Financial Services (Banking Reform) Bill

Steve Barclay Excerpts

Monday 8th July 2013 Commons Chamber

[Greg Clark]

I will be even more secure when I have persuaded the hon. Gentleman, as I hope to do. He, being a fair man, will reflect on the fact that his distinguished commission undertook pre-legislative scrutiny of the proposals made by Sir John Vickers and his commissioners. Sir John did not recommend that there should be the power to separate. In fact, he has been persuaded by the institution-specific power of separation that his commission proposed, but has reflected in evidence to his commission that to go further and introduce a system-wide power is a separate matter and should come before Parliament in an explicit way rather than, as would be the case here, through a statutory instrument following an independent review.

The proposals before us, most fair-minded colleagues would concede, fall very far short of the degree of scrutiny and rigorous assessment, including by the hon. Gentleman’s commission, that the current proposals have gone through. Parliament would not have the ability to present amendments to proposals and at that stage to take account of the recommendations even of the independent review. So the procedures proposed are less than adequate to the scale of the policy change that would be embodied in them. If we are to be serious about the need to respect the views and the role of Parliament—as I have made clear, these are important matters—we must accept that the only right and proper and democratic way of legislating for full separation is by coming back to Parliament with full primary legislation, including the rigorous process that we have undertaken.

[Stephen Barclay (North East Cambridgeshire) (Con)]

I very much agree with the case that my right hon. Friend is making. Is there not a danger with a fixation on structure, which the review advocated by the Opposition would promote, that we work less on making the existing electrification work and getting the behaviours right, and instead allow a focus on structure and the further review? As with any structure, it is possible to ratchet up, but it is also possible to ratchet down, and it would allow a nibbling of the electrification, which would not be constructive.

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[Stephen Barclay]

I beg to move, That the clause be read a Second time.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

With this it will be convenient to discuss the following:

New clause 3—Professional standards—

‘After section 65 of FSMA 2000 insert—

“65A Professional Standards

(1) The regulator will raise standards of professionalism in financial services by mandating a licensing regime based on training and competence. This must—

(a) apply to all approved persons exercising controlled functions, regardless of financial sector;

(b) 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;

(c) make provisions in connection with—

(i) the granting of a licence;

(ii) the refusal of a licence;

(iii) the withdrawal of a licence; and

(iv) the revalidation of a licensed person of a prescribed description whenever the appropriate regulator sees fit, either as a condition of the person continuing to hold a licence or of the person’s licence being restored;

(d) be evidenced by individuals holding an annual validation of competence;

(e) include specific provision for a Senior Persons Regime in relation to activities involving the exercise of a significant influence over a controlled function under section 59 of the Act.

(2) In section 59, remove “authorised” and insert “licensed” throughout the section.”.’.

New clause 4—Duty of Care—

‘At all times when carrying out core activities a ring-fenced body shall—

(a) be subject to a fiduciary duty towards its customers in the operation of core services; and

(b) be subject to a duty of care towards it customers across the financial services sector.’.

New clause 5—Remuneration reform—

‘Within six months of Royal Assent of this Act the Chancellor of the Exchequer shall, in consultation with the appropriate regulation, lay before Parliament proposals on reform of remuneration at UK financial institutions which shall include incentives to take account of the performance and stability of a UK financial institution over a five- to 10-year period.’.

New clause 7—Protection for whistleblowers—

‘(1) After section 43B(f) of the Employment Rights Act 1996 there is inserted—

“(g) that a breach of regulated activities under FSMA 2000 or the Financial Services Act 2012 has been committed, is being committed, or is likely to be committed.”.

(2) After section 43B(5) of the Employment Rights Act 1996 there is inserted—

“The chairman of the board of directors of any relevant UK financial institution will be informed of any protected disclosure made by a worker which qualifies under the terms of Part IVA of this Act.”.’.

New clause 11—Reckless misconduct in the management of a bank—

‘(1) Within the three months of Royal Assent of this Act the Government shall publish proposals for the creation of a new criminal offence of reckless misconduct in the management of a bank.

