Bank of England and Financial Services Bill [HL]

Lord Davies of Oldham Excerpts

Wednesday 11th November 2015 Lords Chamber

[Lord Swinfen (Con)]

My Lords, the idea behind the amendment is estimable but purely to do with the environment. The Bank of England is purely to do with finance and I do not think that the two would make happy bedfellows. We should be able to find a better home for the Green Investment Bank than the Bank of England.

[Lord Davies of Oldham (Lab)]

My Lords, the Minister is faced with a rather challenging task here. First, he operates against a background where the Government’s record in recent months has caused great anxiety among all those concerned with improving the environment and reducing the threats of climate change. Here he faces a fairly significant issue—the Green Investment Bank. Of course, the additional complexity is that the bank is itself subject to other legislation under consideration. Irrespective of the merits of the amendment, I could understand if the Minister felt that this were really quite a challenging situation. I will try to find a way out for him as well, as the Liberal Democrat noble Lords emphasised their solutions.

We are not averse to privatising the bank but we are not very appreciative of the urgency of doing it at this time. Crucially, the question that emerged during the debates on the Enterprise Bill and have been identified again today is how the Government intend to maintain the bank’s mission. Of course, it is easy to privatise if one disregards the fundamental objectives of the foundation of the bank. We need to know how the Government intend to guarantee that the bank does not morph in private hands into a different sort of institution and bank. What is the Government’s answer to that? They may not be totally enamoured of the Royal Mail example. Of course, that is buttressed by regulatory standards that we have not so far seen adduced as far as the green bank is concerned.

It is obvious that the Minister must make some progress on this, otherwise the proposal the Government are putting forward elsewhere will occasion increased opposition from this side of the House. I am always in favour of helping Ministers, particularly when it involves them rather than the Opposition doing the work. I suggest that the Minister consults his colleagues in the business department concerned with the process on the green bank and, after those consultations, comes back on Report with a much clearer identification of the progress of the Government’s thoughts on the bank. At present, in the debates on either the Enterprise Bill or this one we have certainly not yet heard anything remotely convincing from the Government to give the assurances we need that if this bank, which has proven to be a successful initiative and is respected for its work, goes into the private sector it will not all too readily be led down paths that depart from its much-valued objectives.

[Lord Teverson]

As we are in Committee, I will briefly come back to the noble Lord opposite about whether the Bank of England or the PRA is the right organisation for this. The Green Investment Bank is the Green Investment—I emphasise—Bank, so it seems to me appropriate. I want to make clear that we are open to other suggestions to solve this, if the Government and Minister do not believe this is the best way.

For instance, I am involved in an organisation called Regen SW, which used to be a wholly owned subsidiary of the South-West of England Development Agency. It was privatised and is very successful. I am one of three trustees who look after it. If there were a hostile takeover by a non-green organisation, there are three of us who can exert power to make sure that the original aims of Regen SW are maintained. If something creative can be done in that way, I would be absolutely delighted and we would like to hear it.

[Lord Bridges of Headley]

My Lords, I thank the noble Baroness, Lady Kramer, and the noble Lord, Lord Teverson, for their extremely constructive remarks—and, indeed, the noble Lord, Lord Davies, who on Monday offered me sympathy for my position and today offered to be very constructive. Where do we go next? It is going to be very interesting.

[Lord Davies of Oldham]

My Lords, I would be prepared to exchange sides, if the Minister can arrange that.

[Lord Bridges of Headley]

The noble Lord can come and join us. I fully understand the intentions behind the amendment. Indeed, I have read the debate that took place last week with my noble friend Lady Neville-Rolfe on the Enterprise Bill, in which the noble Lord, Lord Teverson, set out his party’s position eloquently. I believe that all parties are agreed, as the noble Lord, Lord Teverson, and the noble Baroness, Lady Kramer, said, that the Green Investment Bank has been a real success story, and we need to build on that success. That is why the Government want to allow the Green Investment Bank to continue to go from strength to strength by moving it into private ownership. As part of our work to achieve this, it has become apparent that the existing legislation which governs the bank, the Enterprise and Regulatory Reform Act 2013, would very likely constitute government control over the bank and result in its remaining classified to the public sector. That is why, as the noble Lord and the noble Baroness said, the Government intend to repeal that legislation through an amendment to the Enterprise Bill, which will remove control and ensure that a privatised Green Investment Bank will have the freedom to borrow and raise capital without affecting public sector net debt.

