Financial Services (Banking Reform) Bill

Lord Eatwell Excerpts

Tuesday 26th November 2013 Lords Chamber

We have seen that succeed. The financial crisis has been too big for us now to experiment. Now is the time for action, otherwise the lobbyists will have won yet again. As the noble Lord, Lord Lawson, said, Glass-Steagall—the separation regime in the United States—did not fail but succeeded for more than 60 years. It failed when the lobbyists in the banks eventually won. However, if we managed to introduce a UK form of Glass-Steagall, strengthened to prevent lobbyists succeeding, we will have achieved something that has never been achieved before. We cannot wait for another big financial crisis. We must do it now. I beg to move.

[Lord Eatwell (Lab)]

My Lords, I am grateful to my noble friend for moving his amendment and for pointing out the extraordinary complexity and confusion about the procedure that the Bill has gone through to get to this stage. As he pointed out, it came from the Commons as 35 pages and is now 170 pages. Substantial matters were introduced in Committee. Substantial errors were identified in Committee—even, as we shall hear, regarding the definition of a bank in a Bill on banking.

More substantial material is now being introduced under the more restrictive circumstances of Report, and I hope that the government Whips will restrain themselves if the rules are bent somewhat in our attempt to scrutinise nearly 200 new government amendments effectively. Yesterday, on the “Today” programme, the Chancellor announced that further substantial amendments will be introduced at Third Reading with respect to payday loans. Then the Treasury was circulating extra material in e-mails after 9pm last night. We have received copies of correspondence dated today between the Chancellor and the Governor of the Bank of England that changes the perspective on leverage. These measures are relevant to the most important industry in this country, and are measures to which we are supposed to give our consideration.

The correct procedure for a Government who are serious about getting this legislation right is to recommit the Bill. If they undertake that responsible step then we on this side of the House will give them every assistance in ensuring that the passage is completed within the restrictive timetable of a carryover measure. I understand the nature of the restrictions and realise that the Minister cannot make this decision at the Dispatch Box. However, will he at least give the House an assurance that he will take this proposal seriously and ensure that the usual channels also take it seriously?

On Amendment 1, moved by my noble friend, will the Minister tell us exactly what the phrase which my noble friend wishes to have omitted actually means? Can he give the House an illustration of the circumstances in which the taking of deposits from UK households and SMEs would not be a ring-fenced activity as the phrase suggests?

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Moved by

[Lord Eatwell]

3: Clause 4, page 17, line 15, at end insert—
“Full separation142VA General requirement of separation
(1) Where the members of any group include one or more ring-fenced bodies and one or more other bodies, the members of the group must, before the end of the period of five years beginning with the relevant commencement date, take steps to secure that there are no members of the group that are ring-fenced bodies.
(2) If in the case of any group steps to secure that there are no members of the group that are ring-fenced bodies are not taken within the period specified in subsection (1)—
(a) at the end of that period the Part 4A permission of each member of the group that is a ring-fenced body shall be treated as having been cancelled to the extent that it relates to a core activity, and(b) after the end of that period the appropriate regulator must refuse to give any member of the group a Part 4A permission to carry on a core activity.(3) At the end of the period specified in subsection (1)—
(a) section 142H, subsections (1)(b) and (4) to (7), and, in subsection (8), the definition of “specified”, and(b) sections 142K to 142V,cease to have effect.(4) In subsection (1) “the relevant commencement date” means the day appointed for the coming into force of section 4 of the Financial Services (Banking Reform) Act 2013 so far as it inserts this section.”

[Lord Eatwell]

My Lords, noble Lords will notice that Amendment 3 is identical to Amendment 6, which is in the name of the group of people who we could perhaps call the commissioners—members of the Parliamentary Commission on Banking Standards who have considered these matters with care and at great length. It is interesting that the noble Lord said just now that no evidence had been provided about issues associated with separation. The parliamentary commission provided extensive evidence, to which I would refer the Minister.

In speaking to Amendment 3, I will argue that the “reserve power” of full separation, as it was described by the parliamentary commission, is a logical and coherent part of the entire strategy of ring-fencing, which consists of three parts. First, there is the provision of the ring-fence itself. Secondly, there is electrification of the ring-fence in the case of individual groups that transgress and are subsequently required to separate. Thirdly, there is the measure put forward in Amendments 3 and 6, under which there is full separation where the process has not been followed successfully or appropriately by the banking industry.

The whole thrust of the commission’s report is about the need to maintain these three stages. Each reinforces the other. The noble Lord argued just now that the Government had seen no case at all for separation. Why then did the Government accept the case for the separation of individual groups should they transgress? That case came from the commission and the case for full separation came from the commission. If he accepts one, he should accept the other. It is quite ridiculous to suggest that the commission’s processes were somehow less rigorous than those of the ICB. Indeed, the whole package put forward in this group, which consists of the case for full separation as the final reserve power and the case for review, is a single coherent package. The case for review and the case for full separation, if that review should argue that ring-fencing is not working successfully, is a coherent structure set out by the commission. The Government are lopping off an essential leg of a three-legged stool.

