Bank of England and Financial Services Bill [HL]

Lord Sharkey Excerpts

Tuesday 15th December 2015 Lords Chamber

[Lord Brown of Eaton-under-Heywood]

With respect, as I understand it, this is a punishable offence; therefore it is a criminal offence. I certainly understand that it is proposed that this offence should be on the statute book to bring blame on those who commit it and lower them in the estimation of the public so that a conviction or finding of guilt under this provision would be to their considerable disadvantage. I have little doubt that Article 6 would apply to how one proves this breach of the law. There is nothing very new in this either. The golden thread that for centuries has been said to run through our law is that it is for those who accuse to establish a case against those who are accused.

[Lord Sharkey (LD)]

Is the noble and learned Lord aware that the Minister who introduced the Financial Services (Banking Reform) Act 2013 into Parliament certified that it was not in breach of the convention he quoted?

[Lord Brown of Eaton-under-Heywood]

That is by no means conclusive of the issue. However, for the most part I am not hinging my argument on the convention; it simply represents what I have already indicated is a common thread of our law—it is for those who accuse to prove. Generally, the burden of proving every ingredient, every element of any wrongdoing or offence—including the disproving of any legal defence to it—lies squarely on the prosecution.

Certainly, there are occasions when the law, including the European Convention on Human Rights, accepts a reverse burden of proof. However, in considering whether this is acceptable one must recognise that whenever an accused is required to prove a fact, as here he would be on the balance of probabilities, that permits him to be found guilty, even if the fact-finding tribunal has some reasonable doubt as to his responsibility. That is the whole essence of the burden of proof. Where there is a doubt, it is resolved in favour of he who stands to be criticised and held liable before the public. It is all very well to speak of the cultural impact of a change like this but the consequence is that in a case of doubt, because he has failed to discharge the reverse burden placed upon him, he is found guilty.

There is a great deal of law in all this, which I will not go through, but I will make just one or two points. First, there is all the difference in the world between the legal burden of proof and the evidential burden of proof. Realistically, the latter is of comparatively little importance. In relation to many defences, the evidential burden is said to be on the defence but this burden is found to be discharged whenever there is any evidence—basically, any evidence at all, wherever it comes from—which raises the possibility that such a defence may exist. For example, when somebody is accused of assault, if there is a suggestion that he may very well have acted in self-defence, the legal burden to disprove that immediately shifts back fully on to the prosecution. The fact is that courts—there are many cases to indicate this—do not like reverse burdens of proof and prefer this golden thread. It is by no means impossible, and I think it is quite likely, that under the 2013 Act—the one for which the certificate was given under the convention—that would be found to be consistent with the convention because the court would construe the legislation as involving not the legal burden of proof but the evidential burden of proof, in which case it would have precious little effect.

The legal burden of disproving guilt is only very rarely put on the defendant. It generally happens only in the case of statutory offences concerned with the regulation of conduct in the wider public interest, and generally in comparatively minor cases involving—I quote from an earlier judgment—

“no real social disgrace or infamy”.

That approach was applied in a trademark case where a trader in branded goods was required to prove that his sale of the goods did not involve any infringement of the trademark legislation. It was held to be in the nature of a regulatory offence with a minor degree of moral obloquy rather than a truly criminal case. Indeed, that was also the position in a case in this House in 2008 in which I was one of the judges. We held that it was not disproportionate to put the legal burden on employers to conduct their undertaking in such a way as to ensure that people were not exposed to health and safety risks. It was for them to establish on the balance of probabilities that it would not have been reasonably practicable for them to have done more than they had to achieve those requirements.

The effect of this amendment is conveniently and succinctly set out in paragraph 137 of the Explanatory Notes. It says that under the 2013 Act senior managers in the relevant area,

“are guilty of misconduct if there has been a breach of any regulatory requirement in an area for which they are responsible unless they can prove that they have taken reasonable steps to avoid the breach … This will be amended so that no senior manager will be guilty of misconduct unless the regulators can prove that the senior manager did not take reasonable steps to avoid the breach happening”.

