Financial Services (Banking Reform) Bill

Lord Brennan Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Lord Brennan (Lab)]

My Lords, I support the amendment because it recognises the obligation of society to protect and deal justly with people who report serious wrongdoing, often at personal cost. The 1998 Act recognises that in its statutory effect. This modest amendment is designed to deal with the relationship between the whistleblower and his employer in relation to an employment claim. I invite the House to look at the question of whistleblowing in a much broader context. The more monolithic the organisation, the tighter its internal process controls, the less likely it is you will find out about wrongdoing. Almost paradoxically, the whistleblower becomes more important —single though that person usually is—according to the size of the enterprise about which he makes revelations. That explains to a considerable degree the point raised by the noble Lord, Lord Phillips of Sudbury, about the effects upon these people of taking such a step.

As I said at Second Reading, the four major banks are, in a broad sense, in charge of four times our gross domestic product. Whistleblowing in organisations as big as major banks is a highly exceptional event. In considering the role of the whistleblower in this context, the Government should, I suggest, have regard to public reaction if it is not seen to be the case that whistleblowers are not only protected but encouraged by legislation such as this. Regulators are there to regulate, not to police in the sense of investigation, detection and prosecution. That is not their usual role—certainly not historically—in this country. Therefore, the whistleblower in this country has even greater importance than he or she has in the United States.

In the United States, the Dodd-Frank Act—the US counterpart of this legislation—introduced special provisions for whistleblowing, not just in banking but in financial institutions generally. It provided for payment to whistleblowers according to the extent of the misconduct that the whistleblower had revealed, as assessed by the SEC—the equivalent of our regulators. So, for example, if a whistleblower had disclosed LIBOR, the payment would reflect the importance of the discovery in relation to the economic loss that had been suffered.

That is exceptionally important. The greater the danger to the whistleblower within his or her employment or in relation to their future and that of their family, the more they should be protected, including financially —but within reason, I accept. If you do not do that, you expose the whistleblower to what almost amounts to serious persecution. One has only to look at some of the events that have occurred in the National Health Service, where whistleblowers in different hospitals or hospital trusts have had their careers ruined, and there was even, I suspect, a suicide a year or two back. This is serious stuff. These are citizens revealing misconduct by great institutions, and no more civic an act could you expect an ordinary person to perform.

In the United States as a result of Dodd-Frank, which was enacted in 2011, in the financial year 2012—the first full year after its enactment—there were 3,000 reports to the SEC. My enthusiasm and that of my noble friend Lord McFall led us to misunderstand each other. The Office of the Whistleblower is a permanent office within the SEC, and its purpose is to investigate claims and to co-operate with and look after the whistleblower. It works. When the new chairman of the SEC said publicly, “Now we are not only felt; we are feared”, one of the main reasons was the whistleblower threat. If we want to change culture, this is a very effective way of doing so. Good intentions count for a lot, but in changing culture, an intuitive fear of finishing up in jail counts for a lot more.

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[Lord McFall of Alcluith]

My Lords, I will briefly speak in support of this amendment. My noble friend Lord Eatwell spoke of treating customers fairly. I remember, going back to 2002, when the FSA, bless its heart, introduced this to the industry. The FSA told me that it was a hugely uphill struggle. I well remember having a conversation with the chairman of one of the banks, who said to me, “Treating customers fairly? I don’t know what that FSA is up to, because I’ve always treated my customers fairly”. The gap between what the FSA was trying to do and the mentality of some people in the industry was huge. I remember being at a seminar with John Kay, who has written a great article in today’s Financial Times that I have already referred to. He said that a duty of care, if it was imposed on the banks, would be “transformational”. I think he said that for the following reason. There is today an imbalance between the customer and the bank—the term for that is symmetry of knowledge—which has led to many of the scandals.

Time after time on the parliamentary banking standards commission, when we ask chairmen and chief executives exactly why mis-selling occurred or why the grievous omissions took place in their organisation, they say that they did not know anything about it. There is, therefore, a hiatus between the top and below. One of the amusing aspects of my time as chair of the Treasury Committee was speaking informally to senior executives in the banks who came along to the Treasury Committee and said, “What you did to the chairman today was good because it allows us to educate him”—or her, although it is largely him—“about what is happening in the organisation”. A lot of them do not know what is happening. If we had this duty of care, that responsibility would lie at the very top.

During the deliberations of the parliamentary banking standards commission, I suggested that there should be an annual meeting between the chairmen and chief executives of these institutions, and the regulatory authorities, so that there was a sign-off on how they do their duty and how they serve the interests of their institution and their employees in the wider society. That information is not made public, but at least there is that accountability at the top between the regulator and the chief executive. At present, we do not have that. Having the duty of care would make those at the top much more alive to what is going on in their organisation. I have received evidence in the banking commission, particularly from the lawyers who were advising us, that the term “duty of care” has a specific legal meaning in the law of torts, and tests to establish whether a duty of care exists and whether it has been breached are a fundamental tenet of common law. In the context of banks and their customers, it is not clear what a duty of care would look like in practice. I know that there are huge legal hurdles to overcoming that, but there is a basic, common-sense and moral purpose to the concept of duty of care, and I think it is one that we will refer to again on Report.

I would like the Minister seriously to consider this amendment and ensure in some way or other that, as the Parliamentary Commission on Banking Standards stated in paragraph 416:

“Banks need to demonstrate that they are fulfilling a duty of care to their customers, embedded in their approach to designing products, providing understandable information to consumers and dealing with complaints”.

