Financial Services (Banking Reform) Bill

Lord Spicer Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Eatwell]

I am sure that the noble Lord, as a distinguished solicitor, would attest to that, as indeed he has done. It seems to me that if members of the professions are required to pass examinations to show professional competence and to undertake rigorous training, bankers should do the same. That is what Amendment 21 seeks to achieve. For example, proposed new Section 65A(2)(b) says that the licensing regime must,

“specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules”.

[Lord Spicer (Con)]

What is a minimum threshold of integrity?

[Lord Eatwell]

Being a “fit and proper person” would perhaps be appropriate. If the noble Lord is not aware of the phrase, it is the standard regulatory threshold which anybody operating in financial services must attain.

Amendment 21 seeks to capture the need for proper training, continuous development and the maintenance of proper professional standards via a licensing regime. I have enormous sympathy with Amendments 50 and 51, tabled by the commissioners, but I am afraid that they do not capture the need for professional qualifications.

With respect to the government amendments in this group, they are mostly concerned with the correct definition of a bank. I am delighted to see that we now have a definition of a bank. It may be of interest to the House to know which banks are now included that were excluded in the past. Barclays Capital, Citigroup, Credit Suisse Securities and Goldman Sachs International were not included in the previous definition of a bank, but I am glad to say that they are now. I congratulate the Government on appropriately incorporating them. However, those government amendments stand slightly aside from the issue of professional standards addressed in Amendment 21 and in Amendments 50 and 51, tabled by the commissioners.

I suggest to your Lordships that this House asserting that the banking industry must maintain appropriate professional standards is the minimum that the public expect of us. I beg to move.

--- Later in debate ---

[Lord McFall of Alcluith (Lab)]

I do not think that we should run away with the idea of codes of conduct because, if you look back over the past 10 or 20 years, you will have seen a proliferation of codes of conduct and ethics from banks. When they had rules, they circumvented them, so we must have something deeper here.

On the Parliamentary Commission on Banking Standards, if we heard the phrase, “This time it’s different”, once, we heard it 10,000 times. We were told that there was new management and a new executive, that the past was behind us and the future here, with new staff—and that everything would be better. Since we have taken evidence, tumbling out every month there has been another scandal. So we need to attest to something deeper here.

The lack of individual responsibility at the top is at the core of the problem. I say this with no understatement: many of the very senior individuals who came before the Parliamentary Commission on Banking Standards were economical with the truth. I give an example on PPI, where we now have a scandal of about £25 billion to £30 billion. There was a “no see, no tell” policy from those at the top. Why? Because they preferred to be seen as incompetent than to have any responsibility. There was a hiatus of responsibility from the top to lower down.

My own view was not accepted by the banking commission, which was fair enough. I thought that every year there should be an individual meeting between the chairman and chief executive of a bank and the regulator. That meeting would be recorded but it would not be made public—but they would have to attest to the regulator that they were responsible for their institution and what went on in their institution was their responsibility. If we implement a code, we will only repeat the mistakes of the past; there has to be a deeper cultural change.

Culture has been mentioned. Again, we had individuals coming before us saying, “Look, we have a new chief executive and a new culture—everything is okay”. You would ask how many employees were in that organisation and be told that it was 150,000. When we asked how long it would take to change the culture, they said, “Oh, three months”. That is for the birds. So the responsibility needs to start at the top.

The example I give of PPI is of a chief executive who came along to the commission and said, with a straight face, “As far as PPI is concerned, my organisation is on the side of the angels”. That organisation is the one with the highest PPI penalties in the United Kingdom. So do not let us kid ourselves that we can sort this problem with codes. We need to give the regulator authority—and we have seen a regulator that was captured, cowed and conned by the industry. There should be someone to go to in the organisation to whom we can say, “That was your responsibility”. If we are told, “Well, that person left”, we need to ask for the handover document that indicates that there was a transfer of responsibility that can be understood.

