Financial Services (Banking Reform) Bill

Lord Archbishop of Canterbury Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Flight]

My Lords, I have broadly been in support of a Glass-Steagall separation of investment and banking banks, but there seems to me something slightly wrong with the concept of having a review and prejudging the outcome of that review. Playing devil’s advocate, I make a point on the other side of the coin. Europe has had universal banking for a long time; that is the banking tradition in continental Europe and there is still a case for universal banking to continue, although it is right out of fashion now. I repeat my point that, to a fair extent, the profits of investment banking have subsidised ordinary banking and benefited ordinary retail customers; the losses have generally come from bad lending. So it is slightly premature to prejudge the review. I cannot see what is wrong with having a review with the understanding that the Government will act on the basis of the recommendation of that review at the time. We will have moved on from the present and other factors may have come to light as well. I do not see what is gained by prejudging the result of the review.

[The Archbishop of Canterbury]

My Lords, as did the noble Lord, Lord Lawson, I begin by expressing my gratitude to the Government that they have listened to the speeches of many noble Lords and my PCBS colleagues on the need for a full and independent review of the ring-fence. I hope that they will realise that the amendments that have been tabled today are the final pieces of the puzzle in this regard. This work, combined with the vast improvements that we have seen to the electrification of the ring-fence—what is officially known as the first reserve power—is most welcome. The noble Lord, Lord Eatwell, put the case very clearly, not only for them but for the second reserve power. The Government’s approach to that is so far disappointing.

The Minister said that he believed that a robust ring-fence will work, and so do we, as the commission. It is just that we do not think that it is robust—that is the problem. The point of the second reserve power is to make the ring-fence sufficiently robust that it will carry the day if the first one is over a period of years overwhelmed.

The swirling floods unleashed in 2008 with the banking collapse continue to cause eddies all over our economy, particularly in the most vulnerable parts, which so many of us on these Benches are so deeply involved in supporting. Both the ICB and the PCBS concluded that the most appropriate way in which to reform the structure of the industry today is to have the ring-fence within a parent company. It is experimental —we hear the arguments, and we know so. This partial structural separation, with the added provision of ring-fence, should create a disincentive for banks to attempt to test the limits or game the ring-fence, but “should” is not sufficient.

The advantage of the second reserve power and the first reserve power together, in addition to the ones that the noble Lord, Lord Eatwell, put so eloquently, is that they give a second shot to the gun. If the first reserve power fails, and a bank or two has been forced into full separation but the whole industry is still gaming the system, then you have still got the second reserve power. It appears that the Government’s policy on this is to have only one shot and then to say, following that, “We’ll do something. As yet, we know not what. But we will do something, and it will be something very, very serious”.

--- Later in debate ---

[The Archbishop of Canterbury]

My Lords, Amendment 50 is in my name and those of the noble Lords, Lord Turnbull, Lord Lawson of Blaby and Lord McFall of Alcluith. It clarifies the scope of who the new senior persons regime will apply to, to ensure that it is rightly focused on material risk-takers, not on all bank employees. I will also speak to Amendments 51 and 60 which stand in my name and those of the noble Lords as colleagues on the commission. Amendment 51 sets out the duties relating to the application of the new licensing regime for the banking regime. Amendment 60 also deals with clarifications in the scope of the senior persons regime.

In Committee, on a day that I was unfortunately unable to attend owing to having to baptise someone, my noble friend Lord Turnbull welcomed many of the Government’s proposals relating to the functions of senior managers in banks, including ensuring that senior managers have a statement of responsibilities and the reversal of the burden of proof on whether a person is fit and proper to take up a senior management position. We are very grateful for that. However, my noble friend Lord Turnbull also raised a number of questions that I hope can be adequately answered today, although I realise that there is still a lot of reflection going on in this area.

At that stage, the Bill made no reference to the second tier of the two-tier system proposed by the Parliamentary Commission on Banking Standards: the licensing regime. As the Bill stands, it simply allows the regulator to,

“make rules about the conduct”,

of any “employee of the bank” if it,

“appears … to be necessary or expedient”.

As both Amendment 50 and Amendment 60 deal with our concerns around the application of these rules to any “employee of the bank”, let me turn to the issues that this language raises.

The commissioners argued that a two-tier system is the right way to deal with the issue. The expectations on senior managers must be high. However, it is also right that those who are not part of the senior management of the bank should have high standards. The noble Lord, Lord Eatwell, has addressed this. By making it explicit that the rules of conduct and the definition of misconduct in Clause 22 refer to,

“employees whose actions or behaviour could seriously harm their employer, its reputation or its customers”,

the amendment is aimed at ensuring that the FCA and the PRA focus their regulatory duties on those employees who could inflict the most significant and material damage on their institutions and on the banking system as a whole. These are not always the most senior employees. They could be a junior dealer, fairly new in the business, who, ignoring his internal limits, deals in a way that does great damage both to customers and to his employer. He can be fired and even sent to prison, but the deals are still the responsibility of the bank.

It is therefore necessary to have an amendment that not only widens beyond the senior management, obviously, but narrows so that it does not try to cover all the employees but has a very focused look at those who are going to be able to do the most damage the most often, and who are at highest risk. In our regular and ongoing conversations with the regulators and in the light of their official responses to our work, the commission has not yet been convinced that they would go far enough to ensure that this specific group of material risk-takers would be central in any further regulation and thus that neither the spirit nor the letter of the commission recommendations would be implemented.

