Bank of England and Financial Services Bill [Lords]

George Kerevan Excerpts

Monday 1st February 2016 Commons Chamber

[Harriett Baldwin]

My hon. Friend, who was a distinguished member of the Parliamentary Commission on Banking Standards, is right to say that the commission highlighted the fact that the approved persons regime made it very difficult to pin down responsibility. The new regime, with its duty of responsibility clearly articulated —every organisation will have that set out when managers are first appointed and on an annual basis thereafter—is a much stronger regime. It also delivers more flexibility in the regulators’ enforcement powers, enabling them to impose high standards of conduct through rules applying to individuals, including those whom they have not approved. The expansion of the new regime to all authorised financial services firms will enhance personal responsibility for senior managers, as well as providing a more effective and proportionate means of raising the standards of conduct of key staff more broadly.

Given the improvements that the senior managers and certification regime with the statutory duty of responsibility delivers in terms of senior accountability, the reverse burden of proof is simply not necessary. In extending the new regime to all authorised financial services firms, it is important to consider whether, under these new circumstances, the application of the reverse burden of proof to any or all firms is appropriate. Most of the firms to which the regime will now apply are small, and it simply would not be proportionate to apply it to those firms. By retaining it for the banking sector alone, we would raise serious questions of fairness and competition.

[George Kerevan (East Lothian) (SNP)]

Can the Minister explain what has happened in the two and a half years since the 2013 Act was passed—essentially, by a Conservative Government—to change the reverse burden of proof?

[Harriett Baldwin]

As the hon. Gentleman knows, the measures in the 2013 Act are due to come into force on 7 March this year. The position in relation to the reverse burden of proof is becoming increasingly clear. Andrew Bailey said in his evidence to the Treasury Committee, of which the hon. Gentleman is a member:

“I support the change, because what the change does is it turns the process round and puts the judgment back on to us”

—that is, the regulator.

“I would rather it does that than have us heading down this tick-box regime with legal questions around it over human rights.

I do not want to come back or have one of my successors come back to you in the future and have to say, ‘I am sorry; we could not use this regime in the way that was intended, because it was always a bit doubtful that we could make it stick’. It is far better we come at this point to you and say, ‘I do not think this has a sufficient probability of being effective’.”

I could supply further quotations, from members of the Parliamentary Commission on Banking Standards in the other place, but I must make fairly rapid progress now.

--- Later in debate ---

[George Kerevan (East Lothian) (SNP)]

I will try to do so, Madam Deputy Speaker.

It is always a great pleasure to follow the right hon. Member for Chichester (Mr Tyrie), who chairs the Treasury Committee. Ninety-nine times out of 100, I would bow to his wise words. Indeed, his repository of knowledge often leads me to think that he should be one of the regulators, rather than sitting on the Back Benches in Parliament. However, in this instance, it pains me that I cannot follow him or the hon. Member for Wyre Forest (Mark Garnier).

I will try to get the right hon. Member for Chichester to understand why those of us on the Opposition Benches cannot accept the Bill as it stands. Fundamentally, it is about the shift away from the reverse burden of proof. Given the backlog of distrust on the banking system and given that the reverse burden of proof was put into legislation and is just about to come into operation in March, to shift away from it now will only make the public less likely to accept what is going on and to make them fear that the banks are being let off the hook yet again. I would say to him and the Minister that it would have been much better to let the legislation run for a few years to see how it worked in practice.

The right hon. Member for Chichester gave us a very good reason for saying that, after so much legislation, it was perhaps time to pause while we made sure that it works in practice. However, his argument can be turned against him, because we are changing legislation at the last moment, after we passed it two years ago, but not implemented it. We should do that: we should see how the reverse burden of proof works. That is why I support the hon. Member for Leeds East (Richard Burgon) in opposing the Bill as it stands.

