Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Wednesday 27th November 2013 Lords Chamber

Moved by

[Lord Phillips of Sudbury]

164: After Clause 113, insert the following new Clause—
“Review of the effects of the exemption of certain business and financial contracts from the Gaming Acts
(1) The Treasury must institute a review of the effects of certain business and financial gaming contracts having been made enforceable at law by the repeal of certain provisions of the Gaming Acts pursuant to the Financial Services Act 1986 (as amended).
(2) “Effects” shall include the national social, cultural and ethical effects as well as the commercial and economic effects.
(3) The Treasury shall appoint one or more persons to undertake the review after consultation with the Bank of England, the PRA and the FCA and such others as it shall decide on such terms as it thinks fit.
(4) The review shall culminate in a report to the Treasury within two and a half years of the coming into force of this Act.
(5) The Treasury must lay the report before Parliament and thereafter publish the same.”

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[Lord Phillips of Sudbury (LD)]

My Lords, when this amendment was moved in Committee on 15 October there were 10 of us here at 10.20 pm. On that occasion my noble friend Lord Newby, summing up the debate, said that the amendment was superfluous, might have problems with EU law; and was,

“not proportionate or objectively justified”.—[Official Report, 15/10/13; col. 528.]

I shall endeavour to briefly answer those objections this afternoon.

Talking of superfluity, nothing in the Bill touches on the issue of gaming and gaming trades of all sorts. I will give a few statistics in a minute to show just how huge gaming now is in the City of London. Then we have the issue of the EU. If I may say so, it is slightly premature for the Government to anticipate the outcome of any recommendations that the review I am suggesting might come out with. That is a long way down the line: two and a half years is the time given for the review and heaven knows what that outcome might be, least of all whether it would be in any way in breach of EU law, which is in any event changing.

Lastly, perhaps the most important ground for rejection was the thought that this proposal to set up a review to look at the effects of gaming on the wider culture—social, ethical and cultural as well as economic and commercial—would be unnecessary and objectively unjustified. If one considers that these gaming trades now amount to many trillions—some estimate quadrillions; I had never heard that word before—it seems bizarre to say that this modest proposal is disproportionate.

The background to all this is the legislation brought in in 1986 in anticipation of the big bang. The Financial Services Act 1986 contained provisions that for the first time ever said that the gaming laws of the land would not apply to these City gaming contracts. Since then there has been a staggering explosion of such contracts. They are simply massive across the world, not just here. Derivatives, which are the most common form of gaming contracts or trades but not the only one, are largely below the radar, although steps are being taken to make them more transparent and measurable. The Bank for International Settlements has calculated this year that the value of derivatives alone—the over-the-counter derivatives, as they are called—is $693 trillion. Others reckon that if you add in the other form of gaming contracts, that goes up to a figure of $1.2 quadrillion in terms of face value, which may work out in real terms at some $20 trillion, or 30% of global gross national product—or gross international product, I should say.

Let us look briefly at the collapse of the world financial centres, particularly Wall Street and London. Lehman Brothers, had 1.2 million derivative contracts on its books when it collapsed in 2008, of which the face value was $39 trillion—that is one bank. It is calculated that 80% of the income of Lehman Brothers before it collapsed was from such gaming trades. Bear Sterns’ proportion of income from gaming was even higher than 80%. The statistics show capital debts of $384 billion against a capital of $11.8 billion; that is, 30 times more. If you look at the collapses of AIG, MF Global, Merrill Lynch, Northern Rock, Countrywide, Wachovia and so on, you will find in all cases that derivative gaming was absolutely central, usually key, to them. I just throw that back at my noble friend when he says that a review of all that, in terms of its cultural outfall, is not objectively justified.

Banks of course are still doing it today and it is creeping up, and I have no doubt that it will go on and on with its potentially malevolent effects just as heretofore. Huge profits are made from these types of contract, but on the other side of the coin they are matched by huge losses, which was the principal spur to this devastating collapse, a collapse which, do not let us ever forget, was stemmed internationally only by Governments moving in with massive sums of money—what was it here, $800 trillion? Not trillion, million—or am I wrong?