I note, as my noble friend Lady Neville-Rolfe noted, the concern that the repeal would remove the Green Investment Bank’s statutory lock over its green mission, and that is where these amendments come in. The noble Baroness, Lady Kramer, eloquently drew a parallel with the privatisation of Royal Mail and its regulation by Ofcom, and whether the Government might replicate that kind of arrangement for the Green Investment Bank. First, there is a difference between regulating a company such as Royal Mail, which provides a public postal service and is a utility, much like energy or water, and the Green Investment Bank. As a country, we regulate mails as an industry, and the regulator for postal services, Ofcom, has designated Royal Mail to provide a universal postal service for the whole of United Kingdom, as set down by Parliament under statutory obligation. That means that, regardless of the nature of its ownership, for as long as Royal Mail holds the role of universal service provider, it must comply with specific regulatory conditions imposed upon its operations for the purpose of providing a universal postal service throughout the United Kingdom, as well as other regulatory conditions which apply to all postal operators in the market. If Royal Mail was not the designated universal service provider, its operations in the postal market would be subject only to those general market regulations that apply to all other postal operators.

The parallel here would be for the PRA to regulate the green investment market, could such a thing be defined. Not only would this amendment increase regulation at a time when the Government are trying to reduce it, but increasing regulatory costs in the sector would be likely to reduce overall green investment. I am sure that is not something that the noble Baroness, Lady Kramer, would wish. I must reiterate that the Government are implementing the repeal of legislation only as a necessary measure in allowing private capital into Green Investment Bank, reflecting advice from the Office for National Statistics. As I have said, to be classified to the private sector, an organisation cannot be subject to significant government control, and that includes control through excessive regulation. The decision on whether an organisation is classified to the public or private sector is made by the ONS on the basis of EU-wide rules. The ONS looks at all factors of control when deciding whether a corporation can be declassified from the public sector. If the Green Investment Bank was not free to change its articles because of public sector control, it would very likely remain classified to the public sector. Similarly, if the bank as a single entity were to be regulated in this way, it would still be likely to be considered as under public sector control, so this would not provide the solution that noble Lords are seeking.

The Government want to work constructively with noble Lords across the House to secure the future of the Green Investment Bank. I totally agree with the noble Baroness, Lady Kramer, that we need to work across government as a whole, and I shall make sure that all parts of the Treasury are aware of her remarks and see the debate. However, I hope that the noble Baroness, Lady Kramer, the noble Lord, Lord Teverson, and, should he so wish, the noble Lord, Lord Davies, will meet my noble friend Lady Neville-Rolfe at BIS to discuss this matter further. I hope that the noble Baroness will agree to withdraw the amendment.

--- Later in debate ---

[Lord Carrington of Fulham]

I will come on to that in a moment; that is the second point I wish to make. The first point is that the power does exist for the PRA—and, indeed, the FCA—to be able to go and investigate what has happened inside a financial institution in very great depth and in very great detail.

The consequence of the reverse burden of proof would be to make the situation to which the noble Baroness referred even worse. An organisation which knows that there is individual liability where they have to prove that they did no wrong will have lawyers crawling all over them to make certain that at every move, nothing is recorded, nothing is said and nothing is minuted which would put them in a position where they could do anything other than deny all culpability. That is what would happen—and to some extent does happen. But I can reassure the House that destroying email trails is extraordinarily difficult. In most institutions, email trails survive through even the greatest attempts to wipe the hard drives clean. I can assure the noble Baroness that if the PRA wishes to find evidence and has the resources, the determination and the suspicion, it will find the evidence to bring the prosecutions it needs.

[Lord Davies of Oldham]

My Lords, this has been an excellent debate and the Minister has a great deal to which he needs to respond. It is little surprise that we have been exercised with these amendments, because they go to the very heart of people’s trust and confidence in the financial services industry.

I would suggest that perhaps one reason why this change has been effected by the Government is because of the lack of transparency in the government proceedings. That is why the controversy has arisen. None of us has been privy to the process whereby the Government produced this significant change to the senior managers and certification regime. Clearly, decisions have been taken behind the scenes and without consultation. I do not think that there is much of an email trail on either of those factors.

The fact is that the Government did not even consider that this might be much of a problem, and today’s debate identifies just why that is. I hope, therefore, that the Minister will be able to demonstrate the thought processes behind these changes. The age-old argument that it is not working in practice scarcely holds, because the SM&CR never had a chance to work in practice—so the Government will have to come out with a better argument than that. What advice did they get that convinced them that these changes were the best approach? Did an event occasion the change? Are the meetings that the Minister had on such a significant issue as these proposed changes on the public record?

