Financial Services (Banking Reform) Bill

Lord Brennan Excerpts

Monday 9th December 2013 Lords Chamber

[Lord Flight (Con)]

My Lords, first, I declare an interest as a commissioner of the Guernsey Financial Services Commission. I will raise an issue which relates, as far as possible, to the territory being addressed right now: what will be the position of the banks in Crown dependencies of the UK under the new arrangements for ring-fenced banks? I have made inquiries of the Financial Secretary and got an answer. However, I have some reservations that the answer will not work very well. An issue analogous to the comment about foreign banks in London is that most of the banks in the Crown dependencies are not branches but subsidiaries. The proposal is for branches to be within the ring-fence and not subsidiaries. However, there is little incentive for banks to convert from subsidiaries to branches to come within the ring-fence. At the heart of this is an issue of UK interest in that those banks mostly effectively gather deposits that are lent to London, and are in some senses merely a legal fiction. Therefore if they will be within the ring-fence and will all have to convert to being branches, there is a strong practical case for including them within the UK deposit insurance scheme. If not, the banks in the Crown dependencies will stay as subsidiaries in the main, they will be outside the ring-fence, and there will be a decline in the deposits they upstream to the UK partly for regulatory reasons and partly because they will not be a subsidiary of the ring-fenced entity. I ask the Minister to think again about the precise arrangements regarding ring-fencing for the Crown dependencies.

[Lord Brennan (Lab)]

My Lords, the present amendments fortify Part 4 by creating a comprehensive structure for conduct, standards, licensing and so on. Third Reading is an appropriate time for the Minister to clarify how in this structure directors, including the chairman of a bank, bear responsibility for the fulfilment of Part 4 as regards conduct and standards. Amendment 9 talks about:

“Vetting by relevant authorised persons of candidates for approval”.

The relevant authorised person is the bank. The bank ultimately sets its standards at directorial level, and directors carry a responsibility for it under statute and common law. Therefore I invite the Minister to clarify what, under this system, is the position of the directors and the chairman in terms of the enforcement of this framework for good standards.

[Lord Eatwell]

My Lords, I am glad to see that the introduction of Clause 15 on Report has at last seen the Government take the recommendations of the Parliamentary Commission on Banking Standards seriously in this matter and introduce these amendments that capture most, though not all, of the recommendations. What we have left, as the noble Lord, Lord Turnbull, has pointed out, is something of a tripartite muddle because we now have three different regimes affecting persons working within banks. I am afraid that this is characteristic of so many parts of this Bill and will need to be sorted out in future.

I would like to ask some questions about Clause 17 which, as was pointed out, brings branches into part of this aspect of regulation. As the House will be aware, in recent months the Prime Minister has significantly weakened Britain’s regulatory protections of its banking system by encouraging the establishment of branches in this country. Previously, the regulatory authorities had strongly discouraged this because they are not then regulated by British regulators but by their home regulator. The Prime Minister has chosen to weaken this protection particularly by encouraging the establishment of Chinese branch banks, which will be regulated by the Chinese authorities.

However, what is particularly interesting about Clause 17 is that it brings some branches possibly within some British regulatory ambit. I say possibly because according to this clause the Treasury may by order provide that authorised persons falling within any of the descriptions are relevant authorised persons. Relevant authorised persons, for those who have not participated in these debates before, are actually banks. The Treasury can choose which branches will be brought into the ambit. It is enormously important that the branches should be. The noble Lord, Lord Newby, was absolutely right in this respect. I hope the Prime Minister will not undermine this legislation by instructing the Treasury to exclude particular branches, perhaps those emanating from Chinese banks, from this regulation.

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Such a statement is vital to be binding on the FCA to include anti-money-laundering compliance as one of the obligations. I beg to move.

[Lord Brennan]

My Lords, I support this amendment. The debate on anti-money-laundering that we have undertaken during the course of this Bill has led the Treasury and government Ministers to send colleagues and me a number of letters and documents. This was extremely courteous and informative—but legislatively useless. The noble and learned Lord, Lord Steyn, once described this kind of material as an exercise in investigating “legislative archaeology”, principally because it had no real significance. Neither do these letters. You cannot legislate by epistle; you do it by the text of the Bill.

Everyone accepts that money-laundering is a major issue. Today is International Anti-Corruption Day. It is also the anniversary of HSBC’s enormous fine for money-laundering imposed last year in the United States. The concern reflects the fact that in the developing world in particular there is a constant, never-ending haemorrhage back into the developed world and our banking system of money that should be going to the poor. Something should be done about it.

The explanation given thus far by the Government is that the FCA has the responsibility for dealing with money-laundering and it is for it to do so. On our side, we do not think that that is strong enough. If in today’s Amendments 2 and 3 the Government feel robust enough to say that the Treasury must take steps to review proprietary trading, why should it not tell the FCA that it must take steps, always and actively, to counter money-laundering. Why the diffidence? Why not put a plain statement before Parliament, now or through the amendment, that anti-money-laundering counts, that we are against it and that the FCA must ensure that banks deal with it.

