Financial Services (Banking Reform) Bill

Lord Watson of Invergowrie Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Watson of Invergowrie (Lab)]

My Lords, I am pleased to associate my name with all five amendments in this group, but I also want to speak to some extent about the FCA note which appeared at about 9 o’clock yesterday evening—typically late in the day, not just literally, as regards the progress of this Bill. I reiterate the point made by my noble friend Lord Brennan that the Government have provided no grounds for reassurance that their amendments adequately deal with the serious issue of anti-money laundering. The fact that the Minister’s promised letter of comfort has not materialised demonstrates that the House should be concerned by the absence of any coalition assurances on this crucial issue. I am not sure whether the FCA note is intended to be in place of such a letter, and I will come on to that later. However, I said in Committee that not only were the Government naive to assume that the amendments we tabled then were unnecessary, they were also complacent. I very much regret to say that the failure to produce the letter setting out the Government’s position which my noble friend Lord Brennan was promised clearly suggests that that complacency remains intact.

We also heard in more general terms in Committee about the devastating human cost caused by the banks’ failure to comply with anti-money-laundering laws. That has not been mentioned this evening but it bears repeating: it is not just a question of what happens in relation to the financial sector in this country but also of money laundering that often amounts to the state looting of developing countries’ aid and haemorrhages billions of pounds from their national budgets, trapping millions of the world’s poorest people in extreme poverty. However, as mentioned in the previous debate, it also threatens the economy of the UK. The integrity of our financial system is hugely compromised by banks failing to prevent access by the worst types of criminals from around the world, whether they be corrupt dictators, drug smugglers, arms dealers or terrorists, as other noble Lords have said. This shows that the stakes could not be higher. I wish that that were reflected in action taken by the Government to counter this problem. It makes their lack of willingness to deal meaningfully with the issue quite unfathomable. Their continuing naivety is potentially dangerous. I apologise for using the word “naivety” again but I feel that I have to do so.

As the noble Lord, Lord Phillips, rightly noted in Committee, should there be any doubt, following the Minister’s letter, about whether the Government’s amendments adequately dealt with money laundering or not, the House should err on the side of caution and choose the alternative amendments. We now know that no such letter has materialised. My noble friends and I have taken great care to move new and refined amendments which reflect the extensive and helpful debate in Committee. In stark contrast the Government have not even offered the explanation they promised. This should leave the House in no doubt as to which set of amendments should be favoured.

I turn to the note from the Financial Conduct Authority that appeared yesterday evening. My noble friend Lord Eatwell said in his opening remarks on Amendment 3, I think, that everything seemed to be done at the last minute as far as the Bill is concerned, and that has been very much the pattern since it first appeared. It is unhelpful in terms of enabling noble Lords to respond meaningfully to new information or, indeed, to draft amendments. It is not clear whether the FCA note on its anti-money-laundering supervision and the new senior managers regime proposed in the Bill is in lieu of the Minister’s letter to my noble friend Lord Brennan, as I said earlier. That letter was intended to outline why the latter’s amendments seeking the explicit inclusion of anti-money laundering in the new senior persons regime and other personal liability mechanisms were unnecessary because the government amendments implicitly did this. However, I submit that the note does not achieve what is required; namely, a guarantee that the FCA will include anti-money-laundering compliance as a key risk and make every bank name a senior banker with personal responsibility for it.

The FCA’s note is largely about what it does and has done, and even refers to what the FSA did. There are just two paragraphs at the end which focus on the proposed new senior managers regime. As the Bill stands, this could give the FCA the power to hold named, individual senior bankers accountable for failures to uphold key standards and risks. However, it seems to me there is a loophole in the Bill which means that it will be left open to the FCA’s interpretation as to whether it uses this power and insists that anti-money-laundering compliance should be one of the issues covered. The note does not indicate that the FCA will include this. It uses terminology such as, “We will consult”, “This will allow firms”, and it, “will help regulators”. These are key phrases in any document but I suggest that they are weak, possibly ambiguous and certainly open to interpretation. I believe that the word “consult” simply means that the outcome is by definition not certain. We should require firms to do something, which is a stronger word than “allowing” them to do something.

My next example is fundamental to the way we deal with anti-money laundering. Instead of the phrase, “for example, anti-money laundering systems”, we should state unequivocally, “including anti-money-laundering systems”. The language that is used is permissive and uncertain rather than being mandatory, which is what I and the noble Lord, Lord Brennan, seek to achieve with these amendments. The content of the note is disappointing and it would be helpful to have clarification of whether it is provided in lieu of the Minister’s letter.

I believe that anti-money laundering compliance should be included as one of the areas of responsibility that is allocated to a named senior banker under the new senior persons regime, is written into the banking standards rules to which staff at banks will have to adhere, and should be one of the conditions of the new remuneration code which makes deferred pay and bonuses contingent on upholding standards. Will the Minister, on behalf of the coalition, ensure that these important requirements are included?

[Lord Newby]

My Lords, we are dealing here with an issue that everybody realises is an extremely important one in terms of the way banks behave and the way that they are seen to behave. As the noble Lord, Lord Eatwell, pointed out, the importance of money-laundering in financing terrorism has given it an added twist.

