Parliamentary Commission on Banking Standards

Lord Ashton of Hyde Excerpts

Thursday 8th September 2016 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord Ashton of Hyde) (Con)]

My Lords, I am grateful to the right reverend Prelate for securing this debate here today and to all noble Lords who have spoken, including distinguished members of the commission itself. I am also grateful for the kind words of those who were wishing me godspeed on my way. There is always doubt as to whether they are longing to get rid of me or want to come to see me in another form.

The theme around today’s debate is that we all acknowledge the problems. We realise that they were incredibly serious and that they had an effect on real people’s lives all over the country. Therefore, the issue demands a huge amount of attention, not only when the commission took place but also as it continues, so it is good that we are having a debate such as this today. There is a theme that some progress is being made—or is it illusory?—and that competition is necessary but consumers should be served well and fairly. I hope to be able to convince noble Lords that real progress is being made and to answer a lot of questions.

It is also helpful that the noble Lord, Lord Davies, took the time to mention that this is a very important industry for the country. It employs 1 million people, two-thirds of whom are not in London and the south-east. They raise £60 billion of tax revenue to pay for things that we all want, such as hospitals. It is very important in the context of Brexit, which I will come on to later. It represents 12% of UK exports.

I think we all agree that the report is an exceptional piece of work. It identified fundamental problems within the banking system and clear solutions to them. In the wake of the financial crisis and a succession of scandals, though, public trust in our banks has undoubtedly been dented, so it will take not only legislative and regulatory reform but a long-term shift in culture if the industry is to fully restore that trust. Culture is a theme that came up throughout the debate.

I shall summarise some of the progress that the Government and the regulators have made in response to the commission’s main recommendations. The noble Lord, Lord Davies, asked me to comment on individual responsibility. A key focus of the commission was the so-called accountability firewall that allowed senior individuals and banks to evade responsibility for serious failings in their firms. Criminal sanctions were introduced for senior managers who recklessly cause their banks to fail, and who can now face up to seven years in jail. We have significantly strengthened the regulator’s ability to hold senior managers to account through the new senior management certification regime, as we were reminded by the right reverend Prelate. This ensures that all the senior managers and key decision-makers in the firm have statements of responsibilities setting out clearly what they are accountable for, enabling the regulator to hold these individuals personally to account if things go wrong. This is because there is now a statutory duty on senior managers to take reasonable steps to prevent regulatory failings on their watch.

There are strong incentives to take such steps because the penalties for breaching the duty can run to an unlimited fine, and firms must review the fitness and propriety of key staff on an ongoing basis. In short, we have taken the steps to create a culture of accountability, sending a powerful message to both senior and junior staff that good conduct is their own personal responsibility.

The regime is still young—it came into effect for deposit-takers and large investment firms in March—but we are already seeing evidence that firms are taking it very seriously. I will come on to the monitoring in a minute. From 2018 the regime will start to be applied to all other authorised financial services firms and firms where misconduct that can undermine the integrity of the market and let customers down can be caused by failings similar to those identified by the commission in banks.

So much for the stick. The commission’s report also highlighted the importance of getting the carrot right. The actions of individual bankers are also influenced by the system incentives that are in place, and again the linkage between risks and incentives was a theme in the debate. As the right reverend Prelate said, one of the roots of the financial crisis was the system of incentives and rewards that existed within financial institutions that meant that the long-term risks were poorly aligned with the short-term rewards. In responding to the commission’s recommendations for reforming remuneration practice, we have created the toughest regime for any major financial services centre. All firms must be able to claw back bonuses if it subsequently emerges that an individual has not met robust ethical and professional standards expected of them. For those who are high earners, or who take significant risks for the firm, at least 40% of any reward must be deferred over five years at least, and at least half must be paid in shares. The Bank of England has also laid out proposals that will enable bankers’ bonuses to be revoked after they have moved employer in the event of misconduct.

As a result of these reforms we have seen a big increase in deferral periods and payment in instruments, with the industry clearly moving away from the kind of remuneration system that promotes a culture of short-term gains over long-term profitability and stability. However, the legislation regulation can only go so far. We think it is important that businesses take responsibility for reform in their own culture.

The commission recommended the creation of a professional body to promote high professional standards, and we are seeing progress being made. The Banking Standards Board, established in response to the recommendation, now has 32 members ranging from the largest banks and building societies to some of the smallest, and has begun valuable work to support a strong banking culture. For example, it has run a comprehensive culture assessment of banks and building societies in the UK to show them their scores benchmarked against their peers along with an analysis of key issues facing their firm. In response to a recommendation by the Fair and Effective Markets Review, the FICC Markets Standards Board was established to improve conduct in wholesale fixed income, currencies and commodities markets, which the noble Lord, Lord Haskel, mentioned. It has already taken important action, publishing some draft industry standards. Therefore I, with the right reverend Prelate and other noble Lords, look forward to seeing how the work of these bodies progresses.

