Financial Services (Banking Reform) Bill

Lord Flight Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Eatwell (Lab)]

It would probably be helpful if I spoke now, and also introduced the amendment which is grouped with this one. I am grateful to the noble Lord, Lord Sharkey, for mentioning the comments that I made at Second Reading, but I feel that his amendment, while it raises a series of valuable issues, conflates some of them in a way which is not entirely helpful.

The first point is the one that he also made, which is that there has been no fundamental thinking at all about the structure of banking in this country. The whole discussion about ring-fencing which occupied us last week is a modification of the existing structures of ownership, rather than encouragement to develop an entirely different and more competitive banking structure. That is a key issue which underlies the amendment in the name of the noble Lord, Lord Sharkey, and the one that is in my name and that of my noble friend Lord Tunnicliffe. Where the issue has been conflated is that regional banking, to which he referred, should be separated from the issue of competition. Either or both can be promoted, but they have to be seen as separate entities. For example, the chief executive of Santander has recently written in the Financial Times that she would like to see a significant increase in regionalisation in its activities. That, of course, is not necessarily an increase in competition, but is a more regional focus of the single entity.

It is, however, encouraging, with respect to the regional issue, that the Governor of the Bank of England argued in Leeds a couple of weeks ago that he was very much in favour of an increase in regionalism in British banking, and I wonder whether the Government agree with him in this respect. The key issue underlying this is not regionalism so much. After all, if we look across Europe, it was the small regional banks which failed in their dozens, particularly of course in Germany. The issue is of relationship banking, and the return to a close relationship between the lending entity—which used to be the manager of the bank—and the community in which he or she is located. For example, that was an important force in the development of the science park in Cambridge. At that time, Barclays Bank played an important role in the funding of the science park. The manager, who took something of a punt in this respect, was of course then promptly moved on, because it was felt that he had overstretched his remit. I am very sympathetic to the idea of regionalism, but we have to see it in the context of a secure structure, without creating the rather weak structures which collapsed in other countries. We have to focus especially on the issue of relationship banking.

I now turn to the amendment in my name and the name of my noble friend Lord Tunnicliffe. This amendment seeks to look in particular at competition, with which the noble Lord, Lord Sharkey, began his discussion. As he pointed out, while at the beginning of the financial crisis it was argued that banks were too big to fail, they are now much bigger than they were then as a proportion of the overall UK market. The “too big to fail” issue is even more important today than it has been in the past.

There is no doubt whatever that the regulatory system itself—as well as various other aspects of banks’ activity, including the payments system, to which we will return later—has been a very effective barrier to entry. Only one significant deposit-taking bank—Metro Bank—has been introduced into the UK system over the last five or six years. We need to tackle this issue of competition. It was striking that the banking commission argued in the second volume of its report that,

“a market study of the retail and SME banking sector, with a full public consultation on the extent of competition and its impact on consumers”,

should be commenced immediately. It continued:

“We make this recommendation to ensure that the market study is completed on a timetable consistent with making a market investigation reference”,

to the competition authority,

“should it so decide, before the end of 2015”.

The Government’s response to the parliamentary commission on this point does not state that they reject this recommendation. Instead, they imply that they will fulfil it. However, what has happened? Nothing; absolutely nothing. They are bringing forward the OFT market review of small business banking, but this was not talking about small business banking. They are not putting in place a market review of the retail banking sector as a whole. Why on earth not? That is what is necessary, and what this amendment calls for.

The Government say that they are in discussions and that they are engaging with the problem. We would like to see some evidence of that. It is just not enough; it is too piecemeal, and not transparent. A proper review of competition in the banking sector is required. This amendment would secure that review in the manner which the commission recommended.

[Lord Flight (Con)]

My Lords, I declare an interest as a director of Metro Bank. I support Amendment 102, in the name of the noble Lord, Lord Eatwell. The Government are now well aware of the competition issue, but no particular policy has been formulated for how to deal with it. This legislation offers the opportunity to require that that should be prescribed. I will say more about competition in a minute.

While I support the principle behind the amendment in the name of the noble Lord, Lord Sharkey, I have strong reservations about regional banks. I remind noble Lords that, going back to the second half of the 19th century, when an industry got into trouble the regional bank failed and the whole region became depressed, often for a decade or more. The principle at that time, led by individuals such as Walter Bagehot, was to create national banks to spread the risk. Therefore, I am not sure that regional banks are particularly the answer.

