FSA Investigation into LIBOR

Lord Tunnicliffe Excerpts

Thursday 28th June 2012 Lords Chamber

[Lord Tunnicliffe]

My Lords, I thank the Minister for repeating the Statement made in the other place. I would like to open by saying a little about the role of this House. It is probable that we will have to take account of today’s events in amendments to the Financial Services Bill. My view of the first day in Committee on the Financial Services Bill was that it was pretty apolitical and very much about getting the right result for the country. I hope that we can carry on in that way. We will do what we can to co-operate on bringing in any changes. We must, through the usual channels, make sure that there will be time to scrutinise properly.

Turning to yesterday’s events, the first area I shall touch on is what is to be done. The Government have claimed that the Financial Services Bill would have created a different result and would have markedly improved the situation. In the Statement, there is no illustration of what that means. I would value the Minister setting out briefly what parts of the Bill are going to change. I have done my best to try to understand the Bill, and I do not see the obvious areas, but if they are there, we will help get them into law and make sure they happen. If the Minister will set those things out, it would be valuable to the House.

Secondly—I shall stop the numbers because they will go on for ever—the regulation of LIBOR and its derivatives was rejected in the other place by the Minister. I am not quite sure what the Statement says. I think it says that the Government are thinking about it. I would hope that the Minister would be a little firmer than that. Surely these things, which are so important, must come into the regulatory regime and must do so soon.

The Statement talks about criminal sanctions. Criminal sanctions are extraordinarily difficult to bring about because of the burden of criminal law. It is fair to say that you cannot find them in the current legislation, and yes, okay, it is our fault—I hope my leaders do not hear me say that. One of the reasons is that it is extraordinarily difficult to bring criminal sanctions into an area such as this where the criminal burden of proof is so high, but if the Minister can illustrate with a few examples what criminal sanctions the Government are thinking about, once again, we will listen to his remarks very attentively.

Let us move on to the victims. The Statement referred to, I think, millions of families and thousands of businesses. These people have probably lost out financially. What are the Government proposing to do about recompensing them? Are they going to bring in any law, or at least address the balance between shareholders and customers in this very difficult area of financial services? This is a scandal akin to the PPI scandal, and we have to recognise its size.

There is the issue of balance. Forgive me, but I will keep coming back to it. There is the concept that the law should contain a duty of care to customers. We are not yet at that point in the Bill, but I would welcome the views of the Minister about whether we should move across that spectrum towards customers having legal rights if, through their processes, the financial institutions they are trading with have put them at an unreasonable disadvantage. It will be difficult to frame, but we have to think about this balance and we have to be in a situation—for a number of reasons that I will come on to—where victims have real care. Finally in this section, the Financial Services Bill is a good vehicle. It will need co-operation, but we encourage the Government to do it. We must do it in a highly scrutinised way.

What is going to happen to those responsible? I am sure that if there are criminal routes, they will be taken. I point out to Members of the House that, frankly, this is not for the Government. Criminal actions and criminal prosecutions are for the appropriate prosecuting authorities, and I hope we can trust those authorities to pursue any criminal sanctions with due vigour. We would expect nothing less of them, and we will be deeply critical if they do not. The FSA probably has powers short of criminal sanctions against individuals to stop them holding office and so on. It would be valuable if the Minister could lay out a little detail. Are they available? How will they be applied?

The real sanction in this case will be in the hands of the Barclays board. It is for that board to act, and to show it is acting, in a way that sends a message that this bank is going to change how it behaves. The tests set out by the Chancellor are incomplete. It is not a matter of what the chief executive knew or when he knew it; it is what action he took to make sure that he was seeking to know and that there were processes in place to assure him that proper responsible actions were being taken by his traders. Donald Rumsfeld ruminated on this. I cannot quote him exactly, but he said something quite profound: you are responsible not just for your errors but for foreseen risks and also for foreseeable risks. Foreseeable risks are risks where, by having the right structures and systems, you can look into the future and make sure that you have got it right. That is what good auditors do, it is what good risk managers do, and it is what this bank should have been doing. It should have seen these risks much earlier.

We come finally to culture change. I have been in the culture change business. I have not run a great bank, but I ran what I consider to be a great institution that is responsible for 2 million people a day and for their lives. Less than a year before I took over, it had killed 31 people. The result was that the boss at the time was fired, after a proper inquiry, his boss was fired, and I ended up head of that organisation. The key change we made was to ensure that everybody was personally responsible. If a death occurred on the Underground, it was my responsibility. It was my responsibility not to check the particular area, but to be able to assure myself that I had done all that was reasonably practical for such a thing not to happen. Indeed, on most occasions one finds that one has learnt something or has to do something more, but all the way through the management chain individuals have to be personally responsible. That burden of responsibility to probity failed in this case.

In addition, we have to look at the bonus structure. We do not talk about bonuses bluntly enough. Frankly, you introduce bonuses to change behaviours. You change behaviours in what is arguably an acceptably benign way. You get people to work longer hours, with more vigour, to be more inventive and so on, but unfortunately a bonus culture will push you to the edge of regulation. When you do that, you have to make sure that the systems are in place to prevent that push beyond the edge of regulation. That requires enormous care and is an enormous responsibility for the board.

The culture must change in the banking industry and it must change from the top. This board must be seen to take decisive action, as indeed must all boards. This is a very, very serious day. This leaves a stain on Britain. Let us be frank about it: before today, people believed that bankers were greedy and stupid, and, sadly, they now know that they are dishonest. For the financial centre of Europe, that is a pretty unhappy combination. We are calling for the strongest punishment for those who have broken trust and broken the law, tough regulation to prevent such practices and a culture change in our banking industry. We must get our economy working, and we must remove this stain on our reputation and repair it. We on these Benches will do all we can to bring that about as quickly as possible.