Financial Services (Banking Reform) Bill

Lindsay Hoyle Excerpts

Monday 8th July 2013 Commons Chamber

[Stephen Barclay]

I beg to move, That the clause be read a Second time.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

With this it will be convenient to discuss the following:

New clause 3—Professional standards—

‘After section 65 of FSMA 2000 insert—

“65A Professional Standards

(1) The regulator will raise standards of professionalism in financial services by mandating a licensing regime based on training and competence. This must—

(a) apply to all approved persons exercising controlled functions, regardless of financial sector;

(b) specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules;

(c) make provisions in connection with—

(i) the granting of a licence;

(ii) the refusal of a licence;

(iii) the withdrawal of a licence; and

(iv) the revalidation of a licensed person of a prescribed description whenever the appropriate regulator sees fit, either as a condition of the person continuing to hold a licence or of the person’s licence being restored;

(d) be evidenced by individuals holding an annual validation of competence;

(e) include specific provision for a Senior Persons Regime in relation to activities involving the exercise of a significant influence over a controlled function under section 59 of the Act.

(2) In section 59, remove “authorised” and insert “licensed” throughout the section.”.’.

New clause 4—Duty of Care—

‘At all times when carrying out core activities a ring-fenced body shall—

(a) be subject to a fiduciary duty towards its customers in the operation of core services; and

(b) be subject to a duty of care towards it customers across the financial services sector.’.

New clause 5—Remuneration reform—

‘Within six months of Royal Assent of this Act the Chancellor of the Exchequer shall, in consultation with the appropriate regulation, lay before Parliament proposals on reform of remuneration at UK financial institutions which shall include incentives to take account of the performance and stability of a UK financial institution over a five- to 10-year period.’.

New clause 7—Protection for whistleblowers—

‘(1) After section 43B(f) of the Employment Rights Act 1996 there is inserted—

“(g) that a breach of regulated activities under FSMA 2000 or the Financial Services Act 2012 has been committed, is being committed, or is likely to be committed.”.

(2) After section 43B(5) of the Employment Rights Act 1996 there is inserted—

“The chairman of the board of directors of any relevant UK financial institution will be informed of any protected disclosure made by a worker which qualifies under the terms of Part IVA of this Act.”.’.

New clause 11—Reckless misconduct in the management of a bank—

‘(1) Within the three months of Royal Assent of this Act the Government shall publish proposals for the creation of a new criminal offence of reckless misconduct in the management of a bank.

(2) The new offence in subsection (2) should cover those approved persons who are licensed under a Senior Persons Regime.

(3) The Government shall bring forward further proposals within three months of Royal Assent of this Act for the civil recovery of monies obtained by individuals who have been found guilty of reckless misconduct in the management of a bank.’.

New clause 13—Financial Services Crime Unit—

‘(1) The Treasury shall conduct a review into the creation of a Financial Services Crime Unit and consult on its proposals for the Financial Services Crime Unit’s powers and responsibilities.

(2) The Treasury shall lay its proposals before both Houses of Parliament no later than six months after this Act comes into force.’.

[Stephen Barclay]

In speaking to new clause 2, which I will not press to a vote, I wish to follow the line of argument pursued by my right hon. Friend the Member for Wokingham (Mr Redwood) on new clause 9. He drew attention to the tension created by building up capital while also lending more and used the analogy of driving with one foot on the accelerator and the other on the brake. If I may, I will take a step outside the car. With new clause 2, I wish to draw the House’s attention to a similar, I am sure unintended tension. The Government are taking a positive step forward, because in paragraphs 2.13 and 2.14 of their response to the parliamentary commission’s report, they make the welcome announcement that they accept the premise of reversing the burden of proof. In doing so, however, they will adopt a measure suggested in paragraphs 1170 and 1171 of the commission’s report that will create a potential handicap. A new condition will be attached to using that burden of proof, whereby the regulator must have concluded a successful enforcement action against the firm prior to doing so.

I do not think there can be any doubt about the merits of reversing the burden of proof. It is clear that if the regulator is required to sift through reams of e-mails looking for evidence to incriminate a senior banker, it will be a time-consuming and costly exercise. It is also highly likely that it will fail, because senior executives are not so stupid as to write boastful and wilful e-mails such as we saw from some of the LIBOR traders, who bragged of having their bottles of Bolly. Most senior executives are wise to the risks of e-mails and would not fall into such a trap. It is proportionate and reasonable to argue that senior executives who say that their hands-on leadership is sufficient to justify very high individual bonuses should also, on the other side of the coin, be able to demonstrate that they have personally acted reasonably.

The Government’s announcement that they will reverse the burden of proof is extremely welcome. However, the acceptance of paragraph 1171 of the Commission’s report could lead to a real impediment. If we open the door to personal enforcement, why would a chief executive wish to settle on behalf of their firm? We are trying to make it easier for the regulator to focus in a time-efficient and cost-effective manner on the individuals who should be held responsible, but that will be impeded by the additional requirement for enforcement to be concluded against the firm. The senior leadership whom we want to target will be incentivised to drag out proceedings and impede any settlement with the firm. I do not believe that is the Government’s intention, but I wished to draw the Minister’s attention to it so that the issue could be discussed in more detail and tackled in the other place.

I do not share the confidence of some colleagues who have spoken about the ability of criminal sanctions to operate effectively. They are a welcome tool to have, and many of our constituents would like the golden handcuffs to be replaced with the prison variety. Indeed, the images on US television of white-collar arrests and convictions have a powerful deterrent effect. My concern, however, is that if we look at the individual fines and enforcement to date, we see that the regulator has struggled to reach the evidential level required to prosecute individuals successfully. Now we are suggesting that it will have to meet a higher standard of proof to secure criminal convictions. It is a bit like asking a hurdler who has just failed at one level to jump over a much higher hurdle.

The reversal of the burden of proof is one aspect of what we need, and the deterrent effect of criminal sanctions is another, because it brings with it the power of the headline. The question is, will we fall into the trap that we so often fall into in this House of passing legislation that sounds tough but proves difficult to use in practice? My fear is that the standard of proof required of the regulator to deliver a criminal prosecution will make it a tool that is rarely used.

We therefore need to consider how we can target individuals, not firms, because that will drive the culture of firms. Currently, where there is wrongdoing, a firm will settle quickly and get a 30% discount. The more junior staff—the heads of the divisions responsible—are quickly exited, and the senior staff wilfully claim blindness, because the most controversial briefings are usually done orally. Reversing the burden of proof will address part of the ill, but through the new clause I wish to draw attention to the limitations of fines on firms, which at the end of the day penalise shareholders and pension funds. Our constituents pay twice—first for the bail-out, and then through the impact on their shareholding.