[Sammy Wilson]

Does the hon. Gentleman accept that one piece of evidence about why the reverse burden of proof would have been an effective brake on the excesses of the banks is the fact that bankers themselves are not keen on it? They knew that it would be an effective tool and were fearful of it.

[George Kerevan]

I am trying to avoid pointing the finger and drawing inferences. What I will do, in agreeing with the hon. Gentleman, is to quote the right hon. Member for Chichester. I hope he will forgive me for doing so. When the LIBOR scandal emerged in 2014, after the Banking Commission, he said:

“As time passes, the pressure for reform will weaken”—

it is, is it not?—

“The old system failed disastrously…Maintaining or resuscitating parts of the failed system, whether at the behest of bank lobbying or for the convenience of regulators, must not be permitted to happen.”

I think we are getting both: we are getting bank lobbying, but we are also getting the regulators wanting a quiet time.

The hon. Member for Wyre Forest made a reasonable point. He said that by extending the senior managers and certification regime, the Bill will place in law a very detailed duty of responsibility on senior bankers to take all reasonable steps to prevent wrongdoing. However, at the same time, it will place the onus on the regulators to prove that that responsibility was discharged. Suddenly, it gives the regulators a job—

[Helen Goodman (Bishop Auckland) (Lab)]

And no resource.

[George Kerevan]

Absolutely.

As the right hon. Member for Chichester pointed out, time after time when there have been regulatory failures, the regulators have been implicated. I therefore do not want to return to a situation in which it is up to the regulators to prove that something has gone wrong in the new regulatory regime, when they are partly responsible for it. I want the onus to fall on the bankers themselves.

It is worth looking more forensically at the reasons against the presumption of the reverse burden of proof. Andrew Bailey has argued that there is a worry that when the next crisis comes along, senior bankers will rush off to the European Court and claim that their rights under the European convention on human rights are being taken away because of the reverse burden of proof. That is rubbish.

The Parliamentary Commission was perhaps a little unwise to use the phrase “the reverse burden of proof”, even though we all use it and I use it. We are not talking about criminal law and making people guilty until proven innocent. We are talking about infractions in banking if, say, a banking crisis takes place. The legislation that the Government are trying to change would make it an infraction to be responsible for an activity in which wrongdoing took place, rather than for committing the wrongdoing itself. To give a flippant example, if it is a criminal offence to be in charge of a bawdy house, the prosecution needs to prove only that somebody was in charge of that house of ill repute, not that they were selling their own body. It would be no defence that they thought the bawdy house was a nunnery.

The reverse burden of proof regime makes managers responsible for the activity in their banks. When a disaster takes place, it is up to them to prove that they failed to stop it happening, rather than, as has always been the case, it being up to the regulators to find the solution and explain what happened, which means that everyone hides behind collective responsibility.

[Mark Garnier]

The hon. Gentleman is making an extraordinarily intelligent speech, but he has just hit on the key point. It is possible for bankers to provide a tick-box operation, which their lawyers have advised them on, to prove that they have undertaken every possible measure to prevent such action. It is therefore very easy for them to get around the reverse burden of proof legislation. The point behind reversing that legislation, which was given by Andrew Bailey and by the Governor of the Bank of England and some of the Bank’s lawyers, is that there cannot be a tick-box operation to show that they have complied with the rules because they involve a much more esoteric way of running the bank. It is therefore much more difficult for bankers to escape the rules if something does go wrong.

[George Kerevan]

I respect the logic of the hon. Gentleman’s argument. Sadly, we will never get a chance to see the legislation that he voted for in the last Parliament put into practice and to watch it fail. I look forward to his contribution—he will have time to make it if I hurry up—and to finding out why he has changed his mind.

I am interested in Mr Bailey’s tick-box argument, which is that if we reverse the burden of proof, senior bank officials will hold endless seminars with those on the trading floor, explaining to them why doing the sort of things that happened in the LIBOR scandal is wrong. When the inevitable crisis happens, they will come with list of who they spoke to—they told the traders that this should not happen, but it did.