Government policy has been anti-competition going back to at least Barings. I remember more than 10 years ago having an extensive debate with the late Sir Eddy George when he was Governor of the Bank of England, because it was stated policy that lender of last resort facilities would apply only to banks that were too big to fail. It seemed to me completely the wrong way round in that it gave smaller banks a disadvantage in terms of what they had to pay for deposits. Lots of them, such as Hambros, closed down. It created the great risk, for which we subsequently paid the price with the banking crisis. Elements of uncompetitive measures have been the big—very much higher—capital ratios that smaller banks have been obliged to have in relation to mortgage lending; the costs of the payment system; and the difficulty of getting a banking licence. If I may boast, I think that Metro Bank is the first new high street bank to have been set up in 120 years.

However, I therefore have some sympathy with the second part of the amendment of the noble Lord, Lord Sharkey. What he is saying, in my language, is that we want high street banks that will get dug into their communities and will naturally get involved with sponsoring activities in those communities. That is exactly what Metro Bank is doing. It is very good business to do it and very popular. When we open branches, there are queues of people waiting to come in and open accounts because they are so fed up with the appalling service that they have had from the banking oligopoly for the past few years. It was, indeed, very much an oligopoly. I think it was Lloyds that first decided that you could cut all service and just leave people with telephone numbers to dial. The other banks all followed, with a very substantial boost to profits as a result. For customers, however, it has been one of the biggest factors in making the large banks so unpopular.

I think the outlook is encouraging. Metro Bank plans to have something like 6% of the nation’s deposit base by 2020, which is not that far away. There are other new banks coming up. I believe that the face of the banking scene, even if the Government do not do much about it, will look very different in some 10 years’ time. One of the issues is that the big banks are simply too big to manage. The have archaic silo systems, which are an enormous problem to them. Their activities are simply too large. The requirement for increases in capital will lead to them shrinking their balance sheets and, rather like the old-fashioned huge department stores in the US, it is inevitable that business pressures will lead to their decline.

I attended an interesting meeting that was addressed by Andrew Bailey, the head of the PRA, this morning. He made the point that perhaps the regulator had been wrong to require small new banks to have much higher capital ratios against certain forms of lending. The logic for that was that new banks were more risky—fair dice—but its net effect simply increased the oligopoly strength of the existing large banks. The PRA is looking constructively at making capital ratios, as far as possible, the same across the board, whether banks are large or small. So the PRA is very much on to the need for more banking competition and for it to be supportive and helpful to new banks, as opposed to having rules that hinder them.

The Government, too, have seen the point and are keen on more banking competition. It seems to me, however, that they have not thought about it adequately and have not made up their mind about what more should be done, other than expressing a wish for more competition. That is why a requirement to look into the subject would be no bad thing. However, as I said, while I fully support the principle of more high street banks doing the things that high street banks always did, I am less comfortable with the amendment of the noble Lord, Lord Sharkey, which I think is overprescriptive.

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[Lord Flight]

My Lords, I ask the noble Lord to look at the other side of the balance sheet. I could not find the extract, but it is from a key government website and says that most organisations within the public sector are obliged to bank with either RBS or Citibank. This means that new banks cannot solicit their business. I am not clear how that came about or whether it is even in accordance with EU requirements, but a large part of the economy in the public sector is simply being dictated to on who it can bank with.

[Lord Higgins]

My Lords, my noble friend says that people have been very slow in the past, but he is now telling us that the OFT will decide whether to make a referral—not actually do anything, just make a referral—by 2015. Does it really take from now to 2015 to decide whether the banks need to be referred?

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[Lord Turnbull]

My Lords, these clauses exemplify the maxim, “be careful what you wish for”. The commission recommended that the UK Government should prepare a UK version of the bail-in scheme being negotiated in the EU as a precaution against the possibility that the EU scheme could be delayed. One only has to look at the Solvency II directive to know how long these things can take. We have a slightly different explanation today, which is that we are sufficiently close to finalising the EU scheme that it is safe to proceed to legislate for it. In other words, that implies that this is a substantive scheme, not an interim scheme that might in due course be replaced by an EU scheme. I wonder if the Minister could clarify this.

My only other remark is to say that I very much support the remarks that the noble Lord, Lord Eatwell, has made about people who, once or twice in a lifetime, have a very large sum in their accounts. The other example that could have been quoted is people who sell a business before they retire.