Amendment 51 seeks to correct the failings of the approved persons regime that this new two-tier system replaces. The noble Lord, Lord Turnbull, also stated previously that this regime operates mostly as an initial gateway to taking up a post rather than serving as a system through which regulators can ensure the continuing exercise of responsibility.

The amendment also deals with another concern articulated by the noble Lord, Lord Turnbull, that there is still no requirement that the regulator operate a licensing regime. The Bill states that the regulator may make rules relating to conduct if it appears “necessary or expedient”. By setting out explicitly that the,

“relevant authorised person has a duty to ensure that all relevant employees comply with rules of conduct”

made by the regulator, the amendment makes it clear that the rules of conduct for material risk-takers who are not senior management are just as seriously applied as those governing senior management. This gives a clear identity to the new second tier of the system, which is vital if it is to be taken seriously by regulators and banks.

As I said a few moments ago, I am aware of ongoing conversations between my colleagues and the Treasury over a few remaining issues around the implementation of the licensing regime. I believe that these are mostly in relation to the most appropriate names for the licensing regime and the senior persons regime and, I hope, to some of the matters that I have raised this afternoon. I hope that the Minister will be able to update the House on these areas and that the news can be welcomed by myself and my colleagues.

--- Later in debate ---

[Lord Eatwell]

My Lords, in the past, anti-money-laundering legislation tended to be associated with crime, typically drugs or gun-running. These days it has achieved a much greater importance in the sense that it is also associated with terrorism. Therefore, the need to maintain the strictest anti-money-laundering rules and to ensure that they are adequately enforced is an element not only of the maintenance of the law, but of national security. Therefore, I would like to commend my noble friends who have put forward these amendments to strengthen the anti-money-laundering regime and to ensure that appropriate levels of criminality or criminal conduct are so defined within this area that suitable penalties for ignoring anti-money-laundering legislation or laundering money in various ways can be enforced.

I hope the Government will accept these amendments; they are hugely important and send a very important signal to the world that London is not a place in which money-laundering will be tolerated in any shape or form. If the Government are not able to accept them at this stage, I hope they will commit to providing in writing both a commentary on the amendments that my noble friend has put forward and a discussion of the relationship between the new personal responsibility mechanism for bankers and the AML compliance. Surely AML compliance should be included as one of the areas of responsibility that is allocated to a named senior banker under the new senior person regime; it should be in the banking standards rules to which all staff at banks will have to adhere, and one of the conditions of the new remuneration code, which makes deferred pay and bonuses contingent on upholding standards. There is no more important standard than those which my noble friend has dealt with in his amendments. I hope that the Government will be able to accept them—if not actually in form, then in spirit—and commit to bringing forward the appropriate form, if necessary, at Third Reading. The best move, however, would be to accept them now.

[The Archbishop of Canterbury]

I want briefly to add my support to the amendment of the noble Lord, Lord Brennan. Money laundering affects not only the areas that have been mentioned, but in my 10 years’ experience of dealing with conflict management and mitigation work in Africa, it was particularly significant in the ways in which illegal regimes or militias managed to fund and supply themselves. My experience, particularly in some parts of Africa, has shown that London, over time, as one of the deepest and most liquid financial markets on earth has, contrary to the impression given by many senior bankers, played a significant role—not through their collusion in any way at all, but because of its size and the complexity of preventing it. I believe that this amendment and the suggestions put forward by the noble Lord, Lord Eatwell, will contribute extensively to restricting that.

[Lord Flight]

My Lords, all Members of this House are what is known as PEPs for the purposes of anti-money-laundering. This means that any bank has to pay extra-special attention to any of our transactions. It is perfectly justified. The thought crossed my mind—and I have great sympathy with the noble Lord’s aspirations—that money laundering for corrupt purposes, for armaments, for terrorism and the rest of it, does not particularly come from an ordinary British family living in a suburb. It comes very much from parts of the world where such things are more prevalent. There is a case for requiring a more judicious anti-money-laundering regime for any form of transfer that comes from such parts of the world in an analogous fashion to a PEP if we really want to get to grips with the horrific money-laundering that can come from some parts of the world, causing misery to citizens there. As arrangements presently stand, there is no difference between an evil regime somewhere and an ordinary British citizen living in Birmingham.

--- Later in debate ---

Moved by

[The Archbishop of Canterbury]

50: Clause 22, page 35, line 43, at end insert—
“(7) This section applies only in relation to employees whose actions or behaviour could seriously harm their employer, its reputation or its customers.”

[The Archbishop of Canterbury]

I have already spoken to the amendment standing in my name. The members of the commission are delighted that the Government are broadly finding agreement with their recommendations, and on all the areas on which the Minister spoke we hope and expect that the government amendments at Third Reading will reflect closely the assurances that we have been given. To ensure that we get this right, we re-emphasise the need to see the amendments as early as possible and reserve the possibility, if we are not content and feel that they do not reflect what has been said, of returning to them at Third Reading. If I have those assurances, I will be happy to withdraw the amendment. I beg to move.

[Lord Newby]

You have those assurances.

[The Archbishop of Canterbury]

I beg leave to withdraw the amendment.

Amendment 50 withdrawn.