Bank of England and Financial Services Bill [HL]

Lord Garel-Jones Excerpts

Wednesday 11th November 2015 Lords Chamber

[The Lord Bishop of Southwark]

My Lords, I shall speak against Amendment 21. I confess that my expertise does not rival that of the most reverend Primate the Archbishop of Canterbury, who justly won plaudits for the seriousness and skill with which he served on the Parliamentary Commission on Banking Standards. Regrettably, he cannot be in his place today, but I am at one with him in supporting the Government’s intentions on the reverse burden of proof.

One of the important functions of the parliamentary commission was to consider the change of culture of banks and the standards of conduct of those working in them, particularly its senior managers. Anger, disbelief and misery was felt by so many following the crisis that engulfed the British economy in 2007-08, much of it directed at the banking industry. That anger and disbelief were compounded when those best remunerated within the banks seemed to demonstrate little or no accountability for their actions. Rather, the burden was borne by society as a whole and it was the poorest who suffered most and, arguably, continue to do so. The ability of well-funded senior managers in the banking sector to evade responsibility was considerable. My assessment is that the commission saw sufficient evidence that there was a balance to be redressed. Small wonder that the commission sought to protect the public, including the taxpayer, with a robust regulatory regime and suitable civil and criminal penalties. This included several provisions with a reverse burden of proof.

A reverse burden of proof would mean that senior managers would have individual responsibility for proving that they had fulfilled their regulatory obligations, rather than regulators having to prove that they had not. This goes against the ancient common-law principle of “innocent until proven guilty”. The proposed reverse burden of proof seems to require senior managers in the sector to do something required in no other sphere of work, and that, from a philosophical perspective, causes concern. It is absolutely right that the individual is obligated to ensure that they take reasonable steps to prevent regulatory breaches in their financial institution but, as with other parts of society, it is right that the burden of proof should sit with the regulator to prove such breaches beyond reasonable doubt.

Secondly, I want to express my anxiety at the creation of a two-tier system of regulation in which deposit-taking institutions, including credit unions and building societies, are obligated to operate under the reverse burden of proof but other financial institutions are not. The need to ensure financial stability in the sector is vital, particularly among the largest institutions, but there seems to be a certain arbitrariness regarding who would be covered by the reverse burden of proof. I fear that a two-tier system would risk confusion or a loss of focus both within the banks and other financial institutions, and on the part of the regulators.

Well-funded individuals and corporations are capable of all manner of misdemeanours across our society, in all sectors of the economy. To introduce a reverse burden of proof only for senior managers in the financial services sector would set a grave precedent. What of those accused of pollution, negligence or failure to care? Where would it be extended next, further eroding the fundamental rights upon which our society is properly based? For the sake of all, not least those without the backing of considerable funds, we should continue to insist that the burden of proof must fall on regulators, prosecutors and those in authority who affirm that wrong is done. Better, as in the published Bill, to have a provision that contains a presumption to act reasonably and for regulators to prove that an individual has done otherwise. In view of these concerns, I humbly urge your Lordships’ House to reject the amendment.

[Lord Garel-Jones (Con)]

My Lords, I draw the House’s attention to my declaration of interests. Before coming to the reasons why I believe that the removal of the reverse burden of proof is a wise move in both practical and administrative terms, I want to say that its removal restores the principle of natural fairness—a fundamental principle of British law to which the right reverend Prelate has just referred, and, if I may be so bold, one to which even bankers are entitled. Also, as again the right reverend Prelate has said, the creation of a two-tier system would not be a very helpful situation to move towards.

The importance of the City of London to the British economy will be a given among your Lordships. If that position is to be retained, bearing in mind some of the abuses we have seen in recent years, it needs to be underpinned by a strict and proper regulatory framework. Under these proposals for senior management conduct, which are supported by the PRA, senior managers remain responsible for taking reasonable steps to oversee the areas for which they are responsible.

The revised disciplinary provisions in the Bill provide that regulators will be able to take action against senior managers on three grounds: first, a breach by the senior manager of the conduct rules; secondly, the senior manager being knowingly concerned in a breach by the firm of its regulatory obligations; thirdly, where there is a breach by the firm of its regulatory obligations in relation to the area for which the senior manager is responsible, a failure by that senior manager to take such steps as a person in his or her position could reasonably be expected to take to avoid a breach occurring or continuing.