[Lord McFall of Alcluith (Lab)]

My Lords, I support the amendment. In evidence from business people to the Treasury Committee and the parliamentary commission it was said that good and firm regulation is a competition issue. Given that we aspire for London to be maintained as a global centre for financial products, it is important to recognise that dirty money comes in and out. The example was given of HSBC. It acquired a Mexican bank in 2001 in America. From day one the board was told by the compliance officer that no decent compliance functions were available. Notwithstanding that, the situation continued for six or seven years in which drug money was laundered, people died in Mexico as a result, and HSBC was fined almost $4 billion by the US authorities. If that can happen to a UK-based bank, it can be happening elsewhere. It is important that we ensure that regulation in this country is firm.

Mention was made of General Abacha. In 2006 there was an investigation by the FSA that did not go anywhere because the regulator did not have authority. It is therefore important that in this legislation we underline the regulator’s authority. The regulator did not have authority because there was a tension—and there will still be a tension, despite the new architecture—between the financial stability of companies and conduct of business. If we are to make London an attractive global centre, we have to understand the elephant in the room—money-laundering. I am afraid that, if we do not give the regulator an express duty and authority on money-laundering, we could find the problems that happened with Nigeria in 2006 and elsewhere being replicated. That case has still not been investigated authoritatively enough. Having this anti-money-laundering element in the Bill would be extremely important, and I support the amendment.

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[Lord Newby]

My Lords, I turn finally to the amendments that deal with claims management companies and the Office for Legal Complaints. It is essential that a new route of redress is available to consumers who feel that they have received a poor service from those providing claims management services, commonly referred to as claims management companies, or CMCs. It is also right that the claims management industry bears the cost of providing this new route of redress. I thank the noble Baroness, Lady Hayter of Kentish Town, for raising this issue at Report stage and I am delighted that she has put her name to this amendment.

Section 161 of the Legal Services Act 2007 already makes provision for bringing complaints about regulated CMCs under the jurisdiction of the Office for Legal Complaints. Once commenced, this will give consumers greater scope for redress against regulated CMCs, including awards for financial compensation. Before Section 161 can be commenced, however, the correct mechanisms need to be put in place to ensure that the costs incurred by the OLC in relation to complaints about CMCs can be recouped. It is also necessary to ensure that these costs are borne by the claims management industry. It is right that costs associated with complaints about CMCs are paid for by the industry which creates them. It is also right to prevent the legal profession having to foot the bill for these costs or benefit from any income generated from recouping these costs.

Turning to the detail of the amendments, it is usual practice for the designated regulator to recoup the costs of redress from those it regulates. In this case, the Claims Management Regulator, or CMR, is the designated regulator. The Legal Services Board, or LSB, will then levy the regulator for the OLC’s costs and reimburse the OLC. To ensure that the Claims Management Regulator can recoup the OLC’s costs, these amendments change the Compensation Act 2006 to enable the Secretary of State to make regulations to allow the Claims Management Regulator to charge CMCs, as part of their fees, for the OLC’s costs associated with CMC complaint-handling. The Legal Services Act 2007 already provides for a levy on the Claims Management Regulator, if one is designated. This enables the LSB to levy the regulator for costs incurred by the OLC in relation to claims management costs.

That mechanism is applicable only when there is a designated person as the Claims Management Regulator. When no person is designated as the Claims Management Regulator, as is currently the case, this role falls to the Secretary of State. The mechanism does not operate in this situation as the Secretary of State cannot be levied. To address this, amendments to the 2007 Act are needed. They will change the Act to give the Lord Chancellor a new power to make regulations to allow him to recover the OLC’s costs associated with CMCs. These powers allow the Lord Chancellor to charge a periodic fee on regulated CMCs.

Finally, in this situation further amendments are needed to address cross-subsidisation. The amendments will change the levy mechanism in the Legal Services Act 2007 to ensure that the calculation of the OLC’s expenditure which is leviable on the legal profession excludes both its costs and its income in relation to CMCs.

These amendments are an important step in improving the redress system for consumers who have suffered from poor service from the claims management industry. It is right that consumers who have been treated unfairly are able to access this new route for redress through the OLC. I beg to move.

[Lord Brennan]

My Lords, these final amendments allow me to raise a point of general importance about the Bill. The amendments create yet a different and welcome addition to the commission’s original proposals.

The Bill came to this House at 30 pages long. With today’s amendments, it is going to be about 200 pages long, with about 150 clauses. I suggest to the House that it is incumbent on all of us—but on the Government, in particular—to assist public understanding of where the Bill is now at. It is going back to the Commons, where most of it will not have been debated, and the strain on people in this House over the past few weeks has been immense. Therefore, I suggest to the Government two measures that they might consider taking.

The first—although it sounds remarkable, it is of utility—is to prepare a set of Explanatory Notes on the Bill as it now is when it goes back to the Commons and when it is considered, as it will be, by the City of London in general and by the banking community and the lawyers in particular. The second point is that, from page 50 onwards, the Government’s response to the commission’s report of July 2013 very helpfully sets out 114 proposals with notes against them and proposed action. The Government have taken different positions on some of those, and there are additions to that list. It would be a great help if the list were revised, bringing it up to date to reflect what has actually happened.

I do not want to appear tedious but the fact is that this is a major Bill and we need to do everything we can to make it as well understood as it can be.