Financial Services (Banking Reform) Bill

Lord Eatwell Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Phillips of Sudbury (LD)]

My Lords, my name is on the 18 amendments in this group and I am the sole signatory on eight of them. I endorse entirely what the noble Lord, Lord Brennan, said. He speaks from great experience, which is of great help to the House.

One of the scandals—I think one can fairly use that word—of the past five years in terms of financial failings has been the extreme paucity of prosecutions for some of the greatest criminal failings, to use a neutral word, in the history of our or any country. It is rather staggering to think that over the past five years you can count on the fingers of your two hands the number of City malefactors who have been prosecuted, when during that time probably 20,000 or 30,000 people have been prosecuted for shoplifting at an average of £25 a time.

I tabled these amendments not in any spirit of vindictiveness—one can also say that, I am sure, of the noble Lord, Lord Brennan, and the other signatories—but to try to give real teeth to a very important clause, Clause 27, which is designed and put forward on the basis that it will be a significant deterrent to conduct arising in the future which is comparable to the conduct that has occurred in the past five or six years. The wording of Clause 27(1) in particular seems to those of us who have tabled these amendments to be so narrow—to cite the word used by the noble Lord, Lord Brennan—that the prospects of getting a conviction before a jury, or, indeed, starting to prosecute at all, will be remote. To give a simple, direct example of that point, Clause 27(1)(b) makes plain that a conviction can be secured only if the implementation of a single decision—“the decision”—causes,

“the failure of the group bank”.

When, except in the rarest of circumstances, did a single decision cause the failure of a bank? Life is much more complicated. Very often a series of decisions is involved and even then you cannot say that the decision or decisions cause the failure but rather that they,

“contribute directly and significantly to”,

the failure of a group bank, as I have put it in my amendment.

We have tabled these amendments to give practical effect to Clause 27 and other clauses. They are important clauses and we must not shackle them with such a narrow set of requirements that they will not serve their purpose. We should never forget that British criminal law is rightly strictly construed, and construed against the prosecution. If you think of that and you think of the wording in the clause, you will realise that it is not fit for purpose. I hope that if my noble friend the Minister does not accept the wording of these amendments—they could be drafted differently—he will at least undertake to come back at Third Reading with wording that the Government find acceptable and which will serve the purpose that we seek to serve in putting these amendments forward.

[Lord Eatwell (Lab)]

My Lords, having listened to my noble friend Lord Brennan and the noble Lord, Lord Phillips, I found this discussion quite disturbing. The creation of a criminal offence is one aspect of the Bill that pushes forward the regulatory regime in the UK and creates an environment more suited to the somewhat cavalier nature of finance in a global marketplace—in particular by identifying those activities that have inflicted enormous harm upon our fellow citizens. What I heard was that, as drafted, the probability of securing a conviction or even a prosecution, as the noble Lord, Lord Phillips, put it, is vanishingly small. Unless the terminology is clarified in a way laid out so clearly by my noble friend, this part of the Bill will simply bring that aspect of regulation into disrepute because it will be worthless. That is why I regard the remarks that I have heard from the two distinguished lawyers who have just spoken to be very disturbing. It is incumbent upon the Government not simply to produce a pat answer here this evening but again to produce a carefully written assessment of the case for an appropriate criminal regime and its implementation in order that the whole House has an opportunity to assess this important aspect prior to Third Reading.

[Lord Newby (LD)]

My Lords, these amendments essentially aim to make three changes to the criminal offence: first, to allow defendants to be prosecuted under the offence when a number of decisions taken together cause the bank to fail; secondly, to enable the offence to be made out when the decision or decisions in question were a significant contributory factor to the failure of the bank, rather than its sole cause; and, thirdly, to include within the definition of bank failure the systematic failure of the bank to prevent liability with regards to broader criminal offences.

On the first two issues, while I understand noble Lords’ concerns, I assure them that these amendments are not necessary to deliver the effects they intend. First, I assure noble Lords that, as a matter of law, under Section 6 of the Interpretation Act 1978 words in the singular include the plural unless express provision is made otherwise. The term “decision” includes “decisions”, plural. Therefore, where appropriate, it will be possible to prosecute on the basis of the implementation of a number of decisions. The Interpretation Act 1978 ensures that it is not necessary to repeat the defined terms or make express provision for the singular to include the plural in every single statute. The case for abandoning that practice seems rather minimal in this instance.

