Financial Services and Markets Bill

Lord Archbishop of Canterbury Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

[The Archbishop of Canterbury]

My Lords, I have added my name to Amendments 241C and 241D tabled by the noble Baroness, Lady Kramer, and wish to speak briefly in support of them here. I am particularly grateful to the noble Baroness, Lady Noakes, who made some very helpful and powerful points.

As the noble Baroness, Lady Kramer, said, this marks 10 years since the publication of the Changing Banking for Good report from the parliamentary commission, on which I sat with her. The two amendments to which I have added my name are probing amendments to stress the importance of not forgetting the lessons of 2008-09, because people and sectors entirely can have very short memories.

As the noble Baroness has explained, the amendments seek to prevent alteration to two elements of the banking reform Act 2013 by statutory instrument without proper debate in Parliament, and to prevent changes which go against the recommendations of the parliamentary commission. Our memories have certainly been refreshed this week. If the debate on this group had been held when it was first scheduled two or three weeks ago, I think we would have had a very different reception. If one is grateful for anything in the present crisis, it is that we have been so warmly reminded of why we need a clear memory.

The ring-fence was first recommended by the Vickers commission in 2012, and it was “electrified”—in the words of the noble Lord, Lord Tyrie, in the Parliamentary Commission on Banking Standards report—to address the issue of banks seeking to test it. In our first report in 2012, we commended the coalition Government’s intention to introduce the ring-fence but said, as has been quoted, that it would be worn down in time, and that it had to be

“sufficiently robust and durable to withstand the pressures of a future banking cycle.”

After 10 years, we are now in a future banking cycle. We have gone through a long period of very easy money in which the banks have been able to make a great deal of money and to recover and increase their capital to much better standards than were around in 2008.

The very rapid increase in interest rates right across the western economies—particularly in the United States, which has the fastest increase for 50 years—has resulted in, as usual, the exposure of risks being taken that had not been foreseen. It is the “had not been foreseen” and possibly the “unforeseeable” that are important to stress when looking at this.

Electrification gives banks a disincentive to test the limits of the ring-fence. It is human nature—especially in a corporate entity—to test the limits of any regulation and see if they hurt when you hit them. But 2008-09 hurt far more people than simply the banks. It caused a global recession, and it hurt the poorest in the land more than anyone else. At that time, I was working in Liverpool and living in Toxteth, and we saw the impact on those who were least able to live with it. It is still hurting the whole economy, because for at least a generation after a financial crisis, as opposed to a normal economic recession, there is a deep fragility in confidence. The ring-fence and the other regulation of banks and higher capital are all about maintaining confidence, not about making it impossible for people to go bust.

The recent failure of SVB in the US, and the ease with which what is by global standards a major bank was reclassified as a systemically important bank and thus eligible to be rescued—even though there is a system for resolving banks which is meant to be robust—demonstrates that the issues of systemically important banks are very difficult to handle. Again, the problem is one of confidence: we are talking about the contagion of a lack of confidence, and not simply about the failure to observe rules and regulations.

The resolution of banks is part of the system in the USA. It applied to SVB and to Credit Suisse, but it was not enough to protect the taxpayers of the US or Switzerland from having to put in significant implicit and explicit support. This is all about confidence. If we go on bailing out the system as it is, one of the unintended consequences is likely to be further damage to confidence.

For me, one of the most memorable moments of the banking standards commission was hearing the very broken and tragic testimony of a former head of a global bank outside this country. He was a man of absolute integrity who had been brought to the point of complete breakdown—I suspect my colleagues remember it—by the impact of the failure of the bank he led. Right at the end of his testimony, I asked him, “When you wake in the night, what do you remember and wish you had done differently, because we all do that over events in our past?” He said, basically, “That’s easy. I remember that you can run a small, complicated bank safely, or a big, simple bank safely, but you cannot run safely a big, complicated bank”.

--- Later in debate ---

[Noble Lords]

Fiscal event.

[The Archbishop of Canterbury]

Going back to the fiscal event, a lot of the pension funds almost went bust. We learned a lesson from that, quite rightly, and I think it is a lesson that will be kept.

The ring-fence and the SMCR have been important for encouraging—not solving—improved standards and culture in the banking sector and for protecting the public from bearing the brunt of future banking failures. We cannot forget the lessons learned with such pain for so many outside the banking sector, who had no idea what goes on in banking but found that life suddenly just did not work any more.

I hope that the Government take a further look, certainly through the consultation, at the lessons of the last few weeks, and that the ring-fence is strengthened, not weakened, and improved. I agree with the noble Baroness, Lady Noakes, about both the ring-fence and the SMCR. Both are cumbersome and need rethinking, but not abolishing.

When asked why he had changed his mind, John Maynard Keynes—apocryphally, I think—replied:

“When the facts change, I change my mind. What do you do, sir?”


Given that the facts have changed over the last few weeks, the Government need to ask themselves whether they are going to change their minds and think harder about adequate protection for the basic financial structures that protect the weakest in our society.

[Lord Eatwell (Lab)]

My Lords, these three amendments project a peculiar background, which is an issue that this Committee debated in an earlier session—that of accountability. The first amendment of the noble Baroness, Lady Kramer, Amendment 216, is too detailed for primary legislation. On the other hand, I sympathise entirely with the noble Baroness’s goals. In a principles-based system, I would have expected these goals to be expressed in the principles and achieved by the rule-making regulator but, given the lack of accountability with which the Government seem so comfortable—I was impressed by the noble Baroness’s argument on Amendment 216—we cannot be confident that changes will be made at the necessary points. There is no vehicle for Parliament to ensure or inspect the rule-making of the regulators.

I think Amendment 216 is necessary because the Government are so weak on accountability. If we had strong accountability, whereby we could hold the rule-makers to account—both positively, in the sense that you are doing something that you should not be, and negatively, in the sense that you are not doing something that you should be—amendments such as this would not be necessary. Amendment 216 is necessary in the way so carefully described by the noble Baroness, Lady Kramer, simply because of the lack of accountability in the system.

This also applies to the other two amendments in this group. The noble Baroness, Lady Noakes, powerfully pointed out that, because of the peculiar circumstances in which it took place, the resolution of SVB UK required a relaxation of the ring-fence. I am entirely sympathetic with the goals of these amendments, which address the overall structure of the industry and therefore the overall risk appetite of this country for banking and financial services. That is what the ring-fence and the senior managers and certification regime are about.

The “but” is the important case highlighted by the noble Baroness, Lady Noakes, where some modification was necessary. If we had proper accountability, this could come to Parliament, which could then examine this example of relaxation to discuss whether it is appropriate to extend it to other banks, so that there is this mythical level playing field in the competitive relationships between them.

I am enormously sympathetic to the goals of these amendments: to the first because it is a practical issue of excessive risk-taking by insurance companies and, as we have seen, pension funds; and to the other two because they refer to the structure of risk which Parliament has decided is appropriate in this country’s financial services industry. It should not be modified wilfully—I am thinking of the marriage ceremony—and without due consideration of the consequences. Therefore, the Government would once again be well advised to reconsider the issue of accountability, which they have brushed away so casually, because it would provide the flexibility for Parliament to be involved in changing the risk appetite of the country as a whole.