Financial Services (Banking Reform) Bill

Lord Brennan Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Flight]

My Lords, I support the points made by the noble Viscount, Lord Trenchard. It is entirely understandable that people in this country are furious when they see individuals whom they blame for the system blowing up getting off scot free. On that front there are two points. First, if monetary policy is too lax for a long time, it will almost inevitably lead to bad lending by banks because, in some sense, banks are an automatic conduit of money. That really is what happened in the UK—because of the 2% inflation target, the Bank of England did not acknowledge that there was much higher inflation here off-set by imported deflation. We had easy money for far too long that filtered its way through into bad lending by banks. I remind the House that it was not investment banks but one or other form of bad lending—old-fashioned bad lending such as HBOS or buying CDO instruments from the US. It is not just individuals when a banking system blows up but the background as well.

Secondly, I blame greatly the useless and negligent regulators as well. Why did they not spot the problem? Why should they get off scot free as well? They have a job. Their task is to keep an eye on and make sure that the banking system is safe. If they fail completely in the discharging of that, to some extent they are as guilty as reckless people running banks badly. There is certainly an argument for saying that it would be desirable to bring in draconian powers against the executives of banks, harmonised internationally. I would be more comfortable if the same sort of measures applied in the US, Hong Kong and continental Europe.

I want also to raise a slightly quirky point relating to anti money-laundering since anti money-laundering amendments have arisen. It seems to me that in some ways anti money-laundering has gone slightly over the top. Noble Lords may be aware that, following the large fine given by the US authorities to HSBC, HSBC has simply fired all its US clients in the UK. It has closed their accounts. It has said it no longer wants the risk of dealing with Americans. This has caused huge inconvenience to lots of Americans living in London. Going forward, I can see if other dangers present themselves to other banks, they may decide that it is not worth having a particular category of client.

FATF, which as far as I can see is an unaccountable body laying down anti money-laundering rules, decided to blacklist a number of countries it felt were not practising anti money-laundering measures adequately. This led to some 30 embassies in the UK finding their bank accounts were likewise closed by HSBC. Some of the embassies found it virtually impossible to obtain a new bank account. If there was a branch of a bank from their country in this country they could go there but most other banks would not take them on as a client because they had been blacklisted by FATF. That again seemed slightly to fly in the face of embassies being approved by the Foreign and Commonwealth Office. Its reaction to this matter, I gather, was to express regret but not to do anything. I raised this with Andrew Bailey from the PRA. He felt it was extremely wrong and was quite surprised it had happened. This is a slightly different issue from where we are in the Bill but I would just say to the Minister that the Treasury needs to keep a little watch on what is going on in the anti money-laundering territory and its knock-on effects. I certainly think it is time that FATF, which is the top body laying down all this, were accountable to somebody. Both the Treasury and the Foreign and Commonwealth Office effectively said to me that they could not interfere with FATF—whatever it says goes.

[Lord Brennan (Lab)]

My Lords, I speak to the amendments in my name and in those of the noble Lords, Lord McFall and Lord Watson. I declare an interest as chairman of Global Financial Integrity. It is a Washington-based think tank whose purpose is to promote measures designed to limit and eventually eradicate illicit financial flows around the world, in particular those from developing countries, which presently run into hundreds of millions of dollars. It is thought that they exceed the amount of aid that developed countries contribute to the countries out of which that money comes. I have experience as non-executive director of a banking operation and have advised banks professionally.

Money-laundering, the proceeds of crime and the results of fraud represent a composite picture of international dishonesty, which has been and will continue to be practised wherever those responsible can find a banking system through which to channel the money. This is a fact of life. Many of our banks have such an international scope that they are a ready target for people wanting to use them for these illicit activities.

I invite the noble Lord, Lord Flight, if he has not already read it, to look at the congressional report on HSBC. The chairman of HSBC described it as a very sobering read and concluded that bankers had lost the right to self-determination on such issues. When we come to the part of the Bill that controls how and what people in banks do so that this kind of dishonesty is not furthered, we should err on the side of authority. I invite those advising the Minister to avoid the legislative naivety I dealt with at Second Reading, or in months to come the Bill will result in many hours of detailed inquiry and comment by lawyers advising banks. The first rule the lawyers will pick up is that that which is not stated in this Bill was neither meant nor intended. The Bill, if it is to restore public trust and avoid the kind of risks I have described in dishonest money transfers, should err on the side of authority.

The amendments I am about to speak to were produced by independent counsel, invited to produce amendments that sought to meet the concerns I and my noble friends have. We played no part in the drafting of these amendments, so let us have a care. If a professional advising us as to the amendments produces this level of authority as being required, what do you think those seeking to protect themselves against it will do in terms of legal expense and inquiry?

My final point before I turn to the amendments in detail is by way of introduction. The noble Lord, Lord Flight, in his usual reserved manner, said, “What about the reckless disregard of regulators in the past of their responsibilities?”. I do not think that we are entitled to repose into the hands of future regulators a degree of confidence that past experience shows would be misplaced. They should be told the scope of how they are to do things and what they are to do because we are talking about bank involvement in criminality.

Amendments 46A and 46B go to the question of strengthening the senior management function—the senior person’s regime—so as to include, with precision and clarity, an obligation on the banking system specifically to deal with the risk of money-laundering and of dealing with the proceeds of crime or the results of fraud. There should be no legislative fault in precision and clarity when dealing with criminality.