Let us examine the arguments made against this amendment when it was first put by the commissioners in Committee. As well as the argument that it was somehow less rigorous—an argument that I think is almost offensive to the commission—the Government put forward the suggestion that, should the ring-fence not work, other options might be considered. The Minister raised the red herring of the possible introduction of a Volcker rule. Surely this is spurious, as here we have a coherent, structured package of three nested sets of measures to ensure the stability of the banking industry, which rely on and strengthen each other.

What I found most surprising in the Government’s rejection of the argument for full separation is that they rejected the idea that the ring-fence will consequently be made stronger by self-policing. The banks will have a major concern that others do not transgress lest they be caught in a final decision for full separation. The noble Lord said:

“The notion that banks will watch each other is not how the industry operates”.—[Official Report, 8/10/13; col.51.]

I must tell the noble Lord that that is exactly how a competitive market operates in a capitalist economy—everyone watches each other. The banking market is no different. Each pursues its own interest. As Adam Smith put it—the Chancellor of the Exchequer has taken to quoting him—it is not the benevolence of the butcher or baker that provides us with meat and bread, but the pursuit of their own interest. If the banks see it as being in their own interest to avoid full separation, we can be sure that they will take all necessary steps, including mutual surveillance, to ensure that full separation does not take place. That is why the commission’s proposal is such a strong one. It strengthens the ring-fence by giving those within it the incentive to ensure that it be maintained and be not transgressed. That is why this is a coherent package.

The Minister omitted to mention that the proposals for full separation are predicated on a thorough, independent review of the progress of ring-fencing. We have not only a nested structure, which strengthens at each stage, but, in the amendments put forward by the commissioners, a process of independent review that suggests when each stage should be introduced. That is why, for example, Amendments 15 and 195 are consequential on Amendment 3 and, with respect to Amendment 6—the identical amendment put forward by the commissioners—Amendments 15 and 196 are consequential. Those amendments involve the review of the entire procedure.

If we are to have a successful ring-fence, what better than to have a structure that incentivises the banks within it to maintain the integrity of the ring-fence? That is what the commission’s three-stage process does. I beg to move.

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The Government have approached this issue in an open and constructive spirit. We have listened to the concerns that have been expressed in this House and elsewhere. The Government’s amendments meet the substance of those concerns and deliver an independent, expert review of the ring-fence, once it is in force. This will ensure that it remains fit for purpose.

[Lord Eatwell]

My Lords, I am very grateful to the Minister for that expert summary of a complex set of amendments. However, I hope that I may ask him one question before he sits down. He referred to our Amendment 12, which would shorten the period before a review takes place, and said that he was very sympathetic and receptive to that point. Will he therefore accept Amendment 12?

[Lord Deighton]

I think the right thing for us to do is to discuss it together with our colleagues from the PCBS. The noble Lord is, of course, entitled to take the amendment to a vote, but I have not yet had the chance to discuss it with PCBS colleagues. The Government have an open mind on the relevant period, so I would prefer a fuller discussion.

[Lord Eatwell]

Does the Minister mean that he is content to return to this issue at Third Reading?

[Lord Deighton]

That is what I meant to say.

[Lord Eatwell]

Thank you very much.

This is a complicated set of interrelated amendments. I congratulate the Government on their Amendments 11 and 16 in which they have moved towards the commission’s position in proposing an independent review. By the way, I did not find any evidence that new Section 142J had been deleted, which was the previous requirement that the PRA conducted the review. Is there supposed to be a PRA review and an independent review? Surely that is not the case. It is not an important point but we should not leave both of them on the statute book. As I say, I did not detect that new Section 142J had been deleted.

We have a coherent package with the nested structure of the ring-fence, the electrification applied to individual groups and the electrification applied to the whole structure of banking—the so-called complete separation. That seems to me a coherent, rational structure which is supported by the review. Therefore, there will be the opportunity to take into account the detailed scrutiny by the ICB and the commission and consider which stage of this nested structure should be accepted. It seems to me that that coherence provides certainty as regards the way forward—not uncertainty, as the noble Lord, Lord Hodgson, suggested—because the review will not throw everything up in the air and lead to more years of parliamentary debate. We have been doing this for three years already, leaving the industry in a state of uncertainty. We should not throw it up in the air again but create a clear, rational structure that has been carefully put together by the ICB and the commission to provide for the review and separation.