[Lord Flight]

My Lords, I can see something like a bail-in scheme working satisfactorily with regard to a bank the size of the Co-op Bank, for example, and indeed the proposals to bondholders are effectively a do-it-yourself bail-in scheme. However, in the unlikely event that it was necessary, if a bank as large as Lloyds Bank were in trouble, I find it difficult to believe that the situation could be resolved by a bail-in scheme. This is in part for the reasons that others have given, that the knock-on effects to the rest of the banking system are too large. So while the bail-in system makes great sense, I do not think it can be a sort of universal solvent to the possible need for taxpayer money to be used when huge banks are in trouble, or for so long as we have huge banks.

[Lord Blackwell (Con)]

My Lords, in asking Parliament to approve these powers, I wonder if my noble friend could set out what protection he believes is built into this legislation for the inappropriate use of these powers. I understand why having a regime in place that allows a speedy resolution to be enacted is desirable. If that is to come about, it needs to happen very quickly and efficiently when the circumstances call for it. The draft legislation sets out the conditions under which those powers might be exercised. The new Section 8A of Schedule 2 talks about appropriate conditions protecting,

“the stability of the financial systems … the maintenance of public confidence … the protection of depositors … the protection of client assets”,

but those conditions are obviously subject to judgment and interpretation, and it would be helpful to understand those parties who might be affected by the exercise of those powers, not least of course shareholders and bondholders, and whether there is any protection for them against the inappropriate use of those powers without getting into some lengthy and time-delaying process of judicial review.

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[Lord Flight]

My Lords, I support the points made by the noble Viscount, Lord Trenchard. It is entirely understandable that people in this country are furious when they see individuals whom they blame for the system blowing up getting off scot free. On that front there are two points. First, if monetary policy is too lax for a long time, it will almost inevitably lead to bad lending by banks because, in some sense, banks are an automatic conduit of money. That really is what happened in the UK—because of the 2% inflation target, the Bank of England did not acknowledge that there was much higher inflation here off-set by imported deflation. We had easy money for far too long that filtered its way through into bad lending by banks. I remind the House that it was not investment banks but one or other form of bad lending—old-fashioned bad lending such as HBOS or buying CDO instruments from the US. It is not just individuals when a banking system blows up but the background as well.

Secondly, I blame greatly the useless and negligent regulators as well. Why did they not spot the problem? Why should they get off scot free as well? They have a job. Their task is to keep an eye on and make sure that the banking system is safe. If they fail completely in the discharging of that, to some extent they are as guilty as reckless people running banks badly. There is certainly an argument for saying that it would be desirable to bring in draconian powers against the executives of banks, harmonised internationally. I would be more comfortable if the same sort of measures applied in the US, Hong Kong and continental Europe.

I want also to raise a slightly quirky point relating to anti money-laundering since anti money-laundering amendments have arisen. It seems to me that in some ways anti money-laundering has gone slightly over the top. Noble Lords may be aware that, following the large fine given by the US authorities to HSBC, HSBC has simply fired all its US clients in the UK. It has closed their accounts. It has said it no longer wants the risk of dealing with Americans. This has caused huge inconvenience to lots of Americans living in London. Going forward, I can see if other dangers present themselves to other banks, they may decide that it is not worth having a particular category of client.

FATF, which as far as I can see is an unaccountable body laying down anti money-laundering rules, decided to blacklist a number of countries it felt were not practising anti money-laundering measures adequately. This led to some 30 embassies in the UK finding their bank accounts were likewise closed by HSBC. Some of the embassies found it virtually impossible to obtain a new bank account. If there was a branch of a bank from their country in this country they could go there but most other banks would not take them on as a client because they had been blacklisted by FATF. That again seemed slightly to fly in the face of embassies being approved by the Foreign and Commonwealth Office. Its reaction to this matter, I gather, was to express regret but not to do anything. I raised this with Andrew Bailey from the PRA. He felt it was extremely wrong and was quite surprised it had happened. This is a slightly different issue from where we are in the Bill but I would just say to the Minister that the Treasury needs to keep a little watch on what is going on in the anti money-laundering territory and its knock-on effects. I certainly think it is time that FATF, which is the top body laying down all this, were accountable to somebody. Both the Treasury and the Foreign and Commonwealth Office effectively said to me that they could not interfere with FATF—whatever it says goes.