(2) The new offence in subsection (2) should cover those approved persons who are licensed under a Senior Persons Regime.

(3) The Government shall bring forward further proposals within three months of Royal Assent of this Act for the civil recovery of monies obtained by individuals who have been found guilty of reckless misconduct in the management of a bank.’.

New clause 13—Financial Services Crime Unit—

‘(1) The Treasury shall conduct a review into the creation of a Financial Services Crime Unit and consult on its proposals for the Financial Services Crime Unit’s powers and responsibilities.

(2) The Treasury shall lay its proposals before both Houses of Parliament no later than six months after this Act comes into force.’.

[Stephen Barclay]

In speaking to new clause 2, which I will not press to a vote, I wish to follow the line of argument pursued by my right hon. Friend the Member for Wokingham (Mr Redwood) on new clause 9. He drew attention to the tension created by building up capital while also lending more and used the analogy of driving with one foot on the accelerator and the other on the brake. If I may, I will take a step outside the car. With new clause 2, I wish to draw the House’s attention to a similar, I am sure unintended tension. The Government are taking a positive step forward, because in paragraphs 2.13 and 2.14 of their response to the parliamentary commission’s report, they make the welcome announcement that they accept the premise of reversing the burden of proof. In doing so, however, they will adopt a measure suggested in paragraphs 1170 and 1171 of the commission’s report that will create a potential handicap. A new condition will be attached to using that burden of proof, whereby the regulator must have concluded a successful enforcement action against the firm prior to doing so.

I do not think there can be any doubt about the merits of reversing the burden of proof. It is clear that if the regulator is required to sift through reams of e-mails looking for evidence to incriminate a senior banker, it will be a time-consuming and costly exercise. It is also highly likely that it will fail, because senior executives are not so stupid as to write boastful and wilful e-mails such as we saw from some of the LIBOR traders, who bragged of having their bottles of Bolly. Most senior executives are wise to the risks of e-mails and would not fall into such a trap. It is proportionate and reasonable to argue that senior executives who say that their hands-on leadership is sufficient to justify very high individual bonuses should also, on the other side of the coin, be able to demonstrate that they have personally acted reasonably.

The Government’s announcement that they will reverse the burden of proof is extremely welcome. However, the acceptance of paragraph 1171 of the Commission’s report could lead to a real impediment. If we open the door to personal enforcement, why would a chief executive wish to settle on behalf of their firm? We are trying to make it easier for the regulator to focus in a time-efficient and cost-effective manner on the individuals who should be held responsible, but that will be impeded by the additional requirement for enforcement to be concluded against the firm. The senior leadership whom we want to target will be incentivised to drag out proceedings and impede any settlement with the firm. I do not believe that is the Government’s intention, but I wished to draw the Minister’s attention to it so that the issue could be discussed in more detail and tackled in the other place.

I do not share the confidence of some colleagues who have spoken about the ability of criminal sanctions to operate effectively. They are a welcome tool to have, and many of our constituents would like the golden handcuffs to be replaced with the prison variety. Indeed, the images on US television of white-collar arrests and convictions have a powerful deterrent effect. My concern, however, is that if we look at the individual fines and enforcement to date, we see that the regulator has struggled to reach the evidential level required to prosecute individuals successfully. Now we are suggesting that it will have to meet a higher standard of proof to secure criminal convictions. It is a bit like asking a hurdler who has just failed at one level to jump over a much higher hurdle.

The reversal of the burden of proof is one aspect of what we need, and the deterrent effect of criminal sanctions is another, because it brings with it the power of the headline. The question is, will we fall into the trap that we so often fall into in this House of passing legislation that sounds tough but proves difficult to use in practice? My fear is that the standard of proof required of the regulator to deliver a criminal prosecution will make it a tool that is rarely used.