The ordering of amendments before us makes our consideration a little awkward because we first have to consider my amendment on separation, Amendment 3 —which is identical to the commission’s amendment, Amendment 6—and then talk about the review. However, in the light of the care and consideration that the commission has given, I am content to fully support the commission’s position on the triumvirate of ring-fencing, group separation and full separation. I therefore wish to test the opinion of the House on Amendment 3.

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Tabled by

[Lord Eatwell]

12: After Clause 8, line 13, leave out “4” and insert “2”

[Lord Eatwell]

My Lords, given the assurance given by the Minister that we will return to this matter at Third Reading, I beg to withdraw the amendment.

Amendment 12 (to Amendment 11) not moved.

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Moved by

[Lord Eatwell]

21: Before Clause 14, insert the following new Clause—
“Professional standards
After section 65 of FSMA 2000 insert—“65A Professional standards
(1) The regulator will raise standards of professionalism in financial services by mandating a licensing regime based on training and competence.
(2) This licensing regime must—
(a) apply to all approved persons exercising controlled functions, regardless of financial sector;(b) specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules;(c) make provisions in connection with—(i) the granting of a licence;(ii) the refusal of a licence;(iii) the withdrawal of a licence; and(iv) the revalidation of a licensed person of a prescribed description whenever the appropriate regulator sees fit, either as a condition of the person continuing to hold a licence or of the person’s licence being restored;(d) be evidenced by individuals holding an annual validation of competence;(e) include specific provision for a Senior Persons Regime in relation to activities involving the exercise of a significant influence over a controlled function under section 59 of the Act.(3) In section 59, for “authorised” substitute “licensed” throughout the section.””

[Lord Eatwell]

My Lords, Amendment 21, and Amendments 50 and 51 from the commissioners, refer to the professional standards to be required in the banking industry—particularly to licensing bankers who have attained the required professional standards and, of course, not licensing those who have not. With respect to the conduct and skills of members of the banking industry, the Bill currently refers to “rules of conduct”. Amendments from the commissioners use the words “licensing regime”, but continuously refer to the adherence to rules.

The notion of a licence surely refers to some level of professional competence or professional standards. The Co-operative Bank may have obeyed the rules, but we now know it would have failed even the simplest test for professional competence. Rules may require the attainment of professional qualifications, but we cannot be sure and, as the Government regularly argue, certainty is important in this legislation. The clause in the Bill as drafted refers to rules of conduct. The commissioners’ amendment refers to,

“training in the effect and application of the rules of conduct”.

However, neither of them seem to convey the true context of professional standards.

As an academic, I am perhaps rather overly keen on examinations and the attainment of professional standards. Doctors have professional standards because they are required to pass examinations, undergo rigorous professional training and be thoroughly trained in ethical standards. Lawyers have professional standards because they are required to pass examinations, undergo rigorous professional training and be thoroughly trained in ethical standards. Of course, doctors and lawyers may, on occasion, not maintain the standards we would expect.

[Lord Phillips of Sudbury]

I hate to interrupt the noble Lord but I cannot resist saying that, unfortunately, the training of solicitors at this time does not involve rigorous ethical training. In fact, it involves little ethical training at all.

[Lord Eatwell]

I am sure that the noble Lord, as a distinguished solicitor, would attest to that, as indeed he has done. It seems to me that if members of the professions are required to pass examinations to show professional competence and to undertake rigorous training, bankers should do the same. That is what Amendment 21 seeks to achieve. For example, proposed new Section 65A(2)(b) says that the licensing regime must,

“specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules”.

[Lord Spicer (Con)]

What is a minimum threshold of integrity?

[Lord Eatwell]

Being a “fit and proper person” would perhaps be appropriate. If the noble Lord is not aware of the phrase, it is the standard regulatory threshold which anybody operating in financial services must attain.

Amendment 21 seeks to capture the need for proper training, continuous development and the maintenance of proper professional standards via a licensing regime. I have enormous sympathy with Amendments 50 and 51, tabled by the commissioners, but I am afraid that they do not capture the need for professional qualifications.

With respect to the government amendments in this group, they are mostly concerned with the correct definition of a bank. I am delighted to see that we now have a definition of a bank. It may be of interest to the House to know which banks are now included that were excluded in the past. Barclays Capital, Citigroup, Credit Suisse Securities and Goldman Sachs International were not included in the previous definition of a bank, but I am glad to say that they are now. I congratulate the Government on appropriately incorporating them. However, those government amendments stand slightly aside from the issue of professional standards addressed in Amendment 21 and in Amendments 50 and 51, tabled by the commissioners.

I suggest to your Lordships that this House asserting that the banking industry must maintain appropriate professional standards is the minimum that the public expect of us. I beg to move.