It is not enough to have lots of meetings; we must change the culture of the banks. It is also important to remember—I hope the Minister remembers this—the title of the Parliamentary Commission’s report on banking standards: “Changing banking for good”. There are a lot of good things in the Bill, but it does not change banking for good. It is half a loaf, and I am afraid that another half loaf will lead us more quickly to yet another banking crisis for which nobody is responsible. Ultimately, we need responsibility.

In conclusion, we are being offered a duty of responsibility versus a presumption of responsibility. Once upon a time, there was a convention: when a ship sank, the captain went down with the ship, whether it was his fault or not. It was presumed that it was his fault no matter what happened, because he was in charge of the ship. What happens these days is that the ship goes down, the captain gets into the first lifeboat, and he turns up at the inquiry to say—to use a Scottish term—“It wisnae me; I did my best”. Once upon a time Ministers also resigned when something went wrong. We should return to a situation where if there is a banking crisis the captain goes down with the ship, and we assume that he will do that, whether it was his fault or not, because he or she was in charge and leading the bank. If we do not change that culture, we will go on having banking crises ad nauseam.

[Mark Field (Cities of London and Westminster) (Con)]

I will be neither as discursive nor as time-consuming as my right hon. Friend the Member for Chichester (Mr Tyrie), but he made some important points. Even before 2008, banking was one of the most highly regulated industries. Although I agree that ideally we need to move towards a much more competitive world in the banking sphere, it is also worth reflecting that one reason why we have not had a great upsurge of challenger banks is because—at least in the retail banking sector—the banking world is insufficiently profitable to make it worth while for such competitors to come through. One reason for that is because there is ever more regulation and compliance in the retail world. It is therefore perhaps predictable that the furore surrounding this Bill has been concentrated on the role in the institutional architecture of the Financial Conduct Authority, and the changes that have already been referred to regarding the Government’s original proposals on the senior managers’ regime.

As the MP for the City of London, I have had my ear to the ground over 15 years as Governments—Labour, the coalition, and now Conservative—have grappled with devising a framework of regulation and compliance, in particular one that was fit for purpose in the aftermath of the financial crisis of 2008. We should all accept that that is not easy work and, in making such changes, it is important not to undermine our global competitive advantage in financial services—again, that was alluded to by my right hon. Friend the Member for Chichester, who pointed out that the most effective regulatory framework will probably have an international nature, rather than one specific to the UK.

We should all be much poorer if regulation is designed simply to punish banks and bankers. By the same token, sensible voices from the City of London—there are more than might be appreciated by certain elements on the Opposition Benches—fully recognise that the British public need to see the risk of future bail-outs kept to a minimum. For all the talk of maintaining free markets and global capital flows, the sheer importance of the financial system to the economy as a whole means that there will continue to be some form of implicit guarantee from taxpayers in the event of a future financial crash. The price to be exacted by the public for that guarantee is rigorous regulation and watchful compliance, as well as the ongoing banking levy that has been introduced and is, I think, here to stay.

As the Minister will recall, I must confess that I have consistently argued against the reversal of the burden of proof, which had been proposed as a key element of the senior managers regime. I am pleased that we have not implemented what was going to come into place on 7 March. I should therefore rightly pay fulsome tribute to the Treasury for rowing back from this draconian and potentially unenforceable measure. Likewise, I am pleased that the Government have fiercely resisted attempts in the other place to resist that.

There was already plentiful evidence that senior executives of global banks were thinking twice about relocating, or indeed continuing to be based, here in the United Kingdom. The notion of a criminal liability being levied on management for actions committed by junior bank staff who were perhaps working even in another jurisdiction, and such liability being regarded by the courts essentially as strict, risked leading to an exodus of senior management from London. Indeed, it has been my understanding that the senior managers regime, as originally proposed, was the single biggest consideration in the ongoing deliberations by HSBC and Barclays that they might headquarter outside the UK—more important than concerns over the bank levy, bonus caps, remuneration caps and the whole ring-fencing agenda.