We therefore need to consider how we can target individuals, not firms, because that will drive the culture of firms. Currently, where there is wrongdoing, a firm will settle quickly and get a 30% discount. The more junior staff—the heads of the divisions responsible—are quickly exited, and the senior staff wilfully claim blindness, because the most controversial briefings are usually done orally. Reversing the burden of proof will address part of the ill, but through the new clause I wish to draw attention to the limitations of fines on firms, which at the end of the day penalise shareholders and pension funds. Our constituents pay twice—first for the bail-out, and then through the impact on their shareholding.

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[Stephen Barclay]

Does the hon. Lady not recognise that the difficulty with catch-all provisions, such as that for a 10-year period, is that they capture the good as much as the bad? New clause 2 would create targeted regulation to focus on those who have done wrong, instead of a catch-all provision that captures everyone.

[Cathy Jamieson]

I might have been tempted to support new clause 2 had the hon. Gentleman decided to put it to the vote, and I look forward with interest to hearing what the Minister has to say. I understand the issues relating to length of time and the dangers of a catch-all provision but, in the aftermath of the banking crisis, the legal and regulatory structures, and the further changes that the Government promise to introduce, we need to ensure that the banking culture really changes. New clause 5 attempts to ensure that banks think for themselves about how to ensure that their performance is sustainable. Now that the Government have moved to an acceptance of the broad principle, the devil will be in the detail of what they do next. Perhaps the Minister will have more to say on that.

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[Cathy Jamieson]

Again, my hon. Friend makes an important point that this is an all-party stance and that everyone on the banking commission took this issue seriously.

It is worth remembering that in response to a question from the Leader of the Opposition last month, the Prime Minister told the House that he would use this Bill to implement the report of the parliamentary commission. The Leader of the Opposition asked:

“Following the Parliamentary Commission on Banking, can the Prime Minister confirm that he supports its important recommendations on bonuses and criminal penalties, and that he will use the banking Bill to implement them?”

The Prime Minister responded:

“Yes, I do support both those measures...Penalising, including with criminal penalties against bankers who behave irresponsibly— I say yes. Also, making sure that for banks in receipt of taxpayers’ money we can claw back and have a ban on bonuses—I say yes too.”

The Leader of the Opposition then asked a further question, to which the Prime Minister replied:

“We will be using that Bill to take these important steps.” —[Official Report, 19 June 2013; Vol. 564, c. 883.]

I hoped the Minister would have been able to bring forward appropriate amendments or new clauses—or whatever is needed—at this stage, rather than leaving that to elsewhere. I hope he will be able to give us some further information on how the work will be progressed and when he now expects to give us more detail.

New clause 13 relates to the financial services crime unit in the Serious Fraud Office. We raised this issue in Committee, and my hon. Friend the Member for Nottingham East gave an eloquent description of some of the areas that an FSCU would be able to address. This new clause would require the Treasury to report on the establishment of the FSCU and to do so within six months of the Act coming into force.

I fear the Minister might sigh and think, “Here go the Opposition once again, asking for another report to be produced.” Before he says that or any Member seeks to intervene to make that point, I will say that the reason we are asking for these reports to be produced is to ensure that progress is made and that things do not just gather dust on a shelf somewhere.

We know we have to look at the resources available to tackle white collar crime. Financial products are becoming ever more complex, and they are being traded faster, and increased resources could enable specialist police officers to develop their expertise. There are huge financial incentives in looking at developing this, too. It is worth remembering that fraud costs Britain about £73 billion a year, according to the Home Office’s National Fraud Authority. As my hon. Friend the Member for Nottingham East recalled in Committee, Andrew Bailey, the PRA chief executive, said it was “more than odd” that bank directors had not faced formal charges over the events leading up to the crisis. The Serious Fraud Office has a bit of a mixed record on tackling the high-profile cases. The Home Secretary was forced to perform a bit of a U-turn on her plans to abolish the SFO. It is clear that the SFO needs to be improved. The LIBOR scandal again shows that misconduct in financial services can have ramifications for traders, for industry, for shareholders, for the reputation of the City and, indeed, for criminal law.

