Financial Services (Banking Reform) Bill

Lord Flight Excerpts

Monday 16th December 2013 Lords Chamber

[Lord Flight (Con)]

My Lords, following on from what the noble Lord has just said, I would have thought that recent history suggested that regulators were not particularly good at being the bodies finding out the bad eggs in banking institutions. Most of the staff of the PRA have come from the FSA. They were the regulators for the period during which the banking system in this country took on board the awful problem of a lack of integrity.

There is agreement across the House and the country that the question is: how do we get integrity back into our banking system? I do not see that rules are going to do it. We should have focused more on the role of the shareholders of banks in making sure that their boards and executives are proper people, and on the role of the auditors in this area, but I do not see any sound basis for being of the opinion that the regulators are going to be much good at it.

I broadly support the concept of licensing, although I agree with the point: what is in a word? It seems to me that you can license people in regard to their academic qualifications and job experience but not for integrity. People have either got integrity or they have not. We want to get to a situation where the managers of our banks have got integrity and give key effort to making sure that their banks are run with integrity.

That leads me to the next big area. My view over 40 years in the City has been that the main cause of this trouble has been that an oligopoly was allowed to develop. If one looks at economic history, wherever there have been cartels and oligopolies, there has always been bad practice. One reason that the oligopoly got worse is that there was a mistaken view back in the 1980s after the failure of Johnson Matthey that led to the doctrine that the lender of last resort only stood behind banks that were too big to fail. That led to a shrinkage of the number of banks. Many, because they were not deemed to be covered by the lender-of-last-resort doctrine, were closed down.

I remember having extensive discussions and correspondence with the late Sir Eddie George on just that issue back in the early 1990s. What was allowed to happen was a moral hazard. The oligopoly was there with its ticket that it had lender-of-last-resort support and it took the view, “Make money in any way you like and pay the fines”—they were a natural cost of business if you were in breach. That led to a complete deterioration of the standards of integrity in the banking system. That is the truth of what I observed.

I repeat, I personally do not see the regulator as being a huge force in turning round integrity. Punishing those that basically act immorally is quite an important ingredient, but above all we need to get sound management into banks. Maybe the regulator has some role in helping that process, but bank managers must run their banks on the basis of integrity. How far down does the regulator go if he is responsible for ensuring that staff have integrity? It seems to me that this would not work.

[Lord Tunnicliffe]

I commend the noble Lord, Lord Flight, on his ongoing campaign for small banks and more diversity—not that I dissent from it, but it is consistent. What I have more trouble with is the concept of competence and integrity in the banking system, and the idea that somehow we should more readily trust the banks than the regulator. The banks have not got much of a record over the past three or four years in terms of either competence or, frankly, integrity. There is virtually no major bank that has not shown some errors in terms of integrity or shown some failure in competence or ripped off customers through mis-selling. The poor FSA might not have done brilliantly, but it did investigate these areas and produce perfectly sensible reports. As far as one can see, the FCA has got off to a good start. It is producing good and competent reports. I want to express my belief that the regulator is doing, and will continue to do, a good job.

The amendment is quite rightly interpreted as saying, “The regulator shall do”. If our amendment were to succeed, I could readily see some drawing back from that. My own experience in the airline industry is that the regulator creates the framework and checks the checkers—in other words, checks the senior management—but that the spreading of annual testing and so on goes into the companies in a trusting framework. There are ways of doing it without having thousands of inspectors around. Our general thrust is in the right direction. However, I get a sense from what is happening in the House tonight that the chances of me persuading people on this point are slim, so I will not press this to a Division. I beg leave to withdraw the Motion.