Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Tuesday 8th October 2013 Lords Chamber

[Lord Phillips of Sudbury (LD)]

My Lords, this must be the first time in parliamentary history for the amendments to a Bill to be more than three times the length of the Bill itself. Moreover, as others have said, the complexity of both the Bill and the amendments is quite barbaric. I must admit that when I put all the papers on my dining room table to try to make head or tail of them, they occupied 10 feet of space, including all the so-called explanatory documents. Having said that, I thank my noble friend Lord Deighton, who has at least listened to what was said at Second Reading. He has an open mind, which has undoubtedly led to the introduction of a lot of the measures in the amendments that we are now debating in Committee.

I thoroughly support Amendment 3, largely for the same reasons given by the noble Lord, Lord Higgins. We are groping around in an extraordinarily complex area of life and it is abundantly sensible to have these reviews—not just of ring-fencing but a series of reviews—to see how we are coming along and whether the suppositions we are making in the course of this legislation prove to be correct. I disagree with the noble Lords, Lord Eatwell and Lord Tunnicliffe. We need to give time for these new arrangements to bed down and show their paces. Frankly, in each case, four and five years are likely to be better than two years.

I will make a few quick points on the way in which Amendment 3 is put together. We will have an opportunity at the next stage to make changes to what is currently before us. A review panel formed of five persons is unnecessarily large. You might well get by better with three or even two people, so more thought is needed on that. I also note that there is a requirement that the PRA and the FCA carry out their independent reviews but that they publish a joint outcome. Proposed new Section 142J(4) says that they,

“must publish a joint assessment of the impact of the operation of their ring-fencing rules”.

However, they may not agree. You have at least to allow, in this terminology, that that may be the case. You cannot force consensus upon these two august bodies.

The other point is in relation to the appointment of the chair and the endorsement of the Treasury Committee of the House of Commons. It requires that the person appointed,

“is likely to act independently of the Treasury, the PRA and the FCA”.

We should provide that the person is likely to act independently, full stop. It is not only required that they are independent of those three bodies; general independence is required, and so I suggest that those words be excluded.

Finally, proposed new Section 142JA(3) states:

“The persons appointed to conduct a review must include at least one person with substantial experience”.

That is one person out of five. If we are to stick with five people—and I suggest fewer, or at least the prospect of fewer—it is not enough to have only one with experience of all this. This is an extremely complex area of life—there is no area more complex—and experience on the part of more than one person on this panel of reviewers is essential.

That was not quite my final point; I have another quick comment. Proposed new Section 142JB(4) states:

“The report must include … recommendations to the Treasury as to the provision that should be included in orders and regulations”.

It is not inconceivable that there may be no recommendations. Indeed, it is very conceivable that there may be more than one. Therefore the language of proposed new subsection (4) needs amending. I will leave it at that, but I commend the noble Lords who tabled the amendment in this group.

[Lord Desai (Lab)]

My Lords, I apologise for not speaking at Second Reading; I was out of the country. I support the amendment tabled by my noble friend Lord Eatwell. As many noble Lords said, ring-fencing will be a new experience. However, given what happened in the banking industry, and the damage it caused, we have to start the process with extreme care and great suspicion. Given time, I know that the banks will innovate ways of avoiding ring-fencing; that is the nature of the market in innovation. Therefore, before anything further happens, we ought to have early scrutiny of ring-fencing arrangements, as proposed by my noble friend. Later, if we wish, we may do the next review after four or five years, but the initial reviews must be done as early as possible and as toughly as possible, because if we are kind to the banking sector and it does the same thing again, the public will never forgive us.

--- Later in debate ---

[Lord Forsyth of Drumlean (Con)]

My Lords, I did not speak at Second Reading because I could not stay for the wind-ups, but listened to most of that debate. I should like to press my noble friend on his logic. He says that we cannot have some body to police or check up on the regulator. I am very surprised that my noble friend Lord Blackwell, with whom I am normally absolutely on the same square on most issues, says that we must trust the regulator. There was a reason we got into this mess and, by the way, we still ought to have a proper inquiry into what the regulator was doing and how the crisis happened in the first place. The very last thing I feel like doing is trusting the regulator.

