Financial Services (Banking Reform) Bill

Lord Lawson of Blaby Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Lawson of Blaby (Con)]

My Lords, this is a very important Bill indeed. We all know the great damage that the banking meltdown in the western world has caused, not least in this country. This Bill seeks to deal with that. There are few more important matters—there may be more important matters in the world but they are not susceptible to legislation. This is a vital matter that we can do something about by legislation, and that is what this Bill is about.

In chronological order, I thank the noble Lord, Lord Barnett, for the kind things he said about points that I had made in earlier debates on this Bill. I agree with much of what he said. I also agree with much of what the noble Lord, Lord Eatwell, has just said. I congratulate the Government on setting up the Vickers commission, on having accepted the recommendations of the Vickers commission and on their amendment endorsing part of the recommendations of the Parliamentary Commission on Banking Standards, of which I was a member. The most reverend Primate the Archbishop of Canterbury was a distinguished member; I hope that he will contribute to our debate. The noble Lords, Lord Turnbull and Lord McFall, whose names are on Amendment 4, were also commissioners. I congratulate them on suggesting that there needs to be a review.

The Government have moved a very long way—and I am delighted—but not quite far enough. That is what we are discussing in this group of amendments. To get to the core of the issue, what the Vickers commission concluded and what the Government have accepted is that there is a problem with the relationship and, indeed, the mixing of commercial and retail banking with investment banking. The Vickers commission accepted that; that is why it introduced the ring-fence. The Government accepted that; that is why they accepted the recommendation of the Vickers commission for the ring-fence.

I have always been in favour of full separation—I came out publicly in favour of it long before the Vickers commission was even set up. We know that this works. It worked in the United States for many, many years under the Glass-Steagall arrangements and it is no accident that serious problems emerged after the Glass-Steagall Act had been repealed. Indeed, the Glass-Steagall Act would have worked for a great deal longer had not successive American Administrations been lobbied by the banks to introduce loopholes in one place and another. Anyhow, that is water under the bridge.

What is the danger? The danger accepted by the Vickers commission and the Government is twofold. First, although my noble friend Lord Flight is absolutely right that ordinary, plain, vanilla banking is a very risky business and often goes wrong, there is one particular range of risks in lending: the bad lending. In investment banking you had a whole new and very complex range of risks. It is not the case that nothing has ever gone wrong there; for example, there have been huge problems with derivatives that are a product of the complexity of investment banking. So there is first the question of whether it is sensible—when straightforward, plain, vanilla banking is risking enough —to add to that a whole new range of risks, a whole new complexity, which can make it more likely that the retail deposit-taking banks will get into difficulties. It must be unwise to do that.

The other problem is about the cultures. The Vickers commission did not talk about this, or think about it; it did not raise the issue of culture. But culture is very important. I was glad that when my right honourable friend the Prime Minister introduced the setting up of the Parliamentary Commission on Banking Standards, he explicitly said that it needed to look at the culture of banking, because something had gone wrong with it.

The culture of retail banking and the culture of investment banking are two quite separate things. One is, or should be, a culture of caution and prudence; the other is a culture of creativeness—which is very desirable—and risk-taking of a totally different order. That is another thing that the Vickers commission did not look at.

Now we come to the question of whether the proposal for a ring-fence will do the trick. We do not know. In the Parliamentary Commission on Banking Standards, we decided that although we had our doubts, it should be given a chance—but that there should be a proper review process, so that if it is proved not to be working, we shall move to something that will work.

Another of the things that the Vickers commission did not consider is the problem of governance. The ring-fence is a curious system, because there is one company with two subsidiaries—the retail bank and the investment bank—and we are told that they are completely separate, yet they are together. There is a real question whether that model of governance is workable. I know of distinguished bankers—at least one of whom is present in the Chamber as I speak—who have grave doubts on this score.

There is also a problem within the law. Boards of directors are responsible to the shareholders, so if there is complete separation it is clear that the board of the retail bank has responsibility to the shareholders of the retail bank and the board of the investment bank has responsibility to its shareholders. But under the ring-fence proposal there are two entities that we are told are completely separate, yet there is a single group of shareholders to whom they are responsible. We do not know whether this will work. We do not know whether there might be cultural contamination across the ring-fence. There is no legislation that can prevent cultural contamination, and that would be a very serious matter.