[Lord Brennan]

My Lords, perhaps I may take up the points raised by the noble Baroness, Lady Noakes. Paragraph (a) of the proposed new clause refers to a “fiduciary duty” by the ring-fenced body. In practical terms that means a duty exercised by, ultimately, the board of directors. The body acts through it. The practical consequences of such a duty, which does not involve enforceability by the regulators, are twofold. First, if the board of a bank breaches its fiduciary duty to customers in this way, it is perfectly reasonable for the shareholders to refuse to indemnify it in respect of any claims made by customers on the basis that it has breached a statutory duty, which could not conceivably be said to have been acting in the shareholders’ interests. That is the first practical consequence. It is a deterrent. Secondly, although I have not checked this yet, I suspect that in the field of commercial insurance you would not be able to get D&O insurance for protection in respect of a fiduciary duty until you have satisfied the insurability test of having acted reasonably and in accordance with commonly accepted standards of probity and good behaviour in the commercial sector. Therefore, the point is answered, I suspect, by practical consequences.

[Lord Deighton]

My Lords, this amendment is an opportunity to revisit the imposition of fiduciary duties or duties of care on financial services firms. The other place debated the same amendment at the Committee and Report stages of this Bill. Of course, no one in this House is going to disagree with the proposition that customers need a better deal from their banks, whether we call it treating customers fairly, having better standards or putting customers first. The Government have been keen, for example, to see more competition between banks as another way of addressing this concern. We all want to see better standards in the banking industry and a return to the days when the customer relationship mattered and the customer came first. We want the leadership of banks to appreciate that it is also in their long-term interests in building successful banking businesses. The Government’s amendments so far, which implement the recommendations of the PCBS, will be an important step in the round in that respect.

However, I note that the commission did not itself recommend the introduction of either a fiduciary duty or a duty of care. To cut to the chase, the Government do not consider that the introduction of either a fiduciary duty or a duty of care in legislation would help to drive up these standards within ring-fenced banks. First, banks are already subject to a wide range of legal duties. Most obviously, they are subject to contractual obligations to their customers. Any banking relationship or transaction is subject to a contract between the bank and the customer. Of course, a bank is subject to obligations under FiSMA and the regulator’s rules. Further, the Government’s amendment on banking standards rules means that in future senior managers and ordinary employees will also be subject to conduct rules. Therefore, it is not clear that imposing a fiduciary obligation on a bank would add any value. The fiduciary obligation is the kind of obligation that a director owes to a company, or a trustee owes to a beneficiary under a trust. It is an appropriate obligation when one person is acting on behalf of another or dealing with another’s property on their behalf. However, deposits with a bank are not property held on trust, so a fiduciary obligation would have no place in the contractual relationship between a bank and its customer.

Similarly, it is not clear what a duty of care—

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[Lord Brennan]

My Lords, it is the end of the legislative day in an empty Chamber. This is an extremely important amendment. It is what the noble and learned Lord, Lord Judge, our previous Lord Chief Justice, now on our Cross Benches, would have described, as he did in a speech in the City, as a “Henry VIII Plus” clause because it is so wide-ranging.

I want to make several points for the Government’s consideration between now and the next stage. The Banking (Special Provisions) Act 2008 and the Public Service Pensions Act 2013 were both Acts that included clauses not as wide as this coming from the Treasury. Researches over the past few hours have not led me to discover any other Act in which there is a clause that provides for any previous Act and also any subsequent Act to be amended to accord with this Act. I may be shown not to know, but I suspect that if there is such a clause, there will be no more than one or two examples. I am concerned that these should come from the Treasury, lest it thinks that it has some special reserve powers for this kind of legislative amendment procedure.

If I have understood the history of this amendment correctly, it has come in the past couple of weeks. As far as I know, it has not been considered either by the Delegated Powers Committee or by the Constitutional Affairs Committee. This is important because in 2006 the Legislative and Regulatory Reform Bill contained a Henry VIII clause, which was withdrawn by the then Government after a critique by the Constitutional Affairs Committee. I invite the Government’s consideration of this and that of the whole House, when it has had the opportunity to consider that matter.

Subsection (2)(b) refers to a power to amend any subsequent Act that is passed within this Session of Parliament. That means by the end of next April. In the Government’s commentary on the list of recommendations of the commission and the Government’s response paper of July 2013, item 41, dealing with directors’ duties, is the present subject of review with a supposed consideration of a report called Trust and Transparency. The Government are saying that they wish to deal with changing directors’ duties and that that requires legislation. If this is currently before the Treasury and the relevant Ministers, is this coming in within this Session? In item 60 on payments regulation, there is to be a government report to Parliament by the end of this year, 2013. It requires legislation. Will that require yet another Act? We need clarity. On the whistleblower point mentioned earlier, if there is to be a change in the law, will that require further enactment? The final point is on auditors and supervisors. There are various reviews from the Chancellor and the Government which, it is said, do not involve legislation but might involve action, which in turn might involve potential legislative effect.

That is three definite items and potentially a fourth that spring out of this topic, and we need clarity. If this is a banking reform Bill, it should be a complete Bill, and the rest of the Session should be geared to accommodate these matters. It is late in the day to ask for a considered response, but no doubt this can be dealt with in writing, and again when we next deal with the Bill.