Bank of England and Financial Services Bill [HL]

Lord McFall of Alcluith Excerpts

Tuesday 15th December 2015 Lords Chamber

[Baroness Kramer]

My Lords, I will not detain the House very long. The National Audit Office and the Bank of England are crucial institutions. It is absolutely necessary that both are not only independent but perceived to be independent. In earlier stages of this Bill, we asked that those two organisations should be brought together to come to a common understanding and agreement of how we could go forward. That has been achieved and, with that, we are pleased that “peace has broken out”—to quote what has just been said. It was essential that that should be done and I congratulate the Minister on the role that he played in this.

[Lord McFall of Alcluith (Lab)]

My Lords, I add my thanks to the Minister and others on this issue. I have had a letter from the Comptroller and Auditor-General, who clearly says that the Government listened to many of the concerns at Second Reading and that the threat to his role as Parliament’s auditor has been reduced. That aspect is very important.

The power of veto was one of the first things on which people came to their senses. It was explained to me that the Bank would publish its view when it refused the NAO, to which I said, “Well, it means that it would go before the Treasury Committee, and the NAO would probably go before the Public Accounts Committee”. If the Treasury Committee and the Public Accounts Committee felt that that was not very good, they would probably have a Joint Committee. I think they thought that it was the best idea to drop the power of veto, which was a good outcome.

I accept that the Bank of England’s independence is essential, particularly in the former role I had as chair of the Treasury Committee. That was very important, particularly during the financial crisis. But the democratic accountability element is important. I see this memorandum of understanding not as something set in stone but as something that can adapt to time as we go along. The noble Lord, Lord Higgins, made a point about whether it would be public. I am sure that it has to be public if there is to be credibility. If there is no intention to have it be public, that would be a backwards step on that issue. If it is not going to be public, the Treasury Committee and the Public Accounts Committee need to have sight of this as it goes along. Let us hope that we do not have that second aspect and that the memorandum of understanding is a public document. As the noble Lord, Lord Young, said, it should be here before we finish the passage of the Bill.

[Lord Lester of Herne Hill (LD)]

My Lords, I have not taken any previous part in the debates on this Bill. I intervene only to explain why I fully support these amendments and the Minister’s statement. Many years ago I represented clients in the Crown Agents inquiry, which was concerned with how millions of pounds came to be lost in an unwise investment in Australia. The Bank of England’s role in that inquiry was important. It turned out that there was no legal adviser within the Bank at all. It seemed to me and many that the amateur system that then prevailed was quite bizarre. I very much welcome the fact that this Bill moves the Bank of England from the dark ages to an enlightened situation.

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[Lord McFall of Alcluith]

My Lords, I wish to speak up for the Parliamentary Commission on Banking Standards. Some of my colleagues seem to be disappearing like snow off a dike on a hot July day, but I want to be faithful to the strictures of the parliamentary commission. We took two years over the examination and we asked 10,000 questions. When the Financial Services (Banking Reform) Act was passed in 2013, all of us were satisfied with seeing our measures enshrined in legislation. But now, 18 months later and with no opportunity to test it, the legislation has been filleted, particularly in relation to the reverse burden of proof.

I have just returned from a conference in Washington attended by regulators from the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Office of Financial Research. They said that progress has been made, but the task ahead in terms of a global resolution for the financial regime is enormous: resolution plans, living wills, leverage ratios, counterparty clearing houses, cross-border co-operation, and not least public resolution mechanisms which do not fit in well with domestic insolvency regimes. Why am I mentioning these? It is because the message also given to me during those conversations was that there is not enough push-back. The momentum goes one way globally, in favour of Wall Street and the banks. In an environment with low interest rates and disappointing returns, it is inevitable that banks will take more risks in the future. So there is a need for vigilance to minimise regulatory arbitrage and change the culture in order to minimise misbehaviour, which was the essence of the parliamentary commission.

We have been talking about the reverse burden of proof, but is it that? Section 32 of the 2013 Act could be interpreted as not a reversal of the burden of proof, because it means that the defendant is considered to be automatically guilty, and she or he has to prove their innocence. That is not going to happen in this case. The present position is that a senior manager will be liable for misconduct if a variety of factors are present, including the absence of reasonableness in breaching a regulatory rule. That does not constitute a reversal of the burden of proof. It means that the regulator must still show that all the factors in Section 66 are present, and then the defendant will be required to demonstrate the defence of having acted reasonably. There is nothing unusual about the regulator having to prove the elements of an offence or misconduct and then the defendant having to prove a statutory defence to that liability. Indeed, the government amendment could have the odd effect of requiring the regulator to prove the defence. But that is for the senior manager to do, and he or she must prove that their work was reasonable.

Perhaps the test of reasonableness is too low because a senior manager need only point to a lack of diligence on the part of other senior managers to demonstrate that they appear to be reasonable as compared with their peers. I would prefer “reasonable diligence”; indeed, I would have preferred the duty of care, which I proposed to the Parliamentary Commission on Banking Standards, saying that it would be simpler and could not be misinterpreted, but it was not taken up, and that is why we find ourselves in this position today.

The real regulatory challenge is to make sure that senior managers manage their institutions properly from top to bottom so that none of their employees can misbehave. In the intervention made just previously to my own, mention was made of the regulator ensuring the best regulation and that companies undertake it. I can well remember Tracey McDermott, then the director of the FSA, coming before the commission to be questioned about UBS, where one of its clients had misappropriated $2 billion. When we asked the senior managers about it, they said that they did not know the client. When we asked them when they found out, they said, “It was on the Bloomberg news wires”. When we asked Tracey McDermott why she did not pursue it, she said, “The trail went cold”. The trail is going to be cold here, and we will still have to fix this problem.

Is it not ironic that Sports Direct knows when someone steals a pair of socks, but Barclays cannot spot millions of pounds being taken through misquoting LIBOR? That is the situation we are facing. The real issue is the quality of regulation. We have ducked it tonight, but perhaps my fellow commissioners will come back in two years’ time and say, “We have had another thought, and what we have passed tonight was not very good, so let us have another go”. There is a pregnant agenda here and we will have to attend to it.