We also need to consider the role of the regulators and how we can ensure that they are bold enough to spot when misconduct takes place. Has their job not been made harder by the fact that there will no longer be a duty on firms if they suspect wrongdoing? Can the Minister please go into some detail about how the Government propose to ensure that the regulators will be able to rule out ineffective management? We have had a refresher course today in just what ineffective management—and, indeed, corrupt management—has done in terms of damage to so many people’s lives. We ought not to forget that.

I hope that the Minister will be able to address these points in some detail. Of course, he has to take into context just what this debate has demonstrated: how difficult the issue is, but how fundamental it is to the welfare of our society. I expect the Minister to give a detailed response.

[Lord Bridges of Headley]

My Lords, it has been a very good debate and I thank all noble Lords who have spoken eloquently, and powerfully at times.

I start by taking a step back. As was mentioned by the noble Baroness, Lady Kramer, and many others, the financial crisis obviously exposed deep flaws in the functioning of parts of the financial services industry, with enormous consequences, as we all know, for the economy and people’s living standards. Since then we have also seen cases of malpractice and, at times, criminality—for example, attempts to manipulate benchmarks for personal gain. That is why, as the Chancellor said, the Government are entirely committed to ensuring that the UK financial services sector is the best regulated in the world with markets of unquestioned integrity and the highest standards of conduct. To that end the Government have made far-reaching reforms to financial regulation—reforms that form the backcloth of today’s debate and reforms that your Lordships know all too well.

I shall remind your Lordships of just a few. The Government have introduced a criminal offence of misconduct in the management of a bank. This means that senior managers who recklessly cause their institutions to fail may face a seven-year prison sentence. The UK’s regime for regulating the remuneration of senior staff who can pose risks to financial stability is now the toughest of any major financial centre. PRA-approved senior managers in banks will face deferral of a significant proportion of their remuneration for seven years, and possible clawback to their pay for up to 10 years where there is a material failure of risk management in their business.

These measures apply to exactly the individuals targeted by the amendment of the noble Lord, Lord Sharkey, and encourage the responsible management that he and of course we all wish senior staff in banks to display. To be clear, I am in complete sympathy with the outcomes that the amendment seeks to deliver. Before I turn to the senior managers regime in more detail, I make another point, which my noble friend Lord Hunt of Wirral made. To restore trust in financial services, strengthened regulation needs to be supported by industry action. That is why I welcome and wholeheartedly support the efforts by the financial sector to strengthen the culture and ethics of all staff. In particular, the Banking Standards Board, formed of the largest banks and building societies, is doing vital work. The fair and effective markets review established by the Chancellor is also prompting change. The review concluded that,

“markets require stronger collective processes for identifying and agreeing effective standards of good market practice”.

As a result, more than 30 firms from a broad cross-section of financial markets have combined to achieve these aims.

The extension of the senior managers and certification regime across the financial sector will support and reinforce all these initiatives to improve individual accountability and raise standards. As Andrew Bailey said,

“it creates the framework to establish effective responsibility within firms, while maintaining the role of the public authorities, the PRA and FCA, for supervising and enforcing the public interest”.

Under the current approved persons regime, the regulators can take action only against those individuals whom they pre-approve if they breach one of the statements of principle set out by the regulators—enforceable standards of conduct that apply on an individual level—or if they are knowingly concerned in activity that causes the firm to breach regulations. The range of approved persons covers significant influence functions, such as the chief executive and directors, and customer-dealing functions, such as sales staff. The new SM&CR focuses pre-approval activity much more closely on those at the top of the firm with enhanced powers for the regulators to impose conditions and time limits on these approvals. This is supported by an ongoing requirement for the firm to assess senior managers’ fitness and propriety annually. The regime requires these individuals to have statements of responsibilities to give absolute clarity about who is responsible for which parts of the firm. It will not be as impenetrable as the noble Baroness, Lady Kramer, said. Beneath the senior managers layer is the certification regime. This puts a statutory responsibility for ensuring the fitness and propriety of key staff below senior managers clearly on the firm both at the point of hiring and annually thereafter.

The new regime also enables the regulators to apply enforceable rules of conduct to all employees if the regulators judge that this will advance their objectives. For senior managers, this includes a rule on effective and responsible delegation, which addresses the “nothing to do with me” argument that the noble Lord, Lord McFall, eloquently talked about and the noble Lord, Lord Tunnicliffe, mentioned. The rule states:

“You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively”,

as well as requiring them to ensure that the area of the firm for which they are responsible can be controlled effectively.