In the limited time available I will address specific comments and questions from noble Lords. We agree that competition is important and that it is important to have more of it in banking. However, the CMA report shows that there is more to do. We welcome the report and will be responding within the 90-day deadline; I think it reported in August. We agree that it is not the end of the debate and will continue to keep a firm eye on the actions that may be required to create a more competitive market.

The most reverend Primate talked about the lack of new entrants in banking. There has been progress on that. We saw one new retail banking authorisation up to 2010 and we have seen 11 new retail banking authorisations since then; shortly we will see some of those names filtering through. However, of course, as the CMA report showed, there is more to do.

The right reverend Prelate asked to what extent the remuneration should be deferred, saying that it was inadequate. We have gone some way, deferring it to five years, which was an extension from three. For senior managers the deferral period was seven years in response to the recommendation of 10, so we are not that far apart.

The right reverend Prelate and the noble Lord, Lord Davies, asked how we are monitoring this, which is an important question. The regulators will keep a public register that will show suspensions and restrictions of public enforcement action for individual senior managers and the FCA will publish an annual enforcement performance account. Since the SMCR has become effective for banks, the regulator has been monitoring its impact with a view to conducting a review of its effectiveness.

Based on his last two questions, the right reverend Prelate obviously has a sense of humour: he asked me to opine whether the new Prime Minister would effectively tear up the basis on which joint stock companies have been working for several hundred years and to comment on Brexit. Having been in post for about four weeks, I feel comfortable answering those questions. At the moment we will not change the principal duty but of course we will keep in mind that the regulators have a duty to maintain adequate financial resources and to take reasonable care to organise and control the affairs responsibly and effectively with adequate risk-management systems. On Brexit, we are determined that the industry and government work together to ensure that Britain takes full advantage of the opportunities. We want the best deal for financial services in Europe and outside and are aware of the implications of things such as passporting and equivalence; clearly, that will be part of the negotiations going forward. Work goes on to deliver those goals as we speak. Noble Lords will not be surprised to learn that after the Statement yesterday by the Prime Minister and the Leader, I will not go any further than that today.

The noble Lord, Lord Haskel, says that culture is not embedded. Of course the SMCR came into effect for banks only in March this year. Personally, I think a huge amount depends on the message from the top in organisations, but we are setting up the mechanisms and firms are taking them seriously.

Change will take time. The work of the Banking Standards Board and the FICC Market Standards Board will be key to raising standards. The Bank of International Settlements is making significant progress on a global code for foreign exchange, which is due to be published in May 2017. The noble Baroness, Lady Kramer, acknowledged that industry is responding well to the taskforce’s work on vulnerable people and things like that. I will come on to that in a minute.

The noble Baroness was honest enough to admit that she had lost the argument in this House about the reverse burden of proof. This was removed after long discussions involving some members of the banking commission, and I am not going to go over those again. I believe, as does the majority of Parliament, that the duty of responsibility is a better approach for embedding senior accountability across the financial services industry.

The noble Baroness also talked about the bonus gap. We did not support the bonus gap but for now it is in place and we have withdrawn the challenge to the EU. We want to build a system of pay in the global banking system that encourages rather than undermines responsibility.

The noble Baroness also talked about public sector organisations in helping vulnerable consumers. I agree that that is an important point—I will continue for a couple of minutes because I think we have until the hour. The CMA identified key groups of consumers who are not well served by the banking sector. No doubt the FCA will want to consider this alongside its high-cost short-term credit costs, and separately it is undertaking an extremely important piece of work on the needs of vulnerable customers.

The most reverend Primate talked about the leverage ratio set at 3% rather than 4%. One of the recommendations was to take this decision away from the Government, so we have left it to the FPC. That includes powers to set an additional leverage buffer to be applied to the systemically important firms that will supplement the minimum requirements if they so feel. It is an important point that this be left to the FPC.

There are some more questions that I have not spoken fast enough to get to, so I will write to noble Lords to answer the questions that I have not answered today. To summarise, we believe that huge progress has been made but also that industry is stepping up to the challenge. We know that momentum, once generated, must not be lost. That is why it is crucial that this vital industry learns from the mistakes of the past and moves on from them to earn the trust of the public once again.