[Stephen Barclay]

I seek to understand the scope of new clause 13 and the financial crime unit. Would it have taken criminal sanctions against the auditors of RBS, who so failed that they required the then permanent secretary of the Treasury to seek a letter of direction?

[Cathy Jamieson]

I am sure the hon. Gentleman will not be surprised to learn that I am not going to go into the detail of that case. He has had a career in the banking sector dealing with such issues, and he will be as aware as I am that looking at one case in isolation is sometimes not the best way to appreciate the overall picture. The overall picture is what I am interested in, and why I specifically mentioned LIBOR, because it is already a criminal offence to attempt to fix that rate. We need to seek to ensure that the SFO has the resources necessary to tackle this and to prevent any further scandals.

We have tabled new clause 13 to give Parliament a chance, once again, further down the line to discuss the creation of a new agency, and we hope it would send a firm message to those tempted to engage in criminal conduct. I hope that the Minister may be able to say something more on that in his response. He did not seem to be persuaded in Committee of the need for a new unit or even a subdivision. My recollection is that he took that view, “Its all fraud and there is no need to have a specific unit or part of an organisation dealing with it.”

I think I have covered a number of issues relating to these proposals. Once again, it is important to put on the record the fact that although we have had the opportunity to raise some of these issues in Committee and this evening, it is unfortunate that on Report we are not going to be able to scrutinise the detail of some of the new clauses—it is fair for us to assume that they might have been tabled at this stage. I seek the Minister’s further reassurance that we are going to get the important detail of how he intends to proceed, that we will see as much as is possible of the draft new clauses and legislation as things are taken forward, and that we will have an appropriate opportunity to discuss all that further in this place.

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I was extremely pleased that the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), for whom I have tremendous admiration, spoke about new clause 11 only lightly, because it would be unwise for her to press the point behind the measure too strongly, given that it seems to some people that the previous Government idled by and doled out knighthoods, but never thought about jail. Where on earth was the thought for the people who were suffering owing to the scandals that were under way at that time? I was pleased that she did not press her point aggressively because, as we deal with the current problems, it is clear to many of us whose fingers are all over the crime. We do not need an Inspector Luther or a Miss Marple to know that people in government were responsible for setting the framework under which criminal activity was allowed to run unchecked. Many of us believe that it isnot just the bankers who should hold their heads in shame, but the people in charge of regulation at that time.

[Stephen Barclay]

Does my hon. Friend share my incredulity that when David Strachan conducted his review at the Financial Services Authority following the Legal and General case and brought forward his recommendations for a light-touch enforcement regime, the vice-chair of the FSA was Sir James Crosby, who is one of the three figures who are especially criticised in the banking commission’s report? We have a multi-layered, light-touch enforcement regime that often creates a disincentive to the regulator—this is why market abuse often involves criminal sanctions, not civil sanctions. One of the people criticised in the banking commission report actually designed the system that applies to the regulator.

[Richard Fuller]

I am appreciative of that intervention, which adds not only to my body of knowledge, but to the commonly held disgust that, following all these efforts involving the best minds we can put in place, no one is going to jail. In the absence of anyone going to jail, we have gone through all the fraud, all the mis-structured, light-touch regulation and all the mis-positioning of responsibilities without a single person being truly accountable. If there is a point on which I disagree with my hon. Friend, which I rarely do, it is that he said in his speech that financial penalties are likely to be more successful. He might have a point in saying that there will be more successful prosecutions, but the loss of one’s liberty cannot be put in a discounted cash flow—there cannot be a beta high enough. If we want to change behaviour, we have to show that people will go to jail and lose their liberty. If, having gone through the worst financial recession that we have experienced in our lifetimes, not a single person goes to jail as a result of all our work, I do not care that there is a cross-party consensus because, in my view, this is failing the people.

