Financial Services (Banking Reform) Bill

Lord Tunnicliffe Excerpts

Wednesday 24th July 2013 Lords Chamber

[Lord Tunnicliffe]

My Lords, I thank the Minister for his detailed introduction to the Bill. I also thank the Parliamentary Commission on Banking Standards—particularly Mr Tyrie, its chairman—for its excellent work. I particularly thank the Members of this House who were on the commission—the most reverend Primate the Archbishop of Canterbury, the noble Baroness, Lady Kramer, and the noble Lords, Lord Lawson, Lord McFall and Lord Turnbull, with whom we hope to work constructively to ensure that the Bill is not a missed opportunity. I praise their wise input into this process. It is certainly a good thing that the economic and financial services expertise in your Lordships’ House is so stellar in quality, given that the Government’s timetabling has left all the meat in the Bill to us.

I do not share the pessimism of my noble friend Lord Whitty and I hope that I am proved to be right. The consensus and enthusiasm that I have heard tonight to get into this Bill despite all the barriers and difficulties will mean that it will have an extremely good passage and that we will radically change and improve it. I hope that I am right but I can see the reason for his caution.

When Lehman Brothers filed for bankruptcy in New York in September 2008, it sparked a financial crisis which ricocheted around most of the major economies in the West. We saw reckless banking requiring vast taxpayer bail-outs. The public finances were irreversibly affected and the economy suffered. The Financial Services Act 2012 was part one of this Government’s response to the structural changes that they argued needed to be made. The Act abolished the FSA and established the PRA and FCA. My party supports the move to prudential regulation but continues to warn that there are numerous question marks over the role of the Bank of England as regulator, and its many and varied responsibilities. We wait to see what impact Mark Carney will have on steering this mighty ship.

If the Financial Services Act 2012 was the Government’s response to the regulatory side of the equation, this Bill would appear to be their attempt to offer some solution to the reckless banking side. As for the impact on public finances, social security bills are going up and more and more people are stuck in long-term unemployment. Things are not improving. It is true that all parts of our society have suffered: the citizen, the bank owner and the customer—as my noble friend Lord Whitty has just outlined.

I had not really thought about bank owners until last night, when I realised by accident that some time ago I had £10,000-worth of bank shares, or more precisely, I had a £10,000 Halifax ISA. I now have a £2,000 Lloyds ISA and I think that I am typical of many of the owners of banks, as well as their customers and as well as citizens. I do not want to go into this Government’s policies that have, in our view, exacerbated the crisis and, in their view, sought to mend it. There has been a self-denying ordinance in this debate to avoid party politics and I will stick to that ordinance because I think that the emerging consensus to get to the meat of this Bill is one that we should preserve.

At the end of the day, however, as my noble friend Lord Eatwell said, the impact on the real economy must be the test. The right reverend Prelate the Bishop of Birmingham talked about the need for new institutions to emerge, and the noble Lord, Lord Lawson, spoke about RBS and how a different RBS could come out of this crisis, contributing to the real economy. I hope that all of these aspirations are met.

The Bill is the Government’s response to the Independent Commission on Banking, led by Sir John Vickers, and it is intended to implement Vickers’s recommendations on structure, capital and loss absorbency. It is also meant to be the vehicle for implementing the recommendations of the Parliamentary Commission on Banking Standards, whose five reports—it is interesting that we had different figures, but I think there were five reports—on standards, ring-fencing, structure, proprietary trading, and culture, are a compendium of experience, expertise and advice in this field. This Bill, however, in fact lives up to almost none of these.

As my noble friend Lord Eatwell has made clear, it is a shell of a Bill. It is reliant on order-making powers, many of which we have not yet seen. It is entirely silent on standards, culture, customer choice and competition. I am pleased that so many noble Lords have seen the importance of filling in these spaces. The challenge before the Government is to give us the information to do this. The noble Baroness, Lady Kramer, made the point early on and my noble friend Lord Barnett said that, of course, Governments like order-making powers, but we must see much more substance in the Bill. My noble friend Lord Watson also touched on that. What the Bill does include is deeply flawed. The ring-fence rules must be reviewed and full separation powers included in the Bill as a bare minimum. The Government’s amendments on ring-fencing have been roundly criticised. My colleague in the other place put it rather succinctly:

“Five strikes and you might be out in six years’ time”.—[Official Report, Commons, 8/7/13; col. 73.]