[Lord Brennan (Lab)]

My Lords, I speak to the amendments in my name and in those of the noble Lords, Lord McFall and Lord Watson. I declare an interest as chairman of Global Financial Integrity. It is a Washington-based think tank whose purpose is to promote measures designed to limit and eventually eradicate illicit financial flows around the world, in particular those from developing countries, which presently run into hundreds of millions of dollars. It is thought that they exceed the amount of aid that developed countries contribute to the countries out of which that money comes. I have experience as non-executive director of a banking operation and have advised banks professionally.

Money-laundering, the proceeds of crime and the results of fraud represent a composite picture of international dishonesty, which has been and will continue to be practised wherever those responsible can find a banking system through which to channel the money. This is a fact of life. Many of our banks have such an international scope that they are a ready target for people wanting to use them for these illicit activities.

I invite the noble Lord, Lord Flight, if he has not already read it, to look at the congressional report on HSBC. The chairman of HSBC described it as a very sobering read and concluded that bankers had lost the right to self-determination on such issues. When we come to the part of the Bill that controls how and what people in banks do so that this kind of dishonesty is not furthered, we should err on the side of authority. I invite those advising the Minister to avoid the legislative naivety I dealt with at Second Reading, or in months to come the Bill will result in many hours of detailed inquiry and comment by lawyers advising banks. The first rule the lawyers will pick up is that that which is not stated in this Bill was neither meant nor intended. The Bill, if it is to restore public trust and avoid the kind of risks I have described in dishonest money transfers, should err on the side of authority.

The amendments I am about to speak to were produced by independent counsel, invited to produce amendments that sought to meet the concerns I and my noble friends have. We played no part in the drafting of these amendments, so let us have a care. If a professional advising us as to the amendments produces this level of authority as being required, what do you think those seeking to protect themselves against it will do in terms of legal expense and inquiry?

My final point before I turn to the amendments in detail is by way of introduction. The noble Lord, Lord Flight, in his usual reserved manner, said, “What about the reckless disregard of regulators in the past of their responsibilities?”. I do not think that we are entitled to repose into the hands of future regulators a degree of confidence that past experience shows would be misplaced. They should be told the scope of how they are to do things and what they are to do because we are talking about bank involvement in criminality.

Amendments 46A and 46B go to the question of strengthening the senior management function—the senior person’s regime—so as to include, with precision and clarity, an obligation on the banking system specifically to deal with the risk of money-laundering and of dealing with the proceeds of crime or the results of fraud. There should be no legislative fault in precision and clarity when dealing with criminality.

The amendments seek to ensure that the definition of “senior management function” should be seen to include those areas that I have just mentioned in terms of compliance. Those in banking must comply and must avoid the risk of non-compliance. The FCA, in specifying senior management functions, will require them to do things, including a minimum threshold for sums to be regulated. Is this too much? It was not thought to be too much in the United States, which has a far bigger banking system than ours. Would it run a risk of damaging our banks? It has not in the United States. It is ours that have suffered the penalties, not theirs. These amendments seek to establish a norm—not some Anglo-Saxon aberration—for proper cross-border behaviour in the banking world.

Your Lordships will note that Amendment 46A uses the words, in proposed new paragraph (b)(iii),

“related to or resulting from”.

In other words, it gives a broad reach to responsibility. Amendment 46B makes specific reference to the statutes that have to be borne in mind. It is hardly a criticism to be met to say that people must obey the criminal law—of course they must. This statute—the Bill and the amendment—remind people in statutory wording of their civic obligation, as well as their professional obligation, to obey the law. It is designed to stop the defence of, “Nobody told me. It was not my job”. The two amendments are straightforward and build on the Government’s well deserved intention to improve the law.

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[Lord Flight]

I clearly did not make my point correctly. I was simply trying to say that I have seen reactions to anti money-laundering arrangements, namely HSBC sacking all its US clients and 26 embassies in the UK being blacklisted by the FATF and having problems getting bank accounts. By the way, 10 of those embassies belonged to members of the EU. It is right to focus on anti money-laundering for the reasons which noble Lords correctly pointed to, but people do not take account of the other side of the coin. What is happening, as I described—and it will increasingly happen—is that people who come from countries that have been FATF-blacklisted will find it impossible to get a bank account, although they may be completely innocent.

[Lord Eatwell]

My Lords, I have an amendment in this group and it may be for the convenience of the Committee if I speak to it now. Before doing so, I would like to make two comments about the discussion that has gone on so far. First, Amendment 55 in the name of the noble Lord, Lord Deighton, which includes the meaning of what is a bank, requires very careful exposition by the Minister, because if it says what it appears to say then it seriously undermines the whole discussion about the senior persons regime that we have been having up until now.

