Bank of England and Financial Services Bill [HL]

Lord McFall of Alcluith Excerpts

Wednesday 11th November 2015 Lords Chamber

[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.

--- Later in debate ---

[The Lord Bishop of Southwark]

My Lords, I do not wish to interrupt the noble Lord in full flight but I should like to put on the record that the most reverend Primate the Archbishop of Canterbury signed up to the reverse burden of proof, having lost the argument in the PCBS that the reverse burden of proof was unjustifiable. I think that slightly puts in context the phraseology he used.

[Lord McFall of Alcluith]

The commission valued enormously the contribution of the most reverend Primate the Archbishop of Canterbury. However, if we feel strongly about something, it can be a matter of record. I take the point about the unanimity of the commission, and will come to an area where I disagreed with it. I did not get my way, but signed up to it. So it is a case of tit for tat and one for one with the most reverend Primate.

This measure sends out the wrong signal—that Parliament is unfairly on the side of the banks rather than on the side of the public. The Parliamentary Commission on Banking Standards was very clear on enforcement action. We described it as being,

“as rare as hens’ teeth”.

The public want effective reforms. They want senior managers to be personally culpable. They want fines on individuals, not companies, because when the fines are on companies it is the shareholders—ordinary members of the public—who pay them. So the public are being denied and punished twice. The public—I include the noble Lord, Lord Sharkey, and others—want a fair market where risk is rewarded but where failure is punished. That has not happened.

The point was made about the most reverend Primate the Archbishop of Canterbury. I pushed the concept of duty of care in the Parliamentary Commission on Banking Standards. It did not accept it as a recommendation, although it was in the report. If the Government were serious about this, they would adopt a duty of care, which would transform the financial services industry. My good friend John Kay, who has just written a book on that, Other People’s Money, agrees with me on this issue.

In the absence of the Government doing anything, when we come back to this on Report they will really have to think about how they can make senior executives personally responsible. Otherwise, the value of the Bill and the reforms, the expenditure and the time we have spent on the Parliamentary Commission on Banking Standards will count for naught. It is time for a reassessment by the Government between now and Report. I hope the Minister takes that seriously.

[Lord Gold (Con)]

My Lords, I oppose this amendment. I have listened to the noble Lord, Lord McFall, and I fully agree—I suspect we all agree—that the examples he has mentioned of culpable things that have gone wrong cannot be acceptable. However, hearing his comments on the demands of public opinion makes me even more certain that we should oppose this amendment, because the rule of law must be upheld and we must allow the innocent to remain innocent until proved guilty.

Regulation is terribly important and we must give appropriate powers to the regulators to enable them to undertake their work effectively, including the ability to search out evidence in order to ascertain what went wrong and who was responsible. They must be able to break down any firewall that the institutions might have erected. Employees in financial institutions must fear the consequences of acting badly and know that if they break the rules the consequences could be very severe, including heavy fines and maybe a prison sentence.

If we have failed to achieve these things, however, the answer is not to shift the burden of proof so that the defendant has to prove his innocence. That would be tantamount to giving up the challenge. Instead, we must tighten up the regulator’s powers and create an appropriate and effective regulatory regime, one that can achieve what all of us want, which is to protect those dealing with the financial institutions and punish those who fail in their duties.

In this Bill, the Government are aiming to do just that by extending the regulatory regime to all financial services firms and giving power to the regulator to make and enforce rules of conduct. This materially strengthens the regulator’s position. In so doing, it rightly reverses the burden of proof so as no longer to presume guilt, requiring the defendant to prove innocence, and we should not now allow that to continue.

I welcome the Government’s proposals for several reasons. First, I believe it is right to extend the regulatory regime across the whole financial services industry and thereby strengthen regulation. It is also right that we should not change a fundamental tenet of English law, which is that a person is innocent until proved guilty. As I have indicated, to reverse the burden of proof in this way is an excuse for failing to create an effective regulatory regime. Indeed, it is a lazy way of dealing with a problem and should not be countenanced. The provision that it is now proposed should be reversed, frankly, should never have been enacted. I am pleased that the Government have now recognised this.

In proposing this change, the Government seek to treat all financial institutions in the same way. Surely that must be right and fair. Why should there be one rule for large institutions and another for smaller ones? If a financial institution or someone working there breaks the rules then there should be a consequence, and everyone should be treated equally. Any suggestion that there should be a two-tier system so that the present law presuming guilt applies only to certain institutions, but the burden of proof shifts for those institutions that now come within this regulatory regime, is unfair. We should not discriminate between institutions. This could lead to unfair competition and could prejudice the very people we wish to protect—the consumers and customers.

The effectiveness of these new rules, once in force, should be carefully monitored and scrutinised. If, despite the extension of the regulatory regime now proposed, more is required, the Government must not shy away from a further extension of regulatory powers. However, in so doing, they should not then restore the short cut of shifting the burden of proof.

--- Later in debate ---

[Lord Hunt of Wirral (Con)]

My Lords, I declare my interests as set out in the register but particularly as a practising solicitor for nearly 50 years.

I heard the noble Baroness talk about fundamental principles. For me, no principle is more fundamental than the presumption of innocence, as one sees in the way that that has been set so deeply within justice systems, particularly in this country. In contributing to this debate, I come at it in a different way: I do not like the reverse burden of proof in any event. However, I have to recognise the extent of the problems that people have set out so clearly, so that would accompany my welcome of the Government’s decision to have what in effect will be the same statutory duty of responsibility right across the financial services industry. I hope there will be a clear message to the industry that, although we recognise that regulation has to be proportionate, there is no way that we can allow to continue the lapses in conduct and responsibility that have taken place.

I think it was the noble Lord, Lord Sharkey, who quoted Tracey McDermott. I too refer to what she said, because I strongly agree with her. She said this at the Mansion House:

“My firm belief is that if the financial services industry is to restore the trust and confidence of those it is here to serve firms should not just aspire to meet our rules. They should aspire to be better than that”.

I have always strongly believed in self-regulation. As a solicitor, what I call super rule No. 1 guides us so that, all right, the rule of law has to be observed, but our code of ethics and professional standards should govern everything we do. I just hope that the message will go from this House to the financial services industry that it should follow the example of the professions that set the highest possible professional standards.

[Lord McFall of Alcluith]

I welcome the noble Lord’s comments, in particular that senior managers have to perform way beyond the call of duty. Will he therefore support my call for a duty of care on the industry, thereby avoiding the reverse burden of proof?

[Lord Hunt of Wirral]

There is a duty of care. It depends on how much you enact to support the duty of care. As far as I am concerned, the customer, the consumer and the client matter most of all. With that there is an associated duty of care; there has to be.

I hate to quote Socrates to the noble Lord, but I seem to recall that it was he who said that good men do not need laws while bad men will always find a way around them. So the more you set out rules and regulations and duties, the more you enable people to find ways around them. My argument to the noble Lord is this: can we get away from trying to set down in legislation, rules and regulations everything you can do and everything you cannot do? Can we not return to that essence of your own principles, namely your duty of care and responsibility?

[Lord McFall of Alcluith]

The noble Lord has mentioned Socrates. I well remember that Socrates consulted the wise men and came away appalled by the level of their ignorance.

[Lord Hunt of Wirral]

I hope that the noble Lord will not mind if I try to avoid following him down that route. I hope that noble Lords will understand that my objection is that I dislike in any event the reverse burden of proof. I welcome the fact that it is to be abolished, but I want to send a message that the financial services industry should be composed of people who put the customer, the consumer and the client first and observe the highest possible principles both professionally and in the standards they seek to maintain.