I respectfully support the Government’s view that the offence being introduced by this legislation, prospectively from the coming March, should properly be considered to be not just a mere regulatory offence involving negligible obloquy—that is not how I understand that the bulk of those opposite would regard guilt of such an offence—but, rather, as constituting serious misconduct. It is the sort of offence, therefore, which should be fully proved and where any doubt as to whether it was committed should be resolved in favour of he who is accused.

--- Later in debate ---

[Lord Sharkey]

My Lords, I have a short checklist of points that I would like to make. I start by thanking the noble Lords, Lord Bridges and Lord Ashton, and their team for the very high levels of engagement on the Bill. That applies too to their officials and the officials of the Bank, especially Anthony Habgood and Andrew Bailey. It has all been extremely helpful and it has resolved some, but not all, of the questions that were raised in Committee. Clause 22 is one of the unresolved questions.

As other noble Lords have said, Clause 22 alters the SM and CR that Parliament agreed to in the Financial Services Act (Banking Reform) 2013. This Act put into law the unanimous recommendation of the Parliamentary Commission on Banking Standards. The commission’s report recommended that the PRA and the FCA should be able to impose,

“the full range of civil sanctions, including a ban, on an individual unless that person can demonstrate that he or she took all reasonable steps to prevent or mitigate the effects of a specified failing”.

The reason given for proposing this measure was that it would,

“make sure that those who should have prevented serious prudential and conduct failures would no longer be able to walk away simply because of the difficulty of proving individual culpability in the context of complex organisations”.

This is an issue that was settled by Parliament in 2013.

Mark Taylor, Dean of Warwick University Business School, former FX trader and an adviser to the Bank of England’s Fair and Effective Markets Review, commented on the situation in May. Mr Taylor said that bonuses are too high, there is little threat of jail for wrongdoers and bosses are not held responsible. He said:

“The problem is the incentives for cheating markets is massive. If you can shift a rate fractionally you can make millions and millions of dollars for your bank and then for bonuses”.

He went on to say that:

“Once senior executives feel they are personally at risk if the culture doesn’t change, and individual traders feel they are at risk of being put in prison, then you’ll get a culture change”.

The Parliamentary Commission on Banking Standards recognised all that, which is why it recommended the new regime. Parliament recognised all that, which is why it passed the new regime into law. This new regime was due to come into force at the end of March next year, but Clause 22 stops that. It replaces the new regime with a lighter version.

Over the course of the stages of this Bill and in discussion, the Government have offered a variety of justifications for reverting to a lighter-touch regime. There have been four main arguments to date. The first was that, since the Bill extends the supervising regime to all financial services, the tougher regime would bear down disproportionately on the smaller firms being brought under supervision. This is not a convincing or even coherent argument for relaxing the regime for systemically important players. It is an argument for a sensible two-tier regulation system—nothing more.

The second argument was that the prospect of the new, tougher regime was leading to individuals spending more time and resources mitigating the risk of being held personally liable for breaches on their watch. This was the whole purpose of the new, tougher regime.

The third argument, put forward by Andrew Bailey, was that noise around the tougher regime has been distracting future senior managers from complying with the spirit of other important aspects of the regime. Mandy Rice-Davies would have known how to respond to that.

The fourth argument I have heard made, entirely understandably—I heard it again this afternoon—was that the reverse burden of proof runs counter to our legal traditions. The Government have not pressed this argument strongly, but other noble Lords have at previous stages. I simply point out that there is ample precedent for this in English law and a helpful Law Lords ruling on where such measures are appropriate. The reverse burden of proof has been used in the Road Traffic Act 1988, the Health and Safety at Work etc Act 1974, the Bribery Act, the Terrorism Act, the Misuse of Drugs Act 1971, the Trade Marks Act 1994, the Criminal Justice Act 1988 and the Official Secrets Act, and there are other examples as well.