In the commission, we said that two kinds of review powers were needed. The first would look at individual institutions. If, after a number of years, we find that an institution has found a way round, or has burrowed under, the ring-fence and found a way of evading what the Government and Parliament decided, it should be obliged to separate its retail banking and its investment banking. But we also said that a second kind of review power was vital. The proposed system is a right idea of the Vickers commission. A number of the Vickers commission are friends of mine, they are very clever, and I have nothing against them—but they do not know whether it will work either. It has never been tried anywhere in the world, whereas complete separation has been tried, and it has worked. So it is vital that if the system proves not to do the trick, we move to complete separation.

Therefore, we need two kinds of review. The first is a review of an individual institution behaving in a way that undermines the ring-fence, and the second is a review to consider whether the system itself does the trick. The government amendment accepts in principle the first kind of review, but it does not accept the second kind.

I ask my noble friend to give a firm assurance that, as part of the review, the Government will look at whether the system is working and, therefore, whether full separation will be moved to. With the best will in the world, I know that he will wish to make it work, that the PRA and FCA will wish to make it work, and so will Uncle Tom Cobley and all. But if it is not working, will the Government look at full separation? Unless that undertaking is given here, in this House, I will seek to take the opinion of the House on Amendments 5 and 6, which are linked. Amendment 6 derives from Amendment 5, as noble Lords will know.

Given that the Government have gone so far, which I welcome, I hope that they will be prepared to make this further step and give this clear undertaking to the House.

[Lord Flight]

My Lords, I have broadly been in support of a Glass-Steagall separation of investment and banking banks, but there seems to me something slightly wrong with the concept of having a review and prejudging the outcome of that review. Playing devil’s advocate, I make a point on the other side of the coin. Europe has had universal banking for a long time; that is the banking tradition in continental Europe and there is still a case for universal banking to continue, although it is right out of fashion now. I repeat my point that, to a fair extent, the profits of investment banking have subsidised ordinary banking and benefited ordinary retail customers; the losses have generally come from bad lending. So it is slightly premature to prejudge the review. I cannot see what is wrong with having a review with the understanding that the Government will act on the basis of the recommendation of that review at the time. We will have moved on from the present and other factors may have come to light as well. I do not see what is gained by prejudging the result of the review.

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Tabled by

[Lord Lawson of Blaby]

4: Clause 4, page 17, line 15, at end insert—
“142VA Review of operation of legislation relating to ring-fencing
(1) The Treasury must, before the end of the initial period, appoint a panel of at least 5 persons (the review panel) to carry out a review of the operation of the legislation relating to ring-fencing.
(2) The legislation relating to ring-fencing means—
(a) Part 9B of FSMA 2000 (as inserted by section 4);(b) orders and regulations made by the Treasury under that Part;(c) ring-fencing rules, as defined by section 142H(3) of FSMA 2000, made by the FCA or the PRA;(d) section 192JA of FSMA 2000 (as inserted by section 116);(e) rules made by the FCA or the PRA under that section. (3) The initial period is the period of 4 years beginning with the first day on which section 142G of FSMA 2000 is fully in force.
(4) The members of the review panel must be persons—
(a) who appear to the Treasury to be independent of the PRA, the FCA, the Bank of England and the Treasury, and(b) who do not appear to the Treasury to have any financial or other interests that could reasonably be regarded as affecting their suitability to serve as members of the review panel.(5) In appointing the members of the review panel, the Treasury—
(a) must have regard to the need to ensure that the review panel (considered as a whole) has the necessary experience to undertake the review,(b) must ensure that at least one of the members is a person appearing to the Treasury to have substantial experience in central banking or banking regulation at a senior level, and(c) must obtain the consent of the chairman of the Economic Affairs Committee of the House of Lords and the chairman of the Treasury Committee of the House of Commons.(6) The Treasury must appoint one of the members of the review panel to be chair of the panel.
(7) The review panel must, within a reasonable time after the end of the initial period, make a written report to the Treasury—
(a) setting out the results of the review,(b) making such recommendations (if any) as the panel considers appropriate.(8) The report must in particular include—
(a) an assessment of the extent to which the operation of the legislation relating to ring-fencing is facilitating the advancement by the PRA of the objective in section 2B(3)(c) and by the FCA of the continuity objective, and(b) any recommendations which the panel considers appropriate for the making of further changes in the law with a view to better facilitating the advancement of those objectives; provided that such recommendations are consistent with the continued protection of core activities as defined in section 142B of FSMA 2000.(9) The Treasury must—
(a) lay a copy of the report before Parliament, and(b) publish the report in such manner as they think fit.(10) Any expenses reasonably incurred in the conduct of the review are to be paid by the Treasury out of money provided by Parliament.”

