Banking: Parliamentary Commission on Banking Standards

Lord Archbishop of Canterbury Excerpts

Thursday 5th December 2013 Lords Chamber

Moved by

[The Archbishop of Canterbury]

That this House takes note of the Reports of the Parliamentary Commission on Banking Standards (1st Report, Session 2012–13, HL Paper 98), Banking Reform: towards the right structure (2nd Report, Session 2012–13, HL Paper 126), Proprietary Trading (3rd Report, Session 2012–13, HL Paper 138), “An accident waiting to happen”: The failure of HBOS (4th Report, Session 2012–13, HL Paper 144) and Changing Banking for Good (1st Report, Session 2013–14, HL Paper 27).

[The Archbishop of Canterbury]

My Lords, your Lordships are asked to take note of the work of the Parliamentary Commission on Banking Standards. I speak not only on my behalf but on that of some of the commissioners who, for various reasons, cannot be here. I should add that it is coincidental and owing to constraints of the diary that this debate falls so neatly between Report and the Third Reading next week of the Financial Services (Banking Reform) Bill. I am particularly looking forward to the maiden speech of the noble Lord, Lord Carrington of Fulham. I am sure his contribution will be significant given his vast experience in another place, especially on the Treasury Select Committee.

In 2008, the Chancellor of the Exchequer found himself faced late one night with the choice of commitment of large sums of money—hundreds of billions of pounds—or of the collapse of almost everything in our society that makes money real, as the banks ran into a collective wall. In the years since, scandal after scandal has become apparent. Out of these vast events arose what was described as,

“a profound loss of trust born of profound lapses in banking standards”,

and thus the formation of the Parliamentary Commission on Banking Standards. The breadth of the task laid at the commission’s feet is hard to overstate. As one can read on the first page of each of the five reports published by the commission, it was appointed,

“to consider and report on professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process, lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy and to make recommendations for legislative and other action”.

As further incidents came to light and Bills came forward, the commission was tasked with investigating the incidents and with pre-legislative scrutiny of the Bills. It was initially said that it would be all over by Christmas—last Christmas. I hope we shall hit it this year. The work was extensive. It involved many hundreds of hours of oral evidence and thousands of questions asked, with a majority answered. Seven volumes of our final report, Changing Banking for Good, are dedicated entirely to the written and oral evidence received.

Neither the quantity nor the quality of the material produced could have been achieved had it not been for a commission made up of such outstanding colleagues, with a great deal of experience, who worked so determinedly together. Their dedication and insight has been immense. I pay special mention to the Member for Chichester, under whose chairmanship we were led with great expertise and forthrightness, and a certain amount of sheer nerve and chutzpah in the way that the commission went forward. I also put on record the enormous debt of gratitude that I and my colleagues at both ends of the Palace owe to the staff that supported the work of the commission. They came from government and the private sector and included counsel. They worked night and day, in a new form of inquiry. We are also much in debt to the work already done by Sir John Vickers and his Independent Commission on Banking, whose recommendations on structural reform were the foundation of our own work.

Our first report provided the pre-legislative scrutiny for the Financial Services (Banking Reform) Bill. We made recommendations to strengthen the proposed legislation, as well as suggesting further necessary measures to enhance the stability of the banking system.

In our second report, Banking Reform: Towards the Right Structure, we considered the Government’s response to our first report and, somewhat unusually, proposed amendments further to improve the Bill in a number of key areas, many of which have now been accepted. Our third and fourth reports focused on specific examples from the banking system that were especially concerning to us.

In the report entitled Proprietary Trading, we examined the effect of one particular banking activity on the culture and standards in banks. We welcome the breadth of the review into proprietary trading that the government amendments announced today appear to allow for. We hope that nothing will delay the timetable that is set out within the amendments, so that the PRA and independent reviews of proprietary trading can be completed most effectively and any necessary action taken as quickly as possible. I will return to that point in a few moments.