The amendments seek to ensure that the definition of “senior management function” should be seen to include those areas that I have just mentioned in terms of compliance. Those in banking must comply and must avoid the risk of non-compliance. The FCA, in specifying senior management functions, will require them to do things, including a minimum threshold for sums to be regulated. Is this too much? It was not thought to be too much in the United States, which has a far bigger banking system than ours. Would it run a risk of damaging our banks? It has not in the United States. It is ours that have suffered the penalties, not theirs. These amendments seek to establish a norm—not some Anglo-Saxon aberration—for proper cross-border behaviour in the banking world.

Your Lordships will note that Amendment 46A uses the words, in proposed new paragraph (b)(iii),

“related to or resulting from”.

In other words, it gives a broad reach to responsibility. Amendment 46B makes specific reference to the statutes that have to be borne in mind. It is hardly a criticism to be met to say that people must obey the criminal law—of course they must. This statute—the Bill and the amendment—remind people in statutory wording of their civic obligation, as well as their professional obligation, to obey the law. It is designed to stop the defence of, “Nobody told me. It was not my job”. The two amendments are straightforward and build on the Government’s well deserved intention to improve the law.

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Tabled by

[Lord Brennan]

46A: After Clause 12, line 13, leave out paragraph (b) and insert—
“(b) those aspects involve, or might involve, a risk of—(i) serious consequences for the authorised person, or(ii) serious consequences for business or other interests in the United Kingdom, or(iii) conduct or omissions by or on behalf of an authorised person related to or resulting from the authorised person transacting with criminal property for its benefit or for the benefit on behalf of other persons.”

[Lord Brennan]

My Lords, I am grateful to the Minister for telling us that he will write in due course about the matters that I raised. If the Committee will forgive me for using a graceless Americanism, we are not talking about legislative refinement—this is hardball. It is serious stuff out there in the commercial world.

I reassure the noble Baroness, Lady Noakes, that I have assumed that money-laundering has its technical meaning, which is using a bank to convert illicit money into a licit flow, which would include tourism and so on, but if necessary that can be dealt with by way of a bigger list in due course.

Amendment 46A (to Amendment 46) not moved.

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Moved by

[Lord Brennan]

58A*: After Clause 12, line 10, after “aware” insert “or should have been aware”

[Lord Brennan]

My Lords, I will deal briefly with these amendments concerning the creation of an offence in relation to a decision that results in bank failure. The amendments are designed to test the definitional value of the present clause, and work on the realistic expectation that once this becomes statute there will be a very much reduced prospect of people committing such an offence, particularly if they face up to seven years in prison on indictment. So the purpose of this section is more of a deterrent, although it has a punitive value if there is a transgression. It is with that in mind that these amendments were put forward.

I shall address Amendments 58A, B and C in turn. My reading of this draft offence does not include any use of the words “reckless” or “recklessness”. It would be unwise in legal terms to equate its contents with some broad description to be used as a synonym, or understood synonym, of “recklessness”, which is a term of art in the law.

Amendment 58A deals with the following risk. It is likely that there will be more cases of one or more people being involved—two, three, four, five, whatever it might be—than a singleton defendant in a bank failure. If the bank is operating properly, it is almost inconceivable that one person could engineer its failure without the knowledge of others. Therefore I predict that if they are brought to trial, one or more of them will say, “I did not know; it was that man, not me.” This particular amendment is designed to cover that situation. “Should have been aware” implies “should have been aware by reason of competent and honest practice of appropriate banking standards”. It is an entirely reasonable test, and it gets over the point that the noble Lord, Lord Lawson, was telling us about earlier, of elective ignorance: “I don’t want to know”; or wilful blindness: “I don’t want to know because I’m never going to ask”. Many would think that both of those situations involve culpability. You cannot get away with it by shutting your mind to that which you should have known by professional standards and proper competence. So the time between now and Report should involve a consideration of how this clause is to be used if it becomes an offence where there is more than one defendant. Even if there is only one, he can blame someone who is not before the court.

I now turn to Amendment 58B. Corporate manslaughter is rarely brought to court. It is normally brought to court in respect of a flagrant breach of health and safety standards, usually in the construction industry, energy, or whatever it might be that causes a terrible accident. In other words, the incident speaks for itself. The word “far” in that context adds nothing to the impact of the event, and I suspect that most juries will not pay any attention to the word “far” when they are directing—they will look at the event. Between now and Report I want the Government to consider this question: how on earth will a judge directing a jury interpret the word “far” in respect of refined banking practices that may cause a concatenation of events that lead to a failure? It is an extremely loose word to use in this context, and I invite reconsideration of it or its omission.

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[Lord Brennan]

My Lords, I raise the question briefly about recklessness for the Government to consider. Let us suppose a senior manager reports to a chief executive officer saying, “I want to tell you about the following risks that would arise if decision A,B or C is taken”. The CEO is of the imperial kind and tells him not to waste his time, that he is not interested in risk, and to get on with it and make the decision. In those circumstances, the present legislation as it is drafted would justify a decision to prosecute the manager because he went ahead despite the risk, but not the CEO because he never actually knew what the risk was; he just ordered the junior to go ahead and do it.

The point about recklessness, which the lawyers advising Ministers should consider again, is what you do in the more likely scenario in banking, not of a round table where people are all carefully considering risks but of high speed commercial dynamics in which somebody forces a decision to be taken, not caring what the risk consequence is. How do you deal with that?

In the mean time, I beg leave to withdraw my amendment.

Amendment 58A, as an amendment to Amendment 58, withdrawn.