The Minister has promised to offer a much more streamlined version—it has got to be a great deal more streamlined to be convincing.

It is fascinating just how many Peers came forward and said flatly that they were in favour of total separation. I listened to the speech of the noble Lord, Lord Lawson, with rapt attention, in particular when he touched on how the cultures were different. My noble friend Lord McFall said that he was in favour, as did the noble Lord, Lord Higgins, my noble friend Lord Hollick, my noble friend Lord Barnett, and the noble Lord, Lord Flight. My noble friend Lord Brennan painted a wonderful image of a lawyer-fest, if we do not have that backstop of full separation sitting behind that reserve power. These ideas were touched on further by my noble friend Lord Watson.

From this side of the House, we argue strongly—and let us face it, there seems to be absolute consensus on this point—that a fuller Bill is needed in response to the crisis and the banking standards. The Bill needs to address cultural flaws in the industry. I acknowledge that cultural change cannot easily be legislated for, but several legislative steps could make a difference and should be included. We believe that that there needs to be a proper fiduciary duty—a duty of care—on banks to operate prudently and to safeguard deposits. Individual responsibilities need to be clearly defined and appropriate criminal sanctions put in place.

At the macro level, the Government should also bring forward the proposals of the parliamentary commission concerning a new offence of reckless misconduct. We are also keen to see a review on setting up a financial services crime unit in the Serious Fraud Office.

My noble friend Lord Brennan spelt out how the industry will respond to the Bill when it comes into force. It will be about personal responsibility and consequences, and we have to think through how we shape the legislation. For instance, we are going down the difficult route of reverse assumption—in the sense of guilt and the need to create a defence. This is a difficult area but we did it in the Bribery Act and there are one or two other examples in legislation. However, it will have to be carefully structured.

In keeping with addressing the proper focus of the banking industry, it is time to look seriously at remuneration. The giving of grossly inflated bonus settlements while the majority of households and individuals in the middle continue to feel squeezed is not a scenario that we should comfortably see continue. We need to force bankers to think of their customers and of the consequences of their actions. We need a more long-termist approach, which could include powers to require elements of remuneration to be deferred for up to 10 years. To engender responsible behaviour, we need to look at professional standards in the banking industry and at whether bankers should be licensed. We need the confidence in our bankers that professional standards regimes have provided in other sectors.

The Minister said that there was a third pillar to this—the whole issue of culture. Many noble Lords touched on that. The right reverend Prelate the Bishop of Birmingham talked about the human or almost spiritual value in the culture. I cannot quite find the right word but perhaps we could refer to “human standards” in the culture. My noble friend Lord McFall talked about regulatory capture in the culture. In pondering this issue, I asked myself when it was that banking was great. It was great when it was based on trust. What do we mean by trust? We mean a willingness to trade in complete contracts because you know that the counterparty will not let you down. That trust completely disappeared in the crisis, and that is why banks stopped trading with each other almost overnight. Rebuilding a culture that works is a really difficult challenge. What do we have on the table so far? We have incentives through getting the remuneration right; we have regulations, which we know are difficult to get right in a holistic way; and we have fear—the fear of going to jail. We have to talk this over at considerable length, and we have to see what other shots are in our locker.

One issue that I certainly hope that we will look at is whether there can be more transparency. In many ways, transparency is a useful prop for a trusting culture. When people are seen doing things by their counterparties, wider society or regulators with a great deal more clarity and openness than is the case now, they behave differently. We will certainly want to probe whether transparency might be added to the list. It could be transparency in relations, remuneration and trade. Transparency in banking is key, and we need to see proper protection for whistleblowers.

