Bank of England and Financial Services Bill [HL]

Lord Turnbull Excerpts

Tuesday 15th December 2015 Lords Chamber

[Lord Eatwell (Non-Afl)]

My Lords, this amendment seeks to provide the Treasury Select Committee of another place with the ability to stimulate the oversight function of the Court of the Bank of England. It may be helpful to provide some context for this proposal. The measures in the Bill, in so far as they refer to the Bank of England, return the regulatory scope and powers of the Bank to roughly the same position that they were in in 1997. From 1997 onwards there was, first, the transfer of many, though not all, of the Bank’s regulatory powers to the FSA, then the abolition of the FSA and the transfer of prudential regulation to the PRA, and now the subsidiary status of the PRA is to be abolished and its activities fully reincorporated within the Bank, so we have come full circle. After major institutional reforms, we are back where we started, with all the powers of prudential regulation being exercised by the Bank. Conduct of business regulation, amalgamated in the FSA from various sources, now resides with the FCA, but it should be noted that few of these powers were originally exercised by the Bank of England.

It is worth recalling that the Bank of England that we began with, prior to the creation of the FSA, was not a successful regulator. The Bank failed in the case of the Johnson Matthey bank and over BCCI, and so glaring was its failure with respect to Barings that the then Board of Banking Supervision commented acerbically that the Bank of England should try to understand the institutions that it purports to regulate. Regulation was taken away from the Bank because it had failed as a regulator. Then, of course, the new tripartite regulatory structuring of the FSA, the Bank and the Treasury failed dramatically in the financial crisis of 2007-08, so the FSA was abolished. At least the PRA can hold its head up and declare that its position as an independent subsidiary is being abolished in this merry-go-round not because it has failed but because of a desire to restore the unitary power of the Bank of England. It is neater that way.

What this tale of circular institutional reform should teach us is that there is no specific institutional structure that can guarantee to deliver regulatory competence. The all-powerful Bank that we are now recreating has proved in the past to be a regulatory failure, while the tripartite structure of the FSA, the Bank and the Treasury failed even more spectacularly. Given that institutional reform will not be a panacea, there is a powerful case for thorough parliamentary scrutiny to at least attempt to identify the failings when they occur, as we can be sure that they will. Moreover, I remind noble Lords of the words of the Treasury Select Committee of another place with regard to the original proposal that a supervisory board be established at the Bank. The committee said:

“The Bank is a democratically accountable institution, and it is inevitable that Parliament will wish to express views and, on occasion, concerns about its decisions. Our recommendation that the new Supervisory Board have the authority to conduct retrospective reviews of the … prudential performance of the Bank, should, if operated successfully, provide the tools for proper scrutiny”.

In Committee I asked the Minister if he agreed with the proposition that the Bank should be a democratically accountable institution. He failed to reply. I will happily give way now if he wishes to comment. Apparently he does not.

Therefore, the Treasury Select Committee argued, correctly, that proper parliamentary scrutiny depends on internal reviews of the Bank, not just on the external inquiries of parliamentary committees. Internal review provides Parliament with the “tools for proper scrutiny”. The reason is obvious. The court that as a consequence of the Bill will be invested with the oversight function has full information about the operations and policies of the Bank—a level of information that even the most assiduous Treasury Select Committee could never have. Indeed, the court has information which is not, and sometimes should not be, in the public domain.

My amendment would allow the Treasury Select Committee of another place to request that the court exercise its oversight function. Note, as the Minister said, that the court is not compelled to comply. The wording of the noble Lord’s amendment, to which my amendment refers, states that the non-executive members of the court “may”—not must—“arrange for a review”.

Let us suppose that the Treasury Select Committee’s request stimulates a review. What happens then? First, as the noble Lord’s amendment requires, a report or reports will be made to the court. To discover what happens next we turn to Sections 3C, 3D and 3E of the Bank of England Act 1998, as amended. There we find that the Bank must give the Treasury a copy of the report and that the report must be published, unless the court of directors decides that publication is not in the public interest. Finally, in exercising its oversight function the court must monitor the response of the Bank—including the court itself—to any recommendations made in a report.

I have detailed the path that any report stimulated by a Treasury Select Committee request might take in order to reassure the House that safeguards are already built into the structure of the legislation before us that will ensure that information which it is not in the public interest to publish at a particular time will indeed not be published. Yet even without publication, a request by the Treasury Select Committee may well stimulate an important investigation that results in valuable internal reform at the Bank.