These amendments are an expanded version of an amendment tabled by the noble Lord, Lord Brennan, in Committee. Since then, my colleagues in the Treasury have met the noble Lord and explained their view of his original amendment. I hope I can convince the House that the Government’s approach meets the requirements which the noble Lord, Lord Brennan, seeks to impose. These amendments would expand the scope of the senior managers regime to include all persons who are responsible for ensuring that a firm complies with specific obligations under the criminal law, irrespective of the level in the organisation at which they work.

No one doubts the importance of robust action to tackle financial crime such as money-laundering, but I can assure your Lordships that these amendments are not necessary to ensure that financial crime is adequately addressed under the reforms that the Government are bringing forward.

These amendments would bring subordinate staff with relevant responsibilities within the scope of the senior managers regime. That could lead to confusion at least and is contrary to the PCBS recommendation to narrow the senior persons regime to very senior people, and parts of the regime, such as the reversal of the burden of proof, make sense only when applied at the senior level. It is not necessary to bring subordinate staff with specific responsibilities for financial crime within the senior managers regime in order to ensure that these staff are subject to enhanced regulatory scrutiny. It will still be possible for the FCA to ensure that appointments of persons to be money-laundering reporting officers, for example, will be subject to prior regulatory scrutiny and approval under the approved persons regime, if that is considered appropriate, and then subject to rules and standards applicable to their role. This is because the approved persons regime is being retained for financial services firms that are not banks. It is also being retained within the banking sector for appointments below senior management level. The Government have always considered this necessary as there may be critical roles below senior management level with important responsibilities for consumer protection, market integrity or preventing financial crime where prior regulatory scrutiny of appointments remains necessary.

In addition, of course, the regulators will have the ability to make rules of conduct for bank employees who are not approved persons. This will mean that rules of conduct can be applied to staff with more limited roles in preventing financial crime in banks, as well as to approved persons and senior managers.

There is also no need to refer explicitly to breaches of the criminal law to bring senior managers with relevant responsibilities within the scope of the senior managers regime. Under the Government’s proposals, a function can be designated as a senior manager function if a person holding it would be responsible for aspects of the bank’s business that could involve serious consequences for the bank, or for business or other interests in the United Kingdom. There is no doubt that a serious breach of criminal law could have serious consequences for the firm as well as for other people. So senior managers in this area would be covered by this new regime.

The noble Lord, Lord Brennan, asked me three specific questions and for assurances on those points. First, he asked me to confirm that there was no reason to doubt the reliability of the conclusions of the FCA paper. There is no reason to doubt them. Secondly, he asked whether the FCA was properly financed to undertake the level of activity required for it effectively to fulfil its responsibilities under the rules on money-laundering. The FCA budget, as he will know, is funded by the sector as a whole. The FCA is therefore unconstrained, in practical terms, regarding its budget. It is for the authority to determine the resources that it thinks it requires and it can then get them. So no budgetary constraint is imposed on the FCA which reduces its ability to employ as many staff as it feels it wants in this area. Thirdly, he asked whether the FCA represented government policy. The FCA does represent government policy. I am sorry that the note was transmitted later than would ideally have been the case but that in no way undermines its significance as a definitive statement of government policy in this area.

I recognise the concern that noble Lords had in Committee, and still have, in this area. It may be of some minor comfort to know that since Committee I have had a meeting with one of the senior relevant staff at one of the largest UK banks to discuss whether, in its opinion, the FCA was pursuing money-laundering with greater rigour than had been the case in the past. The bank said that the FCA was doing so. It also said that the bank itself had recognised that it simply had to give greater priority to this area.

Two things must happen if we are to achieve the level of compliance that the noble Lord would like. The first, which the noble Lord has concentrated on now, is that the FCA has to do its job properly. As I say, it is putting more resources in and is being, as it states in its list of objectives, more intensive and intrusive. Secondly, as we have discussed in relation to a number of other areas, the banks have to accept that they must adopt a zero tolerance approach to money-laundering. It is clear from the evidence which the parliamentary commission received, and from much other evidence, that this has not always been the case. I believe that the banks are giving a priority to this that they have not done in the past. Is it adequate? It is a great improvement, but it will take some time to be fully clear about whether it is adequate. However there has been a sea change which has been effected in part by the regulatory regime and in part by the pressure put on the banks by a whole range of external stakeholders, not least your Lordships’ House.

The noble Lord, Lord Eatwell, suggested that a further letter might be of help between now and Third Reading to confirm the exact position. I am happy to agree to provide a letter in the terms that the noble Lord suggested. With that assurance, I hope that the noble Lord, Lord Brennan, will feel able not to press his amendments.

[Lord Watson of Invergowrie]

Perhaps the noble Lord could clarify something. He made it absolutely clear that the FCA note represents government policy. It therefore seems strange that that policy is allowed to be as—shall I say?—ambiguously worded as the FCA note is. It is of concern that it is left that way. Will he commit to write to the FCA before Third Reading to ask it to make anti-money-laundering explicit in the personal responsibility requirements of senior bankers?

[Lord Newby]

My Lords, I will cover that issue in my letter. I am sorry that the noble Lord thinks that the FCA note is ambiguous, because the fact that it is giving greater priority to this issue and being more intrusive and energetic should give him some comfort. However, as I say, I will write to him.