Queen’s Speech

Lord McFall of Alcluith Excerpts

Wednesday 25th May 2016 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, strengthening the economy, supporting economic recovery and moving to a higher wage economy where work is rewarded: those phrases resonated in the first three paragraphs of the Queen’s Speech. I tell the Government that those cannot be achieved without a well-functioning banking system. Presently, that is a distant prospect, as shown by the evidence that we in the NCA—the New City Agenda—have received from participants: Martin Wolf, Sir John Vickers, John Kay, Philip Augar, Anthony Hilton of the Evening Standard, the former chief executive of Barclays Bank Antony Jenkins, the right honourable and most reverend Primate the Archbishop of Canterbury, and Andy Haldane, the chief economist at the Bank of England, who addressed us last week.

The key message from these individuals is that banks are not functioning for the benefit of either the economy or society. Antony Jenkins, in his speech to us, said that banks are presently not properly fulfilling their role to society and generally they are unhappy places to work. He had a mission to change the banking culture of Barclays. He told his superiors that it was a five to 10-year project. He ran out of patience and left after three years. He was quite clear when he told us that there are still large parts of the industry thinking that this will pass. All informed commentators find it hard to see any bank following the culture transformation through.

Why is this so important? I mentioned Andy Haldane, who addressed our annual dinner last week. The title of his speech, which is on the Bank of England website, is “The Great Divide”. It looked at the difference between the financial insiders and outsiders. The Bank carried out polling at the end of 2015 on the perceptions of the financial sector. The word most used by the general public, the customers rather than producers, was “corrupt”. Not far behind were the words, “manipulating”, “self-serving”, “destructive” and “greedy”. That underscores how far the financial services must still travel to regain their social licence.

We have seen the foot taken off the pedal by politicians, regulators and corporations. With the politicians, the Parliamentary Commission on Banking Standards made a recommendation to reverse the burden of proof, which was altered by the Government. The regulators dropped their review of banking culture at the end of last year. The corporations, as I mentioned in my last speech here, witnessed bonuses paid out of pre-tax not post-tax profits which means executives do not pay for their misconduct. Also, we witnessed creative accounting through issues such as adjusted profits. Indeed, the chair of the International Accounting Standards Board, Hans Hoogervorst, stated that adjusted earnings paint a misleading picture of the financial position of companies. We see real bonuses still being paid out of fake profits. We thought that had gone in 2008.

If the incoming chief executive of the Financial Conduct Authority, Andrew Bailey, is serious about re-establishing the authority and writ of a demoralised and cowered organisation, he must review the decision to downgrade culture to what it calls normal bank supervision. This cannot be allowed to be behind closed doors, with no assessment of progress and no publication of good or bad practice. Such a secretive approach damages the accountability of banks and regulator. The Government should tell Andrew Bailey that he cannot franchise this to outside bodies which are presently unwilling to identify individual banks regarding cultural progress or otherwise. This reminds me of when I was chairman of the Treasury Select Committee and we had the issue of basic bank accounts. At the time, that was monitored by the Banking Code Standards Board, which referred to banks as “A”, “B”, “C” and “D”, and did not identify them. The result was that I ensured that this was achieved— the floodgates opened and we had meaningful assessment of and progress in what was happening.

We need to ensure that there is public accountability and transparency of assessments of progress. Only the Financial Conduct Authority has the ability to ensure this outcome. We also need to ensure that bank chief executives are held individually accountable for poor culture and demonstrate a greater appetite to take enforcement action against executives. We have seen the so-called shareholder spring recently. Again, Andy Haldane said in his speech:

“Ultimately … these investor votes are binding on neither management nor boards. They are a ‘Say on Pay’, but not a ‘Stay on Pay’”.

Little or no effect has been had on executive compensation packages as a result of investor action. In fact, cases of investors actively voting against pay packages are as rare as hens’ teeth. The system of executive pay is broken. There are still high rewards for those at the top. In the banking sector, this allows senior management to harvest the fruits of large and open-ended subsidies from the taxpayer.

The incoming chief executive, Andrew Bailey, said recently in his speech, “Culture in Financial Services,” that culture had laid the ground for bad outcomes. It has, absolutely. He said:

“A change of culture is possible and as the England Cricket team has demonstrated to our great enjoyment, a lot can be achieved in a short space of time where there is commitment”.

I have two comments. First, this is not a short space of time but a five to 10-year programme and the FCA must put its foot on the pedal. Secondly, a comparison with the English cricket team is, I suggest, rather vacuous and trivialising. The global financial crisis devastated both financial and social capital. For example, the market cap of the world’s 20 largest banks in 2016 remains about half its value in 2007. The market value lies well below the book value of their assets. Put simply, that means that many banks are a value-destruction machine for investors.

Yet those losses pale into insignificance given the loss felt by the wider economy. Nine years on from 2007, GDP is still 15% below pre-crisis level. That is a cumulative income loss of £1.8 trillion—or one year’s GDP. That is mind-boggling, and the clock is still ticking. Yet perhaps the biggest loss is social capital, which is intrinsically linked to trust. My message to the Government and regulators—the FCA and the Bank of England—is that the recovery of financial and social capital is essential if we are to ensure that finance plays its proper role in society. We have witnessed finance as a growth killer not a growth booster. We saw the social cost of that on livelihoods, with businesses destroyed, unemployment increased and young people’s opportunities lost. New City Agenda is coming out in the next month with a report on the culture of regulators. I tell the Government this because we are on their tail as well as others here. We will not give up until this cultural problem is tackled effectively.