[A noble Lord]

Billion.

[Lord Phillips of Sudbury]

Yes.

I want to see, and I think that this may commend itself to the House, a cool look at just what the consequences are beyond the merely financial—you can scarcely use “merely” in terms of the numbers concerned. In Committee, I tried to remember a quote from John Maynard Keynes in 1936, when this type of trade was trivial when compared with today. He stated in his great book, The General Theory of Employment, Interest and Money:

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”.

How pre-eminently true that is. The noble Lord, Lord Turner of Ecchinswell, made the bold but timeless statement when he was head of the FSA that a great deal—I am not sure that he did not say the majority—of what the City now does is socially useless, because, sadly, only a tiny proportion of these gaming trades has any commercial purpose whatever. They are pure gambling. It is not that they are buying forward raw supplies for some manufacturer to even out the ebb and flow of world prices in whatever commodity or mineral it is—nothing to do with it; it is pure, unalloyed gambling.

[Lord Higgins (Con)]

My Lords, I am trying to follow my noble friend’s argument. Precisely what contract is he describing as a gaming contract?

[Lord Phillips of Sudbury]

I will do my best to explain. Let us consider Merrill Lynch. It cornered, it is estimated, 50% to 80% of the world’s copper in a series of purchases last year, I think it was. That was pure gaming. It was not to satisfy any of its customer needs; it saw potentially vast gains in moving into the world copper market and simply buying it up. Can you imagine: 50% to 80% of all the world’s copper was purchased? That was pure gaming. In fact, I think that it went wrong and was part of the collapse, but I would not lay my life on that.

These are extremely difficult issues. The cultural and ethical aspects are deep. The vast majority of people engaged in such trading are decent, good people. They are not all crooks, but the system in which they are trapped is one which, first, was at the root of the disastrous financial and banking collapse from which we are still suffering—and there is a long way yet to go. Also, we should be interested in the wider outfall. The noble Lord, Lord Lawson, coined a rather vivid phrase last night about the cultural contamination that can go on when one part of a system loses all contact with any ethical underpinning.

Let us consider what is happening in our nation at large, and the extent to which gaming is now spreading rapidly. This week, I heard of one medium-sized town that has more than 70 betting shops. In my town, they have spread like a disease. I am the first to accept that it will be a difficult set of issues to address, but taking a cool, calm look at the wider effects of what is going on in the City of London must surely be for the public benefit.

My noble friend may argue that we have review overload and that the City must be allowed to settle down and not have any further big inquiries. We have had all sorts of them, have we not? That would be a profound mistake, because, often, the more difficult the inquiry, the more important the potential outcome. This proposal has no pre-judgment. Some of my remarks in opening the debate on the amendment, and some of my assumptions, may, in the light of a deep, extended inquiry that looks at all aspects of these difficult matters, be proved wrong. As I emphasise, it would be an open-eyed inquiry.

I refer to the Kay inquiry, which was published in July 2012. Many noble Lords will remember it. John Kay undertook an interesting and important inquiry. He stated that,

“trust and confidence are not generally created by trading between anonymous agents attempting to make short term gains at each other’s expense. Trust and confidence, or their absence, are the product of the prevailing culture”.

I want a better hold on what the prevailing culture is and what part in it is played by the City of London, which is central to our economic future and our thriving.

I hope that there will be support for this proposal. Even if the Government do not like some of the detail, I hope that they will take the nub of it away and, conceivably, come back at Third Reading with their own amendment. Such a review will speak to the prevailing values of Britain today and to the spirit of our times. In a profoundly and dangerously materialistic society, surely nothing could be more material to us all than to seek to get beneath these complex and technical facts and issues, in order to understand the wider underlying effects. I beg to move.

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[Lord Newby]

My Lords, the purpose of the amendment is to require the Treasury to undertake a review of the consequences of exempting certain gaming contracts from the rule that used to provide that no gaming contract or wager could be enforced in a court of law. Such a review would consider the national, commercial and economic effects, in addition to the social, cultural and ethical effects, proposed in the equivalent amendment in Committee. I understand my noble friend’s desire to know more about the consequences of what appears to have been an extensive gambling culture in the City of London, which flourished in the derivative markets that expanded significantly following the gaming contracts rule change but was not limited to those markets.

