Banking Misconduct and the FCA

Kevin Hollinrake Excerpts

Thursday 10th May 2018 Commons Chamber

[Kevin Hollinrake (Thirsk and Malton) (Con)]

I thank the hon. Member for East Lothian (Martin Whitfield) for bringing forward this important debate. Like me, he is an officer of the all-party group on fair business banking and finance, which I co-chair. I also speak today on behalf of Jon and Kerry Welsby and others in my constituency who have suffered as a consequence of the apparent bank-induced failure of business services company Mouchel.

As the motion states, the problems in the banking sector are not restricted to RBS—I will offer evidence to the House later that will widen this debate—but I will deal first with RBS. It is clear that the senior management are directly responsible for what happened, but there are also serious questions that the regulator, the FCA, needs to answer, particularly about how it intends to hold these individuals to account through phase 2 of its inquiry and about the reasons for the fundamental difference in tone and substance between the conclusions of the full report and those of its summary. Its summary sets out its key conclusions, and although it identifies isolated examples of poor practice, it lists eight separate areas where RBS was cleared of blame before later highlighting areas in which widespread inappropriate treatment had occurred.

The full report, released eventually by the Treasury Committee some 15 months later, stated:

“Our central conclusions are that there was widespread inappropriate treatment of customers by GRG”,

that

“in a significant proportion of cases...we assessed”

these businesses

“as being potentially viable”

and that

“the treatment appears likely to have caused material financial distress…for the most part”

as

“a direct result...of the priorities GRG pursued.”

[Martin Whitfield]

Is it not indicative of the problems of transparency that the delay between the release of the initial report and the full report was unacceptable and that it was only eventually released because of the efforts of Committees of the House and Members of this Chamber?

[Kevin Hollinrake]

The hon. Gentleman makes a strong point. We should thank the Treasury Committee and its Chair for their work.

As I said, these issues are not restricted to RBS. Many will also be familiar with the HBOS Reading scandal, where former bankers and their advisers were jailed for a total of 47 years in 2017 for activities that took place over a decade earlier, prior to the takeover by Lloyds in 2008.

I have recently been sent by one of those convicted, Mr Michael Bancroft—this was kindly facilitated by my hon. Friend the Member for Stratford-on-Avon (Nadhim Zahawi)—hitherto unreleased documents, including the Project Lord Turnbull report, authored by Lloyds senior manager Sally Masterton, which alleges that senior managers within the bank were aware of the fraud prior to the takeover and the £14 billion Lloyds and HBOS rights issues, yet they took clear, deliberate and documented action to conceal it. Let us be clear: if this is true, it could potentially make the rights issues and the takeover fraudulent. Those named as culpable for non-disclosure in the report include chief executive Andy Hornby, chairman Sir Dennis Stevenson, former CEO James Crosby, corporate CEO Peter Cummings, and the auditors and reporting accountants, KPMG. The all-party parliamentary group will have a full copy of the report and Members will be given access to it. Status, seniority and background cannot be a barrier to justice or to holding to account those who are ultimately responsible for the devastation caused to so many lives and to the wider economy.

[Luke Graham]

Those papers, which will be made available to the APPG, mention the actions of the auditors, KPMG. Will KPMG be included in the investigation, and should it be the subject of a further debate in this place?

[Kevin Hollinrake]

They should certainly be included in the wider investigation, which is what I will call for shortly.

The Project Lord Turnbull report raises significant questions. Was there deliberate concealment of the scale of the fraud within HBOS and Lloyds? Who was party to the concealment? Crucially, did the concealment result in significant loss to bank shareholders and to subscribers to the rights issue? We see conflicts of interest in the report and in many other places. They include the auditors, KPMG, giving HBOS a clean bill of health in February 2008, only a few months before its collapse; the audit watchdog, the Financial Reporting Council, seeing no reason to investigate this audit; and the fact that four of the 10 members of the FRC board are partners at KPMG and that it is chaired by former Lloyds chairman Sir Win Bischoff, who oversaw the £14 billion rights issue.

Our all-party group sets out clearly what steps we now need to take. We need an investigation into the serious concerns raised against Lloyds and HBOS. The FCA must build a reputation as a regulator that acts without fear or favour. We need a new primary dispute resolution mechanism, potentially in the form of a financial services tribunal, which also sets aside the statute of limitations. We need a review of the structure of our financial crime agencies in the light of the evidence now before us to ensure that our system of justice is fit for purpose. Finally, the only way in which we can resolve the deep-seated cultural problems in our banking sector and remove the conflicts of interests that are so prevalent is by way of a full public inquiry.