The government amendment makes a valuable addition to the powers of the non-executive members of the court in the exercise of their oversight function. However, the procedure envisaged by the government amendment is such that investigations can be stimulated only by insiders—not what might be considered proper democratic accountability. My amendment will at least provide a pathway along which proper democratic accountability may be exercised: not will be, but may be. The Treasury Select Committee will be able to request that the court institute a review. That is just a small increase in democratic accountability but one that may well avert future regulatory failings. I beg to move.

[Lord Turnbull (CB)]

My Lords, I am somewhat puzzled by the amendment, because it seems to be a power which the Treasury Select Committee already has and already exercises. I will give noble Lords three examples. It called for a report from the Bank into Northern Rock, another one into RBS, and then—with some delay, appearing only three days ago—finally into HBOS. Therefore the Treasury Select Committee, led by the people who lead it now, does not need this power. It is perfectly capable of forcing the Bank to undertake a review and to reveal the contents to that committee.

[Baroness Kramer (LD)]

My Lords, I have no wish to detain the House. The Government have listened to the concerns that we raised at previous stages of the Bill and in the discussions that the Minister generously agreed to. The amendment that the Government have brought forward does not go as far as we would like but we feel that it addresses the most essential issue, which is the independence of the non-executive directors of the court, and that it provides a mechanism so that they can resist capture by officials of the court. For that reason, we are satisfied.

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[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.

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[Baroness Kramer]

Perhaps I may ask a question of the noble Lord, Lord Turnbull. The FCA stated just over a week ago:

“The FCA may take disciplinary action against an individual where there is evidence of personal culpability on the part of that individual”.

Where does that differ from the regime before any of this is introduced?

[Lord Turnbull]

That is not exclusive. Elsewhere, there is still a duty of responsibility. There is still personal culpability where it can be proved, but there are many people to whom it does not apply—senior people—and, there, you will need to have recourse to the duty of responsibility to secure a “conviction”—that is, proof of regulatory breach.

[Lord Hunt of Wirral (Con)]

After the speeches that we have heard, particularly that of the noble Lord, Lord Turnbull, I had hoped that the noble Lord, Lord Tunnicliffe, might rise to the Dispatch Box and say, “In the circumstances, I will no longer press this amendment”. But, sadly, he has not. In declaring my interest, I say to the noble and learned Lord, Lord Brown of Eaton-under-Heywood, and the noble Lord, Lord Grabiner, that not only did I completely agree with every word they said but I thought that they made outstanding speeches.

I strongly support the extension of the senior managers and certification regime to all sectors of the financial services industry. It will create a fairer, more consistent and rigorous regime for all sectors of the financial services, enhancing personal responsibility for senior managers as well as providing a more effective and proportionate means of raising standards of conduct of key staff more broadly, supported by what we have heard during this Bill will be more robust enforcement power for the regulators.

As I have not persuaded the noble Lord, Lord Tunnicliffe, so far, perhaps I may now proceed to declare my interest as chair of the Credit Union Expansion Project and Cornerstone Mutual Services. The noble Lord did not mention credit unions, but credit unions as deposit takers are subject to the senior managers regime. I am delighted that, due to the advocacy of the Association of British Credit Unions and the support of the All-Party Parliamentary Group on Credit Unions, both the Prudential Regulation Authority and the Financial Conduct Authority have made special allowances for smaller deposit takers to apply a simplified regime in recognition of the need for proportionality. But not a word of that lies in this amendment. There are no associated amendments helping to deal with the position of credit unions.

If this amendment were to be carried, we would have the reverse burden of proof applying to managers in credit unions. Credit unions in the vast majority of cases have fully non-executive volunteer boards which are democratically elected by and drawn from a credit union’s membership. They already face significant challenges in attracting and retaining skilled and experienced individuals willing to sit on their boards on a voluntary basis. The imposition of the heightened personal responsibility which the noble Lord, Lord Tunnicliffe, would impose by removing this clause would compound and exacerbate these difficulties for many credit unions. Some larger credit unions have already begun to move away from the voluntary board model in order to attract the right people in the light of SMR and, in particular, the prospect that the noble Lord, Lord Tunnicliffe, might succeed in this amendment. There are many other reasons but, please, do not impose this level of responsibility on institutions—admittedly deposit takers—like credit unions.

We have heard all the arguments about presumption of innocence. We have the opportunity of a regime which will be tougher and fairer. Please do not let us complicate it any further by introducing a disparate, varied scheme. Let us impose this new regime, which I believe will be very successful indeed.