But in the past few days, the arguments have focused on a different aspect of the proposed change: that the rigorous specification of responsibility will make it easier to identify senior managers who are guilty of misconduct or unreasonably allow misconduct to take place. This argument was advanced forcefully by the noble Lord, Lord Bridges, in response to my Oral Question of 2 December, and by Andrew Bailey at a private meeting last week.

There is a very serious flaw in this argument. It assumes that it was previously impossible to identify senior managers with responsibility for misconduct. That is not the case. At the very least, board members and departmental heads carry, and have always carried, responsibility. That was not the problem. The problem was the evidence trail. This was, in all cases, so defective that all senior managers could say and did say, “I didn’t know”, and that was enough to get them off the hook.

As Tracey McDermott, the then director of enforcement and now acting CEO of the FCA, said in 2013 to the Parliamentary Commission on Banking Standards, the inability to impose sanctions on senior executives was first and foremost due to the evidential standard required to prove their liability. That is why the old regime produced no penalties against senior managers, and that is precisely why the regime proposed in Clause 22 will not do that either. It is absolutely no use having a detailed organisation and responsibility chain if there is no evidence trail. Barclays knew this when it sent some of its people out to buy a safe to keep incriminating documents out of sight and prevent an electronic trail.

Then there is the question of equality of arms. Banks are rich. They employ many very bright people on astonishing amounts of money; they can afford very expensive and extended legal defences; they have absolutely enormous resources. By contrast, the FCA is underresourced, underpaid, overstretched and outgunned. The G30 report of this year, Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform, also noted this inequality of arms. The contest between the FCA and the banks is unequal, made more unequal by Clause 22. It is notable that the Government have fielded no one from the FCA to defend their proposed change. They have relied instead on Andrew Bailey, a Bank of England official.

The senior manager regime proposed by the Parliamentary Commission on Banking Standards and enacted by Parliament is there because both the commission and Parliament recognised the extraordinary failure to hold any senior manager to account. What this regime says is simply this: senior managers must show that they have behaved reasonably in doing the right thing. Senior managers must show the FCA the electronic and paper trails that demonstrate that they took reasonable action to do their jobs properly. The Government proposal scraps that. It says that the FCA must extract, if it can, this paper and electronic trail from the banks. Well, it will not be able to do that, for the same reasons that Tracy McDermott gave the Parliamentary Commission on Banking Standards in 2013.

If Clause 22 remains part of the Bill there will be no holding to account, no changes in banking culture for fear of being held to account, and no reason to expect a change in behaviour. We will be back where we started. We should remove Clause 22, and we on these Benches support this amendment.

[Lord Turnbull]

My Lords, looking back over the discussions on this issue, inside and outside this House, I cannot help feeling that an element of caricature has crept in. We are told that the Government have lost their nerve, caved in to bank lobbying and gone back to the failed status quo ante. At the same time, the debate has been excessively polarised, disguising the fact that there is substantial agreement on what I believe is the primary issue—tackling the problem of personal liability. The difference between us is what I think is a secondary issue: what does the reverse burden of proof add or detract from this proposal? Is this the only way in which the regime can be made to work?

The proposal in the Bill is not retracing these steps but moving forwards by introducing the SM and CR and the new concept of the duty of responsibility, which will fall on the senior managers. It tackles directly the difficulty with establishing personal liability and the Pontius Pilate defence: “It wasn’t me guv, I wasn’t there; I only read about it in the FT a couple of days ago”. That is actually true—that is what someone told the Parliamentary Commission on Banking Standards.

In future, senior managers will have to take responsibility for what goes on in the teams for which they are responsible and for the actions of the people whom they have appointed and thereby given accreditation. The code rule for senior managers says:

“You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively”.

That is absolutely clear and I still fail to see why the reverse burden of proof is the only way to get people to understand that.