The director of enforcement at the FSA came before the commission at the time of the UBS scandal, which cost the bank billions of pounds. We had four from the top management of the bank before us and, when we asked them if they knew who the individual was, they said that they did not know at all. Then we asked them how they found out, and they said, “Bloomberg wires”. That is how corrupt the institutions are in terms of accountability.

We need to change. I am happy for the Government to accept this amendment, but I am certainly not happy for warm words or for anyone to say, “This time is different”. This time ain’t different. The scandal has kept going and will continue, and we need to do something severe to ensure individual accountability by those at the very top of those organisations.

[Lord Spicer]

I have enormous respect for the noble Lord, Lord McFall, but I think the idea of legislating to be more responsible—in fact, legislating for human character—is a very dangerous path. It is why I intervened on the question of minimum standards of integrity: you are either honest, or you are not honest. It is quite dangerous to keep loading the statute book with matters which attempt to affect human characteristics. I think that there should be some caution about some of these amendments.

[Lord Newby (LD)]

My Lords, this is a very large group of amendments dealing with another key aspect of the Government’s reform-namely, how to drive up standards across the banking system. The Government’s amendments in this group, and in the following group, widen the range of firms covered by the reform. They respond to points made in Committee, and I am grateful to the noble Lord, Lord Eatwell, for his welcome for them, but we will deal with them in more detail when we come to the next group.

I would like first to respond to the concern that the Government’s Committee stage amendments did not implement the commission’s recommendations for what it calls the licensing regime. To be completely clear, the Government are committed to implementing the vast majority of the commission’s recommendations on the regulation of individuals in banking, including its recommendations to introduce a licensing regime. The regulators, in their responses to the commission published in October, confirmed that they would do this.

The Government’s amendments in Committee put in place all the essential features of the commission’s licensing regime proposals in Clauses 22 and 23. These clauses give the regulator power to make rules of conduct imposing binding standards on employees and ensure that the regulators can take action when there is any breach of these rules. The relevant provisions would form part of FiSMA and confer powers on the regulators in the normal way.

However, we recognise that this may not be seen as giving the full weight and impetus to the commission’s proposals, so we are looking to see whether we can bring forward at Third Reading amendments which will highlight the proposals more and put beyond doubt the determination which we all share to see real change in this area. In the light of this, the Government are looking to introduce amendments at Third Reading to impose obligations on banks and PRA-regulated investment firms, first, to verify before appointing someone as a senior manager, an employee in a role that could do significant harm to the firm or another role requiring regulatory pre-approval that the person is fit and proper to perform that role in the firm; secondly, to maintain up-to-date lists of such persons which could be made available to the regulators when required; thirdly, to notify the appropriate regulator when they take formal disciplinary action against such persons—formal disciplinary action could include giving a formal written warning, dismissal, suspension or clawing back remuneration; and, fourthly, to notify all such persons of the banking standards rules that apply to them. All these obligations will be regulatory requirements under FiSMA. Failure to comply with the obligations will be a breach of regulatory requirements, and actions could be taken against the bank concerned by the regulators. In addition, deliberately or recklessly submitting a materially false or misleading list of persons to a regulator will be a criminal offence.

The Government will also look at tabling amendments requiring, rather than simply empowering, the regulators to set out those functions for which a bank must do the above. We anticipate that this class will match the category of staff defined in the PCBS report as being those whose actions or behaviour could seriously harm their employer, its reputation or its customers. I hope that when we produce those amendments they will satisfy the concerns addressed by the most reverend Primate.

There are certain detailed respects in which the Government have decided not to follow the recommendations of the commission. These do not change the substance of the impact of the regime, but they will ensure its effectiveness. First, the commission envisages that the licensing regime provisions would entirely replace the regime of regulators, giving pre-approval to people below senior management level. That would mean dropping regulatory pre-approval for all appointments below senior management level, including in areas such as money laundering, with which the noble Lord, Lord Brennan, and others were particularly concerned in Committee.