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[Lord Newby]

My Lords, that is the key focus of the senior managers regime—that, for the first time, senior managers and their banks will have to tell the regulators what the specific responsibilities of those people are, and we are introducing enhanced penalties if people do not stick to those responsibilities and break the rules. I think that we are indeed doing what the noble Lord requires us to do. I hope that when the noble Lord, Lord Lawson, and the most reverend Primate see our amendments, they will feel that we have done everything we can to meet their requirements.

Amendment 21, proposed by the noble Lords, Lord Eatwell and Lord Tunnicliffe, is an amendment which we saw in Committee. As I explained on that occasion, it would really just rename the existing approved persons regime as a “licensed” persons regime. The only extra feature in the proposal is for annual validation of competence by the regulator. This would have the effect of increasing the number of approved person applications from around 30,000 to around 150,000 a year. This would mean an unnecessary and costly extra burden on firms and regulators.

The Official Opposition’s amendment would not deliver the real reforms proposed by the parliamentary commission, which Clauses 14 to 26 of the Bill deliver and which we will enhance. It would just add to regulatory burdens without producing any real improvement in standards of conduct in the industry. I hope, therefore, that the noble Lords, Lord Eatwell, will agree to withdraw his amendment.

[Lord Eatwell]

My Lords, I was intrigued by the proposals which the Minister suggests will be brought forward at Third Reading and I look forward to having the opportunity to see them—perhaps in good time—before we have to debate them.

The key issue in Amendment 21 is that of qualification: professional qualification, minimum thresholds of competence and continuous professional development. These are fundamental to any serious professional standards and are vital if we are to have in the future the sort of people who can deliver a banking industry of which we in Britain can once again be proud.

I should make it clear that Amendment 21 is not in any way contrary to Amendments 50 and 51 by the commission; it is complementary. It adds to the overall structure of the requirements to be met by those who seek to pursue a banking profession. It is that word “profession” which we regard as central. It is no accident that we have labelled our amendment “Professional standards”. That is what this amendment seeks and that is what I believe it would achieve in addition to, and complementary to, the amendments by the commission and, as I hear it, the endeavours by the Government to develop a framework of rules which ensure that standards are met. The professional standards must be the bedrock. That is why I have moved Amendment 21 and why I wish to test the opinion of the House.

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The problems of banking affect everyone and they have done so in recent years. There are many problems to be dealt with in these debates. The one thing, surely, that must be dealt with adequately is criminality associated with banking; that is, criminality—criminal offences—not just one risk-take. It is a remote second for most people but has an enormous financial impact. I call on the Government and the Minister today to state with absolute clarity their position on the points that I have raised and on which I have invited them to agree. I beg to move.

[Lord Eatwell]

My Lords, in the past, anti-money-laundering legislation tended to be associated with crime, typically drugs or gun-running. These days it has achieved a much greater importance in the sense that it is also associated with terrorism. Therefore, the need to maintain the strictest anti-money-laundering rules and to ensure that they are adequately enforced is an element not only of the maintenance of the law, but of national security. Therefore, I would like to commend my noble friends who have put forward these amendments to strengthen the anti-money-laundering regime and to ensure that appropriate levels of criminality or criminal conduct are so defined within this area that suitable penalties for ignoring anti-money-laundering legislation or laundering money in various ways can be enforced.

I hope the Government will accept these amendments; they are hugely important and send a very important signal to the world that London is not a place in which money-laundering will be tolerated in any shape or form. If the Government are not able to accept them at this stage, I hope they will commit to providing in writing both a commentary on the amendments that my noble friend has put forward and a discussion of the relationship between the new personal responsibility mechanism for bankers and the AML compliance. Surely AML compliance should be included as one of the areas of responsibility that is allocated to a named senior banker under the new senior person regime; it should be in the banking standards rules to which all staff at banks will have to adhere, and one of the conditions of the new remuneration code, which makes deferred pay and bonuses contingent on upholding standards. There is no more important standard than those which my noble friend has dealt with in his amendments. I hope that the Government will be able to accept them—if not actually in form, then in spirit—and commit to bringing forward the appropriate form, if necessary, at Third Reading. The best move, however, would be to accept them now.

[The Archbishop of Canterbury]

I want briefly to add my support to the amendment of the noble Lord, Lord Brennan. Money laundering affects not only the areas that have been mentioned, but in my 10 years’ experience of dealing with conflict management and mitigation work in Africa, it was particularly significant in the ways in which illegal regimes or militias managed to fund and supply themselves. My experience, particularly in some parts of Africa, has shown that London, over time, as one of the deepest and most liquid financial markets on earth has, contrary to the impression given by many senior bankers, played a significant role—not through their collusion in any way at all, but because of its size and the complexity of preventing it. I believe that this amendment and the suggestions put forward by the noble Lord, Lord Eatwell, will contribute extensively to restricting that.