The next report, ‘An Accident Waiting to Happen’: The Failure of HBOS, is a case study of bank failure—and one of remarkable quality. The work on this was led exclusively by the noble Lord, Lord Turnbull, whose vast experience and forensic skills were stretched considerably as the paper mounted up, but whose work is foundational to understanding this crisis. While not making specific recommendations, it serves as a stark reminder of the many aspects of poor banking standards and culture that pervaded the industry in the run-up to, during and following the great crisis of 2007-08.

Our fifth and final report, Changing Banking for Good, outlines the radical reform required to improve standards across the banking industry and presented Government, the regulators and the industry with a package of recommendations which, taken together, will raise standards and drive positive cultural change, ultimately changing banking for good.

Although we have made progress on structural and regulatory aspects of banking reform, through an enormous amount of work by your Lordships in this House, if we think that by changing the law we have solved the problems revealed by the crisis, we are profoundly mistaken. In this light, I wish to focus on those parts of our work that cannot be implemented through legislation or regulation but require cultural change within our banks.

As any vicar will tell you, a sermon should have three main points. I hope that your Lordships do not feel that you are being preached at today, but I wish to ask three questions which must be answered if we are to cut to the heart of how the rotten culture was found to be in the banking industry and how it can be changed for good.

The first question is the most essential: what is our vision for banking? We—not only the commission but legislators, regulators, bankers and society at large—have been tasked to find a once-in-a-generation leap of imagination that does not simply attempt to repair what was destroyed in 2008 but to replace it with something that is of substantial and lasting value. A vision for banking that is sustainable and of value needs to offer the possibility of a flourishing society at every level of the economy, through investment, lending and understanding the communities in which the banks work—a vision that enables all banks to respond better to their customers and to the well-being of society. Without good banking, savings stagnate in fetid pools of hoarding, and good ideas and entrepreneurial vigour wither without the water of capital and liquidity. Such is the state into which we have been growing for many years, which is one—although only one—contributory factor to inequality, social immobility and areas of the country being condemned to generations of poverty and deprivation.

However, secondly, when we asked witnesses, “What is the social purpose of banking?”, worryingly, it seemed to be a question that often stumped them and which they had never asked themselves. Activity without social purpose is ultimately anarchy. The work of the commission, in my view, fundamentally has been about enabling the financial services industry to retrieve its basic purpose of supporting the common good and social solidarity. Banking is ultimately a utility function. It is of course one that is especially important to our economy, but there is a danger in treating the industry entirely differently from other utilities. It is necessary that a culture of service and social purpose is renewed in our banking industry. Banks must assert their roles in both national and local economies for without their investment in and service to local communities everywhere, there will be no durable and universal recovery.

Finally, we must ask: what ultimately will drive cultural change? Taken together, the commission’s recommendations are an effort to encourage positive cultural change. Proprietary trading, in the opinion of many of us—and it is subject to review—should be banned. Remuneration should be reasonable and proportionate. Regulation should be effective and accountable. The implementation of the ring-fence is a clear and welcome effort to ensure that distinctive and possibly irreconcilable cultures are kept separate. The ring-fence will, we hope, make the development of good culture more possible—and with the right safeguards, we hope also that it will be more durable than the walls of Jericho, so that not even the trumpets of Joshua’s army could find a way through.

However, it is clear that law and regulation cannot cause people to be good: making people good by law has been—to put it mildly—tricky since the days of Moses. Read the Epistle to the Romans to see why. Culture is set by leadership, training and implementation. In a recent report, the City of London emphasised remuneration and shareholder activism. Such recommendations illustrate the problem. Good culture is good through virtue, not out of hope of reward alone, although of course that must play a part. Shareholder activism also has had little or no impact historically, with the average share traded five times a year.

For a culture to become dominant, it was clear to us that it must be internalised by employees at all levels. A set of values governed by a deeply-held belief in what is right and wrong is foundational to long-lasting cultural change. Such beliefs are caught and also taught. If no one inside a bank believes that some of the practices we have heard about, some as recently as last week, are wrong, or if they believe it has no adequate way of expressing their concerns—the commission, by the way, has recommended improvements to facilitate whistleblowing—then cultural change will never take place, and poor standards will continue to fester.