Moreover, in practice we generally expect a prosecution of the offence to focus on one individual decision in order to maximise the ability of the prosecution to make its case effectively when asking the jury to consider what are likely to be very complex events. This would enable the prosecution to focus on the causal relationship between the implementation of one decision and the failure of the bank, where that relationship seems to be most clear. In these cases, any other relevant decisions would be taken into account by the jury as the circumstances in which the key decision was taken, when the jury was deciding whether the defendant’s behaviour fell far below that which reasonably could be expected of him or her. For example, a decision to take on a risky acquisition may be more or less reasonable depending on earlier decisions to strengthen or weaken the bank’s capital position.

These amendments also include references to agreeing to the carrying on of activities by a firm. This would add nothing to the offence as currently drafted, since the reference to agreeing to the firm carrying on certain activities assumes that those activities in some way require authorisation and this must involve taking a decision, or agreeing to the taking of a decision, by or on behalf of the firm, and is therefore already included in the offence.

Moving on to Amendments 94, 95, 100 and 102, under general principles of criminal law the test for an action having “caused” an event to occur is that, had that action not been taken, the event would not have occurred. Therefore, in this specific offence the test is that, if the decision or decisions in question had not been implemented, the bank would not have failed. The implementation of the decision need not be the sole or even the main cause of the bank’s failure. In practice, because of the evidential standard that applies to criminal cases, we expect that cases will be prosecuted only where it is very clear that the implementation of the decision or decisions in question was a significant contributing factor to the failure of the bank.

In addition to these general points, the Government oppose some aspects of the amendments in principle. As well as including reference to “activity”, Amendment 97 would lower the bar of the reasonableness test for when the offence would be committed. As set out in Committee, the Government do not think this is appropriate. Referring to conduct which is far below that which would be expected has precedents in the Law Commission proposal for a statutory offence of killing by gross carelessness and in legislation creating the offence of corporate manslaughter. We have used this particular phrase knowing that it works and can be effectively interpreted by the courts. There is no precedent in UK criminal law for criminalising behaviour that is merely unreasonable. To do so would amount to an indiscriminate diffusion of criminal liability, in a way that made it hard for individuals to know with sufficient certainty when they might be committing an offence.

Amendment 118 would expand the definition of institutional failure that would trigger the offence to include occasions where there was a systematic failure of the bank to comply with a range of laws imposing criminal liability in connection with the conduct of financial services business. A similar amendment was raised in Committee, focused specifically on compliance with the Fraud Act 2006, the Proceeds of Crime Act 2002 or the Money Laundering Regulations 2007. The Government’s position on this remains unchanged—this offence has been introduced to plug a gap in existing legislation where there are no criminal powers available to sanction senior managers who have recklessly caused their banks to fail. By definition, criminal liability can arise where offences already exist that individuals can be convicted for and appropriately punished, depending on the seriousness of the breach. In certain cases, they can also be charged with consenting to or conniving in such activities. It is difficult to see how this amendment strengthens the offence.

The noble Lord, Lord Brennan, raised the question of the definition of “way”. The expression includes both the activities in the business and how those activities are carried out. This makes the offence broader. The noble Lord also suggested, if I understood him right, that in some cases the real risk is that people did not know what risk they were taking or wilfully turned a blind eye. While it might appear attractive to include incompetence by senior managers in the offence, doing so could introduce unwelcome and potentially damaging uncertainty into the sector. Further, to comply with the European Convention on Human Rights, the offence must be sufficiently certain to enable individuals to know when they are at risk of committing the offence. However, this does not mean that it is possible for a senior manager to simply close their eyes to the risk the bank is taking. In some cases a court may decide that it can be inferred that a particular person had knowledge of a risk. In the case of a director, ignorance of a risk to the bank’s existence may, in some cases, be to admit to breaches of the duties under the Companies Act 2006. Accordingly, there are cases in which an argument that a defendant had no knowledge of a particular risk would carry very little credibility and could even expose the defendant to criticism for breach of duty.

We take this offence extremely seriously as a key part of the new infrastructure that we are putting in place and we believe that it meets the test we have set out. On that basis, I hope that the noble Lord will withdraw his amendment.