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[Mr Love]

I will comment on the commission’s thought processes on some of the issues that the hon. Gentleman mentioned. He will remember, as we all do, the evening on which we set up a special parliamentary vehicle in the wake of the LIBOR rate-rigging scandal. Since 2008, there have been a variety of critical events, including the credit crunch and the recession. All that led to a catastrophic decline in the reputation of the financial services sector. Trust in bankers sank to an all-time low, and frankly LIBOR was the last straw. This was truly shocking behaviour on an unprecedented scale. Something had to be done, and the focus was very much on our terms of reference on standards and culture.

As a result, the commission had to answer some tough questions, and the hon. Member for Bedford (Richard Fuller) has posed some of them: why had so few bankers been held to account for their failings? Why had it appeared that bankers pocketed the gains, but passed on the losses to the taxpayer? Why were customers who should have been treated fairly treated in the exact opposite way—a point that my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson) raised? We tried to answer those questions through three themes that came out in our report. The first theme is individual responsibility.

When all the head bankers came before us, we were genuinely shocked to hear that they denied any responsibility for what happened in their banks. Whether it was ignorance of the serious failings happening under their noses, or because there was collective decision making, the result was the same: no one could be held to account. That, we discovered, was the result of the failure of the approved persons regime, which did not attribute responsibilities to senior staff, who, as a result, could not be held to account.

Two steps are proposed to try to address that problem. First, we have already mentioned the new senior persons regime, designed to ensure that the most important responsibilities are assigned to specific individuals, who will more easily be held to account for them. Secondly, for a much wider group—not every employee, but those who could do serious harm to the bank, or its customers, due to their customer-facing position—we propose a new licensing regime, with a set of banking standard rules that enable them to be held to account.

However, for people to be held to account, we need more effective sanctions, and that is the second theme of the commission’s report. Identification of those responsible under the new regime will provide a stronger basis for the regulator to enforce existing civil penalties, such as fines, restrictions and bans. One of the great difficulties was assigning responsibility; we hope that individual responsibility will address that.

Given the seriousness of the wrongdoings—an issue mentioned in earlier contributions—the commission is recommending two new, far-reaching powers. New clause 2 does not address this point, but under certain conditions, the regulator should be able to impose a full range of civil sanctions, unless the person can demonstrate that reasonable steps were taken to prevent or mitigate the failing. In effect, that does what new clause 2 suggests: it reverses the burden of proof, but only under certain conditions.

[Stephen Barclay]

In essence, the hon. Gentleman is describing the purpose of new clause 2. Earlier, I alluded to the fact that there is a condition that militates against the effectiveness of the new clause: the tool can be used only if there is a successful prosecution, which gets in the way. As much as I agree with my hon. Friend the Member for Bedford (Richard Fuller), does the hon. Member for Edmonton (Mr Love) agree that we need to be careful about changing the law retrospectively, particularly on custodial sentences? One of the issues that we are addressing today is how we get it right for the future, and what the sanctions should be.

[Mr Love]

Personally, I oppose retrospective legislation. It was not considered by the commission, which does not make any recommendations on it. I suspect, however, that none of its members would be in favour of addressing these issues in that way.

The other change is the much publicised criminal offence of reckless misconduct in the management of a bank, which normally carries, as has been suggested, a custodial sentence. Importantly, we have laid down preconditions before a charge of that nature can be brought. There must be a cost to the taxpayer—the bank has turned to the taxpayer to bail it out; or there are consequences for the financial system—stability is critical, and anything that destabilises the system should be subject to a criminal sanction; or there is serious harm to customers. We think that we have framed a big change in the law. Bankers continually ask why they are singled out as the only commercial group that can be charged in that way. It is a delicate balance, and I hope that the Government will look seriously at what we are trying to do.