My noble friend Lord Eatwell said that there was a serious need for competition. Virtually everybody who has spoken has said that, including the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, my noble friend Lord Hollick and the noble Lord, Lord Flight. My noble friend Lord Brennan pointed out that, in the face of the big four, building a challenger bank will take a generation.

We welcome the Government’s intention to ask the new regulator to explore the feasibility of account portability. This could be an important contributing factor to bringing greater competitiveness to the sector. Diversity and competition are vital, but they have gone backwards on this Government’s watch. We hope that the Government will heed the PCBS’s proposals that the Competition and Markets Authority immediately begins a full-market study of competition in the retail and SME sector. There are a number of other areas I will not touch on which have already been discussed, but leverage will have to be discussed and, in particular, the issue of proprietary trading.

The Government have suggested some key changes and made some quite good general statements, but we must probe them and find out what they really mean. They must stick to it and we must make sure they do. We will be watching like hawks to make sure that they stick to their promises and, indeed, go further. We will have enormous challenges—I will not call them problems—in handling the Bill. We will work through the usual channels, with the Government and other interested parties, as to how we structure this. Whether we like it or not, many of the debates in Committee will be “Second Reading debates”. That is not wrong: whole new concepts will be introduced and it will be entirely proper for the Minister presenting them to outline them in context and for them to be challenged within that wider context. It will probably be a good idea for us to discuss how to do that away from the Floor of the House, but it will be a big challenge to create the right structure to discuss the very wide areas that have been discussed. There are the real-economy consequences, the new investment vehicles and the points made by the noble Earl, Lord Caithness, which had never crossed my mind until tonight but will be useful. We heard about pay-day loans from the noble Lord, Lord Sharkey, and the issue of PPI.

We also have the point made by the noble Lord, Lord Higgins, and, I think, by my noble friend Lord Brennan, about the sheer density of the material in front of us. The noble Lord rightly said, “When I went to FiSMA and saw how it related, it did not make any sense”. No, it does not make any sense, because FiSMA has been modified ten times over since the copy he got from the Printed Paper Office. We need help from the Government on this. I believe it is called a Keeling schedule—they put one on the web for the Financial Services Act. I urge them to do that early and make sure that we can get a document so that, as the noble Lord said, he can go from the Bill to a document, the cross-references work and he can see what is happening.

This is not a particularly political Bill; but it is an incredibly important Bill. It will impact, frankly, on how we do business in the United Kingdom for decades to come. It is crucial that we get it right. I shall set out briefly where we will be coming from. The noble Lord, Lord Northbrook, set out the Opposition’s position reasonably accurately—I thank him very much for that; it saves me having to do it. The position in many areas of the Bill is a spectrum with a series of strands. The spectrum goes from light-touch regulation at one end to detailed, prescriptive, heavy-handed regulation at the other. Light-touch regulation did not work. It did not work here or in the US and we know that it has to be changed. Let us face it, the vast majority of the western world believed it was the solution. There are some people who can genuinely say that they said, “This is too hazardous”, all the way through, but they are very few. Many of us said, “It is working, it is producing the money, great”.

That is one end of the spectrum. I described the other end of the spectrum. In many ways the Banking Commission tried to be at the consensual centre of the spectrum, where it was optimal. We will bring forward amendments, probably between the Banking Commission recommendations and the more detailed end; we will be at the more intrusive end, probably. We will do that believing that it is a good place to be. We will be a listening Opposition, because there is so much expertise and depth of knowledge in this House on this subject. We want to see how those amendments fare and what counter-amendments come forward. We will look to form consensus with other Members of this House—with the Back-Benchers of other parties and the Cross Benches—and we hope, through the process of debate, to draw the Government into that consensus. At the end of the day, this Bill really needs the support and wisdom of all parts of the House. The Lords will work constructively in a cross-party way to ensure that the Government deliver a good Bill—or, if they do not, that Parliament will.