--- Later in debate ---

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

It has been a sobering experience to listen to this debate. We have heard so many stories and so much advocacy from hon. Members on behalf of constituents. I commend everyone who has spoken today. I thank my hon. Friend the Member for East Lothian (Martin Whitfield) and the all-party parliamentary group on fair business banking for securing this debate on a topic that continues to be of such critical importance.

In my remarks I want to restate the Opposition’s support for a full public inquiry; talk a little about the current inadequacy of the regulator and the section 166 procedure; state why an independent mechanism of redress for business is clearly required; and say why this is in the best interests not just of customers and the country, but of the banks themselves.

This debate shows that the issues around the relationship between banks and their business customers are not fading, diminishing or going away. Rather, in recent weeks we have continued to hear yet more appalling revelations about the way in which RBS’s Global Restructuring Group treated its customers and stories of how that had spread to other financial institutions, too. Following the efforts of my hon. Friend the Member for Norwich South (Clive Lewis), we can now read the full section 166 report on the conduct of the GRG unit. The extent of the inexcusable behaviour revealed in that report is truly shocking. The purchase of the assets of distressed businesses, in some cases by RBS staff themselves, illustrates just how deeply the conflicts ran within GRG. Clearly, certain bank employees felt that they could act with total impunity towards their customers, and that cannot be acceptable.

We are all aware that the complaints process is ongoing between RBS and its former business customers who were the victims of GRG. However, I echo the call made by my hon. Friends the Members for Norwich South and for Sefton Central (Bill Esterson) in the debate that took place earlier this year in saying that this issue demands a full, independent public inquiry. Given the revelations exposed in the section 166 report, there must be a comprehensive examination of whether criminal liability has occurred, and those responsible must be held to account. In addition, given that certain individuals involved in GRG’s management continue to work in senior positions within British banking, surely an objective assessment should be made as to whether those people are fit to do so.

I am afraid that the Government’s response on this has so far fallen short—for instance, in the Treasury’s repeated cut-and-paste responses to the numerous parliamentary questions tabled by my hon. Friend the Member for Sefton Central since December 2017. The Treasury has simply deferred the issue time and again, saying that it is impossible to comment while the Financial Conduct Authority’s investigation is ongoing. Will the Minister please acknowledge today the strength of feeling in all parts of the House?

Another key issue is the effectiveness of the existing system—in particular, the use of section 116 reports and whether that is entirely appropriate to deal with these cases. A section 116 report, or skilled person’s report, is conducted by a third party appointed by the Financial Conduct Authority. The cost is met by the subject of the investigation, and it can range from hundreds of thousands of pounds to millions of pounds, but the reports remain entirely confidential. This lack of transparency is not good enough.

[Kevin Hollinrake]

The hon. Gentleman mentioned executives from RBS who are still earning large amounts of money within the financial services sector. Is he aware that Nathan Bostock, a senior director within GRG, currently earns £1.6 million as chief executive of Santander and £1.8 million a year from RBS as part of his payoff?

[Jonathan Reynolds]

I am grateful to the hon. Gentleman. These are the questions that need answering. People have told me that they worked for RBS and left because they were unhappy with the conduct of the bank. Surely they should also be allowed to put their case in a proper way.

Returning to the confidentiality of section 166 reports, I have to put on record the disquiet, certainly among Opposition Members, about the discrepancy between the FCA’s summary of the investigation into GRG and the actual report in terms of the former’s heavily sanitised nature. Now that the report has finally been made public, we can fully witness the extent to which relationships with business customers were abused. Under normal conditions, however, the report would have remained confidential. That cannot be appropriate, because it furthers the perception that the odds are stacked against businesses. We need processes that are transparent and fair, and command the confidence of everybody. We also need to look at who is asked to undertake these reports and any conflicts of interest that they might have.

As many Members have pointed out, small businesses are the backbone of our economy. If they cannot trust the financial institutions that are meant to serve them, we are all going to pay the price for that. Statistics show that up to half of all SMEs are non-borrowers, although we do not know whether that is because they do not feel they can trust their banks or simply feel too anxious to expand by taking on credit. As a country, we all acknowledge that we need to offer those businesses the right incentives and support to grow. We need to solve this crisis of trust in business banking. An independent arbiter who can fill the gap between the Financial Ombudsman Service and the full legal route for redress is a minimum sensible starting point for consideration. We await with interest the outcome of UK Finance’s independent review, chaired by Mr Simon Walker, of complaints handling and alternative dispute resolution for SMEs, which could provide a steer.

However, I do not believe that this industry can be allowed to self-regulate, and that is why an independent platform must be considered. Like many Members who have spoken today, I believe that the restoration of trust in business banking is essential, but it will not come without the Government taking decisive action. A public inquiry, redress for victims, accountability for those responsible and a new independent system of redress are surely the right places to begin.