Secondly, on the amendments tabled by my noble friend Lord Brennan and his colleagues, it seems that it is incumbent on the Treasury between now and Report to produce a written report demonstrating the noble Lord’s claim that these amendments are unnecessary; showing that the current regime is fully in accord with the latest FATF principles; and therefore providing the comfort which my noble friend might seek if his amendments are indeed unnecessary. Perhaps the noble Lord could also take in some of the points made by the noble Baroness, Lady Noakes, as there are areas that the noble Baroness wants to be sure are equally well covered. Particularly with respect to the issues raised about anti money-laundering and prevention of terrorism principles, it is crucial, as those principles are conveyed into legislation, that we are absolutely clear—and the legislation is clear and explicit—on this matter.

Amendment 100, which is in my name and that of my noble friend Lord Tunnicliffe, proposes to introduce a licensing regime to apply to all approved persons. The noble Lord, Lord Newby, made the extraordinary remark that this would weaken what was elsewhere in the regime as set out in the Government’s amendments. However, I was heartened to hear the noble Lord, Lord Turnbull, use the word licence as I did, and to hear him quote almost word for word the specification of,

“minimum thresholds of competence … integrity, professional qualifications, continuous professional development”,

and so on, which is included in our amendment.

Amendment 100 would significantly strengthen the requirement for approved persons to be suitably qualified in this country, to be licensed and to face the possibility of having the licence removed. Doctors, teachers and lawyers all require some form of professional licence, so why not approved persons in banking? If the noble Lord really undertook to understand this amendment he would realise that it fits precisely with the goals of the commission and would significantly strengthen the quality of regulation and approval of those working in the banking sector in this country.

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[Lord Newby]

The definition relates to deposit-taking, retail and wholesale.

[Lord Flight]

Could I add my support? It seems to me that it is in investment banking territory where there is the greatest scope and where there has been the most inappropriate behaviour. It was Lehmans that nearly brought the whole system down. Part of the intent of the ring-fence is that what is in it is much simpler banking. The whole argument does not stand up unless investment banks are very much covered by the new regime.

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[Lord Turnbull]

My Lords, this is another example of where we should be careful what we wish for. The Treasury committee and the parliamentary commission both welcomed the Government’s damascene conversion —that was what it was called in our report—announced in the Budget last year to create a payments regulator. However, this has been done in a quite extraordinary way with some 40 pages of amendments having been produced only two or three days before we were due to examine them. Although the new clauses were published following a process of consultation, there does not seem to be time for anyone in Parliament or anyone affected by them to scrutinise them. How can we tell whether what has been drafted is workable, reflects the views expressed in the consultation or will deliver what the Government want? From a procedure point of view, the usual channels might consider whether the gap between Committee and Report might be rather longer than normal so that we get a chance to look at not just this but also at the bail-in provisions as we have only had a small amount of time to consider them.

Through much of the consideration in Committee my view has been pretty close to that of the noble Lord, Lord Eatwell. However, as regards whether this body should be independent or part of the FCA, I am in the other camp. One of the key features here is that there is doubt about whether competition comes high enough up the FCA’s priorities. We shall come to later amendments whereby the parliamentary commission wanted to push competition higher up the FCA’s priorities. The proposal before us serves the interests of competition better than by making the body under discussion another department within the FCA, so there is another side to the case.

[Lord Flight]

I support these amendments. The biggest part of the Bill is concerned with creating competition in the banking industry. The thought had crossed my mind that we are proliferating yet another regulator but I am persuaded by the argument advanced by the noble Lord, Lord Turnbull, that it might get lost within the FCA which has many other things to focus than competition. However, I make the small point that in the past year the Payments Council has done a good job in bringing in the ability to transfer a bank account within seven days. Although the new body will be more representative, the Payments Council should not be overcriticised for what it has achieved while it has existed.

[Lord Higgins]

Those of us who have been through many legislative processes may be a little appalled to find that it takes 40 pages of amendments to establish a payments regulator. I wish to ask one or two simple questions. On whom will the cost of this regulation fall? Have we an estimate of what it is likely to be? The Minister referred to what I believe was the lamentable attempt to get rid of the cheque system. Will this proposal stand up if the cheque system is changed? As far as international transactions are concerned, will the regulator be concerned with payments which are made internationally?