Introducing informal mechanisms to catch poor standards early on was one of the commission’s recommendations—it can be found in paragraph 786 of our final report—but in situations like this, once the principle of the recommendation has been accepted, the responsibility for bringing it about must be on banks themselves. That is why the commission recommended that, as well as the essential reforms to regulation and law, the industry must professionalise the sector in a similar way to the medical and legal professions. This recommendation has been much overlooked, but provides a convincing long-term answer—complementary, not an alternative, to the other things in the report—as to how culture can be shaped and styled, and virtue measured, understood and valued.

The banks have started on this work and it is especially clear that the chief executives of the major British banks are working very hard in this area. The struggle to change the culture has begun. It will be a long one. In our view, we are talking of years—decades, a generation perhaps—to embed a completely different culture to replace the one that seeped slowly away over the years after big bang. On the outcome of this struggle hangs to a considerable extent the flourishing of our society and the re-establishment of the reputation of our most successful industry.

For all these reasons, Parliament must hold regulators and market participants to account, not only for their adherence to written laws and regulations but, perhaps more importantly, for their commitment to the common good and to a culture of virtue, so that, possessing extraordinary power and influence, they may enable extraordinary good and development.

I wholeheartedly commend the work of the Parliamentary Commission on Banking Standards to the House. I hope that its work will not be in vain but will continue to be drawn upon as a new system is built in place of its failed and discredited predecessor. I beg to move.

--- Later in debate ---

[The Archbishop of Canterbury]

My Lords, I add my thanks to all noble Lords who have contributed this evening. A number of striking comments and speeches have been made, notable among them that of the noble Lord, Lord Carrington, with his description of a Sharia-compliant bank and the impact that that can have and his deployment of his experience both in the other place and in the banking industry over many years.

The debate has ranged far and wide. I want to draw on two characters. One is Dracula. We have the threat of reincarnation—or, if one is into “Doctor Who”, regeneration—of the Parliamentary Banking Standards Commission. I saw the blood drain from the face of the noble Lord, Lord Turnbull, as I sat from this distance. I hope that we can find some stake and clove of garlic that can put it into its grave and that someone else will have the pleasure of reincarnating it at some point.

The speech of the noble Lord, Lord Eatwell, clearly reminded us that financial services are immensely connected and that what you squash down in one place pops up in another—to put it less elegantly than he did—often with great force, little regulation and usually much danger. His exceptional speech should be noted and thought about. I fear that there will be need for continual monitoring of what happens over the next few years.

I have a couple of comments. I shall be brief, because we are at the end of our time and it has been a long day. The comments made by the noble Lord, Lord Sharkey, about size were also strong reminders of the difficulties that we face. One of the most memorable comments in evidence for me was from a former head of UBS, clearly deeply affected personally by the pain of what he had gone through. He was one of those bankers who came who had borne the whole weight of it on his shoulders and suffered greatly as a result. There was no lack of responsibility from him. When asked if, in the depths of the night, he looked back and thought that he might have done differently, he said that you can have a big simple bank or a small complicated bank; you cannot have a big complicated bank. He said that if he had his time again, he would have kept it simple.

When I listened to the noble Lords, Lord Sharkey and Lord Eatwell, I was reminded of the extraordinary statistic anticipating the banking industry at nine times GDP. I was reminded of the need for banks to be kept to a size where they do not threaten everything else. They are not the only goose laying golden eggs in our economy. We cannot be a “monocrop economy”, as Martin Wolf described us in a notable article in the Financial Times in January 2009.

I cannot go through all the other points raised, but I heard with gratitude the comments about education. Competition is obviously essential, but, as the Minister said a few moments ago, competition must be to be the best supplier of the customer, not the most profitable bank going. You may get the second through the first, but if you aim solely for the second, you will never get the first.

Finally, the quality of finance—to which the noble Lord, Lord Eatwell, referred directly and indirectly—is that which sustains our communities and enables the talent of our nation to flourish, grow and develop jobs. He used a phrase, “financial services”, that has been used many times in the debate. All these industries, banking and the others, are there to serve, not to rule. They are, as I was taught as a child by my grandmother, when talking about fire, good servants and very bad masters.

Motion agreed.