--- Later in debate ---

[Lord Newby]

My Lords, there is an issue about the timing of an ad hoc committee which produces a report to inform your Lordships’ debate. Agreement has been reached with the usual channels that we start Committee stage very soon after we come back and I am not sure that such an ad hoc committee would help. I will talk to colleagues in the Treasury and in another place to see how best we can facilitate proper discussion of secondary legislation, because, obviously, as everybody agrees, much of the meat is in the secondary legislation.

Can I reassure the noble Lord, Lord Barnett, that the banks had no part to play in drafting the Bill? It was produced by parliamentary counsel in the normal way. I should have said that draft secondary legislation was published on 17 July.

There was much discussion about standards and culture. The right reverend Prelate the Bishop of Birmingham talked about banks discussing doing what is right and about personal virtue. I agree with him that a wind of change is blowing through the banks and I am not as gloomy as a number of noble Lords have been about the extent to which the culture within banks may change. I would not put it any higher than that. I think there has been a big change in Barclays, and that is not a legislative change, it is because of the change of leadership and a change in culture.

In response to the commission, the Government propose to bring forward a number of amendments which specifically deal with standards and culture. These include a new senior persons regime for senior bank staff; introducing a new criminal offence of reckless misconduct; reversing the burden of proof, so that bank bosses are held accountable for breaches of regulatory requirements within their areas of responsibility; and giving the regulators new powers to make rules to provide enforceable standards of conduct for all bank staff.

Virtually every noble Lord who spoke has talked about the need to increase the degree of competition in the banking sector. I absolutely agree with the noble Lord, Lord Flight, that this is, if anything, the fundamental issue now facing the sector. I congratulate him and Metro Bank on its third birthday, and I congratulate him on the work that he is doing to increase competition in a very practical way.

Clearly, there is no simple way of getting to the state that most noble Lords would like, which is having a plethora of new banks providing effective competition to the existing big banks. What we have done, however, is to make it a lot easier for new banks to enter the market. In July last year, the Chancellor commissioned an FSA review of barriers to entry and expansion in the banking sector and the result of that review, in answer to the noble Lord, Lord Northbrook, is that for new banks we could see capital requirements fall by up to 80% over what was previously required. This is a big change and one of the many components that will be needed to transform the competitive landscape.

The noble Lord, Lord Eatwell, said that he was concerned about whether branches of EEA banks in the UK could arbitrage the ring-fence. EU passporting law makes branches subject to regulation and supervision in the home state, so UK branches of EU banks would not be subject to UK regulation or to ring-fencing, as the noble Lord said. The presence of EEA banks in the UK market at the moment is very small and we believe that domestic banks enjoy a strong home advantage, so there is not likely to be significant arbitrage. However, EU law has within it provisions to ensure that institutions cannot simply move to avoid regulation. We and the regulators will of course be keeping that issue very much under review.

A number of noble Lords talked about leverage—what an appropriate ratio should be, and where the power to set ratios should lie. There is a certain confusion about where powers lie at the moment. Although I am sure that we will discuss this at greater length later on, I would point out that the Government’s proposal, based on the Basel process, is that we would have a statutory minimum leverage level across the piece. However, the regulators already have the power to set a different leverage ratio for individual institutions, as we have already seen in the way that they have looked at Barclays and Nationwide—and completely without any political interference. That power will obviously continue.

The noble Lord, Lord Eatwell, drew a comparison between the 3% leverage ratio here and the 6% ratio in the US. We do not believe that these are even remotely comparable. Indeed, Mark Carney described comparing the two as being like comparing apples and oranges. I am sorry that I do not have time to explain in great detail why we believe that to be the case.

Electrification was possibly the issue that took most of your Lordships’ time. There are two issues here, given that we have agreed that in respect of an individual bank we will take powers in the Bill to enable that bank to be wholly separated. In respect of that, there has been considerable criticism of the provisions in the Bill on the basis that they provide too low a voltage, as the noble Lord, Lord Lawson, possibly said. We will be bringing forward amendments before Committee which seek to provide an appropriately increased level of voltage. I hope that they will commend themselves to your Lordships’ House.