--- Later in debate ---

[Lord Watson of Invergowrie (Lab)]

My Lords, the noble Lord, Lord Selsdon, makes an interesting and important point about those people who are in the situation where they see this as a last resort for receiving credit. If any noble Lords were watching “Newsnight” yesterday evening, they would have seen a disturbing feature concerning Wonga; the noble Lord, Lord Selsdon, did not want to name companies, but this company was named in the programme. It turned out that people who had had loans from Wonga, and had then gone to try to get a mortgage, had been told by their financial adviser, or by the mortgage company, that they were not going to get a mortgage simply because they had had a loan. I am sure that would apply to any payday loan company.

It seems perfectly wrong that somebody who takes out that kind of loan and pays it back within the defined period at no additional cost and without extending it or anything—in other words, someone who has done nothing wrong or outwith the agreement—is then penalised. It seems that this stain on their record remains for six years. It seems fundamental that any payday loan company ought to be saying on its website, or telling people over the telephone, “Yes, we are happy to give you this money, but we have to tell you that some mortgage companies and some lenders will not lend to you for a period of six years simply because you have taken this loan”. This seems to be a nefarious practice, and it also seems quite wrong that those companies are not obliged to state unequivocally and perfectly clearly that this could be the case.

[Lord Eatwell]

My Lords, we of course look forward with interest to the amendments that the Government will put down at Third Reading. However, I was somewhat disturbed by newspaper reports suggesting that the Government are going to ask the FCA to formulate a policy on the level of the cap. That would be entirely inappropriate. It is for the Government to formulate and to define the objectives of the policy and for the FCA to then implement it. The FCA may, on the basis of research, be charged with setting the level of the cap in relation to principles defined by the Government, but it is up to the Government to specify those principles, specify the objectives and, indeed, design the policy. We do not want to hear a cop-out, where the Government declare, to general acclaim, that they are going to cap payday loans and then hand the whole design of the policy over to an organisation which is a regulator and not designed, in and of itself, for the formulation of policy.

I hope that the Minister can give us some reassurance that when these amendments are brought forward at Third Reading, they will contain clear objectives, principles and processes that will define the approach and policy that the Government are prepared to implement with respect to payday loans and that the responsibility that is then handed to the FCA will be one of implementation, not of policy design.

[Lord McFall of Alcluith (Lab)]

My Lords, Amendment 178 concerns continuous payment authorities. This is an issue that I raised during the passage of the Financial Services Act 2012. Continuous payment authorities are a recurring payment mechanism involving a debit or credit card where the debtor gives his or her card to the company and they contact the bank. Unlike direct debits or standing orders, this allows a firm to take regular payments from a customer’s bank account without having to seek express authority for each payment. When I made this point to the Minister, the noble Lord Lord Newby said that,

“abuse of the CPA is one of the most concerning practices of payday lenders”.—[Official Report, 28/11/12, col. 235.]

Consumer groups, the Law Society and the OFT have expressed ongoing concerns about this issue. The real issue is that the debtor—the customer—is not in full charge of their affairs. The continuous payment authorities do not offer the same guarantee as direct debits or standing orders. In effect, they give the company authority about how much is taken from an individual’s account and when. This is hugely important to those who take out payday loans, whose financial position is tenuous. Unlike direct debits and standing orders, there is no written communication between the individual and the bank. This situation has led to the banks reviewing up to 30,000 complaints from customers since 2009. According to the Financial Conduct Authority, quite a number of those will be eligible for compensation. That authority has said that many of the banks or providers are not cancelling recurring payments to payday loan firms.

Last December, the OFT warned that businesses should not lock customers into CPA traps because people did not know what they were signing up to. The OFT opened formal investigations last November into several payday lenders over aggressive debt collection practices. Their progress report focused on concerns regarding unfair or improper practices:

“Using the CPA in a manner which is unreasonable or disproportionate or excessive in failing to have proper regard to the possibility that a debtor is in financial difficulties”.

This includes,

“seeking payment before income or other funds may reasonably be expected to reach the account”.

The Financial Ombudsman Service was seeing 50 new cases a month at the end of last year. My information is that that number has increased since.

Such blatantly unfair treatment of consumers should not be restricted to a matter of guidance. The new clause that I am proposing ensures that debtors are informed about their rights and that only the debtor may cancel or vary a CPA in communication with the bank. Furthermore, the debtor’s bank is obliged to comply with the debtor’s instructions, as they do with direct debits and standing orders. I suggest to the Minister that in these austere times we ought to legislate to protect such debtors and to ensure a level playing field between the lender and the debtor.