We have also seen the regulators going off to work for the banks at, no doubt very appropriately, very high salaries to help them with their compliance and operation of regulation. Let us face it, I am not sure where I stand on the notion that we should trust the regulator on this matter. Like the noble Lord, I was prepared to go along with ring-fencing but could not see how it could work. But it certainly is not going to work if you have very clever people in the banks and at the regulator, but no one is actually breathing down the regulator’s neck. That seems to be the lesson that we can learn with absolute clarity from the previous experience.

I have to say that my noble friend’s logic was, “We can’t possibly have the regulator being subject to second-guessing all the time. How are they going to be able to carry out the agreed policy?”. As has repeatedly been said in a number of speeches, this is an experiment because it is part of a compromise to try to get the banks reasonably on board and to proceed on the basis of consensus.

In my seven years—perhaps it was nine years—working in an investment bank, I learnt that investment bankers are extremely adept at getting between the wallpaper and the wall. If they can find a way to get around something, they will. That is their job and how they make money and resources. The notion that if we have ring-fencing there will not be lots of clever people finding very good schemes to get around the intention of it and that the regulator will stand up to them, especially if we are in a period of prosperity, flies in the face of the experience that we have had.

It is essential to have someone independent of the regulator looking at this relationship and seeing if it is working. They should report to Parliament, with Parliament ready to enforce separation if it is required. It is by putting their feet to the fire in this way that we can be sure that they realise that it is in their interests to make this ring-fence procedure work. Without that, it will not work and we will be back to where we were before you can say “renewed prosperity”.

My noble friend uncharacteristically showed a lack of logic in what he was saying. If he wants the House to commit itself to this policy, he needs to address this basic question of who will guard the guardians.

[Lord Phillips of Sudbury]

I have a lot of sympathy with what my noble friend has said. However, on my noble friend’s thesis, there is the problem that if you have a regulator of the regulator, you should have a regulator of the regulator of the regulator. At some point you have to put some trust in someone. As he has said, bankers are adept at getting around any set of regulations. Is there not a point at which you have to have trust?

[Lord Forsyth of Drumlean]

I agree, but all questions can be reduced in that way—reductio ad absurdum. On that basis, we would get rid of Parliament, which ultimately is the regulator of the regulator. The regulator is accountable to Parliament. We are dealing here with day-to-day very complex circumstances. In this great House we have many experienced people. In my view, the banking commission has done a brilliant job, as has the Treasury Select Committee in many respects. I think all of us would agree that that was appropriate and that that job has been done. However, as I understand it, in the particular instance of deciding whether this ring-fencing experiment will work, here we are talking about the need for some kind of process which will scrutinise that and will report on an informed and an in-depth basis. That is why I support the amendment in the name of the noble Lord, Lord Turnbull, which seems a sensible course of action.

In the case of the Bank of England, why did it allow interest rates to remain so low when it could see a housing bubble and an asset bubble being formed? Even the former governor, who is now a Member of this House, has acknowledged that and has said publicly that it is very difficult when everyone is making lots of money and the whole consensus is that we have abolished boom and bust. It is very difficult for a regulator to stand up to that, especially if Ministers are egging them on and in their speeches are saying the same thing.

If the purpose of this exercise is to say, as we always say, “What went wrong? What are lessons that we need to learn?”, this amendment points to one of the clear lessons that we need to learn. I am disappointed that my noble friend does not see that.

--- Later in debate ---

[The Archbishop of Canterbury]

My Lords, I apologise that I, too, was not here for Second Reading as I was at the funeral of a close friend. I speak as a member of the PCBS, having had the privilege of a year of lessons from the other members, especially noble Lords here today, and the great pleasure of being rung up by the noble Lord, Lord Lawson, quite frequently at weekends, to explain how I should think about a particular subject, which he has done with great eloquence as well today.

I agree entirely with the speeches made by the noble Lord, Lord Turnbull, twice, and both speeches by the noble Lord, Lord Lawson, which have put the position very clearly. It must be a very long time—and my experience of this House is very limited—since a solution to a major problem was put forward with such a noticeable lack of enthusiasm. Almost everyone who has spoken about the ring-fence has damned it with faint praise, to put it at its most polite. The noble Baroness, Lady Cohen, simply eliminated it quite quickly and very clearly. We are in danger of getting lost in looking at the regulation and forgetting what the regulation is trying to do. This is about a question of a culture and ethics, not detailed rules. We all remember Bob Diamond, the chief executive of Barclays, saying that culture is what happens when no one is looking.