In terms of total separation and a reversion to Glass-Steagall, our view is very straightforward. If ring-fencing were to prove ineffective, the only proper and democratic way to introduce full separation would be to return to Parliament with new primary legislation. However, given that it is a separate policy—not the same policy with a bit tacked on—we do not believe that the proposals in the Bill will be a failure. It would not be sensible to legislate for a failure that we do not think will happen; if we did that with every bit of legislation, the statute book would be many times its current length.

The noble Baroness, Lady Kramer, asked whether the Government had gone further than the PCBS on competition. It is a small thing, but we have recommended that the PRA and FCA review barriers to entry in a shorter time—the commission said two years; we have said 18 months—and that they publish annual statistics on the authorisation process so that we can see how things are going. The noble Baroness asked about game-changers in retail banking. The truth is that there will be no game-changer, but a series of small steps. The one step that will help is the seven-day switching service, which will be introduced in September and to which a number of noble Lords referred.

The noble Baroness also asked who will buy bail-in bonds. The Government have consulted on that; feedback suggested that there should be demand for bail-in debt instruments of the type that the ICB said banks should issue. Therefore we do not share her concern that there will be no effective demand for that.

The noble Lord, Lord Lawson, made a very eloquent argument for breaking up RBS into the good bank and bad bank. He knows that there will be a government response to that suggestion in the near future. He asked also about proprietary trading and believes that that is a bad idea. We believe that the ring-fencing method is superior to the Volcker-type rule in respect of prop trading and do not see a compelling case for a ban on prop trading in addition to the ring-fence. I can confirm that a difficulty in which an investment bank found itself would not threaten a high street bank. In terms of where funds can flow, it is a one-way valve: there would be no possibility of funding going from a ring-fenced bank back to an investment bank.

The noble Lord, Lord Flight, asked about the mis-selling of CDOs where that was being done, as I understand it, by foreign banks in this country. I can confirm that UK regulators could take action against any firm for mis-selling in the UK, including, obviously, foreign firms that were based here.

The noble Earl, Lord Caithness, talked about banks owning your money. He proposed what is essentially the same as full reserve banking and limited reserve banking, as it is known in the trade. The ICB has considered that issue and rejected the approach that he suggested.

The noble Lord, Lord Sharkey, asked whether the Government had gone soft on payday loan regulation: no, they have not. The FCA will be bringing forward proposals about how it intends to regulate the sector early in the autumn, which means that regulators are not waiting until next April to start to have impact. On central counter-parties, the noble Earl said that perhaps this is not the right Bill, and he is correct. The Financial Services Act 2012 extended the resolution powers in the Banking Act 2009 to systemically important investment firms, CCPs or group companies. Those powers will commence when secondary legislation has been laid in the autumn.

The noble Lord, Lord Northbrook, said that the SIs do not allow ring-fenced banks to provide export finance to SMEs. That is not the case. They can support UK businesses trading internationally. Obviously that is a very important issue for many small businesses.

I am extremely grateful to the noble Lord, Lord Tunnicliffe, for the constructive approach he took to the way we deal with this. I completely accept that we are asking noble Lords to work very hard over a relatively short space of time looking at a lot of new material. From the Government’s point of view, we will be making available all amendments and secondary legislation the moment we have them, and we are very keen that the House has the full opportunity to give all the proposals, not just those already in the Bill but those that will be coming forward, the maximum possible considered scrutiny.

[Lord Tunnicliffe]

A noble Lord asked that the amendments be accompanied by explanatory memorandum-type documents to help us understand them. Will the Government be providing those sorts of documents?

[Lord Newby]

I am very happy to give that assurance. Apart from anything else, Ministers will need such documents, so it is only reasonable that everybody else should have them, too.

The strength of this legislation will be due in no small part to the intense degree of scrutiny that it has already undergone and will undergo. It will be an onerous job, but I am confident that we will be able to strengthen the Bill further and look forward to further debates in the constructive spirit we have seen this evening. I look forward to the autumn, and I commend this Bill to the House.

Bill read a second time and committed to a Committee of the Whole House.