The first of those two grounds would also be grounds for action against any other employee or director of the firm, while the third ground in effect replaces the reverse burden of proof. In all three cases the burden of proof now rests with the regulators. Importantly, the FCA’s reaction to these changes makes it clear that the regulators,

“remain committed to holding individuals to account where they fail to meet our standards”.

I therefore believe that the Government are right in claiming that senior managers will remain subject to the same tough underlying conditions. The statutory duty, together with the statement of responsibility, means that senior managers will no longer be able to plead ignorance in these matters.

I make one final point, which to many noble Lords may seem a mere footnote to the bigger issues we are discussing. One of the great attractions of London is that it is truly the most international city in the world. Not surprisingly, therefore, many of the most senior positions in the City are held by non-British citizens. If you are running a global business, in many instances you can just as easily manage that with your team from New York or some other financial centre. I am advised that, had the reverse burden of proof remained on the statute book, many senior managers may well have declined to be posted to London, and that some now here would have moved as soon as a suitable opportunity arose. I believe that we have here a rigorous regulatory framework of the type we need, which no longer carries within it what might well have proved to be a strong disincentive to senior non-British bankers to base themselves in London.

[Lord McFall of Alcluith (Lab)]

My Lords, I support the amendment of the noble Lord, Lord Sharkey. I bring to the attention of the Committee my position as deputy chairman of the Banking Standards Board, but I speak here in a personal capacity.

This measure abandons a key element of the recommendation of the Parliamentary Commission on Banking Standards—a decision that was unanimous among its members, including the most reverend Primate the Archbishop of Canterbury. We all signed up to the recommendation to hold senior bankers to account. The essence of the recommendation is that, if misconduct or prudential failings take place, in order to avoid sanction senior managers have to demonstrate that they did all they could to prevent them happening.

I remind the Committee why we came to that decision. We sat for two years and asked 10,000 questions. We questioned senior executives of banks, whose response when anything went wrong was, “No see, no tell. Nothing to do with me”. In fact, senior executives were content to come across as incompetent rather than culpable, no doubt advised to do so by their lawyers. We covered examples such as PPI, which went on for 20 years. I questioned the former chief executive of Lloyds. I asked him, “What about PPI? It’s cost you about £12 billion”. He replied, “Oh, we were on the side of the angels as far as PPI was concerned”. This is a group of people divorced from the reality of the situation in society, and that is why the parliamentary commission unanimously made this recommendation.

I shall give your Lordships another example. We had four UBS executives lined up before us. We were told informally that their salary was probably £100 million a year. One of their star traders had lost more than $2 billion in Hong Kong, so naturally we asked, “Did you know?”, to which the answer was “No”. We said, “You didn’t know what your star trader was doing? Fine. So when did you find out?”. The answer was, “Oh, we found out on the Bloomberg wires”. In other words, it took someone outwith the company to tell the most senior managers that one of their star traders had lost $2 billion.

The director of corporate affairs, Tracey McDermott, came before one of the sub-committees in relation to this issue. She is a very competent and professional person. We asked her, “What happened with the UBS situation?”. She said, “We examined it but the trail went cold. In other words, we couldn’t pinpoint anyone in the organisation who was culpable because there wasn’t a sufficient organisational chart”. Her evidence indicated that at that time—this was mentioned by the noble Lord, Lord Sharkey—the FCA was unable to impose sanctions on senior executives, first and foremost due to the evidential standard required to prove their liability. She added:

“The test for taking enforcement action is that we have to be able to establish personal culpability on the part of the individual, which means falling below the standard of reasonableness for someone in their position”.

That entails showing that senior executives failed to reach a reasonable conclusion and, as the Bill stands, that will remain the evidential standard for proving culpability. So we are back to the future here—a future that has failed time and again. That is why the Parliamentary Commission on Banking Standards was very frustrated at the situation and said that something had to be done in civil law. However, the new standard in the Bill will not effect the change that it is supposed to bring about because the evidential standards remains the same and, as a result, we are going back to an old regime.

I remind the Committee of the long list of recent failures, not least IPOs, LIBOR and forex. Those are what are called the three lodestars of the market, and they were all rigged. It was a corrupt market, and the Parliamentary Commission on Banking Standards was very clear, from the evidence it received, that it was a corrupt market. We had evidence from HBOS, UBS and RBS. PPI mis-selling went on for 20 years and cost £40 billion. What does £40 billion mean? It is about 2% of the country’s GDP, so, paradoxically, the PPI fines helped economic growth. I do not want to live in a country with standards like that.