[George Kerevan]

Is the right hon. Gentleman essentially saying that, from his knowledge, the Treasury was blackmailed into changing the proposed legislation?

[Mark Field]

I am not suggesting that for one minute, but we need to make legislation that is effective and enforceable. I think there were human rights implications about having a reverse burden of proof. If we are going to try to encourage a banking and professional services industry that is worth its salt here in the UK, we need to ensure we do not put it under burdensome regulations that apply here in the UK but not across the globe.

I agree very much with the Chancellor’s decision not to renew the contract of the first chief executive officer of the Financial Conduct Authority, Martin Wheatley. The concern went beyond the well-publicised leak over pensions policy, which saw £3 billion wiped off insurance company shares. In truth, Mr Wheatley had lost the confidence and, more importantly, the respect of many leading figures in the City. I suspect some Opposition Members would regard that as a badge of honour, but frankly for an industry regulator to let it be known that he regarded those working in the financial services industry as inherently dishonest is not the way to win hearts and minds. To be quoted as saying he would

“shoot first and ask questions later”

in championing customers against the banking fraternity may have played to the gallery, but it was not sensible regulation.

I am unconvinced that that superficially robust approach ever truly benefited customers. I commend my hon. Friend the Member for Aberconwy (Guto Bebb) for securing a Backbench Business debate later today on the failure, thus far, of the FCA to secure fair redress for victims of financial mis-selling of interest rate hedging products. I have constituents—I am sure all Members do—who are still waiting for redress from the mis-selling of such products in 2007. They now find themselves out of time, under the six-year rule, to initiate legal proceedings because the Financial Services Authority advised them to rely instead on its own processes and the FCA subsequently failed to devise a satisfactory structure for compensation.

I was pleased to see last week that the respected head of the Prudential Regulation Authority, Andrew Bailey, was appointed as Mr Wheatley’s successor. I know from my own dealings with him that he is no soft touch. I trust that his experience and his reputation for fairness, not only at the PRA but at the Bank of England, will restore credibility to this vital part of the regulatory infrastructure. The breadth of his experience should hopefully ensure that he is able to take a comprehensive view of the financial system that avoids some of the mistakes of the discredited tripartite system of oversight. Going forward, I believe City regulators—and central bank governors, for that matter—would perhaps do well to give careful consideration to the famous advice one is given on joining the Whips Office: why say one word when none will do? I fully endorse the clauses of the Bill that recalibrate the duties of the FCA. I hope the Government are now able to convince an admittedly sceptical public and a very wary financial services community that in its new iteration the FCA will achieve more—much more—of what was intended when it was set up.

It was fair of the hon. Member for Leeds East (Richard Burgon) to point out that the other place had made changes to regulation, but I am not sure it went far enough. I still think there is the risk of a virtually untrammelled power being given to the Governor to appoint or remove deputy governors. Granted, such appointments and dismissals would necessitate a statutory instrument procedure in the House, but such a process would not pass muster as good corporate governance of a FTSE 250 company, so why, in view of the Bank’s extensive powers, should it be tolerated here? This is not simply an academic concern. We are potentially enabling a Governor to pack his board with worthies happy to do his bidding and thereby outweigh the influence of the Bank’s independent directors.

As Mark Carney begins the second half of his term, we have seen in the past week the swooning of the financial press over Mario Draghi’s decisive actions as President of the European Central Bank. This cult of the central banker is nothing new—it goes back to the 1920s and the greater control central banks had in the aftermath of world war one—but I have long been sceptical about the practicality, or even the desirability, of fully fledged Bank of England independence. In the final analysis, strategic economic decision making must lie with elected politicians operating within financially responsible Ministries. The composition of the Bank should neither be nor, more importantly, appear to be the plaything of the Governor.

In wholeheartedly supporting the Bill, I trust that the Minister will give some thought to those genuine governance concerns as it makes its way through the House.