We know what happened when no one was looking in the culture of some parts of the banking industry—they fixed LIBOR, overgeared and gamed any system of regulation going. All of that was dealt with under regulatory processes that did not work. They still fixed LIBOR, gamed the system and did all kinds of other things. The force of culture in those institutions made it hard to challenge and it is very noticeable that over 10 years when this was going on at its worst the number of people who blew whistles on this was almost zero. The culture made it very hard to discern that what you were doing was not right.

The noble Lord, Lord Lawson, referred to the dreadful effect of the meltdown we experienced in 2008—as was said earlier, five years almost to the day. The terrible cost of that catastrophe must not happen again. That is what we are trying to do. It has affected the City of London for a while but the far-flung areas of deprivation and poverty in our country suffered grievous blows of further damage from which they are still in the process not even of looking for recovery. The damage when the culture goes wrong is not localised. It is not just about the City; it is about people far away who know very little about what is going on there but find that they cannot raise money, that they cannot do their business and that their banking disappears locally. The vast structures of reform that have been and are being passed through Parliament, including this Bill, and that are passing through the regulators and the industry, show that there is a great failure of trust—and trust will be re-established not by regulation but by culture.

We have already heard the problems expressed very clearly about the ring-fence. The noble Baroness expressed herself very pointedly and precisely. But one thing that we found in discussing this issue in the Parliamentary Commission on Banking Standards is that separation is almost as hard to work out as a ring-fence, because you have to decide which bits get separated into which bits. The next thing that happens is that the brilliant merchant bankers, as it was put a few minutes ago, get between the wall and the wallpaper—that, I think, was the memorable phrase—and start putting other bits into the wrong bit. They game the system just as much with separation as with a ring-fence, so I do not think that that is a simple solution.

We have had the prodigal son and elements of faith from the noble Lord, Lord McFall, but we have the Trappist solution here. You live in the same community, but you do not talk; that is how the ring-fence is meant to work. The amendment—and this is why the element of culture is so important—increases vastly the voltage of the ring-fence. If it has to be used, like much of these forms of regulation, it will have failed to some degree. But it says that, if the industry loses its way in ethics and culture, as it did in the early years of this century, there is catastrophe in regulatory terms. Banks will be split up; people will come in and take them apart. The Government have argued that such a drastic step should require further primary legislation, but that argument seems to carry very little weight. The amendment is merely a rational extension to existing provisions and ensures that the banking industry realises that poor culture leads to fatal shocks, not to a little buzz in the fingers, or to lengthy debates in future on primary legislation. It will concentrate minds.

There is no doubt that we are seeing good things happen in the culture of a number of banking institutions. The new leadership in a number of banks is changing the culture very effectively. A professional standards body is being set up. I believe that this is not merely temporary self-interest but, in many cases, a deep sense that there needs to be a change of culture and values. But that is what is happening in this generation, now; it must be reinforced with firm boundaries to the ring fence, with very serious consequences if you walk into it to see what will happen. The amendment will reinforce that change of culture and act as a permanent reminder to the banking industry of the danger of slipping back into the bad old ways. Not to have that reality signalling the boundaries of acceptable ethics and culture is to encourage behaviour that looks first to what is legal, as has happened for a number of years, and never to ask the question, “What is right?”. To have banks ask what is right rather than what is merely legal would be good not only for the bank but for the whole society that it exists to serve, as the noble Lord, Lord Lawson, said.

[Lord Phillips of Sudbury (LD)]

My Lords, I entirely agree with what the most reverend Primate has just said. As a lawyer of far more years than I am willing to admit, I wonder whether sometimes the legislation that we pass in this place, with the very best of intentions, has in some strange and horrific way an almost contrary effect, for the reason given by the most reverend Primate—namely, that people look at the law rather than what is behind the law and look at the small print instead of the large issues. In my professional life, I have seen this get worse and worse.

One argument above all others persuades me that this amendment is a good one. By and large, I am persuaded that it will leave us with a simpler, more workable outcome than the ring-fence arrangements, which seem to me, even in my most legalistic frame of mind, to be of barbaric complexity. These will be bad enough, but they are significantly more straightforward, more comprehensible and, in a way, more down to earth than the ring-fencing. So I support the amendment.