The third area I want to touch on is remuneration and incentives. The reality is that rewards have been huge, and still are huge for a more limited supply of senior bankers. That incentivises excessive risk taking and, occasionally, misconduct. The commission concluded that risk and reward are still misaligned, particularly when making pay awards over a short period. It therefore sees advantages in making a significant portion of remuneration variable, rather than fixed. We do not have much sympathy for the European solution in relation to that, but we think that reform is necessary in this area. More variable pay should be deferred to take into account changing circumstances at the bank at which the banker works, with power for the regulator to extend the period for up to 10 years. To those who say that that is a long time, many banks have a good year, but then some less good years, and the commission wanted to recognise that that can go on for an extended period.

Regulators should be able to limit or prohibit sales-based incentives. We were shocked at the way in which sales-based incentives were used to create the mis-selling scandals of PPI and interest rate swaps. There was a cascading group of incentives from senior management through to the customer-facing end of the bank, and we think that that made a major contribution to the problems that arose. We want to give the regulator much stronger powers. Where a bank requires taxpayer support, the regulator should have discretionary power to cancel all deferred compensation. It is shocking that, as happened in some banks, they were still paying remuneration to employees after the bank had taken on taxpayer funds.

The issues of conduct and remuneration that I have raised lie at the heart of what the commission thinks needs to be done in respect of culture and standards. These recommendations have been much debated and discussed. We have done everything we can to make them practical and realisable, and I hope that, when there is an opportunity to debate them in the other House, or when they come back to this place, the Government will give serious consideration to those recommendations.

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[Greg Clark]

This summer.

New clause 11 concerns the new criminal offence of reckless misconduct recommended by the parliamentary commissioner. As we have already announced, we agree with the commission’s recommendations and will over the summer draft amendments to create such a legally watertight criminal offence, including compliance with the European convention on human rights. As my hon. Friend the Member for Bedford suggested, the commission did not recommend retrospectivity, and these provisions are intended to enact its recommendations. I hope that he will understand that.

My hon. Friend the Member for Bury St Edmunds (Mr Ruffley) was absolutely right to point out that it was of course this Government who first raised the possibility of criminal sanctions for managerial misconduct in July last year. We are grateful to the commission for its extensive work. We will follow its advice on misconduct committed by persons covered by the regime that is being set up. The commission noted the legal challenges involved in mounting a successful prosecution, but we absolutely agree that the creation of this offence should be justified by the signal that it sends and the potential deterrent effects it can have. We have to make it clear that reckless behaviour by those in charge of our banks cannot be tolerated.

New clause 13 proposes to create a new financial services crime unit. A similar amendment was discussed at some length in Committee. I can assure hon. Members that the Government fully recognise the importance of tackling financial crime. There is to be a dedicated command within the new National Crime Agency responsible for directing the national response to economic and financial crimes. The economic crime command will have a clear remit to reduce the threat from economic and financial crimes, working collaboratively across the different sectors. Substantial progress has already been made in establishing the National Crime Agency and driving early operational success against criminals who seek to engage in economic and financial crimes.

The Government accept the broad recommendations of the parliamentary commission on each of these matters. We will be acting quickly to take the opportunity afforded by this Bill to make amendments that are legally watertight and likely to pass into law in the early part of next year, just six months after the parliamentary commission’s extensive report. In acting in this way, we are keeping faith not only with the recommendations of the parliamentary commission but with the urgency of the need to enact these reforms, which I commend to the House.

[Stephen Barclay]

We have had a full and constructive debate that builds on the cross-party nature of the work of the banking commission. That has been reflected in the consensual tone of hon. Members’ speeches. I am very reassured by the comments of my right hon. Friend the Minister about the Government’s willingness to look at the outcome that new clause 2 seeks, which is in line with the comments made by Members across the House. For that reason, I will not press the new clause to a vote but ask leave to withdraw it.

Clause, by leave, withdrawn.

New Clause 4

Duty of Care

‘At all times when carrying out core activities a ring-fenced body shall—

(a) be subject to a fiduciary duty towards its customers in the operation of core services; and

(b) be subject to a duty of care towards it customers across the financial services sector.’.—(Cathy Jamieson.)

Brought up, and read the First time.

Question put, That the clause be read a Second time.