The financial crisis exposed serious problems in derivative markets—particularly, as the most reverend Primate pointed out during our last debate on the equivalent amendment, in OTC activities. Clearly, the proliferation of such activities and the lack of adequate regulation showed up a need for change.

Following extensive international regulatory debate, a set of significant international reforms was agreed by the G20 to address these concerns. It may be helpful if I provide noble Lords with a short update on what they are. They include measures to ensure transparency by requiring all OTC derivatives transactions to be reported to trade repositories, and the requirement for all standardised derivatives to be centrally cleared and, where appropriate, traded on electronic platforms. These reforms are now being implemented in the UK and should go some way towards limiting the risks associated with these instruments.

So far as the wider effects of gaming in the City are concerned, the PCBS undertook an extensive and wide-ranging examination of the professional standards and culture of the UK banking sector. Its final report made a number of findings on the existing standards and culture in the banking sector, and recommendations as to what might be done to improve the position. We are seeking to give effect to those recommendations in this Bill. As the noble Lord will be aware, we will have a debate on the broader cultural aspects of the PCBS’s report next week.

In the circumstances, I am not sure that a formal Treasury review, as proposed by the noble Lord, is the best way forward. In Committee, I suggested to him that a more appropriate way forward to address his concerns might be for him and, possibly, other Members of your Lordships’ House to work with a think tank that specialises in financial services to undertake such a review. The precedent I had in mind was the review of the banking sector undertaken in the previous Parliament. The Future of Banking Commission was chaired by David Davis MP and included not only my colleague Vince Cable but the noble Lord, Lord McFall. That report had a major impact at the time in influencing the consideration of how we should be looking at the banking sector. The advantage of such a structure over a formal Treasury structure is that it enables a wide range of individuals, including serving politicians, to sit on it. That is much more likely to happen if it is done under the aegis of that sort of think tank than if it is initiated by the Treasury. As a result, when the report came out, it commanded a broad degree of public respect.

I take the point made by the noble Lord, Lord Eatwell, and the most reverend Primate the Archbishop of Canterbury about the specific consequences of potential tax avoidance or evasion by people involved in this sector. I undertake to discuss that with my colleagues in the Treasury in the context of measures that might be brought forward in a future finance Bill. I agree that at first sight it appears to be a loophole that we should have a look at. As noble Lords know, the Government have devoted considerable resource and attention to these issues. I am sure my colleagues in the Treasury will be happy to have a look at the issue.

With those suggestions, I hope my noble friend will feel able to withdraw his amendment.

[Lord Phillips of Sudbury]

I thank the Minister for what he said. I am particularly pleased to hear him say that he will take up the two practical points made by the noble Lord, Lord Eatwell, which are entirely germane to the review that I was thinking of. That will be an important step forward. I am obviously disappointed that the Government will not go further, but I do not think that I can take the matter any further today.

In opening, I should have said how grateful I was to two professors at the University of Essex, on whom I relied substantially for a lot of the statistics: Professor Sikka and Professor Markose. With that, I beg leave to withdraw the amendment.

Amendment 164 withdrawn.

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Therefore, this is a point in the Bill at which we can really address the issue of the culture of banking today, by restoring trust in our banking system with a fiduciary responsibility with respect to deposits, and a duty of care with respect to other elements in financial activities. If we do that, we will have performed a major service for the banking industry, for the British economy, and for ordinary households and small firms throughout this country. I beg to move.

[Lord Phillips of Sudbury]

Before the noble Lord sits down, why does he not propose extending his fiduciary liability to all banks rather than just the ring-fenced entities?

[Lord Eatwell]

That is because I think the distinction between commercial banking and investment banking is relevant in this case. One would expect investment bankers to behave honestly and in an appropriate manner in their business transactions. I would not expect an investment banker necessarily to display a duty of care and certainly not a fiduciary responsibility whereas I really would expect a commercial banker to exercise those responsibilities in all circumstances when dealing with families and small businesses.