[Lord Lawson of Blaby]

My Lords, in the light of the clear and explicit assurance given by the Minister that the independent review will be able to recommend full separation, I will not move the amendment.

Amendment 4 not moved.

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I hope that in any case we can all agree that the name given to the regime is not the most important thing. What matters is what it does. The regime we have legislated for cannot be called a licensing regime, but it delivers precisely what the parliamentary commission called for in its report. There will be a regime of regulatory standards for employees encapsulated in enforceable banking standards rules. Firms will inevitably have a role in ensuring their staff comply with those standards and taking action if they do not, while the regulator will be able to take action if needed.

[Lord Lawson of Blaby]

Before my noble friend sits down, can he give an undertaking that he will produce the further amendments he proposes to introduce at Third Reading in good time so that we can thoroughly evaluate them and decide whether they go far enough in meeting the commission’s requirements? There has been a tendency recently—I know that a lot of work is involved—to produce complicated amendments at the last minute which do not give noble Lords time to assess them properly.

[Lord Newby]

I have a great deal of sympathy with what the noble Lord says, and I can give an assurance that we will bring the amendments forward at the earliest possible point. I cannot say what day that will be, and we may of course have different definitions of “giving short notice”, but we will do our best to give the noble Lord several days’ notice. We hope that, as we get towards Third Reading, the number of amendments we bring forward will be much lower than at the previous stage.

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[Lord Newby]

My Lords, we now move to a group of government amendments which pertain to the scope of the offence relating to a decision that results in bank failure. This offence was introduced through amendments to the Bill in response to a recommendation by the PCBS. As tabled in advance of the debates in Committee, and building on the FiSMA definition of “bank”, the offence would have applied to retail banks and building societies. This meant that all deposit takers except credit unions were covered.

As discussed in earlier debates on the scope of the senior managers regime, the Committee debate on 15 October has prompted the Government to reconsider this position. In the light of the persuasive arguments put forward in that debate, we are amending these clauses so that the offence may be committed not only by senior managers of a bank, but by senior managers of relevant authorised persons. “Relevant authorised person” is defined by government Amendment 106 to include banks and those investment firms that are regulated by the PRA as well as the FCA. These are known as systemic investment firms, because their large size means they have a significant impact on the wider financial sector. Smaller investment firms will continue not to be covered by the offence. This is because, like credit unions, they do not represent a significant risk to taxpayer funds, or to financial stability, and their failure is very unlikely to lead to serious harm to customers.

The Government shared this definition with the members of the former PCBS and are hopeful that the scope now captures those firms that the PCBS had in mind. I hope that these amendments fully meet the House’s concerns on the matter.

The other amendments in this group make consequential amendments to Clauses 27 to 28 which are necessary to give effect to this change, and improve the drafting of the existing provisions. There was also some debate in Committee over whether the cross-heading as tabled properly represented the offence. In the light of this, I have asked the House printers to amend the heading so it now reads, “Offence relating to a decision causing a financial institution to fail”. I trust that this addresses the concerns raised. I beg to move.

[Lord Lawson of Blaby]

I make one point of clarification on what my noble friend said. I apologise for my cold. It is absolutely necessary that the definition of “bank” should be extended in the way that the noble Lord has said. I am very pleased with that. He gave us a reason that these investment banks, or these investment institutions, might be a potential liability for the taxpayer. I hope he will withdraw that. It is very important that there is no taxpayer liability there. The reason we wanted it expanded is that we were concerned about banking standards, which was what this commission was all about: banking standards and culture. That is why it is necessary that there should be this regime for these banks, not because there might be a taxpayer risk or bailout.

[Lord Newby]

I can give the noble Lord that assurance.