under the status quo. The DPA legislation has been passed but, as I understand it, no one has come forward to say that their company has been doing wrong, that they want to admit that, that they will pay a fine, that they will change their ways, that they want auditors to come and see how they are behaving and that they will point out the individuals who have been behaving in a criminal way. I respectfully submit that that is how to change the culture. That is how we ought to be working and I look forward to discussing it with the hon. Member for Chichester once he has read the Christmas present I intend to send him. If elected in 2015, Labour intends to introduce its own economic crime Act, and I hope that we will take the issues further and develop them. Obviously, I would be interested to hear the hon. Gentleman’s reactions.

[Mark Garnier]

I intend to talk principally about Lords amendment 41, but before I do so let me echo the comments made by the Chairman of the Parliamentary Commission on Banking Standards, my hon. Friend the Member for Chichester (Mr Tyrie), at the beginning of the debate. He said that he was grateful to the Government for moving such a long way along the road towards the commission’s recommendations. That is a tribute to the organisation that he chaired extraordinarily well for about 18 months and that came up with such sound proposals. It was a great honour for me to be part of that process. It also says a huge amount for the Government that they have taken great heed of what the commission said and have moved a great deal further towards implementing the proposals.

On Lords amendment 41, I suspect that there is not too much of a difference of opinion in the House about what we are trying to achieve through the Bill—that is, a change in the culture of banks. I take slight issue with the hon. Member for Islington South and Finsbury (Emily Thornberry), because it is not just about preventing banks from collapsing. It is about getting better standards and better service for consumers. Many constituents will complain about their treatment by banks and that has nothing to do with criminal matters; it is simply about the culture and how certain people address other people in their everyday lives. We want to drive that out and to ensure that the banking culture is one of which we can be proud and which consumers can trust enormously.